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

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Tuesday, 17 February 2015

Genworth delinquencies lowest since 2007

Genworth Australia lists in 2014

In May this year Genworth Mortgage Insurance Australia Limited (ASX: GMA) finally completed its initial public offering (IPO) of 220 million shares at an IPO price of $2.65 per share.

The stock is relatively speaking a little tightly held, with Genworth Financial Inc. retaining 430 million of the 650 million ordinary shares representing a 66.2 percent ownership, while institutional investors account for most of the rest - the Top 20 shareholders of GMA hold all but 7.8 percent of the 650 million ordinary shares on issue.

Genworth in Australia (GMA) is a monoline lenders mortgage insurance (LMI) insurer and with a 44 percent share of the Australian LMI market it has been perceived by many to be the ideal shorting vehicle for Australia's long-suffering housing market bears.

Unfortunately people tend to hear the words "monoline insurer" and in a Pavlovian response assume that shorting the vehicle is a good idea.

But unless you have great market timing and money management skills, it isn't.

A "cleaner proxy"

While Australia's major banks are somewhat diversified, gross written LMI premiums are essentially the whole of Genworth's Australian business, and as such GMA is a "cleaner" proxy for mortgage delinquencies and related housing market sentiment. 

While the percentage of total issued capital being sold short will not run high due to the group's shareholding structure noted above, there has been some interest on the short side for GMA, although the data shows that there have been a greater volume of shorters of embattled iron ore producers, such as Fortescue Metals Group (ASX: FMG).

As Genworth Australia is 66.2 percent owned by Genworth Financial Inc. and with the "instos" mopping up much of the rest the market, GMA will be far from the most liquid market on the ASX. 

Nevertheless, the GMA share price chart should act as an effective bellwether for expectations of non-performing loans and delinquencies, and thus analysts will therefore continue to scrutinise future price action with a keen eye.

Shorters ruined

Unfortunately, just as though who tried to short Commonwealth Bank (CBA) as a proxy for the Australian housing market lost out as the share price soared to record highs, so too have many of those shorting GMA, although daily shortsell reports did at least suggest that most did not take the plunge and sell short over the earnings season.

Full year results

Genworth released its 2H/FY2014  results last week and it was a corker of a result.

Gross written premiums increased by 6.3 percent and net earned premium jumped by 12 percent. Inclusive of $26.4m of mark-to-market gains, reported NPAT soared by 51.9 percent to $172.9 million.

This allowed GMA to declare a fully franked final ordinary dividend of 13.1 cents per share and in addition a fully franked special dividend of 11.5 cents per share.

Key underwriting metrics

For a monoline mortgage insurer market analysts are keen to check out a number of underwriting metrics rather than pure statutory results, and these showed loss ratios as having dived from above 32 percent in FY2013 to 19 percent.

GMA's regulatory solvency ratio remained strongly capitalised at 159.3 percent of the Prescribed Capital Amount (PCA).

Perhaps most significantly for this release, the delinquency rate has declined to only 0.33 percent, which is the lowest delinquency rate since 2007.

Delinquency development ratios are usually best viewed by book year as below. 

GMA's results show that since 2007 delinquency rates have cascaded lower, mirroring what has been found by research of the Reserve Bank as well as major banks.

That is, that with mortgage rates declining to record lows, on average mortgagees are finding repayments very comfortable, and with most home loans in Australia on variable rates, mortgage holders have opted to move ahead of their mortgage repayments in order to build material buffers.

Often in Australia this happens in an automated fashion when mortgage rates are cut, with loan repayment schedules maintaining repayments at the existing level thereby allowing borrowers to move ahead in building a buffer.

Moreover, observers should take care not to be misled into believing that advertised loan products are the same thing as loans written.

APRA's latest quarterly statistics showed a continuing trend towards a lower LVR mix, with a lower percentage of loans of greater than 90 percent LVR written (and correspondingly a greater percentage of loans with an LVR of between 60 percent and 90 percent).

This trend is likely due to the higher volume of investors in the market at the present time.

In a similar vein, if an automated online home loan calculator says that you "may" be able to borrow 8 times your salary as a first homebuyer, this means that you "may" not be able to, and indeed you almost certainly won't.

Genworth record high share price

Due to the nature of the industry, GMA trades only at a low P/E ratio which values the company at around $2.8 billion.

After trading in a range for six months, GMA has now broken out and boomed to new market highs of above $4.30.

The Wrap

Short-selling is a genuinely useful tool for portfolio managers to hedge their positions, and shorting can have an important role to play in the controlling of asset bubbles.

Shorting can also be a mechanism via which skilled traders who have a proven track record over a period of years of making consistent profits from trading can make profitable trades regardless of the direction of the market.

Average investors who dabble in short-selling often end up in a frightful mess. and just as they did when shorting Commonwealth Bank, once again, they have been by shorting GMA.

Mortgage delinquencies have declined to their lowest levels since 2007, which is wonderful news.