Genworth Mortgage Insurance (ASX:GMA)

Georgette Nicholas
MD
Market Cap (AUD): 1.6B
Sector: Financials
Last Trade (AUD): 3.83 -0.06 (-1.54%)
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1. About

Genworth Australia is a leading provider of lenders mortgage insurance (LMI) in the Australian LMI market. Genworth Australia is a residential mortgage loan insurance specialist with extensive expertise in the Australian residential mortgage market, actively engaging on residential mortgage policy development with the key lending institutions, government bodies, local and international regulators and industry bodies. Genworth Australia has commercial relationships with over 100 lender customers across Australia, including three of the four major banks.

2. Business model

 

The Company operates as a single entity:[1]

 

Business

Revenue ($’000)

% of Revenue

% of Profit (before Tax)

Profit drivers[2]

Gross written premium

$368,963

99.59%

100%

Market dynamics continued to be challenging during the year with reduced high LVR lending as a proportion of total mortgage originations. In response to these trends, New Insurance Written declined 10.2% to $23.9 B and Gross Written Premium was down 3.4% at $369.0 M. New delinquencies decreased in both mining and non-mining areas

Movement in unearned premium

$69,246

18.69%

Outward reinsurance premium expense

($67,740)

(18.28%)

3. Strategy

 

Key strategies include:[3]

 

Genworth’s primary business activity is the provision of LMI to its lender customers. Genworth’s mission is to support Australian homeownership by providing capital and risk management solutions to its customers in residential mortgage lending. In 2017, Genworth made significant progress toward its goal to reinvigorate profitable growth.

 

2018 Priorities

In 2018 Genworth will deliver core capabilities in underwriting efficiencies, product flexibility and expense management – capabilities which are foundational to meeting the changing needs of its Australiabased customers and to future growth

 

A refined strategic plan to re-ignite profitable growth over the medium-term

Value Proposition:

Innovation and technology will underpin Genworth’s value proposition

Focus:

To be a leading provider of customer-focused capital and risk management solutions in residential mortgage markets and deliver sustainable shareholder returns

 

Immediate and ongoing initiatives  (2017–2018)

1. Redefine core business model

  • Cost efficiency
  • Underwriting efficiency
  • Product enhancement
  • Leverage data and partnerships
  • Regulator and policymaker advocacy

 

Longer-term initiatives  (2019+)

2. Leverage data and technology to add value to the mortgage value chain

  • Product innovation
  • Loss management solutions
  • Leverage high LVR experience  and expertise

 

Strategic enablers

  • People, organization, and cultural change
  • Data and analytics
  • Technology
  • Stakeholder management

4. Markets

 

[4]

Industry (Australia)

Industry Revenue

Growth rate  (annual 2013-18)

General Insurance

$68 billion (2017)

1.5%

Mortgage Brokers

$2 billion (2018)

6.8%

Insurance Brokerage

$12 billion (2017)

2.0%

5. Competition

 

Major competitors include:[5]

 

  • QBE Insurance Group (ASX: QBE)
  • Insurance Australia Group (ASX: IAG)
  • Suncorp Group (ASX: SUN)

6. History

 

1965[6]

Housing Loans Insurance Corporation (HLIC) started by the Australian Government

 

1997   

GE purchased HLIC from the Australian Government and begun GE mortgage insurance co.in Australia

 

2004   

GE sold its LMI businesses globally, and Genworth was born through the largest IPO of the year on the New York Stock Exchange

 

2014   

Having successfully completed its initial public offering in May 2014, Genworth Australia began life as a publicly listed company while Genworth Financial, Inc. retained a majority shareholding

 

2015   

Renewed its supply and service contract with National Australia Bank(NAB) for the provision of Lenders Mortgage Insurance for NAB’s broker business

 

2016   

GFI announced acquisition by China Oceanwide

 

2017   

Genworth extended LMI contract for NAB's broker business

7. Team

 

Board of Directors[7]

 

Ian MacDonald – Chairman, Independent

Georgette Nicholas – Chief Executive Officer and Managing Director, Genworth Financial designee

