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Good day. Thank you for standing by, and welcome to the first quarter 2021 earnings results. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your first speaker today, Head of Investor Relations, Mr. Paul O’Sullivan. Thank you. Please go ahead.
Hello, and welcome to the first quarter 2021 financial results briefing for Genworth Mortgage Insurance Australia. I am Paul O’Sullivan, Head of Investor Relations. This morning, we will start with the presentation from our CEO, Pauline Blight-Johnston, who will give an overview of the results. Our CFO, Michael Bencsik, will then provide details on the financials, and Pauline will then wrap up with a summary. After the presentations, we will open up for questions from investors and analysts.I will now hand over to Pauline.
Thanks, Paul, and good morning, everyone. Thanks for joining us today. I'd especially like to welcome the new investors on the call today, who recently joined our register following the sell-down by our former majority shareholder, Genworth Financial. I've really enjoyed meeting many of you over recent weeks and look forward to our ongoing relationship.Today, I'll start on Slide 4 of the presentation. Genworth has had a good start to the year. Our underwriting results for the quarter improved to $34.8 million. We've seen ongoing momentum in top line volume growth and strong house price appreciation has improved the outlook for claims.New business volumes and claims experience have been supported by the low interest rate environment, rising national dwelling values and stronger consumer sentiment. Against this, the more positive outlook has also led to higher bond rates, generating mark-to-market investment losses that adversely impacted the statutory net profit over the quarter.The strong underlying business momentum resulted in new insurance written increasing 17.2% over the same period in 2020 to $7.5 billion. Gross written premium increased 25.1% to $143 million, and net earned premium increased 13.9% to $86 million. This new business flow will underpin earnings growth for the company over the coming years.Throughout the quarter, reported delinquencies continued to be affected by the ongoing government and lender support programs. As in previous quarters, we have compensated to these impacts with increasing curve but not reporting reserving of $22.1 million over the quarter. The support program has now concluded. The JobKeeper scheme ended on the 28th of March, and home loan repayment deferrals expired on the 31st of March, with arrears reset or loans restructured.We're working very closely with our lender customers to understand the performance of loans that were previously on repayment deferral. It's still early days in that process. Over the coming periods, it will become increasingly evident how many insured loans may continue to experience difficulty. Importantly, Genworth remains in a strong operational and financial position. This provides us with the capacity to adapt to changing circumstances and withstand a wide range of future claims outcomes. As of the 31st of March, the company's regulatory solvency ratio was 1.63x prescribed capital amount on a level 2 basis. This is comfortably above the Board's target range of 1.32 to 1.44x, representing surplus capital of $200 million above the top end of the range. Genworth's ultimate COVID-19-related claims outcomes will, to a great extent, depend upon the speed and shape of the economic recovery, particularly with respect to unemployment and house prices.I want to touch briefly on the economy now on Slide 5. The economic recovery in Australia is well underway and has perhaps been stronger than anticipated at the start of the pandemic just over a year ago. The resilience of the economy has been supported by an unprecedented level of fiscal stimulus, accommodated monetary policy and lender support programs. We're pleased to see a further improvement in the recently reported unemployment rate and national dwelling values. National dwelling values are now 6.2% above the previous peak achieved in March 2020. Rising asset prices are helping the economic recovery and is good for our business. The headline unemployment rate fell to 5.6% at March 2021, although we know that the JobKeeper scheme was still affecting these results, and we eagerly await the publication of the April unemployment data. GDP has almost returned to its pre-pandemic level in Australia, and household savings have significantly increased over 2020. These indicators are all positive signs for Genworth's business. However, we do caution that uncertainty remains. We expect a clearer picture about the impact of COVID-19 on our business to emerge over the course of the year as we see the performance of loans that had previously been on repayment deferrals.I want to touch briefly now on the recent sell-down of our shares by Genworth Financial, on Page 6. On the 3rd of March 2021, GFI sold its entire holding and no longer owns any shares in the issued capital of Genworth. We were pleased to see the significant interest from investors with this transaction oversubscribed. The sale has no impact on our capital strength, employees, customer contracts or local service offerings. Certain key service arrangements between us and GFI will terminate over time, and we've established a dedicated team to manage the transition of relevant services in-house or to local service providers.We're in the process of finalizing the project scoping for this transition. I'll provide an update on the progress and costs at the half year results. Following the GFI sell-down, we intend to move from quarterly to semiannual reporting, consistent with the usual practice in Australia, so this will be our last quarterly results.We'll next report financial results for the half year ending on the 30th of June 2021 and then, following that, for full year on 31 December 2021.On to Slide -- I've got 6 or 7? 7, excellent. Over the quarter, we continued to work on our strategy for sustained growth under the 3 pillars you can see here: enhance, evolve and extend. We've already implemented a range of initiatives to enhance our current business by improving its efficiency and competitiveness. These are primarily in automation and digital reporting. We're also evolving LMR to better resonate with the new generation of homebuyers. After a successful pilot of the monthly premium LMI product at the end of 2020, we're delighted that this new product is now in market and available through 2 lenders. We're in discussion with other lender customers as well and expect to have additional lenders launching the products during the year. In addition, we've undertaken deep research on borrowers, lenders and brokers that we'll be using as part of our human center design process to further innovate LMI to better meet the needs of today's homebuyers. We're conscious that there is much to do to help Australians buy homes, and so we've also started to explore solutions to extend our core LMI capabilities in ways that make purchasing property more accessible for more Australians and support them to stay in their homes. These explorations are in an early stage, and I look forward to sharing more detail regarding our strategic plans over the course of the year.On that note, I'll now hand over to Michael Bencsik to talk about the first quarter financial results in more detail.
