Non major eases lending policy for FHBs

From Australian Broker.

Teachers Mutual Bank (TMB) and its divisions UniBank and Firefighters Mutual Bank have announced softer lending policy guidelines for first home buyers.

Effective from 18 May, the lender has made changes with regards to genuine savings requirements which reflect recent policy changes by Genworth, the bank’s LMI provider.

“Where deposit funds/savings have not been held for the minimum term of three months and satisfactory rental payment history is used to mitigate the genuine savings requirement, the First Home Owner Grant (FHOG) may be accepted to contribute to the 5% savings/deposit requirement,” the bank said in a broker note.

This follows from new underwriting guidelines from Genworth, effective from 16 May, which include the FHOG as an acceptable source if true ‘genuine savings’ cannot be found. All funds required to complete the loan application – deposits plus settlement disbursements minus the grant – must be shown at time of the mortgage application.

Genworth’s new conditions place responsibility on the lender to ensure the borrower is eligible to receive a FHOG at the time of the application.

“We are pleased that the changes proposed will further support first homebuyers realise their dream of homeownership,” TMB said.

Genworth Under Pressure

Lender Mortgage Insurer Genworth reported today, and gives a good snapshot of what is happening in the mortgage market.  The volume of new higher LVR loans (HLVR) is falling.  Claims are rising.  But capital ratios remain strong, they have lifted premiums and are exploring new business opportunities.

They showed that claims volumes and value paid rose.

Within their book, delinquencies were at 0.78% in WA, whilst QLD had the largest number, and 0.68% of book.

They make the point that 2008 is a problem year.

Genworth Mortgage Insurance Australia Limited (Genworth) has reported statutory net profit after tax (NPAT) of $52.2 million down 22.4% on 1Q16, and underlying NPAT of $68.3 million for the quarter ended 31 March 2017, up 10.7% on 1Q16.

New business volume, as measured by New Insurance Written (NIW), increased 9.7 per cent to $6.8 billion in 1Q17 compared with $6.2 billion in 1Q16. The result included $1.3 billion in bulk portfolio transactions.

GWP increased 3.8 per cent to $88.2 million in 1Q17. This reflects a higher LVR mix of business compared with the same quarter in 2016 and the impact of the premium rate actions taken in 2016.

Reported NPAT includes after-tax mark-to-market loss of $16.1 million on the investment portfolio.

Net Earned Premium (NEP) of $107.9 million in 1Q17 decreased 4.9 per cent compared with $113.5 million in 1Q16 reflecting lower earned premium from recent book years.

The expense ratio in 1Q17 was 25.2 per cent compared with 23.4 per cent in 1Q16.

The loss ratio was 34.8 per cent in 1Q17, up from 27.0 per cent in 1Q16, due to lower NEP, an increase in the number of delinquent loans relative to a year ago and a higher average paid claim amount.

New South Wales and Victoria continue to perform strongly. However, the performance in Queensland and Western Australia remains challenging and delinquencies are elevated due to the slowdown in those regional and metropolitan areas that have been previously benefited from the growth in the resources sector.

As at 31 March 2017, the Company had invested $207 million in Australian equities in line with the previously stated strategy to improve investment returns on the portfolio within acceptable risk tolerances. After adjusting for the mark-to-market movements, the 1Q17 investment return was 3.14 per cent per annum, down from 3.55 per cent per annum in 1Q16.

Genworth previously announced that the exclusivity agreement for the provision of LMI with its second largest customer was terminated in April 2017. The Company has been successful in entering into new business with that customer that assists them in managing mortgage default risk through alternative insurance arrangements.

Genworth also advises that its customer, the National Australia Bank, has issued a Request For Proposal relating to its LMI requirements. The Company has submitted its proposal and will provide updates as to the outcome of its proposal.

Genworth continues to pursue other profitable opportunities in the market that meet its risk appetite and return on equity profile.

