Here's why Genworth Mortgage Insurance Australia shares are getting smashed

Genworth Mortgage Insurance Australia (ASX:GMA) shares are being hammered following the release of a disappointing third quarter result. Is it a bargain or best avoided?

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It is looking like a disappointing end to the week for shareholders of Genworth Mortgage Insurance Australia (ASX: GMA). In early afternoon trade the lenders mortgage insurance provider's share price is down 7% to $2.81 following the release of its third-quarter results.

For the third quarter the company reported net profit after tax of $46.7 million, down 28.7% from the $65.5 million it reported in the prior corresponding period. This disappointing result now means that year-to-date net profit after tax is up just 2% on the same period last year to $182.6 million.

A 28.3% drop in new written premiums in the quarter is partly to blame. Year-to-date new written premiums stand at $20.1 billion, down 23.3% on the first three quarters of FY 2015.

Furthermore net earned premiums fell by 6.5% to $115.9 million during the quarter, bringing its year-to-date figure to $344.8 million from $349.6 million a year earlier. Unfortunately this looks set to get worse, with management forecasting a full year decline of 5%.

Management has placed some of the blame on a subdued high loan-to-value ratio (LVR) market. According to the release the high LVR market is down and the mix of business in lower LVR bands is pressuring gross written premiums and negatively impacting its results.

Worryingly the company's portfolio delinquency rate continues to rise. Driven by elevated delinquency development in the mining related regions of Queensland and Western Australia, its portfolio delinquency rate rose from 0.39% to 0.47%.

With its shares providing an estimated fully franked 8.4% dividend and changing hands at just over 7x trailing earnings, Genworth Mortgage Insurance may appear to be a tempting option. But I would caution against an investment as things look set to get worse before they get better.

Any investors in search of a strong dividend might be better served with an investment in Suncorp Group Ltd (ASX: SUN) or even Australia and New Zealand Banking Group (ASX: ANZ) instead.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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