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Edited Transcript of GMA.AX earnings conference call or presentation 4-Nov-20 11:00pm GMT

·42 min read

Q3 2020 Genworth Mortgage Insurance Australia Ltd Earnings Call NORTH SYDNEY Nov 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Genworth Mortgage Insurance Australia Ltd earnings conference call or presentation Wednesday, November 4, 2020 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Michael Bencsik Genworth Mortgage Insurance Australia Limited - CFO * Pauline Blight-Johnston Genworth Mortgage Insurance Australia Limited - CEO, MD & Director ================================================================================ Conference Call Participants ================================================================================ * Andrew Buncombe Macquarie Research - Insurance and Diversified Financials Analyst * Andrew Martin Peak Investment Partners Pty Ltd. - Portfolio Manager * Desmond Tsao Goldman Sachs Group, Inc., Research Division - Associate * Siddharth Parameswaran JPMorgan Chase & Co, Research Division - Research Analyst * Simon Fitzgerald Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials ================================================================================ Presentation -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [1] -------------------------------------------------------------------------------- Thank you all, and good morning, everyone. Thanks for joining us this morning to discuss the financial results of Genworth Mortgage Insurance Australia for the third quarter of 2020. As Miles has mentioned, I'm Pauline Blight-Johnston, Genworth's Chief Executive Officer; and joining me this morning is our Chief Financial Officer, Michael Bencsik. I'll start with Slide 5 of the presentation. As we've all heard very many times, these are challenging times. Many people, families, businesses and communities are doing it tough. We understand how important it is for us to continue to support our customers, their borrowers and the broader community as the COVID-19 pandemic takes its course. In this difficult environment, Genworth has been focused on 3 priorities: firstly, prudently and efficiently managing our business; secondly, working closely with our lender customers to support borrowers impacted by COVID-19; and thirdly, taking care of our people. I've been really impressed with the way that our people have continued to professionally service our lender customers and assist their borrowers in such a challenging environment. We've diligently managed the high volumes of loan repayment deferrals as well as higher transaction volumes of new business. And despite this extra workload, we've consistently maintained our service levels. This reflects the commitment of our people and also the technology and systems that Genworth has invested in over recent years, which are enabling us to adapt and respond quickly to lender customer requirements. Importantly, Genworth entered a difficult period in a strong operational and financial position, providing us the capacity to be able to adapt to the changing circumstances. This quarter, Genworth reported a statutory net profit after tax of $24.6 million for the third quarter of 2020. This follows the $35.6 million net profit after tax we delivered in the second quarter. Year-to-date, we delivered a statutory net loss after tax of $65.4 million, which was, of course, materially impacted by the first quarter deferred acquisition cost write-down of $181.8 million. New insurance written increased over the quarter to $7.8 billion and $21.3 billion over the year-to-date. The ongoing growth in new business volume is particularly pleasing given the increased scrutiny of credit quality during the COVID-19 pandemic. We continue to support the repayment deferral program, government job support packages and legal moratoriums that are assisting Australians at this time of need. These programs are beneficial for the economy and for our business. They are delaying the debt development and progression of delinquencies in claims, providing Australians some respite and some time to recover. They do, however, reduce our visibility of anticipated future claims outcomes. These unusual circumstances together with the expected uneven economic recovery are creating an operating environment where there's a higher degree of uncertainty about the timing and extent of future potential claims. In response to the claims delays and the uncertainty, with increased reserving by $47.1 million in the third quarter. This includes adjustments to compensate for the anticipated delayed claims as well as an increase in the outstanding claims risk margin to reflect the elevated uncertainty. Over the coming periods, it will become increasingly evident how many insured loans may continue to experience difficulty following the end of the repayment deferral program. We'll continue to assess the appropriateness of our reserving methodology as we obtain more data on repayment deferrals and as the nature of the economic recovery becomes more apparent, increasing the visibility on the future anticipated incidence of claims in our book. Against this