An early gift for Genworth shorts

Not sure what’s going on here:

Genworth Mortgage Insurance Australia Ltd said Westpac Banking Corp, the country’s second-biggest lender, has cancelled a sales agreement after a review of its riskier loans, a move that will hit the insurer’s 2016 earnings.

…Genworth, one of Australia’s most valuable stock listings of 2014 and now worth A$2.8 billion by market value, didn’t provide further details explaining the Westpac decision.

The Westpac contract represented 14 percent of Genworth Mortgage Insurance Australia’s gross written premiums in 2014, Genworth said. On Feb. 11, Genworth’s Australia business reported A$634.2 million ($494 million) in gross written premium for the year to Dec. 31.

It was too early to be shorting Genwoth anyway so not sure if anyone much would have benefited from this.

I wonder what WBC is going to do with its high LVR mortgage now? It’s either QBE’s LMI operation or internal. APRA would surely insist on the former given the concentration risk, in which case WBC just did QBE an enormous favour pre-float of QLMI.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


    • Now down -23.0%

      I keep calling the LMIs triple-distilled risk and a useful sentiment barometer.

      Westpac are crazy to ditch this risk-sharing partner. It was an ideal conduit to cleanly nationalize all the dud loans they are writing once it goes belly-up.

      Will this stop the partial float of QBELMI?

      An argument could be raised to own GMA simply to sell cover to the shorts taking a gamble on the future trajectory. They are quite capable of mis-pricing/mis-timing too.

      • Conforming loans must be insured over 80% LVR David. If Genworth lose the business then another insurer must pick up that business. The cost to banks increases if high LVR loans do not conform.

        You and others who short these stocks should be able to negatively gear your interest cost on the losses on these shorts, so that’s a positive outcome for you.

      • The LMI’s face erasure on the slightest down-tick in land prices. Sure, they have reinsurance – but will they have passed on enough risk?

        I don’t need to short GMA, PF. I am already handsomely short the property market by renting.

      • You have had this plan for at least four years that I am aware of David.

        How would you evaluate your success?

        A score out of 10.

  1. The Traveling Wilbur

    QBE down 2.5% at the point at which the bottom stopped dropping out of the futures market. Guess no one else has figured out that WBC needs to put its LMI business somewhere… Hey! Maybe they’re planning on buying a bank in the UK and contracting LMI with them?! ; )

  2. What do you think the exposure of your super funds to GMA is, HUGE.
    How much have super funds lost, MASSIVE . WW

  3. felixthecatMEMBER

    Doug Noland of Credit Bubble Bulletin fame went through the risks being carried by Mortgage Insurers about a decade ago. no one ever learns. Why would anyone want to own shares in this ticking time bomb ?

  4. Does it matter whether it is internal or external if the externals are underwritten by the same banks anyway?

    • Fair question with APRA on the case.

      90% LVR less the spectacular property blow-off value gains in the last 60 or however many days. Portfolio is probably at 80% LVR by the time any payment delays start showing up. Bet they are keen to hold onto them themselves.

  5. If you think that the banks are over-exposed to the Aussie housing market, have a look at Genworth.

    Genworth share prices will die when Australian house prices start to fall and claims increase.

    All they need now is for CBA to do the same thing and Genworth share price will be on an express elevator to the bottom.

    Anyone who bought their shares clearly doesn’t understand concentration risk. Much worse if you also own a house, one or more IPs, bank shares etc!

    Westpac has its own LMI company which until now has insured the lower LVR Westpac loans. It is entirely possible that it has elected to insure the higher LVR loans as well. WLMI is also regulated by APRA and I am certain that additional capital support and/or resinurance cover would have been required if it is going to replace Genworth.

    As for QBELMI, their risk appetite has traditionally been lower than Genworth’s so it will be interesting to see whether that changes. There is no way that I would buy QBELMI shares if offered.

    • The Traveling Wilbur

      Cheers Mr M. +1. Thank you.

      Just a thought: with interest rates dropping and likely to drop further, maybe the powers that be (those bankers), have decided that “there’s never been a better time to self insure LMI in Oz.” After all, property prices can only go up and rates can only go down. No one could possibly ever get themselves into payment difficulties for their mortgage in that kind of environment. Could they? Nah… sweet as bro. Only need to look to NZ to see how choice the next 6-12 months will be / how much greener the grass is / will be.

      Where could the risk possibly be with that approach?

      • Wilbur

        You could be right cuz. However as someone whose job is about 90% making those calls I am of the view that this is the worst possible time in Aus and NZ to adopt that stance. As you say:
        – Historically low interest rates.
        – Bubble housing markets in both countries – particularly Sydney and Auckland.
        – Relatively historically low unemployment but, at least in Aus, trending up.
        – Aus economy getting worse not better (can’t say that about NZ but your economy is very exposed to primary produce prices).

        Basically, risks are building for Aus and NZ mortgage lenders and now is not the time, IMHO, to be jumping up the risk curve.

    • +1. They’ve completely bought into the hype. Rates will continue to drop, ergo delinquencies will decline, might as well vertically integrate and tap into the additional revenue. What could possibly go wrong?