Helia Group Limited (HLI) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to the Helia Group Limited Full Year 2022 Financial Results Conference Call. [Operator Instructions] Please realize 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 2022 financial results briefing for Helia Group. I'm Paul O'Sullivan, Head of Investor Relations. This morning, we will start with a 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 to take questions from investors and analysts. I'll now hand over to Pauline.

Thank you, Paul. Good morning, everyone, and thank you for joining us this morning. Before I start, I'd like to acknowledge the Cammeraygal people of the Eora Nation on this land we are 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 are pleased to report another strong financial results for Helia in 2022, driven by a continuing low claims environment and high net earned premiums. These results are the culmination of a year of significant progress right across the business. Over the past year Helia delivered against our purpose of helping Australians to accelerate financial well-being through homeownership, helping over 69,000 people into homes and perhaps even more importantly, helping 8,000 families to stay in their homes during times of hardship. Our focus on supporting the needs of homebuyers is resonating with customers as we continue to work alongside them to develop solutions to help Australians own property and live better lives as a result. This work is also delivering for our business and our shareholders, helping us to achieve a 100% customer retention rate in 2022 as well as winning 2 new exclusive customer relationships with BOQ and Bendigo and Adelaide Bank. Perhaps most visibly, we're now operating under a new name and a new brand that is more representative of our ambitions. Our new name, Helia is inspired by the sun. It reflects who we are and how we use our expertise, experience and understanding to show people possibilities, to show the light on solutions and to create brighter outcomes. Building on our proud heritage of helping Australians achieve the dream of homeownership, just as we've been doing for more than 55 years and driven by our purpose to accelerate financial well-being now and for the future. Particularly pleasingly, we've achieved all of this whilst delivering strong financial results and returns for our shareholders, demonstrating the business momentum we are building at Helia. I'll now turn to Slide 5 to walk through Helia's 2022 financial and business highlights. In 2022, Helia delivered a strong underlying net profit after tax of $288 million, 21% higher than 2021, underpinned by a very strong underwriting result of $362 million. Statutory net profit after tax of $187 million was materially lower than underlying profit due to unrealized mark-to-market investment losses. The 2022 result had 3 key notable features. Firstly, net claims incurred of negative $35 million due to an exceptionally low claims environment. Secondly, significant growth in earned premiums despite reduced new business volumes as a result of strong new business in 2020 and 2021 as well as an unusually high level of policy cancellations. And thirdly, higher bond rates, which led to the divergence between underlying and statutory profit. In 2022, we continued to deliver on our strategic agenda to enhance, evolve and extend our business to accelerate financial well-being through homeownership. We continue to see the benefits of our investment in better understanding the needs of our customers and their borrowers, retaining all customers and securing 2 new exclusive customer relationships. And in the second half, we announced a new investment in household capital to help people stay in their homes whilst funding their retirement and completed the rebranding of the business to Helia, the final step in our separation from Genworth Financial. Over the year, we've continued to demonstrate a strong and resilient capital position, positioning the business well to navigate the changing economic environment and to continue to deliver returns to shareholders. This capital strength has allowed the Board to declare a fully franked dividend of $0.14 per share and a fully franked special dividend of $0.27 per share, taking total 2022 dividend to $0.53 per share. It has also enabled the return of capital via on-market share buyback totaling $181 million over the year and we are pleased to announce today a further on-market buyback of up to $100 million. The key performance measures on Slides 6 and 7 depict these results in graphical format. In particular, I'd call your attention to the underlying return on equity chart on Slide 6 and the capital management chart on Slide 7, which first demonstrate the growing momentum in the business and the resulting improvement in shareholder returns. Let's turn now to Slide 8 for a closer look at the economic environment. Over recent years, Helia has benefited from unusually favorable economic conditions. However, it won't escape anyone's attention that the economic environment is changing. Interest rates have risen sharply from their historical lows and are approaching previous serviceability floors. And of course, rates are still expected to rise further. This has led to a fall in house prices with National Home Dwelling values falling 5.3% over 2022. In this environment, the resilience of the labor force has been encouraging. Unemployment is near historical lows at 3.5% in December with participation rates near all-time highs. As the economy slows, unemployment levels are expected to modestly increase. Our expectation is that these continued economic pressures will lead to increased claims over the course of 2023. The business is well-prepared for this changing backdrop, and Michael will go into more detail regarding this later in the call. Turning now to Slide 9, which provides a closer look at Helia's portfolio. Higher interest rates dampened the demand for credit and hence growth in new insurance written and gross written premium for Helia during 2022. First homebuyer demand continued its fall during the year as falling dwelling values impacted sentiment and rising interest rates impacted affordability. New housing loan