Tag: Genworth

Mortgage Delinquencies Tick Higher As More Higher LVR Loans Written

Genworth, the Lenders Mortgage Insurer released their third quarter results today. Their statutory net profit after tax (NPAT) in 3Q19 was $25.1 million (3Q18: $19.6 million) and their underlying NPAT2 of $26.5 million (3Q18: $20.4 million).

Genworth said 3Q19 financial performance was “solid” with gross written premium up 24.4% from growth in our traditional lenders mortgage insurance (LMI), driven by increasing volumes in high loan to value lending by our lender customers.

The Delinquency Rate increased from 0.55% in 3Q18 to 0.60% in 3Q19. This was driven primarily by an increase in delinquency rates across most states (particularly in Western Australia, New South Wales and Queensland).

The increase also reflects the continued extended ageing of delinquencies due to slower loss management processing by lenders first called out in FY18. Encouragingly, signs of faster processing by some lenders has emerged this quarter. The Delinquency Rate remained flat between 2Q19 and 3Q19.

New Delinquencies was down slightly (3Q19: 2,622 versus 3Q18: 2,742) and in line with favourable trends usually experienced in the third quarter as new delinquencies reduced from 2,853 in 2Q19. Cures improved from 2,378 in 3Q18 to 2,439 in 3Q19 as lender customers started to emphasise remediation of aging delinquencies. However the cure rate is still lower than back in 2017.

The number of Paid Claims was up (3Q19: 361 versus 3Q18: 320) although the average paid per claim decreased from $115,700 in 3Q18 to $97,900 in 3Q19. This decrease is a result of the stabilisation of mining regions. However, the average paid per claim remains elevated as challenging market conditions remain across areas such as Perth and its specific sub-regions.

The aging also highlights the length of time it takes to get into difficulty, see the peak in loans written back in 2013-14.

Portfolio delinquency performance remained relatively steady quarter on quarter, following seasonal trends. Despite the overall stability, impacts from ageing delinquencies continue, but early signs of faster loss mitigation processing by lenders are emerging.

2006 and prior book years performances were affected by higher proportion of low doc lending which reduced significantly in 2009 following policy changes and decommissioning of the low docs product in the latter part of 2009.

Historical performance of 2008 09 book year was affected by the economic downturn experienced across Australia and heightened stress experienced among self employed borrowers, particularly in Queensland, which has been exacerbated by recent natural disasters.

2010 12 book year delinquencies at lower levels driven by stronger credit policies

Deterioration in 2013 14 book years reflect downturn in mining regions resulting in ongoing economic and housing market challenges.

But the most obvious issue ahead is the rising levels of delinquency in NSW. This will be one to watch in coming quarters, alongside a potential rise in the proportion of high loan to value loans being written now (thanks to the APRA loosening).

Genworth Says Mortgage Delinquencies Higher

Genworth reported their 1H19 results today. As the most transparent Lenders Mortgage Insurer in Australia it provides an important, if myopic sense of what is happening at the mortgage portfolio coalface. And pressure is still building.

They reported a NPAT of $88.1 million includes after tax unrealised gain of $45.4 million on investment portfolio (1H18: after tax unrealised loss of $8.4 million), and an underlying NPAT 1 of $43.1 million includes after tax realised gain of $5.8 million (1H18: $9.1 million).

Their loss ratio was 54.1% (1H18: 53.3%) in line with the Company’s FY19
guidance reflecting they say a seasonal uptick in delinquencies historically experienced in the first half of the year.

Delinquencies were up, by 6 basis points, with WA leading the way at 11 basis points, followed by NSW and QLD. This is consistent with DFA mortgage stress analysis.

They said that overall portfolio delinquency performance deteriorated marginally quarter on quarter, in-line with seasonal expectations, but also impacted by ageing delinquency portfolios as a result of slower loss mitigation processes by lenders.

This is code for lenders choosing NOT to press stressed borrowers to foreclose, in my view.

Their 2006 and prior book years performances were affected by higher proportion of low doc lending which reduced significantly in 2009 following policy changes and decommissioning of the low docs product in the latter part of 2009

Historical performance of 2008-09 book year was affected by the economic downturn experienced across Australia and heightened stress experienced among self-employed borrowers, particularly in Queensland, which has been exacerbated by recent natural disasters.