Overall, the Company expects GWP in 2017 to be below 2016 levels, down between 10 per cent and 15 per cent, subject to the timing and extent of any changes in the customer portfolio. Genworth expects 2017 NEP to decline by approximately 10 to 15 per cent and for the full year loss ratio to be between 40 and 50 per cent. The Board continues to target an ordinary dividend payout ratio range of 50 to 80 per cent of underlying NPAT.

 

Genworth Seeks Possible On-Market Share Buy-Back

Genworth released their notice of the 2017 Annual General Meeting today, to be held on 11 May 2017.  They are reacting to the changing market conditions, with lower LMI volumes at lower LVR’s.

Of note is Resolution 4 which asks shareholders to approve an on-market share buy-back of up to 125 million of the Company’s issued ordinary shares, over a period of up to 12 months form the data of the 2017 AGM.

We were previously advised that the Genworth was evaluating the potential to deploy and excess capital towards profitable opportunities that would enhance the return profile of the business and in the absence of those, capital was to be returned to shareholders.

Given that the Companies regulatory solvency ratio continues to be above the board’s target capital range of 1.32 to 1,44 times the PCA, and is expected to remain so, buy-back is an option.

Shareholders are required to approve the buy-back thanks to the 10/12 rule limit. They will also have to comply with ASX listing rules and approval of APRA.

There is no guarantee the Company will buy back the full number of shares. Currently there are 509,365,050 shares.

They say excess capital may also be deployed to:
• enhance the return profile of the business;
• pay dividends in excess of profits earned;
• undertake a capital reduction;
• reduce Tier 2 capital; or
•reduce reinsurance.
These alternatives will continue to be evaluated.

Genworth Australia Downgraded

From Australian Broker.

One of Australia’s leading providers of lenders mortgage insurance (LMI), Genworth Financial Mortgage Australia, has had its ratings revised from stable to negative.

S&P Global Ratings announced the move yesterday (20 March), 11 days after the company announced the loss of a major customer. The unnamed partner – a second tier bank – opted to terminate the agreement upon the expiry of its contract on 8 April.

“The outlook revision to negative reflects our expectations of a possible weakening of Genworth Australia’s competitive position, and subsequent operating performance, as a consequence of the continued decline in the insurer’s market position,” analysts wrote.

Over the past three years, Genworth has lost two large clients with the most recent loss accounting for around 14% of its gross written premium during the 2016 fiscal year (ending 31 December).

“As a result, we expect Genworth Australia’s full-year 2017 gross written premium to contract further, which is below our previous expectation of modest premium growth.”

This follows a larger than anticipated decline in gross written premium of around 25% during the 2016 fiscal year. While the company remains the largest provider of LMI insurance in the market, these declines have put pressure on its competitiveness, market position and earnings resilience, analysts said.

“We recognise the decline in gross written premium has been partially driven by industry-wide contraction reflecting regulatory measures to curb investor lending growth and reduced lender risk-appetite for high loan-to-value ratio loans.”

The new negative outlook means S&P has a one-in-three chance of further lowering Genworth’s ratings over the next two years. This would occur if there is a material deterioration in the firm’s competitive position or operating performance, or there is evidence of excessive risk taking through inadequate pricing or looser underwriting standards.

S&P could revise the outlook to stable over the next two years if Genworth’s competitive positions stabilises and its operating performance is sound while its underwriting discipline and pricing remains solid.

LMI Genwoth Confirms Loss Of Exclusive Contract

Genworth has confirmed the exclusive contract with their second largest customer, which was due to expire in February 2017, will be terminated on 8th April 2017.

The LMI business underwritten under this contract represented 14% of gross written premium in 2016. The termination of this contract has not changed the forward guidance that GWP would be down 10 to 15 percent in 2017.

The company remains in discussions with the customer about managing default risk in the context of other insurance alternatives.

We think that as banks reduce the proportion of high-lvr loans they are writing, and insure more of the lower risk business within their captive internal insurers at lower net costs, the role of stand-alone LMI’s in the Australian market will need to evolve.

