Helia Group Limited (HLI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Helia Group Limited 2026 Half Year Results Investor 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. Please go ahead.

Hello, and welcome to Helia's 2026 Half Year Results Conference Call and Webcast. I'm Paul O’Sullivan, Head of Investor Relations, Capital and Investments. This morning, Helia's Interim CEO Michael Cant, will start with an overview of the results. Helia's CFO, Craig Ward, will then go into more detail on the 1H '26 financial results. Michael will then wrap up the presentation with an outlook statement and closing comments. At the end of the presentation, we will pass back to the moderator for a question-and-answer session with analysts and investors. I'll now hand over to Michael.

Thank you, Paul. Good morning, everybody, and thank you for joining us. Before commencing the presentation, I would like to acknowledge the Cammeraygal people of the Eora nation on whose land I'm hosting our call today. I pay our respects to all elders, past and present, and to all aboriginal and Torres Strait Islander people with us today. Helia is a leading risk partner for the home lending industry. For more than 60 years, we have partnered with lenders to accelerate financial well-being through homeownership, enabling low deposit lending through lenders mortgage insurance. We are proud of the role that we play in supporting borrowers across all stages of their property journey, whether they are entering the market for the first time, investing or upgrading their property. This morning, I'm pleased to present our 2026 first half results. Helia has delivered another strong financial and operational performance despite a challenging industry backdrop. Slide 5 summarizes our financial performance. Net profit after tax was $100 million and underlying NPAT $106.3 million, representing a return on equity of approximately 22%. The profit result benefited from negative total claims incurred, reflecting continuing low delinquencies and strong levels of portfolio equity. However, the result was down on the first half 2025 due to a decline in insurance revenue and the prior period having a more substantial claims benefit as well as large investment gains. The Board has today declared a fully franked interim ordinary dividend of $0.16 per share and an unfranked interim special dividend of $0.27 per share. As shown on Slide 6, the Australian labor market continues to be resilient, and this has been a major contributor to the low claims environment. Labor market conditions in the half year did weakened slightly with the unemployment rate rising to 4.4%. However, the unemployment rate remains below historical levels, while hours worked and the participation rate remains supportive. In response to persistent inflation, the RBA increased the cash rate target to 4.35% through 3 consecutive 25 basis point increases. Cost of living pressures driven by inflation and higher interest rates remain a challenge for many borrowers. National dwelling values increased modestly over the half year, with the Cotality Home Value Index rising 1.2% nationally. There are, however, signs of a cyclical peak with dwelling values in Sydney and Melbourne declining in the second quarter and other capital cities also down in July. Despite the recent fall in property prices, dwelling values continue to have a significant positive equity buffer for most borrowers. Home lending activity has softened in recent months as elevated interest rates, affordability pressures and weaker borrower confidence have dampened demand. Changes to negative gearing and capital gains tax announced in the recent federal budget had further weighed on investor sentiment, contributing headwinds for mortgage lending. Slide 7 provides a closer look at the high LVR lending market. Lending in the high LVR segment continues to grow strongly, driven by investor and first home buyer demand as well as the challenges in saving a 20% deposit. Despite this positive backdrop, the LMI market in the first quarter of 2026 saw a 14% contraction in the level of new premiums. Lenders self-insurance and LMI waivers have continued to be elevated amongst the major banks, and most first home buyer demand went to the government's 5% deposit scheme. Helia continues to advocate for a more targeted government scheme, one that directs public support to borrowers who need it most while operating alongside a sustainable private LMI market. Helia's LMI gross written premium market share for the first quarter was approximately 30%, noting that new business from CBA ceased on 31st of January and contributed about 4% of this market share. In-force market share was approximately 50% and steady on the prior period. Slide 8 looks at credit performance. Industry arrears were steady in the first half. Helia delinquencies continue to be at modest levels with closing delinquencies down 4% on December 2025. This decrease is primarily attributable to a smaller in-force book with the overall delinquency rate flat for the half year. The in-force portfolio maintains a strong positive equity position. The level of negative equity in the portfolio was again down slightly in the half year. The proportion of the portfolio with negative equity remains very low due to the high level of house price appreciation over the last 3 to 5 years. As summarized on Slide 9, the company's strategy is focused on growing new business and creating a simpler, more efficient organization to drive sustainable long-term performance. After a difficult period in the first half of 2025, the business has stabilized, and we are making good progress on our agenda. During the half year, we were pleased to have renewed important customer contracts with AMP Bank and ING Bank. As a specialist LMI provider we seek to add value to our lender customers beyond the simple transfer of risk and to leverage our deep industry expertise to support their growth in high LVR lending. In response to the decline in the overall size of the LMI market, Helia is focused on becoming more efficient. We are 18 months into our efficiency program and are on track to achieve a $12 million per annum reduction in recurring expenditure by the end of financial year 2026. Our efficiency gains have been underpinned by a focused effort to reduce complexity and increase automation. AI is also playing an important role with a range of applications across the business. We've also made progress in evolving our risk maturity and resilience with a particular focus on our cyber capabilities in response to the evolving threat environment. Despite the challenges of downsizing, we've maintained a strong workplace culture, and we continue to invest in our people, including an organizational-wide focus on AI adoption and capability. Slide 10 looks at Helia's gross written premium by lender and borrower type. Helia's lender customer base is well spread across the midsized banks, customer-owned banks and nonbank lenders. As previously mentioned, in the half year, we had success in renewing some important customer contracts. The share of new business for investor loans increased to 49% for the half year, reflecting the growth in the investor market, combined with the decline in the use of LMI by first-time buyers due to the presence of a 5% government schemes. Slide 11 shows the progress we have made on costs. Expenditure incurred was down significantly on the prior year, and this was a result of actions to reduce management expenses as well as a sizable fall in acquisition-related costs. which were unusually low for the half year. The biggest component of our cost base is employee expenses and the run rate for staff cost has continued to decrease with the closing FTE reducing to 151 as of the first of July. On Slide 12, you can see our recent history of capital management initiatives. And today, the Board has declared a fully franked interim ordinary dividend of $0.16 per share and an unfranked interim special dividend of $0.27 per share. The Board also approved an on-market share buyback up to a maximum aggregate value of $75 million. As our track record has demonstrated, we are committed to disciplined capital management with capital returns undertaken in a measured and consistent way over time. I am pleased with the progress we've made over the half year. Financial results are again strong. We renewed a number of important customer contracts, including ING and we have made good progress on our efficiency agenda with further reductions in ongoing costs. Finally, our capital position remains very strong, and we are continuing to return surplus capital to our shareholders. I'll now hand over to Helia's Chief Financial Officer, Craig Ward, who will provide more detail on the financial results.

