Helia Group Limited (HLI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Genworth Mortgage Insurance Australia Full Year 2020 Earnings Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Mr. Paul O’Sullivan, Head of Investor Relations. Thank you. Please go ahead.

Hello, and welcome to the full year 2020 financial results briefing for Genworth Mortgage Insurance Australia. I am Paul O’Sullivan, Head of Investor Relations. This morning, we will start with the presentation from our CEO, Pauline Blight-Johnston, who will give an overview of the results. Our CFO, Michael Bencsik, will then go into the details of the financials, and Pauline will then provide a summary. After the presentations, we will open up for questions from investors and analysts. I'll now hand over to Pauline.

Thanks, Paul, and good morning, everyone. Thank you for joining us this morning. I'll start with Slide 5 of the presentation. 2020 certainly was an extraordinary year, and one of the -- one that none of us is likely to ever forget. The sudden onset of the global pandemic materially impacted the Australian economy and our business results as well. But despite these impacts, Genworth continued to partner with high mortgage lenders to share lending risk, enabling thousands of Australians to build financial security through the purchase of homes and investment properties. With home ownership appearing increasingly out of reach for many Australians, the role that Genworth plays in facilitating homeownership and the purchase of property has never been more important. Over 2020, the company faced and managed many challenges. We prepared the business to operate effectively in a new economic environment. We transitioned our entire workforce to remote working. We supported over 55,000 home loan repayment deferrals from our lender customers. We refined our reserving methodology to reflect COVID-19 impacts, and we prudently assessed high volumes of new insurance applications over the year. Despite the challenges, the company continued to progress our strategic agenda to make home ownership accessible to more Australians. We piloted our monthly premium product, and we commenced a strategic review to better position the business for growth, grounded in a deeper understanding of the needs and desires of today's vendors and borrowers. All of this was done while maintaining service standards for our customers and improving our Net Promoter Score. I'm really proud of the resilience and adaptability of our people and their passion for helping Australians in their difficult times. Genworth's financial and operational strength enabled us to successfully navigate the challenges and end the year in a strong position, ready to manage future impacts and take advantage of opportunities. As previously announced, our full year results were materially impacted by the effects of COVID-19 on the economy as we increased reserving to allow for an anticipated increase in the future level of claims as a result of the pandemic. For the full year, we reported an underwriting net loss of $234 million, incorporating in excess of $290 million of one-off reserve strengthening. Pleasingly, even in the uncertain economic environment, the business continued to deliver strong top line growth in gross written premium flow volume and outstanding operational performance during the year. As we sit here today, we hope that the economic impacts of COVID-19 will be less severe than initially seen at the onset of the pandemic, although, of course, we still have a long and uncertain road ahead of us. Importantly, against this still uncertain backdrop, despite the unforeseen challenges of 2020, Genworth remains in a strong operational and financial position, providing us the capacity to continue to adapt to the changing circumstances and to withstand a wide range of future claims outcomes. Turning to Slide 6. I'll highlight our key financial measures, and Michael will go through the detail later in the call. As I mentioned earlier, new business volumes have been strong over 2020. Gross written premium increased nearly 30% on full year 2019 to 262 -- sorry, $562 million. Net earned premium increased 4.6% to $312 million over the same period. This strong new business flow will underpin earnings growth for the company over the coming years. The full year 2020 underwriting result of a $234 million loss incorporated $290 million of one-off reserve strengthening precipitated by COVID-19, including the DAC write-down of $192 million and the December 2020 reserving review of $109 million, both of those numbers being pretax. During 2020, lender customer initiatives and government support packages interrupted the typical incidence patterns of delinquencies and claims, leading to lower-than-anticipated claims activity over the year. To allow for these unusual circumstances, Genworth strengthened reserving, including increasing the outstanding claims risk margins. And in the fourth quarter, we revamped -- we refined our reserving methodology for rate delinquencies, which shot forward the timing for recognizing the liability for expected losses from re-delinquent