commitments in 2022 was 7% below the 2021 and perhaps more relevantly for Helia high LVR lending fell 19% across the industry. The contraction in high LVR credit growth, together with the impact of the expanded federal government first time guarantee scheme, contributed to a decrease in gross written premium of 42% year-on-year from an extraordinarily high volume year in 2021. We're working closely with our lender customers to look for business growth opportunities in 2023 as the house price cycle is expected to bottom. Turning now to Slide 10, which provides an overview of industry refinancing activity. Whilst written premium was down in 2022, net earned premium was up due to a combination of previous book year growth and high levels of cancellations. Policy cancellations are economic value accretive for Helia and under current accounting standards also bring forward revenue recognition to the current year. A core focus of all industry participants is the scheduled roll-off of fixed interest rates over the course of 2023 and to a lesser extent, in 2024. This is expected to provide a further catalyst for refinancing cancellations, whilst also generating some level of increase in delinquencies. Helia's portfolio is well-positioned to manage these forces as shown on Slide 11, which we'll turn to now. Helia's portfolio is well seasoned and has significant levels of positive equity across book years with an average effective LVR of 48%. All book years have benefited from rising dwelling value since origination with the exception of 2022, which accounts for 7% of our in-force book. Whilst we expect the economic environment over the coming years is likely to be more difficult than we've seen in recent years, we are confident that Helia is well-positioned to navigate this period commencing from a robust starting point. Over the past decade, we have progressively tightened and refined underwriting standards. This refinement has continued during 2021 and 2022 with a particular focus on positioning our portfolio for an environment of rising rates. In addition, we remain cognizant of the risk to the economy in our reserving since the onset of COVID, ensuring we have the financial resources to withstand a wide range of possible economic outcomes. Now turning to Slide 12. I'm pleased to share with you the progress we've made on the delivery of our strategic agenda. Our focus on enhancing the existing franchise continues to pay dividends as we successfully retained all customers that came up for renewal during 2022, accounting for 73% of our premium income. In addition, as we advised at the first half, we converted 2 top 10 members that were previously shared with another provider to exclusive relationships, reinforcing our position as the leading provider of LMI in Australia. At the same time, we've continued to modernize our core technology, including the introduction of the new underwriting system and improved lender connectivity. We've also invested in our onboarding capabilities as we position the business to win new customers in the coming years. We continue to focus on product evolution as we work with lenders to integrate new product offerings into their existing IT and infrastructure. We remain committed to delivering more choice and options for borrowers, noting that take-up of these enhancements is likely to take time. Our monthly premium product is in market with 4 lenders, Family Assistance is in market with 11 lenders and we were pleased to introduce a new self-managed super fund offering to the market in December. All of this has contributed to an increase in Helia's net promoter score for the fourth consecutive year to an impressive plus 77%. In the second half, we announced a new partnership and investment in Household Capital, adding to our existing relationships with Tic:Toc and OSQO. These partnerships are intended to diversify our revenue base over time and contribute to medium-term growth as well as delivering holistically on our purpose to accelerate financial well-being through homeownership. Additionally, conscious of our opportunity and obligation to make a positive contribution to the society of which we're a part, during the year, we revised our approach to sustainability as outlined on Slide 13. In formulating our refreshed approach to sustainability, we've deliberately focused our efforts on those areas where Helia can have the greatest impact. Our 3 new sustainability pillars of driving financial well-being and housing accessibility, enhancing climate resilience and good corporate citizenship, set the framework for our sustainability goals, priorities and reporting. They capture our commitment to important ESG risks and opportunities and will guide our business in setting sustainability initiatives and targets for the future. Moving to Slide 14, we'll now look at capital management. Our strong financial and capital position enables Helia to both invest in the future of the business and to deliver immediate value to shareholders through dividends and capital returns. During 2022, Helia returned $143 million of capital to shareholders by dividends and bought back $181 million of shares through on-market buybacks. Despite this active capital management program, strong profitability and high levels of cancellations, so the PCA coverage ratio rise to 2.22x as of December, well above the Board's target operating range of 1.4 to 1.6x. In recognition of this strong financial outcome this morning, the Helia Board declared a fully franked ordinary dividend of $0.14 per share and a fully franked special dividend of $0.27 per share, taking total dividends in respect of 2022 to $0.53 per share. We are also announcing today a new on-market share buyback of up to $100 million to commence in March. We previously indicated that our aim was to seek opportunities to bring Helia's capital position to within the Board's targeted range of 1.4 to 1.6x PCA within 2 years. Given the strong profitability and capital generation over 2022, our current expectation is to be back within the Board target range by the end of 2024 post the payment of declared dividends. I'll now hand over to Helia's CFO, Michael Cant, who will provide more detail on our financial results.