2010-12 book year delinquencies at lower levels driven by stronger credit policies

Deterioration in 2013-14 book years reflect downturn in mining regions resulting in ongoing economic and housing market challenges

They announced a new product offering – a regular monthly premium LMI to lenders as an alternative to the current upfront single premium product. This may lower the sticker shock on premiums for LMI.

Their outlook is predicated on metropolitan housing market conditions stabilising, but Perth is likely to continue to experience challenging market conditions. They think unemployment levels will remain reasonably stable throughout 1H19 though with continued excess capacity in the labour market ahead.

Genworth still has a strong capital base with total assets as at 30 June 2019 at $3,648.2 million. The 1.6% increase is due to share buy-backs, unrealised gains in investments and changes in accounting.

Total liabilities as at 30 June 2019 were $1,925.9 million, which is a 3.9%
increase of $73.1 million from 31 December 2018.

Since listing in 2014, Genworth has paid out 100% of after tax profits by way of ordinary and special dividends to shareholders.

So LMI remains a tricky business, with new competitors, internal bank alternatives, and the Government 95% scheme coming next year, so no surprise that some rating agencies have recently downgraded.

Genworth 3Q18 Pressure Continues As Mortgage Market Slows

Lenders Mortgage Insurer Genworth reported their 3Q18 earnings today with a statutory net profit after tax (NPAT) of $19.6 million and underlying NPAT of $20.4 million for the third quarter ended 30 September 2018 (3Q18). It is an important bellwether for the mortgage industry, and confirms recent softening. Whilst they have a strong capital position, their net investment returns were also down a little.

The Delinquency Rate (number of delinquencies divided by policies in force but excluding excess of loss insurance) increased from 0.50% in 3Q17 to 0.55% in 3Q18 (1H18: 0.54%).  They called out “the continued trends of softening cure rates from a moderating housing market, tightening credit standards and increases in mortgage interest rates. This has resulted in a more subdued seasonal uplift than has historically been experienced by our business”. As a result, loss ratio guidance was revised higher to 50-55% from 40-50% guidance range previously.

Gross Written Premium increased in 3Q18 reflecting growth in their traditional Lenders Mortgage Insurance (LMI) flow business.

New business volume (excluding excess of loss insurance), as measured by New Insurance Written (NIW), decreased 7.3% to $5.1 billion in 3Q18 compared with $5.5 billion in 3Q17. NIW in 3Q17 included $0.8 billion of
bulk portfolio business versus no bulk portfolio business in 3Q18. Excluding the bulk portfolio business written in 3Q17, flow business NIW increased 8.5% in 3Q18.

Gross Written Premium (GWP) increased 3.6% to $92.1 million in 3Q18 (3Q17: $88.9 million). This does not include any excess of loss business written by Genworth’s Bermudan entity and reflects the greater proportion of traditional LMI flow business written by Genworth lender-customers.

Net Earned Premium (NEP) decreased 32.0% from $100.1 million in 3Q17 to $68.1 million in 3Q18. This includes the adverse $24.8 million impact of the 2017 Earnings Curve Review, and lower earned premium from current and
prior book years. Excluding the 2017 Earnings Curve Review impact, NEP would have declined 7.2% in 3Q18.

The adverse impact on NEP of the 2017 Earnings Curve Review has been reducing quarter on quarter since it took effect on 1 October 2017. Whilst the 2017 Earnings Curve Review has the effect of lengthening the time-period over which premium is earned, it does not affect the quantum of revenue that will be earned.

Genworth’s Unearned Premium Reserve as at 30 September 2018 was $1.2 billion.

The Delinquency Rate (number of delinquencies divided by policies in force but excluding excess of loss insurance) increased from 0.50% in 3Q17 to 0.55% in 3Q18 (1H18: 0.54%). This was driven by two factors. Firstly, there was a decrease in policies in force following completion of the lapsed policy initiative undertaken by the Company in 2Q18. The second factor was the increase in delinquency rates year-on-year across all States (in particular Western Australia, New South Wales and to a lesser extent South Australia). In terms of number of delinquencies, Western Australia and New South Wales experienced the largest increase with Queensland and Victoria experiencing a decrease in number of delinquencies.