loans. Due to the company's statutory loss, IFRS regulatory guidance and the still uncertain economic outlook, Genworth's Board concluded it would preserve capital and not pay an interim or final ordinary dividend in 2020. Genworth's ultimate COVID-19 related claims outcome will, to a very great extent, depend upon the speed and nature of the economic recovery, particularly in respect of unemployment and house prices. I'll touch briefly on the economy now, turning to Slide 7. The Australian economy was severely impacted by the pandemic in 2020 and its resilience was supported by an unprecedented level of fiscal stimulus, accommodative monetary policy and lender support programs. Recent economic indicators have been encouraging. We're pleased to see the improvement in the recently reported unemployment and national house prices. However, uncertainty remains, and the continuation of the recovery will depend on Australia's ability to continue managing the health risks posed by COVID-19. On to Slide 8 now. As I mentioned, despite the challenging economic environment, Genworth experienced ongoing top line growth in 2020. New insurance written increased as owner-occupiers and first home buyers took the opportunity provided by low interest rates to enter the housing market. Against this backdrop, Genworth's lender customers achieved above-market lending growth rates. These higher business volumes were the main driver of premium growth, with small positive contributions from mix and rate. We've been actively monitoring and applying higher levels of scrutiny to the quality of applications that are coming in this year, which were consistently strong throughout 2020. The continued strong growth will drive growth in net earned premium over the medium term. Turning to Slide 9. We will provide even further information on home loan repayment deferrals from our lending customers. By the end of 2020, most borrowers who are on repayment deferral arrangements had either opted out or had their loans restructured. As at the 31st of December 2020, Genworth had over 8,100 active repayment deferrals remaining from our lender customers, down from the over 31,000 that we reported in the third quarter. Our refined reserving approach that we announced to the market in December and we applied from the fourth quarter 2020 sees delinquency claims reserves now held for all policies that have at any point experienced delinquency up until the associated policy is canceled or a cash reserve is established. This reflects our observation that previously delinquent loans have an increased rate of re-delinquency for the life of the loan. The refined delinquency reserving methodology increased fourth quarter 2020 net claims incurred by $109 million, to $138 million, which is at the lower end of the market guidance range provided on the 18th of December of between $135 million and $150 million. Things are still tough for many Australians, so we will remain sensitive to borrower circumstances, working closely with lender customers on appropriate hardship solutions to mitigate potential losses. Moving to Slide 10. Despite a difficult year, Genworth ended 2020 in a strong capital position. Genworth's prescribed capital amount coverage ratio on a Level 2 basis of 1.65x sits comfortably above the top end of the Board's target range of 1.32 to 1.44x. This represents surplus capital of $203 million above the top end of the target range. Before handing over to Michael, I just want to spend a minute or 2 talking about our strategic customer focus outlined on Slide 11. Execution of the company's current strategy over recent years to enhance core capabilities has provided Genworth with a solid foundation to support lender customers over this difficult year. We responded quickly at the outset of COVID-19, taking actions to decisively and prudently support our people and customers. Our people transitioned to remote working very quickly and effectively. Over the year, we've redirected people to where they were needed the most to process over 55,000 home loan repayment deferrals and to support the high growth in new business volume with increased scrutiny. All this work was delivered while meeting our contractual service-level agreements and improving our customer Net Promoter Score. While we were busy managing the business day to day, we also kept an eye on the future. During the year, we commenced the strategic review of the business and are now developing a business strategy that positions our customer value proposition to respond to evolving lender and borrower needs. Our strategy for sustained growth will enhance our current business to improve its efficiency and competitiveness and evolve our LMI offering by refreshing it for a new generation of home buyers. We're also exploring opportunities to extend our core LMI capabilities in ways to support our goal of increasing home ownership in Australia. I look forward to sharing more detail regarding our strategic plans as we complete the strategy development and planning process over the course of 2021. I'll now hand over to Michael to talk about our financial results in more detail.

