Helia Group Limited (HLI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Genworth Australia First Half 2022 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Paul O'Sullivan, Head of Investor Relations. Please go ahead.

Hello, and welcome to the First Half 2022 Results Briefing for Genworth Mortgage Insurance Australia. I'm Paul O'Sullivan, Head of Investor Relations. This morning, we will start with the presentation from our CEO, Pauline Blight-Johnston, who will provide an overview of the results. Our CFO, Michael Cant, will then go into more detail on the financial results, and Pauline will then wrap up with closing comments. At the end of the presentation, we will pass back to the moderator and take questions from investors and analysts. I'll now hand over to Pauline.

Thanks, Paul. Good morning, everyone, and thank you for joining us. Before I start today, I'd like to acknowledge the Cammeraygal people of the Eora Nation on this land I'm hosting our call today. I pay my respects to their elders past, present and emerging and to all Aboriginal and Torres Strait Islander peoples here today. Today, we're pleased to report that Genworth has continued to deliver strong underlying business performance over the first half of 2022, despite the impacts of unrealized mark-to-market investment losses weighing on the headline statutory profit results. We're pleased with the start of 2022 and that Genworth remains well positioned to continue to support Australians through the changing economic environment ahead. Our purpose at Genworth is to accelerate financial well-being through home ownership. We exist to help people buy homes. Even with the recent softening of housing prices in some markets, saving through deposits and buying a home has never been more out of reach for many Australians. Helping these people realize their dreams is why we come to work every day. This purpose represents an exciting business opportunity as well. As the need continues to grow, we are evolving our business offerings to find more and better ways to help people access the dream of homeownership. The strong profitability and capital position delivered over the half provide the foundation from which we can continue to deliver for Australia's lenders and borrowers as we enter a more challenging economic environment. We have the financial capacity to meet our promises, invest in our strategic agenda and operational improvement and to continue to return capital to shareholders through a wide range of possible future economic scenarios. I'll now turn to Slide 5 for an overview of the first half business performance. For the first half 2022, Genworth delivered strong underlying net profit after tax of $134 million, 76% higher than the first half of 2021, underpinned by very strong underwriting results of $173 million and net claims of negative $3 million. Statutory net profit after tax of $18.9 million was materially lower than underlying profit due to unrealized mark-to-market investment losses as a result of rising bond rates. Increased bond rates have also resulted in an increased running yield of 3% as at 30 June, which will have a positive impact on investment returns going forward. Michael will spend more time talking about the impact of the bond rate changes in our portfolio. Over the half, we saw a continuation of the exceptionally low claims environment, reflecting the strength in borrower finances that has been assisted by high savings levels through COVID, the strong labor market and, until recently, record low interest rates. As the economic environment changes, we expect this borrower strength, along with house price appreciation in recent years and the tightening of underwriting standards, to provide a buffer to delinquencies despite rising interest rates and declining house prices. Despite reduced new business volumes, net earned premium increased 27% to $217 million, benefiting from the strong gross written premiums over recent years and from high levels of cancellations. Over the half, we continued to deliver on our strategic agenda to enhance, evolve and extend our business to accelerate financial well-being through homeownership. Our borrower-centric approach to evolving the LMI proposition to better meet the needs of today's homebuyers is instrumental in securing 2 new exclusive contracts over the period: one with Bendigo Bank, including ME Bank and -- I'm sorry, one was Bendigo Bank, and the other was ME Bank in conjunction with renewing our exclusive relationship with BOQ. We were delighted to recently be awarded Australian Broker Magazine 2022 5-Star Mortgage Innovator Award and are pleased with the progress we're making with our strategic partner, OSQO, to bring alternative deposit funding products to market. Through all this, the business has remained financially very strong with a pro forma PCA ratio of 1.94x. This has allowed the Board to today declare a first half dividend payment of $0.12 per share and announced our intention to commence another $100 million on-market share buyback. Slides 6 and 7 depict key business results and the growing business momentum in graphical format for you to peruse in your own time. Let's now turn to Slide 8 for a closer look at the economic environment. Over the past 18 months, Genworth has benefited from unusually favorable economic conditions. However, we are beginning to see changes to the economic environment. Interest rates are expected to continue rising, putting negative pressure on dwelling value. Importantly, for Genworth, we enter this period following 2 years of very strong growth in dwelling values with a 26% increase in values over the 2 years to 30 June 2022. As a result, our portfolio is in a strong positive equity position. Also importantly, the labor force remains resilient with a historically low unemployment rate of 3.5%, record participation over 67% and consistent annual wage growth. Turning to Slide 9. Indications are that we're entering a period of dwelling price depreciation precipitated by the steep increases in interest rates over recent months. In this context, Slide 9 provides an interesting historical perspective on house prices in Australia. Australia's housing market is somewhat unique globally with