Earnings On 5 August 2015 Genworth Mortgage Insurance Australia Limited delivered its 1H 2015 result delivering a gross written premium (GWP) of $285 million, down 9% on a proforma basis as a result of low mortgage originations in the high LVR sector. Turning this into profit, the group experienced a net earned premium (NEP) of $265.7 million, up 3.7%. This was broadly in-line with market expectations and is a function of revenue generated from mortgage originations in 2001-2013. Net claims were 6.6% higher at $116 million as mortgage delinquency rates in Queensland / Western Australia started to increase and reserve releases reduced. The expense ratio remained broadly unchanged which translated into an underwriting result of ~$115 million. As with other insurers the investment result (3.7%) helped drag the Insurance Trading Result (ITR) down 10.7% to $129 million. This result does not change our thesis that Genworths earnings profile is affected by cyclical and structural factors and GWP is being effected by low loan growth from origination channels (70% major banks) – as a result of new APRA constraints. The business strategy is unlikely to rely on unearned premiums to maintain NEP forever and hence the business strategy decision in the next 12 months should be key to earnings stability. We continue to believe the claims experience will remain relatively benign over the coming year but the delinquency uptick in regional WA and Queensland is a cause for concern. Capital As at 30 June 2015 Genworth’s regulatory capital position was 1.64 times the Prescribed Capital Amount (“PCA”) and the Common Equity Tier 1 (“CET1”) ratio was 1.59. This significantly exceeds the internal targeted range of 1.32 – 1.44 times the PCA and the regulatory CET1 requirement of 0.60 times PCA. This effectively confirms ths position post the Genworth Subordinated Notes issue. While this is a significant capital buffer is will reduce over time and evidence of this was the special dividend paid to shareholders ($18.5c on top of $12.5c) and the discussion of further specials over the coming year. Genworth continues to shuffle its capital position through reinsurance programs, issue/redemption of subordinated notes and the phase out of APRA approved capital instruments. The announcement by Genworth Financial (the US major shareholder) CEO Tom McInerney that he plans to “evaluate ownership of Australia unit” does not come as a surprise and in our opinion removing the US parent from the shareholder list would actually be a credit positive for the group. However, this does create downward pressure on the equity price. Overall, we believe Genworth’s internal risk management framework systems are highly sophisticated and capital sensitive. We remain cautious of the performance of the housing market (especially in mining regions) in Australia but would argue that Genworth’s technology would be timely enough to act on any deterioration of mortgage portfolios and then the key focus should be making sure they have readily available access to capital markets. Reserves and Reinsurance Capital is not the only tool available to Genworth in order to protect itself against unforeseen losses. Reserves and Reinsurance is the front line of protection for Genworth and since listing on the ASX in 2014 this has been the focus of their attention. Over this period they have renewed and expanded the reinsurance program which means the level of qualifying reinsurance has increased from $815 million (as at 31 December 2014) to $915 million. This increased “Excess of Loss” reinsurance is probably the start of a wider plan to increase reinsurance as a capital management tool. The cost of reinsurance has been reducing but ultimately it is a trade off between reinsurance cost, the composition of capital and the cost of issuing new capital instruments.