Helia Group Limited (HLI) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Helia Group Limited Half Year 2025 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paul O'Sullivan, Head of Investor Relations, Capital and Investments. Please go ahead.

Hello, and welcome to Helia's 2025 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 Interim CFO, Craig Ward, will then go into more detail on the 1H '25 financial results. Michael will then wrap up the presentation with some closing comments. At the end of the presentation, we'll pass back to the moderator for a question-and-answer session with analysts and investors. I'll now hand over to Michael.

Good morning all, and thank you very much for joining us today. Before commencing the presentation, I'd like to acknowledge the Cammeraygal people of the Eora Nation on whose land I'm hosting the call today. I pay my respects to all elders past and present and to all Aboriginal and Torres Strait Islander people here today. Helia is Australia's leading lenders mortgage insurance provider. We have helped both homebuyers and lenders for over 60 years. For homebuyers, LMI offers a pathway into homeownership by reducing the time needed to save a deposit and enabling the availability of credit. For lenders, LMI supports their ability to offer high LVR loans by transferring risk to the insurer. In turn, this supports a vibrant and competitive lending market and is especially critical for smaller lenders who don't have the balance sheet size of the big major banks. Housing affordability in Australia has never been more challenging. And we are proud of the role that we play in enabling Australians to get into the housing market. Since 2010, Helia has helped more than 1 million Australians into homeownership, including a further 13,000 in the last 6 months. I am pleased to present our 2025 first half results, highlighted by an excellent financial performance for our shareholders, continuing support to our customers and a strong capital position that provides security for our policyholders and scope for shareholder capital returns. While the half year financial results were very positive, we did have a number of setbacks. The likely loss of Commonwealth Bank and ING as customers will reduce new premiums from 2026. And the expansion of the government guarantee scheme for first-time buyers will likely reduce the overall market size for LMI. In response to these developments, the Helia Board has announced a comprehensive business review. This review is ongoing, and we will not be providing a detailed update today. Slide 5 provides a summary of the half year highlights. Helia delivered a strong statutory net profit after tax of $134 million, benefiting from a continuation of unusually light claims experience and good investment returns. Insurance revenue of $182 million was down 6% due to a declining in-force portfolio, reflecting lower levels of new business in recent years. Claims experience continues to be extremely favorable, leading to a reduction in claim reserves and a total claims incurred of negative $27 million. Capital management remains a major focus for Helia. The Board today has declared a fully franked interim ordinary dividend of $0.16 per share and an unfranked special dividend of $0.27 per share. The interim special dividend recognizes that the PCA ratio is well above our target range and also the fact that we undertook negligible buyback in the first half of the year. On the customer front, it was obviously disappointing to lose 2 of our largest customers. However, we did successfully renew and extend our LMI contract with another top 10 lender. As a specialist LMI provider, Helia seeks to add value to our lenders beyond the simple transfer of risk. And a core part of our customer value proposition is supporting lenders to grow in the high LVR market. In recent times, this has included selective expansion of risk settings for some lenders. We have also continued our efforts to improve the understanding and perception of LMI amongst the broker community. Given the decline in the overall LMI market size, Helia needs to become a simpler and more efficient business with a lower cost base. We started down this path 12 months ago and have made good progress, but more needs to be done. Slide 6 contains a number of our key performance measures. These highlight Helia's strong financial performance over the last 3 years and the significant value being created for shareholders. This half year result has very similar themes to recent years. And in particular, the continuing exceptionally low level of claims is driving unusually high profits and a very high return on equity. A key measure of the value of our in-force business is the net tangible assets plus CSM, and this has increased to $5.35 per share over the last year. As shown on Slide 7, economic conditions were again favorable. The resilience in the Australian labor market continues to be a key positive for Helia. The unemployment rate at the end of June was 4.3%, a modest increase over the period, but still very low by historical standards. The participation rate remains high and hours worked increased. In response to easing inflation and a slowing economy, the Reserve Bank of Australia commenced a rate easing cycle with the cash rate down 50 basis points in the half and a further 25 basis point fall in August. These rate cuts have flowed through to mortgage rates and are expected to take some of the pressure of household budgets. House prices were up over the half year with Cotality's Home Value Index reporting an increase in national dwelling values of 2.4%, with price growth being experienced in all states. Slide 8 provides a closer look at the LMI industry premium volumes. Industry gross written premium was flat for the half despite a growth in industry high LVR lending. This lack of growth in industry GWP reflects the impact of the federal government's home guarantee scheme, together with an increased level of self-insurance and waivers from lenders. While