2017 looks like being a horrible year for lenders mortgage insurer, Genworth Mortgage Insurance Australia (GMA). Not only is it facing a sharp slide in new business, premiums and revenues, but a near doubling in its loss ratio and a continuing slide in the number of lenders mortgage insurance contracts it writes falls.
But on top of that the company faces another year of uncertainty as it looks at the possible loss of two major service contracts. In fact if it loses these two deals, it will be left with one contract – the Commonwealth Bank, which may like a key insurer to have a bit more diversity in its customer base.
These developments come on top of the company expecting to write less lenders mortgage insurance in the coming year as the number of home loans to riskier borrowers (those with a loan to valuation ratio of 80% or more falls for another year, and house prices weaken) – plus a rise in delinquent home loans and insurance payouts.
All this while maintaining dividend payout to shareholders (including its Chinese controlled US parent) to between 50% and 70% of whatever is left as profit. Earnings fell in 2016 as the company wrote less businesses, while maintaining dividend payout ratio at 72%, up from 63% in 2015 when trading conditions were easier. All this news took shareholders by surprise yesterday and they reacted by selling down the shares by around 15% to $2.87.
Genworth said yesterday that as it had announced last November, it had renewed its Supply and Service Contract with its largest customer, the Commonwealth Bank of Australia, for a further 3 years to the end of 2019. The CBA contract accounts for 47% of the company’s Gross Written Premiums – in other words the CBA is Genworth’s biggest customer.
But the company revealed that a similar arrangement with its second, unnamed customer (and remember it lost Westpac two years ago) falls due this month and from yesterday’s comments, there might not be much of a chance of the business being retained. Genworth noted:
"Genworth is in ongoing discussions with this customer about managing its mortgage default risk and is aware that the customer is considering other alternatives to traditional Lenders Mortgage Insurance (LMI), in particular for their less-than-80% LVR portfolio, and this may impact the level of business received by Genworth.
And if that wasn’t bad enough, Genworth also revealed that “the current Supply and Service Contract with its third largest (unnamed) customer is due to expire on 20 November 2017 and that this customer may, or may not, issue a Request For Proposal prior to that time.”
Genworth said it continues to pursue other profitable opportunities in the market that meet its risk appetite and return on equity profile. But there is not much for a company whose specialist skills are concentrated in lenders mortgage insurance.
Looking to 2017, the company said that "House price growth is likely to moderate in 2017, with Sydney and Melbourne continuing to outperform the other major cities. There may be a wider variance in price movements of single dwellings compared to high density properties, particularly in east coast capital cities.”
Genworth said it "remains engaged with other existing and potential customers about the provision of LMI and other risk management solutions and will continue to actively pursue new agreements over the course of 2017.”
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 said it expects to see a worse performance in 2017 with net earned premiums (its key revenue measure) falling by 10% to 15% (against a 3.6% dip in 2016) and “for the full year loss ratio to be between 40% and 50% (35.1% in 2016). The Board continues to target an ordinary dividend payout ratio range of 50 to 80 per cent of underlying net profit after tax (NPAT).”
The company yesterday reported a statutory net profit after tax (NPAT) of $203.1 million, down 10.9% on 2016 and underlying NPAT of $212.2 million, down 19.8% for 2016.
The Genworth Board declared a fully franked final ordinary dividend of 14 cents a share.With the interim of 14 cents a share and a special payout of 12.5 cents a share, shareholders will have received a total of 40.5 cents a share from the company for 2016.
New business volume, as measured by New Insurance Written (NIW), of $26.6 billion in 2016, fell18.4% compared with $32.6 billion in 2015.
Gross Written premiums (GWP) fell 24.8% to $381.9 million in 2016. "reflects a number of factors including reduced high-LVR penetration in the market, a lower LVR mix of business, as well as the full impact of the changes in customers in 2015, the company said.
Net Earned Premium (NEP) of $452.9 million in 2016 fell 3.6% from $469.9 million in the prior year.
The loss ratio was 35.1% in 2016, up from 24.0% in 2015, due to an increase in the number of delinquent loans relative to a year ago and the expectation of higher average paid claim amounts.
"New South Wales and Victoria continue to perform strongly, reflecting strong labour markets and property prices in those states. 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 exposed to the resources sector,” Genworth said yesterday.