New delinquencies were down in the quarter (3Q18: 2,742 versus 3Q17: 2,887) with mining regions showing signs of improvement. In non-mining regions, the softening in cure rates experienced in 1Q18 and 2Q18 continued in 3Q18 with the traditional seasonal uplift in the third quarter being more subdued than prior years.

Net Claims Incurred for the quarter were down 3.2% (3Q18: $35.8 million versus 3Q17: $37.0 million). The Loss Ratio in 3Q18 was 52.6% up from 37.0% in 3Q17, reflecting the impact of lower NEP due to the 2017 Earnings Curve Review. Excluding the impact of the 2017 Earnings Curve Review the loss ratio would have been 38.6%.

The Expense Ratio in 3Q18 was 32.5% compared with 29.7% in 3Q17, reflecting the lower NEP.

Investment Income of $21.5 million in 3Q18 was up 38% on the prior corresponding period (3Q17: $15.6 million). The 3Q18 Investment Income included a pre-tax mark-to-market unrealised loss of $1.2 million ($0.8 million after-tax) versus a pre-tax mark-to-market unrealised loss of $12.0 million ($8.4 million after-tax) in 3Q17.

As at 30 September 2018 the value of Genworth’s investment portfolio was $3.2 billion, more than 90% of which is held in cash and highly rated fixed interest securities and $169 million of which is invested in Australian equities in line with the Company’s low volatility strategy. After adjusting for mark-to-market movements the 3Q18 investment return was 2.80% p.a. marginally down from 2.88% in 3Q17.

LMI Genworth Remains Under The Gun

We suspect that when Genworth went public a few years ago, they did not necessarily consider the extra scrutiny such a listing warrants, especially in a home lending sector which is now under more pressure. This pressure is reflected in their 1H18 results and is a bellwether for the wider housing sector.  Actually I think they are doing much right, given the market context but its a tough gig.

The Group reported a 2018 statutory interim net profit after tax of $41.9 million, down 52.7% from $88.7 million in the prior corresponding period mainly driven by the adverse impact from the change in earnings curve conducted in 2017 which resulted lower earned premium.

On 1 August 2018, the Directors declared a 100% ordinary franked dividend of 8.0 cents per share totalling $36,817,000 and a 100% franked special dividend for 4.0 cents per share totalling $18,409,000.

New business volume, as measured by New Insurance Written (NIW), decreased 21.4% to $10.3 billion in 1H18 compared with $13.1 billion in 1H17. NIW in 1H18 included $1.1 billion of bulk portfolio business versus $2.1 billion of bulk portfolio business in 1H17. NIW excludes the Company’s excess of loss reinsurance and the new business written via Genworth’s Bermudan entity.

The decline in NIW in 1H18 compared to 1H17 reflects the $1.0 billion reduction in bulk portfolio business and the fact that 1H17 included business written pursuant to an agreement with the Company’s then second largest customer. This agreement terminated in April 2017 and represented $2.5 billion of NIW in 1H17.

Gross Written Premium (GWP) increased 46.4% to $266.8 million in 1H18 (1H17: $182.3 million). This includes the new business written via Genworth’s Bermudan entity and the new Micro Markets LMI business. As disclosed at the time of the Company’s 1Q18 Results announcement Genworth has retained $170.2 million of risk and placed the remainder with a consortium of global reinsurers through its Bermudan entity. Net of the premium to the consortium of global reinsurers, Genworth’s GWP increased 12.0% in 1H18 as a result of this transaction. For reporting purposes this risk is not reflected in NIW. In terms of the traditional LMI business, volumes were down 6% from 1H17 following termination of the Company’s then second largest customer contract in April 2017. This was partially offset by a higher LVR mix which resulted in a higher average price for written premiums.

The expense ratio increased to 32.9% from 25.9% in the prior corresponding period mainly reflecting lower net earned premium in the current period. The reported loss ratio increased from 34.8% at 30 June 2017 to 53.3% at 30 June 2018 reflecting primarily lower net earned premium in the current period.