backdrop, importantly, Genworth remains in a strong capital position and is able to withstand a wide range of volatility in claims outcomes. As at September 30, 2020, the company's regulatory solvency ratio was 1.79x the prescribed capital amount ratio on a Level 2 basis. Pro forma, excluding the recently redeemed 2015 Tier 2 subordinated notes, the PCA ratio would have been 1.73x. Either way, these are comfortably above the Board's target range of 1.32x to 1.44x, representing pro forma surplus capital of $255 million above the top end of the target range. Turning to Slide 6. I want to highlight a couple of our key financial messages, and Michael will go through the detail in his presentation. As I mentioned in my introduction, new business volume is strong. New insurance written increased 22.2% to $7.8 billion. Net earned premium increased 4.6% to $79.7 million. We've seen continued strong volumes being written by our lender customers. Borrowers are taking advantage of a competitive housing market in a low interest rate environment to buy their first home, to upgrade or to refinance. Our reported loss ratio of 63.5% is largely a result of the increase in COVID-19-related loss reserving for anticipated future claims as delinquencies and claims payments continued to be subdued as a result of the repayment deferral program. Genworth's ultimate claims outcomes will depend on the speed and nature of the economic recovery, particularly in respect of unemployment and house prices. We've provided an update on our view of these indicators and the overall economic environment on Slide 7, so let's turn there now. On Slide 7, during the third quarter, there have been slightly improved published forecasts for GDP, an anticipated lower and earlier peak in unemployment and a milder-than-expected deterioration in the national housing market, notwithstanding the challenges in Victoria. The economic assumptions underpinning Genworth's Central Estimate have moved only within narrow bounds since March and are tracking broadly in line with recent economic indicators. Reported unemployment is currently slightly better than our Central Estimate peak assumption of 9.1% due to the government support measures. House price depreciation to date is also better than the peak-to-trough Central Estimate of minus 8.3%. Although, we are expecting some markets, such as Melbourne, to experience greater price depreciation than others over the coming months. While economic indicators are encouraging, considerable uncertainty remains. Moving to Slide 8. Despite the challenging economic environment, Genworth is still seeing ongoing top line growth. Importantly, underwriting quality has been strong across a range of credit metrics. We are actively monitoring the quality of applications that are coming in. Alongside our lender customers, we are applying high levels of scrutiny, particularly in validating employment and source of income. Turning to Slide 9, where we provide some further information on repayment deferrals. As of 30 September, we had over 31,000 active repayment deferrals from our lender customers, which represented approximately 3% of our insured loans in force. This was down from our peak of approximately 50,000 in May. This reduction against the peak reflects significantly lower new repayment deferrals received over the third quarter as many repayment deferrals expired or were closed down by borrowers opting out. Over the quarter, we continue to meet frequently with our lender customers to discuss their repayment deferral program. We're liaising with lenders on the workout strategy they've started to implement, which includes moving borrowers to interest-only loan, loan consolidation or extension of loan term. Moving to Slide 10. Talk about capital. In these challenging times, I'm very pleased to report the company remains in a strong capital position. As I mentioned earlier, Genworth's PCA coverage ratio on a Level 2 basis of 1.79x sits comfortably above the top end of the Board's target range of 1.32 to 1.44x. Pro forma, excluding the recently redeemed 2015 Tier 2 subordinated notes, the PCA ratio was 1.73x. This represents pro forma surplus capital of $255 million above the top end of the Board's target range. Our $800 million reinsurance program also provides additional flexibility above this. Although we a central estimate scenario for our forecasting, we do continue to model a range of scenarios for possible claims outcomes, including a base case and a downside. Testing these scenarios again this quarter confirmed our confidence in Genworth's ability to withstand an environment significantly worse than current expectations. Before handing over to Michael, I just want to spend a few minutes talking about our strategic focus, which is outlined on Slide 11. As housing affordability continues to be pressured, particularly in capital cities, the increasing challenges facing homebuyers [in paying their deposits] are driving a greater need for a sustainable, competitive, high loan-to-value lending market. Genworth is the market leader in Lenders Mortgage Insurance and have positioned ourselves as a trusted partner for our lender customers. During this last quarter, we