Tag: LMI

QBE’s Cyclical Deterioration In LMI

QBE Insurance reported their full year 2017 results today and  reported a statutory 2017 net loss after tax of $1,249 million, which compares with a net profit after tax of $844 million in the prior year.

This is a diverse and complex group, which is now seeking a path to rationalisation.  They declared their Asia Pacific result “unacceptable” and said the strategy was to “narrow the focus and simplify back to core” with a focus on the reduction in poor performing segments.

This begs the question. What is the status of their Lenders Mortgage Insurance (LMI) business? They reported a higher combined operating ratio consistent with a cyclical slowdown in the Australian mortgage insurance industry, higher claims and a lower cure rate. Very little detail was included in the results, but this aligns with similar experience at Genworth who reported a 26% drop in profit, the listed monoline and provides greater insight into the mortgage sector.

Both LMI’s are experiencing similar stresses, with lower premium income, and higher claims. And this before the property market really slows, or interest rates rise!  Begs the question, how secure are the external LMI’s?

QBE LMI reported a combined operating ratio of 50.7%, up from 34.9% in the prior year, largely reflecting an increase in the net claims ratio to 33.0% from 21.2% previously. The net claims ratio deteriorated due to a moderate increase in arrears rates, primarily related to properties located in mining towns in Western Australia and Queensland, coupled with an increase in the propensity for claims in arrears to generate claims (a reduced “cure” rate) and an increase in average claims severity. The commission ratio increased to 4.5% from 1.8% in the prior year, reflecting a lower exchange commission following the non-renewal of our external quota share reinsurance treaty. Note that QBE LMI (is required to) has their own reinsurance protection.

Notwithstanding reduced LMI earnings, Australian & New Zealand Operations’ combined operating ratio improved to 92.0%  from 92.4%  in the prior period, underpinned by a 1.8% improvement in the attritional claims ratio or 2.5% excluding LMI.

The overall results for the group includes the significant non-cash impairment of goodwill ($700 million) and write down of the deferred tax asset following the reduction in the US corporate tax rate ($230 million) in our North American Operations.

Overall, the results reflect the record cost of catastrophes in the second half of 2017 together with deterioration emerging markets businesses and two significant non-cash items. Notwithstanding comprehensive reinsurance protections, the net cost of catastrophes for QBE (after reinsurance) was $1,227 million in 2017 compared with $439 million in 2016.

Genworth Gets NAB’s LMI Contract Extended

In a release to the ASX, Genworth, the listed Lenders Mortgage Insurer said that its contract with NAB to provide LMI had been extended for one year to 20th November 2018.

The contract represented 10% of Gross Written Premium in 2016.

Ms Georgette Nicholas, Chief Executive Officer and Managing Director of Genworth, said, “We look forward to continuing to build on our long-standing partnership with NAB under this extended agreement. We are focused on delivering risk and capital management solutions for our customers and we’re delighted that we have been able to continue to be the LMI provider for NAB’s broker business.

“Genworth remains committed to supporting Australians realise their dream of homeownership. Our focus continues to be on the provision of capital and risk management solutions to our lender customers, being a strong risk management partner and using our data and analytics to provide in sights to this changing market.”

The extended contract does not change the guidance provided that Gross Written Premium (GWP) will be down 10 to 15 per cent in 2017.

More Evidence of Mortgage Distress

Genworth, the listed Lenders Mortgage Insurer (LMI) released their 1H17 results today, and as a bellwether for the mortgage industry, they make interesting reading.  We see continued pressure on mortgage defaults in WA (0.86%) and QLD (0.72%), and a fall in higher LVR lending leading to lower volumes of new premiums being written, but at higher prices.  The average original LVR of new flow business written in 1H17 was 82%.

They reported a statutory net profit after tax (NPAT) of $88.7 million for 1H17. After adjusting for the after-tax mark-to-market move in the investment portfolio of $24.8 million, underlying NPAT was $113.5 million. Compared with IH16, net written premiums were down 7.5%, reported NPAT was down 34.7%, the loss ratio was up 1.8% and the delinquency rate was up 8 basis points. The ROE was down 3.4%. They also suffered a decline in investment returns, from 3.53% (IH16) to 2.88% this time.

Net claims incurred decreased 2.4% which included the $8.2 million favourable impact of a periodic review of its non-reinsurance recoveries on paid claims. This benefit was partially offset by an increase in delinquencies from Queensland and Western Australia, particularly in regions exposed to the slowdown in the resources sector.