Genworth FY16 Results Highlight Changing Market Conditions

Lender’s Mortgage Insurer Genworth released their results to December 2016 today. From it, we get insights into the changing nature of the housing market, and also a view of the pressure LMI’s are under.

Genworth reported a statutory net profit after tax (NPAT) of $203.1m, down 10.9% on prior year. After adjusting for the after-tax mark-to-market move in the investment portfolio of $9.1m, underlying NPAT was $212.2m down 19.8% on prior year. The loss ratio was 35.1%, compared with 24% last year. They remain strongly capitalised, and though claims are higher, they declared a final fully franked dividend of $14.00,  a FY16 payout ratio of 67.2%, but down from last half.

Banks are clearly writing less high LVR mortgages, thanks to APRA, and when households default, and are forced to sell, there is sufficient capital appreciation in most properties to avoid a LMI claim due to strong price rises.  The banks, can’t loose! (Remember the LMI protects the bank, not the borrower). However, in regions where prices are falling – for example in the mining belts of WA and QLD, and home prices are falling, claims are up. This does not bode well if home prices were to revere more widely.

Genworth was listed in 2014, but since then has completed share buy-backs to reduce the number of issued shares. Further restructure will simplify the corporate structure in 2017, with a view to driving efficiency. They are the only separately listed LMI in Australia, (the banks have their own LMI captives, and the other player in the market is less transparent).

We will look at the market data they provided first, then look at the drivers of their results more specifically.

Genworth had an in-force portfolio of approximately $324 billion at Dec 2016. Standard LMI accounted for 91% of the book, and Low Doc 5%. 26% of the book relates to Investment loans.

The seasoning picture is interesting.  This shows the evolution of Genworth’s 3 month+ delinquencies (flow) by residential mortgage loan book year, from issue.

The delinquency population by months in arrears aged buckets shows that over the past two years, the mortgagee in possession (MIP) as a proportion of total delinquency is trending down. This is because the strong property market has allowed stressed households to sell and release equity, with no LMI claim.

With regards to the current results, a range of factors influenced the lower outcomes.

New Insurance Written (NIW) fell 18.4% in FY16, to $26.6 billion. Moreover, NIW above 90% LVR decreased 39.8%, and 80-90% LVR fell 17.2%. This reflects changing appetite among lenders for higher LVR business, following regulatory intervention from APRA.

Lower Sales (Gross Written Premium – GWP) fell 24.8% compared to previous period due to the lower number of high loan-to-value (LVR) penetration in the market and a lower LVR mix of business.

The average price for Flow (GWP/NIW) decreased from 1.63% to 1.51% in FY16. However, they got some benefit from premium repricing in the second half.

Lower Revenue (Net Earned Premium) – NEP fell 3.6% reflecting lower earned premiums from current and prior book years.

Higher Net Claims Incurred – Net claims incurred increased by $46.1 m to $158.8m due to an increase in the number of delinquent loans relative to a year ago, and a higher average claim amount.  The performance in QLD and WA is “challenging”, reflecting increased delinquencies, especially in resource exposed regions. NSW and VIC were better performers.  Overall, the delinquency rate rose from 0.38% to 0.46%.

Whilst financial income (interest income and realised and unrealised gains/losses) increased by $18.1 m, to $126.0 m in FY16, the yield on the investment portfolio dropped 3.69%.

Regulatory capital fell from $2,600 m in 2015 to $2,213 m in 2016. CET1 decreased in FY16 mainly reflecting the $250 m of dividends, $202 m capital reduction and $86 m decrease in the excess technical provision, offset by $203 m NPAT. Tier 2 capital decreased following the redemption of $50 m of the $140 m notes issued. The PCA coverage ratio was consistent with FY15.

QBE Lifts LMI Fees

From Australian Broker.

