US insurer, Genworth Financial Inc. is to make the second attempt in two years to float off part of its Australian mortgage insurance business with the aim of raising around $A880 million.
The company revealed in a filing on Monday night with the US Securities and Exchange Commission that it plans to try and sell up to 40% of its Australian insurance business through an initial public offering by June 30.
The move is Genworth’s second attempt at securing an Australian listing.
It put similar plans to raise as much as US$850 million through an IPO of its Australian business on hold in 2012 after forecasting the unit would make a quarterly loss.
The company didn’t explain the timing, but seeing its mortgage insurance is tied to the health of the property sector, the current boom would explain the timing of this attempt.
The prices of new and existing homes are rising, especially in Sydney and Melbourne, while the average value of new and existing homes also rises.
Building and lending approvals are also rising, which means more business for companies like Genworth, and its major competitor in this market in Australia, QBE.
Genworth Australia said it had roughly 45% of the market, with QBE having a similar share.
In the US filing Genworth said the Australian company wouldn’t keep any proceeds from the IPO, which is subject to market conditions.
Funds raised would instead be used to repay debts between Genworth and its other units.
"Genworth Australia will use the net proceeds from the Offer to repay intragroup funding arrangements with Genworth Financial and its subsidiaries,” the company said.
Genworth Australia and its subsidiaries will not retain any net proceeds from the Offer.
"The amount of net proceeds received by Genworth Financial from the Offer will be determined based on the number of shares offered and the price per share received, as determined by agreement between Genworth Financial and the joint lead managers of the Offer, less fees and expenses incurred in connection with the Offer,” the company said.
Details from the US filing were circulated to local investors yesterday.
Lead broker Goldman Sachs reportedly said the Australian business was worth $1.9 billion to $2.4 billion, compared to net assets of $A2.4 billion at December 31, 2013.
The company reckons net profit will rise 29% this year – from $A179.4 million to $A231.1 million. Underlying profit would rise by a smaller amount – from $A220 million to $231.1 million.
Net earned premiums, the company’s prime source of income from its Lenders Mortgage Insurance business (LMI) is forecast to rise 10.6% to $A440.2 million from $398 million.
The value of LMI policies written is forecast to ease to $A33.8 billion in 2014 from $A34.3 billion last year.
Gross premiums are forecast to rise $A45 million to $515 million this year from $A471 million.
Outwards reinsurance expense is expected to increase by AUD 2 million (3%) from AUD 74 million in FY2013 to AUD 76 million in FY2014F, reflecting a full year of the higher premium rate from the new 2013 reinsurance treaty.
Genworth said in the filing its Australian arm "is forecasting system credit growth of between 4% and 6% for the year ended December 31, 2014 (“FY2014F”)".
As a result, Genworth Australia expects total residential mortgage originations to increase by approximately 10% in FY2014F. Genworth Australia expects that this increase will result from increased residential mortgage loan originations by its lender customers, including investment property loans, consistent with increased investment property loan originations experienced in the second half of 2013.
The company’s biggest problem is the level of bad home loans and claims made by lenders, such as the big banks. On that point, Genworth is confidence.
"Net claims incurred is a function of net claims paid and the movement in claims reserve. Net claims incurred is forecast to increase in FY2014F to a total of AUD 133 million from AUD 128 million in FY2013.
"Genworth Australia’s Loss Ratio is expected to decline to 30.2% compared with 32.1% in FY2013. The increase in net claims incurred is expected to result from the changes in net claims paid and movement in the claims reserve as discussed below:
"Net claims paid is expected to decrease 30% during FY2014F. The average claim payment is expected to decrease from AUD 77,800 in FY2013 to AUD 72,000 in FY2014F,” the company said.
The company said this improvement will result from:
• Higher house prices that were experienced in FY2013 and a forecast continuation of positive house price appreciation in 2014 which is expected to result in higher selling prices for houses;
• The current relatively low interest rate environment is expected to lead to lower levels of accrued interest on delinquent residential mortgage loans;
• The recent improvement in the property market is expected to continue with the expectation of shorter times to sell properties and consequently lower levels of accrued interest on delinquent residential mortgage loans; and
• The expected positive impact of the strengthening of Genworth Australia’s underwriting guidelines from 2009 resulting in the higher quality book years written post 2009 forming an increasingly larger portion of the in-force portfolio.
