Genworth mortgage insurer set for ASX debut

Mortgage insurer Genworth is set to list tomorrow on the Australian stock exchange after strong local and international equity interest, the second biggest initial public offering for the year to date. There was a $2.65 per share institutional price.

Genworth plans to list with a market capitalisation of around $1.72 billion. It has a 45% share of the lenders’ mortgage insurance (LMI) market in Australia, in an oligopoly as Genworth and the other main player, QBE LMI, have a combined share of around 78%.

Goldman Sachs and CBA Equities, Macquarie and UBS launched a book build last week following the decision of the US parent to sell down a 34% stake in its Australian subsidiary.

Genworth will raise about $750 million from the float, which was delayed two years ago, following heavy losses in the local LMI arm.

LMI covers lenders when borrowers default on their home loans. LMI is typically required by banks as a result of pressure from the Australian Prudential Regulation Authority and their own boards for risk mitigation when a borrower has less than 20% of the purchase price as a deposit.

Mortgage insurance covers the lender – usually banks – with Genworth the largest Australian provider, with more than 60% of its business coming from loans written by CBA, Westpac Banking Corporation and National Australia Bank.

Genworth said it expected to post a net profit of US$231 million ($248 million) for the year to 31 December, up from US$179 million in 2013.

But CLSA analyst Jan van der Schalk told the AFR the company produces an 11% return on equity, which is a “desperately poor return for a feast or famine business”.

Goldman Sachs has estimated a property price correction of 10% would have a pre-tax impact of $870 million over a two to three year period.

A hard landing for property prices – a fall of 30% – would have a pre-tax impact of $2.2 billion over two to three years.