Thank you, Pauline, and welcome to everybody on the call. Thank you very much for joining us today. I'm going to start on Slide 16 with the income statement. Underlying net profit of $288 million was a very strong result. The statutory profit was also healthy, but below underlying profit due to unrealized losses on the investment portfolio. The drivers of these full year results were very similar to those in the first half. Gross written premium was well down, impacted by slowing industry volumes, particularly for high LVR lending. Net earned premium grew by 15%, mainly due to continuing high levels of policy cancellations. The claims outcome for the year was again exceptionally low and reflected a very benign claims environment. Investment income was negative $85 million due to sizable unrealized losses on the bond portfolio from rising interest rates in the first half of the year. Slide 17 has some further analysis on the top line. New insurance written for the year was down 36%, largely reflecting a drop in industry new lending volumes, particularly for high LVR lending. The Federal Government's First Home Loan Deposit Scheme has also had a negative impact on the volume of LMI written. The fall in new insurance flowed through to gross written premium. GWP was also negatively -- slightly negatively impacted by a lower mix of business in the high above 90% LVR category and reduced premium rates for a few customers. Net earned premium was up 15%, as I said before, benefiting from high cancellations. Cancellations bring forward the release of unearned premium and the revenue contribution from this source was unusually high due to high levels of loan refinancing activity in the industry. The strong NEP result also reflected particularly high levels of gross written premium in 2020 and '21, and these cohorts are now coming into the peak years of the earnings curve. I'm now going to turn to Slide 18 on claims. Net claims incurred were negative $35 million. That is a credit to the bottom line. This outcome was driven by low claims paid of $28 million and a $63 million reduction in reserves. Paid claims and mortgages in position continue to remain low. And this is a function of both the favorable economic environment, but also the savings buffers that were built up during the COVID period. The COVID moratorium on foreclosures are still having an impact on the volume of late-stage delinquencies. And these moratoriums have clearly now come to an end. And consequently, we do expect to see increases in both mortgages and position and claims paid in the year ahead and this has been fully anticipated in our reserves. Slide 19 contains some more analysis on claims. Delinquencies continue to fall with improvements across most parts of the portfolio. Closing delinquencies are now at their lowest level since 2014. New delinquencies remained particularly subdued as a result of the favorable economic environment and particularly the strong employment market. Net ageing, that is cures less ageing had a positive financial impact of $109 million. And this is a consequence of the strong labor market, healthy borrower finances and house price appreciation in recent years. Our reserving basis has been fairly stable for the last 2 years. And over the full year, the impact of changes in the actuarial reserving basis was relatively minor with only a $10 million release. I'd now like to turn to Slide 20 on investment returns. Total investment income for the year was negative $85 million, representing a return of minus 2.4%. The big driver of the overall investment result were unrealized losses of $140 million, mainly due to rising bond yields. We typically hold our fixed interest assets to maturity, so the impact of the unrealized losses will unwind as the bonds mature over coming years. Higher interest rates are positive for the long-term profitability of our business and this can be starkly seen in the higher running yields on our portfolio, which have risen over the year from 1% to 4.3% and on an asset base of over $3 billion, this adds significantly to revenue. Slide 21 has some further detail on the impact of changes in interest rates. As you no doubt are aware, the year saw a dramatic rise in interest rates, particularly in the first half and this has caused significant mark-to-market losses on the investment portfolio. On the flip side, higher rates have an offsetting impact on the value of the insurance liabilities, particularly as we adopt a matched investment portfolio. Due to the fact that the accounting liabilities are not discounted, changes in interest rates do create volatility in our income statement. However, the matched investment portfolio ensures much more stability in our solvency position and the underlying economic value as can be illustrated in the slide on the chart on the right of the slide. I'd now like to move from the income statement to the balance sheet on Slide 22. Investment assets were down due to a combination of the fall in market values, plus the substantial quantum of capital returned to shareholders over the year. Deferred acquisition costs at the end of 2022 were $115 million, an increase of $27 million over the year, reflecting the capitalization of new DAC post the write-off in the first half of 2020. Unearned premium has decreased by $168 million, reflecting both the high cancellations and low volumes of new gross written premium in the most recent year. I'd now like to take a look at the composition of our investment portfolio. The asset allocation in our portfolio 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 a duration of 3.1 years. The fixed interest portfolio backing the shareholder funds has a much shorter duration of only 0.7 of a year and this portfolio has benefited significantly from the rising yield environment. The shareholder funds have a higher risk return profile with approximately 21% of these funds invested in equities and infrastructure. And the shareholder fund portfolio also has a greater allocation to corporate credit designed to enhance overall returns. I'm now going to turn to Slide 24, which has a breakdown of the outstanding claims liability. The total outstanding claims liability of $416 million reduced by $65 million during the year. This reduction was largely a function of the low level of delinquencies. Since the onset of COVID, the average reserve per reported delinquency has been relatively steady at approximately $40,000, and this reflects a degree of stability in our reserving basis. The fall in the absolute level of reserves in recent periods is largely a function of the number of delinquencies, not assumption changes. The reserves do incorporate allowance for future house price depreciation of a further 10% over 2023. In addition to the drop in the liability for reported delinquencies, there was a slight reduction in the reserves for IBNR and future re-delinquencies. Our reserving basis was strengthened significantly during 2020. Since that time, the reserving basis has remained relatively stable and we are comfortable that our reserves are appropriate for the economic environment that is ahead of us. Slide 25 looks at the regulatory capital position. The regulatory capital base fell by $159 million over the year, reflecting the substantial capital returns during the year. At the same time, the APRA PCA requirement fell by $154 million due to lower GWP and high cancellations. As Pauline noted, our capital position remains very strong with a ratio of 2.22x PCA. The composition of our capital base is much the same as in prior periods with $190 million in Tier 2 capital, approximately $300 million from the surplus relating to insurance liabilities and the balance in Tier 1 equity capital. Please now turn to Slide 26, which looks at the movement in capital over the course of the year. Despite the return of $322 million in capital through dividends and share buybacks, the PCA ratio increased to 2.22x due to the drop in regulatory PCA requirement. The PCA ratio benefited from the runoff and seasoning of the in-force book, which was greater than the capital strain on new business. In aggregate, our business is generating large amounts of organic capital and we expect this dynamic to continue. The capital position remains well above the Board's target range even after the final dividend and proposed buyback, highlighting scope for further ongoing capital management. As previously noted, we anticipated getting back into our target capital range by the end of 2024 after payment of the final dividend. Please now turn to Slide 27 on reinsurance. Reinsurance is an important part of our capital mix as well as risk mitigation and extreme stress scenarios. Historically, we have placed approximately $800 million of reinsurance via a whole of portfolio cover that was typically canceled and rewritten each year. After careful consideration, we've commenced a transition to a book year program of reinsurance. Book year reinsurance provides cover for a cohort of business over the life of those loans. And there are several advantages of the book year cover, most notably including reduced renewal risk. Over time, we also expect the book year cover that has lower cost than our previous reinsurance program. The book year cover will build over time. And as this happens, we will gradually phase out the back book cover. We expect to place a similar amount of reinsurance as to what we've done historically, approximately $800 million, noting that the quantum may flex in response to changes in the APRA PML. I'd now like to spend a little bit of time on the outlook for 2023 and beyond. Despite the interest rate rises over the last 9 months, delinquencies have continued to fall, which is consistent with the trends seen across the industry. We do expect that the combination of higher rates and cost of living pressures will see delinquencies rise in 2023. And this will be exacerbated by the high volume of fixed rate on maturities rolling on to higher rates. Notwithstanding some of these headwinds, the portfolio is very well-placed coming into a more challenging period. Starting delinquencies are at record lows. The strong house price appreciation from 2019 to '21 has meant most borrowers had good levels of positive equity. Many households built up substantial savings during COVID-19, which can and are being drawn upon. And importantly, we took proactive steps to tighten our credit settings in the second half of 2021. At our half year results, we shared some information on the expected sensitivity of our future claims to the economic environment. And I'll provide some updated information on this on Slide 29. Over the last 2 years, claims incurred have been exceptionally low. Economic conditions have clearly changed significantly in 2022 with significant rises in interest rates and resulting fall in house prices. Looking forward for 2023, most economists are now forecasting further rises in the RBA cash rate, taking it to approximately 3.85% by middle of the year. Further house price falls of approximately 10%, which would represent a peak trough fall of 16%, but with unemployment remaining relatively low and under 4.5%. Under that economic scenario, we expect claims incurred for 2023 to increase towards long-term average levels. While rising interest rates and falling house prices will negatively impact claims, 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 for each of house price appreciation, interest rates and unemployment. While the economic environment outlook is expected to lead to higher claims, our expectation is that unless there is a major jump in unemployment, claims incurred over the next few years will be in line with long-term average levels. On Slide 30, I provided the most recent view of profitability by book year. And you recall this is the chart that we shared at the last 2 half year results. The chart on the top left of the slide shows the cumulative loss ratio to date by different book years. And this cumulative loss ratio should be indicative of the ultimate profitability of the different cohorts. The book years have been grouped into cohorts, which have broadly similar loss experience. Book years 2008 and 2009 were very unprofitable with a loss ratio to date of 73%. And the time these cohorts were written and credit standards in the industry were much weaker than today and LMI pricing was significantly lower. The cohort of business from 2010 to '14 was adversely impacted by the mining boom and bust in regional Queensland and Western Australia. Other states have performed well. The book years from 2015 onwards are showing much more profitable loss ratios, reflecting better pricing, better underwriting quality, geographic mix and to date, a lack of any major claim events. Loss ratios for the 2021 and '22 cohorts are also low, but are not shown as they have not had sufficient time to develop. Given the recent fall in house prices, we would not expect the loss ratios for the last 2 book years to be as low as those for the 2015 to '20 cohorts. Another useful way to look at the different cohorts is to consider the quantum of embedded profits in the existing book. The excess of unearned premium over the premium liabilities represents expected future profits from the current in-force portfolio. And as you can see from the chart, the vast majority of embedded profits relates to cohorts since 2015. Over time, the dynamic of the runoff of the old cohorts and replacement by more profitable business since 2015 is leading to an improving return on equity across the whole business. Before finishing my section, I wanted to quickly touch on AASB 17, which is the new accounting standard for insurance. In November, we held an investor update on AASB 17 and its impact on Helia. And we continue to make good progress on preparations to the introduction of the new accounting standard. We have refined our estimate of the financial impact of the change in accounting standard and we now expect the transition to AASB 17 to result in a reduction in net assets in the range of $210 million to $270 million. This transitional impact is due to timing differences in the recognition of revenue under AASB 17 compared to the previous accounting standard. Accounting NPAT is expected to be of a similar magnitude, but with reduced volatility. Importantly, the introduction of AASB 17 is not expected to have any material impact on our capital requirements. And importantly, the economic fundamentals of the business are unchanged. We will be reporting on the new accounting standard from the year 2023 and expect to provide a further update in the second quarter, including pro forma income statements and balance sheet. I'd now like to hand back to Pauline.

