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Genworth investors betting on bumper dividend, buyback

Anthony Macdonald, Sarah Thompson and Kanika Sood

Feb 3, 2022 – 9.34pm

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ASX-listed Genworth Mortgage Insurance Australia is prime candidate for some capital management action this reporting season, with some investors tipping it to consider winding back conservative COVID reserving policies to make way for a big dividend or share buyback.

Genworth’s February 25 results will be closely watched by investors. Louise Kennerley

Genworth, which sells lenders mortgage insurance to the likes of Commonwealth Bank, is slated to report its results for the 2021 full year on February 25.

As a listed financial with just a $1 billion market, it often flies under the radar of big funds but has been one to watch for some small cap and private investors.

By one such investor’s measure, Genworth’s sitting on nearly $300 million of excess reserves, which resulted in an accounting loss for the full year 2020 (it’s last full year reporting period) even as claims have behaved themselves and new money has kept coming in the door.

RELATED QUOTES

GMAGenworth Mortgage Insurance Australia

$2.530 -1.94%

1 year1 day

Feb 21May 21Aug 21Feb 222.0002.5003.000

Updated: Feb 3, 2022 – 10.46pm. Data is 20 mins delayed.

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The bone of contention seemed to be the government’s mortgage repayment deferrals offered during COVID. While Australian Prudential Regulation Authority (APRA) allowed banks to record these loans as current instead of delinquent (thereby saving them from ringing up extra capital charges), APRA didn’t provide explicit guidance on how LMI providers like Genworth should treat them.

Genworth, erring on the side of caution, still set aside money from these loans that to banks were “current” during COVID. Meanwhile, house prices shot up and Genworth did not get many claims, creating what some investors think, is an excess of reserves.

It also continued to bring in more premiums, with the total rising from pre-pandemic levels of $497 million for the 2019 full year to $638.6 million.

What Genworth does with the extra cash will be interesting to see.

It has already taken small steps in the direction, resuming a small dividend last year and starting a $100 million share buy-back in November.

But it’s still got cash to get rid off, investors reckon.

One option would be to funnel it into a chunkier dividend, while the second would be to undertake a bigger buy-back. And if it is going to do either, then reporting season is the logical time to announce it.

Genworth’s traditionally traded below its net tangible assets (NTA) at 0.6 to 0.8 times the number. And that could make a share buyback the most accretive capital return mechanism at least at face value.

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