periods of depreciation typically followed by strong recoveries rather than a long period of housing price weakness experienced by some other markets. Key contributing factors to this resilience are the primarily floating rate mortgage market and the high proportion of national wealth stored in housing, which together, result in interest rate changes flowing through the economy faster than in many other markets and hence, typically shorter cycles. As it takes many months and sometimes years for a loan to move from delinquency to claim, Genworth is primarily impacted where there is a contracted downturn in housing. As can be seen by the blue house price index line on the chart, periods of aggregate negative equity in Australia are typically fairly short, thereby reducing the financial impact of dwelling price depreciation on mortgage providers and insurers. Whilst this historical context does provide some comfort, nevertheless, Genworth has taken the opportunity over recent years to ensure it is well positioned for a weakening economy. Turning to Slide 10. Whilst we expect the economic environment over the coming years to be more difficult than we've seen in recent years, we are confident that Genworth is well positioned to navigate this period commencing from a robust starting point. Over the past decade, we've progressively tightened and refined underwriting standards as we have come to understand our portfolio and its experience in greater detail. This refinement has continued during 2021 and 2022 with a particular focus on positioning our portfolio for an environment of increasing interest rates. The portfolio has also benefited from strong dwelling price appreciation and household savings over the last 2 years. At present, only around 1.5% of our in-force portfolio has an effective LVR above 90%. And the Reserve Bank of Australia estimates that for owner-occupied variable loans, the median mortgage holder has a repayment buffer of approximately 21 months, and 75% of loans have a buffer of greater than 3 months. And of course, in addition to these external factors, we have remained cognizant of the possibility of this emerging economic situation in our reserving since the onset of COVID. Taken together, this means that whilst we expect claims to increase in their current levels, which is not a bad outcome as paying a reasonable level of claims is ultimately good for our business, the portfolio and business settings are well positioned for this change. Now turning to Slide 11 to discuss how we're progressing on our strategic priorities. Over the first half of 2022, we've continued to see progress on the delivery of our strategic agenda to enhance, evolve and extend our business as we create more avenues to help Australians buy homes and to diversify our revenue base. Particularly pleasing over the period has been seeing how our 3 strategic pillars are creating synergistic value with the customer solutions emerging from our evolve and extend pillars, key contributors to recent wins in our core LMI business. In the past 18 months, we've renewed over 80% of our premium base, including the renewal of 4 of the top 10 industry lenders in the past year. During the half, we were delighted to be selected as the exclusive LMI provider to Bendigo and Adelaide Bank. This outcome and the recent exclusive renewal with Bank of Queensland, now including ME Bank, demonstrate the continued building of positive momentum in our business. In addition to our customer wins, Genworth was recently announced as the winner of Australian Broker Magazine's 2022 5-Star Mortgage Innovator Award for our monthly premium and family assistance products. This recognition provides further evidence that we are successfully differentiating our LMI proposition in a way that is making a difference to our lender customers and their borrowers. Alongside our core LMI offering, we have remained focused on expanding our business to include a range of flexible homeownership solutions for the future. Earlier this year, at our full year results, we announced that we had entered into a strategic partnership with OSQO. Over the half, we have worked with OSQO to develop a deposit gap loan product for homebuyers, which supports cofunding by friends and family investors. We are on track to have a proof of concept this year and a product in market within 12 months. Our progress with OSQO is an important step forward for Genworth as we work to provide Australians with alternative pathways to homeownership. We have also been increasingly focused on how we can positively impact the key ESG factors relevant to our business and customers now and for the future. This year, we've seen Genworth's first Reconciliation Action Plan endorsed by Reconciliation Australia. We have committed to the development of a next zero carbon plan, and we have developed a new strategic framework for sustainability to help guide our business as we strive to deliver social, economic and environmental value through what we do and how we operate. Whilst we still have plenty to do in this space, I'm pleased with the progress we're making and looking forward to providing you with a more detailed update at the full year. Moving to Slide 12. As I mentioned earlier, our strong financial and capital position means that Genworth is able to both invest in the future of our business and deliver immediate value to shareholders through dividends and capital returns. Despite an active capital management program over the half, which included both a special dividend and a share buyback, the capital position of the business has strengthened, closing at 2.11x PCA. This morning, we've announced a new $100 million on-market buyback to commence in August. Genworth has also today declared a fully franked interim ordinary dividend of $0.12 per share. As we've previously indicated, our expectation is that we will be in a position to declare stable ordinary dividends with some type of progression over the medium term, and we will continue to seek opportunities to bring Genworth's capital position within the Board's target range of 1.4 to 1.6x PCA within the next 2 years. I'll now hand over to Genworth CFO, Michael Cant, who will provide more detail on our financial results.