the industry GWP was flat, Helia's gross written premium was up 28% on the prior comparative period, reflecting our efforts to grow high LVR lending amongst our customers. The Home Guarantee Scheme is having a material impact on the mortgage insurance industry. In financial year 2024, the number of new loans going to the scheme was 62% of the number of new policies written by the entire LMI industry over that same period. From the 1st of January 2026, the Home Guarantee Scheme will be further expanded by removing the cap on the number of places. Income tests will also be removed and property price caps significantly increased. Accordingly, our expectation is that the expanded scheme will result in minimal participation for the private LMI industry in the first homebuyer market. As an indication of the impact, first homebuyers represented approximately 25% to 30% of Helia's GWP in the most recent half year. While Helia saw good GWP growth in the last period, the outlook for 2026 is obviously negatively impacted by the loss of CBA and ING. As you can see on Slide 9, together, these customers represented 61% of our GWP for the half year. Helia's customer base has a good representation of lenders across the regional banks, customer-owned banks and nonbank lenders. However, the loss of Commonwealth Bank as a customer means we will not have any major bank customers in the near term, and this will have a noticeable impact on GWP and new business market share. The nature of LMI means that revenue is primarily driven by the size of the in-force business. The LRC or liability for remaining coverage on the balance sheet is an estimate of the future revenue yet to be recognized on the in-force portfolio. On this measure, Helia has a 50% market share. And this large in-force portfolio will underpin our revenue and provide vital scale for some years to come. We recognize the importance of rebuilding our new business in GWP. Given the typical industry tenure for LMI contracts, there will be a mix of both renewal and new lender opportunities for Helia in the years ahead. Slide 10 provides more detail on industry arrears and the credit quality of Helia's portfolio. Favorable economic conditions and prudent lending practices across the industry continue to result in delinquencies remaining relatively low. The recent falls in mortgage rates are expected to provide some relief to households. The continuing house price gains have also resulted in low levels of negative equity in the portfolio, and this will continue to provide a very good buffer if economic conditions deteriorate. Mortgage defaults in the Australian market have been exceptionally low in recent times. While this is contributing to very good profit results for Helia, the perceived absence of risk in the market is a major contributor to the pressure on new business volumes across the industry. Slide 11 summarizes our recent history of capital management. Inclusive of the dividend declared at this half year, Helia has paid $715 million in dividends, plus a further $451 million in buybacks since 2022. I did also want to elaborate on the interim special dividend of $0.27 per share. This special dividend is in lieu of the lack of buyback undertaken in the first half. It is not our normal practice to pay a half year interim dividend. And as such, it should be seen as incremental to our normal dividend approach and as a consequence, is unfranked. While there was a negligible quantum of buyback undertaken in the first half of 2025, Helia intends to continue to return excess capital to shareholders and has approval from APRA for a further $121 million in capital return. Slide 12 outlines Helia's sustainability priorities, which encompass social well-being and climate resilience. Helia's purpose is to accelerate financial well-being through homeownership. Over the last 6 months, we have supported over 13 Australians -- 13,000 Australians to buy a home with the financial and social benefits this brings. Through our community partnerships, we're also playing our part to help those less fortunate with a particular focus on people experiencing homelessness. In the area of climate, our Scope 1 and 2 emissions have been maintained at net zero, and we have commenced measuring our Scope 3 emissions on the investment portfolio. LMI does not have the same direct exposure to climate change as some other lines of insurance. However, Helia does have exposure through potential adverse impacts on local economies and house prices. We are using our extensive data and insights to quantify the potential impact of climate change on mortgage losses. This is integral to the way that we manage our insurance risk, but it also helps lenders in understanding their exposure to climate risk. Moving to Slide 13. Helia has experienced some setbacks over the last 6 months. We are committed to learning from the recent RFP losses and will emerge a better competitor. The overall LMI market has changed in the last few years with the government guarantee scheme reducing the overall size, together with the entry of a new competitor. Helia remains committed to the market and will evolve our business to adapt. Inevitably, this will involve Helia becoming a leaner, more efficient business with a lower cost base. We also recognize the need to rebuild the level of new business. Our deep expertise in mortgage insurance and high LVR lending, together with a customer-centric focus positions us well to retain and win customers. Importantly, the scale from the in-force portfolio gives us time to do this. We remain focused on the need to deliver an attractive return on capital for shareholders and the importance of capital management. We will continue to pursue opportunities to optimize the capital base. And as we have demonstrated in the past, we have the discipline to return capital to shareholders if that is the best path to go down. I would now like to hand over to Helia's Chief Financial Officer, Craig Ward, who will provide more detail on the financial results.

