Sector risks weigh down on Australian mortgage insurers

Last year’s earnings dropped below the five-year average ROE of 10.7%.

Australia’s mortgage insurance industry remains sensitive as elevated product risks and muted demand weigh down on profitability, an S&P Global Ratings report said.

The sector has maintained healthy profits with a return on equity (ROE) of 8.9% for the 12 months to end-December 2019. However, returns have been dropping for several years, with last year’s earnings below the five-year average ROE of 10.7%.

Excluding realised and unrealised gains, underlying ROE has been more impacted during the period, falling to 6.5% as of end-2019 from a recent high of 13.7% in end-2015.

Profitability will abate further over the next one to two years due to a contraction in new insurance written and rising claims brought about by the economic uncertainty, higher unemployment and a possible downturn in property values, the report said.

Operational and regulatory barriers to entry for mortgage insurers are still high. Costs related to system integration of an insurance platform with lenders can be useful for potential entrants, S&P wrote.

The regulatory barriers are considerable due to the comprehensive licencing process and high capital requirements, it added. Moreover, institutional framework remains supportive of sector profitability, reflecting the industry’s strong regulations and track record, S&P said.

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