Thank you, Pauline, and welcome to everyone on the call. Thank you very much for joining us today. I'd like to start on Slide 14 with the half year income statement. First half of 2022 saw a very strong underlying net profit, offset by significant losses on the investment portfolio. Gross written premium was down 35%, impacted by slowing industry volumes of high LVR lending. This fall in the top line GWP needs to be seen in the context of the historically high levels of GWP in 2020 and 2021. Net earned premium for the half grew by 27% due to the strong written premium in recent years, combined with continuing high levels of policy cancellations. The claims outcome for the half was exceptionally low. Total net claims incurred was negative $3 million, which reflected a very benign claims environment. Investment markets for the half were down with a substantial rise in bond rates. This led to sizable unrealized losses on the fixed interest portfolio and a total investment income of negative $142 million. Please turn to Slide 15 for a more granular view on the top line. New insurance written for the half was down 28%, largely reflecting a drop in industry lending volumes, particularly by higher LVR lending and first home buyers. This fall in new insurance flowed through to gross written premium. GWP was also negatively impacted by a lower mix of business in the greater than 90% LVR category, which has higher premium rates. Net earned premium was up 27%, benefiting from high cancellations and the very high GWP in 2020, which is now coming into the peak years of the earnings curve. As we've explained before, cancellations bring forward the release of unearned premium, and the contribution from this source was $60 million higher than in the first half of 2021. Comparisons with the first half of last year are also impacted by earnings curve changes in 2021. Turning to Slide 16. Net claims incurred for the half were negative $3 million. That is a credit to the P&L. This outcome was driven by low claims paid and a $15 million reduction in outstanding claim reserves. Paid claims and mortgages in position continued to remain very low. This was a function of both the favorable economic environment but also the COVID moratorium that lenders allowed on foreclosures. These moratoriums have now come to an end, and we do expect to see increases in both mortgages in position and claims paid in the coming periods. And these have been anticipated in our reserves. The average level of paid claims was well below historic levels, in part due to the strong house price gains, which has dampened the extent of any negative equity in the portfolio. Slide 17 has some further detail on the claims analysis. The overall delinquency rate has fallen to 0.51% with improvements across most parts of the portfolio. Closing delinquencies are at their lowest level since 2014. New delinquencies remain particularly subdued, given the favorable economic environment for most of the half year. Net aging, that is cures less aging, was a positive $55 million, and this reflects a strong labor market, healthy borrower finances and the impacts of strong house price appreciation in recent years. Over the course of the half year, the impact of changes in the actuarial reserving basis was relatively minor at $11 million, and this can be seen in the table on the other adjustments line. These changes in reserving basis include an allowance for the impact of potential future house price depreciation in the year ahead. If you can now please turn to Slide 18 on investment returns. Total investment income was negative $142 million, representing an investment return of minus 8% annualized. The big driver of the overall investment result is the unrealized losses of $162 million, mainly due to rising bond rates. Falling equity markets also contributed. While the rise in interest rates hurts the profit and loss in the short term, there is a longer-term positive impact on the profitability of the business, given the long-term nature of our liabilities. And this can be seen in the higher running yields, which have risen from 1% to 3% in the half. We typically hold our fixed interest assets to maturity, so the impact of the unrealized losses will unwind as the bonds mature over the coming years. Slide 19 looks in further detail at the impact of interest rates. As I've noted, the half year saw a dramatic rise in interest rates. And across the curve, rates were up approximately 2% for the half year. Clearly, this has caused significant mark-to-market losses on the portfolio for the half. On the flip side, higher rates had an offsetting impact on the value of the insurance liabilities, particularly noting that we adopt a matched investment portfolio that funds it back to the insurance liabilities. To understand the impact of changing interest rates, it is instructive to look at both the assets and the liabilities. The tables on the slide show the actual experience for the half year as well as a generic 50 basis point interest rate sensitivity. Due to the fact that the accounting liabilities are not discounted, changes in interest rates impact assets and not the liabilities and, as a consequence, create volatility in the profit and loss. However, our matched portfolio ensures much more stability in the capital position and the underlying economic value. Moving now from the income statement to the balance sheet on Slide 20. Deferred acquisition costs are $104 million, an increase of $16 million in the half, reflecting the capitalization of new DAC post the write-off of DAC in 2019. Unearned premium has decreased by $60 million or 4%, reflecting the fact that high cancellations exceeded the level of new business. Gearing remains low with interest-bearing liabilities comprised of $190 million 5-year floating rate notes. I'd now like to take a closer look at the investment portfolio on Slide 21. As we've previously outlined, the asset allocation varies between the technical funds backing the insurance liabilities and the capital in the shareholder funds. The technical funds are invested entirely in fixed interest assets which are matched to the liabilities with an average duration of 3.3 years. The shareholder funds have a higher risk/return profile with approximately 13% of funds invested in equities and infrastructure, and an additional $120 million investment in infrastructure is due to fund shortly. The shareholder fund portfolio also has a greater allocation to corporate credit securities to enhance overall returns. Finally, the fixed interest portfolio that backs the shareholder fund has a much shorter duration of only 0.7 year and is well positioned for a rising yield environment. If you could turn now to Slide 22, which summarizes the breakdown of the outstanding claims liability. The total outstanding claims liability of $464 million reduced by $16 million during the half year. The reduction in reserves was a function of both the low delinquencies and house price appreciation. As you can see on the chart, the outstanding claims liability has 3 main components: a reserve for reported delinquencies; a reserve for incurred but not reported claims; and thirdly, a reserve for future redelinquencies. The reserving basis was strengthened significantly in 2020 due to the introduction of a new redelinquency reserve as well as other