Helia Group Limited (HLI) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to the Genworth Mortgage Insurance Australia's First Half 2021 Earnings Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Paul O’Sullivan, Head of Investor Relations for Genworth Mortgage Insurance Australia. Thank you. Please go ahead.

Hello, and welcome to the first half 2021 financial results briefing for Genworth Mortgage Insurance Australia. I am Paul O’Sullivan, Head of Investor Relations. This morning, we will start with a presentation from our CEO, Pauline Blight-Johnston, who'll provide an overview of the results. Our CFO, Michael Bencsik, will go into more detail on the financials and Pauline will then wrap up with 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. Good to be here with you as we reported a strong first half 2021 results with a return to profit, ongoing top line volume growth and the resumption of dividends. Over the half, the business benefited from the improved economy, housing market appreciation and low interest rates. Our strong performance was also underpinned by the operational and reserving initiatives we implemented last year that are enabling us to respond more efficiently and strategically to the evolving needs of our lender customers and their borrowers. The increasing challenge in housing affordability in Australia continues to drive demand for solutions to help individuals bridge the deposit gap and get on to the property ladder. Through our traditional LMI product as well as a strategic focus on evolving this offering to better meet the desires of today's homebuyers, the company is well positioned to help meet this demand and benefit from the continued strength in the housing market. Of course, the latest lockdowns will have some impact on the economy over the coming months. We have been pleased to see the resilience of the economy and its ability to recover from prior lockdowns due to its strong underlying momentum and hope this pattern will continue as the states move through their reopening phases over the coming months. So now let's turn to Slide 5 to go through the results. On Slide 5. For the first half of 2021, Genworth delivered an improved underwriting result of $88 million. Underlying net profit after tax was $76 million, with statutory net profit after tax of $59 million, which includes the impact of unrealized mark-to-market investment losses from a rise in government bond rates. Over the half, we achieved ongoing top line volume growth underpinned by strong housing market performance and above system growth from our lender customers. New insurance written during the first half of 2021 increased 14.7% to $15.5 billion compared to the same period in 2020. Gross written premium increased 21.1% to $290 million and net earned premium increased 13.3% to $171 million. This strong new business flow will underpin earnings growth for the company over the coming years. During the first half, reported delinquencies and paid plans remain subdued as a result of strong dwelling price appreciation and the government and lender support programs that were in place to assist borrowers up until March 2021. Of course, it remains to be seen how the latest lockdowns will affect the ongoing economic recovery and hence Genworth's claims experience over the coming periods. We welcome the new borrower support programs introduced by vendors, noting that they will further extend the duration of the subdued delinquency-related behavior that we've been experiencing. We believe these programs are ultimately positive for our client experience. However, they will extend the time frame over which we will obtain clarity on the ultimate claims outcome. Importantly, the company remains in a strong operational and financial position. We are well placed to withstand a wide range of future claims outcomes and have the capacity to respond to changing circumstances and opportunities. As of the 30th of June 2021, Genworth's PCA coverage ratio on a Level 2 basis was 1.74x, which was above the top end of the Board's target range of 1.32 to 1.44x, representing surplus capital of $320 million above the top of the range. This strong capital position and the improvement in our earnings have led to the Board's decision to declare an unfranked interim ordinary dividend of $0.05 per share. I'd like to touch briefly on the economy now on Slide 6. Economic conditions continued to improve through the first half with a low interest rate environment, providing ongoing stimulus to housing market, and unemployment improving to pre-COVID-19 levels supported by significant fiscal and monetary support. As of June 2021, national dwelling values were 12.4% above the previous peak of April 2020 and the unemployment rate is 4.9%. Improved GDP results have been reported in the most recent data published to the 31st of March 2021, and housing savings have significantly increased over the same period. These trends are all positive for our business. Against this, the recent COVID-19 outbreak and the reemergence of lockdowns demonstrates that the speed and shape of the economic recovery is far from certain. It largely depends on the effective management of health outcomes across the nation, including the speed of the vaccine rollout. We are, however, encouraged that the Australian economy has shown extraordinary resilience since the onset of pandemic and has demonstrated an ability to recover for the short-term shock created by lockdowns. I'll turn now to Slide 7 to talk about Genworth's claims experienced to date. You'll recall that the initial government support and lender repayment deferrals ended in March 2021. The vast majority of loans that were on those repayment deferrals prior to March have resumed repayments, and we're working closely with lender customers to understand the performance of the remaining loans that have been restructured. To date, we've seen large unusual levels of reported delinquencies. These, accompanied by the ongoing moratoriums on owner-occupied foreclosures