Helia Group Limited (HLI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Genworth Mortgage Insurance Australia First Half 2020 Earnings Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, CEO, Ms. Pauline Blight-Johnston. Thank you. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us this morning to discuss the financial results of Genworth Mortgage Insurance Australia for the first half of 2020. I'm Pauline Blight-Johnston, Genworth's Chief Executive Officer. Joining me is Chief Financial Officer, Michael Bencsik. I'll start with Slide 5 of the presentation. At our last investor briefing in May, the entire country was in lockdown, and we're all working from home. In these unusual times, protecting the health and well-being of our people has been a top priority for me and the management team. We reopened our offices in early June, and while our Melbourne office is currently closed, Sydney and Brisbane remain open for now for those employees wishing to come in. Most of our employees have settled into a routine of flexible working with a mix of time in the office and time at home. This is how many businesses will operate for the foreseeable future, responding to government guidelines and ensuring the community is safe. I've been very impressed with the way our people have transitioned to this new way of working. Fortunately, Genworth's investment in data and technology over the past 2 years has really helped in this regard. Through all the upheaval, we have maintained service levels for our lender customers, and we're working very closely with customers to assist them and their borrowers. I'll talk more about that shortly. You might have seen our announcement to the market this morning, and note that Genworth's results for the first half has unsurprisingly been impacted by COVID-19. We reported a statutory net loss after tax for the first half of $90 million. The result reflects a net loss after tax of $125.6 million for the first quarter that included the deferred acquisition cost, or DAC, pretax write-down of $181.8 million. In the second quarter, we delivered a $35.6 million net profit after tax. The first half result also include the $35.5 million increase in reserves that relates largely to the anticipated future claims that may result from lender home loan repayment deferrals. As at 30 June, we have received over $48,000 repayment deferrals, representing about 4% of our insured loans in-force. Importantly, the company remains in a strong capital position and is able to withstand volatility in claims outcomes. Genworth's regulatory solvency ratio of 1.77x remains comfortably above the top end of the Board's target range of 1.32 to 1.44x. This represents surplus capital of $276.5 million, above the top end of the target range. Turning now to Slide 6 and our financial results. Michael will go into detail shortly, but I want to call out a few highlights. We've seen continued insurance business growth and a 30% increase in gross written premium to $239.3 million, reflecting consistently stronger flow volumes broadly across our lender customers. New insurance written increased 8.1% to $13.5 billion, reflecting this growth, ongoing low interest rates and the housing market recovery pre-COVID-19. The loss ratio increased to 67% due to the increase in COVID-19-related loss reserving during the second quarter. Turning now to Slide 7 and the economic and market conditions we encountered in the first half of the year. Clearly, the economic environment has changed significantly since the onset of COVID-19 globally. In Australia, the lockdown to contain the virus has helped to manage the health crisis. But as we've seen recently, particularly in Victoria, future outbreaks are likely to occur at various levels for some time. The headline unemployment rates remained high at 7.4% in June but has been materially contained by the JobKeeper package that the government extended last week for further 6 months. Unemployment arising from the lockdown, together with structural changes to those industries directly and indirectly impacted, will weigh heavily on the medium-term economic outlook. Whilst we're seeing half price declines in the metropolitan centers, the stability of the national housing market will ultimately depend on the response to and containment of the spread of COVID-19 and the return of consumer confidence. But now unemployment and house price depreciation rates are broadly consistent with the assumptions that underpin the debt write-down in the first quarter. On to Slide 8 now. Leading indicators have picked up recently. However, the nature and speed of the economic recovery remains highly uncertain. It's likely that fiscal and monetary support will continue to be needed for some time. At the end of the half, consumer confidence has started to return following April's extreme low. However, in the past few weeks, there appears to have been a reversal to some of those gains. Further lockdowns in Victoria and elsewhere are likely to impact sentiment over the second half of 2020. In these circumstances, we welcome the target of federal government support announced in the budget update last week. Of particular relevance to our business is the extension of the JobKeeper Payment with new eligibility criteria and tapered payments supporting a gradual transition to economic recovery. Genworth is also supportive of the extension of the repayment deferral programs offered by the bank. As I mentioned, we have supported over 48,000 repayment deferrals from our lender customers. We expect that some of these borrowers in deferral arrangements will progressively come off the deferral program as they or their lender reassess individual financial position under the new eligibility guidelines. Over the second half of the year, we should have a clearer picture of the proportion of borrowers that are expected to remain in hardship following the repayment deferrals. Moving to Slide 9. Over the last 50 years, Genworth has built a market leadership position in LMI by developing partnerships with our lender customers that are based on an in-depth understanding of their business and their borrower needs. Our strategic program of work to enhance the business core over the past few years has made us more automated and flexible to deliver risk and capital management solutions that meet the evolving needs of our lender customers. We are able to leverage our data insights and tailor our operational support and loss-mitigation solutions, and this has set us up very well to support our customers in this COVID-19 environment. We're working closely with our lender customers to understand how they're responding to the current circumstances and to ensure we are adequately supporting borrowers while prudently managing underwriting risk. Genworth has further expanded our natural disaster policy to include COVID-19, allowing our lender customers to work with their borrowers around different solutions until the end of March 2021. We've not made blanket changes to our underwriting guidelines, although consistent with responsible lending practices, we are applying higher levels of scrutiny to applications. We've also paused debt recovery actions. It's a testament to the quality of our people and our systems that we have continued to meet our customer service levels during this time while working remotely and experiencing higher transaction volume, including continued growth in new business. In this rapidly changing economic and commercial environment, Genworth needs to evolve its business to continue to thrive in a world where customer expectations are increasing, and advances in technology are enabling new business models and strengthening others. Against this backdrop, our annual strategic review commenced recently, and our focus is to ensure that we are optimally set up for success in our existing LMI business as well as to consider how we like to use our market-leading capabilities to identify new sources of growth. As part of this review process, we will also look at how we work and identify opportunities to improve efficiency, which will enable us to free up resources to invest in building a stronger business in the future. In closing, Genworth came into this difficult period very well positioned operationally and financially, and we continue to manage our business prudently and efficiently. I'll now hand over to Michael Bencsik to expand on our financial results.

