Genworth Mortgage Insurance will experience ongoing revenue pressure as rising “tail risks” in the housing market and regulatory changes create headwinds for the ASX-listed group.
In a report released this week titled Genworth Financial Mortgage Insurance P/L: Solid Underlying Performance Offsets Topline Revenue Pressures, Moody’s Investors Service outlined a number of factors set to curb Genworth’s revenue growth, including risks in the housing market.
Moody's said the group’s operating results over the next 12 months will be supported by low loss ratios and a solid capital position, a situation which reflects the low interest rate environment in Australia, as well as the likely reduction in Genworth Australia's regulatory capital needs.
“However, Genworth Australia's revenues will remain under pressure,” the report's author and Moody's vice-president and senior credit officer, Ilya Serov, said.
“The mortgage insurer is exposed to the risks of a sharper than anticipated correction in Australia's housing market.”
The report noted that while housing market activity slowed in the second half of 2015 on the back of regulatory pressures, house prices remain elevated relative to incomes and household debt levels are rising.
Moody’s also found that Genworth’s sales have been declining as a result of macroprudential measures to limit the origination of investor mortgages and mortgages with high loan-to-value (LTV) ratios.
A developing trend towards reduced use of mortgage insurance by Australia's major banks also contributed to Genworth's declining sales.
“We expect Genworth to see continued pressure on its mortgage insurance sales in 2016,” Mr Serov said.
“Measures undertaken by the Australian Prudential Regulation Authority (APRA) over the course of 2015 to curb lending in the investor and high LTV segments of Australia’s mortgage market have put pressure on the company's sales,” he said.
“While these trends are common across the financial sector, they are exerting particular pressure on the sales of Australia’s mortgage insurers, including Genworth, because these insurers specialise in high LTV loans.”
Moody’s highlighted that as a result of these regulatory pressures and the termination of the Genworth’s arrangements with Westpac in May last year, its new insurance written (NIW) fell by 9.9 per cent in 2015 to $32.6 billion.
“The decrease has been particularly pronounced in the very high LTV segment,” the report noted.
NIW for the >90 per cent LTV segment declined to 23.3 per cent of Genworth’s total originations in 2015 from 36.0 per cent in 2013.
In the second half of 2015, NIW in the >90% LTV segment dropped to $3.1 billion versus $6.6 billion in the second half of 2013 and $5.3 billion in the second half of 2014.
“While Genworth has offset some of this decline with portfolio transactions in the <80 per cent LTV segment, in our view, such transactions are likely non-recurring,” the report said.
“Consequently, looking ahead, the firm’s ability to maintain stable NIW levels will likely remain under pressure”.
Moody’s warned that the decline in Genworth's sales is also exacerbated by a developing trend towards lower usage levels of mortgage insurance by Australian lenders.
A large proportion of the decline in Genworth’s sales last year was due to the decision by Westpac in February 2015 to terminate its contract with Genworth in May 2015 and re-orient its mortgage insurance arrangements towards foreign insurance providers.
According to Moody’s, Westpac accounted for 9.5 per cent of Genworth’s NIW during 2014 and 14.0 per cent of its GWP.
“We believe this trend reflects the lack of regulatory capital incentive to use mortgage insurance for banks operating under the internal rating based (IRB) approach to capital calculation. Such banks include the four major Australian banks, which together account for in excess of 80 per cent of the Australian mortgage market. Australia's regional banks are also seeking IRB accreditation under bank capital rules,” the report said.
“Such accreditation is expected to occur during 2016-17 and could erode further the underlying demand for mortgage insurance.”
Moody’s noted that instead of using the domestic LMI providers – Genworth and QBE LMI – Australian banks have started in recent years to allot their mortgage insurance purchases over a more diverse set of global reinsurers and introduced self-insured low deposit mortgage products.
“In our view, the interplay of reducing flows and the lack of regulatory incentive for the banks to use mortgage insurance is weakening the negotiating positions for Australian mortgage insurance companies, including Genworth,” it said.
“As a result, Genworth will likely face increasing challenges in its ability to re-price its products to offset the declining average premiums.”