successfully renewed 2 mutual customers with whom we've had exclusive partnerships for quite some time. Like any business, we need to adapt and evolve to meet changing homebuyer expectations and keep up with advances in technology, for example, through our new monthly premium product, which we are delighted to have commenced piloting during the quarter. Innovation and adaptation are critical in this new operating environment. This is top of mind for us as we finalize our annual strategic review. We're examining how we might use our market-leading capabilities to identify new sources of growth. We're also in how to make our business more efficient, which will enable us to free up resources to invest in the future. In the meantime, of course, we remain focused on running the business responsibly and efficiently and helping our lender customers to support their borrowers. And I'll now hand over to Michael Bencsik to talk more about our financial results in detail. -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [2] -------------------------------------------------------------------------------- Thank you, Pauline, and welcome to everyone on the call, and thank you for joining us today. I will now sort of go through the financials in a bit more detail, starting on Slide 13 with our third quarter 2020 income statement. This quarter, Genworth reported a statutory net profit after tax of $24.6 million or 2% below the third quarter 2019. This result was largely attributable to higher new insurance written from growth in business volumes, which was offset by additional reserving reflecting the uncertainty and timing of anticipated future claims from loan repayment deferrals and lower investment income. The year-to-date third quarter 2020 statutory net loss after tax was $65.4 million. This was compared with $113.2 million profit in third quarter 2019 and was materially impacted by the DAC write-down of $181.8 million during the first quarter of 2020. Pleasingly, gross written premium increased 25.5% to $143.8 million. This was up from $114.6 million in third quarter 2019, arising from strong growth in LMI flow volumes across our lender customers. Year-to-date, gross written premium was up 28.3% to $383.1 million on third quarter 2019. Net earned premium increased 4.6% to $79.7 million over third quarter 2019 and was up 3% on a year-to-date basis to $230.5 million and reflects continuing [ceasing] of current and prior book years and the higher gross written premium result. Net claims incurred increased 25.7% to $50.6 million over the prior year. This reflected a $47.1 million increase in reserving during the quarter from repayment deferrals that are delaying delinquency development and normal loss resolution processes. Investment income earned was a gain of $23.9 million during the quarter, which was down 18.9% over the prior year due to lower interest income and lower unrealized gains from the declining interest rates and tightening of credit spreads. We have included in Slide 14 some further detail on how the economic environment, particularly, unemployment by state and house prices by capital city, has influenced our loss experience in the third quarter. During third quarter 2020, the national housing market has been relatively resilient. Year-to-date, national house prices have improved slightly by 0.7% in all capital cities except for Melbourne, which was minus 2.8%; and Perth, which was minus 0.9%. The national headline unemployment rate at 6.9% as of 30 September is obscured by those workers supported on the federal JobKeeper program. And as a result, our updated central estimate has been revised at 9.1% unemployment rate by fourth quarter 2020. This unemployment rate assumption includes allowance for workers currently on the JobKeeper program and takes into account the employment distribution of our portfolio. Our delinquency rate of 0.62% at the third quarter 2020 remained flat to second quarter 2020 as delinquencies and claims continue to be subdued due to current repayment deferral programs. And I'll talk more about this shortly. Moving to the next slide, 15. Victoria, which represents 23% of our insured loans, has experienced a more pronounced set of economic circumstances to the rest of the country because of the extended lockdown period. House price depreciation here has been higher in Victoria, and this has been particularly the case in Melbourne. While the Victorian unemployment rate at 6.7% was lower than both New South Wales and Queensland during the quarter, this underlying unemployment rate has been masked by low participation rates of those employees on the JobKeeper program and the lower hours worked, which declined to levels that were last seen in May 2020. The delinquency rate of 0.49% in Melbourne was relatively consistent with the rest of Victoria but below the national average delinquency rate of 0.62%. Whilst we have not seen any material uplift in new delinquencies in Victoria, this is largely because the delinquency rate is currently subdued by those Victorian borrowers on these repayment deferral programs. They comprise approximately 24% of our active 31,000 deferrals as at 30 September 2020, which is in line with the