Thank you, Pauline. Welcome as well to everyone on the call, and thank you for joining us today. I'll firstly go through the financials starting on Slide 8 with the income statement. In first quarter 2021, Genworth reported a $3.4 million statutory net profit after tax and an underlying net profit after tax of $30.3 million. Gross written premium raised 25.1% to $143 million over first quarter 2020, arising from strong growth in LMI premiums across our lender customers. This growth was driven by a rise in home-buyer confidence and housing affordability, particularly in the Sydney and Melbourne markets that was supported by a low interest rate environment.Net earned premium in first quarter of 2021 increased 13.9% to $86 million over the prior quarter, largely driven by strong growth in gross written premium since the second half of 2020.Net claims incurred was $35.9 million compared to $35.5 million in first quarter 2020. During the quarter, the government's stimulus packages and lender home loan repayment deferrals continue to interrupt the typical incidence patterns of delinquencies and claims experience, leading to an increase in reserves during the quarter. I will talk more about the loss performance shortly.Acquisition costs in first quarter 2021 were $1.4 million, which was 89% lower than first quarter 2020 due to the $181.8 million deferred acquisition costs, or DAC write-down, that we took in the first quarter of 2020.Investment income earned on technical and shareholder funds for first quarter '21 was a loss of $27.8 million compared to an $8.9 million loss in first quarter 2020. This loss was primarily due to the higher unrealized losses on bonds from an increase in the 10-year risk-free rate during the quarter, reflecting the more positive economic outlook.On to Slide 9, we will provide some further detail on new insurance written and gross written premium performance. New insurance written of $7.5 billion increased materially over first quarter 2020 as owner-occupiers and first home buyers took the opportunity provided by low interest rates to enter the housing market or refinance. Genworth's lender customers continue to achieve above-market lending growth rates. These higher business volumes were the main driver of premium growth with small positive contributions from mix and rate. The continuing business growth for lender customers in 2021 will, to some extent, offset the impact of the net contract that expired in November 2020. This ongoing strong growth in gross written premium will drive growth in net earned premium over the medium term, in line with the current earnings curve premium recognition pattern over 12 years.The key features of our loss performance are shown on Slide 10. Net claims in was $35.9 million in first quarter 2021 compared to $35.5 million in first quarter 2020. As we've already mentioned, claims experienced during the quarter continues to be impacted by the government stimulus packages and repayment deferrals that expired at the 31st of March 2021. We saw lower paid claims in first quarter 2021 of $186 million due to the ongoing moratorium on possessions. During the quarter, the average paid claim fell to $67,200 compared to $92,700 in the first quarter of 2020, primarily due to a combination of the effects of higher borrower sales and house price appreciation. In first quarter 2021, we increased reserving by $24.9 million, including an amount for incurred but not yet reported reserves of $22.1 million for the continued tax of the repayment deferrals. We've also reserved the lag impacts for the moratoriums on possessions as well as the potential impact of the New South Wales and Southeast Queensland storms and floods.The reported first quarter 2021 loss ratio of 41.8% reflects the benefit of strong house price appreciation over the quarter and improving economic conditions. The delinquency rate of 0.58% at first quarter 2021 was flat to first quarter 2020 as delinquencies and claims were subdued due to repayment deferral programs that expired on the 31st of March, with some borrowers using deferrals to make good on any arrears.Slide 11 highlights the continued strength of our balance sheet. The asset side of the balance sheet consisted of a $3.5 billion cash and investment portfolio with 79% held in cash and fixed interest securities with a rating of A- or better. The cash balance tends to fluctuate in line with the timing of both investment settlements and liquidity management activities. In terms of liabilities, our outstanding claims reserves was $565 million. This is higher than usual due to the reserving that has been built up over the past 12 months to compensate for the reduced claims activity we saw during the repayment deferral period.As at March 31, 2021, we have retained $1.5 billion of unearned premium on our balance sheet, which we will gradually earn over future periods. On the 1st of January 2021, we renewed our $800 million reinsurance program, which is structured on a paid claims basis for policies in-force plus 2 additional years of new insurance written. It is our investment portfolio plus the reinsurance program that are essentially what is available to meet our claims paying obligations to our policyholders, providing us with