Ratings agency S&P has lowered its ratings on two Australian lenders’ mortgage insurance (LMI) heavyweights, reflecting a structural decline in the industry and a weakened local competitive position.

The rating on Genworth Australia has been lowered by one notch to A, with S&P saying reduced revenues and capital have diminished the insurer’s ability to weather large shocks. The outlook is stable.

QBE Lenders' Mortgage Insurance Ltd was lowered a notch to A with a stable outlook, while its A rating on QBE Mortgage Insurance (Asia) Ltd was placed on CreditWatch with negative implications subject to a review.

The downgrades come after the ratings agency outlined new assessment criteria at the start of July. After applying this new methodology, S&P lowered its rating for Genworth and its subordinated debt rating to BBB+ from A-.

In response, Genworth said the change had no immediate impact on contractual arrangements with lenders, though one customer contract contains a termination provision which if exercised would affect about 14% of its annualised gross written premium.

S&P says both downgrades reflect a weakened competitive position locally and a lack of business diversity.

Genworth Australia's earnings and market share have decreased amid structural declines in lenders’ mortgage insurance over the past five years, driven by a lower appetite for high loan-to-value ratio bank loans, restrictions on mortgage broker commissions and more onerous loan servicing assessment.

“We expect increased competition from bank LMI captives and a new entrant to place pressure on Genworth's market position and earnings,” S&P says.

S&P assumes Genworth will remain the largest LMI in Australia and that its profitability will stabilise at around current levels over the next one to two years.

It says “market momentum” will improve on lower interest rates, the loosening of regulatory lending constraints and greater certainty around tax settings. However, new business volumes are expected to remain at lower levels.

Genworth reports its first-half results on Wednesday.