Thank you, Michael. I'm pleased to present another strong financial result for Helia as the newly appointed Interim CFO. This result is underpinned by continued favorable claims experience and strong investment performance. Let me begin with Slide 15, which outlines our income statement. Statutory net profit after tax was $134 million for the half, which was 38% higher than the prior corresponding period. Statutory NPAT was also higher than underlying NPAT due to unrealized investment gains in the half. The insurance service result of $151 million was up 7% on PCP, supported by lower insurance service expenses, primarily from negative incurred claims in the half. The reinsurance cost has also continued to reduce between periods in line with lower new business written. The net financial result of $60 million benefited from significantly higher investment revenue of $103 million, although this was partly offset by the increased net finance expense of $43 million, with both impacted by lower bond yields or discount rates. Net investment revenue represented an annualized return of 7.3% during the half. Turning to Slide 16. We can see the breakdown of insurance revenue by its constituent parts. Overall, insurance revenue was down 6% on PCP, largely due to the lower GWP levels in recent years. The CSM recognized in profit and loss was flat to PCP, consistent with the stable CSM balance. Slide 17 shows that the level of new business was up 28% on PCP. However, this outcome remains subdued relative to historical levels, driven by the ongoing impact from the government Home Guarantee Scheme. In the waterfall chart, increased volume was a primary driver of higher GWP and reflects growth in the high LVR market and increased market share from our customer activity. Changes to risk settings such as the 95% LVR threshold have also contributed to volume improvements. The increase in rate is driven by changes in our customer contribution to GWP, including with our largest customer retaining lower risk business. Higher mix of policies with different risk characteristics such as LVR and loan size bands are the key driver of this component of the chart. Investor lending will also continue to influence GWP dynamics as more first home buyers continue to use the government scheme. Slide 18 has been included in this presentation again to illustrate the long-term nature of Helia's revenue recognition, which occurs over a 15-year period. This means that changes in GWP take time to flow through the insurance revenue line and that the recent lower GWP will only be reflected in the P&L gradually over time. This also provides Helia with time to proactively manage our cost base to align with changes in expected revenue. Helia continued to take active steps to manage expenses. On Slide 19, we can see that insurance service expenses of $25 million continue to benefit from the negative total incurred claims of $27 million during the half. Incurred claims in the current period remained modest and prior incurred claims have benefited from the ongoing favorable economic conditions supporting lower claims experience. I will talk to these dynamics some more in later slides. Expenses were also lower in the first half. Slide 20 presents the different ways we look at expenses in our business. As noted, expenses are a key focus for us, noting that we have already begun to address the expense base in line with reduced expected insurance revenue. On the left-hand side of the page, we present our expenses as they are shown in the P&L with a 6% reduction compared to PCP. Excluding the one-off redundancy costs from a recent restructure, the decline in expenses would have been greater than that shown in this table. The pie chart on the right-hand side of the page better reflects how we manage our costs on an expenditure incurred basis. Expenditure incurred costs will decline much faster than accounting costs, primarily from the effects of amortization of acquisition expenses. The pie chart also provides more context to the split of the cost base, demonstrating the opportunities to reduce expenses for our business. The key takeout from this is that costs are spread across a number of categories, and we'll have to consider all of these. Employee expenses represent just over 50% of expenditure, and we've already begun to manage this cost, however, also recognize that people are key to delivering on Helios's objectives and requirements. IT infrastructure and other expenses represent a fair portion of our cost base and other customer acquisition costs are expected to decline with the loss of larger customer contracts. Turning to Slide 21. Claims paid remained low with benign conditions continuing. The number of claims is well down from already low levels and mortgages in possession are also lower, suggesting subdued near-term trends. Claims paid during the half have predominantly emanated from Victoria and some old mining towns in New South Wales and Queensland. Slide 22 shows similar trends in delinquencies. New delinquencies are down 11%, supported by strong employment and lower interest rates. Closing delinquencies are also down 4% with stable cure rates offsetting new delinquencies. Victorian delinquencies continue to rise is the only state where delinquency count has increased since 2019. Slide 23 provides further analysis on incurred claims. Incurred claims from the current period of $25 million was down on PCP, largely due to reduced estimates for the IBNR delinquencies. The release of $34 million of prior incurred claims reserves offset this and together with the basis release of $18 million results in negative incurred claims. This outcome continues to be supported by the impact of rising dwelling values, which results in more property sales without claims. Cancellations through either property sales or refinancing also continued to have a positive impact by releasing reserves on policies where Helia has gone off risk. The basis change in the half primarily reflects the favorable claims experience. Slide 24 provides a different way to look at the insurance service results. The expected insurance service result is the estimated outcome at the beginning of the period based on actuarial assumptions. For the first half of 2025, the expected result was in line with PCP with the reduction in insurance premiums offsetting lower risk-adjusted revenue. Experience variations represent the difference between the actual experience and the expected result. The largest of these variations is claims experience in line with the points made previously and reflecting the very favorable environment for Helia's policy on risk. The half saw a large positive experience variation of $68 million. Overall, expenses are performing in line with expectations this half. On Slide 25, we can see that net investment revenue of $103 million was significantly above the PCP result. The annualized return of 7.3% has been supported by rising equity markets and unrealized gains from falling bond yields with a net running yield of 3.8% reflective of this