as well as strong economic recovery, have resulted in lower than usual paid claims, as you can see in the chart on the left-hand side. We compensated for these impacts to the $23 million incurred but not reported reserve increase in the first quarter of 2021. In the second quarter of this year, we reviewed the earnings curve to incorporate the more favorable loss experience and improved economic outlook. Based on the advice of Genworth's appointed actuary, the earnings curve has been adjusted to improve the alignment of premium recognition with net claims incurred by lengthening the average duration of revenue recognition. You can see this in the chart on the right-hand side. The earnings curve adjustment is effective from the 1st of April 2021 and resulted in a reduction in first half 2021 net earned premium of $12 million. Turning now to Slide 8, where I'll talk about our strong capital position and capital management. As at the 30th of June 2021, Genworth's PCA coverage ratio was 1.74x on a Level 2 basis. This was above the top end of the Board's target range of 1.32 to 1.44x and represented surplus capital of $320 million above the top end of the range. The chart on the left provides a PCA ratio walk showing the key movements in our capital position over the half. You can say that the capital required to support the ongoing new business growth is slightly less than the capital being released on back book. This demonstrates the ability of the business to self-support its growth. In addition, the PCA ratio has improved as a result of the statutory NPAT and economic assumption changes reflecting the improvement in the economy over the half. Turning to the chart on the right on capital management. This provides some recent historical context regarding the payment of dividend. Prior to COVID-19, Genworth regularly paid our ordinary dividend, targeting a dividend payout ratio of between 50% to 80% of underlying NPAT. Consisting on the ASX in 2014, Genworth has returned over 100% of after-tax profit by way of ordinary special dividends to shareholders. The company has also implemented other capital management initiatives, including share buybacks and capital reduction. In 2020, due to the uncertain economic outlook, regulatory guidance from APRA and the company's statutory net loss, the Board concluded it would preserve capital and not pay an interim or final ordinary dividend. As noted earlier, the improvement in earnings and increased confidence regarding the [ eventual ] impact of COVID-19 on the company's capital position, have allowed the Board to resume dividend payments. For the first half 2021, the Board has approved an unfranked interim ordinary dividend of $0.05 per share. This is payable to shareholders registered as of the 18th of August 2021. Due to the prior year statutory loss in 2020 and the company's current franking position, the interim ordinary dividend will be unfranked. The company is committed to responsibly managing its capital. And while there's still some uncertainty around how COVID-19 will ultimately play out in 2021, it's pleasing that we've been able to resume dividend payments during this half year. Moving now to Slide 9. I want to touch briefly on the separation of the company from our former majority shareholder, Genworth Financial Inc. or GFI. On the 3rd of March 2021, GFI sold its entire 52% shareholding in the company. As a result, key service agreements between Genworth Australia and GFI will terminate over time. We're working through the transition of relevant services to bring them in-house or to local service providers and a separation program is progressing on schedule. The separation has provided a good opportunity to review and simplify some service areas, such accounting and human resource information system. We expect the main transition activities will be completed by the 31st of March 2022, with some rebranding actions completing later in 2022. The costs are expected to be in the range of $15 million to $19 million, with the bulk expensed in 2021, including approximately $1 million that's already been expensed in the first half. Moving now to Slide 10. Genworth has relationships with over 50 lender customers, including banks, building societies, credit unions, and nonbank mortgage originators. Throughout the half, whilst managing large volumes of new business, we've maintained excellent standards of customer service. At the end of the first half 2021, Genworth successfully renewed its contract with a large nonmajor bank customer for the provision of LMI on an exclusive basis for a further 3-year period to 2024. Importantly, ongoing customer renewals continue to exceed our ROE benchmarks. We welcome the opportunity to submit a proposal to CBA during the coming months to extend our arrangements for the supply of LMI beyond 2022, building on the strong foundation of a long-standing relationship. In addition, we're continuing to progress our customer-centric sustained growth strategy under the 3 pillars you can see on the slide, enhance, evolve and extend, that will enable us to take advantage of our growing markets. We've implemented a range of initiatives to improve efficiency and competitiveness. These have been primarily around automation and digital reporting. After a successful pilot of the monthly premium LMI product in late 2020, this new product is now in market and available to 2 lenders. We're in advanced discussion to other lender customers to extend the rollout of this offering further. We're also exploring how we must play a greater role in helping Australian to access homeownership, including evaluating partnership opportunities to offer new ways of bridging the deposit gap. The strategy work completed to date is already enhancing our offerings to our lender customers through a greater alignment to their strategic goals and improve borrower outcomes and the feedback has been very positive. On that note, I'll now hand over to Michael to talk about the first half financial results in more detail.