Thanks, Michael. I will take you through the financial results in the first half in more detail. As noted, Helia has delivered another strong result in a more challenging operating environment. And this reflects the resilience of the in-force portfolio, continued cost discipline and a very strong balance sheet. I'll focus on those 3 themes as we step through the numbers. Statutory NPAT for the half continued to be strong at $100 million and underlying NPAT of $106 million. Earnings were well supported by the insurance portfolio, the current period revenue reflected the lower GWP in more recent book years, a smaller benefit from negative incurred claims and low investment returns. I'll come back to each of these drivers in more detail on the following slides. Turning to new business. GWP was $61.6 million, down 44% on 1H '25, mainly driven by the loss of CBA new business from January 2026 and softer first home buyer volumes following the expansion of the government's 5% deposit scheme. The mix shifted modestly with investor lending representing a larger share of activity. More broadly, new business conditions have become more challenging with higher interest rates changes in tax legislation for investor lending and the government scheme all creating potential headwinds for the LMI volumes. Insurance revenue was down reflecting lower GWP in recent years, flowing progressively through the revenue line. The 2020 to 2022 book years, together with earlier vintages, remain significant contributors to revenue and continue to support the earnings profile. These years give the business a degree of resilience while the new business environment is more subdued. The CSM recognized in profit and loss remains an important source of current period earnings and a reminder that the in-force book still contains substantial future profit. Moving on to insurance service expense. The results reflected 2 main drivers in the half. Total incurred claims remain negative although the benefit was smaller than in the prior corresponding period, while operating expenses continued to fall as cost actions flow through. The total insurance expense ratio was lower in the period at 28%. I'll come back to both incurred claims and costs over the next few slides. Looking more closely at portfolio resilience. One of the clearest indicators remains delinquency performance. New delinquencies fell 24%. Our closing delinquencies fell 4% reflecting strong cures and the smaller book of in-force policies. The delinquency rate remained 0.79%, which is still low by historical standards. The book year profile is important here, 2021 to 2023 vintages have the highest delinquency rates, partly reflecting the lower rate environment origination and subsequent cash rate increases. This is, however, also a typical pattern with peak delinquencies usually occurring 3 to 5 years after origination. What gives us comfort is that the house price appreciation across those high delinquency years have been material, providing significant positive equity protection. On Slide 20, total incurred claims remained negative at $14 million. reflecting favorable experience on delinquencies already in place at the start of the period. Lower new delinquencies also helped together with strong embedded equity in the seasoned vintages that have since come delinquent. What matters most here is that the experience benefit continues to be favorable, supported by robust cures, cancellations and strong borrower equity. The gross loss ratio remains well below historical levels, and the through-the-cycle average of 24%. The second component of insurance service expense includes operating expenses. Total operating expenses were down 16% on the prior corresponding period, reflecting management actions to reduce recurring costs in 2025. That reduction is now flowing through the income statement, although acquisition costs reduced more gradually over time. Expenditure incurred reduced materially to $38 million for similar reasons, but was also helped by very low acquisition costs following the loss of CBA and some other one-off benefits. This component of the cost base was, therefore, unusually low and will remain more volatile than the accounting measure. With lower new business volumes, we are continuing to align the cost base. We remain on track to achieve a $12 million per annum reduction in recurring expenditure for FY '27 with the focus remaining on simplification, lower complexity and greater efficiency. Net investment revenue was lower than the prior corresponding period after 1H benefited from strong realized and unrealized gains and 1H '26 included small losses from rising bond yields. The net investment return for the half was 3.8%, although a useful reference point is the net running yields, which increased to 4.7%. The portfolio remains conservatively positioned and continues to be managed with a disciplined risk profile rather than a high risk-return approach. Interest rate movements only had a negligible impact on net insurance finance expense in the half, particularly because the long end of the curve was relatively stable. Technical assets and insurance liabilities remain closely matched. So the main interest rate sensitivity sits in the shareholder fund. That finalizes the earnings outcome for the half. I'll now turn to the balance sheet, which continues to underpin both the resilience of those earnings and our capital position. On the balance sheet slide, the net tangible assets per share were lower at 30 June, mainly reflecting the large dividends paid in the period. Cash and investments remained strong at $2.18 billion. Insurance contract liabilities reduced driven by lower LRC as the back book continued to run off and a lower LIC due to good claims experience. The balance sheet remains strong, liquid and conservatively managed, and that continues to give us meaningful flexibility in our capital approach. On Slide 25, technical fund has an average duration of 4 years, in line with our insurance liabilities. Shareholder fund has a shorter duration of 1.5 years. which we reduced in the half in response to more uncertain geopolitical and inflationary backdrop. Portfolio remains high quality and diversified and we continue to manage for resilience and consistent returns, the strong liquidity position and a conservative risk profile. That discipline is important in the current environment. Total insurance and reinsurance contract liabilities reduced from year-end. The LRC was down 6% in the half, reflecting the smaller book of in-force policies. The LIC continues to reflect a long-dated profitable in-force book with CSM remaining a substantial component of that balance, CSM balances continued to increase as a proportion of this insurance liability in recent periods. The LIC reduced to $179 million mainly because of lower reported delinquency reserves and a lower re-delinquency reserve, particularly from cancellations. Looking more closely at CSM, we can see it was lower than year-end. New business continued to add CSM in the half, reflecting the profitability of new business written despite the lower GWP environment. However, as expected, CSM recognized some profit and loss exceeded new business added. The CSM however remains well diversified by duration with around 1 quarter expected to emerge beyond 5 years. Key takeaway is that the in-force portfolio continues to hold substantial expected future profits, providing good support to future earnings. The next slide shows how the balance sheet strength flows through to regulatory capital. PCA coverage ratio was 2.07x at 30 June, up 4 basis points half-on-half and comfortably above our target range of 1.4x to 1.6x. PML reduced by 10% in the half, driven by cancellations and portfolio seasoning, which more than offset new business strain. It remains an important reminder that the in-force book continues to generate capital as it matures. The balance sheet remains strongly capitalized, and we continue to retain flexibility in our capital mix through the issuance of debt and greater reinsurance should we need. Final slide simply shows how these capital flows reconcile over the half and the capital walk brings the story together. Dividends paid in the half exceeded statutory NPAT and the in-force runoff reflecting seasoning of the back book exceeded new business strain. After adjusting the June closed position for the interim dividend and the announced buyback, pro forma PCA ratio remained strong at 1.79x. the walk highlight the underlying strength of the business. As the portfolio seasons continues to generate capital, supporting our capacity to pay dividends and return surplus capital to shareholders. So in summary, we have continued to actively manage costs down in the half as revenue reflects a lower new business environment. And we have a strong liquid and conservatively managed balance sheet that positions us well into a more challenging operating environment. Thank you. And I'll now hand back to Michael for the outlook.

