Genworth fesses up

From the excellent Banking Day:

Genworth will lift its premiums on lenders’ mortgage insurance by seven per cent in Australia, its US management disclosed last night. The rise will help offset a rise in the severity of claims that triggered a loss of US$21 million in the March 2012 quarter on Genworth’s Australian business.

The company’s US owner devoted most of its quarterly conference call with investors yesterday to a review of the positioning of its Australian business.

The quarterly loss may be the first since the firm (or its predecessor, GE Capital) took control of the company in the late 1990s. In 2011, Genworth earned a profit of US$196 million in Australia.

The loss ratio in the first quarter of 2012 was 154 per cent. In 2011, the loss ratio was 47 per cent.

Borrowers based in the tourist regions of coastal Queensland, and self-employed and small business borrowers feature among those losing all their equity in their homes and obliging their financiers to rely on insurance to minimise lending losses.

Loans made in 2007 and 2008 (that is, before the onset of the GFC forced a tightening in underwriting standards) are producing the bulk of recent claims.

A presentation published yesterday evening shows that the average claim paid by Genworth jumped to A$104,000 in the month of March, up from an average that ranged from $53,000 to $77,000 in each of the six months before this.

Genworth paid 852 claims by lenders for lending losses on home loans during the March quarter, up from 483 claims during the December 2011 quarter.

The lift in the number of claims reflects efforts by Genworth to reduce the lag between a loan falling into arrears and that delinquent loan turning into an insurance claim.

Jerome Upton, chief operating officer of the international mortgage insurance business, told the conference call that this lag used to be a little longer than 12 months but had lengthened to as long as 24 months.

Upton cited lender forbearance and an increase in the number of hardship disputes referred to the Credit Ombudsman Service and to the Financial Ombudsman Service for this trend.

He said borrower complaints to these services – a tactic that suspends collections activity – were on the rise.

However, the spike in the average size of claims in March surprised local and US management.

A speedy but thorough review of troubled loans led to a rise in reserves of US$131 million for the quarter or more than three times the average level for each quarter in 2011.

The spike in the loss ratio and the additional reserves led the board of Genworth to defer a planned sale of up to 40 per cent of its Australian operations until next year.

Upton said Genworth still expected the Australian business to make a profit in 2012 and would still pay a dividend.

A few extra points. If you’ve wondering why Australian mortgage delinquencies haven’t risen more quickly, here’s your smoking gun. The stretching of lender forbearance, probably via the borrower assist programs all banks are required to run, look like nice little purgatory buckets from which the banks can drip feed delinquencies into the market. Not necessarily a bad thing but perhaps leading to an understatement of the true level of stress in the mortgage market.

The other point is that the hike in LMI premiums will no doubt be passed straight through to higher risk borrowers so its another small hike in the cost of some mortgages.

GNW 1Q12 Australia Materials FINAL (1)

Houses and Holes


  1. Peter Fraser

    It is an impost on FHB’s and it will add to their costs, but if the 7% premium increase is uniform across all LVR’s it won’t be a lot in dollar terms. The LMI is financed. Without doing the calculations it is probable that it is only a matter of dollars monthly.

    On the other hand these losses seem to be concentrated on the self employed and probably low doc borrowers. They are the borrowers in the 60% to 80% LVR range. That makes sense given the large falls in the value of upper end homes on the Gold Coast where business owners have really struggled. So the premium increases are possibly in this area of lending.

    Low doc lending has really tightened up since the gfc – asset lending no longer exists in the residential sector.

    • It is an impost on FHB’s and it will add to their costs

      Well, Its a free market..

      ..and FHBs have multiple choices to avoid the impost:

      1. Don’t borrow over 80% LVR.

      2. Don’t buy Now! (© David Collyer) and save for a 20+% deposit.

      I know which one I’ll be making :p

  2. boyracerMEMBER

    HnH – on the delinquency smoking gun, I forwarded this post to a banker mate of mine and he had this to say:

    “Not sure I agree with the comment that delinquent loans are being drip fed into the market. Even if a loan is tagged ‘hardship’, if it is delinquent then it is recorded as delinquent. Hardship is just a modifier on the approved course of treatment, not reporting.”

  3. thomickersMEMBER

    say bye bye to the floatie plan.

    A 7% rise in premium is chicken feed and will not be able to offset any newer “severity claims”

  4. From a buyer’s point of view what I focus on is the tendency for forced sales to increase. Bring it!

    I’ve seen 16 properties in the last 4 weeks. 2/3 are baby boomers who retired. I say to this group: Sell now!

    How right is Steve Keen!


  5. Diogenes the CynicMEMBER

    So this corporation was going to be floated and due to “lack of demand” was pulled and now there is a nice mea culpa coming out post the IPO withdrawal. Quelle Surprise!

    I agree about the smoking gun – Aussie bricks have had their first canary fall flat on its back.

  6. The LMI insurance businesses better have large cash balances because they are going to write a lot of big cheques in coming years.

    Hyman Minsky saw ‘Ponzi Financing’ as a vice of business. When this gambling fever percolates through to housing consumption assets and every homeowner takes a seat at the green baize with a little pile of chips, losses must be made.

    LMI is triple distilled risk: it insures the fluffiest portion of the debt of weak borrowers who did not – could not – save a decent deposit.

    Michael Hudson helpfully points out “Debts that can’t be paid won’t be paid.”

    The weak borrowers will be cast into the street when they stop repayments.

    The banks will then want every red cent of their positions the LMI’s protect, to the point of bankrupting the insurers.

    The unwinding process will take years. The LMI’s are getting very poor returns on their invested funds, so the hit will be entirely to their capital. Ouch!

    Don’t Buy Now!

  7. Genworth CDS is up 200bp in the last month – to 600bp. Pretty high for an insurance company.

    • Nice earner for the short, but I think the risk is still understated. I expect the spread will widen further.
      Mortgage insurance is less like insurance and more like a credit derivative with counterparty risk and indirect basis risk. So I think CDS spreads reflect the true nature of this business.
      When property markets correct (or any market for that matter) the weak hands are pushed out first. High LVR loans and the mortgage insurance on same represent a higher proportion of those weak hands than the general market. So expect to see a lot of stress in LMI.