Thank you, Pauline, and welcome to everyone on the call, and thank you for joining us today. I will start on Slide 12 with the income statement. During first half 2021, Genworth reported a $59 million statutory net profit after tax and an underlying net profit after tax of $76 million. Statutory NPAT was impacted by unrealized mark-to-market investment losses from a rise in government bond rates during the half. Gross written premium rose 21.1% to $290 million over the first half of 2020 from higher LMI flow volumes across our lender customers with consistent underwriting quality. Net earned premium in first half 2021 increased 13.3% to $171 million over the first half 2020, continuing the stronger growth in gross written premium that began over the second half of 2020. This strong new business flow will underpin earnings growth in future years. The change to the earnings curve in second quarter 2021 reduced net earned premium by $12 million in first half 2021. This adjustment has the effect of lengthening the average duration of the period of premium revenue recognition to align with the [ path of ] net claims incurred, reflecting the slower emergence of new delinquencies noted earlier. Net claims incurred was $49 million or 51% lower than compared to $101 million in first half 2020. During the half year, the government and lender support programs continue to interrupt the typical incidence patterns of delinquency behavior and claims with lower loss experience, high levels of cures and reduced aging, including as a result of moratoriums in placing properties into possession. I will talk more about loss performance on Slide 14. And finally, investment income earned on typical and shareholders' funds the first half of 2021 was a small net gain of $1 million compared to $50 million in the first half of 2020. Moving on to Slide 13. We have provided some further detail on new insurance written and gross written premium performance. New business volumes and claims experience continue to be supported by the low interest rate environment providing stimulus to housing markets to rising national dwelling values and strong consumer sentiment. New insurance written of $15.5 billion, increased 14.7% over first half 2020, as owner-occupiers and first-time buyers have taken advantage of the low interest rates to enter the housing market. Genworth's lender customers continue to achieve above-market lending growth rates. These high business volumes were the main driver of our top line growth and will drive growth in net earned premium over the medium term. The key features of our loss performance are shown on Slide 14. As we have mentioned, our claims experience during the half continued to be impacted by government stimulus packages and the restructuring by lenders of home loans that have been on repayment deferral prior to 31 March 2021. Whilst the majority of these loans have resumed repayments, there remains a portion of the remaining loans that have been restructured or continue in arrears. Net claims incurred was $49 million in the first half 2021, down 51.2% in the first half of 2020, reflecting lower levels of new reported delinquencies and aging as well as high levels of cures. The reported first half 2021 loss ratio of 28.9% reflects both these trends as well as the benefit of strong house price appreciation over the half year and improving economic conditions. We saw lower paid claims in first half 2021 of 325 claims due to the ongoing legal moratorium on repossessions as well as improved house price appreciation. During first half 2021, the average paid claim fell to $75,000 compared to $95,000 in the first half 2020. This is due to an increased proportion of borrower sales and house price appreciation, both of which are helping generally reduce claim sizes. In terms of reserving, in first quarter 2021, we had increased reserves by $23 million, including an amount of incurred but not yet reported reserves of $22 million to compensate for the low levels of reported delinquencies and paid claims noted earlier. There was a small increase in reserves in second quarter 2021 of $10 million. Looking at the second table on this slide, you can see that the lower value of new delinquencies for the first half of 2021 compared to first half 2020. It is still too soon to have seen much impact from the expiry of the repayment deferrals as at 31 March 2021. The cures line represents the release from reserves of the delinquencies that are naturally cured being $85 million in the first half 2021 compared to $69 million in first half 2020. This reflects the improved economy, house price appreciation and new support measures. Aging of $35 million represents the natural increase in reserves for delinquencies which remain on our books over the year. Finally, the other adjustments line of $30 million included such items as COVID-19, actuarial adjustments relating to policies affected by moratoriums, IBNR for repayment deferrals and an allowance for cure policies reentering arrears. On the bottom table of this slide, you can see that the key movements in the outstanding claims reserve. As of first half 2021, the outstanding claims reserves was $567 million compared to $399 million in first half 2020. The outstanding claims reserve comprises both reported delinquencies, largely 90-day arrears reported by lenders and IBNR reserves were unreported or sub 90-day arrears, in addition to an 18% risk margin we hold on both these reserve levels. We have provided detail on the delinquency rate and trends in the supplementary slides, specifically on Slide 26. The delinquency rate has been relatively flat at 60 basis points in first half 2021 compared to 62 basis points in first half 2020. On to Slide 15 and our investment performance over this half. Investment income earned on technical and shareholders' funds for the first half 2021 was a net gain of $1 million compared to $50 million in first half 2020, which experienced realized gains due to falling bond rates. It was really a tale of 2 quarters. In first quarter 2021, there was a loss of $28 million due primarily to higher unrealized losses on government bonds from an increase in bond rates during that quarter. These losses were partially reversed in the second quarter as bond rates reduced, resulting in unrealized gains for that quarter of $15 million. Our annualized investment return for this half was 0.1% compared to 3.1% for the first half 2020, reflecting the unrealized losses and that investment returns continue to be pressured by the low interest rate environment. Between 31 December 2020 and 30 June 2021, the running yield of the investment portfolio improved from 50 basis points to 70 basis points, net of fees, reflecting the increase in government bond rates and higher exposure to corporate bonds and equities to improve yield. Slide 16 highlights the continued strength of our balance sheet. The asset side of the balance sheet consisted of a $3.6 billion cash and investment portfolio. The increased assets from second half 2020 reflects the strong new business and the lower claims paid. The cash balance tends to fluctuate in line with the timing of both investment settlements and liquidity management activities. In terms of liabilities, the movement in payables is due to the renewal of our reinsurance program on the 1st of January 2021, and the timing of investment trade settlements. Our outstanding claims reserves were $567 million. This is higher than usual due to the reserving that has built up over the past 12 months to compensate for the reduced incidence of claims payments as a result of the repayment deferrals. As of 30 June 2021, we have retained over $1.5 billion of unearned premium on our balance sheet, which we will gradually earn over future periods. On the 1st of January 2021, we renewed our $800 million reinsurance program, which is structured on a paid claims basis for policies in force plus 2 additional years of new insurance written. It is our investment portfolio plus our potential reinsurance recoveries are essentially what is available to meet our claims paying obligations to our policyholders, providing us with over $4.4 billion of claims paying resources. Turning to Slide 17. Genworth retains a well-diversified cash and investment portfolio with an average maturity of 4.2 years and an average duration of 2.4 years, which excludes equities and derivatives. During the half, we reduced our exposure to Commonwealth government bonds and increased our exposure to corporate bonds and equities to improve yield. 94% of this portfolio is now held in cash and investment-grade bonds. Turning to Slide 18 shows that our regulatory capital position remains strong. As of 30 June 2021, Genworth's PCA coverage ratio on a Level 2 basis of 1.74x was above the top end of the Board's target range of 1.32 to 1.44x. This represented a surplus capital of $321 million, above the top end of the range. The reduction in net premiums liability deduction reflected the improved economic outlook. The movement in asset risk charge during the half reflected the increase in our exposure to corporate bonds and equities. The chart on the right hand of this slide shows the trend increase in probable maximum loss, which increased slightly in first half 2021 to $1.77 billion. This reflects the higher volume of new business being written on our front book and to a smaller extent, a higher LVR mix business mix being written in the 80% to 95% -- 90% LVR band, meaning the amount of capital we are required to hold is gradually increasing, but this is being supported by the capital being released by the in-force runoff in the back book. With that, I'll hand now back to Pauline to wrap up the presentation.