assumption changes to cater for the potential economic impact of COVID. While things have evolved differently to original expectations, the changes made back in 2020 mean we are well reserved going into the economic period ahead. Since the onset of COVID, the average reserve per reported delinquency has been fairly steady at approximately $40,000, reflecting a degree of stability in the reserving basis. The fall in the absolute level of reserves in recent periods, including the half year just gone, is largely a function of the number of delinquencies reducing rather than the assumption changes in our base. In fact, the average reserve per reported delinquency increased 7% for the half due to mainly an allowance for future house price depreciation. Slide 23 shows our capital position, which remains strong. Regulatory capital base fell by $196 million in the half, reflecting our active capital management during the period. The APRA regulatory capital requirement is driven by the probable maximum loss, or PML, and the PML has reduced significantly in the 6 months due to a combination of high cancellations and portfolio seasoning. A key component of our regulatory capital requirement is $800 million offset we received for the reinsurance we have on the portfolio. The level of reinsurance has remained at the same $800 million quantum but as a percentage of the PML has increased to 50%. The resulting capital ratio is 2.11x PCA. This PCA ratio is before the completion of the $100 million on-market buyback that we announced this morning and the payment of the declared dividend. Together, these would reduce the ratio to 1.94x PCA on a pro forma basis. If you can now please turn to Slide 24. As Pauline has noted, despite the significant return of capital in the half, the PCA coverage ratio actually increased by 8 basis points. The PCA ratio benefited from the runoff in the -- from cancellations and seasoning of the in-force book, which together was greater than the capital strain from writing new business. This demonstrates that the business is generating large amounts of capital organically, and we do expect this dynamic to continue. The capital position remains well above the Board's target range even after the dividend and proposed buyback, highlighting scope for further ongoing capital management. And as previously noted, we are committed to getting back into our target capital range within a 2-year period. That largely concludes the update and overview of the results for the half year, and I now wanted to spend a little bit of time on a few key matters relating to the future, starting on Slide 24 -- 25, I'm sorry. Over the last 18 months, claims incurred have been exceptionally low. And clearly, this cannot continue forever. And while no one can forecast with certainty the level of future claims on lenders mortgage insurance, I do want to share some sensitivities. Economic conditions have changed significantly in the last 3 months. Economists are now forecasting official cash rates near 3% by year-end, house price falls of approximately 15% over the next 18 months but with unemployment remaining relatively low and under 4.5%. Under that economic scenario, we expect that claims incurred will return to long-term average levels from 2023. While rising interest rates and falling house prices will negatively impact claims in coming years, the magnitude is moderated by the house price appreciation of recent years, combined with relatively low unemployment. The slide also shows the sensitivity of claims to different economic variables using a 3-year sensitivity. We have previously shown similar sensitivity information in relation to the liabilities, but we are now also sharing the impact of these sensitivities on expected losses. The loss figures quoted in the table are cumulative 3-year impacts, so the average annual impact is 1/3 of the total share. Please also note that these sensitivities are incremental to the base case economic scenario I outlined on the slide. Please now turn to Slide 26, which has some more color on the unearned premium. As you can see on the chart, the unearned premium balance has grown strongly in recent years but with a drop of 4% in the last 6 months. The chart also -- the slide also highlights the unearned premium balances dominated by the last 3 years of business, which is a function of both the large volumes of premium written in 2020 and '21, combined with the shape of the earnings curve. The high GWP in recent years and the resulting growth in the unearned premium balance provide a good foundation for future revenue in coming years, acknowledging that there will be year-to-year variability due to the level of cancellations. Finally, I'd like to turn to Slide 27 and talk about the profitability by different book years and how this has changed over time. We have shared this analysis previously at our 2021 year-end results, and I wanted to provide an update to the most recent year. The chart on the top left shows the cumulative loss ratios by different book years, that is the ratio of cumulative claims incurred to date as a percentage of earned premium today. Because the earnings curve is intended to reflect the timing of when claims are incurred over the life of the policy, the cumulative loss ratios to date for each cohort should be indicative of the ultimate profitability. The bookings have been grouped in cohorts which have broadly similar loss experience. Book years 2008 and 2009 were very unprofitable with a loss ratio of approximately 75%. These cohorts had a material proportion of load off loans and were also significantly impacted by the GFC. LMI pricing was also well below what it is today. The cohort from 2010 to '14 with a loss ratio in the mid-30s was adversely impacted by the mining boom and bust in regional Queensland and WA. Other states have performed well. The mining claims took some time to play out and were a drag on incurred claims in our business up until approximately 2019. The more recent year -- book years from 2015 onwards are showing much better loss ratios, reflecting enhanced pricing, better underwriting quality, geographic mix and, to date, a lack of any major significant claim events. Loss ratios for 2021 and the first half of 2022 are also low but are not shown as they have not yet had sufficient time to develop. Another useful way to look at the different cohorts is the embedded profit in the existing book. The excess in unearned premium over the premium liabilities effectively represents the expected future profits from the current in-force portfolio, and the breakdown by cohorts again shows some interesting insights. The pre-2014 cohort had negligible unearned premium due to the premium having largely been earned today but will still have a small level of future claims. The cohorts from 2015 to 2019 has strong profitability, but much of it has already been earned. And the business written post 2019 has sizable profits, the majority of which are expected to emerge in the future. Profitability can vary significantly by book year, reflecting the many different factors that I outlined earlier. Over time, we expect that the runoff of the old cohorts and replacement by more profitable business written since 2015 can and is likely to lead to improving returns going forward. I'd now like to hand back to Pauline.