exposure of our in-force loans on our book. The key factors of our loss performance are shown on the next slide, 16. Net claims incurred was 25.7% higher at $50.6 million compared to $40.3 million in the third quarter 2019, resulting in a loss ratio of 63.5% when compared to 52.9% at third quarter 2019. This reflects the additional $47.1 million from reserving during the quarter for the anticipated delayed claims. While our portfolio was performing as expected prior to COVID-19, our loss management experience reflects the unusual circumstances created by the government stimulus, legal moratoriums and extended lender support deferral programs that are delaying both the normal development and progression of delinquencies as well as aging. To adjust the timing of these delayed claims, we have increased our reserving by this $47.1 million during the third quarter of 2020. This reserving included actuarial adjustments of $33.9 million to compensate for claims delays and $13.2 million for an increase in the risk margin from 14% to 18% in the outstanding claims liability, reflecting the uncertainty on lender workout strategies for payment deferrals. We, however, continue to assess the impacts of these repayment deferrals and changes in delinquency behaviors on the timing of incidence and associated reserving. This work is occurring in tandem with the annual review of the premium earning pattern, or otherwise known as earnings curve, that will normally be conducted by the business in fourth quarter 2020. Moving to Slide 17. Investment income continues to be pressured by this low interest rate environment. Investment income earned for the quarter was a gain of $23.9 million or 18.9% below the prior year largely due to lower interest income and lower unrealized gains from the declining interest rates and tightening of credit spreads. As of third quarter 2020, our annualized investment return was 1.2% per annum when compared with 2.3% per annum for third quarter 2019. Slide 18 highlights the continued strength of our balance sheet. First, the asset side of the balance sheet comprises a $3.3 billion cash and investment portfolio with approximately 81% held in cash and fixed income interest securities with a rating of A- or better. The cash balance fluctuates in line with the timing of investment settlements and liquidity management activities. In terms of liabilities, we increased our outstanding claims reserves to $416.7 million, reflecting a change in COVID-19 reserving and risk margins. We have retained over $1.4 billion of unearned premium on our balance sheet, which we will earn in future periods. Our investment portfolio plus the $800 million reinsurance program are essentially what is available to meet our claims obligations to our policyholders, providing us with over $4 billion of claims-paying resources. In the context of stress testing, this would allow us to withstand a wide range of volatility in claims outcomes. Turning now to slide 19. Genworth retained a conservative and well-diversified cash and investments portfolio with an average maturity of 4.2 years and an average duration of 2.5 years. This investment portfolio of $3.3 billion comprises 38% in Australian government bonds, 30% in Australian investment-grade credits, 20% in U.S. dollar CLOs and non-AUD investment-grade credits with the remainder in equities and short term deposits. During the quarter, we have not made any significant changes to our portfolio. Although as market volatility has settled down in the third quarter of 2020, Genworth has reduced its exposure to commonwealth government bonds and increased its exposure to state government bonds and corporates. Moving now to Slide 20. Genworth performs a liability adequacy test, or LAT, at the end of each quarterly reporting period, which represents a point-in-time test. As the premium liability measurement critically relies on future economic conditions, the measurement is sensitive to the ongoing uncertain future impacts of COVID-19. As at third quarter 2020, we have tested and updated our central estimate with a range of economic scenarios regarding the duration of the assumed economic recovery and mitigating benefits of the government stimulus and labor initiatives to support the estimation of premium liabilities and future claims. These assumptions are noted on Slide 10. This reestimation, as at the third quarter of 2020, demonstrated that we retained a LAT surplus of $88.6 million, following on from the $81.3 million surplus that we reported at second quarter 2020, representing the amount of net earned -- unearned premium, which exceeded premium liabilities by this amount. Slide 21 shows that our regulatory capital position remains relatively strong. Genworth's PCA coverage ratio on a Level 2 basis of 1.79x sits comfortably above the top end of the Board's target range of 1.32 to 1.44x capital. On a pro forma basis and excluding the recently redeemed 2015 Tier 2 subordinated notes, the PCA coverage ratio was 1.73x. This is still above the Board's target range of 1.32 to 1.44x and represents a pro forma surplus capital of $255 million, above the top end of that target range. On -- the chart on the right that you see