change. The net insurance finance expense on Slide 26 measures the impact of interest rates on the insurance contract liabilities. Insurance liabilities and the technical fund are closely matched and changes in interest rates with lower discounts in this half have influenced the net finance expense, which increased to $43 million in the period. The interest rate sensitivity table on the slide shows the P&L impact of changes from interest rates on investment assets and liabilities. Slide 27 presents a strong balance sheet for Helia. The balance sheet is a straightforward one with most of the assets comprising cash and investment assets at $2.8 billion. The liabilities are mainly comprised of insurance contract liabilities of $1.5 billion and at 30 June, a Tier 2 debt instrument. Soon after the reported balance sheet date on the 3rd of July 2025, Helia redeemed its Tier 2 debt note with $190 million. Given our capital position is well above our target range, we have not yet issued a new Tier 2 debt instrument, but do believe this will continue to play an important role in our capital mix considerations in the future. Cash of $268 million is higher than the prior year, positioned to fund the post-balance sheet date redemption. In aggregate, net assets are down $59 million over the reported period with the payment of the year-end dividend exceeding first half NPAT. We can see some changes in the investment portfolio in Slide 28. Our technical fund remains focused on matching expected insurance liabilities with fixed interest assets. The shareholder fund is, however, more diversified and flexible. At the end of the half, we exited our externally managed equities portfolio, balancing risk and return considerations and have used the proceeds to partially fund the Tier 2 notes redemption. Slide 29 shows the breakdown of the insurance contract liabilities. The liability for incurred claims or LIC, represents the liability arising from past periods, while the liability for remaining coverage, or LRC, represents the estimated liability for future periods. Another way we also think of LRC is that it represents our stock of unearned insurance premiums that will be released to the P&L in future years. Overall, the LRC has declined 3%, reflecting the runoff of the in-force business outpacing new business written. CSM remained stable between reporting periods, benefiting from lower expected future claim costs. CSM now represents 50% of the LRC. LIC continued to trend down due to the good claims experience. Slide 30 provides further detail on the LIC balance. The liability reflects a combination of reserving for current delinquent policies early-stage delinquent policies, including an estimate of those that we have not yet been formally notified of and old delinquencies which have cured, which we refer to as redelinquencies, but we believe, therefore, have a higher probability of moving back to delinquency status in the future. The reserving calculations use a statistical model that reflects the likelihood of delinquent policies developing into a claim. Reserves also include risk elements such as LVR, stage of arrears and location and factors into the expected economic environment and outlook. During the half, the biggest driver of the smaller LIC balance was the redelinquency reserve, which decreased primarily from cancellations and changes to the reserving basis. Reserves per reported delinquencies are down modestly. Slide 31 shows more detailed movements on the CSM through the first half of 2025. CSM represents the expected future profits on the existing in-force business and therefore, reflects a key driver of value for shareholders. New business added $33 million to the CSM balance together with an additional $24 million of benefits from lower claims estimates. The changes in estimates were primarily from older underwriting years as we now expect limited further claims development from these years. Together, these 2 factors offset the ongoing CSM recognition to P&L, which was $74 million in the half. The table on the right-hand side of the page demonstrates that the strong market conditions over time have continued to support a stable balance despite P&L release exceeding new business. We currently have $636 million of CSM on the balance sheet and expect to recognize $137 million over the next 12 months, assuming no new business. As noted in earlier slides, CSM per share calculated net of a 30% tax rate has been added to the NTA per share to demonstrate the value of this unearned profit to Helia and its shareholders. Slide 32 confirms that our regulatory capital position remains strong at 2.30x the prescribed capital amount. Regulatory capital base was reduced by $54 million, reflecting the decline in net assets. The prescribed capital amount, however, fell by more due to lower new business relative to historical levels, ongoing cancellations and portfolio seasoning. The reinsurance credit is, however, lower, reflecting a deliberate approach to take out less reinsurance in response to lower new business volumes and the very strong capital position. This also provides capital headroom for the future. The asset risk charge has also decreased following the sale of our equities portfolio. We've included a chart to show the probable maximum loss or PML and how it reduces over time with noticeable drops at the 3- and 5-year time frames after a policy is written. This helps highlight that Helia's largest policy years of 2020 to 2022 are now reaching these milestones, leading to lower capital requirements. At the same time, recent years have seen less new business, which means smaller new PML capital requirements. It's also worth referencing the shape of the PML decline with the illustrative insurance revenue chart we showed earlier. This shows that PML declines faster than insurance revenue is recognized. Finally, Slide 33 shows that the combination of strong NPAT and capital releases from seasoning of the book and runoff continues to drive large amounts of organic capital generation. The other category increase relates to the sale of our equities portfolio. The 2024 year-end dividends, together with new business strain have provided some offset to this outcome, but the overall ratio has increased by 0.20x in the half. As separately noted, there are some impacts to this ratio, which will occur in the second half. These include the redemption of the Tier 2 instruments in July and the ordinary and special dividends declared but only paid in the second half. Organic capital generation will continue to be influenced by new business strain, which is expected to remain subdued with the in-force book continuing to season. So to wrap up and summarize, the results for the first half represents a very strong outcome for shareholders, supported by low claims and strong investment performance. We have made progress on reducing expenses and returning excess capital remains a key focus as reflected by the unfranked special dividend declared as part of this result. Thank you, and I will now hand back to Michael.