Thank you, Pauline, and welcome to everyone on the call, and thank you for joining us today. I'll now go through the financials, starting on Slide 13 with our full year 2020 income statement. Genworth reported a $108 million statutory net loss after tax and an underlying net loss after tax of $104 million. This result was largely attributable to 3 factors: the deferred acquisition cost, or DAC, write-down of $182 million pretax that we took at first quarter 2020; the reserving methodology review of $109 million pre-tax as at fourth quarter of 2020; and thirdly, the reduced investment income earned from declining fixed interest yields that were offset by higher realized gains during the year. Gross written premium increased 29.7% to $562 million, up from $433 million in full year 2019. This arose from strong growth in LMI flow volumes across our lender customers. Net earned premium increased 4.6% to $312 million over full year 2019, which reflected the continued seasoning of current and prior book years, but also due to the higher gross written premium result. Net claims incurred increased 92% over the prior year to $290 million. This included a $109 million increase from the reserving methodology change, where an IBR reserve is established in the outstanding claims liability on the balance sheet. This reserve was for all policies that have at any point experienced delinquency up until the policy is canceled or a cash reserve is established, and applies from the fourth quarter of 2020. Investment income earned from full year 2020 was $90 million, which was down 35.4% over the prior year, resulting from declining fixed interest yields, offset by higher realized gains. We have included in Slide 14 some further detail on how the economic environment, particularly unemployment and house prices, has influenced our loss experience during the year. National prices were up 3% over the year, with Melbourne house prices particularly impacted by the recent COVID-19 lockdown, falling 1.3% over the year. The unemployment rate reduced 0.8% from June 2020 levels to 6.6% at December 2020. And this headline rate continued to benefit from the federal government stimulus programs that will start to wind back during the first quarter of 2021. Our delinquency rate of 0.58% at full year 2020 rose 2 basis points on full year 2019 but declined 4 basis points in the second half of 2020 and reflected lower new delinquencies as a result of loan repayment deferrals and policy cancellations from loan refinancing. The key pictures of our loss performance are shown on Slide 15. Net claims incurred was 92% higher at $290 million compared to $151 million in full year 2019, resulting in a loss ratio of 92.9%. This was elevated over the prior year of only 50.6%, which really reflected the reserve strengthening that we took during the year. The net claims incurred of $290 million during the year included actuarial adjustments of $113 million, which were reflective of the anticipated future increase in claims as a result of the economic effects of COVID-19 as well as compensating for the reduced incidence of claims seen over 2020 due to the lender support initiatives. $30 million of this number was for an increase in the risk margin from 14% to 18% and outstanding claims liability, reflecting the future uncertainty regarding the deferral resolution process and $109 million related to the refinement to reserving methodology noted earlier. Moving to Slide 16. Investment income earned on technical and shareholders' funds was a gain of $90 million, down 35.4% over the prior year. This was due to lower interest income from defining fixed interest yields, and these were offset by higher realized gains from rebalancing within the fixed income portfolio. Slide 17 highlights the continued strength on our balance sheet. The asset side of the balance sheet consists of a $3.4 billion cash and investment portfolio. The cash balance tends to fluctuate in line with timing of both investment settlements and liquidity management activities. In terms of liabilities, we increased our outstanding claims reserves to $540 million, reflecting the reserving methodology refinement, COVID-19 and risk margin change. Today, we retain around $1.5 billion of unearned premium on our balance sheet, which we'll gradually earn over future periods. It's our investment portfolio plus our reinsurance that are essentially what is available to meet our claims obligations to our policyholders, providing us with over $4.2 billion of claims-paying resources. Turning to Slide 18. Genworth retains a well-diversified cash and investment portfolio with an average maturity of 4.2 years and an average duration of 2.6 years. The cash and investment portfolio of $3.4 billion consists of 80% being held in cash and debt securities with a rating of A-minus or better. During the year, we reduced exposure to Commonwealth government bonds and increased exposure to state government bonds and equities to try and improve yield. Moving now to Slide 19. Genworth performs the liability adequacy test, or LAT, at the end of each quarterly reporting period, which represents a point in time in payment tests. As the premium liability measurement is critically reliant on future economic conditions, the measurement is sensitive to the ongoing uncertain future economic impacts of COVID-19. As at 4Q 2020, we tested and updated our central estimate with a range of economic assumptions regarding the duration of the economic recovery and mitigating benefits of the government stimulus and lender support initiatives in order to estimate premium liabilities and future claims expected to rise on in-force policies. This re-estimation and the reserving methodology refinement as at 4Q 2020 has contributed to an increase in LAT surplus, being $279 million as at 31 December 2020. This surplus reflects a reduction in premium liabilities from the reserving review, which led to a corresponding increase to the outstanding claims liability on the balance sheet as at 31 December 2020 plus higher unearned premium growth during the quarter. Turning to Slide 20. This shows that our regulatory capital position remains strong. Genworth's PCA coverage ratio on a Level 2 basis of 1.65x was above the top end of the Board target range of 1.32 to 1.44x, representing surplus capital of $203 million, above the top end of that range. The chart on the right on this slide shows the trend in probable maximum loss, which has further increased during the year to $1.75 billion as at 31 December 2020. This was driven by the higher LVR business mix being written in the 80% to 90% LVR band, meaning that the amount of capital we are required to hold is gradually increasing. With that, I'll hand it back to Pauline to wrap up the presentation.

