Payouts for housing loan defaults hit QBE's bottom line

QBE's mortgage insurance arm was hit by a sharp rise in claims last year, as the weakening economy caused a growing number of borrowers to default on their home loans.

Payouts more than doubled to $60.8 million last year, up from $27.6 million in 2011, because of "unfavourable economic and housing market conditions", the company said in accounts filed with the corporate regulator this month.

The higher payouts caused net profits from insurance underwriting to drop by a quarter to $76 million, though its bottom line was boosted by higher investment earnings. Net profit rose 20 per cent to $154.5 million, helped by a surge in the company's investment income.

The jump in claims underlines the weakening conditions that have faced providers of lenders' mortgage insurance - which protects banks against losses when borrowers default.

"The unfavourable economic and housing market conditions, reflecting a fundamentally two-speed economy, that was initially experienced in 2011 continued through 2012," the report said.

"The company saw heightened rates of conversion of defaults to claims and greater claim severity."

Despite the growing cost of payouts, QBE said its ratio of losses was much lower than during previous economic downturns, and the number of defaults had eased as interest rates were slashed to record lows towards the end of the year.

QBE is the second largest provider of lenders' mortgage insurance behind America's Genworth, which is planning to float 40 per cent of its Australian business by the end of this year. But the float, estimated to be worth about $800 million, has been repeatedly delayed after a spike in claims led to a first quarter loss last year.

QBE and Genworth control about 75 per cent of the market for lenders' mortgage insurance, which banks often require for home buyers who are borrowing more than 80 per cent of the property's value.

Despite the recent challenges in the industry, it remains a lucrative line of business. QBE's combined operating ratio was 64 per cent - meaning it was paying out significantly less in claims than it received from premiums.

QBE's mortgage insurance business did not pay its parent company a dividend last year, compared with a $175 million dividend in 2011. At QBE's annual results in February, the company forecast its Australian mortgage insurance division would write $US405 million ($392 million) in premium income this year, up from $339.3 million last year.