Genworth Gets NAB’s LMI Contract Extended

In a release to the ASX, Genworth, the listed Lenders Mortgage Insurer said that its contract with NAB to provide LMI had been extended for one year to 20th November 2018.

The contract represented 10% of Gross Written Premium in 2016.

Ms Georgette Nicholas, Chief Executive Officer and Managing Director of Genworth, said, “We look forward to continuing to build on our long-standing partnership with NAB under this extended agreement. We are focused on delivering risk and capital management solutions for our customers and we’re delighted that we have been able to continue to be the LMI provider for NAB’s broker business.

“Genworth remains committed to supporting Australians realise their dream of homeownership. Our focus continues to be on the provision of capital and risk management solutions to our lender customers, being a strong risk management partner and using our data and analytics to provide in sights to this changing market.”

The extended contract does not change the guidance provided that Gross Written Premium (GWP) will be down 10 to 15 per cent in 2017.

Genworth Under Ratings Agency Scrutiny

Genworth, the listed Lenders Mortgage Insurer updated the ASX yesterday of the results of the outcomes of recent rating agency reviews. The ratings agencies appear somewhat split on how to assess the risks in the sector.

Fitch ratings affirmed the A+ IFSR and maintained the outlook at stable – saying Genworth had a robust standalone credit profile, solid operating performance, strong capital ratios and conservative investment approach. They noted a generally stable operating environment which continues to support the performance of the insurance portfolio.

Standard & Poor’s rating affirmed the A+ IFSR and maintained the outlook at negative noting standalone credit profile, business risk profile and strong capital and earnings position. “Claims paying resources, which include conservatively invested capital, claims reserves and external reinsurance are supportive of the company’s ability to absorb a significant level of claims if Australia were to experience a severe extended economic downturn”.

Moody’s has however revised its unsolicited IFSR on GFM1 from A3 with a negative outlook to Baa1 with stable outlook. This follows Moody’s wider rating action on financial institutions in June 2017 to reflect its view that “risks in the Australian housing market have risen, heightening the financial sector’s sensitivity to adverse shocks”.

So, you “pays your money and takes your choice!”

More Evidence of Mortgage Distress

Genworth, the listed Lenders Mortgage Insurer (LMI) released their 1H17 results today, and as a bellwether for the mortgage industry, they make interesting reading.  We see continued pressure on mortgage defaults in WA (0.86%) and QLD (0.72%), and a fall in higher LVR lending leading to lower volumes of new premiums being written, but at higher prices.  The average original LVR of new flow business written in 1H17 was 82%.

They reported a statutory net profit after tax (NPAT) of $88.7 million for 1H17. After adjusting for the after-tax mark-to-market move in the investment portfolio of $24.8 million, underlying NPAT was $113.5 million. Compared with IH16, net written premiums were down 7.5%, reported NPAT was down 34.7%, the loss ratio was up 1.8% and the delinquency rate was up 8 basis points. The ROE was down 3.4%. They also suffered a decline in investment returns, from 3.53% (IH16) to 2.88% this time.

Net claims incurred decreased 2.4% which included the $8.2 million favourable impact of a periodic review of its non-reinsurance recoveries on paid claims. This benefit was partially offset by an increase in delinquencies from Queensland and Western Australia, particularly in regions exposed to the slowdown in the resources sector.

5,997 new delinquencies were added in 1H17 with a total of 7,285 on book, reflecting a delinquency rate of 0.51%, up from 0.46% in 2H16. Cures were higher, reflecting ongoing borrower sales activity.

Genworth has commercial relationships with over 100 lender customers across Australia and has Supply and Service Contracts with 8 of its key customers. The top three customers accounted for approximately 66 % of Genworth’s total New Insurance Written (NIW) and 71 % of GWP in 1H17. The largest customer accounted for 37 % of total NIW and 51 % of GWP in 1H17. The Group estimates that it had approximately 30 % of the Australian LMI market by NIW for the six months ended 30 June 2017.

On 10 March 2017, Genworth announced that the exclusivity agreement for the provision of LMI with its second largest customer was terminated in April 2017. The LMI business underwritten under this contract represented 14% of Gross Written Premium (GWP) in 2016. 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 previously advised 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.

They showed their delinquency by year of acquisition.

Each line illustrates the level of 3 month+ delinquencies relative to the number of months an LMI policy has been in-force for policies issued within a specific year.

2008 Book Year was affected by the economic downturn in Australia and heightened stress experienced among self-employed borrowers, particularly in Queensland, which was exacerbated by the floods in 2011.

Post-GFC book years seasoning at lower levels as a result of credit tightening, however ongoing deterioration for 2012-14 books have been predominantly driven by resource reliant states of QLD and WA that are continuing to face challenges following the mining sector downturn.

The above chart illustrates the delinquency population by months in arrears (MIA) aged bucket at the end of each reporting period. Over the past two years, the mortgagee in possession (MIP) percentage as a proportion of the total delinquency population has been trending down.

This reflects strong housing market conditions and the low interest rate environment in which a MIP generally progresses faster to a claim, or sold with no claim, which in turn leads to a relatively lower claims pipeline.

The 3-5 months MIA bucket shows a seasonal uptick in the second quarter of each year, consistent with historical observed experience.

The CET1 capital did not materially change in 1H17 reflecting the $88.7 million Reported NPAT being offset by the $71.3m dividends paid and a $17.0 million decrease in the excess technical provisions. The PCA coverage ratio increased from 1.57x to 1.81x, mainly through a $135.8 million reduction in the PML and a $50 million increase in Allowable Reinsurance.

The Board declared a fully franked interim ordinary dividend of 12.0 cents per share and a fully franked special dividend of 2.0 cents per share both payable on payable on 30 August 2017 to shareholders registered on 16 August 2017.

Former Broker Boss Joins Genworth

From The Adviser.

Suncorp’s former broker head, Steven Degetto, is to join a leading provider of Lenders Mortgage Insurance as its chief commercial officer.

Genworth has announced that Steven Degetto, who was formerly the head of broker for Suncorp Bank before switching roles with Mark Vilo last year to become head of wealth and life intermediaries, will become the company’s new chief commercial officer in “the third quarter of 2017”.

Mr Degetto will, at that time, also become a member of Genworth’s senior leadership team and executive committee.

Building on the Genworth brand in the Australian marketplace, the former broker head will have responsibility for the marketing and distribution of products and services “to meet the evolving needs of lender customers”.

Genworth CEO Georgette Nicholas commented: “We are very excited and pleased to have an individual with Steven’s experience join our team as the new chief commercial officer.

“Steven brings to Genworth extensive business development leadership and experience in residential mortgages as well as strong commercial acumen and an unwavering customer focus.”

Mr Degetto has more than 20 years’ experience in the finance industry with the majority of this based in the intermediary channel.

He was head of Suncorp Bank’s third-party channel between 2013 and 2016, and before that was responsible for managing all intermediary relationships and leading a team of business development managers across Vic, Tas, SA and WA.

As well as working at Suncorp, Mr Degetto has worked for the Macquarie Group, Lawfund Australia and Commonwealth Bank.

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.