Thanks, Michael. As we look to the future, we're confident that Helia is well-positioned to navigate the changing economic environment and to continue to deliver its purpose of accelerating financial well-being through homeownership. Turning to Slide 33, outlook and full year 2023 guidance. As we've expressed a number of times today, over the course of 2023, we expect to see continued upward pressure on interest rates, with resulting impact on Helia's new business claims and investment returns. New business is likely to remain subdued, while earned premium will be driven by previous book year premium volumes as well as the level of cancellations. Incurred claims are expected to increase over the year towards long-term averages. Offsetting this net interest and dividend income will benefit from higher interest rates, noting the 4.3% running yield at the end of 2022. Dividends are expected to be sustainable at $0.26 per share with some scope for growth over time and we are currently expecting returning to the Board's target range of 1.4x to 1.6x PCA by the end of 2024 after the payment of the 2024 declared dividend. Now turning to Slide 34. We're proud of Helia's position as Australia's leading LMI provider and the positive momentum the business still have in recent years, particularly as evidenced by success in many new customers. We serve a large and growing addressable market with significant levels of unmet demand for access to housing. We position for profitable growth, delivering returns in excess of our cost of capital, creating value to our shareholders. This sustainable return on equity, combined with capital related from the back book allows the business to deliver ongoing capital management for shareholders while still investing in our strategic agenda. All this in combination has enabled Helia to deliver superior total shareholder return since listing, the second highest amongst our banking and insurance peers over the period of 2014 to 2023. Helia is excited to be at the forefront of helping Australians to buy homes today and for the future. We are energized by the diverse range of alternative homeownership solutions we're working to deliver to help meet the growing need in Australia and we remain confident of the business opportunity that this will create. We're proud of the momentum we're building and are pleased this has been achieved alongside strong underlying financial results today, allowing us to continue to deliver on our commitment to effective capital management for the benefit of our shareholders. On behalf of the Board and my fellow leaders, I would like to thank all the people at Helia 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 of our shareholders for your ongoing support and commitment to Helia. Without you, nothing would be possible. And with that, I'll open up to any questions. Thank you.