Thank you, Pauline. Welcome, everyone, on the call, and thank you for joining us today. The COVID-19 pandemic, which arose during this half year, is expected to materially impact the economy throughout the remainder of 2020 and into 2021. Genworth's ultimate COVID-19 claims experience will largely be dependent on the pace of the economic recovery and on the outcome of the 2 key economic variables that affect our business. These are unemployment and house prices. These anticipated impacts were primarily reflected in the deferred acquisition costs or DAC write-down that we took in first quarter 2020 and the strengthening incurred but not reported, or IBNR, reserving through second quarter of 2020. I want to talk about these briefly, and then I will go through the financials in more detail. Genworth performs a liability adequacy test, or LAT, at the end of each quarterly reporting period. As at 31 March 2020, we tested a range of economic scenarios regarding the duration of assumed recovery and mitigating benefits of the government stimulus and lender initiatives to support the estimation of premium liability and future claims from business already written. As the premium liability measurement relies on future cash flows, the measurement is [ sensitive ] to the uncertain future impacts of COVID-19. This re-estimation at first quarter 2020 demonstrated that we had a LAT sufficiency that required us under Australian Accounting Standards to write down our DAC asset on our balance sheet by $181.8 million because the COVID -- post-COVID-19 premium liability exceeded the net unearned premium of this amount. As at 30 June 2020, the LAT position had improved to an $81.3 million surplus, mainly due to increased unearned premium from profitable new business written during the second quarter and a reduction in premium liability from the natural transition of reserves. The IBNR reserving booked in first half 2020 allows for the expected delinquencies from the current lender deferral programs based on a method which looks through the impact of the payment deferrals to estimate how those loans would normally be incurred if deferrals were not in place. To allow for this slightly increase in claims following the end of the repayment deferral period by the lender banks, we have strengthened our reserving by $35.5 million. I will now go through the financials in more detail, starting on Slide 11 with our first half 2020 income statement. As you can see on this slide, our statutory net loss after tax of $90 million in the first half includes the $127.3 million DAC price down after tax in first quarter 2020 and the COVID-19 $24.9 million after-tax increase in reserving for the half. This has been partially offset by investment income of $34.9 million after tax in first half 2020. The gross written premium result of $239.3 million was up 30% from $184.1 million in first half of 2019 and 1% below the second half 2019. This result reflects the higher LMI premium growth in first half 2020 from Genworth's lender customers, arising largely from refinancing home mortgages and arising from pre-COVID housing market recovery, supported by a low interest rate environment. Net earned premium increased 2.2% to $150.8 million over first half 2019, which reflected the seasoning of current and prior book years and higher GWP volumes. Net claims incurred increased 26.7% to $101.1 million, representing $65.6 million in claims paid and IBNR reserving of $35.5 million, including reserving for COVID-19 loan repayment deferrals. Investment income earned was a profit of $49.8 million, which was down by 56.7% over the prior period due to the nonrecurrence of higher unrealized investment gains in first half 2019. Interest and dividend income declined to $27.2 million from $42.4 million in first half 2020 with returns pressured by the lower interest rate environment. Realized investment gains of $29 million in first half 2020 were driven by rebalancing within the fixed income portfolio. Overall, our annualized investment return for this half was 1.7% compared with 2.6% for the first half of 2019. Turning to Slide 12, illustrates a 6-monthly view of gross written premium, a new insurance written, plus the [ later value ] mix of our LMI business. The left-hand chart illustrates the drivers of change in the level of GWP with a 30% increase in first half 2020. The right-hand chart shows GWP and the average flow price of business since first half 2016, indicating the continued shift to more LMI flow business being written in the 80% to 90% LVR band. During first half 2020, our average flow price increased 7 basis points to 1.82% from 1.75% in first half 2019. Looking at the bottom chart on the right now, which shows new insurance written, or NIW, by LVR band. During first half 2020, NIW increased by 8.1% to $13.5 billion from first half 2019. You can see from this chart that there has been a change in the mix of business with the proportion of under 80% LVR business decreasing from 22% in first half 2019 to 6% in first half 2020, and the 80% to 90% LVR business increasing from 60% in first half 2019 to 72% in first half 2020. This level of new business we write in each LVR band has 2 implications for our business. Firstly, on the average price of flow business and our GWP earned; and secondly, the level of regulatory capital required to support this new business. The key features of our loss performance are shown on Slide 13. Net claims incurred was 26.7% higher at $101.1 million compared to $79.8 million in first half of 2019. This partly reflects the $35.5 million in reserving during the half that takes into account the impacts of COVID-19. The number of paid claims in first half 2020, or 691, was up 12.4% on first half 2019, or 615, which reflects refinancing by borrowers in an improved property market earlier this year compared to lower volumes in first half 2019 