Mortgage insurer's profits drop by 35% as delinquencies rise

The insurance company released earlier this week its half year 2017 financial results, which showed that statutory interim net profit after tax (NPAT) was $88.7 million, down by 34.7 per cent from $135.8 million in the prior corresponding period “largely reflecting unfavourable mark-to-market movements in the investment portfolio”. 

As well as this, gross written premium (GWP) was down by 4 per cent from the same period last year (to $182.3 million) “due to a number of factors including changes in the customer portfolio, changes in business mix and the impact of the premium rate actions taken in 2016”. 

However, new insurance written increased by nearly 10 per cent (9.7 per cent) to $6.9 billion in the first quarter of the year. 

Looking at the GWP, the average price for flow increased from 1.45 per cent last year to 1.65 per cent, but the average original loan-to-value ratio (LVR) remained consistent at 82 per cent. 

Just over 30 per cent of the group's new business for the first half of 2017 was for loans from buyers with a 90 per cent LVR, a 6 per cent drop from the same period last year.

In the first half of the year, investment property lending represented 23 per cent ($2.5 billion) of Genworth’s portfolio for the period ended 30 June, while the vast majority ($8.5 billion) was from owner-occupied loans. 

Of the insurance in force, 74 per cent was for owner-occupied mortgages while 26 per cent was for investment loans.  

The mortgage insurer noted that while net claims incurred dropped by 2.4 per cent (to $73.6 million), the benefit was largely offset by an increase in the number of delinquent loans and a higher average paid claim amount. 

This was partly driven by a higher proportion of claims in the mining regions of Queensland and WA, where conditions remain “challenging” and delinquencies are elevated due to “the slowdown in those regional and metropolitan areas that have been previously benefited from the growth in the resources sector”. 

The insurance company added that it expected delinquencies in these regions to be “elevated” in 2017. 

It also said that the rising issue of housing affordability has led it to press for recognition for lenders mortgage insurance (LMI) in taxation via “favourable taxation treatment” as an “enabler to higher levels of home ownership, especially for first home buyers”.

Speaking of the half yearly results, Georgette Nicholas, chief executive officer and managing director of Genworth, said that profitability was “being pressured by a smaller high loan-to-value ratio market”. 

She said: “Australian regulators have taken further steps recently to reinforce sound housing lending practices, with a particular focus on slowing the growth in investor lending and limiting the flow of new interest-only lending. We are supportive of regulatory measures that promote prudent mortgage lending standards and ultimately foster long-term sustainable credit growth." 

Ms Nicholas continued: “We have strategic initiatives underway to redefine our core business model, with a particular focus on improving our underwriting efficiency, enhancing our product offerings and, where appropriate, leveraging our data and partnerships along the mortgage value chain.”

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 also said that it expected the full year loss ratio to be between 40 per cent and 50 per cent, and the net earned premium to be down by between 10 per cent and 15 per cent. 

Despite the fall in profit, the board said that it would continue to target an ordinary dividend payout ratio range of 50 per cent to 80 per cent of underlying NPAT and would be buying back shares of up to $100 million.

[Related: Regulatory changes continue to weigh on Genworth]