Genworth Mortgage Insurance Australia Ltd plunges after profit update: should you buy?

Booming housing market sets scene for an impressive 12 months for Genworth Mortgage Insurance Australia Ltd (ASX:GMA).

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Shares in Australia's only pure-play listed Lenders Mortgage Insurance (LMI) provider Genworth Mortgage Insurance Australia Ltd (ASX: GMA) plunged 3% on Thursday after the company reported a third quarter that disappointed some investors.

Mostly Strong Signs

Genworth, which is 66% owned by Fortune 500 company Genworth Financial, Inc., reported that year-on-year:

  • New insurance written (NIW- i.e. the value of insured properties) increased by 11.4%
  • Gross written premium (GWP) increased by 5.3%
  • Net earned premium increased by 9.5%
  • Underlying NPAT increased by 20%

The solid results, which demonstrate the strength of the local housing market, present some interesting observations.

Lower LVRs

This statement was of particular interest: "The average premium rate of 1.82 percentage points has not increased to the level anticipated as the business continues to experience a lower average Loan to Value Ratio (LVR) mix in the NIW as a consequence of a greater than expected volume of sub 80% LVR business being written in the year to date."

This implies that investors and homeowners are favouring lower LVRs than expected, and perhaps than what is being reported in the media. It will be interesting to see what commentary comes out of QBE Insurance Ltd (ASX: QBE) and the big four banks about the local LMI market in the next couple of months.

Negotiations

Genworth reported that during the third quarter the company completed a number of negotiations with lending partners. Pleasingly the company reported that: "The net impact on NIW and GWP of these contractual changes is expected to be minimal in 2014 and marginally positive in future years."

An Opportunity?

Genworth shares have returned nearly 40% in the six months since its IPO. Investors have been attracted by the group's exposure to the Australian housing market, relatively stable earnings potential, and yield outlook. Analysts expect a fully-franked yield of around 3.5% in the 2014 financial year, the majority of which should be paid in the first half of 2015. A prolonged fall in the share price would make me have a serious look at the company.

Like many other insurance companies, Genworth has a large investment portfolio which meaningfully contributes to income. The portfolio is extremely defensive, meaning that over the long term management may increase the growth asset allocation in order to boost investment returns.

Motley Fool contributor Andrew Mudie owns shares in QBE. You can find Andrew on Twitter @andrewmudie

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