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Genworth returns to profit as house prices jump

Genworth Mortgage Insurance posted a $34.8 million underwriting profit in the first quarter as strong house prices and a robust economy boosted uptake of home loans and also improved the outlook for claims.

Australia’s leading provider of lenders mortgage insurance (LMI) says gross written premium (GWP) jumped 25% to $142.7 million in the first three months of the year as owner-occupiers and first home buyers underpinned the rising national housing market.

“This has been a great start to the year for us,” CEO and MD Pauline Blight-Johnston said, adding there is “great underlying momentum in the business” and Genworth is hopeful the positive economic and house price trends continue.

“Rising asset prices are helping the economic recovery and are good for our business,” she said during an investor briefing today.

During the quarter, Australia's house prices saw the steepest increase in almost 18 years. Sydney and Canberra recorded the fastest quarterly increases in nearly three decades while Melbourne's house and unit prices have reached a new record high, with the median house price projected to pass $1 million in the current quarter.

Australians are taking advantage of cheap mortgages, with demand for housing unmet for many years, Ms Blight-Johnston says, and “Genworth has “every expectation the growth will continue”.

“First time buyers and upgraders are taking the opportunity of the low interest rate environment to get their little piece of Australia,” she said. “While interest rates are low and house prices are in reach, we don’t see any change to these underlying (GWP) trends,” she said.

Ms Blight-Johnston said there was some danger sales of mortgage insurance would slow if continued house price increases put property too far out of reach of buyers.

Genworth’s first quarter loss ratio was 41.8%, versus 47.1% a year earlier, an improvement it says reflects the strong property values and economy, offset by its additional reserving.

The swing to the black comes after a loss of $234 million in 2020 as Genworth shored up its reserve war chest with refined delinquency reserving of $109.1 million in anticipation of claims spurred by mortgage delinquencies. This has not materialised so far due to support packages which it says “interrupted the typical incidence patterns of delinquencies and claims”.

The first quarter delinquency rate was little changed at 0.58%. Genworth paid 186 claims for net claims incurred of just $35.9 million in the first quarter, compared with $138 million in the fourth quarter.

Borrowers in hardship mostly had their loans restructured and this closed out all active repayment deferrals at Genworth’s lender customers by the end of March. There had been 8162 at the end of 2020 and 31,139 three months prior to that.

“As at 31 March 2021, these arrangements have effectively terminated, with arrears reset or loans restructured,” Genworth said.

Genworth is working closely with lender customers to understand their loan restructuring in detail and determine the most appropriate hardship solutions to mitigate potential losses and has maintained prudent reserving to compensate for the continued lag effects of COVID-19 moratoriums on possessions, as well as the potential impact of the NSW and south east Queensland storms and floods.

Genworth said today it will carefully monitor bank lending data over the course of this year as uncertainty over the claims outlook persists.

“We still need to see what happens in the loan book when the loan has to perform again and that’s when we can really refine those (claims) assumptions,” Ms Blight-Johnston explained to investors.

After Genworth Financial Inc sold its entire 52% stake in Genworth Mortgage Insurance Australia in March, Genworth is switching to half-yearly reporting and will next update in August.

“We’ll know more then,” Ms Blight-Johnston said of mortgage hardship and the outlook for claims.

Genworth says the impacts of the winding back of support programs are yet to flow through the economy and it “will remain vigilant to the signals arising from economic indicators and loan delinquency data”.

“With these support programs now concluded, we are working very closely with our lender customers to understand the performance of loans that were previously on repayment deferral,” Ms Blight-Johnston said. “Over coming periods, it will become increasingly evident how many insured loans may continue to experience difficulty.

“We look forward to a clearer picture of the ultimate impact of COVID-19 on Genworth’s business emerging over the course of the year.”