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Buyers reportedly keen to acquire QBE’s lenders’ mortgage business

A number of unnamed investors are looking to buy QBE’s lenders’ mortgage insurance (LMI) arm, according to a report in The Australian.

The newspaper says the potential buyers are “running the numbers… seeking to pounce as the housing market shows signs of life”. The report says the QBE business may fetch offers of nearly $1 billion.

QBE declined to comment on the report when contacted by insuranceNEWS.com.au.

The insurer has in the past said it was evaluating options to optimise value from the LMI operations, and in 2015 shelved plans to float the business.

At last month’s earnings press conference, QBE was again asked if the time was right to rethink whether the LMI unit should remain a part of the group.

“I’ll dodge answering that question specifically I think,” CEO Pat Regan said. “I think first and foremost, we wanted to reduce the capital we were deploying to that business and the earnings dependency we had on that business.”

The LMI business, the second biggest player in the market after Genworth Mortgage Insurance Australia, was impacted by significant premium reduction last year, with the combined operating ratio worsening to 58.3% from 54.8% in 2018.

“The increase was primarily attributable to a higher average claim size as losses resulting from the unwinding of the mining boom in [WA] and regional Queensland, continue to transition through the portfolio,” QBE says.

Net earned premium, on a constant currency basis, declined 8%, partly reflecting the contraction in lending over recent years.

Macquarie Research Insurance Equities Analyst Andrew Buncombe says that, should a good offer come along, the insurer should give it due consideration.

“[The LMI unit] is a capital heavy business and it would allow more US investors in particular to be able to invest in the stock,” he told insuranceNEWS.com.au.

“At the moment, a number of them refuse to because they are concerned about QBE given the exposure to the Australian housing market.

“So, if you removed that, all of a sudden, you get more interest in investors and theoretically the stock price would go up but I suppose all these questions are very difficult if you don’t know what the price is.”

Morningstar analyst Nathan Zaia, who tracks the insurance industry, sees no “urgent need or hurry” at the moment for QBE to divest the LMI business.

“While the growth outlook for LMI doesn’t appear strong, reductions in premiums and a strong housing market mean that despite becoming a smaller earnings contributor for QBE, the division has also become less capital intensive,” he told insuranceNEWS.com.au.

“LMI businesses can actually be quite profitable, but that’s because over the cycle you can expect periods where rising arrears put a significant dent in profits. The last thing a business would want to be doing is trying to flog the business off during that period.”