The Delinquency Rate (number of delinquencies divided by policies in force but excluding excess of loss insurance) increased from 0.51% in 1H17 to 0.54% in 1H18. This was driven by two factors. Firstly, there was a decrease in the policies in force following completion of the Lapsed Policy Initiative. The second (lesser) factor impacting the delinquency rate has been an increase in the number of delinquencies in Western Australia, New South Wales and to a lesser extent South Australia. This was partially offset by a decrease in delinquencies in Victoria and Queensland. New delinquencies were down in the half (1H18: 5,565 versus 1H17: 5,997). Delinquencies in mining areas are showing signs of improving. In non-mining regions there are indications of a softening in cure rates. These are being closely monitored to ascertain any developing adverse trends.  WA continues as primary contributor to deterioration in 2013-14 vintages due to ongoing economic and housing market challenges following the downturn in the mining sector.

The market capitalisation of the Company as at 30 June 2018 was $1.2 billion based on the closing share price of $2.57.

The Group’s regulatory capital at 30 June 2018 was 1.90 times the Prescribed Capital Amount (“PCA”) and the Common Equity Tier 1 (“CET1”) ratio was 1.71. Regulatory capital exceeds the Group’s targets and reflected a strong capital position.

In early 2017 Genworth commenced a Strategic Program of Work designed to enable it to effectively compete in a market of evolving borrower and lender expectations, resulting from technological advances and regulatory change.

As part of its Strategic Program of Work the Company announced in 1Q18 that it had entered into agreements with lender customers to provide new product offerings that are complementary to its traditional lenders mortgage insurance (LMI). These new offerings included a bespoke risk management solution via a newly established Bermudan insurance entity, micro markets LMI and excess of loss cover.

In 2Q18 the Company continued the momentum of its Strategic Program of Work. Over the past 12 months Genworth has worked with a technology partner to develop a new automated underwriting decision engine (Auto Decision Engine) which will be launched later this year. This initiative will deliver operational efficiencies and provide the business with greater underwriting risk management insights.

Also of note is Genworth’s investment in Tictoc Online Pty Limited (Tic:Toc). Tic:Toc is a fintech in the online origination space. In addition to a small equity stake in Tic:Toc, Genworth has been appointed the exclusive provider of LMI on Tic:Toc’s digital loan platform. Tic:Toc’s digital loan platform operates both as a direct-to-consumer platform and as a partner platform.

Genworth Delinquencies Up Again

Lenders Mortgage Insurance is a tough gig, because they tend to get the higher risk loans, written at higher loan to value ratios. So, perhaps no surprise that in the current environment, of tougher lending conditions, and high debt, we continue to see a drop in new business and a rise in delinquencies. Significantly, there was a rise in NSW delinquencies, the most populous state, with the biggest loans! “In non-mining regions there are indications of a softening in cure rates, in particular in NSW and Western Australia. These are being closely monitored to ascertain any developing adverse trends”.

Genworth Mortgage Insurance Australia Limited has reported statutory net profit after tax (NPAT) of $8.4 million and underlying NPAT of $19.9 million for the quarter ended 31 March 2018 (1Q18). This is down 70.9% on prior corresponding period (though 1Q17 underlying NPAT included a $20.8 million realised gain resulting from a re-balancing their investment portfolio).

New business volume, as measured by New Insurance Written (NIW), decreased 36.8% to $4.3 billion in 1Q18 compared with $6.8 billion in 1Q17.

NIW excludes excess of loss insurance and the new business written via Genworth’s Bermudan entity. NIW reflects the fact that: i) there were no bulk portfolio transactions in 1Q18 (1Q17 included $1.3 billion of bulk portfolio business); and ii) 1Q17 included business written pursuant to an agreement with the Company’s then second largest customer. This agreement terminated in April 2017 and represented $1.6 billion of NIW in 1Q17.

Gross Written Premium (GWP) increased 97.4% to $174.1 million in 1Q18 (1Q17: $88.2 million). This includes the new business written via Genworth’s Bermudan entity and the new Micro Markets LMI business. Genworth has retained $170.2 million of risk and placed the remainder with a consortium of global reinsurers through its Bermudan entity. Net of the premium to the consortium of global reinsurers, Genworth’s GWP increased 26.5% in 1Q18. For reporting purposes this risk is not reflected in NIW. In terms of the traditional LMI business written during the quarter, the lower volumes were partially offset by the higher LVR mix resulting in a modest increase in the average price of the flow business.

