LMI – Page 3 – Digital Finance Analytics (DFA) Blog

QBE Lifts LMI Fees

QBE has announced an increase in the cost of lenders’ mortgage insurance (LMI) for property investors with the surcharge (or pricing loader) rising from 7% to 12%, reports the Australian Financial Review.

LMI for owner-occupiers will remain as is with the 8% first home buyer discount being extended to mortgages up to $1.2 million.

This is the first increase in three years, a QBE spokesperson said.

“Our experience shows first home buyers perform better than our average portfolio and we are pleased to continue to provide an 8% discount. The premium loading for investors has been increased to 12%, reflecting increased risk compared to lending to owner-occupiers.”

The minimum fee for QBE’s new and existing LMI products will also increase to $950.

Despite these changes, the firm will remain competitive, the spokesperson said.

A spokesperson from Genworth told AFR the firm had increased rates by 5% in the first half of 2016. The firm provides LMI for National Australia Bank, Commonwealth Bank of Australia and over 100 smaller lenders.

Genworth 3Q16 Hit By Lower LVR Loans and Higher Claims

Whilst Lenders Mortgage Insurer Genworth renewed their important CBA contract, today’s 3Q results show the impact of the fall in high LVR lending and change in business mix. Of course some lenders are holding more LMI business within their own captive insurers. It also confirms rising defaults, especially in Queensland and Western Australia and in particular in mining related regions.

If high LVR lending continues to fall thanks to regulatory intervention, the LMI’s will remain under pressure. The stability of LMI’s is important for the overall financial stability of the banking sector thanks to their high mortgage exposures. Data from APRA shows the shift in loan mix.

New business volume, as measured by New Insurance Written (NIW), of $6.1 billion in 3Q16, decreased 28.2 per cent compared with the previous corresponding period (pcp). Year-to-date NIW of $20.1 billion is down 23.3 per cent on the pcp.

Gross Written Premium (GWP) decreased 25.8 per cent to $92.5 million in 3Q16. Year-to-date GWP is 31.2 per cent lower than the pcp.This reflects a number of factors including reduced high-LVR penetration in the market, a lower LVR mix of business, as well as the full impact of the changes in customers in 2015.

Net Earned Premium (NEP) decreased 6.5 per cent to $115.9 million in 3Q16 compared with the pcp reflecting an adjustment to the NEP earnings curve implemented in 3Q15. Year-to-date NEP is down 1.4 per cent on the pcp.

The normalised loss ratio rose to 45.3 per cent in 3Q16 from 26.0. The number of claims paid rose from 286 (2Q16) to 321 3Q16. The average claim paid was $73k.

The overall portfolio continues to be supported by strong performance in New South Wales and Victoria. However, the performance in Queensland and Western Australia is still challenging, reflecting increased delinquencies, particularly in regions exposed to the slowdown in the resources sector as the economy in those areas navigates through a period of transition.

The expense ratio in 3Q16 was 25.8 per cent compared with 25.7 per cent in the pcp. The steady expense ratio reflects a continued focus on expense management. Genworth continues to manage the business with a target expense ratio of 26-28 per cent in 2016. Investment income of $36.3 million in 3Q16 included a pre-tax mark-to-market loss of $0.9million.

As at 30 September 2016, the value of Genworth’s investment portfolio was $3.5 billion, more than 95 per cent of which continues to be held in cash and highly rated fixed interest securities. As at 30 September 2016, the Company had invested $171 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 2016 year-to-date investment return was 3.51 per cent per annum, down from 3.70 per cent per annum in the pcp. As at 30 September 2016, the Company’s regulatory solvency ratio was 1.55 times the Prescribed Capital Amount (PCA).

The Board continues to target a capital range of 1.32 to 1.44 times the PCA ona Level 2 basis. The Company continues to focus on optimising its capital structure and is evaluating capital management initiatives that could be implemented in the future.

Genworth expects 2016 NEP to decline by approximately 5 per cent and for the full year loss ratio to be approximately 35 per cent. The Board continues to target an ordinary dividend payout ratio range of 50 to 80 per cent.

