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Moody’s cuts LMI outlook as reinsurer threat looms

The long-term future of Australian lenders’ mortgage insurance (LMI) may be threatened by banks switching to products from “more diverse” global reinsurers, Moody’s warns.

As a result, the ratings agency has downgraded its outlook for three mortgage insurance providers: QBE LMI and two Genworth companies.

The sector may also face a threat from banks introducing self-insured, low-deposit mortgage products, Moody’s says.

“While the trend away from LMI usage may take some time to have an impact on the companies’ financial profiles, and remains contingent on market developments, it exposes the LMI [providers] to potential volatility in revenues and claims.”

The trends threaten the insurers’ franchise and future revenue prospects.

Moody’s has downgraded the insurance financial strength ratings of Genworth Australia and Genworth Financial Mortgage Indemnity from A3 to A3 negative, while QBE LMI moves from A2 to A2 negative. Westpac LMI remains at Aa3 and stable.

These four Australian LMI providers account for more than 90% of the market.

Moody’s Senior Credit Officer Ilya Serov says the sector remains financially sound, with healthy capital levels, good underlying profitability and solid underwriting practices.

“However, a relatively high level of client and geographic concentration and uncertain demand weigh on the sector’s outlook.”

Low interest rates have improved loss performance and lifted housing activity and volumes.

“But we balance these strengths against the LMI [providers’] relative lack of diversification – both client and geographic – and the uncertainty around the long-run demand for the mortgage insurance product,” Mr Serov said.

Moody’s views the threat from house price inflation as moderate, but rising.

Property prices and household debts are at record highs relative to incomes, and the latest data suggests banks have become more conservative in their underwriting and have curtailed exposure to high loan-to-value ratios.

“The growth in Australian house prices since 2013 does not appear to be fuelled by excessive, overall credit growth or a sharp relaxation of lending standards, although the rapid increase in the investor housing segment represents a notable downside risk,” Mr Serov said.

Mortgage affordability is declining, and this poses a long-term challenge to banks’ credit profiles. Despite low interest rates, the proportion of income households spend on mortgage repayments has risen to 27% nationally, and a record 35% in Sydney.