QBE has announced an increase in the cost of lenders’ mortgage insurance (LMI) for property investors with the surcharge (or pricing loader) rising from 7% to 12%, reports the Australian Financial Review.

LMI for owner-occupiers will remain as is with the 8% first home buyer discount being extended to mortgages up to $1.2 million.

This is the first increase in three years, a QBE spokesperson said.

“Our experience shows first home buyers perform better than our average portfolio and we are pleased to continue to provide an 8% discount. The premium loading for investors has been increased to 12%, reflecting increased risk compared to lending to owner-occupiers.”

The minimum fee for QBE’s new and existing LMI products will also increase to $950.

Despite these changes, the firm will remain competitive, the spokesperson said.

A spokesperson from Genworth told AFR the firm had increased rates by 5% in the first half of 2016. The firm provides LMI for National Australia Bank, Commonwealth Bank of Australia and over 100 smaller lenders.

Genworth 3Q16 Hit By Lower LVR Loans and Higher Claims

Whilst Lenders Mortgage Insurer Genworth renewed their important CBA contract, today’s 3Q results show the impact of the fall in high LVR lending and change in business mix. Of course some lenders are holding more LMI business within their own captive insurers. It also confirms rising defaults, especially in Queensland and Western Australia and in particular in mining related regions.

If high LVR lending continues to fall thanks to regulatory intervention, the LMI’s will remain under pressure. The stability of LMI’s is important for the overall financial stability of the banking sector thanks to their high mortgage exposures. Data from APRA shows the shift in loan mix.

genrowth-3q16-1New business volume, as measured by New Insurance Written (NIW), of $6.1 billion in 3Q16, decreased 28.2 per cent compared with the previous corresponding period (pcp). Year-to-date NIW of $20.1 billion is down 23.3 per cent on the pcp.

genworth-3q16-4Gross Written Premium (GWP) decreased 25.8 per cent to $92.5 million in 3Q16. Year-to-date GWP is 31.2 per cent lower than the pcp.This reflects a number of factors including reduced high-LVR penetration in the market, a lower LVR mix of business, as well as the full impact of the changes in customers in 2015.

genworth-3q16-3Net Earned Premium (NEP) decreased 6.5 per cent to $115.9 million in 3Q16 compared with the pcp reflecting an adjustment to the NEP earnings curve implemented in 3Q15. Year-to-date NEP is down 1.4 per cent on the pcp.

The normalised loss ratio rose to 45.3 per cent in 3Q16 from 26.0. The number of claims paid rose from 286 (2Q16) to 321 3Q16. The average claim paid was $73k.

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 navigates through a period of transition.

The expense ratio in 3Q16 was 25.8 per cent compared with 25.7 per cent in the pcp. The steady expense ratio reflects a continued focus on expense management. Genworth continues to manage the business with a target expense ratio of 26-28 per cent in 2016. Investment income of $36.3 million in 3Q16 included a pre-tax mark-to-market loss of $0.9million.

As at 30 September 2016, the value of Genworth’s investment portfolio was $3.5 billion, more than 95 per cent of which continues to be held in cash and highly rated fixed interest securities. As at 30 September 2016, the Company had invested $171 million in Australian equities in line with the previously stated strategy to improve investment returns on the portfolio within acceptable risk tolerances.

After adjusting for the mark-to-market movements, the 2016 year-to-date investment return was 3.51 per cent per annum, down from 3.70 per cent per annum in the pcp. As at 30 September 2016, the Company’s regulatory solvency ratio was 1.55 times the Prescribed Capital Amount (PCA).

The Board continues to target a capital range of 1.32 to 1.44 times the PCA ona Level 2 basis. The Company continues to focus on optimising its capital structure and is evaluating capital management initiatives that could be implemented in the future.

Genworth expects 2016 NEP to decline by approximately 5 per cent and for the full year loss ratio to be approximately 35 per cent. The Board continues to target an ordinary dividend payout ratio range of 50 to 80 per cent.

