Small caps: Wide Bay Australia to wind down unprofitable insurance arm

Listed building society Wide Bay Australia is to wind down its captive mortgage insurance business and source all its insurance from external providers. The Bundaberg-based building society disclosed the plan in an investor presentation lodged with the ASX last week. It said the move would strengthen the society's balance sheet.

Formed more than 10 years ago, Mortgage Risk Management earned more than $2 million in net profit in four out of the past five years, or roughly one tenth of Wide Bay's total profit. In 2010/11 MRM contributed $2.3 million to total earnings of $22.7 million.

However, MRM's performance deteriorated in the December half. Profit was just $67,000 for the six months to December. The company said this was a result of increased provisioning for arrears, as well as losses on the sale of repossessed property.

Wide Bay said repossessions increased due to inactivity in the housing market. With house prices weakening, many borrowers do not have the option of selling as a way of overcoming debt stress. Wide Bay said: "The society made a conscious decision to clear the repossessions that had been accumulating. This loss on repossessions is not expected to be repeated in the current period."

New Basel III rules are the main factor in the decision to wind down the MRM business. The company said: "MRM enjoys the same credit rating as Wide Bay, the parent company, which is BBB/A2. In anticipation of the requirements of Basel III, the society will elect to insure with the traditional mortgage insurers who hold credit ratings in the range of AA-."

For many years Wide Bay reinsured the risks for its captive insurance arm with US insurance group Radian Guaranty. However, Radian has wound down its international operations in the wake of the GFC and because of losses on unrelated credit insurance activities in Australia. Genworth Australia and QBE Lenders Mortgage Insurance (the two dominant providers in the market) took over as reinsurers three years ago.

A restructure of Radian's business led to a loss of $2.4 million in business from MRM in 2009, while the insurer also adopted more conservative investment policies.

With no captive insurer in place Wide Bay will follow market practice and dispense with mortgage insurance over loans with loan-to-valuation ratios of less than 80 per cent.

Wide Bay will, like all other lenders that require mortgage insurance, source cover from Genworth and QBE LMI.

The winding down of MRM will release capital to the parent, which will enhance Wide Bay's Tier 1 capital ratio. The net assets of Mortgage Risk Management were $20.5 million at June 2011, on Australian Prudential Regulation Authority data. As the risks in MRM run off (over around 10 years) Wide Bay will be able to recognise this capital in measures of its core capital ratio.

Wide Bay has 35.8 million shares on issue and a market capitalisation of around $256 million. During the past 12 months its share price has traded at a high of $10 and a low of $6.90. Its closing price on Friday was $6.87.