Genworth reports 71% decline in profit

Genworth Mortgage Insurance Australia (Genworth) has announced that its underlying net profit after tax (NPAT) for Q1 FY18 was $19.9 million, down from the $68.3 million recorded in the previous corresponding period, while statutory NPAT for the quarter dropped by 83.9 per cent year-on-year from $52.2 million to $8.4 million.

Georgette Nicholas, CEO and MD at Genworth, noted in a disclosure to the Australian Securities Exchange (ASX) that 2018 was expected to be a “transitionary year” for the mortgage insurer.

Mr Nicholas said that its quarterly performance reflects the impact of the 2017 Earnings Curve Review, which lengthened the period of time over which premium is earned, initiatives rolled out as part of its broader work program to redefine its business model, and a market-to-market loss on its equity portfolio.

“I am pleased to report that we are making good progress in redefining our core business model… in the areas of product innovation and revenue stream diversification,” the CEO said.

The mortgage insurer also revealed its plans to buy back up to $100 million of its shares upon shareholder approval at its AGM later this week (10 May).

Ms Nicholas added that the buyback is part of Genworth’s efforts to optimise its capital structure and maintain the board’s targeted prescribed capital amount of 1.32 to 1.44 times.

“Genworth Financial has indicated that it presently intends to engage in on-market sale transactions during the buyback in order to maintain its approximately 52 per cent stake in the company, subject to matters including the prevailing market price of the company’s shares during the buyback, market trading volumes and applicable legal constraints,” the mortgage insurer said in its disclosure to the ASX.

Should the buyback be approved by shareholders, it would represent 8.9 per cent of Genworth’s shares outstanding as at the 1 May share price of $2.38.

As part of its strategic program of work, Genworth set up an offshore insurance entity in Bermuda earlier this year, which provides the mortgage insurer with the capability to structure risk management solutions for portfolio cover across both high and low loan-to-value ratios.

Its gross written premiums (GWP) for Q1 FY18, which increased by 97.4 per cent from $88.2 million in Q1 FY17 to $97.4 million, includes new business written through its new Bermudan entity.

“The increase in GWP that we reported this quarter is indicative of the opportunities we have to grow our business by offering customers a broader suite of complementary capital and risk management solutions,” Ms Nicholas said.

Genworth’s net earned premium decreased by 37.5 per cent year-on-year from $107.9 million in Q1 FY17 to $67.4 million in Q1 FY18 due to the 2017 Earnings Curve Review, while the reported loss ratio (i.e. the percentage of premiums spent on claims) rose over the year from 34.8 per cent to 55.9 per cent.

The insurer acknowledged, however, that the review will have no effect on the revenue earned over time.

“The unearned premium reserve as at 31 March 2018 was $1.2 billion,” Genworth said in its disclosure to the ASX.

While the insurer’s financial results in recent years have been significantly impacted by APRA’s macro-prudential measures, which resulted in tighter credit and a significant reduction in high LVR mortgage originations, Ms Nicholas maintains that the company is in a good financial position.

“Our company is well capitalised, we have a solid balance sheet with net tangible assets of approximately $3.83 per share as at 31 March 2018,” the CEO said.

[Related: Genworth looks offshore as profits plummet by 27%]