Company Reports

Helia, formerly known as Genworth, has a long history of providing mortgage insurance to lenders in Australia but has only been listed on the ASX since May 2014. Global US-based insurer Genworth Financial listed it and completely sold out in 2021. We think it is likely Helia will find it challenging to grow its lender's mortgage insurance business in the face of increased competition. We believe the entrance of Arch Capital Group, and increasing tendency of lenders to self-insure, will see Helia cede further share over time.

Helia is not trying to shrink to greatness, but as industry demand for lenders mortgage insurance dries up, so does Helia’s gross written premium. Helia reported an 11% drop in GWP in the half to AUD 85.9 million. It’s a whopping 70% fall from first-half 2021 GWP, which was almost AUD 290 million. Low cash rates boosted demand a couple of years ago, and the opposite is occurring now, as borrowing capacity—regardless of leverage—is decreased by higher repayment costs. Banks waving borrower requirements for insurance is also likely a cyclical drag, given that bad debts have been nonexistent. Still, the government's First Home Guarantee Scheme appears to be a more permanent drag on demand.

Helia shares sold off heavily after announcing its largest customer, Commonwealth Bank, intends to issue a request for proposal. Helia and Commonwealth Bank renewed this contract for a three-year period in 2022, with the bank also issuing a request for a proposal back then. One difference this time is the bank is considering the merits of moving to one provider for both Commonwealth Bank and Bankwest branded loans, with the latter currently insured by QBE Insurance. The strong returns the lenders mortgage insurance providers are making in a very low claims environment might have contributed to the bank wanting to create as much competitive tension as possible.

Helia, formerly known as Genworth, has a long history of providing mortgage insurance to lenders in Australia but has only been listed on the ASX since May 2014. Global US-based insurer Genworth Financial listed it and completely sold out in 2021. We think it is likely Helia will find it challenging to grow its lender's mortgage insurance business in the face of increased competition. We believe the entrance of Arch Capital Group, and increasing tendency of lenders to self-insure, will see Helia cede further share over time.

Helia’s performance continues to be defined by weak demand for lenders' mortgage insurance and very low levels of claims. First-quarter 2024 premiums of AUD 38.4 million fell 25% from the previous corresponding period, and we estimate down 12% on fourth quarter 2023. The federal government home guarantee scheme and less demand for high loan/value ratio loans in a higher rate environment are the key drivers. Helia also called out Commonwealth Bank, Helia’s largest customer, insuring fewer of its high loan/value ratio loans. The ability for Helia to offset reduced volumes or higher claims on Commonwealth Bank loans over the medium term will be challenging, given how much business the bank brings to Helia.

Helia, formerly known as Genworth, has a long history of providing mortgage insurance to lenders in Australia but has only been listed on the ASX since May 2014. Global US-based insurer Genworth Financial listed it and completely sold out in 2021. We think it is likely Helia will find it challenging to grow its lender's mortgage insurance business in the face of increased competition. We believe the entrance of Arch Capital Group, and increasing tendency of lenders to self-insure, will see Helia cede further share over time.

The story hasn’t really changed for Helia. The top line is shrinking as demand for lenders' mortgage insurance dries up in a higher cash-rate environment. However, on a positive note, claims are well below long-term levels, investment income is strengthening in a higher bond yield environment, and the insurer is returning (and building more) surplus capital to shareholders. Australia’s largest provider of lenders' mortgage insurance has done better than we expected in recent years across claims and capital generation.

Helia, formerly known as Genworth, has a long history of providing mortgage insurance to lenders in Australia but has only been listed on the ASX since May 2014. Global U.S.-based insurer Genworth Financial listed it and completely sold out in 2021. We think it is likely Helia will find it challenging to grow its lender's mortgage insurance business in the face of increased competition. We believe the entrance of Arch Capital Group, and increasing tendency of lenders to self-insure, will see Helia cede further share over time.

Helia, formerly known as Genworth, has a long history in providing lenders mortgage insurance in Australia but has only been listed on the ASX since May 2014. Global U.S.-based insurer Genworth Financial listed it and completely sold out in 2021. We think it is likely Helia will find it challenging to grow its lenders mortgage insurance, or LMI, business in the face of increased competition. We believe the entrance of Arch Capital Group, and increased tendency of lenders to self-insure, will see Helia cede further share over time.

With the Reserve Bank of Australia cash rate rapidly increasing to 4.1% and tipped to move higher, demand for borrowing at a high loan/value ratio, and ultimately lenders mortgage insurance, have fallen materially since 2020 peaks. Helia’s third-quarter 2023 gross written premiums of AUD 45 million are around 35% lower than third quarter 2022, and almost 70% lower than third quarter 2020. The rate of decline has slowed, and we think likely approached a bottom.

