The Genworth Mortgage Insurance Australia (ASX:GMA) share price jumped 4% to $3.14 this morning after the company released its earnings for the first half of 2017. Here's what you need to know:
- New insurance written fell 6% to $13.1 billion
- Gross written premiums (GWP) fell 4% to $182.3 million
- Net earned premium fell 7% to $211.6 million
- Net profit after tax fell 35% to $88.7 million
- Loss ratio rose from 33% to 34.8%
- Delinquencies rose from 0.43% to 0.51%
- $100 million share buyback at $3.02 per share
So what?
It was another mediocre half for Genworth, with a weak housing market in Queensland and Western Australia weighing on the company's results. Tighter lending conditions may have hurt the amount of new insurance written, while delinquencies (the number of loans behind in repayments) rose, as did the loss ratio (claims paid on bad loans).
Furthermore, there doesn't appear to be any relief in sight, with the company forecasting a full-year net earned premium decline of 10% to 15% (down 7% this half). The full year loss ratio is expected to be between 40% and 50%, up from 34.8% this half.
Now what?
Genworth has a prescribed capital ratio (the amount of capital it has in reserve) of 1.81x, above the board's target of 1.44x and above the regulatory requirement of 0.6x. Despite the tough market conditions, Genworth has announced that it will lighten this ratio by paying out cash to shareholders via special dividends and buying back shares. With net tangible assets of $3.87 per share, the buyback at $3.02 per share may generate significant value for shareholders.
Speaking for myself, I would prefer to avoid Genworth at today's prices. While the company does look undervalued, its business is visibly deteriorating. There is also pressure on earnings as banks have increasingly been taking their lenders mortgage insurance (LMI) in-house, and/or writing loans that don't require LMI. I would wait to see how things shape up at the full year results (February next year) before considering a purchase.
