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Analysis - Genworth Mortgage Insurance Australia Limited (GMA) is in our radar today. The Company released its full year 2014 earnings stating the statutory net profit after tax (NPAT) for six months ended 31 December of $172.7 million and a full year 2014 pro forma NPAT of $324.1 million. The statutory NPAT of $215.2 million associated to the financial period post the Initial Public Offering (IPO) being from 19 May 2014 to 31 December 2014 has also been stated. The underlying NPAT which excludes mark-to-market investment gains has been reported to be $146.3 million for the six months ended 31 December and $279.4 million for the full year 2014 on a pro forma basis. The Company declared a fully franked final ordinary dividend of 13.1 cents per share and a fully franked special dividend of 11.5 cents per share. A payout ratio of about 58% of the 2H14 underlying NPAT has been represented by the final ordinary dividend.
2014 Full Year Performance Metrics (Source – Company Reports)
In terms of sales and revenue, GMA conveyed that the new business volumes of $18.9 billion of New Insurance Written (NIW) for 2H14 rose 3.3% compared to 2H13, and 2.3% rise was noted for NIW of $36.2 billion for the full year. Lower average Loan to Value Ratio (LVR) mix along with a lower volume of 90-95% LVR business and greater proportion of below 90% LVR business being written in the year supported the growth.
New Insurance Written (Source – Company Reports)
The Company reported that its gross written premium (GWP) of $634.2 million for full year surged 6.3% in comparison to that of the full year 2013. This was slightly below the approximations provided at the end of Q314. Nonetheless, the growth emanated from price increases and volume growth although balanced down by change in LVR mix. 12% rise in net earned premium (NEP) compared to the full year 2013 was another highlight.
Gross Written Premium (Source – Company Reports)
It was noted that the business performance was driven by promising loss experience in the portfolio throughout the year with the loss ratio of 18.4% during 2H from 22.6% in the previous corresponding period. This was backed by the robust housing market that helped in lowering levels of delinquent loans and conversion thereof to claims. The Company thus reported that its full year loss ratio was of the order of 19.0% which has been down from 32.1% for the full year 2013.
Delinquency Development (Source – Company Reports)
The underlying return on equity (ROE) has been reported to be 12.2%. GMA’s regulatory solvency ratio has been reported to be 159.3% of the Prescribed Capital Amount (PCA Level 2).
Portfolio of Insured Loans (Source – Company Reports)
Other attribute relates to a slightly lower full year expense ratio of 26.5% than 27.4% in 2013 given lower growth in expenses compared to NEP growth. The Company mentioned about the investment income of $122.9 million in 2H14 that comprised a pre-tax mark to market gain of $37.7 million. The investment income was $226.9 million for the full year 2014. This included a pre-tax mark to market gain of $63.8 million. Primarily, the Company reported for investment return for the 2H14 period and the full year of 4.0% per annum after adjusting for the mark to market impact.
Underlying ROE (Source – Company Reports)
GMA seems to be happy with the performance in its first annual reporting period as an ASX listed company while stating that the underlying performance has been better than what was expected. The capital position has been strong. The Company has $1.36 billion of unearned premium reserves indicating good revenue visibility.
Expansion to Reinsurance Program (Source – Company Reports)
The Company has also renegotiated various existing reinsurance contracts in 2014 along with binding coverage for a new Excess of Loss reinsurance treaty. This has led to an increase in the level of qualifying reinsurance from $844m as at 31 December 2013 to $915 million as at 1 January 2015. Key attributes thus include successful renew and expansion of the external reinsurance program. The position with over 100 lender customers under commercial relationships across Australia and about 44% of the Australian LMI market by NIW for the year ended 31 December 2014 speak a lot about GMA. The Company also revealed about contractual relationship with 11 of key lender customers, which in 2014 accounted for 86% of GWP.
From 2015 performance standpoint, the Company states that it needs to have thoughtfulness with regards to the Australian macroeconomic environment. The lowering in interest rates is expected to reinforce the housing market. House price growth is expected to continue but at a slower rate of 3.5%. The Company anticipates a below par growth for the Australian economy with GDP growing at 2.9% and unemployment remaining above 6.0% for 2015. The Company forestalls to have 2015 NEP growth of up to 5% and a full year loss ratio between 25.0 and 30.0%. This has been projected subject to business conditions and unanticipated economic conditions. GMA has given a positive outlook for the ordinary dividend for 2015 which it expects to be within the approved dividend policy of between 50 and 70% of underlying NPAT. The Company aims to assess the potential for further capital management initiatives entailing consideration of additional reinsurance, additional regulatory compliant capital instruments and other capital return mechanisms in order to support overall ROE progression over the medium term.
Mixed Macroeconomic Conditions in 2014 (Source – Company Reports)
The Company sometime back announced about the termination of the Westpac Banking Corporation’s LMI agreement (with 90 days’ notice) post a strategic review of the LMI arrangements. GMA reported that Westpac constituted 9.5% of NIW and 14.0% of GWP in FY14. So, this termination may have an impact on the second half for GMA, however, in view of the 90-day termination notice, GMA is expected to recoup well. The Company is also expected to respond well to this step in view of efforts associated with expenses and commitment to return capital. Given the type of agreements with NAB and CBA, probability of internationalization of LMI by said entities after Westpac’s decision look slightly feeble. However, in case this happens then high LVR lending would be the only domain of the four majors to fund captives.
GMA Daily Chart (Source - Thomson Reuters)
Given the fact that the Company completed the allocation of 650 million ordinary shares under the IPO in May 2014 and the listing of the shares on the ASX at an issue price of $2.65 per share, we see potential looking at the current share price situation and the Company’s internal efforts. There is also a wave that that GMA will pay 65% of its profits as dividends in the CY15 while still having excess capital. The reinsurance expansion is also expected to add to capital flexibility.
Based on the foregoing, we put a BUY recommendation for this stock at the current price of $3.26
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