[Operator Instructions] First question comes from the line of Simon Fitzgerald from Jefferies.

I just wanted to start a little bit about the guidance statements for FY '23. The company mentions that net claims are expected to return towards long-term average levels. Just wanted to know what this is referring to. Is it loss rates, average dollar value of net claims or number of net claims incurred? And I guess I'll say that remembering that loss rates have been distorted by changes in the earnings curve a couple of occasions right off of the DAC, reserve releases exceeding claims costs, et cetera. So I guess, what exactly are we looking towards in terms of the longer-term shift towards net claims if you can help us out a bit more there, please?

Sure. Thanks, Simon. I'll make a couple of comments, and then I'll pass to Michael, who that will add some more color. As you know, none of us hold at the crystal ball and claims the amount and timing of plans is notoriously difficult to predict, timing even more difficult to predict than the amount that may come through. What we are trying to say there and we've been giving the same message in the last few lots of results announcements is that as we look to the increasing interest rate environment and as we look to the fixed rates rolling off and people have talked a lot about what that may mean, all of our modeling indicates that that environment will take us about back to the level of claims we've priced for as opposed to being a major event that goes beyond that. That's really what we're trying to say there. So I think it's probably best to think about it as a long-term average loss ratio rather a particular dollar or number of claims. But Michael, do you want to add to that?

Yes, I...

Even though those loss ratios have been distorted by a couple of things that you've done in the past in terms of changes in the earnings curve and the write-off of the deck. But I think once you've said before, you set the business up for about a 30% loss rate. Is that still relevant?

