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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Tuesday, 3 November 2015

Short report: Genworth

Short report

I explained here last year year why as a monoline mortgage insurer with a significant market share Genworth Mortgage Insurance Australia (GMA) could represent an interesting proxy for Australian housing market sentiment, as well as a vehicle of interest to would-be shorters of residential property.

Daily short-sell reports suggest that there has been some ongoing interest on the short side, although being a 52 per cent owned subsidiary of Genworth Financial Inc. only a relatively small percentage of the issued capital is reported as short sold.

It has been an interesting time for GMA since its float in mid-2014.

At the beginning of this calendar year Genworth's FY14 earnings release had been relatively well received following on from the reporting of a solid statutory pro-forma NPAT for the post-IPO period (Point A on the chart below).

However, the spike in the share price was almost immediately reversed when it was announced just one week later (Point B) that Westpac would be terminating its agreement for the provision of Lenders Mortgage Insurance (LMI).

The business underwritten by this contract had accounted for 14 per cent of gross written premium in 2014, with the full effect on net earned premium not expected to be felt until 2016.

Although the market had accordingly anticipated a weaker outlook in the results for the first half, the 1H15 earnings release disappointed (Point C), while a generally softening real estate market sentiment saw the share price hit a 52 week nadir of $2.21.

Since that time a tightening of mortgage rates by the major lenders as well as the Reserve Bank keeping the cash rate on hold today has been well received by the market and the share price has come rollicking back some 29 per cent higher to to $2.85 against the tide of the wider stock market, in part assisted by a solid quarterly earnings result for 3Q15.

Delinquency developments have moved broadly in line with seasonal trends through this financial year, and to date at least delinquency rates have performed favourably since the 2009 book year. 

This mirrors the disclosure in ANZ's full year results which disclosed 90+ day delinquencies fairly steady at 0.63 per cent. That said, it seems likely that there will be some fallout in a number of resources regions over the months ahead. 

As expected GMA continues to trade at a moderate price-earnings ratio, with a market capitalisation of around $1.8 billion.

One to watch with interest.