Genworth Mortgage Insurance Australia Limited

GMA Details

1QFY19 Results in-line with Guidance: Genworth Mortgage Insurance Australia Limited (ASX: GMA) is engaged with the provision of LMI (Lenders Mortgage Insurance) under authorisation from APRA. LMI transfers the risk from lenders to LMI providers, principally for high loan to value ratio (HLVR) residential mortgage loans.

At the Annual General Meeting 2019, the Chairman addressed its shareholders and updated about the development. With this, the company has been progressing to broaden its product suite, leverage technology, and data to further strengthen the mortgage chain and operational efficiencies. Commenting on FY18 results, the Chairman confirmed the financial health of the company as it maintained a regulatory capital base of $1.9 billion and a coverage ratio of 1.94 times the PCA (Prescribed Capital Amount) on a Group (Level 2) basis.

Market value for the cash and investment portfolio stood at $3.2 billion, which included $122.8 million and $535 million invested in Australian equities and non-Australian dollar income securities, respectively. ~83% of the investment portfolio accounted for cash, and highly rated fixed interest securities. Statutory net profit after tax (NPAT) witnessed a de-growth of 49.3% whereas underlying NPAT was down 45.1% during the period. The downfall in the results was due to the 2017 earnings curve review comprising a long period of revenue recognition. GWP (Gross Written Premium) with a growth of 24.7% indicated the traction of the strategic program.

1QFY19 Earnings Highlights: The company recently announced its earnings for the first quarter with statutory NPAT at $47.8 million, up 469% and underlying NPAT at $22.3 million, up 12.1%. The vast difference between the two was due to an after-tax unrealised gain of $25.5 million on the investment portfolio as compared to an unrealised after-tax loss of $11.5 million in 1Q18. Other parameters also witnessed sufficed growth on the face of moderating market conditions-
 

1. NIW (New Insurance Written) saw a growth of 24.0% to $5.4 billion, primarily driven by the result of sustained growth in LMI flow and bulk portfolio business.
2. GWP (Gross Written Premium) witnessed a decrease of 50.4% to $86.3 million during the quarter. The sharp de-growth was on the back of 1Q18 numbers which had included a bespoke transaction written through Genworth’s Bermudian insurance entity, excluding to which GWP saw a growth of 7.5%.
3. NEP (Net Earned Premium) grew by 8.2% to $72.9 million in Q1FY19, including $4.5 million of unearned premium, excluding to which NEP depicted a growth of 1.5%.
4. The Delinquency Rate inched up by 8 bps to 0.57% in 1Q19 from 0.49% in 1Q18.
5. The number of Paid Claims went down to 319 from 365 in 1Q18 with net claims incurred at $40.3 million. Loss Ratio at 55.3% as compared to 55.9% on pcp was in-line with the FY19 guidance range of 45%-55%.
6. Expense Ratio at 34% was also in-line with 33.5% in 1Q18.

1Q19 Results Snapshot (Source: Company Reports)

Capital Management: In February 2019, GMA commenced on-market share buy-back worth $100 million. As per the release of buy back share, dated 28 June 2019, the company bought back 24,950,648 shares as part of its capital management initiative for the total consideration of $63,903,389.20.Company’s regulatory solvency ratio at 2.01x as on 31 March 2019 was superior to the targeted capital range of 1.32x to 1.44x of the PCA (Prescribed Capital Amount) on a level 2 basis.

Outlook: The Management reiterated FY19 guidance with FY19 NEP to be in the rage of -5% to +5% of FY18 NEP. Ordinary dividend pay-out ratio is expected to be between 50%-80% of underlying net profit after tax. Metropolitan housing markets continued to moderate during the first quarter of FY19. The Management expects this moderation to be continued reflecting tightened credit conditions, weak wage growth, and higher supply, mainly in parts of Sydney and Melbourne.
Stock Recommendation:With a resilient business, well capitalised and strong balance sheet, net tangible assets of ~$4.0 per share as at 31 March 2019, the company has witnessed a track record of delivering decent profits and capital returns. Despite the prevailing market challenges, GMA was able to post decent results.

At the current market price of $2.810, the stock is trading at price to earnings multiple of 17.090x. On the valuation front, the company reported a lower P/BV multiple of 0.7x (TTM basis) as compared to the industry median of 2.0x.  The stock has gained ~32% in the last 6-months and currently trading near to its 52-week high price of $2.970 with an annual dividend yield of 6.03% and a market capitalization of ~$1.17 billion. Converting the collective aforesaid facts to the outcome, we recommend to “Hold” the stock at the current market price of $2.810 per share (down 0.355% on 03 July 2019).


GMA Daily Chart (Source: Thomson Reuters)

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