Michael?

Yes. So Simon, on the loss -- I mean the earnings curve and the backpay impact in the short term. But if you look at it in the longer-term history of the business and look at loss ratios, I think they are still representative of what we would call long-term and what we priced for. And yes, we have said in the past, I think something in that sort of 30% to 35% range is pretty normal for the long term and also roughly where we'd be pricing towards.

Next question is just about looking at the average paid claim, there's quite a jump in the second half versus the first half. And I understand it's only over 153 claims, but the average paid claim was 16,500 and that compares to, I think, a peak that I've seen in the past of about 113 that skipped up from about 57 onwards. And I'm just wanting a little bit of clarity in terms of what might be the driver there? Is there some post-COVID involved here? Or is this really the start of a reflection of falling dwelling prices coming through?

So Simon, the first thing I'd say is it's on very small numbers, pipeline. So that's the first thing I'd say is I'd be cautious drawing too much to either the particularly low average paid claim in the first half of '22 and the higher average paid claim in the second, if you look across the full year, it's reasonably in line with the news before that. The size of the average paid claim is very much a function of the geographies where we pay claims. And our paid claims are still disproportionately represented by areas in the mining. So if we get a few large claims mining areas that particularly are small numbers that will boost the average.

Just one more question here then just in regards to the central estimate, the decrease in the -- I think it was the IBNR or -- sorry, [indiscernible] referring to. There was a decrease from $410 million to $355 million. It was a note in the accounts that talks about the IBNR. The central estimate is what I'm referring to. I just wanted to know a little bit about the economic assumptions behind that central estimate. Just given it's decreased in the environment where you're talking about claims picking up?

Yes. So just to clarify, the bulk of the drop in the reserves is not incurred, but what it does the bulk of the drop in the reserve related to the reported delinquencies and that's largely a function of, you take the delinquencies, we look at the economic outlook and the past sort of roll rates on those delinquencies. So that number is calculated. The IBNR is a small part of the reserve. That's intended to pick up the -- yes, by definition the claims that have -- delinquencies that have been incurred, but we haven't yet been notified of. So almost by definition, the fact that delinquencies have so been so low, you would expect to have a lot of quantum of IBNR for the period. But that...

But you...

Second change is the minority and I think only contributed about $10 million to the reduction in reserves. The overall economic environment that we factored into in the calculation of the reserves is consistent with the economic scenario that we outlined on Slide 29. So further rise in interest rates, another 10% drop in house prices and modest tick up in unemployment.

[Operator Instructions] Next up, we have the line from Andrew Lyons from Goldman Sachs.

Pauline, just a high-level question on your reserving and you did sort of go into it in a bit of detail in response to Simon's question. But when you were talking to Slide 8, just on the macro economy, you noted that the macroeconomic environment had been a tailwind for the business in recent years and now things had somewhat inflected given interest rates, et cetera. And yet despite this, obviously, your overall reserving, is it the lower end of the levels from the last 3 years? Obviously, I recognize the conservatism of the inputs that go into your reserving and they're reflected on Slide 29. But just keen to sort of reconcile your comments on the macro economy, I guess, inflecting versus just those lower levels of reserves versus the last couple of years?

So I'll again give some overall comments and I'll pass to Michael for a little bit more detail. As Michael said, the lower reserving is only in respect of delinquencies on the books at the moment. And we just have a very, very low level of delinquencies. So that's what's coming through. From a perspective of fee picture perspective, the way I think about it is, at the beginning of COVID, we put aside some reserving for an economic scenario that might have been a little bit [ awkward ]. And of course, we saw what happened the government effectively propped up the economy for a couple of years by pumping money into it and we didn't see that scenario eventuate for those -- that period of time. Now the scenario that we're looking at is very similar to the scenario that we reserved for back at the beginning of COVID. So the reserves we put aside for the eventuality, that's what looks like we're now looking at. So it makes sense to measure that perspective. As I said, in the meantime, we had a number of years of strong house price depreciation and low delinquencies and a strong unemployment which is very -- sorry, strong employment, which is very important to our portfolio. But I'll get Michael to add some more color to all of that.

