Helia Group Limited (HLI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Genworth Mortgage Insurance Australia Full Year 2019 Earnings Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Duncan West, CEO. Please go ahead.

Good morning. Thank you, everyone, for joining me and our CFO, Michael Bencsik, on this call this morning to discuss the 2019 full year results for Genworth Mortgage Insurance Australia. It's a pleasure to be able to join you as acting CEO while we wait for the arrival of Pauline Blight-Johnston next month. We will follow the usual format today with opening comments from me before Michael takes you through the details, and then I'll close with some remarks with respect to our guidance, and then we'll take questions. Starting with Slide 4 of our presentation. Overall, our FY '19 performance reflects that of our core business which continues to perform well. The market overall is continuing to grow with a stronger house price appreciation occurring in Sydney and Melbourne, encouraging buyers back into the market, along with an increase in activity from earlier rate cuts and borrower confidence. As a result, our new insurance written was up 20.3% to $26.7 billion in FY '19, representing both overall market growth and growth in our share. We achieved this growth by working closely with our lender customers to jointly identify areas of opportunity. Our gross written premium, or GWP, decreased 5.9% to $433.2 million in FY '19. Noting that in FY '18, GWP includes a large bespoke transaction written through our Bermudian insurance entity. Excluding this transaction, GWP for FY '19 increased 17.1%. Net earned premium increased 6% from $281.3 million in FY '18 to $298.2 million in FY '19. This result was slightly above the upper end of our FY '19 guidance of minus 5% to plus 5% following cancellation initiatives in FY '19. Statutory net profit after tax was up 58.7% to $120.1 million, and it includes an after-tax unrealized gain of $24.6 million on the investment portfolio. Our underlying NPAT was $97 million, which was $3 million above the prior year. Importantly, from a strategic perspective, we remain focused on developing new risk and capital management solutions for our customers that complement our single-premium LMI product and existing offerings. Our capabilities continue to grow, and they now include, alongside our traditional single upfront premium LMI, structured and bulk transactions, excess of loss cover, bespoke risk management solutions written through our Bermudian entity, fixed term and fixed LVR cover, risk share cover such as top cover and quota share cover and regular monthly premium LMI announced in July 2019, which provides borrowers with the option of not capitalizing the premium into the loan or coming up with the entire LME -- LMI fee upfront. In addition to product innovation, we continue to actively manage our capital position, as demonstrated today by the announcement of our fully franked ordinary dividend of $0.075 per share, taking the total 2019 dividend, including the interim ordinary dividend and the unfranked special dividend, to $0.626 per share, $0.165 per share of which were fully franked. We continue to evaluate a range of capital management initiatives to ensure that we have flexibility to continue to grow the business and that excess capital to return to shareholders in the most effective and timely manner. Turning now to Slide 5. Economic growth remained below the long-term trends throughout 2019, driven by subdued household consumption and ongoing slow growth in household income. The key drivers of our business showed some positive signs with recent house price appreciation over the second half of 2019 particularly in the Sydney and Melbourne mortgage markets; unemployment, a key driver of mortgage stress, falling to a 9-month low of 5.1% at 31st of December 2019, although excess capacity in the labor market continues to impact lower wages growth; and a reduction in RBA cash rate and mortgage interest rates during the year. The ongoing low interest rate environment, income tax cuts, government spending on infrastructure and generally -- a generally improved outlook for the resources sector are providing positive momentum into 2020, particularly -- but potentially offset by the uncertainty arising from the impact of bushfires and coronavirus. National house prices continue to recover in the second half of 2019 led by metropolitan centers of Sydney and Melbourne, both recording stronger growth in the fourth quarter of 2019. The Perth market, which has experienced challenging market conditions since mid-2014, is beginning to show recent signs of price stabilization, aided by a gradual recovery of the Western Australian economy. These economic conditions as well as the extended aging of delinquencies called out in FY '18 has resulted in a 1% increase in the number of delinquencies. The portfolio delinquency rate increased nationally by 2 basis points to 0.56% over the year to 31st December. This was primarily driven by a decrease in the policies in force as a result of the policy cancellation initiatives. Encouragingly, signs of faster processing by some lenders in the third quarter has continued into the fourth quarter of 2019. In terms of 2019 delinquency rates on a geographic basis, Western Australia and Queensland continue to experience the highest delinquency rates. However, our stock of mining delinquencies declined 4.5% in the fourth quarter '19, and nonmining delinquencies have declined 6.6% due to seasonality and loss mitigation activities. On Slide 6, you can see the average HLVR market in 2019 increased slightly at around 22% as we continue to see a gradual recovery in the housing market and across all major capital cities except Perth. Credit growth in the owner-occupied lending market remained relatively constant in 2019 in line with 2018 levels. However, house price appreciation and higher auction clearance rates were particularly evident over the fourth quarter of 2019. In the investment lending market, we saw flat growth over the period in response to earlier measures by lenders to tighten credit conditions around interest-only loans. The investment property lending represented 14% of Genworth's portfolio. The home loan market continues to be responsive to market changes with lenders looking to attract low-risk borrowers by providing reduced interest rates for new customers using stricter serviceability criteria. Within this environment, we continue to proactively engage with our lenders to support growth in targeted markets such as the first homebuyer segment as evidenced by our strong GWP performance this quarter. I'll now hand over to Michael Bencsik to provide you with a more detailed update on the financials.

