Australia’s largest provider of lenders’ mortgage insurance (LMI) Genworth is exposed to a number of key market conditions that heighten its risks, analysts have said.
A recent investor note by Morningstar has said that despite a strong performance over the past five years, this did not reflect strong underwriting skills for the LMI provider.
“The insurer has benefitted from a favourable operating environment,” the analysts wrote. “Australia has had a long period of economic growth and a benign credit environment with the country coming through the global financial crisis largely unscathed.”
Genworth has an estimated 35% market share followed by QBE Lenders’ Mortgage Insurance with around 30%.
The firm’s business is highly leveraged to the Australian housing market as it is exposed to the riskiest residential home loans, analysts said, which means it is highly susceptible to macro-economic changes.
Pressure points include exposures in the mining-related states of Queensland and Western Australia which represented 35% of group insurance in force as of 31 December 2016.
“The more wealthy and populous states of New South Wales and Victoria represent a combined 51% of group insurance in force and these mortgages continue to perform strongly with home loan arrears rates rising only modestly in the first quarter fiscal 2017 update,” analysts wrote.
“We forecast claims to trend higher on expectations of higher delinquencies as we do not expect the benign credit environment in Australia to continue indefinitely.”
Genworth will be at the forefront of this upward trend in delinquencies as it is exposed to riskier, higher LVR loans, they warned.
The firm is also facing pressure from macro-prudential measures by APRA which aim at reducing the number of new high LVR loans.
“While moves by the prudential regulator to slow investment home loan growth and push tougher lending standards bode well for delinquencies on new business and demands on capital, it hurts new business volumes and mix.”
Finally, Genworth also lost a large client corresponding to 14% of its gross written premium in April 2017 with a second similarly-sized contract up for renewal later on this year in November.
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