Net Earned Premium (NEP) decreased 37.5% from $107.9 million in 1Q17 to $67.4 million in 1Q18. This reflects the $32.3 million impact of the 2017 Earnings Curve Review and lower earned premium from current and prior book years. Excluding the 2017 Earnings Curve Review impact, NEP would have declined 7.6%. The 2017 Earnings Curve Review took effect from 1 October 2017 and has the effect of lengthening the period of time over which premium is earned. It does not however affect the quantum of revenue that will be earned over time. The unearned premium reserve as at 31 March 2018 was $1.2 billion.

The delinquency rate increased slightly from 0.48% in 1Q17 to 0.49% in 1Q18, driven by Western Australia and New South Wales (NSW).

South Australia and Queensland experienced lower delinquency rates, whilst the delinquency rate in Victoria increased marginally. All states experienced a decline in new delinquencies, with the exception, of Western Australia. Delinquencies in mining areas are showing signs of improving. In non-mining regions there are indications of a softening in cure rates, in particular in NSW and Western Australia. These are being closely monitored to ascertain any developing adverse trends.

Net Claims incurred was stable during the quarter at $37.7 million (1Q17: $37.6 million). The loss ratio in 1Q18 was 55.9%, up from 34.8% in 1Q17, reflecting the impact of lower NEP due to the 2017 Earnings Curve Review. Excluding the impact of the 2017 Earnings Curve Review the 1Q18 loss ratio would have been 37.8%.

The expense ratio in 1Q18 was 33.5% compared with 25.2% in 1Q17, reflecting the lower NEP and expenditure on the Strategic Program of Work.
Investment income of $7.8 million in 1Q18 included a pre-tax mark-to-market loss of $16.4 million ($11.5 million after-tax). In the first quarter of 2017, the portfolio was restructured to reduce interest rate risk exposure, resulting in pre-tax realised gains of $29.7 million ($20.8 million after tax). This gain was included in the underlying NPAT reported in 1Q17. As at 31 March 2018 the value of Genworth’s investment portfolio was $3,285.4 million, more than 83% of which is held in cash and highly rated fixed interest securities. The Company had $216.9 million invested in Australian equities as at 31 March 2018. Whilst volatility in equity markets contributed to unrealised losses in 1Q18, the equity portfolio has delivered a return of 8.9% p.a. (pre-tax) since inception in 2016.

They continue to be focused on an optimal capital structure to maintain the Board’s targeted Prescribed Capital Amount (PCA) of 1.32 to 1.44 times. So they announced an on-market share buy-back of up to a value of $100 million, subject to shareholder approval at the Annual General Meeting 10 May 2018.

Genworth 2017 Results Down 26.5%

Genworth Mortgage Insurance Australia Limited reported its 2017 full year (FY17) financial results.  As a major player in the LMI sector, we get an insight into the overall market. Today’s Productivity Commission report of course highlights that LMI’s should refund unused premiums. This could impact the market further, but for now, as LVR’s fall, LMI’s need to tweak their business models. Meantime, new business is falling, though claims also eased a little.

Statutory  net profit after tax (NPAT) for the year ended 31 December 2017 was $149.2 million compared with $203.1 last year, down 26.5% and underlying NPAT was $171.1 million down 19.4%. This was in line with guidance.

The Genworth Board declared a fully franked final ordinary dividend of 12 cents per share payable on 16 March 2018 to shareholders registered on 2 March 2018. The total ordinary dividend for 2017 was 24 cents per share and represents a payout ratio of 70.3%, up from 67.2% in 2016.

New business volume, as measured by New Insurance Written (NIW), of $23.9 billion in 2017, decreased 10.2% compared with $26.6 billion in the prior year.

The mix of business is aligned to owner occupied borrowers, with 19% of loans in 2017 for investment purposes.

Gross Written Premium (GWP) decreased 3.4% to $369.0 million in 2017. This decline was partially offset by the impact of the premium rate actions taken in 2016 and reflects changes in the customer portfolio and changes in business mix during the year.