5,997 new delinquencies were added in 1H17 with a total of 7,285 on book, reflecting a delinquency rate of 0.51%, up from 0.46% in 2H16. Cures were higher, reflecting ongoing borrower sales activity.

Genworth has commercial relationships with over 100 lender customers across Australia and has Supply and Service Contracts with 8 of its key customers. The top three customers accounted for approximately 66 % of Genworth’s total New Insurance Written (NIW) and 71 % of GWP in 1H17. The largest customer accounted for 37 % of total NIW and 51 % of GWP in 1H17. The Group estimates that it had approximately 30 % of the Australian LMI market by NIW for the six months ended 30 June 2017.

On 10 March 2017, Genworth announced that the exclusivity agreement for the provision of LMI with its second largest customer was terminated in April 2017. The LMI business underwritten under this contract represented 14% of Gross Written Premium (GWP) in 2016. The Company has been successful in entering into new business with that customer that assists them in managing mortgage default risk through alternative insurance arrangements.

Genworth also previously advised that its customer, the National Australia Bank, has issued a Request For Proposal relating to its LMI requirements. The Company has submitted its proposal and will provide updates as to the outcome of its proposal.

Genworth continues to pursue other profitable opportunities in the market that meet its risk appetite and return on equity profile.

They showed their delinquency by year of acquisition.

Each line illustrates the level of 3 month+ delinquencies relative to the number of months an LMI policy has been in-force for policies issued within a specific year.

2008 Book Year was affected by the economic downturn in Australia and heightened stress experienced among self-employed borrowers, particularly in Queensland, which was exacerbated by the floods in 2011.

Post-GFC book years seasoning at lower levels as a result of credit tightening, however ongoing deterioration for 2012-14 books have been predominantly driven by resource reliant states of QLD and WA that are continuing to face challenges following the mining sector downturn.

The above chart illustrates the delinquency population by months in arrears (MIA) aged bucket at the end of each reporting period. Over the past two years, the mortgagee in possession (MIP) percentage as a proportion of the total delinquency population has been trending down.

This reflects strong housing market conditions and the low interest rate environment in which a MIP generally progresses faster to a claim, or sold with no claim, which in turn leads to a relatively lower claims pipeline.

The 3-5 months MIA bucket shows a seasonal uptick in the second quarter of each year, consistent with historical observed experience.

The CET1 capital did not materially change in 1H17 reflecting the $88.7 million Reported NPAT being offset by the $71.3m dividends paid and a $17.0 million decrease in the excess technical provisions. The PCA coverage ratio increased from 1.57x to 1.81x, mainly through a $135.8 million reduction in the PML and a $50 million increase in Allowable Reinsurance.

The Board declared a fully franked interim ordinary dividend of 12.0 cents per share and a fully franked special dividend of 2.0 cents per share both payable on payable on 30 August 2017 to shareholders registered on 16 August 2017.

Former Broker Boss Joins Genworth

From The Adviser.

Suncorp’s former broker head, Steven Degetto, is to join a leading provider of Lenders Mortgage Insurance as its chief commercial officer.

Genworth has announced that Steven Degetto, who was formerly the head of broker for Suncorp Bank before switching roles with Mark Vilo last year to become head of wealth and life intermediaries, will become the company’s new chief commercial officer in “the third quarter of 2017”.

Mr Degetto will, at that time, also become a member of Genworth’s senior leadership team and executive committee.

Building on the Genworth brand in the Australian marketplace, the former broker head will have responsibility for the marketing and distribution of products and services “to meet the evolving needs of lender customers”.

Genworth CEO Georgette Nicholas commented: “We are very excited and pleased to have an individual with Steven’s experience join our team as the new chief commercial officer.

“Steven brings to Genworth extensive business development leadership and experience in residential mortgages as well as strong commercial acumen and an unwavering customer focus.”

Mr Degetto has more than 20 years’ experience in the finance industry with the majority of this based in the intermediary channel.

He was head of Suncorp Bank’s third-party channel between 2013 and 2016, and before that was responsible for managing all intermediary relationships and leading a team of business development managers across Vic, Tas, SA and WA.

As well as working at Suncorp, Mr Degetto has worked for the Macquarie Group, Lawfund Australia and Commonwealth Bank.

Market headwinds to increase risk for LMI sector

From Australian Broker.

Structural headwinds in the property market could result in heightened risks to the Australian mortgage insurance industry, according to a major international ratings agency.