Thank you, Craig. I'd now like to turn to the outlook and guidance for Helia for the full year results, which are summarized on Slide 31. Full year insurance revenue is expected to be in the range of $330 million to $360 million, revised from our earlier guidance of $320 million to $370 million. While economic and property market conditions are becoming more challenging, as Craig noted, the portfolio is well positioned. Accordingly, the claims ratio for financial year 2026 is expected to remain well below through the cycle average levels. Slide 32 highlights Helia's consistent track record of delivery for our shareholders. Our expertise and responsible financial management continue to result in attractive returns as evidenced by our TSR performance, where we have outperformed the broader market over the medium and longer term. While market conditions are challenging for new business, Helia has the scale, expertise and execution capability to continue to succeed. Today will be my last results before retiring later in the year. It has been a privilege to have lead Helia and I have thoroughly enjoyed the opportunity. As we previously announced, Mark Senkevics will be joining Helia as CEO. Mark will be commencing on the 19th of October, and I look forward to working with him to support a smooth transition. On behalf of the Board and the senior leadership team, I'd like to thank all of our people at Helia, the result we have delivered today is indeed our whole team effort. Thank you also to our lender customers with whom we've worked so closely. And finally, thank you to our shareholders for your support. I'd now like to pass back to the moderator and hand over to questions.