due in part to the federal election. The average amount paid per claim was similar at 94,900 when compared to first half 2019. During first half 2020, we expect the net reserves by $35.5 million. These reserves reflect an incurred component resulting from the additional anticipated COVID-19-related claims from the 48,000 repayment deferrals received from our lender customers, which comprised of 4% of our insured loans in-force. It is expected that the bulk of the delinquencies resulting from these deferrals will be reported to Genworth from late 2020 through the first half of 2021, and our reserving methodology will continue to make provision for incurred delinquencies from these deferrals over that period. Finally, our loss ratio was 67% compared to 54.1% at the first half of 2019 due to this increase in COVID-19 loss reserving largely during the second quarter of 2020. Turning to Slide 14. This highlights the delinquency roll and incurred loss drivers. In first half 2020, delinquency rates across the portfolio increased 2 basis points to 0.62% compared to first half 2019 of 0.60%. This was largely attributable to the benefits of our continued policy cancellation initiatives, reducing the insured loans in-force exposure. Our portfolio was performing as expected prior to the government restrictions to suppress the spread of COVID-19 during the second quarter 2020, which led to a slowdown in lender customer loss management processes with legal moratoriums and repayment deferrals that reduced the incidence of new delinquencies and cures in our book. As a result, new delinquencies were down 9.6% to 4,988 from 5,515 in first half 2019. Similarly, cures, which relate to such things as underlying assets sold, refinancing or repayment of a loan, were also down 6% to 3,904 compared to first half 2019 of 4,154, as we saw fewer delinquencies emerging to later cure and due for moratoriums as I mentioned earlier. On the bottom of this table of this slide, you can see how we evaluate our loss development and manage our reserving. The new delinquency reserves in first half 2020 of $79 million were up $10 million compared to first half 2019, reflecting the higher average reserve per delinquency from the anticipated increase in claim frequency and severity due to COVID-19. The aging line shows the additions to reserves that we make for delinquencies that transition from one of [ recent ] buckets to the next on the basis that the longer that a line is delinquent, the greater the probability it will go to claim. While lenders are not pursuing litigation during the loan deferral period, we do expect our existing portfolio of delinquencies to age, hitting the resumption of collection activities. We have seen about 48,000 repayment deferrals coming in from our lender customers, and we expect this figure to be at or close to the peak because although the repayment of deferral program has been extended, lenders are now very actively segmenting and managing their borrowers to identify genuine hardships. This should lead to increasing numbers of borrowers opting out from or being taken off the program. As Pauline mentioned, we're actively working with our lenders on loss-management approaches, particularly in those segments that represent a high risk of default such as self-employed borrowers. The cure rate and delinquency outlook for these repayment deferrals will gradually emerge over the next 12 months. Moving now to Slide 15 on the liability adequacy test. As mentioned, Genworth is required to determine premium liabilities in compliance with both the APRA Prudential Standard 340 and AASB Accounting Standard 1023 General Insurance Contracts, where net insurance liabilities recognized on balance sheet must exceed all future claims that are expected to arise on insured loans in-force, including appropriate risk margin, less any future premiums to be earned. Our acquisition improved at 30 June 2020 to $81.3 million surplus. This was due to an increase unearned premium from new business written and a reduction in premium liability due to higher net claims incurred in the second quarter of 2020, being the transition of loss provisions out of premium liability and into IBNR reserving. Slide 16 highlights the continued strength of our balance sheet. The asset side of the balance sheet comprises $3.2 billion of an investment portfolio with more than 81% held in cash and fixed interest securities with a rating of A- or better. This comprised 44% in Australian government bonds, 27% in Australian credits, 20% in U.S. dollar CLOs and non-AUD investment-grade credits, 3% in equities and 6% in short-term deposits, internally managed cash and derivatives. In terms of liabilities, our outstanding claims reserves increased to $398.8 million as a result of an increase in the stock of delinquencies and the additional COVID-19 IBNR reserve. We have also retained over $1.3 billion of unearned premium on our balance sheet, which we will continue to earn over time. It is this investment portfolio, plus our potential reinsurance recoveries, which are essentially what is available to our policyholders to meet our claims obligations, providing us with over $4 billion of claims paying resources. In the context of stress testing, this will allow us to meet all of our clients' obligations even if situation is significantly worse than what we expect. Slide 17 shows that our regulatory capital position remains strong with a PCA coverage ratio at 1.77x capital as at 30 June 2020, above the Board's target range of 1.32 to 1.44x, representing surplus capital of $276.5 million, above the top end of the range. The chart on the right on this slide shows the trend in probable maximum loss, which has increased to $1.68 billion. This has been driven by the increase in new business flow written by our lender customers. With that, I'll now hand it over to Pauline for the wrap-up.