Thanks, Michael. Genworth's full year result reflects the very unusual environment that we operated in during 2020. The company experienced strong top line growth throughout the year. However, the impact of COVID-19 on borrowers affected the full year results and will, to some extent, be ongoing. To date, we've seen reduced claims activity as a result of repayment deferral and government support programs. We've attempted to compensate for these and the increased uncertainty by strengthening reserving. With the support programs being phased out in 2021, COVID-19 is expected to result in sustained pressure on claims throughout the year. It's also 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 under accounting standards to bring different aspects of reserving to account at different times. Whilst there are encouraging signs in the economy, uncertainty remains. The Board acknowledges the importance of dividends to shareholders and remains committed to resuming dividend repayments when it believes it's appropriate to do so, taking into account the impacts of COVID-19 on the company's financial and capital position as further information becomes available. Genworth ended 2020 with a strong capital base and a capital buffer that means we remain well positioned to navigate the challenges and opportunities ahead. Our developing business strategy will set us up to take advantage of the opportunities to achieve sustainable growth in the years ahead as we continue to help Australians manage the ever-growing challenge of housing affordability. We'll keep working together with our lender customers to support Australian borrowers, helping as many people as possible to realize their dream of homeownership and stay in their home wherever possible. With that, I'll open up to any questions you may have.

[Operator Instructions] Your first question today comes from the line of Andrew Buncombe from Macquarie.

I just had 2 fairly high level ones, I think, please. Just the first one, should we continue to expect Genworth to build reserves per new delinquency over the course of FY '21? Or is the current rate the right way to think about it?

Thanks, Andrew. I think that will have to depend on what we see throughout the course of the year. One of the reasons we've been building reserves is because we haven't been seeing the claims come through because of the deferrals. If we continue to see that, we will need to continue to reserve in lieu of the claims coming through. So it will depend on the experience that we see during the year.

Yes. And then my other one, the economic data coming out in terms of house prices and unemployment is coming out exceptionally strong. What more do you need to see before you start releasing reserves? Or will that not necessarily happen until you review your earnings curve at the back end of '21?

We've always said what we -- we need to see 2 things, really. One is what happens to the economic indicators when the government stimulus comes off, because we still have that to come off during the course of the year. And the second is how our portfolio deferrals behave when the deferrals end, because it's only really as those deferrals end and we get in there and work with each of those borrowers that we will fully understand the level of claims that will come through to us. So realistically, that will be towards the end of 2021. By the time the deferral program ends in 31st March and then we work through -- once then all the loans are reset to 0, and then we work through the usual delinquency process.