Thanks, Michael. Turning now to Slide 20. Genworth has reported a strong first half result. The growth in written premiums in the half will underpin our earnings over the coming years. We have extensive underwriting experience through a range of economic cycles, and we'll continue to focus on strong underwriting quality and profitable customer renewal. Over the coming periods, we'll have increasing visibility over the ultimate claims outcomes from the COVID-19 pandemic. This visibility will gradually improve over the second half of 2021 and into 2022, although we note it has been delayed by the latest round of mortgage repayment deferrals on offer. Importantly, Genworth has a capital strength and operational resilience that means we remain well positioned to withstand a wide range of future claims outcomes. We're pleased to have been able to resume dividend payments in this half, and we'll continue to focus on improving returns to shareholders. We'll continue to review the appropriate level of capital for the company to hold as clarity emerges regarding the likely ultimate capital implications of the pandemic and to actively manage our capital resources. The operational and strategic initiatives that we implemented in 2020 have set the business up to benefit from the ongoing demand support to achieve home ownership in a market where it is becoming increasingly difficult. We will continue to partner with our lender customers to provide support to home buyers who need help to bridge the deposit gap as well as to explore partnership opportunities with others looking to solve this problem in new ways. Our developing business strategy will set us up to take advantage of the opportunities to achieve sustainable growth over the years ahead as we help more Australians to build financial security through homeownership. And with that, I'll open up to any questions we have today.