Genworth Renews CBA LMI Contract

Genworth Mortgage Insurance Australia has announced it has renewed its Supply and Service Contract with CBA to provide Lenders Mortgage Insurance from 1 January 2017. This contract represents 43% of Gross Written Premium in 1H16.

The contract will be for 3 years to 31 December 2019. Genworth will be the exclusive provider of LMI to CBA for a minimum specified percentage (determined by the number of funded applications for new loans) of new high LVR residential mortgage loans. The minimum LMI percentage is consistent with the level set in 2014 and is fixed for the duration of the renewed term.

You can read our recent post on LMI here.

China Oceanwide Acquires Genworth For $2.7 Billion

From Zero Hedge.

China Oceanwide Holdings Group agreed to buy troubled US insurer Genworth Financial Inc. for $2.7 billion in cash, pledging to help the U.S. firm manage its debt and strengthen life insurance units after it was hurt by higher-than-expected losses tied to long-term care coverage. A China Oceanwide investment platform will pay $5.43 per share, the companies said Sunday in a statement. That’s 4.2% more than Genworth’s closing price of $5.21 Friday. The buyer also promised to provide $600 million to Genworth to address debt maturing in 2018, as well as $525 million to strengthen the life insurance businesses.

“Genworth is an established leader in both mortgage insurance and long-term care insurance, which are markets that present significant long-term growth opportunities,” China Oceanwide Chairman Lu Zhiqiang said in the statement. “We are providing crucial financial support to Genworth’s efforts to restructure its U.S. life insurance businesses.”

In recent months, Genworth CEO Tom McInerney has been selling assets to ensure the insurer has sufficient liquidity after it was hit by losses on its long-term care coverage, which pays for home-health aides and nursing home stays, and as low interest rates crimp returns. At that point, it was almost as if a white knight emerged for the troubled company, one from across the Pacific. China Oceanwide plans to let Richmond, Virginia-based Genworth operate as a standalone company after the takeover with senior management still in place, according to the statement. “Genworth is an established leader in both mortgage insurance and long-term care insurance, which are markets that present significant long-term growth opportunities,” China Oceanwide Chairman Lu Zhiqiang said in the statement. “We are providing crucial financial support to Genworth’s efforts to restructure its U.S. life insurance businesses.”

A quick prime on what Oceanwide’s $2.7 billion in cash will buy it:

Genworth writes mortgage insurance in the U.S., and has stakes in a Canadian and an Australian home-loan guarantor. Mortgage insurers cover losses for lenders when homeowners default and foreclosure fails to recoup costs. This deal gives China Oceanwide the chance to benefit from gains in the U.S. housing market.

McInerney has been seeking to free up capital to pay bonds coming due, and has also been boosting capital by selling assets. He struck a deal in 2015 to sell a European mortgage unit to AmTrust Financial Services Inc. and also agreed to have Axa SA buy a European unit that offers customers protection against the financial impact of major illness, accident or death. He’s also been working to restructure the business units in a way that’s acceptable to regulators, and won approval from bondholders earlier this year to reorganize some of its units.

The deal will help give Genworth the finances to separate a life and annuity operation from another life insurance arm, according to the statement. Lu said the transaction was structured to make it easier to obtain regulatory approval.

According to Bloomberg. the deal is expected to close by the middle of 2017.

Genworth received advice from Goldman Sachs Group Inc., Lazard Ltd., Willkie, Farr & Gallagher LLP, and Weil, Gotshal & Manges LLP, while the board of directors sought guidance from Richards, Layton & Finger. China Oceanwide was advised by Citigroup Inc., Willis Towers Watson Plc, Sullivan & Cromwell and Potter Anderson & Corroon LLP.

Should the deal close, it will likely unleash a surge of more Chinese acquisitions of questionable US companies, leading to even more short squeezes on concerns that the “Chinese are coming.”

