Pre-nationalisation Genworth breaks

Via Banking Day:

A large write-down and additional reserving tipped Genworth Mortgage Insurance Australia into loss in the first half of the year, but the company is confident it is well positioned to deal with anything COVID throws at it.

Genworth reported a loss of A$90 million for the six months to June 2020, compared with a profit of $88.1 million in the June half last year.

After a liability adequacy assessment it wrote off $182 million of deferred acquisition costs. It also added $35.5 million to claims reserves.

In one respect the business performed well, as low interest rates and housing price recovery early in the year prompted more mortgage market activity.

Gross written premium of $239 million was up 30 per cent on the previous corresponding period. Net earned premium was up 2 per cent to $151 million.

However, the loss ratio grew from 54.1 per cent in the June half last year to 67 per cent in the latest half, as the number of claims grew by 12.4 per cent and also due to the impact of the $35.5 million increase in claims reserves.

The company took a hit in June, when NAB advised it that it would not renew its LMI contract when it expires in November. NAB accounts for about 12 per cent of Genworth’s business.

Genworth chief executive Pauline Blight-Johnston said 48,000 loans covered by Genworth LMI are subject to loan deferral arrangements, representing 4 per cent of its insured loans.

Blight-Johnston said Genworth has not changed its underwriting standards but it is scrutinising applications more thoroughly.

She said the company was working with banks to assist their relief efforts. Measures include putting debt recovery activity on hold and expanding its natural disaster policy to include the pandemic.

“What we have observed is that in the early days of the crisis, anyone who wanted a deferral was put on deferral. Now the banks are engaging with those customers and discovering that some did not need to go on deferral, while others have opted out,” Blight-Johnston said.

“In some cases the borrower did not understand that interest would continue to accumulate during the deferral period. Now deferral requests are going through a much more rigorous process.”

The company’s solvency ratio is 1.77 times the prescribed capital amount, representing surplus capital of $276.5 million.

This is the thin end of the wedge. The housing bust is on. As we crash in 2021 I expect GMA to face a tsunami of default as:

  • unemployment remains very sticky;
  • stimulus is withdrawn;
  • convulsive virus episodes prevent any economic momentum.

This dog is woefully undercapitalized as it holds $305bn of high LVR schlock:

Underwritten by a lousy $1.5bn in capital, including dubious reinsurance:

Coughing up a leverage ration of 150x plus.

Any kind of accident of scale and this thing will be wiped out overnight, meaning that there has to be a serious danger of credit downgrades and rising funding costs as well.

GMA is the pre-nationalisation walking dead, increasingly with a share price to match

David Llewellyn-Smith
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