shows the trend in probable maximum loss, which has increased slightly to $1.7 billion at 30 September 2020. This has been driven by the increase in new business flow written by our lender customers. The movement in the asset risk charge during the quarter reflected the increase in our exposure to state government bonds and corporates in a more stable investment environment that I alluded to earlier. I'll now hand back to Pauline to wrap up the presentation. -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [3] -------------------------------------------------------------------------------- Thank you, Michael. Genworth's third quarter result reflects the very unusual environment in which we're operating. We've enjoyed strong ongoing top line growth. However, the impacts of COVID-19 on borrowers will to, some extent, be ongoing, at least for the remainder of 2020 and through 2021. To date, we've seen reduced claims activity as a result of the prepayment deferral program. We've attempted to compensate for this and the higher uncertainty in our reserving by increasing actuarial adjustments on the risk margin. Financial outcomes may demonstrate a higher-than-usual level of volatility in coming periods as more information comes to hand regarding the anticipated ultimate claims impact of COVID-19. We'll continue to assess the appropriateness of our reserving methodology as we obtain more data on repayment deferrals and the nature of the economic recovery becomes more apparent, increasing our visibility on the anticipated future incidence of claims in our book. This work is occurring in tandem with the annual review of the premium earning pattern, known as the earnings curve, that will be conducted in the fourth quarter. It's worth noting that even if all economic and loss outcomes are not exactly in line with our assumptions, the nuances of accounting treatment may result in period-to-period volatility over the coming years as we may be required under accounting standards to bring different aspects of reserving to account at different times. Genworth entered this pandemic a strong capital base and a capital buffer that means we will remain well positioned to navigate the challenges and opportunities ahead. We'll keep working together with our lender customers to support Australian borrowers, helping as many people as possible to realize the dream of homeownership and [find that home wherever] possible. And with that, I'll open up to any questions you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Andrew Buncombe from Macquarie. -------------------------------------------------------------------------------- Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [2] -------------------------------------------------------------------------------- And I just had 2. Just the first one, are you able to give us a bit of color around how reinsurance pricing and coverage is looking for next year and sort of what reinsurers are telling you at this point? -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [3] -------------------------------------------------------------------------------- Yes. Thanks, Andrew. First, sort of (inaudible) initial indications really from global reinsurers, both in Europe and the U.S., indicate that pricing will be quite elevated, but capacity could be constrained. But the overall feedback that we are getting is some good -- they're very comfortable with the level of Australian mortgage risk across our sort of book. But we'll continue to work through that renewal over the course of November, and we should have an update for our full year results. -------------------------------------------------------------------------------- Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [4] -------------------------------------------------------------------------------- Excellent. And then my other question was just in relation to the contract, the large contract which ends in November, which you'd previously announced. In the past, those sorts of contracts have tended to drag on a little bit as the handover has gone a little bit slower than expected. Is there any chance that, that will [fill out] this time around from the 20th of November? -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [5] -------------------------------------------------------------------------------- We're not expecting that at this point in time. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Okay, your next question comes from the line of Desmond Tsao from Goldman Sachs. -------------------------------------------------------------------------------- Desmond Tsao, Goldman Sachs Group, Inc., Research Division - Associate [7] -------------------------------------------------------------------------------- I just had a question around the cure rates. I'm just wondering if you can sort of flesh that out in a bit more detail. Obviously, it was broadly flat on pcp, but trends have really increased considerably on a quarter-on-quarter basis. If you can sort of talk to the drivers and what you expect in the fourth quarter in light of, I guess, the macro backdrop, particularly, the rate cuts this week and as well as the reserving that you've sort of flagged