Canadian LMI’s Will Need More Capital

According to Moody’s, Canada’s national banking and insurance regulator, the Office of the Superintendent of Financial Institutions (OSFI), published for comment draft guidelines on changes to capital requirements for mortgage creditor insurers.

The draft advisory provides a new standard approach for residential mortgage insurance that is more risk sensitive and incorporates new key risk and loss drivers including creditworthiness, remaining amortization, and outstanding loan balances.

These new capital requirements, if implemented as drafted, would increase overall capital for Canada’s mortgage insurance industry and Canadian Crown corporation, Canada Mortgage and Housing Corporation, a credit positive.

The draft guidelines require a supplemental capital requirement for mortgages insured in Canada’s 11 largest metropolitan areas when those cities show indications of high house prices relative to income levels, similar to bank capital requirements introduced earlier this year. This supplemental charge will create a capital cushion for mortgage insurers’ exposures in cities whose housing markets have had rapid price appreciation, such as Vancouver, British Columbia, and Toronto, Ontario. We believe required capital for mortgages in
these cities will increase.

Of the CAD1.6 trillion in outstanding Canadian mortgage debt, including home equity lines of the credit, almost half are covered by creditor insurance (see exhibit). This insurance is primarily sold either directly to the borrower, who is legally required under the Bank Act to obtain it if the mortgage’s loan-to-value ratio exceeds 80%, or lenders purchase the insurance on a portfolio basis as a liquidity and capital management tool.

The Canadian government limits its mortgage insurance guarantee to CAD900 billion, which is shared among only three entities. CMHC, which as a crown corporation with government agency status, effectively makes any policies it writes a direct contract with Canadian government. Under legislation, CMHC’s insurance-in-force is limited to CAD600 billion. The Canadian government also provides a 90% guarantee on the insurance in force of two private-sector insurers, Genworth and Canadian Guaranty Insurance Company of Canada, in the event that one of them fails. This CAD300 billion guarantee is shared between the two insurers.

These and other recent actions by Canadian policymakers will assist in slowing rapid house price appreciation and corresponding mortgage growth, reducing the prospect of a sharp housing price correction that would increase credit losses at Canadian banks. Increasingly, elevated housing prices have driven up Canadian household indebtedness, a key threat to the stability of the Canadian banking system. Since 2008, Canadian policymakers have implemented a series of changes to the rules for government-backed insurance, including limitations on amortization, premium increases and elimination of specialized product offerings.

We do not believe this has any credit implications for Canadian banks that hold insured mortgages because their exposures to mortgage insurers are already backstopped by the Canadian government.

ABC 7:30 Does Lenders Mortgage Insurance

7:30 did a segment tonight on Lenders Mortgage Insurance (LMI). As we discussed in an earlier post there are a number of issues which make LMI a complex area. The segment includes comments from DFA.

Households wising to borrow at an LVR above 80% will be required to pay a significant insurance premium to get a mortgage – Lenders Mortgage Insurance. This extra cost may be bundled into their overall mortgage, or will be a large additional cost.

Many households are not clear on what is truly covered by the LMI in case of default. Whilst LMI may protect the bank, households are not necessarily protected.

In addition, the costs of LMI are not necessary transferable, and there are some industry concentration risks caused by the limited market of providers, over and above the captive insurers within the banks.

Genworth 1H16 Offers Mortgage Book Insights

Whilst Genworth, as one of the two independent Lender’s Mortgage Insurers in Australia, will have a skewed mortgage portfolio compared with the market (higher Loan-to-Value (LVR) loans which the banks prefer not to cover internally), we get a good feel for the market from their results today. Whilst the proportion of new loans with a high LVR is falling, delinquencies are rising especially in the mining heavy states.

Now a public company, the level of disclosure from Genworth is useful. They reported statutory net profit after tax (NPAT) of $135.8 million for 1H16. After adjusting for the after-tax mark-to-market move in the investment portfolio of $22.9 million, underlying NPAT was $112.9 million.

