EUR 850.00 For Business Accounts Only

Morningstar | Corporate Action: After in Line 2018 Results, Vote in Favour of Genworth’s Proposed Share Buyback

No-moat Genworth’s full-year 2018 results were in line with our expectations. Moderating Australian housing conditions and an October 2017 earnings curve review led to a 24% decline in net earned premiums, or NEP, and a 51.9% loss ratio, tracking our forecast for a 25% decline and 53% loss ratio. Excluding the impact of the curve review, NEP fell 4.3% in 2018, reflecting challenging end-market conditions, although underlying NPAT of AUD 93.9 million matched our projection. We maintain our AUD 2.70 per share fair value estimate.

Downside risks remain. We expect further credit standard tightening by major bank customers and the impact of stronger macro prudential regulation, particularly following the recent Financial Royal Commission, and forecast low single-digit near-term NEP growth. Our forecast 4% growth for 2019 NEP is at the high end of management’s range of between negative 5% and positive 5%, while our assumed loss ratio of 50% is at the mid-point of management’s 45% to 55% estimate. But further negative follow-on effects from Australia’s housing moderation, such as a spill-over into the broader economy due to lower household wealth, could drive our valuation downward by nearly 50%.

Nonetheless, we’re encouraged by Genworth’s solid capital allocation, including repurchasing AUD 149 million worth of shares in 2018 at roughly our fair value estimate, on average. The company announced an additional AUD 100 million of buybacks, with a portion subject to shareholder approval at the annual general meeting on May 9, 2019. So long as the market price remains below our fair value estimate, we recommend voting for this repurchase. Genworth’s balance sheet supports this endeavour. The firm finished the year with more than AUD 3.2 billion in cash and investments, and its regulatory capital base is 1.94 times its prescribed capital amount, or PCA, coverage ratio, which continues to be well above its target PCA coverage ratio of 1.32-1.44 times.

Genworth also saw delinquency rates (loans in arrears as a percentage of loans in-force) tick up to 0.55% in 2018 from 0.47% the year prior, although we’re less concerned about this headwind. This increase was primarily driven by higher delinquency rates in Western Australia and New South Wales, but the firm noted that new delinquencies fell slightly in the year due to mining regions seeing signs of improvement. The major driver of delinquencies is the unemployment rate, and recent improvements here should provide some support to Genworth.