We increase our fair value estimate for Helia by 9% to AUD 3.70 after another solid result for Australia’s largest provider of home lenders mortgage insurance, or LMI. Our short-term forecasts are lifted materially, with insurance revenue much higher than expected. We also reduce the share count and assume less capital is retained within the business. Despite having surplus capital and subdued new business for some time, we saw risk that economic deterioration could change claim assumptions and absorb capital. But the financial health of the business makes this look increasingly unlikely and the outlook for house prices and unemployment is not as dire as once feared. We assume completion of the AUD 100-million share buyback announced today, plus another AUD 180 million in buybacks by the end of 2024.

We maintain our AUD 3.20 fair value estimate for no-moat-rated Helia after reviewing first-quarter numbers. The 145% increase in first-quarter 2023 profit to AUD 121 million is impressive. The lenders mortgage insurance provider delivered a decent insurance underwriting result, but the profit uplift is driven by higher investment income thanks to higher interest rates. At the top line the dramatic decline in demand for LMI continues as gross written premiums tanked 52% from the previous corresponding period. For now, the impact on revenue continues to be far less material as the insurer recognises revenue on policies written in recent years when demand was strong and benefits from high levels of cancellations. Policy cancellations, due to higher-than-usual refinancing, continues to be beneficial and pulls forward revenue and profits. Net earned premium was only down 13%.

Apart from lower investment income, things have been going no-moat-rated Helia’s way in recent years. The name changed from Genworth Mortgage Insurance, following U.S.-based Genworth Financial selling out, but the focus on lenders mortgage insurance, or LMI, remains. The 21% increase in 2022 underlying net profit after tax to AUD 288 million, which excludes unrealised losses on the investment portfolio, shows how the insurer is benefiting from the favourable operating environment.

Strong demand for lenders mortgage insurance in 2020-21 continues to benefit Genworth Mortgage Insurance's earnings, but the tailwind is subsiding. Net earned premium, or NEP, in the third quarter was down 8% on the quarterly average of the first half, with new policies, which drive future revenues, down a much more material 27%. The tailwind of nonexistent claims continues, but we expect this to end in fiscal 2023 as higher cash rates increase mortgage stress.

At this stage we assume Genworth will extend its agreement to provide lender mortgage insurance, or LMI, to Commonwealth Bank beyond 2022. This is a crucial contract for Genworth, with premiums written on Commonwealth Bank loans accounting for 57% of premiums in fiscal 2020, which we estimate rises to around 65% in fiscal 2022. The power imbalance between wide-moat Commonwealth Bank and Genworth had already been factored into our forecasts, with the high customer concentration risk contributing to our very high uncertainty and no moat ratings. Genworth currently has a three-year exclusivity agreement with Commonwealth Bank, which ends on Dec. 31, 2022. Contract negotiations are normal, but Commonwealth Bank does not ordinarily issue a request for proposal as it intends to do this time. We suspect the entrance of Arch Capital into the Australian market may have encouraged the bank to review its current LMI solution.

Genworth has a 50-year history in providing lenders mortgage insurance in Australia but has only been listed on the ASX since May 2014. Global U.S.-based insurer Genworth Financial Inc. listed it and completely sold out in 2021. We think it is likely Genworth will find it challenging to grow its LMI business in the face of increased competition. We believe the entrance of Arch Capital Group, and increased tendency of lenders to self-insure, will see Genworth cede further share over time.

Granted it is just one quarter, and earnings are volatile, but Genworth’s first-quarter 2021 result and the strong economy puts the insurer on course for a better full-year result than we expected. We lift our fiscal 2021 forecasts to AUD 152 million from AUD 90 million previously. We lower claims costs from 60% of premiums to less than 30%, with lower investment returns offsetting some of the benefit. Lower unemployment and strengthening house prices add to our confidence the insurer is more than adequately reserved for a potential increase in claims. Our long-term forecasts and our fair value estimate of AUD 2.20 are unchanged.

Genworth has a 50-year history in providing lenders mortgage insurance in Australia but has only been listed on the ASX since May 2014. Global U.S.-based insurer Genworth Financial Inc. listed it and completely sold out in 2021. We think it is likely Genworth will find it challenging to grow its LMI business in the face of increased competition. We believe the entrance of Arch Capital Group, and increased tendency of lenders to self-insure, will see Genworth cede further share over time.

Genworth’s fiscal 2020 loss of AUD 104 million is better than the AUD 120 million loss we expected. It is far from a clean result though. The insurance loss of AUD 174 million was dragged down by movements in reserves. We estimate profits would have increased to AUD 177 million excluding reserves, compared with profits of AUD 108 million in 2019, the former driven by strong premium growth and fewer claims. Reserve movements were associated with expected coronavirus claims in future and changes to reserving policies for loans that have been delinquent at any stage. The loan-loss ratio increased to 93% from 53% in 2019, despite actual claims paid in fiscal 2020 falling 8%.

Genworth has a 50-year history in providing lenders mortgage insurance in Australia but has only been listed on the ASX since May 2014. Global U.S.-based insurer Genworth Financial Inc. listed it but retains a 52% stake. We think it is likely Genworth will find it challenging to grow its LMI business in the face of slow credit growth and increased competition. We believe the entrance of Arch Capital Group, and increased tendency of lenders to self-insure, will see Genworth cede further share over time.