Thank you, Craig. And I'd now like to turn to Slide 35, which contains a summary of the outlook and guidance for Helia for the full year result. The outlook for the operating environment for the rest of the year looks very similar to what was experienced in the first half. Accordingly, full year insurance revenue is now expected to be in the range of $350 million to $390 million. Relative to earlier guidance, the top end of the range is unchanged, that there has been an increase in the bottom end of the guidance range. Full year claims are expected to be negative, in line with the half year, and the claims environment is anticipated to continue to be favorable in the near term. As we've noted before, LMI claims are highly cyclical and dependent on economic conditions. And while claims are currently extremely low, Helia's longer-term loss ratio across a range of economic cycles has averaged around 30%. Slide 36 highlights Helia's consistent track record in delivering returns for our shareholders. Our expertise and responsible financial management have enabled Helia to deliver returns in excess of our cost of capital. At the same time, we have steadily increased the NTA and CSM per share. This strong profitability, combined with capital releases from the back book, gives us the capacity to return capital to shareholders, which we have done consistently for a number of years. This has enabled Helia to deliver superior total shareholder returns over a sustained period with Helia having outperformed the ASX 200 Index over 1 and 3 years and the full period since listing. I'm personally excited by the opportunity to lead Helia in its next phase. While the last 6 months has presented some setbacks, we have the market position, the capabilities and the financial strength to rebound. I did want to take the opportunity today to acknowledge former CEO, Pauline Blight-Johnston. I worked very closely with Pauline for the last 4 years, and today's results are a reflection of what was achieved during her tenure. On behalf of the Board and the senior leadership team, I would like to thank all of our people at Helia. The results we have delivered today are a testament to their commitment and the expertise of the whole Helia team. Thank you also to our customers with whom we work to deliver on our purpose of making home ownership more accessible for Australians. And finally, thank you to all our shareholders for your continuing support.