over $4.3 billion of claims payment resources.Turning to Slide 12. Genworth retains a well-diversified cash and investment portfolio with an average maturity of 4.2 years and an average duration of 2.5 years, excluding equities and derivatives. During the quarter, we reduced our exposure to Commonwealth government bonds and increased exposure to state and corporate bonds as well as equities to improve yield.Slide 13 shows that our regulatory capital position remained strong. Genworth's PCA coverage ratio on a level 2 basis of 1.63x was above the top end of the Board's target range of 1.32 to 1.44x, representing surplus capital of $200 million above the top end of the range. The chart on the right shows the trend in probable maximal loss, which increased to $1.77 billion as at 31 March 2021. This was largely driven by the higher volume of new business being written and, to a smaller extent, a higher LVR mix being written in the 80% to 90% LVR band, meaning that the amount of capital we are required to hold is gradually rising.Finally, the movement in asset risk charge during the quarter reflected the increase in our exposure to corporate bonds and equities.With that, I'll hand now back to Pauline to wrap up the presentation.
Thank you, Michael. Genworth's first quarter result reflects the underlying strength of our business despite the unusual environment in which we've been operating since the start of the pandemic. The company experienced further top line growth this quarter. Underwriting quality remained strong, with the underwriting results benefiting from strong house price appreciation. Again this quarter, we've seen reduced claims activity as a result of repayment deferrals and government support packages. With these support programs now coming to an end, we're working very closely with our lender customers to understand the performance of loans that were previously on repayment deferrals. It's still early days in this process.Over the coming periods, we'll have increased visibility over the ultimate claims outcomes from COVID-19. Genworth's capital strength, along with our operational flexibility, positions us well to manage a wide range of future claims outcomes as well as to deliver on our sustainable growth strategy. We remain focused on operational excellence and strategic initiatives that support more Australians to build financial security through homeownership.And with that, I'll open up to any questions you may have.
[Operator Instructions] We have multiple questions in the queue. Our very first question is from Andrew Lyons from Goldman Sachs.
Just a quick question just on your NIW progression. You've obviously had some pretty good growth over the course of the year. But certainly versus the third quarter and the fourth quarter, you've seen your NIW in the first quarter of '21 come down a bit. Can you maybe just talk about some of those trends? Obviously, there's the NAB contract rolling off. But just if you can make any comment on whether there was any seasonality that might have impacted the growth and how that might play out over the course of the rest of the year? And then just a second question. It was noted just around the asset risk charge increase due to some changes in your corporate bond and equity exposures. I was just wondering if you can make some comments in relation to -- through the rest of the year, if you expect any further changes that will impact that risk charge.
Okay. At a very high level, yes, the NIW was impacted by the NAB contract rolling off, as you are aware and alluded to, as well as some seasonality. And the asset risk charge, yes, we have gone a little bit up the credit risk curve in our investments, which is coming through in the risk charge but we believe is positive for ROA. But I'll guess Michael will add to that.
Yes. I mean certainly on the new insurance written, we saw most of that growth being first-time buyers, making up around 42% of our new insurance written during the quarter, mostly in the owner-occupied segment. And most of the NIW growth was mainly in that 85% to 90% LVR bands that we spoke about earlier.In relation to your second question on the net contracts, yes, we did call out at the third quarter that the net contract represented around sort of $43 million of our GWP, and it represented around 11% of the full year GWP. We believe that in terms of the growth that we are seeing through the first quarter that, that will be easily offset at the full year. Look, you commented, Andrew, in relation to the asset risk charge. Look, that basically relates to the cash investment balance increases that we've seen throughout the quarter. This is mainly higher GWP and lower claims and also the fact we haven't sort of reduced any capital. Also, we took the opportunity to increase our exposure to equities and state government bonds to increase yield. Our yield has increased over the fourth -- from the fourth quarter over the first quarter, and we only are repositioning the portfolio to take account of that, but we still remain within our strategic asset allocation. Going forward, look, we don't expect to see material changes in that, but we continue to tweak that according to where rates and yields are at that particular point in time.
