Moody’s has just announced that they have put Genworth Financial Mortgage Insurance Australia, one of Australia’s largest mortgage insurers, under review for possible downgrade of their credit rating.
The reason for the review was obvious, with the delay of the partial IPO pushed back to 2013 (if at all?) and the announcement of a first quarter operating loss mainly due to the higher claims from sluggish Australian house prices. From the release (emphasis added):
“The rating review of Genworth’s Australian mortgage insurance operations reflects Moody’s concerns regarding the higher-than-anticipated losses reported in Q1 2012”, said Ilya Serov, a Moody’s Senior Credit Officer.
“The company’s performance during this period was adversely affected by developments in the coastal Queensland housing markets, underlining the vulnerabilities of its business model to a downturn in a regional area or in the broader Australian housing market“, he added.
The rating review of Genworth Australia will focus on the potential for a prolonged period of heightened claims incidence and claim severity arising out of the current delinquency pipeline and will consider the prospect that this might reduce the mortgage insurer’s capitalisation levels over time. Specifically, Moody’s will evaluate whether an extended downturn would result in meaninfully lower capital cushions. The review will also examine the adequacy of Genworth Australia’s risk management practices, including during times of stress.
Interestingly, Moody’s also noted that the review of the credit rating was due to a change in “house price stress rate assumptions underpinning its residential mortgage-backed securities and LMI analysis, as well as changes to the methodology used in Moody’s collateral analysis model.”
So as boom turns to bust, assumptions about risk-weighted assets change. Has a ring of Minsky to it doesn’t it?
This is a comprehensive review and a clear warning signal for the market. Here are the other issues to be raised by Moody’s:
1) The degree to which the postponement of the planned IPO would challenge financial flexibility of Genworth Australia and result in continued
heightened reliance on its US parent, Genworth Financial Inc., for capital market access.2) The extent to which Genworth Indemnity, a subsidiary of Genworth Australia, may be affected by these developments. Genworth Indemnity ceased writing new business in 2003, and is running off its existing book of business. The company is characterized by the seasoned nature of its portfolio and strong regulatory capital levels.
3) The success or otherwise of loss mitigation initiatives undertaken by Genworth Australia in regard of the current delinquency pipeline and future loss formation.