Helia Earnings: Can’t Fault the Track Record, but Conditions Unlikely To Remain As Favourable

We increase our fair value estimate for Helia HLI 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.

First-half 2023 underlying net profit after tax of AUD 137 million increased 7% on second-half 2022 and 32% on first-half 2022. It is the first period under new accounting standards, with the trends of lower gross written premium, or GWP, but continued revenue growth, claim benefits, and higher investment income, all largely as expected. The midpoint of insurance revenue guidance of AUD 420 million-AUD 460 million is around 20% higher than we had forecast, with the revenue recognition of premiums written in recent years plus the benefit of policy cancellations offsetting the decline in new business by more than we expected.

Despite the increase to our fair value, which is close to the current share price, our forecasts still assume no moat Helia faces a much tougher outlook. We think an annualised return on equity north of 20% delivered in the first half will trend down toward the cost of equity over time. Either claims are likely to exceed management expectations, or large customers such as Commonwealth Bank negotiate lower premium prices to reflect the lower claims. Our midcycle claims forecast at 40% is well above management’s 30% guidance.