Yes. Andrew, probably the only extra thing adding is that what we reserve for and what we're allowed to reserve for under the accounting standard is for existing delinquencies are potentially incurred, but not reported delinquencies and also we also reserve for loans that have been in the past being delinquent and now healthy, that could go delinquent in the future. And we factor in the prevailing economic environment and the outlook into the appropriate amount to hold for each of those 3 categories. What we don't and can't reserve for is future delinquencies on loans that have a healthy today and have always been healthy. So again, that's probably a little bit different to some of the provisioning at a bank level. But certainly, we take into account the economic environment and I want to say here that the more challenging economic environment in the reserves we set aside for those first 3 categories, but we can't and don't set aside reserves for what might happen for future delinquencies.

Well, I mean they're explicitly the net earned premium and the earnings curve. And so to the numbers on Slide 24, where you can see that outstanding claims have coming down, they are primarily in respect of not by delinquencies. And also, we have had a decrease in volumes, which also be impacting our net earned premium.

Someone who's first and foremost a banks analyst, that does help, appreciate it. So you are saying that your ability to do what are called management overlays at banks is more difficult under the accounting standards that you guys are subject to. Is that correct?

We have no ability to put in place effectively what a bank would call a selective provision and to increase and decrease growth.

And then just a second question, which you've heard from me before, but I'm going to push again. You've reported a 19% ROE today. That's despite significant surplus capital. Obviously, investment yield is running well below your running yield, albeit offset by a much lower-than-normal claims ratio. Just in light of all of that, does the Group believe current pricing and interest rates can allow the Group to sustainably deliver a low to mid-teens ROE?

We do believe that and I believe we've said that before. I'm going to pitfalls to what we have and haven't said before. But yes, we do believe that the Group is in a position to deliver a sustainably better ROE than it has over the past.

We have a follow-up question from Simon Fitzgerald from Jefferies.

Pauline, I just wanted a little reminder of the sort of lag effects that we get in this business from, say, 181 days onwards. It obviously takes time for a bank to give a property owner and notice of position, then it takes time for them to obviously put that property up for sale and then there's a time or period after that in which Helia would get a claim. Can you sort of help me -- just remind me in terms of the time frame beyond 181 days where all that sort of happens? And is it taking longer under these circumstances than you would normally think?

Yes. Again, I'll make some comments and then Michael might add anything I missed. Typically, you're right, it can -- in normal times, it might take around about a year from the time someone goes delinquent until the time the property is sold. Given the COVID moratoriums we've seen in recent years, that time frame has extended materially in the last 2 years. However, our reserving is largely agnostic to the date at which that event happens before closure happens. So we begin to reserve an outstanding claims from 90 days in arrears and we have probability factors that we will pay a claim. And as the delinquency ages, those probability factors adjust, so getting closer and closer to the time that the claim is actually paid. By that point, our estimate is pretty close.

And then with also the change of the reserving some news back that you did as well, even if that property owner were to be cured at preserving would stay, would it not?

Not the whole level, but we allow for every delinquency to get cured. We set up what we called re-delinquency reserves because they have a higher propensity to [indiscernible] in the future, which is at lower levels.

[Operator Instructions] We appear to have no questions at this time, allow me to hand the call back to the management for closing.

Thank you. Thanks, everyone, for joining us this morning. We really are proud to share with you what we delivered in 2022. We're pleased to be delivering strong financial results, strategic progress and most importantly, to be sharing the benefits of that with you as shareholders via dividends and capital returns. We've talked a fair bit today about the fact that the environment next year is different. That does have an impact on our accounts. We expect that to come through and to see the impact of that in our claims line as well as in our investment return line going forward. We believe and we have demonstrated today that we are well-placed and well-setup to navigate this environment. And we look forward to, therefore, being able to continue to deliver on the strategic agenda and financially for our shareholders through the coming periods. So thank you for your time today.

This concludes today's conference call. Thank you for participating. You may now disconnect.