Operator, we'll now hand back to you for the Q&A session, please.

[Operator Instructions] First question comes from Jason Shao from Macquarie.

Congratulations on the great result. First one, if I look at your arrears across different states, I mean, Victoria appears to be a bit of a drag compared to the rest of the country. Has that started becoming a concern in your book? Or are the properties mostly above water and not in negative equity, so the arrears don't really have an impact?

Craig, are you happy to take that one?

Yes. So we -- as you suggest, we have had strong house price appreciation and therefore, a very small part of our portfolio, approximately 0.5% is in negative equity. And so we are not particularly concerned about the arrears that we've got at the moment.

Jason, just to pick up particularly, I think the line was a little -- wasn't a great line. So I'm not sure we entirely heard the question, but I think it might have been specifically on Victoria. And you're right. I mean we are seeing there both a pickup in delinquencies, but also that's been the state that's had the least house price appreciation over the last few years. In fact, had a period last year where it was down. So we are monitoring that. It's certainly not at a level that we're concerned about, but as at any time in the portfolio, you've got some pockets of geographies that you're more closely monitoring. And Victoria certainly is one at the moment. We're certainly not concerned, but it's one we're closely monitoring.

And my second one is around the positive claims experience. I mean it seems to be impacted, as you mentioned, by refinances and property price appreciation and a few other things. I mean what proportion would be impacted by, let's say, between refinances and actual appreciation of property? Would you have those sort of -- or a bit of color around the proportion that's impacted by those different factors?

Look, not in that precise detail, but perhaps a good way I could signal that the re-delinquency reserve, which, again, to recap, that's when we -- a policy has been delinquent in the past, maybe a year ago, 2 years ago, it's got back healthy. We still hold a reserve as a prudent measure for that because now those policies, once they have got back healthy for a while do have the capacity to refinance. And so typically, when we talk about the benefit of cancellations impacting the claims, it's typically through the impact on that redelinquency reserve. So if you looked at that, the movement in that, I would suggest it's heavily influenced by cancellations. The impact of property prices is more significant in the reserve for the reported delinquencies. So hopefully, that might give you some color to think about the magnitude of the 2.

Next, we have Simon Fitzgerald from Jefferies.