Net Earned Premium (NEP) of $370.5 million in 2017 decreased 18.2% compared with $452.9 million in the prior year reflecting the $37.3 million impact of the 2017 Earnings Curve Review and lower earned premium from current and prior book years. Without the 2017 Earnings Curve Review adjustment, NEP would have declined 10.0%.

New delinquencies decreased in both mining and non-mining areas. The proportion of new mining delinquencies has been increasing in Western Australia while Queensland mining experience has been quite stable. Cures increased, particularly in non-mining areas. The number of claims paid in FY17 was higher than FY16, mainly driven by a higher proportion of claims in mining areas.

Net Claims incurred fell 10.7% from $158.8 million in FY16 to $141.8 million in FY17. The loss ratio in FY17 was 38.3%, up from 35.1% in FY16 reflecting the impact of lower NEP due to the 2017 Earnings Curve Review. Without this adjustment the FY17 loss ratio would have been 34.8%.

The expense ratio in FY17 was 29.3% compared with 25.7% in the prior year, reflecting the lower NEP and expenditure on the Strategic Program of Work. This is in line with the expected target range of between 28% and 30%.
Investment income in FY17 was $103.3 million and included a pre-tax realised gain of $36.4 million ($25.5 million after tax) and a mark-to-market loss of $31.3 million ($21.9 million after-tax). After adjusting for the mark-to-market movements, the FY17 investment return was 2.82% per annum, down from 3.41% per annum in FY16.

As at 31 December 2017, the value of Genworth’s investment portfolio was $3.4 billion, more than 86% of which continues to be held in cash and highly rated fixed interest securities. The Company had invested $237.4 million in Australian equities as at year-end in line with the previously stated strategy to improve investment returns on the portfolio within acceptable risk tolerances. In 2017, the Board approved a strategy to diversify the Company’s assets by investing in non-AUD fixed income securities. This will be implemented in 2018.

As at 31 December 2017 Genworth’s regulatory solvency ratio was 1.93 times the Prescribed Capital Amount (PCA) which is above the Board’s target capital range of 1.32 to 1.44 times.

Throughout the year the Company embarked on a number of capital management initiatives designed to bring Genworth’s solvency ratio more in line with the Board’s target range. A fully franked special dividend of 2 cents per share and fully franked ordinary dividends totalling 24 cents per share were declared by the Board. This equates to a yield of 8.7% based on the share price of $3.00 as at 31 December 2017.

In 2017 the Company also commenced an on-market share buy-back up to a maximum value of $100 million. As at 31 December 2017, $51 million of shares had been acquired as part of this initiative. Genworth intends to continue the buy-back of shares in 2018, up to a maximum total value of $100 million, subject to business and market conditions, the prevailing share price, market volumes and other considerations.

The Company will continue to actively manage its capital position and proactively evaluate potential uses for its excess capital.

Genworth has commercial relationships with over 100 lender customers across Australia and Supply and Service Contracts with 10 of its key customers. Our top three customers accounted for approximately 60% of our total NIW and 72.7% of GWP in 2017. We estimate that we had approximately 25% of the Australian LMI market by NIW in 2017.

On 10 March 2017 Genworth announced that the exclusivity agreement for the provision of LMI with its then second largest customer would terminate in April 2017. The Company has been successful in entering into new business with this customer that assists them in managing mortgage default risk through alternative insurance arrangements.

On 20 September 2017 Genworth announced that it had extended its Supply and Service Contract with National Australia Bank (NAB) for the provision of LMI for NAB’s broker business. The term of the contract has been extended for one year to 20 November 2018.

The Company’s Strategic Program of Work is designed to address evolving lender and consumer expectations (resulting from technological and regulatory change) by leveraging Genworth’s existing core competencies in managing mortgage credit default risk.

As part of this work program a number of initiatives have been identified that focus on improving the Company’s underwriting efficiency, enhancing its product offerings and, where appropriate, leveraging its data and mortgage partnerships along the mortgage value chain.

