Standard & Poor’s (S&P) has downgraded its insurer financial strength and issuer credit ratings on QBE Lenders’ Mortgage Insurance (LMI) to A+ from AA-.

The step was implemented after S&P applied its new criteria to the LMI sector.

S&P has also cut the long-term local currency insurer financial strength and counterparty credit ratings on Hong Kong-based QBE Mortgage Insurance Asia to A from A+.

The new rating is to reflect S&P’s downgrade of parent company QBE LMI.

S&P says the outlook on QBE LMI’s A+ rating is stable and its position in the Australian market remains strong, with an estimated 36% share of the market based on gross earned premiums.

Only Genworth Financial Mortgage Insurance holds a bigger market share, at 44%.

“We expect QBE LMI to maintain its very strong market position over the medium term, given the majority of its relationships are tied to exclusivity arrangements with terms of two or more years,” S&P says.

QBE LMI’s medium-term earnings prospects are seen as solid, underpinned by S&P’s expectations the Australian economy will continue to motor along moderately.

The company has adequate reinsurance to fund claims and investment earnings, and a high probability of reserves sufficiency exceeding 95%, against the minimum 75% set by regulators. 

“We view QBE LMI’s governance framework as adequate for its risk profile,” S&P says.

“There is evidence of well-developed and documented approval, review and oversight policies from both a financial and operational-risk-management perspective.”

QBE LMI enjoys relatively low industry and country risk because its business is concentrated mostly in Australia, one of only two countries assigned a “low risk” score for the mortgage insurance sector.

“This is the second-strongest score on a scale of six,” S&P says. “This is further supported by our positive view of the institutional framework, including the regulatory framework.”

But S&P warns another downgrade looms if parent company QBE’s rating is cut by “two or more notches”. A deterioration in the business risk profile and weakening of capital adequacy reserves would also hurt QBE LMI’s ratings.