Our next telephone question is from Andrew Buncombe from Macquarie.
Just a couple from me. One, maybe you can just give us some color -- maybe until you get more clarity on the delinquency outlook, is it still fair to assume that you'll continue to build up the IBNR like we have done this quarter or is it unusual?
Okay. So as we've been doing over the last 12 months, we've been using IBNR to compensate for the claims that we know would normally have been coming through to us or the delinquencies that we would normally have been reported to us but haven't been because of the deferral programs. The theory and the intent is that as those delinquencies start to be reported through and the reserve fall to our usual techniques, then we will, in a compensating way, unwind that IBNR so that we end up back of the number we first thought of to the extent that the experience is what we're expecting. Now we need to see how that emerges. At the moment, the deferrals finished on the 31st of March. So at that point in time, loans are either restructured or their arrears are set to 0. So we're only seeing the first batch, anybody who was unable to make a repayment, we're only seeing the very first batch of those today, must be 30 days in arrears. So we haven't seen the data come through yet. But as we said, come through, we'll need to make a judgment call. As to the rate at which we use those reserves, we've built up to compensate for the claims that we knew were coming through, how we use those as the claims come through and the delinquencies come through.
Okay. And then that dovetails with my next question. Given the change in reporting time lines on quarterly to half yearly, if you start to hear that economic data coming through materially the back end of calendar year compared to your reserving, is the new reporting time line going to restrict even putting out an update at the back end of this calendar year? How should we think about that?
Sorry, I missed that last sentence. This is a new reporting time line?
Yes. Because you've gone from quarterly to half yearly, does that mean that you're just not going to comment on the claims performance sort of back end of this calendar year? Is it coming clearly better than your expectations?
So we'll be reporting again in -- I think it's in early August, and we'll know more information then. We'll have 3 months' worth of data as the deferrals are running off. We won't know everything there. As we've said, a lot of these will take time to work to in the system, but we'll definitely know more then. Then, of course, we will report, as you say, in the normal course, probably early February, but we're under continuous disclosure obligations. And if we see anything that's very surprising coming out or it seems to be different from what people are expecting, then we take those continuous disclosure obligations seriously.
That makes sense. And then just a final one from me. Are you expecting the first quarter GWP growth to be a good guide for the next couple of quarters? So is there anything unusual in there?
Sorry, Andrew, I'm struggling to hear you. I don't know if you're using a speaker phone. It's difficult to hear clearly.
Just -- I'll ask that again. So hopefully, that's better. So are you expecting the first quarter GWP growth to be a good guide for the couple of quarters? Or was there anything unusual in this quarter?
As Michael said, what we're seeing is, particularly first-home buyers but also operators and owner-occupiers taking the opportunity of the low interest rate environment to get their little piece of Australia. And so we know that there is significant -- has been significant unmet demand for housing in Australia for many years. That's still there. So whilst house interest rates remain low and house prices are within reach, we don't see any change to those underlying trends. I think the one thing that may temper that a little bit is if the house price appreciation continues so quickly then houses will become out of reach for some of those people again.
Yes. We have to see, Andrew, just in terms of whether APRA may put some brakes as I've sort of said around the heat of the property market with some further credit constraints as well going forward. But certainly, with the persistency of low interest rates and demand, I think there's every expectation that the growth will continue.
Our next telephone question comes from Simon Fitzgerald from E&P.
The first question relates to the LAT surplus. Whether you could give us any advice of what that looked like at the end of the first quarter, that was on part of the presentation that I couldn't find or was at least missing from the last ones?
So exactly. We've just -- you noticed we haven't included that this quarter. It's not something we would normally include but we used because of this particular situation we found ourselves in last year. So -- but Michael will give you some color.
Yes. Look, Simon, I think in terms of the LAT surplus, we have -- the premium liabilities has benefited from positive economic data, particularly house price appreciation. So we have seen a surplus increase over the prior quarter.
Okay. So would it be above $300 million at this stage? I mean, remember, it closed at $278 million last time around.
Look, I can't really comment on that, Simon.
Okay. That's fine. You did talk also about the level of deferrals, Pauline, in terms of -- or at least the deferrals, which cut off at the 31st of March. Are you able to share with us what the last level of recorded deferrals was in your book?
