The ASX-listed scrip of Genworth Mortgage Australia was hammered on Tuesday after the company revealed that its largest customer - Commonwealth Bank – had indicated it would put its mandate for lender’s mortgage insurance out to tender.
Genworth derives more than half of its revenue from an exclusive LMI supply deal with CBA that is due to expire at the end of 2022.
Given the materiality of the CBA relationship, Genworth’s share price plummeted by more than 22 per cent as investors digested the prospect of the country’s largest bank engaging another insurer to underwrite its high-LVR home loans.
Trading in the stock appeared to stabilise in the afternoon with the share price closing down 40 cents or 16 per cent to A$2.14. Economic fallout from the pandemic has increased pressure on LMI providers in the last 18 months, with Genworth reporting a $108 million loss for the 12 months to the end of December last year.
LMI claim rates across the industry have risen sharply since early last year but the impact on insurers has been softened to some extent by the home lending boom which spurred premium growth.
Genworth is likely to report a market-leading surge in premium income for the June half because it underwrites most of the fastest growing home lenders in Australia.
However, the withdrawal of a LMI mandate from Westpac in 2015 increased the risk profile of the Genworth business, which now depends on CBA for 57 per cent of its annual premium income.
Genworth chief executive Pauline Blight-Johnson put the best possible spin on CBA’s decision to put its LMI contract up for tender.
“We welcome the opportunity to submit a proposal to CBA to extend our agreement for the supply of LMI beyond 2022, building on the strong foundations of our long-standing relationship,” she said.
“A core part of our strategy is to work with our lender customers to continue to improve the efficiency and competitiveness of LMI as we look to reimagine LMI for a new generation of home buyers.”
Blight-Johnson said that Genworth continued to underwrite the activities of fifty Australian lenders, seven of which had renewed exclusive mandates with the insurer in the last 12 months.
Goldman Sachs analyst Andrew Lyons told clients in a report he could find no evidence of CBA issuing a request for proposals on its LMI mandate since Genworth was listed on the ASX in 2014.
Lyons told clients he was unsure what the regulatory response might be to Genworth losing the CBA contract.
“In the event Genworth lost the CBA contract, which represented 57 per cent of 2020 gross written premium, we are unsure how the regulator would respond – that is would it require all of the capital held against the CBA contract to be retained for the entire eleven-year run-off period?” he stated in the research report.
“The answer to this question would materially impact the value of the remaining Genworth business.”
Almost 20 million Genworth shares were traded on Tuesday - the highest level of activity since the first week of March when the company’s