One such initiative has involved the establishment of an offshore insurance entity based in Bermuda, which provides Genworth with the capability to structure bespoke risk management solutions for portfolio cover across both high and low loan to value ratios (LVR). By leveraging its strong relationships in the global reinsurance market, Genworth has created a consortium and entered into an agreement with a customer to utilise the new structure to manage mortgage default risk. This bespoke solution is a complementary risk management tool to traditional LMI cover.

The second half of 2017 also saw the culmination of work undertaken by Genworth to create and implement risk management solutions for borrower-paid LMI in the less than 80% LVR segment on a micro market basis (Micro Market LMI).

 

Genworth Changes Recognition of Premium Revenue

Genworth Mortgage Insurance Australia Limited (Genworth  today advised an expected greater fall in Net Earned Premium.

ASIC had raised concerns about the basis used by Genworth to recognise premium revenue in the financial reports for the year ended 31 December 2016 and the half-year ended 30 June 2017 having regard to the pattern of historical claims experience in earlier underwriting years.

Genworth said that it has finalised its annual review of the premium earning pattern (also known as the “earnings curve”). The review process included a detailed evaluation and recommendation by the appointed actuary and supporting work and recommendation by independent reviewers.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction

The modified premium earning pattern reflects an expectation of the future emergence of risk based on a consideration of all identified relevant factors, but principally:

  • losses from mining related regions, which form the majority of the incurred cost of the last 2 years, continuing to occur at late durations; and
  • improvements in underwriting quality in response to regulatory actions, along with continued lower interest rates, extending the average time to first delinquency, while continuing to be beneficial to overall loss levels.

The change will have the effect, in aggregate, of lengthening the average duration of the period over which Genworth recognises its revenue by approximately 12 months. It also has the effect of introducing a third separate earnings curve for business written in 2015 and later. The change however does not affect the total amount of revenue expected to be earned over time from premiums already written.

The two earnings curves that comprise the previous premium earning pattern were first introduced in 2012. The last time the Board approved a change to the premium earning pattern was in September 2015, with this change applied to the financial statements in the third quarter of 2015. The Company conducted an annual review of the earnings curve in 2016 but no change was made to the curve based on the information at that time.

The modified premium earning pattern will be applied to the recognition of revenue in the income statement for the fourth quarter of 2017 and in subsequent reporting periods. The Company’s Unearned Premium Reserve (UPR) balance of $1,087 million as at 30 September 2017 remains unchanged. As was highlighted in the half year (2 August 2017) and third quarter (3 November 2017) results announcements, any change to the premium earning pattern has the potential to change the Company’s 2017 full year guidance.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction.

Based on preliminary estimates, the Company expects the full year loss ratio to remain between 35 and 40 per cent as the NEP reduction is expected to be partially offset by the fourth quarter incurred loss expectations, and preliminary estimates of the Outstanding Claims Reserves as at 31 December 2017 which currently reflect more favourable recent incurred loss experience.

The change to the premium earning pattern is expected to have minimal impact on Genworth’s regulatory solvency ratio which is expected to remain above the Board’s target capital range of 1.32 to 1.44 times the Prescribed Capital Amount as at 31 December 2017. The Company has completed an on-market share buy-back to a value of approximately $50 million and following this announcement intends to continue the
buy-back for shares up to a maximum total value of $100 million, subject to business and market conditions, the prevailing share price, market volumes and other considerations.

The Board continues to target an ordinary dividend payout ratio range of 50 to 80 percent of underlying NPAT and will continue to evaluate other capital management opportunities.

The Company notes that this full year outlook is based on preliminary expectations and recommendations that remain subject to completion of the year end process, including the external audit, market conditions and unforeseen circumstances or economic events. The Company expects it will be in a position to provide guidance for the 2018 financial year at the time of announcement of its 2017 full year financial year results.

Genworth notes that it has had discussions with ASIC about the premium earning pattern. The modification to the premium earning pattern announced today was determined following the outcome of Genworth’s annual review. In particular, Genworth believes that the premium recognition pattern as applied to prior released financial statements was the correct pattern to apply in respect of those financial statements. Genworth does not intend to restate financial statements already released to the market.

ASIC notes the decision by Genworth Mortgage Insurance Australia Limited (Genworth) to change the recognition of premium revenue in its upcoming financial report for the year ending 31 December 2017.