[Operator Instructions] Our first question today comes from the line of Andrew Lyons from Goldman Sachs.

Just 2 questions, if I may. Just firstly, you've noted that claims activity is expected to normalize after additional deferral period is complete. Just in light of your reserve build over the past 12 months, can you perhaps help us to understand what that might mean for your P&L claims expense. So I then got a second question.

I guess the simple answer to the question is that if that experience that we see over the next -- it probably takes 12 months or more from now to emerge if that comes through as we expect, then the reserves that we put aside, we'll do what we need to cover that. And so money will move out of reserves into claims pay, with little impact on the P&L. If those claims emerge at a lower level than we expect that we have reserved for -- somebody's not on mute and typing. If those claims emerge at a lower level than we've reserved for, then clearly, the reserve releases will be greater than what gets expensed to claims and have a positive impact on P&L and vice versa, if the claims emerge at a higher level than we've reserved for, then the release of reserves won't be sufficient to meet the claim payments and it will have a negative impact on P&L. But that will all come through over the next probably 2 years.

Great. And just a second question. You've noted the company's capital position remains well above the top end of the target range. And I think you said it will be optimized as a future capital requirements become clearer. Can you perhaps talk about what those future capital requirements might look like? And specific to the CBA contract, if that was to be lost, how quickly might the capital requirements of that contract be returned to shareholders?

So the first piece of clarity we're looking for on capital requirement is, of course, just how those claims pay out for COVID-19. So as we get more confidence each period on how those claims are looking, that will give us better visibility of how much capital we ultimately need and how much is available for other things. The second, I guess, would be any strategic investment required to make the most of the opportunity in front of us to be -- the third, of course, is then the pace of the [ runoff ] of the existing book. As we've noted this period, the [ runoff ] of the existing book generates pretty significant capital anyway that can provide a fair [ growth ] flexibility. If we were to lose any one of our large customers, that will, of course, increase the [ runoff ] of the capital of the existing book, but it's not an immediate impact. It runs off over the life of the business running off. So it's not a one-off windfall.

And our next question comes from the line of Andrew Buncombe from Macquarie.

Two from me, please. Just the first one. Maybe if you can talk about your updated assumptions for unemployment and house prices and maybe how they've changed in the last quarter. I'm just trying to understand, is there still a buffer above the current rates?

Yes. We haven't disclosed our assumptions. It's not something we normally disclose. Throughout the height of the pandemic, we did disclose, we thought it was important to provide some more visibility. But we've returned to a normal level of disclosure around that. What I would say is that the assumptions -- in setting our assumptions, we take account of the most recent economic data. So they've been updated by what we've seen as of the end of June.

Okay. And then my other question was just maybe if you can give us an update on your expected timing for the CBA tender. That would be great.

We expect this to play out over the second half of the year, and we'll update you as we know more.

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