The fall in its recent and future levels of new business because of the housing slow down, has seen local lenders mortgage insurer, Genworth Mortgage Insurance, reveal plans to hand back up to $250 million of surplus capital to its shareholders.
The company told the ASX yesterday that it is planning a $202 million capital reduction in the form of a 34 cents per share distribution and is also considering a $48 million share buyback.
Genworth says that if shareholders do not approve its distribution and share consolidation resolutions at the May 5 annual general meeting, it may instead look at a $250 million buyback.
The news came a month after the company revealed a 20% slide in gross written premiums in 2015, and said it expects to see a similar decline this year. That 40% fall in premium income has come from a 10% slide in new insurance written last year and expectations of a similar fall this year.
That means the company will need less capital to support a smaller base of liabilities (Lenders Mortgage Insurance generally lasts three years).
Such a move will favour its US parent Genworth Financial Inc which owns 52% of the local company and give the loss making company a valuable $130 million or so.
“This capital management initiative represents another important step in our ongoing journey to manage our capital base at a level which balances our objectives of meeting our policyholder obligations, delivering long-term shareholder returns and having the flexibility to grow the business in the future,” Genworth chief executive Georgette Nicholas said in a statement to the ASX yesterday.
The news shouldn’t be surprising as, when revealing its full year financial results in February, Genworth management forecast a fall of 20% in new mortgage lending insurance business in 2016 because of the cooling in the local home loan market and the drop in bank finance for borrowers seeking loans and offering loan to valuation ratios of 80% or more (which usually require the borrower to take out Lenders Mortgage Insurance).
Genworth reported a 5% fall in underlying net profits to $264.7 million for the year to December.
Statutory net profit was $228 million, 30% down from 2014, due to mark-to-market losses during the period.
Ms Nicholas said in February’s statement, "High loan-to-value ratio lending as a proportion of total mortgage originations has reduced recently in response to tightened lender risk appetite. We expect this to lead to a lower level of new insurance written in 2016”.
"Yet, this business is expected to be lower risk and less capital-intensive. Our focus is on maintaining our risk discipline in this changing market,” she said.
Genworth’s new insurance written dropped 10% in 2015 from $36.2 billion to $32.6 billion. Gross written premium, or revenue, fell 20% to $507.6 million.
The group expects its GWP to fall by about 20% this year because of the housing slowdown and fall in new insurance written.
Genworth shares jumped on the news yesterday morning, rising by around 8% in early trading to $2.51, they they fell to under$2.40, before rebounding in late trading and before closing at $2.50.
Genworth shares have lost around 25% of their value (up to Wednesday night) in the past year.
