The fortunes of the lenders’ mortgage insurance sector may be on the wane.
Combined underwriting profits for the two largest mortgage insurers – Genworth and QBE LMI – were A$228 million in the year to June 2012, down from $381 million in 2011.
The Australian Prudential Regulation Authority released company-level data on the general insurance industry last week that provides a rare insight into the sector.
Meanwhile, Moody’s Investors Service released its updated methodology for rating mortgage insurers during the same week.
The updated methodology introduces a new rating factor called Housing Market Attributes that allows an assessment of the state of local housing markets. In addition, Moody’s has revised its capital adequacy metrics, so as to cap insurance financial strength ratings, and has recalibrated the rating score-card.
As a result of these changes, Moody’s says that established mortgage insurers with sound credit profiles will fall into the A range. Australian mortgage insurers, currently on review for a possible downgrade, will probably fall into the low A range.
This implies that the Aa3 and A1 ratings assigned QBE Lenders’ Mortgage Insurance Limited and Genworth Financial Mortgage Insurance Pty Ltd are facing multi-notch downgrades.
Since Moody’s first warned the Australian LMI’s back in December 2011 there has been a slow and steady trickle of news suggesting that this was on the way. Genworth itself reported back in May that there was increasing pressure building in the mortgage market as capital growth slowed, although there have been on-going rate cuts since that time and a reported stabilisation.
In Australia Genworth and QBE are on the hook for approximately $600bn worth of mortgages and by their very nature are the riskiest loans. The issue is that these companies only have around $5bn in capital, that is a ratio of 0.8%. This is the thinnest of lines of defensive capital between the economy and banks balance sheets. For more on this point please read this post.
So is this latest action a tweeting canary for Australian mortgages or just the expected outcome the current housing market? Time will tell I guess, but banks are doing their best to buffer themselves in the meantime
Banks are exploiting better conditions on global funding markets to buy back billions in wholesale debt that has been guaranteed by the taxpayer, with close to $10 billion snapped up in recent weeks.
Under the guarantee of wholesale borrowing, which provided a lifeline to the financial sector at the height of the global financial crisis, banks could pay the government a monthly fee in return for using its AAA credit rating.
Latest figures show the scheme, which closed to new borrowing in early 2010 but still has tens of billions in guaranteed liabilities, has delivered $3.9 billion to federal coffers since it started in 2008.
In a sign of the sharp improvement on funding markets since November, however, banks have sought to lower their costs by purchasing back-guaranteed wholesale debt from bond holders and refinancing it at lower interest rates.
So interest rates cuts should be getting passed on in full then? Not if that canary is starting to pine for the fjords.