Thank you, Michael. So now moving on to Slide 29, bringing it all together. As we look to the future and the changing economic environment, we're confident that Genworth is well positioned. Despite slowing gross written premium, net earned premium is expected to remain strong over the remainder of the year with a full year 2022 guidance range of $375 million to $435 million. Net incurred claims are expected -- they're expected to begin to normalize in the second half of the year. However, it may take some time for economic changes to flow through to delinquencies. We expect second half claims to remain below historic averages. And as a result, full year '22 net incurred claims is expected to be in a range of $0 to $50 million. In respect with investment returns, movements in bond rates and hence, unrealized profits or losses are, of course, unpredictable over the short term. However, the current higher bond rates are expected to benefit our second half 2022 investment income due to increased running yields. Turning to the medium-term outlook on Slide 30. Moving forward, we anticipate the trends we expect to see over the second half of 2022 to continue into the medium term. As mentioned previously, the strong gross written premium and delivery of our strategic agenda should underpin net earned premium. And we expect that while claims will likely revert to longer-term levels, the business is well positioned to navigate this transition. Perhaps most importantly, all else equal, we expect ROE to improve over the coming years as we benefit from the runoff of low ROE book years, improved portfolio returns and our ongoing commitment to returning excess capital. Turning now to Slide 31. Those of you who are at our recent Investor Day will have seen this before, showing our outperformance in terms of shareholder returns since listing. But I can't stop talking to it again as I believe it's often missed by potential investors. Genworth has a proud history of delivering total shareholder return that reflects the embedded value of our business. This embedded value enables us to deliver top quartile shareholder returns whilst we reposition the business to take advantage of the untapped long-term opportunities. So bringing it together on Slide 32. In conclusion, Genworth is excited to be on the forefront of evolving LMI to better meet the needs of homebuyers today and for the future. We are energized by the diverse range of alternative homeownership solutions we are working on to deliver to help meet the growing needs in Australia, and we remain confident of the business opportunity that this will create. Its focus on evolving and extending our offering has already yielded benefits in securing additional exclusive LMI contracts. Over the coming periods, we look forward to supplementing our base LMI offering with alternatives such as the OSQO deposit funding solution. We're proud of the momentum we're building and are pleased that it has been achieved alongside the solid underlying financial results today, allowing us to continue to deliver on our commitment to effective capital management. We've had a strong start to 2022 and look forward to continuing to evolve and deliver for our customers, our people, Australia's aspiring homeowners and for you, our shareholders. On behalf of the Board and my fellow leaders, I would like to thank all the people at Genworth for joining us on this journey and making it your own. Today's results are a reflection of your unique contribution and passion for homeownership in Australia. And finally, thank you to all our shareholders for your ongoing support and commitment to Genworth because without you, nothing will be possible. And with that, I'll open up to any questions.