Thank you, Duncan, and welcome, everyone, on the call. Starting with our full year 2019 income statement on Slide 8. Our full year result continues the momentum of growth since our third quarter 2019 results and was in line with our full year 2019 market guidance. The gross written premium result of $433 million, excluding the Bermudian transaction in first quarter of 2018, was up 17.1% in full year 2019. This result really reflects 3 factors: firstly, the stronger volume growth in traditional LMI flow business across Genworth's lender customers as property prices continue to recover, particularly over the last quarter of 2019; secondly, the growth in our bulk portfolio business, the majority of which was written in the first half of the year; and thirdly, the improved homebuyer confidence and affordability, particularly in the Sydney and Melbourne markets. As at full year 2019, net earned premium increased slightly above our full year guidance of minus 5% to plus 5%, up 6% to $298 million. This result is attributable to the continued seasoning of our full year '17 and full year 2018 book years, the cancellation initiatives in full year 2019 and the continued execution of our strategic program of work. Our investment income earned on technical and shareholders' funds was up 78% year-on-year from $78 million in full year 2018 to $139 million as of full year 2019. This strong performance in 2019 comprises of 4 factors: one was the $29 million of realized gains in our equities and fixed income portfolio; $35 million of unrealized gains due to the reduction in risk-free rates; $78 million from interest and dividends; and offset by a $2 million hedging cost. These realized gains, interest and dividend income are included in our full year 2019 underlying net profit after tax of $97 million, which was up 3.3% over 2018. Bringing all this together, for full year 2019, statutory net profit after tax was up 58.7% to $120 million during the year. Turning now to Slide 9, illustrates the half yearly view of new insurance written by product since first half 2015 and the LVR mix of our LMI business. Both these charts exclude our excess of loss insurance business and business written through our Bermudian entity in full year 2018. During full year 2019, our new insurance written increased 20.3% to $27 billion compared with $22 billion in full year 2018, reflecting a change in the mix of business. Importantly, the quantum of insurance written across the greater than 80% to 90% and the greater than 90% LVR bands continued to trend higher than in previous corresponding periods. In fact, our fourth quarter 2019 saw the strongest volume growth in new insurance written flow since 2015. Slide 10 provides some further detail on our full year gross written premium performance. The left-hand side chart that you see shows gross written premium and average flow price since second half 2015, indicating the shift in LVR mix contributing to a favorable impact to our overall average price in recent halves. The average premium remained stable at 1.81% over the second half of 2019 compared to the corresponding period in 2018. This has been due to a combination of lenders' risk appetite, the cost of capital in a low investment yield environment and growth levels in property markets in prior periods. The right-hand side chart shows the drivers of change in the level of GWP with a year-on-year decrease of 5.9%, which primarily relates to the excess of loss insurance transaction written through our Bermudian entity in full year 2018. If this was excluded, our GWP for full year '19 increased 17.1%. The key features of our loss performance are shown on Slide 11. Net claims incurred for the year was $151 million compared to $146 million in full year 2018. In fourth quarter 2019, reserves fell by $6.6 million, reflecting property price growth in Sydney and Melbourne markets and early signs of stabilization in the Perth property market as well as a higher cure rate, which are partly seasonal in nature but also reflects some benefit of the impact of earlier falls in interest rates. This fourth quarter reserving result reverses the trend of increasing reserves over the first 3 quarters of 2019. As a whole, full year 2019 reserves increased by $20 million as a result of earlier fall in property markets across most states and higher delinquency stock as a result of lower levels of [ raised ] cures. Interest-only behavior is consistent with our decisions made during the year where we proactively positioned the portfolio ahead of any potential impacts from weakness in specific housing market conditions that may eventuate to losses. The number of paid claims was up 3.1% to 1,352 as at full year 2019. Pleasingly, the average paid claim was down from $112,800 in full year 2018 to $96,600 in full year 2019. This decline is the result of the stabilization of mining regions. However, there remain challenging market conditions across nonmining areas such as Perth metro and some specific subregions. This has the effect of keeping the average price paid per claim higher than historical averages that we experienced before the mining losses in 2017. Turning now to Slide 12, highlights the delinquency roll and incurred loss drivers. Delinquency rates increased nationally by 2 basis points from 54 basis points in full year 2018 to 56 basis points in full year 2019. On a geographical basis, Western Australia and Queensland continue to experience the highest delinquency rates, relating largely to 2013 and 2014 mining book years. When comparing quarter-on-quarter performance since first quarter 2018, the gradual increase in portfolio delinquencies have been a result of the improvement in the overall stock of aging delinquencies towards the end of 2019, the faster processing of these delinquencies by lender customers emerging over Q3 and Q4 2019 based on our discussions with them. To a lesser extent, the reduction in the number of policies in force as a result of cancellation activities during 2019 also impacted this delinquency rate. This highlights that the loss mitigation capabilities and the strategies that we have in place across our portfolio to achieve the best outcome for both the lender and -- customers and borrowers are starting to yield results. In terms of new delinquencies, full year 2019 performances of 10,414 are 2.6% favorable when compared to full year 2018. We have also been encouraged by the stronger performance in cures for full year 2019. Cures of 8,986 in 2019 was a slight increase from 8,937 in 2018 as lender customers gained traction on remediation of aging delinquencies and the fall in interest rates started to positively impact our borrowers. This resulted in the number of delinquencies at the end of December 2019 being 7,221 or up 1% against December 2018. On the bottom on the table on the slide, the new delinquency reserves in full year 2019 were $156 million compared to $138 million in full year in 2018 and includes the additional $20 million of reserving during 2019 noted in the previous slide. The cures line here represents the release from reserves of the delinquency that naturally have cured, being $147 million in full year 2019, up 11% on full year 2018 of $132 million. The aging of $139 million represents the natural increase in reserves for delinquencies which remain on our books over the year. Finally, the net cat -- paid claims gap line represents a small release of reserves from settlement of claims in the full year. What's really evident by this slide is that we remain well reserved at the time a delinquency becomes a claim. Slide 13 highlights the continued strength of our balance sheet. The asset side of the balance sheet includes the $3.1 billion investment portfolio, of which 81% continues to be held in cash and fixed interest securities with a rating of A- or better. As of 31 December 2019, around $83 million was invested in equities, with allocation of $572 million invested in non-AUD income securities. With this, our investment portfolio plus our potential reinsurance recoveries are essentially what is available to our policyholders to meet our claims obligations. This provides us with almost $4 billion of claims-paying resources. The right-hand side pie chart that you see on Slide 13 shows the composition of our unearned premium reserve by book year. We have retained $1.3 billion of unearned premium on our balance sheet, which we will gradually earn over time. On Slide 14, our regulatory capital position remains strong with a PCA coverage ratio of 1.91x capital. The chart on the right on that slide shows the trend of a declining probable maximum loss to $1.65 billion, driven by the lower LVR business mix being written in the greater than 90% LVR space and seasoning of larger back books particularly in 2013 and '15, meaning that the amount of capital we require to hold is reducing over time. As of 31 December 2019, this regulatory capital solvency ratio of 1.9x the prescribed capital amount was in excess of the Board's target of 1.32 to 1.44x. Some of the notable changes in the composition of our solvency position as at full year 2019 included the payment of the $63.9 million of returned capital by way of share buyback in the first half; $68.1 million distributed through fully franked ordinary dividends, both interim and final, totaling $0.165 per share for full year 2019, which included the $0.075 ordinary franked dividend declared today; and $190 million distributed through unfranked special dividends, both interim and final, totaling $0.461 per share during 2019; and finally, the reduction in probable maximum loss of $117 million, which is net of new business capital requirements, and the stating of back book capital levels under the APRA 1 in 200 regulatory model. Slide 15 sets out our reinsurance position as of full year 2019. Our reinsurance program took effect at the beginning of 2019, and this follows a successful renewal as at 1st of January 2020, which maintains the same excess of loss reinsurance levels that we implemented last year. The decision to maintain the same level of reinsurance reflects the reduced probable maximum loss to $1.65 billion of the business and the desire to maintain an appropriate and flexible level of reinsurance under APRA guidelines. With that, I'll now hand back to Duncan for the wrap-up.