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

I just wanted to get a little bit more information on the expenditure incurred, but more specifically, obviously, it relates to the CBA contract, but trying to think a little bit more about how that will look in the second half, I'm not quite sure in terms of the CBA effect from last year. But I imagine there's also an impact of lower new policies written across the board. So I'm wondering if you sort of break those 2 down for us and sort of call out any specific impacts that we should look for in the second half?

Yes, Simon, it's Michael. I'll make a couple of quick comments. So you're absolutely right. The loss of CBA new business has seen corresponding significant drop in acquisition expenses. As Craig noted -- sorry, and then the other thing is just the general flow of new business being down, we get a benefit from that. As Craig noted, there's also some lumpiness in some of those acquisition costs depending on contract renewals and we would be at pains to point out that probably the first half is unusually low in that respect. So the first half has definitely -- there's been a sort of a reduction from no acquisition costs relating to CBA, but it is unusually low.

Maybe I could then move to just sort of the capital reduction to call out specifically the PML. I mean you mentioned it was down 10% in this half, and it was down, I think, 6% in the prior half. So we're getting that acceleration starting to come through a little bit. Should we be thinking about a similar type of uptick in terms of the reduction for the second half in the PML?

Yes. Look, again, we don't provide a forecast. What I would say is that the PML comes off relatively quickly at 0.3 and 5 from duration. So one of the dynamics we're getting is we had deep book years in 2020 and '21 and to lesser extent, '22 terms and obviously, they're coming out of their peak capital period, and that doesn't happen overnight. That's a gradual field.

Got you. Okay, good. And then the delinquencies, I just wanted to talk about that a little bit. I know that you mentioned that we're starting to see some peak coming through in the cycle for Sydney and Melbourne. But it looks to me like in terms of the delinquency increase, it's all Canberra. Just wondering if you had any comments about that.

Yes. Look, it's -- I'd say the overall point on delinquency is trying to -- I think a trend at this point is difficult. The overall message is that delinquency, it continues to be very favorable. And I wouldn't read too much into any pockets of particular geographies. I think that the second half will be one that we'll want to watch carefully, but I don't think we've got a specific view on locations at this stage.

And even then if we were to see some impacts in the second half, like from a delinquency point of view or even sort of arrears from a bank level, it's still going to take some time before it ever would have come out close to a claim anyway, given your late cycle.