Gai McGrath – Director, Independent

Gayle Tollifson – Director, Independent

David Foster – Director, Independent, Genworth Financial designee

Stuart Take – Director, Genworth Financial designee

Jerome Upton – Director, Genworth Financial designee

Duncan West – Non-Executive Director[8]

Christine Patton – Non-Executive Director[9]

 

Management Team

 

Georgette Nicholas – Chief Executive Officer & Managing Director

William Milner – Acting Chief Financial Officer

Andrew Cormack – Chief Risk Officer

Tobin Fonseca – Chief Operations Officer

Steven Degetto – Chief Commercial Officer

Kate Svoboda – Chief Human Resources Officer

Prudence Milne – General Counsel and Company Secretary

Scot Garner – Head of Strategy & Innovation


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8. Financials

 

2018 Half Year Results Presentation

 

Financial Year 2017/18 (ended 31 December):[10]

 

Business

Revenue ($’000)

% Change

Profit (after Tax) ($’000)

% Change

Gross written premium

$368,963

(3.39%)

N/A

N/A

Movement in unearned premium

$69,246

(51.51%)

N/A

N/A

Outward reinsurance premium expense

($67,740)

5.69%

N/A

N/A

Total

         $370,469

          (18.20%)

$149,174

        (26.55%)

9. Risk

 

Major risks include:[11]

 

Key Risks

Evolving LMI and mortgage default risk landscape

Evolving market for mortgage default risk solutions may result in a reduction in new insurance written

 

Changing customer dynamics

Lenders increasingly searching for diverse risk and capital management solutions

 

Adverse or neutral regulatory changes have the potential to impact Genworth’s business model and medium-term profitability

Adverse regulation may impact Genworth’s business model and/or profitability

 

Macroeconomic deterioration and potential deterioration in financial and capital performance of Genworth

A deterioration in macroeconomic conditions or outlook may result in a flow on impact to the financial and capital profile of Genworth

 

Changes in financial strength ratings

Genworth’s financial strength rating may be downgraded

 

Reinsurance renewals

Failure to renew reinsurance contracts as and when they fall due for renewal

 

Risks related to supply and service contracts with customers

Termination before the expiry of the contractual term or a change of control of a customer or a ratings downgrade may result in loss or partial loss of a customer

 

Change in interest rate cycle and risk of mark-to-market loss exposure

Lower yield environment continues to pressure both financial and pricing returns. Mark-to-market adjustments may have an adverse impact on profitability and financial position

 

Market risk

Market risk is the risk that the market price of assets change and the potential for such change to result in the actual market value of Genworth’s assets being adversely impacted.

 

Currency Risk

Currency risk is the risk of loss arising from an unfavourable movement in market exchange rates. The Group is exposed to currency risk on its investments in receivables and payables denominated in a currency other than Australian dollars and the net investment in foreign branch operations. The currency giving rise to the risk is New Zealand dollars. The NZ currency risk exposure to the Group is not material.

 

Cash flow and fair value interest rate Risk

The Group is exposed to interest rate risk primarily arising from interest bearing assets. Assets with floating rate interest expose the Group to cash flow interest rate risk. Fixed interest rate assets expose the Group to fair value interest rate risk.

 

Equity price risk

Price risk is the risk that the fair value of a financial asset will fluctuate because of changes in market prices, rather than changes in interest rates and/or exchange rates. These price movements may be caused by factors specific to the individual financial asset or its issuer, or factors affecting all similar financial assets traded on the market. The Group has exposure to equity price risk through investment in equities.

 

Credit risk exposures

Credit risk is the risk of default by borrowers and transactional counterparties as well as the loss of value of assets due to deterioration in credit quality. The Group’s credit risk arises predominantly from investment activities and the amounts are as indicated by the carrying amounts of the financial assets.

 

Liquidity risk

Liquidity risk is the risk that there are insufficient cash resources to meet payment obligations to policyholders and creditors without affecting the daily operations or the financial condition of the Group.