Yes. As at the 31st of December, well, we reported our quarter in our previous results that we were down to 8,100. As at the 31st of March, we know we're down to 0 because the program has ended. So what we need to see now, as we've said before, is how many of those are now performing, and that will -- we get -- for various lenders, we get data coming to us 30 days, 60 days or 90 days in arrears. We don't count those delinquency until they're 90 days in arrears. So they won't stop our delinquency figures for a number of months, but we'll start to get some visibility by lender over the course of this quarter.
Yes. Okay. Then so you aren't able to share with us at least what that number was on the 30th of March in terms of that decrease from, say, 8,000?
It's actually number we have...
Yes. Sure. Sure. [indiscernible] already come through.
No, no, no. We don't get daily reports from our lenders.
It's actually 0, Simon. Yes, because what happens from the 1st of April is the bank is undertaking to restructure these deferrals. And these only should be limited to those lines that satisfy the servicing test under the prudential standard LPS 220. So that data, as Pauline mentioned, will be coming through over the second quarter, which will give us an indication of the nature of those restructures.
Okay. And final question was -- still relates to the same matter. Do you have any handle in terms of the ones that have come off deferral, how much were actually paying back to their required amounts or at least what their new requirements were under a loan restructure?
We're seeing some early indicators, and there tends to be a fairly high performance rate, and we also know that borrowers took the opportunity to bring their line back up-to-date during the deferral period that took that opportunity. So early indicators are pleasing. However, as we've always said, it will take a number of months because if someone hasn't been paying -- making repayments for 9 months, they have the savings to make them for the first month or 2, it will be as if -- as life returns to normal, that we see the strength come through.
Our next telephone question is from Harry Dudley from Watermark.
Could I just quickly clarify, did you say 8,000 deferrals? Is that as in every deferral? Or is that your -- the remaining active deferrals?
Those are the remaining deferrals. We had over 55,000 deferrals throughout the deferral period.
Okay. So when I look at kind of common banks have 92% returning out of deferral, that's correlating to your 8,000 over 50,000?
I'm not sure exactly what time periods they were looking at, so...
That thing just came up.
Conceptually, you can say yes, but probably not for an exact comparison.
Yes, they are a portion of our deferrals, and there are other banks that make up that deferral number throughout the course of the year.
I'm just trying to correlate the reduction in deferrals with an increase in provisioning. I thought you'd be preparing for the worst when that provision was set. And I'm just trying to understand, like, are we missing a piece? Because obviously, the environment is already improving from a reduction in deferrals point of view, and that deferral pool is the risk is smaller than it was 3 and 6 months ago? Is there something that we're missing here?
Yes. So don't think of the increase in reserving the same way you normally would. This is the case of -- because delinquencies haven't been reported. So when we get notified of delinquencies, we would go for them. Not at the full level of decline, but at a probability-weighted reserve for what we think we have to pay on the client related to that delinquency. Because of the deferral program and even when they finish, their loans are not being reported as delinquency. It's going to take at least 3 months from the end of the deferrals before the loans get reported as delinquencies. So all we're doing is finding effectively different bucket to put the money we need [indiscernible] those delinquencies that we know are there, but then don't get reported as delinquencies to put that into. It's not [indiscernible] in a traditional sense.
Yes. Okay. But what was the initial -- I know you've had to set this reserve in a different form of the write-down of the DAC 2. But what was kind of initial expectation for delinquencies or finishing deferrals when that was set? I think already in the reduction in deferrals, it's already far exceeded everyone's expectations on the upside, yet it still seems like you're provisioning for a worser environment?
I actually have a really good hard look at the provisions every quarter based on the data that we have at this point in time, we believe that's the best estimate assumption. As we've said a number of times, we still need to see what happens in that loan book when the loans needs to perform again to really get a good view, and that's when we'll be able to really refine those assumptions.
[Operator Instructions] There are no more further questions in the queue. I'd like to hand the call back to today's speakers for closing remarks.
So thanks, again, everyone, for joining us and for your engagement and interest in our story. We think it's been a great start to the year for us with pretty good underlying momentum in the business that we're pleased to see. And we're seeing that both in our results and also in the delivery of our strategic agenda. And of course, we're delighted that we launched this week another lender on our monthly payment LMI business.We -- as we said, we're hopeful that the economy continues to recover and these trends continue. Of course, we need to wait and see as the data emerges over the course of the year that flows through our book. But we are very well capitalized. We have a lot of capital and operational flexibility to manage the data as it emerges and to continue to support our lender customers and their borrowers through the economic recovery. So thank you, and we will speak to you in a few months' time. And I'll now hand back to the moderator to end the call.
Ladies and gentlemen, you may all disconnect. Have a good day.