For only the second time in 60 years, Commonwealth Bank is seeking a Request for Proposals for it lenders mortgage insurance business, a contract held all these decades by Helia and its predecessor, HLIC.
Arch LMI is almost certainly the only plausible alternative provider.
QBE LMI, equally certainly, won’t be in the running, given QBE is widely understood to be seeking an exit from lenders mortgage insurance and has been for some time.
While Arch will be making their best bid, and it will surely be an aggressive and attractive pitch, the smart money is already leaning towards Helia as being well-placed to retain the CommBank business, as Helia (then Genworth) did in early 2022.
That tender, which CBA put to market in late June 2021, took around seven months to resolve.
Helia, in an announcement to the ASX yesterday, said revenue from the CBA contract represented 53 per cent of gross written premium. It said the current contract runs to the end of 2025 “and does not include all CBA group brands.”
It seems it is the anticipated margin compression from the keen pricing Helia is bound to offer CommBank to retain this business that explains the 21 per cent per cent dive to $3.34 in Helia’s share price yesterday, rather than any real belief that Helia might easily lose this highly strategic client.
There may be other outcomes, however.
CBA could to elect to establish a captive insurer, as ANZ has, and has long had, and as Westpac had before selling its captive to Arch four years ago. (QBE LMI is the mortgage insurance provider for NAB).
Alternatively, CBA could take the more radical path of dispensing with paying for LMI altogether on high LVR loans, and simply price this risk into home loan interest rates, though this option presents complications on risk-weightings of home loans under APRA’s prudential standards.
Both are options that CBA’s management and board must have examined many times, with the present RFP process an input into weighing the current merits of either option.
While Helia has been earning comfortable profits in this monoline domain of insurance, challengers have tried and failed in the last 20 years.
Radian and MGIC are two in this category, while Royal & Sun Alliance and Vero both called it quits long ago, the back books of the latter two being under the wing of Helia.