Westpac Banking Corp (ASX: WBC) has given Genworth Mortgage Insurance Australia (ASX: GMA) notice that it's terminating its Lenders Mortgage Insurance (LMI) agreement with the company.
In what is likely to be a huge blow to Genworth, 14% of Gross Written Premium (GWP) in 2014 has just walked out the door. That's around $89 million after Genworth reported $634.2 million in GWP last financial year.
Westpac had a contract with Genworth for loans with a greater Loan-to-Valuation (LVR) ratio of more than 90% issued by subsidiaries RAMS, St George, Bank of Melbourne and BankSA only. It was signed in January 2013 and had a term of three years, expiring in January 2016 – unless cancelled beforehand – such as Westpac has just done with 90 days' notice. Genworth lost the contract to 'Westpac' branded loans in 2013.
The key question now is how is Westpac going to insure those loans with LVRs over 90%?
The bank has its own LMI unit, so it's possible that Westpac will take that additional risk on itself. The other alternative is that Australia's other major provider of LMI, QBE Insurance Group Ltd (ASX QBE) will take over the contract.
Taking on the insurance risk itself is a highly risky strategy, with any downturn in the property market likely to give Westpac more headaches than its rivals, and make the bank more sensitive to fluctuations in the property market.
This follows on from Westpac announcing in January 2015 that it was exiting the money service industry – impacting on OzForex Group Ltd (ASX: OFX). OzForex had used Westpac to make and receive foreign currency payments for its clients, along with National Australia Bank (ASX: NAB) and several other partners.
It seems Westpac has decided that it needs to drastically cut costs, and simplify its business – usually a good move but the Genworth announcement could come back to bite them.
