CBA extends Genworth contract

Genworth has confirmed that it will continue to be the exclusive provider for LMI to the Commonwealth Bank of Australia, for its CBA and RMG business (excluding Bankwest).

The current supply and service contract between CBA and Genworth will expire at the end of the year.

The new contract will last for a three-year period from 1 January 2023, before it expires on 31 December 2025.

It will include the provision of LMI to a minimum proportion of new high loan-to-value ratio (LVR) residential mortgage loans.

A research note from Morningstar weighed in on the contract renewal, forecasting “ongoing demand for LMI”, although Genworth’s reliance on CBA has increased as it has lost two large bank customers in recent years.

NAB ended its LMI contract with Genworth in May 2020.

“This removes a cloud which has been hanging over Genworth since mid-last year when the bank surprisingly put the contract out to tender,” the analyst note stated.

“With Commonwealth Bank accounting for 57 per cent of gross written premiums in 2020, losing a contract with Australia’s largest lender would have forced no-moat-rated Genworth to take a less preferred cost-cutting and capital return journey.”

The analysts speculated CBA had managed to leverage more out of its arrangement with Genworth.

“While we are not privy to negotiations, we can only assume wide-moat-rated Commonwealth Bank was able to squeeze more out of Genworth,” the note said.

“Be it money spent on product innovation or technology to improve speed and provide greater insight, or accept lower premium rates.”

Demand for LMI has also been supported by low cash rates and “higher-than-usual demand” from first home buyers, the Morningstar note added.

The analysts have forecast gross written premiums of $585 million in 2021, up from $433 million in 2019, although rising lending rates are expected to reverse the trend.

The sale of Westpac’s LMI business to Arch Capital that took place in 2021 is also expected to change sector competition, and to weigh on premium rates and industry returns.

Pauline Blight-Johnston, chief executive and managing director of Genworth commented her company had worked with CBA for more than 50 years.

“We are delighted to continue our relationship, supporting CBA and its borrowers,” Ms Blight-Johnston said.

“The renewed contract will support the strategic business goals of both CBA and Genworth, as well as delivering additional value to CBA’s customers and appropriate returns for Genworth’s shareholders.”

Genworth has partnerships with more than 50 lenders across Australia, including major and regional banks, building societies, credit unions and non-bank lenders.

The insurer has flagged that it expects to release its full-year results on 25 February.

In September, Genworth chief financial officer Michael Bencsik resigned after two years in the role.

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