And your next question today comes from the line of Simon Fitzgerald from Evans & Partners.

My first one is a little similar to Andrew's but potentially asked in a different way. If we look at the LAT surplus, which has increased obviously from the third quarter to fourth quarter, which sort of points out that conditions are obviously a lot better than your best estimate assumptions, if that continues to expand because conditions are improving and, again, better than the central estimate assumptions, could we assume then that you're well and truly adequately reserved? And I understand that claims still need to come through to confirm that. But obviously, you're in a position where the reserves will be blending out if conditions continue to improve and better than those central estimate assumptions. Maybe you can make a sort of few comments on what we're sort of seeing from the LAT surplus versus your other comments made a moment ago.

Sure. So clearly, we are more comfortable with the LAT surplus position where we are now than where we were earlier in the year. The -- really, as we sit here, it really is a case that's very difficult to predict what's going to come in the future. Of course, if the economy continues to improve, the economy doesn't react too bad to the stimulus coming off and we don't get further significant bouts of COVID-19 lockdowns in Australia, then, hopefully, our central estimate may prove to be on the conservative side. On the eclipse side, if we do get further bouts of COVID-19 in Australia and more shutdowns, or the economy reacts worse than we expect to the stimulus coming off, it may prove to be the other way around. So at this point in time, we have reserved to what we believe is the central estimate really between those 2 different scenarios.

Okay. And just a couple more questions here. You mentioned that you expect to sort of see some of these claims starting to come through or have a better ability to be able to assess those at the end of 2021. What time frame do you suspect that -- let's say that claims are quite low and people are getting loans modified, et cetera, where it's not resulting in claims, what time frame do you sort of reassess that and say, well, maybe we're over reserved?

As I said, it will be progressive throughout the course of the year. We'll get more information drops as the year goes on. So once the deferrals have finished in 31 March, then we'll understand the position of which loans are starting to become delinquent. As we work with the lenders and the -- to the restructure opportunities, and I know a lot of the lenders are very proactively looking at which loans to restructure and bucketing them and trying to target their loss mitigation activities, and we are helping with that, as we get more information through that, we'll progressively become clearer. I don't think it's going to be sort of one day where it's all going to become clear to us.

Yes, okay. Understood. And final question, just on the dividends, which you mentioned before, which you would obviously need APRA approval before. Can you just remind us what the rules are? Is it 2 quarters in a row profits where you're allowed to, or some of those rules -- there's room to be relaxed or something?

It's 12 months of profits. We can pay -- without APRA approval, we can pay dividends out of our last 12 months' profit. So that's 2 paths.

And our next question today comes from the line of Andrew Lyons from Goldman Sachs.

Just a question on Slide 20 and the composition of your new insurance written over the course of the year. You're at all-time highs in the greater than 80% origination, certainly, walk back to 2013, and not far from all-time highs in the greater than 90% bucket. And yet over that period, your in-force is sort of unchanged or broadly up. Yet against all of that, your PML has -- is actually still well below where it was back sort of in 2013 through 2015. I'm just wondering if you can talk to how the PML might trend if you maintain new insurance written at around current levels for the next year or 2 at -- with similar composition in relation to the LVR buckets.

Okay. I'll ask Michael to address that one.

Yes. Look, thanks, Andrew. Look, what we called out last year was we started to see in the last 2 quarters an increasing trend in the PML. And the PML is a mathematical formula basically looking at the risk in-force. And the risk in-force, which we have, as you mentioned, 1.2 million policies, that will tend to decline as we push our cancellations. What is happening in terms of the probability default factor is that is weighted according to the LVR band. So as -- if you're writing business above 90% LVR, that has a higher probability to default than the bands of 85% to 90%, which is around 3%. So what we are seeing is that we'll see that probable maximum loss start to increase gradually over time in reflecting of where that LVR lending has been occurring. When we looked at the volumes that have come through this year, most of the risk appetite has been in that 80% to 90% banding by lender customers. And a lot of that has been flowing -- has been through home loans coming through for new business. So I do expect to see that if the trend continues, based on where we are writing this business in the 80% to 90% space, that PML will start to gradually increase over time.

