Genworth Revenue Benefits from Refinancing Activity, but New Policies Continue to Slow

Business Strategy & Outlook:

Genworth has a 50-year history in providing lenders mortgage insurance in Australia but has only been listed on the ASX since May 2014. Global U.S.-based insurer Genworth Financial Inc. listed it and completely sold out in 2021. It is likely Genworth will find it challenging to grow its LMI business in the face of increased competition. The entrance of Arch Capital Group, and increased tendency of lenders to self-insure, will see Genworth cede further share over time. 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.

The low growth in high loan/value ratio, or HLVR, loans, due to low systemwide home loan growth, as well as banks being more risk-averse after the Royal Commission and tightening of lending standards. 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. Management is rolling out optionality for borrowers to pay premiums in monthly instalments and paying LMI upfront at a discount (instead of capitalized on the loan). While initiatives such as these are important to address borrower challenges in saving a deposit, they can lead to Genworth earning less on an average policy, and by not receiving premiums upfront, reduces funds available for Genworth’s investment portfolio. Unless Genworth’s larger customers integrate these offering into their systems, take up will likely be low. In June 2021 Genworth’s largest customer, Commonwealth Bank, issued a request for proposal relating to its LMI requirements. While the agreement was renewed for another three years, it highlighted the risk to the insurer’s outlook given its reliance on Commonwealth Bank. The bank accounts for around 65% of Genworth’s GWP.

Financial Strengths:

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 Dec. 31, 2021, is a healthy 2 times. Genworth announced a share buyback of AUD 100 million as a first step in moving the solvency ratio closer to the board’s target range. With AUD 3.7 billion in cash and investments, and reinsurance covering AUD 800 million of claims above AUD 1.65 billion, the insurer has adequate coverage for a severe economic recession.

Bulls Say:

Fiscal and monetary stimulus cushion an economic downturn in Australia, resulting in a rise in delinquencies but allows Genworth to remain profitable.
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 Description:

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)

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