The rating agency says the downgrade of RSALMI reflects its belief that the mortgage insurer, which effectively stopped writing new business in May 2003, and is now in run-off, will remain vulnerable to the long tail risks of mortgage insurance, exacerbated by the 100% cover typical of LMI policies in Australia, with diminished prospects for institutional or parental support. The run-off status of the firm is an additional negative.
Moody's views the mortgage insurer's capital position as adequate for the time being to meet its likely future claims obligations. Furthermore, regulatory supervision from APRA will help maintain capital levels.
However, RSALMI is a non-strategic, run-off business of Promina, and Moody's does not believe that Promina has much long-run incentive to maintain other than the minimum capital level at RSALMI, or to provide support.
Furthermore, the rating agency believes that while the management and other resources dedicated to servicing the outstanding policies of RSALMI are adequate at this time, they may deteriorate as the run-off progresses.
The stable outlook also takes into consideration the low mortgage default rates typically experienced in Australia, and Moody's expectation that mortgage default rates are unlikely to dramatically increase in the near term. Moody's notes, however, that the 100% cover typical of LMI policies makes LMIs such as RSALMI vulnerable to infrequent, but potentially severe, swings in loss experience, and that this characteristic lengthens what is already a very long-tail business.
"Should RSALMI's credit loss performance, or the effectiveness of the management of the run-off, materially deteriorate, the rating would be under downward pressure. An upgrade scenario is difficult to envision, and would likely reflect exceptional performance of the run-off, or the sale of the business to a strong owner." Royal & Sun Alliance Lenders Mortgage Insurance Limited, based in New South Wales, is a mortgage insurer that provides primary mortgage insurance on single-family dwellings in Australia and New Zealand.
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