And just a follow-up question, just obviously the growth in the business, your GWP growth has been very strong. Can you maybe just make a few further comments, Pauline, just around what you're seeing sort of at the coalface at the moment? Are originations continuing to come through? Have they slowed at all or accelerated? And again, just -- has the composition that was just touched on, has that sort of continued in relation to the LVR profile?

So we're very pleased with the volumes that are continuing to come through. We've, of course, spent a lot of time examining them to make sure it's the quality of business that we want. And it seems to be very much a case of first home buyers and owner-occupiers taking the opportunity to enter the market while interest rates are low. And we've seen over the course of the year, house prices haven't spiked the way they sometimes do when interest rates are low. So they're really taking that opportunity. We're seeing it broad-based across our lender customers and across the economy, with some of our larger lender customers benefiting more than other lenders because they've got their processes well under control and very efficient. So largely, I would say that the most -- the predominant feature of what we're seeing come through there is first home buyers, owner-occupiers really taking opportunity to enter the market.

That's really helpful. So just a final one, putting all of that together, you talked to $200 million of -- $203 million of surplus capital above the top end. Are you increasingly of the view with the growth profile that you can see, the composition of growth and the PML headwind that, that surplus capital is probably going to be reinvested back into the business as opposed to potentially coming back to shareholders?

I think it's too early to know at this point in time. I think we'll need to make those decisions as the business evolves, as you see the claims. But -- we see the claim information comes through, we see the growth of the business and we look at the opportunities for the business. The Board, I would say, is very, very focused on making wise decisions around that.

And your next question today comes from the line of Nathan Zaia from Morningstar.

I just had a couple of questions. The slide on the strategic customer focus, there's obviously very limited detail at this stage. But do you anticipate any increased operating costs as you pursue some of these initiatives?

As you say, it is very early days, yes. But what we did in the fourth quarter was we actually redirected some of our cost base. So the early work we have funded by efficiencies to the rest of our business. That's our intent, to do that as long as possible.

Okay. And on the leverage core capabilities, can you just remind me, this doesn't mean pursuing other lines of insurance, does it?

We will only play where we have competitive advantage, and I don't see us having competitive advantage in other lines of insurance at this point in time.

And your next question today comes from the line of Andrew Martin from Peak Investment.

Pauline, sort of a top-down macro question. We've got new management in place. It's been quite a year for the company. We've seen deferred acquisition costs written off. We've seen a huge increase in reserving with your revised reserving policy. Yet as we exit 2020, we've got record home prices, record low interest rates, households are awash with disposable income. It just, to me, seems a bit of a disconnect between the way forward and the way that you're crunching the numbers. I suppose it does make it -- and I am being a bit cynical here. It certainly makes it a lot easier for new management to jump the performance hurdles, write everything down and make the -- well, we're seeing a huge pull forward of forward expenses into the year just gone. So I was just wondering, I mean has the parent company had an input into this? We know that they're undergoing sort of discussions about being acquired at the moment. Just wondering what their input into this has been. So over to you.

As I'm sure you'll appreciate, rather than a parent company, Genworth can actually substitute for the shareholder. So as a shareholder, there are certain rights around the shareholders' agreement, but management and the Board run the company for the benefit of all shareholders. So that's not something that they actually get to dictate to us.

So with your revised reserving policy, how does that compare to industry benchmarks?

It's a little bit difficult to know. There's really only 2 providers in the industry, ourselves and a subsidiary of a larger company. And it's been a subsidiary of a larger company that had need to -- it's a -- [ sit and ] send that kind of material to the group. So not as much information is available.

Okay. But from a cash point of view, it's been a very good year for the company. Your claims paid is well down on the last previous 3 years. It just seems to me a bit -- a disconnect between what we're looking at in the market and how you guys are behaving.