While I’m on the topic of outstanding claims liabilities, I...

While I’m on the topic of outstanding claims liabilities, I thought I’d show one of my favourite Genworth graphs – this one below from the 1 H 2020 Financial Results (slide 34):

This graph shows the claims severity by underwriting year. Claim severity is expressed as a % of the original loan size. The development of this severity is shown over time. The GFC impacted years (2006 – 2010) have what is considered a higher severity at 23% to 27%. These years also had higher claims frequency. Genworth’s profits were a lower over this period.

The high severity years of 2011 and 2013 are due to the mining bust. There is remarkable alignment between these severity development patterns and the home value indices below (source: RBA).

Home values peaked in 2012 and fell up to 70% in some regions by 2016 and 2017. In the first graph we see severity peak in 2012. We also see the strong severity development occurring in the 2016 and 2017 calendar years, across many underwriting years. Despite higher severity losses (32% to 37%), claim frequency was lower and Genworth remained profitable during the 2016 and 2018 period.

If you look at the position more recently, 2018 and 2019 are tracking well below prior levels. With the record (and broad-based) house price growth that followed, claim severity for the 2016 to 2021 will remain low.

What is the point of all this? It is that at December 2021 Genworth assumed a claim severity of 27%. It is also worth stressing that this assumption applies to outstanding claim, i.e. those that are were 90 days delinquent at December 2021, not future delinquencies. To me, I think such an assumption is only reasonable if a GFC or mining bust type of event was expected to occur in the short-term. The assumption seems inconsistent with the consensus economic forecasts Genworth claim to subscribe to.

My guess is that this severity assumption is twice as high as it needs to be and does partly explain the lower than expected claim payments and the now persistent write-downs in claims.