Genworth will find it Challenging to Grow its LMI Business In the face of Slow Credit growth and Increased Competition

Arch Capital Group received Australian Prudential Regulation Authority, or APRA, approval to enter the market in 2019 and announced it would acquire Westpac’s LMI business in 2021. This marked increased competition for Genworth and QBE in Australia.

LMI protects a lender against a potential gap between the outstanding loan amount plus costs and the sale proceeds from the mortgaged property. While it’s the lender who is protected and decides whether to purchase LMI, the premium is paid by the borrower. Low growth in high loan/value ratio, or HLVR loans, due to low system wide home loan growth, as well as banks being more risk-averse after the Royal Commission and tightening of lending standards is expected. An economic backdrop where Australians are holding historically high levels of home-loan debt, and wage growth is low, makes strong credit growth and a significantly stronger appetite for loans with higher LVRs unlikely.

Key Investment Considerations

Higher-risk home loan exposure means Genworth is very sensitive to the Australian economy, particularly employment and house prices. In a downturn, it faces the likely lower premiums, higher claims and reduced investment returns.
The full-recourse nature of Australia’s home loans reduces potential claims risks and in a benign economy it has proved profitable, earning profits in all but two years of its roughly 50-year history.
A sound balance sheet means there is the prospect of further capital-management initiatives.

Financial strength

Genworth is regulated by APRA to maintain a certain prescribed capital level, or PCA. Genworth’s PCA is driven primarily by its LMI concentration risk charge (which is mainly based on its probable maximum loss based on a three-year economic or property downturn of an APRA determined 1-in-200 year severity level) and insurance risk charge (the risk that net insurance liabilities are greater than the value determined by the actuary). Genworth targets a regulatory capital base of 1.32 times-1.44 times its PCA, which it has been consistently above. The PCA as at March 31, 2021, is a healthy 1.63 times.

Bulls Say

Fiscal and monetary stimulus cushion the economic downturn in Australia, resulting in a rise in

delinquencies but allows Genworth to remain profitable and continue to generate profits over the longer term.

A sound balance sheet provides the capacity to continue to institute capital management initiatives, including special dividends and buying back more shares.
The recent relaxation of some macro-prudential measures and low cash rates may spur lenders to issue more investor and HLVR home loans, which Genworth is well positioned to benefit from.

Company Profile

Genworth Mortgage Insurance Australia listed on the Australian Securities Exchange in 2014 after its U.S.-based parent, Genworth Financial Inc. (NYSE: GNW), sold down its stake. It has since exited. With a history spanning over 50 years, Genworth Australia is a provider of lenders’ mortgage insurance, or LMI, in Australia. In Australia, LMI is predominantly purchased on loans with a loan/value ratio, or LVR, above 80%. LMI protects a lender against a potential loss (gap) between the outstanding loan amount and sale proceeds on a delinquent loan property. LMI does not protect the borrower, however the premium is paid by the borrower. It’s regulated by the Australian Prudential Regulation Authority, or APRA, which requires it to meet minimum regulatory capital requirements.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.