Genworth Renews CBA LMI Contract

Genworth Mortgage Insurance Australia has announced it has renewed its Supply and Service Contract with CBA to provide Lenders Mortgage Insurance from 1 January 2017. This contract represents 43% of Gross Written Premium in 1H16.

Chess-HusingThe contract will be for 3 years to 31 December 2019. Genworth will be the exclusive provider of LMI to CBA for a minimum specified percentage (determined by the number of funded applications for new loans) of new high LVR residential mortgage loans. The minimum LMI percentage is consistent with the level set in 2014 and is fixed for the duration of the renewed term.

You can read our recent post on LMI here.

 

 

 

 

China Oceanwide Acquires Genworth For $2.7 Billion

From Zero Hedge.

China Oceanwide Holdings Group agreed to buy troubled US insurer Genworth Financial Inc. for $2.7 billion in cash, pledging to help the U.S. firm manage its debt and strengthen life insurance units after it was hurt by higher-than-expected losses tied to long-term care coverage. A China Oceanwide investment platform will pay $5.43 per share, the companies said Sunday in a statement. That’s 4.2% more than Genworth’s closing price of $5.21 Friday. The buyer also promised to provide $600 million to Genworth to address debt maturing in 2018, as well as $525 million to strengthen the life insurance businesses.

genworth“Genworth is an established leader in both mortgage insurance and long-term care insurance, which are markets that present significant long-term growth opportunities,” China Oceanwide Chairman Lu Zhiqiang said in the statement. “We are providing crucial financial support to Genworth’s efforts to restructure its U.S. life insurance businesses.”

In recent months, Genworth CEO Tom McInerney has been selling assets to ensure the insurer has sufficient liquidity after it was hit by losses on its long-term care coverage, which pays for home-health aides and nursing home stays, and as low interest rates crimp returns. At that point, it was almost as if a white knight emerged for the troubled company, one from across the Pacific. China Oceanwide plans to let Richmond, Virginia-based Genworth operate as a standalone company after the takeover with senior management still in place, according to the statement. “Genworth is an established leader in both mortgage insurance and long-term care insurance, which are markets that present significant long-term growth opportunities,” China Oceanwide Chairman Lu Zhiqiang said in the statement. “We are providing crucial financial support to Genworth’s efforts to restructure its U.S. life insurance businesses.”

A quick prime on what Oceanwide’s $2.7 billion in cash will buy it:

Genworth writes mortgage insurance in the U.S., and has stakes in a Canadian and an Australian home-loan guarantor. Mortgage insurers cover losses for lenders when homeowners default and foreclosure fails to recoup costs. This deal gives China Oceanwide the chance to benefit from gains in the U.S. housing market.

McInerney has been seeking to free up capital to pay bonds coming due, and has also been boosting capital by selling assets. He struck a deal in 2015 to sell a European mortgage unit to AmTrust Financial Services Inc. and also agreed to have Axa SA buy a European unit that offers customers protection against the financial impact of major illness, accident or death. He’s also been working to restructure the business units in a way that’s acceptable to regulators, and won approval from bondholders earlier this year to reorganize some of its units.

The deal will help give Genworth the finances to separate a life and annuity operation from another life insurance arm, according to the statement. Lu said the transaction was structured to make it easier to obtain regulatory approval.

According to Bloomberg. the deal is expected to close by the middle of 2017.
Genworth received advice from Goldman Sachs Group Inc., Lazard Ltd., Willkie, Farr & Gallagher LLP, and Weil, Gotshal & Manges LLP, while the board of directors sought guidance from Richards, Layton & Finger. China Oceanwide was advised by Citigroup Inc., Willis Towers Watson Plc, Sullivan & Cromwell and Potter Anderson & Corroon LLP.

Should the deal close, it will likely unleash a surge of more Chinese acquisitions of questionable US companies, leading to even more short squeezes on concerns that the “Chinese are coming.”