today. -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [8] -------------------------------------------------------------------------------- Yes. Look, I'll hand it to Michael for more detail. But just to put a little bit of color on that, remember that the repayment deferral concept is new for Australia. [We haven't seen it before in the past, and we've all had to adapt to that.] And so (inaudible) And so what it meant is that the [banks would handle the systems differently] and some are [recording] information differently. So that's what we're seeing. I wouldn't read too much [certainly into any actual numbers] in each quarter because some banks are actually (inaudible) deferrals, and we're trying to [get that noise out]. The amount that I think [more instructive is that you'll see numbers] quarter-on-quarter. [So Michael?] -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [9] -------------------------------------------------------------------------------- Yes, I think generally, what we have seen post our half year results has been really a slowdown broadly of delinquencies through the repayment deferrals. But that has had a slowing impact on aging and sort of cures. And the reason is basically, we're not seeing -- we're seeing a distortion to the normal pattern that has been occurring. As Pauline mentioned, at the peak, we had about 50,000 deferrals; and at the end of September, we had around 31,000 deferrals. And we do expect to see that further reduce over the coming months as we lead into the end of November. So what we are seeing is basically an abnormal sort of pattern of cures, and we do -- would expect to see that continuing into first quarter of next year. But basically, what we're seeing is an elevated dollar value of cures but on actual number basis somewhat subdued. -------------------------------------------------------------------------------- Desmond Tsao, Goldman Sachs Group, Inc., Research Division - Associate [10] -------------------------------------------------------------------------------- Fantastic. And maybe just a question around top line growth. Another quarter of pretty solid GWP and NEP growth. If you can sort of maybe flesh out the drivers and where you're seeing that growth and, I guess, the run rate into the fourth quarter, what you're sort of expecting on that front. -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [11] -------------------------------------------------------------------------------- Yes. There's 2 things going on there. One, the housing market and mortgage growth generally has held up better than people expect, and you can see that from the APRA stat. The other thing that you can see from the APRA stat is that, within that, the winners and the lenders that have been doing better compared to their peers fortunately tend to be the ones that we insure. So we've had the benefit from both of those things coming through our results. And we're seeing that those lenders that are doing better, typically, it's because they have -- their operations have kept up. So some lenders struggled at the beginning of COVID where their operations centers were offshore. Those that managed that transition to COVID have kept up their volumes better during this period. And we've had a higher exposure to those lenders. -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [12] -------------------------------------------------------------------------------- And what we have seen is quite a growth into [some homebuyers] coming back into the market. And I guess with the recent reserve bank rate cut to 0.1%, we would expect to see some further interest of [obviously through] refinancing on new borrowers coming in. Most of the growth that we have seen at the top line has been in the owner-occupied space, and we would expect to see those volumes continue into the fourth quarter based on, as Pauline mentioned, a lot of the banks increasing the speed to yes in terms of approval processes. The important point to remember, I think, for us, at least from a general perspective, is we've maintained our strict underwriting standards in relation to the growth of this new business. And we've actually put in -- put on the extra resourcing to accommodate those extra volumes. But... -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [13] -------------------------------------------------------------------------------- Yes. In fact, at the beginning of the COVID, we turned off a lot of our auto-decisioning so that we made sure we actually saw every application coming in. So we have applied high standards to that, and still -- [we've still written in the] increased volume. -------------------------------------------------------------------------------- Desmond Tsao, Goldman Sachs Group, Inc., Research Division - Associate [14] -------------------------------------------------------------------------------- Sure. And maybe just picking up on that, like, in terms of, I guess, the shift towards fixed rate loans, are there any nuances to be aware of as to how that may potentially impact demand for your products? -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [15] -------------------------------------------------------------------------------- I