[Operator Instructions] Your first question comes from Andrew Lyons from Goldman Sachs.

Just a couple of questions for me. Firstly, just your FY '22 guidance for NEP at the midpoint implies second half NEP of about $190 million. I'm just wondering, just given the transparency you have around the NEP, given it's obviously a function of previous GWP, are you of the view that you'll be able to hold that sort of implied second half level into the first and second half of 2023? That's my first question. Maybe if you can answer that, and then I've got a few more.

Yes. Andrew, this is Michael. A couple of comments without sort of stepping into the 2023 territory. So a reasonable element of the net earned premium is quite stable from year-to-year. So the unwinding of the earnings curve is quite stable and predictable. The amount that's harder to -- and more volatile is the contribution from cancellations. And as we've said, that has been particularly elevated in the last 12 months. We do expect that to start to come off, and that is reflected in our guidance range. How quickly that comes off and what that means for 2023, I think it's a little early to speculate. But certainly, the forecast or the guidance that we've given for 2022 has an implicit level of cancellations coming back by the end of the year to a more normal level.

Okay. So just to be sure on that, like the cancellation, you would say your assumption on the NEP, I guess there is a range, it's fair. So is the range largely just, I guess, at one end, cancellations revert to sort of long run normal and at the other end, maybe hold somewhat above that close to where it was in the first half?

Yes. That's the synopsis.

Okay. That's great. And then just a second question, just again, off very low levels and still at very low levels, you -- we did see a small turning point half-over-half in your mortgage in position and in number of paid claims in an environment where unemployment has continued to fall, albeit house prices have rolled over. Is there anything that we should be reading into that, any sort of trends? Or is there a seasonal element to it that you can maybe just help us to understand what may have driven that sort of very small turning point?

Look, I would expect, Andrew, it is largely a function of the moratoriums coming off in the industry, yes. So there was virtually nothing going through there for a period because of the lenders placing the moratoriums and that sort of review. So we're expecting that will pick up in the next 6 months, but it didn't. But just through the time for things to take through, anything we see in the next 6 months is going to be much more a function of, yes, those moratoriums coming off than it is any deterioration in economic environment.

