QBE sells US mortgage business

QBE is letting go of its US mortgage business – but the one at home is still a concern.

The best insurers distinguish themselves by letting premium revenue shrink when prices no longer compensate for the potential risks. By this measure, QBE Insurance’s (ASX: QBE) decision to sell its North American Mortgage and Lender Services (M&LS) business is a sound one.

The M&LS division is being sold for $90m to National General Holdings, a US-based insurer that specialises in personal lines, such as auto, home and health insurance.

The M&LS sale is expected to generate a pre-tax loss of $120m in the 2015 financial year, mainly due to a write-off of goodwill. The sale will also reduce QBE’s gross written premium (an insurer’s measure of revenue) by $400m.

But it won’t be missed. We doubt QBE was making much money, if any, from the M&LS business, which is probably why the company said the division’s sale would lead to an improvement in margins and return on capital. The sale will also free up $100m to be reinvested in more profitable lines.

Chief executive John Neal said: ‘The sale of this business is a pleasing result as we look to focus on commercial lines and significantly build out our specialty underwriting capabilities in North America’

Management has done a commendable job shedding more than $2bn of unprofitable business over the past two years and returning the company to its roots after its failed attempt to expand in the US.

However, one major risk still concerns us: QBE has a 35% share of the Australian lenders mortgage insurance market. Lenders mortgage insurance protects lenders from a customer default. If a property’s value isn’t enough to cover the outstanding loan, QBE pays the difference.

Property prices have risen significantly in recent years and consumer debt levels continue to set new records. QBE now insures $250bn worth of mortgages; if property prices decline, the company could face a deluge of claims.

Insuring against a fall in house prices was a big part of what caused the collapse of AIG, which was formerly the world’s largest insurer. In 2009, after American home prices had fallen 30%, the company reported a loss of US$100 billion – the biggest corporate loss in history. Without too much surprise, a loss with 11 zeros in it meant shareholders were wiped out and a government bailout was needed. 

QBE’s simplified business, lower claims and the prospect of favourable interest rate movements could mean the company’s darkest days are behind it. But there’s a long way to fall if property prices pop.

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