In a new report from S&P Global Ratings, Insurance Industry and Country Risk Assessment: Australia Mortgage, analysts looked at the health of the industry and posited that the risk for the overall sector was intermediate.

Encroaching macroeconomic risks such as rising house prices and a growing ratio of household debt to disposable income have the potential to cause volatility in the mortgage insurance industry, analysts said.

If these factors cause a sharp correction in house prices – as mentioned in S&P’s recent downgrade of 23 Australian financial institutions – this could create a significant rise in credit losses.

“This increases the risk of material adverse claims experience for lenders’ mortgage insurers in Australia,” S&P said.

However, the agency’s base case scenario assumed that current and future actions by the government and regulators could lessen the impact of this scenario.

For the short term, analysts predicted that an “orderly correction” of house prices in Western Australia and Queensland would continue throughout the rest of the year.

“While the latter could increase insurance claims originating from these states, it is unlikely to pose a significant challenge to the credit profiles of insurers that offer lenders’ mortgage insurance (LMI).”

Furthermore, S&P predicts that employment levels – which can drive claims frequency for the sector – are likely to improve from 5.8% in fiscal year 2017 to approximately 5.2% in fiscal year 2019.

One pressure point highlighted by S&P was continued restrictions on lending practices put in place by the Australian Prudential Regulation Authority (APRA).

“We expect these regulatory actions to weaken LMI premium demand, absent a structural change to the product or market,” analysts said.

As well as reduced lender risk appetite in the high-LVR segment, S&P warned that outside factors could further drive market contractions as they have affected the market in the past.

“Other contributing factors include a major Australian bank shifting part of its mortgage insurance requirements offshore and, more recently, a material home lender choosing to retain the risk instead of purchasing insurance.”

As a result of these factors, S&P predicts a moderation in return on equity within the mortgage insurance sector over the next two to three years.

 

Non major eases lending policy for FHBs

From Australian Broker.

Teachers Mutual Bank (TMB) and its divisions UniBank and Firefighters Mutual Bank have announced softer lending policy guidelines for first home buyers.

Effective from 18 May, the lender has made changes with regards to genuine savings requirements which reflect recent policy changes by Genworth, the bank’s LMI provider.

“Where deposit funds/savings have not been held for the minimum term of three months and satisfactory rental payment history is used to mitigate the genuine savings requirement, the First Home Owner Grant (FHOG) may be accepted to contribute to the 5% savings/deposit requirement,” the bank said in a broker note.

This follows from new underwriting guidelines from Genworth, effective from 16 May, which include the FHOG as an acceptable source if true ‘genuine savings’ cannot be found. All funds required to complete the loan application – deposits plus settlement disbursements minus the grant – must be shown at time of the mortgage application.

Genworth’s new conditions place responsibility on the lender to ensure the borrower is eligible to receive a FHOG at the time of the application.

“We are pleased that the changes proposed will further support first homebuyers realise their dream of homeownership,” TMB said.

NAB in proposed LMI tender with US insurer

From Australian Broker.

US mortgage insurance giant Arch Capital Group is ramping up its Australian presence in a bid to win more business in the country’s lenders’ mortgage insurance (LMI) market. Arch already does business with Westpac, who offloads LMI’s loans above 90% LVR to them (with lower LVR loans held by the banks internal LMI division).

The Australian Financial Review reports that Arch is considering a request for proposal by National Australia Bank to provide its LMI. Currently, the bank’s LMI is provided by Genworth Mortgage Insurance Australia for broker-originated loans and QBE Insurance for bank-originated loans.

According to the AFR, the process is still “in the preliminary stages”.

Arch already has a presence in Australia, supporting Westpac’s LMI operations by reinsuring riskier loans, the AFR reported. And now the US giant is said to have been granted a local license and plans to ramp up its business in the country.

There’s one big customer the US company won’t be able to touch for a few years, though. Genworth managed to lock down its relationship with Commonwealth Bank of Australia last year, renewing its contract for a further three years, according to the AFR.

Genworth Under Pressure

Lender Mortgage Insurer Genworth reported today, and gives a good snapshot of what is happening in the mortgage market.  The volume of new higher LVR loans (HLVR) is falling.  Claims are rising.  But capital ratios remain strong, they have lifted premiums and are exploring new business opportunities.

They showed that claims volumes and value paid rose.

Within their book, delinquencies were at 0.78% in WA, whilst QLD had the largest number, and 0.68% of book.

They make the point that 2008 is a problem year.

