Genworth Financial Mortgage Insurance Pty Ltd (Genworth Australia) reported its 1H16 results. Despite what appears to be an underwhelming top line performance – in terms of new insurance written and gross written premium – management stated that key performance metrics for the first half were in line with expectations and full year 2016 guidance remains unchanged
Genworth Australia financial results
The top line decline was due to a number of factors, including reduced high loan to value ratio (LVR) sales, a lower LVR mix of business, as well as the full impact of the changes in customers in 1H15.
Furthermore, the normalised loss ratio rose to 33.0% in 1H16 from 26.4% in the 1H15, due to an increase in the number of delinquent loans relative to a year ago and a higher average paid claim amount, as shown in Figure 1.
Figure 1
Source: Genworth
The company believes that the overall portfolio continues to be supported by strong performance in New South Wales and Victoria. However, the performance in Queensland and Western Australia is still challenging, reflecting increased delinquencies, particularly in regions exposed to the slowdown in the resources sector as the economy in those areas transitions.
Management noted:
“Overall economic conditions are supportive and the fundamentals of the residential mortgage market are sound, but there is pressure in some areas of the market. It is clear that the business is navigating through some variability and changes in the residential mortgage market. In particular, there has been a significant decline in the proportion of high loan-to-value ratio (LVR) loans originated given regulatory changes and changes in lender risk appetite.”
Genworth Australia paid a distribution to shareholders of 34c per share on 1 June 2016, representing a total payment of approximately $202m. This capital reduction is a continuation of the capital management actions that are designed to bring the company’s solvency ratio more in line with the board’s target capital range of 1.32 to 1.44 times the prescribed capital amount (PCA). As at 30 June 2016 the company’s regulatory solvency ratio had a PCA of 1.56 times, as shown in Figure 2.
Figure 2
Source: Genworth
S&P noted that the $202m capital reduction did not affect its rating of Genworth Australia. S&P rates Genworth Australia’s financial strength and issuer credit rating at A+ and the outlook is stable.
In terms of outlook, the Genworth Australia’s management noted:
“The high LVR market continues to be constrained in 2016 and Genworth continues to expect GWP to decline by approximately 20 per cent for the year due to these market conditions. Genworth expects 2016 NEP to decline by approximately 5 per cent and for the full year loss ratio to be between 25.0 and 35.0 per cent. The Board will target an ordinary dividend payout ratio range of 50 to 80 per cent.”
Moody’s
Moody's rates Genworth Australia insurance financial strength at A3 (outlook negative); this reflects the firm's resilient levels of capitalisation, its profile as Australia's largest mortgage insurer, and the gradually improving quality of its portfolio. These positive considerations are tempered by the company's elevated dependence on key customers and relatively high levels of geographical concentration. They are also tempered by downward pressure on its top line revenue generation, with declining gross written premiums during 2015 and 1H16.
The outlook on Genworth Australia's rating is negative, reflecting the pressures arising from both the declining gross written premium volumes, and rising tail risk in the Australian housing market.
S&P
S&P rates Genworth Australia at A+ (outlook stable) and reflects its view of the insurer's A+ standalone credit profile (SACP). This takes into account the concentration within the lenders' mortgage insurance line of business and changes in market conditions over the last one to two years. These include reduced lender risk appetite for high LVR lending, soft 10% limit on investor loan growth and greater capacity provided by offshore reinsurers.
The stable outlook on Genworth Australia for the next one to two years reflects S&P’s view that the ratings principally reflect the insurer's SACP and that any subsequent divestment of shares by the parent, Genworth, would be unlikely to cause Genworth Australia's competitive position or capital position to materially deteriorate, and that Genworth Australia will increase its level of insulation from the Genworth group.
Takeover of Genworth Financial Inc (GFI) (Genworth)
China Oceanwide and Genworth announced they have entered into a definitive agreement under which China Oceanwide has agreed to acquire all of Genworth’s outstanding shares for a total value of approximately US$2.7bn. The transaction is subject to approval by Genworth's stockholders as well as other closing conditions, including the receipt of required regulatory approvals.
As part of the transaction, China Oceanwide has additionally committed to contribute to Genworth $600m of cash to address the debt maturing in 2018, on or before its maturity, as well as US$525m of cash to the US life insurance businesses.
Moody’s
As a result of this announcement, Moody's will continue its review for downgrade of the Ba3 senior unsecured debt rating of Genworth.
Moody’s stated:
“Genworth's continued review for downgrade reflects execution risk associated with the transaction as well as a lack of visibility into Genworth's plans to resolve its holding company liquidity and financial flexibility challenges following a transaction. Although COH [China Oceanwide] will contribute capital (in addition to the payment to Genworth shareholders) to support GLIC and pay down the 2018 debt, Moody's remains concerned about Genworth's ability to address the $1.5 billion of debt maturing in 2020 and 2021, as well as the company's weak results from its life insurance operations.”
Moody’s then bizarrely continued,
“Notwithstanding these uncertainties, should the deal close, it would be a credit positive for Genworth, as COH will help support Genworth's restructuring plan.”
S&P
S&P more sensibly, in my opinion, placed its B rating for Genworth on CreditWatch with developing implications. Although S&P do not rate the legal entity and potential acquirer, China Oceanwide, it does maintain a 'B' counterparty credit rating on a portion of Oceanwide through its subsidiary Oceanwide Holdings Co., Ltd. (Shenzhen listed).
Conclusion
It is interesting to note that neither S&P nor Moody’s cited a downgrade of Genworth Australia’s parent as a major rating factor. At the moment, it is unlikely that the acquisition would have any impact on Genworth Australia’s rating.