Tuesday 14 February 2017 by William Arnold Company updates

Genworth Mortgage Insurance Australia Ltd full year 2016 results

Genworth Australia released its full year 2016 results

Full year 2016 earnings

Key points:

  • Underlying NPAT is down 20% to $212.2m
  • Delinquencies stepped up to 46 bps in 2H16, driving a 35% loss ratio (consistent with guidance)
  • Capital remains strong with Prescribed Capital Amount (PCA) coverage of 1.57x. This translates to circa $400m of surplus capital above the top end of its 1.32x-1.44x target PCA. The company did not highlight any capital management activities
  • FY17 guidance:
    • Gross written premium (GWP)/Net Earned Premium (NEP): Genworth expects both to fall 10%-15% vs. FY16A
    • Loss ratio: 40-50% vs. 35% in FY16A
    • Expense ratio: 28-30% vs. 25.7% in FY16A

Customer contracts

Genworth Australia have flagged it may not renew – in full – its contract with its second largest customer, noting that the customer is “considering other alternatives to traditional lenders mortgage insurance” in particular for their less than 80% loan to value ratio portfolio.

Company FY17 guidance assumes the loss of all GWP relating to this contract. Genworth Australia also advises that its third largest customer contract, due to expire on 20 November 2017, “may or may not” be renewed. Its top three customers accounted for approximately 78% of Genworth’s total new insurance written (NIW) and 71% of GWP in FY16. Commonwealth Bank of Australia (CBA), Genworth Australia’s largest customer, recently renewed its contract to 31 December 2019.

Potential impact on BBSW+3.50% Tier 2 Notes

Summary: If Genworth Australia continues to write less business, liabilities will naturally reduce, reducing the amount of regulatory capital required to be held. As the business shrinks, capital is released which is more than sufficient to repay the $200m Tier 2 notes when they are due. At December 2016 the group held $800m of excess capital. However, Bloomberg consensus expects net income to stabilise in 2018.

New Insurance written

New Insurance written (NIW) continues to shrink, which is reducing gross written premium (GWP). However as GWP reduces, Genworth Australia needs less capital to support a smaller base of liabilities. If the company stopped or writes less new business, liabilities will naturally reduce, releasing capital.

Source: Genworth Australia

At December 2016, Genworth held capital of $2.2bn ($2bn of common equity and $200m BBSW+3.50% Tier 2 Notes) against a minimum regulatory requirement of $1.4bn. The minimum capital requirement reduced from $1.64bn in FY15, given the reduction in premiums.

Genworth therefore holds excess capital of $800m.

Over the last few years as the business has reduced in size, and excess capital has been returned to equity investors via special dividends. If the business continues to shrink, the $200m of Tier 2 Notes may also be repaid, depending on regulatory requirements and cost of funding at the first call date.

GMA is however seeking to develop new product that better aligns with the demands of its customer base. Bloomberg Conesus forecast is for Net Income to fall from $212m in 2016 to $160m in 2017, then to $155m in 2018, before increasing in 2019 to $162m.