Okay. That's helpful. And then just one final very quick one and more just trying to sort of understand the business. But just on -- when you do have to foreclose on an account, can you maybe just help us understand how long on average does it take from a mortgage, say, going delinquent to your ultimate foreclosure and realization? And on average, what is the cost that -- I guess the nonnegative equity cost of doing that, i.e., accrued interest, real estate fees, legal fees, et cetera? How much on average, just as a rough rule, does it cost that have to foreclose on someone?

So I won't answer the second part of that question because that's -- clearly, some of that information is commercially sensitive, as you'd understand. The time frame, it's really -- at the shortest end, probably about just under a year, about 9 months as the shortest and more heading towards 21 months to 2 years at the longer end is -- from the time that someone strikes trouble. So it is quite a protracted period before there is a [ possibility ] of a decline.

Great. And the median would be about in between that? Or is it biased to one side or the other of that sort of 9 to 21 months?

It really -- it depends on a lot of [indiscernible] time. But coming back to sort of the interest impact, in a strong HPA environment, that's what I hope because the HPA is greater than the interest. The environment we're moving into with interest rates [ below ] HPA, not so much. That will -- that equation will change.

Your next question comes from Simon Fitzgerald from Jefferies.

Thanks for the additional disclosures around the sensitivities. That was very interesting, particularly the part around interest rates as well. I was going to ask just very briefly, do you have any sort of thoughts about sort of how much is fixed versus variable in terms of some of these loans that have been taken out recently and when, say, some of these larger cohorts are coming off that sort of fixed term and what that might mean in terms of their ability and worthiness as a borrower? And I guess I'd also ask the same question with sort of those that come off interest only as well.

Yes. So Simon, we haven't disclosed those stats in our portfolio, but I wouldn't expect that our portfolio is going to look materially different to the industry as a whole. And I think there's been some fairly good disclosure from the banks but also some analysis from the Reserve Bank on proportions of fixed and variable at the time and time periods in which they would revert back to variable. So again, I think that's probably a reasonable proxy for what we would look like as well.

Yes. So then what about interest only, which you do disclose, in terms of how much is interest only in principal and interest? Do you have any sort of thoughts about those borrowers that are coming off interest-only components and then having to pay principal in the next sort of couple of years, like what that might mean for their ability to repay?

Yes. I mean, our interest-only component in our portfolio, this has obviously been reducing over time. And I guess, anecdotally, has it transitioned from interest earning to principal and interest caused the significant factor in our losses? No, it's not something that's really featured significantly in the way we manage our portfolio.

Okay. That's very helpful. And then my second question, we've talked before and you've mentioned a lot about sort of post COVID reaching [ its ] point and just in terms of sort of various analysis on that. I'm interested to know what exposures you might have to the flood regions. But what happens also in a case where, say, a borrower may have changed their insurance, home and content, significantly? So I'm thinking about those that may have opted out of flood insurance, for example. What -- maybe you can touch on if you do have any exposures there. But I'm interested to know like whether there could be an increased severity there in terms of homes being sold at a really steep discount or indeed ones that are unable to be sold, like what might happen in that scenario.

So we've been looking very closely at flood as we've been looking at climate risk. So we've done a lot of work and looked [ over ] a bit and have worked with our lenders on very specific location-based climate risks. And one of those is, of course, flood-based. Now remembering that as a first-order impact, if the property is damaged, we don't cover that. Any claim that we pay is discounted by the amount of property damage. So assuming that the property is still at a reasonable level of inhabitable, et cetera. So it's really almost the land value in many ways that we are covering. Now clearly, as -- so that first-order issue, it's not ours. The second-order issue, of course, is the whole area has become less attractive to live in, that does increase -- decrease the property values and does flow through to us, which is why we've been focusing on climate risk, not just for flood areas but also coal mining towns, et cetera, to look at what our long-term exposure might look like. And that's what we've been doing with our lenders. We've been -- we work very closely with them following an event around what's coming through the new business, how they're managing the claims that are coming through, how they're managing the stress in the local area and have been -- part of the refinement some of our setting has been the climate risk issues over recent years.