Genworth has announced that the change will negatively impact net earned premium by approximately $40 million and as a result net earned premium for the 2017 year is expected to be approximately 17-19% per cent lower than the 2016 year, instead of previous guidance of a 10 to 15 percent reduction.  The change affects the recognition of revenue for the fourth quarter of 2017 and subsequent reporting periods.  The unearned premium liability at 30 September 2017 remains unchanged.

ASIC had raised concerns about the basis used by Genworth to recognise premium revenue in the financial reports for the year ended 31 December 2016 and the half-year ended 30 June 2017 having regard to the pattern of historical claims experience in earlier underwriting years.

Genworth 3Q Update Highlights Regional Risks

Lender Mortgage Insurer, Genworth a bellwether for the broader mortgage industry,  has reported statutory net profit after tax of $32.1 million and underlying NPAT of $40.5 million for the third quarter ended 30 September 2017.

While the volume of new business written was down 9.8% on 3Q16 to $5.5 bn, the gross written premium was down only 3.9% to $88.6 million. Underlying NPAT was down 14.5% to $40.5 million.

The total portfolio of delinquencies rose 4.4% to 7,146, and the loss rate overall was 3 basis points. The regional variations are stark.

The loss ratio however fell, 8.3 pts to 37%, thanks to (DFA suggests) equity linked to rising home prices. New South Wales and Victoria continue to perform strongly. 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 previously benefited from the growth in the resources sector.

The 2008 book year was affected by the economic downturn experienced across Australia and heightened stress among self-employed borrowers, particularly in Queensland, which was exacerbated by the floods 2011. Post PostPost-GFC book years seasoning at lower levels as a result of credit tightening. Underperformance for 2012-14 books have been predominantly driven by resource reliant states of QLD and WA following the mining sector downturn however has started to show signs of stabilising over recent months.

There is considerable variation in economic activity across the country with continued growth in New South Wales and Victoria offset by weaker activity in Queensland and, in particular, Western Australia.

Investment income of $15.6 million in 3Q17 included a pre-tax mark-to-market unrealised loss of $12.0 million ($8.4 million after-tax). As at 30 September 2017, the value of Genworth’s investment portfolio was $3.4 billion, 89 per cent of which continues to be held in cash and highly rated fixed interest securities.

As at 30 September 2017, the Company had invested $214 million in Australian equities in line with the previously stated strategy to improve investment returns on the portfolio within acceptable risk tolerances. After adjusting for the mark-to-market movements, the 3Q17 investment return was 2.88 per cent per annum, down from 3.51 per cent per annum in 3Q16.

The Company has completed the on-market share buy-back to a value of $45 million and intends to continue the buy-back for shares up to a maximum total value of $100 million, subject to business and market conditions, the prevailing share price, market volumes and other considerations.

Genworth previously advised that its customer, the National Australia Bank Limited, extended its Supply and Service Contract for the provision of Lenders Mortgage Insurance (LMI) for NAB’s broker business. The term of the contract has been extended by one year to 20 November 2018.

Genworth expects 2017 NEP to decline by approximately 10 to 15 per cent. The full year loss ratio guidance has been updated to be between 35 and 40 per cent (based on the current premium earning pattern). Any change to the premium earning pattern may result in a change to these expectations

Genworth Gets NAB’s LMI Contract Extended

In a release to the ASX, Genworth, the listed Lenders Mortgage Insurer said that its contract with NAB to provide LMI had been extended for one year to 20th November 2018.

The contract represented 10% of Gross Written Premium in 2016.

Ms Georgette Nicholas, Chief Executive Officer and Managing Director of Genworth, said, “We look forward to continuing to build on our long-standing partnership with NAB under this extended agreement. We are focused on delivering risk and capital management solutions for our customers and we’re delighted that we have been able to continue to be the LMI provider for NAB’s broker business.

“Genworth remains committed to supporting Australians realise their dream of homeownership. Our focus continues to be on the provision of capital and risk management solutions to our lender customers, being a strong risk management partner and using our data and analytics to provide in sights to this changing market.”

The extended contract does not change the guidance provided that Gross Written Premium (GWP) will be down 10 to 15 per cent in 2017.