They show that Gross Written Premium declined 33.5% decreased 33.5% to $189.8 million in 1H16. The decline in GWP is consistent with the broader industry trend of a reduction in the proportion of mortgage originations above 90 per cent LVR. The result also reflects changes in the customer portfolio in 1H15.

New Insurance Written decreased 20.9% to $14.0 billion in 1H16. NIW in the greater than 90% LVR segment decreased 49.1% while NIW in the less than 80% LVR segment increased 10.9%. The decline in the proportion of high loan-to-value loans originated reflects changes in lender risk appetite and focused regulatory oversight in the Australian mortgage market. The result also reflects changes in the customer portfolio in 1H15.

The Net Earned Premium increased 1.4% reflecting higher earned premium from prior book years and the benefit from the premium earnings pattern revision adopted since the second half of 2015.

Net claims incurred increased due to an increase in the number of delinquent loans relative to a year ago and a higher average claim amount. The overall portfolio continues to be supported by strong performance in New South Wales and Victoria. However, the performance in Queensland and Western Australia is challenging, reflecting increased delinquencies, particularly in regions exposed to the slowdown in the resources sector.

They showed an interesting evolution of Genworth’s 3 month+ delinquencies (Flow only) by residential mortgage loan book year from the point of policy issuance.

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.

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

The 2010 to 2015 Book Years are performing favourably relative to the previous five years (2005-2009). The recent increase in the 2012 and 2013 book years is due to increased delinquencies, mainly in parts of Queensland and Western Australia.

Finally, the delinquency population by months in arrears (MIA) aged bucket at the end of each reporting period. Over the past two years, the 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 mortgagee in possession (MIP) generally progresses faster to a claim, or sold with no claim situation, 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 Group’s capital position was strong as at 30 June 2016 with a regulatory capital solvency level of 1.56 times the Prescribed Capital Amount (PCA) on a Level 2 basis and a CET1 ratio of 1.43 times PCA. The decrease in CET1 capital reflects $114.9 million of dividends and the $202.4 million capital reduction paid to shareholders during 1H16, partially offset by $135.8 million reported NPAT. Tier 2 capital decreased due to the redemption of the remaining $49.6 million of the 2011 subordinated notes.

Westpac’s Revised LMI Arrangements Are Credit Negative for Australian Mortgage Insurers – Moody’s

Moody’s says that according to media reports, last Monday, Westpac Banking Corporation advised its mortgage brokers that it had revised its mortgage insurance arrangements so that effective that day, 18 May, all new Westpac-originated loans with a loan-to-value ratio (LTV) above 90% would be insured with its captive mortgage insurer, Westpac Lenders Mortgage Insurance Limited and reinsured with Arch Capital Group Ltd.

Westpac’s decision to shift its mortgage insurance policies away from domestic third-party lenders’mortgage insurance (LMI) providers is credit negative forGenworth Financial Mortgage Insurance Pty Ltd and QBE Lenders’ Mortgage Insurance Limited. Westpac accounted for around 14% of Genworth Australia’s gross written premium during 2014, and potentially a meaningful, albeit undisclosed, proportion of QBE LMI’s business. At the same time, existing policies will not be affected and the effect o nthe insurers’ net earned premium should only become material beginning in 2016. LMI customer contractual relationships are long term in nature and any further erosion of the customer base, when and if it occurs, remains contingent on market and individual customer developments.

Westpac’s move follows its earlier disclosures and the Genworth Australia announcement in February 2015that Genworth’s contract for the provision of LMI to Westpac was being terminated. Our understanding from Westpac’s disclosures and media reports is that Westpac’s LMI arrangements with QBE LMI have also been affected. Moody’s says that Westpac’s move is indicative of a longer-run trend towards reduced usage of the domestic mortgage insurance product. Australia’s major banks are not currently deriving regulatory capital benefits from using LMI. Similarly, product innovation, such as the use of self-insured low-deposit mortgage products, will affect the need for third-party LMI. Diminished third-party LMI usage elevates the insurers’ risk of losing pricing power and reducing their customer base, putting downward pressure on the firms’ profitability and volumes.