Genworth Mortgage Insurance Australia Ltd (ASX: GMA) shares have fallen by more than 11% in early morning trading, after the company announced a change to its reserving methodology will hit the bottom line by $110 million. As a result, the company says it is unlikely to report a profit or declare a dividend in FY20.
At the time of writing, the Genworth share price is trading at $2.24, down 25 cents.
Why the Genworth share price fell hard this morning
The Genworth share price is plunging lower today after the company advised an independent actuary was appointed to assess the potential impact of changes to delinquency behaviours and home loan repayment deferrals. The assessment formed part of the company’s annual earnings curve review.
In tandem with this review, the assessment also considered the appropriate timing of recognition and reserving for claims, given the changes to claims patterns arising from the COVID-19 borrower support packages.
Genworth says the introduction of repayment deferrals in response to the pandemic has interrupted the usual pattern of claim occurrence, notification and cure.
At the completion of the study, Genworth concluded that it is appropriate to “refine its reserving methodology”, and to hold re-delinquency claims reserves for all policies that have at any point experienced delinquency. This will apply to all policies currently cured and in force, and any new policies becoming delinquent from the fourth quarter of FY20 onwards.
As a result of this update in reserving methodology, the company estimates that the pre-tax impact for the year ending 31 December 2020 (FY20) will be an increase in net claims incurred by $110 million.
Consequently, Genworth expects the fourth quarter FY20 net claims incurred to be in the range of $135 million to $150 million.
Given this announcement, the company says it is unlikely to report a statutory profit for FY20, and the board is unlikely to be in a position to declare a dividend for FY20.
About the Genworth share price
Genworth Mortgage is the provider of Lenders Mortgage Insurance (LMI) in Australia.
Back in November, the company announced steady results, reporting net profit after tax (NPAT) of $27.4 million for the third quarter, up from $26.5 million on the prior corresponding period.
The Genworth share price has lost 38% in 2020, including today’s losses. It is still a long way off from its 52-week high of $4.06. The company commands a market capitalisation of $1 billion.
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Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
The post Genworth Mortgage (ASX:GMA) share price drops by 11%. Here’s why appeared first on The Motley Fool Australia.
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