Thanks, Michael. Turning now to the outlook on Slide '18. Looking ahead, Australian economic fundamentals remain sound with foundational support on multiple fronts, including historically low interest rates, tax cuts, continued infrastructure investment at the state and federal levels and recovering metropolitan housing markets. We expect this to provide momentum into the first quarter of 2020, along with a strong export and pricing commodities supported by the level of the Australian dollar. Counterbalancing the positive factors is the continued geopolitical uncertainty and the impact of trade tensions, which have the potential to impact global economic growth over the remainder of the year. In addition to this, there is the uncertainty caused by bushfires and the coronavirus, where the economic impacts are uncertain and will only emerge in coming months. We expect house prices to continue to recover led by strong growth in Sydney, Melbourne and Brisbane, which should support ongoing lending activity, although we continue to monitor the impact of the first home loan deposit scheme of the LMI market. In respect of our 2020 full year guidance, on balance, we anticipate our NEP to be in the range of minus 5% to plus 5% on the full year '19 number, and the full year loss ratio to be between 45% and 55%. Our underlying business and customer value proposition remained fundamentally strong and solid, and our ongoing customer feedback is encouraging. There is no room for complacency, and we are very focused on continuing the momentum of our strategic program of work, especially around product innovation and leveraging technology and data. We are pleased to see our focus on the core business is helping to drive the above-market growth of our NIW, along with the impact of our loss mitigation activities assisting our claims performance. On the capital front, we remain committed to actively evaluating all options available to us to ensure we return excess capital to shareholders in an effective and timely manner while having flexibility to grow the business. The company is well capitalized with a solid balance sheet and net tangible assets of $3.66 per share as at 31st of December 2019. Importantly, our track record of delivering solid profits and attractive shareholder returns continues. As I mentioned at the outset, you will also have seen the announcement on January 24, 2020, that Pauline Blight-Johnston will move into the role of CEO and Managing Director on the 2nd of March 2020. I would like to take this opportunity to personally thank the Board and senior leadership team for their support during my time as acting CEO. Thank you also to our employees for their efforts and commitment to the business. To our shareholders, thank you for your continued support over the years. With that, I'll open it up to any questions you might have.

