World insurance market open to Aussie mortgage risk

A vibrant flow of premium income over high risk home loans is being farmed out by Westpac to the international reinsurance market.

Westpac has kicked Genworth, and maybe also QBE, off its reinsurance panel with others moving to fill the void.

Banking analysts and CLSA said Westpac would "effect a capital arbitrage with a Bermudan reinsurer whereby they can extract more (profit) commission for ceding the business than they could by keeping it in Australia."

In a briefing note, analysts at UBS wrote: "We understand QBE LMI received similar notification."

Genworth will also lose insurance business placed directly by Westpac, all of it relating to loans with LVRs of worse than 90 per cent. Loans in the less risky 80 to 90 per cent LVR range will continue to be supported by Westpac's own insurance arm.

Fourteen per cent of Genworth's premium income came from Westpac's multibrand subsidiaries St George, RAMS, BankSA and Bank of Melbourne.

And according to the prospectus for Genworth's Australian IPO last year, around ten per cent of its total premium income was derived from covering Westpac's riskiest loans.

This tags Westpac's move as an interesting marker of the momentum at this end of the market.

Westpac also has a greater share of investment loans than its peers - but the bank's loosened screws on credit standards are no different from most other quarters of the Australian banking industry.

There may be no coincidence in the timing of Genworth's majority owner in the US having its credit rating cut to Baa1 from A3, only one level above junk.

APRA data puts 90 per cent plus LVR lending at about 12 per cent, down from 13.5 per cent a year ago, with a corresponding pick-up in the 80 to 90 per cent LVR band.

The Westpac Genworth break suggests it may be flying.