Strong housing market good news for Genworth

Mortgage insurer Genworth has reported a 26 per cent increase in net profit for the year to December, putting the strong result down to "a favourable loss experience." Claims were down more than 30 per cent and the delinquency ratio was at its lowest level since 2007.

Genworth Mortgage Insurance Australia chief executive Ellie Comerford warned that she did not expect that situation to continue in the current year. With unemployment increasing and house price growth likely to peak, the company's loss ratio would be heading up.

Genworth made an underlying net profit of A$279.4 million in 2014 - an increase of 26.5 per cent over the previous corresponding period.

Net earned premium income was up 12 per cent to $445.8 million. Claims were down 33.9 per cent from $127.8 million in 2013 to $84.5 million last year.

The rise in property prices has had a big impact on Genworth's business - reducing the amount that has to be paid out on claims after mortgagee sales. The average paid claim fell from $75,400 in the December half in 2013 to $62,900 in the June half last year and $54,400 in the latest half.

The number of claims fell from 1091 in the December half in 2013 to 664 in the latest half.

The "lower severity of claims" resulted in the company's loss ratio falling from 32.1 per cent in 2013 to 19 per cent last year.

Looking ahead, Comerford said: "The unemployment outlook is uncertain. We expect house price growth to continue but at a more muted rate and low interest rates are putting pressure on our investment returns."

She is expecting growth of around five per cent in net earned premium and a loss ratio of around 25 per cent this year, with market share remaining stable.

The move by regulators to get lenders to limit their high-LVR and investment lending will have impact on premium income.

The company's underlying return on equity rose from 10.4 per cent in 2013 to 12.2 per cent last year. The company has set medium term ROE target in the mid-teens.

Comerford said the company was currently holding 1.5 times its required regulatory capital. If and when that buffer is deployed it will enhance the ROE.

The company performed well on other key metrics. The expense ratio, which expresses acquisition costs and underwriting expenses as a percentage of net earned premium, fell from 27.4 per cent in 2013 to 26.5 per cent last year.

The combined ratio, which calculates claims plus underwriting expenses as a percentage of premium income (a combined ratio of over 100 per cent indicates an underwriting loss), fell from 59.5 per cent in 2013 to 45.5 per cent last year.

The insurance margin, which expresses profit from underwriting and interest income on funds as a percentage of net earned premium, increased from 51.3 per cent in 2013 to 65.8 per cent last year.