[Operator Instructions] Your first question comes from Andrew Buncombe of Macquarie Group.

Congratulations on the results. I just had one question, please, and it's in relation to the NEP guidance. The way that I'm thinking through the pieces, for the last couple of quarters, you've had high 20s to 30s GWP growth, which now needs to start earning through. And then if you flick over to Slide 15 on the reinsurance program, the programs largely remain unchanged at similar prices. So can you just help us understand why the NEP growth expectations for FY '20 are unchanged compared to '19?

Yes. There are -- as we look at the guidance for FY '20 around our NEP, there are a number of factors that we take into account. Obviously, it's our forward-looking view on growth. Secondly, it's the fact that the earned premium only comes -- as you know, with the long earning curve we have, Andrew, only comes through over a relatively long period of time, so we don't get all the benefits of that straight away. We've also taken into account our thought on the first time loan deposit scheme and how that might play out as well. So we've looked at all of those factors, combined with our earning profile and the way the profile works through and come up with the range that we've guided to.

Your next question comes from Simon Fitzgerald of Evans & Partners.

I just wanted to get a little bit of sense or a little bit further clarity in terms of the decline in the probable maximum loss. I'm also interested to know in terms of what effects into that line is going from business mix. So a lot of the newer sort of products that you're looking at and talking about that are certainly less capital-intensive. So I'd like to hear a little bit about that.