Thanks, Michael. These certainly are challenging times. Importantly, we're engaging regularly with our lender customers and maintaining our high service of standards. We've expanded our natural disaster policy and adapted our processes to manage the increased transaction volume, whilst prudently managing underwriting risk. We continue to respond with appropriate loss-mitigation activities to work in tandem with the various stimulus packages, income support and repayment deferrals to ensure that the company is able to assist lenders and borrowers, both at this time of need and over the longer term. Of the 48,000 repayment deferrals, we know that some borrowers will come off these programs. The ultimate numbers and the ultimate impact on our loss experience is still unknown. There have been some encouraging signs from leading economic indicators. However, significant global economic and health uncertainty remains and the nature and speed of the domestic economic recovery is unclear. It's important to recognize the impact on borrowers or, to some extent, the ongoing, at least for the remainder of 2020 and through 2021. Therefore, financial outcomes may demonstrate a higher-than-usual level of volatility for the foreseeable future. It's worth noting that even if economic and loss outcomes emerge exactly in line with our assumptions, the nuances of accounting treatment may result in period-to-period volatility over the coming years as we're required to bring different aspects of reserving into account in each reporting period. Most importantly, Genworth's capital strength, along with the flexibility we have built with our reinsurance program, positions the business well into the economic recovery. Notwithstanding this, in light of the ongoing uncertain economic outlook and [indiscernible] the guidance, we believe it's prudent at this time to preserve capital. In these circumstances, the Board has decided not to pay an interim ordinary dividend in 2020. Any future dividend will be subject to economic conditions, retaining a strong capital buffer and may require our Board approval. The company remains well capitalized with a solid balance sheet, a solvency capital ratio of 1.77x and net tangible assets of $3.37 per share at 30 June 2020. We will continue to work together with our lender customers through this period and beyond to support Australian borrowers, helping as many people as possible to realize the dream of home ownership. And with that, I'll open up to any questions you may have.