Genworth Mortgage Insurance Australia Limited (Genworth) has reported statutory net profit after tax (NPAT) of $52.2 million down 22.4% on 1Q16, and underlying NPAT of $68.3 million for the quarter ended 31 March 2017, up 10.7% on 1Q16.

New business volume, as measured by New Insurance Written (NIW), increased 9.7 per cent to $6.8 billion in 1Q17 compared with $6.2 billion in 1Q16. The result included $1.3 billion in bulk portfolio transactions.

GWP increased 3.8 per cent to $88.2 million in 1Q17. This reflects a higher LVR mix of business compared with the same quarter in 2016 and the impact of the premium rate actions taken in 2016.

Reported NPAT includes after-tax mark-to-market loss of $16.1 million on the investment portfolio.

Net Earned Premium (NEP) of $107.9 million in 1Q17 decreased 4.9 per cent compared with $113.5 million in 1Q16 reflecting lower earned premium from recent book years.

The expense ratio in 1Q17 was 25.2 per cent compared with 23.4 per cent in 1Q16.

The loss ratio was 34.8 per cent in 1Q17, up from 27.0 per cent in 1Q16, due to lower NEP, an increase in the number of delinquent loans relative to a year ago and a higher average paid claim amount.

New South Wales and Victoria continue to perform strongly. However, the performance in Queensland and Western Australia remains challenging and delinquencies are elevated due to the slowdown in those regional and metropolitan areas that have been previously benefited from the growth in the resources sector.

As at 31 March 2017, the Company had invested $207 million in Australian equities in line with the previously stated strategy to improve investment returns on the portfolio within acceptable risk tolerances. After adjusting for the mark-to-market movements, the 1Q17 investment return was 3.14 per cent per annum, down from 3.55 per cent per annum in 1Q16.

Genworth previously announced that the exclusivity agreement for the provision of LMI with its second largest customer was terminated in April 2017. The Company has been successful in entering into new business with that customer that assists them in managing mortgage default risk through alternative insurance arrangements.

Genworth also advises that its customer, the National Australia Bank, has issued a Request For Proposal relating to its LMI requirements. The Company has submitted its proposal and will provide updates as to the outcome of its proposal.

Genworth continues to pursue other profitable opportunities in the market that meet its risk appetite and return on equity profile.

Overall, the Company expects GWP in 2017 to be below 2016 levels, down between 10 per cent and 15 per cent, subject to the timing and extent of any changes in the customer portfolio. Genworth expects 2017 NEP to decline by approximately 10 to 15 per cent and for the full year loss ratio to be between 40 and 50 per cent. The Board continues to target an ordinary dividend payout ratio range of 50 to 80 per cent of underlying NPAT.

 

Genworth Seeks Possible On-Market Share Buy-Back

Genworth released their notice of the 2017 Annual General Meeting today, to be held on 11 May 2017.  They are reacting to the changing market conditions, with lower LMI volumes at lower LVR’s.

Of note is Resolution 4 which asks shareholders to approve an on-market share buy-back of up to 125 million of the Company’s issued ordinary shares, over a period of up to 12 months form the data of the 2017 AGM.

We were previously advised that the Genworth was evaluating the potential to deploy and excess capital towards profitable opportunities that would enhance the return profile of the business and in the absence of those, capital was to be returned to shareholders.

Given that the Companies regulatory solvency ratio continues to be above the board’s target capital range of 1.32 to 1,44 times the PCA, and is expected to remain so, buy-back is an option.

Shareholders are required to approve the buy-back thanks to the 10/12 rule limit. They will also have to comply with ASX listing rules and approval of APRA.

There is no guarantee the Company will buy back the full number of shares. Currently there are 509,365,050 shares.

They say excess capital may also be deployed to:
• enhance the return profile of the business;
• pay dividends in excess of profits earned;
• undertake a capital reduction;
• reduce Tier 2 capital; or
•reduce reinsurance.
These alternatives will continue to be evaluated.

LMI Genwoth Confirms Loss Of Exclusive Contract

Genworth has confirmed the exclusive contract with their second largest customer, which was due to expire in February 2017, will be terminated on 8th April 2017.

The LMI business underwritten under this contract represented 14% of gross written premium in 2016. The termination of this contract has not changed the forward guidance that GWP would be down 10 to 15 percent in 2017.

The company remains in discussions with the customer about managing default risk in the context of other insurance alternatives.

We think that as banks reduce the proportion of high-lvr loans they are writing, and insure more of the lower risk business within their captive internal insurers at lower net costs, the role of stand-alone LMI’s in the Australian market will need to evolve.