Royal & SunAlliance has decided to wind down its mortgage reinsurance business, forcing it’s newest customer Westpac to go elsewhere.
"We've put our business with GE Capital. The change doesn't especially faze us – it has excellent credit ratings and is the biggest operator," Westpac spokesman Paul Gregory says.
Most banks insist that borrowers of more than 80% of the value of a residential property insure the additional amount, usually though a one-off upfront fee to companies such as RSA’s subsidiary or its two rivals PMI and GE Capital.
The Promina prospectus says that in the year ended 31 December, its business with Westpac and ANZ Bank accounted for about 75% of gross written premiums. The rest was accounted for by Australian mortgage wholesalers AMS, Interstar and RAMS Mortgage Corp.
RSA’s lenders mortgage insurance (LMI) business is being discontinued "due to the relatively high levels of capital required to maintain a financial strength rating of AA which is generally required by mortgage lenders and securitisers."
The high capital levels mean it is difficult to meet targeted rates of return on capital from the business.
The decision to wind down the business follows a failed attempt to sell the business – the Australian Financial Review had estimated the business’ worth at up to $A300 million.
The prospectus says the business made a $25.3 million profit in calendar 2001 and a $45.6 million profit in 2002.
RSA ceased underwriting new policies from 31 March, subject to contractual obligations that expire no later than 27 September. It will continue to manage and service existing policies until their expiry or cancellation.
At the end of last year, it had about 306,000 policies in force and the unearned premium reserve was about $183 million. This includes an allowance for profit margins which are released into income as earned.
"Promina expects that more than half of the unearned premium reserve and the embedded profit margin will be released over the next four years," the prospectus says.