[Operator Instructions] Our first question in queue is from Simon Fitzgerald from E&P.

My first question just relates to the reserving increase. As you mentioned, the Board sort of said that it's prudent, and I understand why you're doing it. But is there a potential it might also be premature just given that you've also mentioned that the ultimate impact on the claims experience is still unknown at this stage? I mean maybe you can help me a little bit more in terms of the calculation to get you to 35.5. I mean I'm trying to ask whether there's a level of reserving per delinquency that you are aiming at. And then I even go back to the second quarter '19 where it was 46,000. Maybe you could just sort of help me with the calculation at least, and then give a couple of comments on how conservative you think that estimate is, et cetera.

Thank you, Simon. Look, this is -- I guess there are times that we're not used to in many ways. And we've got the 48,000 repayment deferrals. This is something very new. I actually don't have, obviously, a lot of history as to what's going to happen with that 48,000. And we know that within that, there's a very, very broad range of different financial circumstances. So we're trying to look through that the best we can on information that will emerge coming forward. So I would say that the Board has not taken any deliberate position to be overly conservative or overly aggressive. We're trying to, to the best we can, with this information, bearing in mind that we do expect it's very difficult times potentially for the coming 6 to 12 months. But I'll hand over to Michael to talk about how we've actually done that.

Yes. Thanks, Simon. What we've actually looked is what we said, sort of through approach to see the underlying nature of the reserving. When you sort of look at our sort of delinquency book at 30 June, we have around sort of 7,600 delinquencies. What we have seen emerging through the 48,000 hardships, around 20% or 1,500 of those delinquencies are actually related to pre-COVID delinquency. So what we've tried to do is exclude those going forward. In second quarter, we could be -- the actual IBNR reserving consisted of 2 amounts. One was at $10 million allowance for expected house price depreciation, which was a catch-up from the 31 March house price depreciation estimate. The $20 million was relating to an increase in IBNR from liabilities. And this just sort of takes into the consideration of any uplift in frequency and severity but also the particular impacts of these lender payment deferrals. So what we are sort of seeing is that the initial view of the hardships that we are seeing is that we'll -- the increase in [ our EBITDA ] will increase pressure of any future incurred events as we see going forward. But we do expect to see that in relation to the IBNR reserving we have taken, it really will depend upon the upturn of the second half and particularly how the lender bank -- banks work through their hardship applications. As Pauline and I mentioned, a lot of the hardships, we're seeing a lot of people opting out. And we're also seeing that the quality of hardships tend to be performing loans at this point in time.

Okay. That sort of leads on to my second question. With the loan deferrals as well in terms of who can apply for those or who at least qualifies for those, I think you mentioned that the banks were going through those with a fine tooth comb in the sort of changing the rules in terms of who will qualify for the hardship and who won't. What do you sort of suspect will come out of that in terms of the number? And are those rules just imposed by the banks? Or is there something from APRA that's behind that that's a little bit more solid?

In the early days, it was also happening so fast, and the volumes coming through the bank were very, very rapid. So basically, anybody who rang and said, "I want to be put on deferral," was pretty much put on deferral. There was [ a very good ] scrutiny of individual circumstances. What's emerging over time, as most of the lenders have been engaging with those customers over the recent months, and it's turned out that some of those customers perhaps didn't actually need to be put on that deferral. Some of them didn't understand that they will continue to accrue interest during that period, for example. And so some are opting out already. The real question for us, of course, is exactly which proportion fits in which bucket? It's something that will become more obvious over the coming months. The -- beyond the 6-month period, in fact all the banks have now switched so that any new requests for loan repaying -- deferrals are put through in rigorous process to [ undersell ] the customer need and properly understood, and the bank is going to help the customer to work through what that means for them going forward as they start to -- over the last -- extra 4-month extension, we should be seeing the lenders working with the borrowers much more closely to work out what the long-term solution is for each of those borrowers on repayment deferral, which will [ maybe cure ] and which ones are need to move to a more formal hardship program. So you will see a change in the -- we have already seen a change in the engagement, and that should the engagement between the lender and the borrower, but still see what that does to the portfolio.

And our next telephone question is from Andrew Buncombe from Macquarie.