In the concentrated, near-duopoly that is the lenders’ mortgage insurance market, the current swoon in housing prices paired with an unstable industry structure look to be mixed blessings.
The LMI sector is an industry in flux, with Arch LMI now two years into its journey of disruption in a sector where the overwhelming share of premiums and profits has long been held by Genworth and QBE, and two upstarts have retired hurt.
In various guises Genworth has been the undisputed market leader in mortgage insurance, ever since the old HLIC pioneered this form of insurance (alongside AMP) in the mid 1960s.
The capital market over recent days has been asked to reappraise the strategy, capital adequacy and credit rating of Genworth Australia after Genworth Financial, its US-parent, offloaded its 52 per cent holding.??
GMA said on Monday that the sell-down was complete, a step S&P Global Ratings has said insulates the insurer from its lower-rated ultimate US parent, and “may lift the funding and operational flexibility of Genworth Australia”.
The index-hugging institutional investors that are now all-in on GMA’s backstopping of the mortgage funding chain in Australia will be digesting APRA’s definitive overview of the niche market, as part of the quarterly general insurance statistics for December 2020, released yesterday.
On APRA data, there were 152,000 “insured risks” at the end of December 2020, 30 per cent more than a year before.
The claims number for CY2020, at A$618 million was near double the claims of $342 million in 2019.
Claims on lenders’ mortgage insurance are made by banks and credit unions, who typically pass on the premium in full to home loan borrowers.
The combined underwriting result for the six specialist LMI providers, more or less a loss of $100 million over CY2020, is the first full-year loss on LMI underwriting in APRA’s rather sparse data set, one that spans less than 10 years.
Investment returns were lean last year; at $60 million these returns were less than half those in 2019.
APRA put the aggregate net loss for the LMI sector at $26 million.
The industry’s capital base is pretty robust at $3.47 billion, a decline of around $200 million over one year.
More losses may lie ahead as the Covid pandemic weaves its mischief, even though house prices are off on an improbable trot.
Three weeks ago, Genworth chief executive Pauline Blight-Johnston warned of “sustained pressure on claims” this year as government and bank COVID support measures are withdrawn.
Genworth reported a loss of A$108 million for the year to December 2020. That loss was largely due to the company’s decision to strengthen reserves and also lower returns on invested funds.
QBE Insurance Group, the number two provider, shields insight into its LMI division in financial reporting.
Richard Pryce, the interim CEO of QBE, told an investor briefing last month that “on Lenders’ Mortgage Insurance, lead indicators and credit metrics have trended better than expected, with most bank customers having resumed mortgage repayments after brief Covid-19 related repayment holidays.
“Having said that, this is a long-tail business, and the economic outlook, while stabilising, remains uncertain and supported by significant stimulus programs that are yet to roll-off.”
Arch Capital Group, the owner of Arch LMI, is no more forthcoming.
Premiums written by the mortgage segment in the December 2020 quarter were 5.1 per cent higher than in the 2019 fourth quarter, Arch said, “primarily reflecting growth in Australian single premium mortgage insurance, partially offset by a lower level of U.S. primary mortgage insurance”.
ANZ and Westpac continue to operate captive mortgage insurers; around 5 LMI providers have wound down or sold down since 2010.
With the 2018 entry of Arch and competition from the reinsurance market - and above all the need on the lender side to temper the cost of LMI passed through to new borrowers - Genworth and QBE won’t be repairing LMI underwriting profits any time soon.