don't think they're between fixed are variable. I mean the [real thing] for us is between owner-occupied and investor or between interest-only and principal and interest. And as Michael said, what's been really good to see, good for Australia as well as good for our business, is the first-time buyer coming back into the market, which tend to be owner-occupied P&I loans. -------------------------------------------------------------------------------- Desmond Tsao, Goldman Sachs Group, Inc., Research Division - Associate [16] -------------------------------------------------------------------------------- Fantastic. And just last question. Just finally on capital, I guess, as you highlighted, very strong PCA ratio. Is there anything you can comment on just around, I guess, expectations for capital management into the fourth quarter and even sort of into '21 and beyond? -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [17] -------------------------------------------------------------------------------- That will clearly be something that we'll consider when we look at our full year results. As you know, we consider that very, very carefully. We know what our shareholders would like. We also need to manage a regulator. And once we see the full year results, then we'll be able to consider that. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Simon Fitzgerald from E&P. -------------------------------------------------------------------------------- Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [19] -------------------------------------------------------------------------------- My question relates to the fourth quarter potential change in the earnings curve or, at least, the review that you've mentioned. I appreciate you can't sort of give us a clue of what might happen, and that review is still yet to occur. However, I was just curious to note, how are you going to manage what could be a temporary change in the claims development outcomes versus what could end up being a permanent change in your earnings curve? I mean we may very well get to a situation later on next year where the claims development cycle happens a little bit shorter than what sort of COVID-19 is sort of stressing. So I'm wondering how you're going to balance those 2 items? -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [20] -------------------------------------------------------------------------------- So look, I've been an actuary for 25 years, and I can tell you that the #1 question I get is that is this a temporary determinant, whatever thing happens. And to be honest, that is the [art] of what we need to do. The intent of what we do and the intent of the earnings curve is to come up with this long term, not to be unduly influenced by the short term. As we've said, the challenge we're having this year is all the usual patterns have changed, and so the actuaries are doing a lot of work and is why it will take time to unpick what is noise and what our actual underlying change is in long-term trends. So that's what we'll be targeting. Of course, we don't have [so big] information, but the intent is certainly to come to have the long term over the short term. -------------------------------------------------------------------------------- Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [21] -------------------------------------------------------------------------------- Yes. Understood. And then the second question is just regarding the deferrals. You're satisfied that you're getting the right and full information from your lending customers at this stage. Maybe you can also talk to whether the data has improved over the period of time since we first sort of heard about lockdowns in COVID-19, et cetera. -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [22] -------------------------------------------------------------------------------- Yes. So yes, we are. We've really asked a lot of questions as to why we have persistently seen a lower proportion of our book in deferrals than across the market. There's 2 reasons for that. One is there is something to do with the way that we [conduct] policy [but sometimes top-up comes] to a second policy. So that has a small impact on our number. But the bigger impact is our skew. We're skewed away from the big banks. And if you look at the -- our portfolio and if you look at the results across the industry, you'll see that the big banks have higher deferral rates on average than the rest of the market. So we're comfortable that we're not missing large tranches, that the data is right, coming through to us. We're spending a lot of time trying to understand both the data but also the stories behind that. That's really what everyone wants to know. It's not just the numbers that are in deferral but the likelihood of each of those deferred loans ones having trouble when the deferral period ends. And that's partly data-driven, and it's partly insight and trying to understand the story behind that. So as well as getting very regular data from our customers, we actually sit down with our lender customers and have quite in-depth discussions about what they're feeling about the portfolio, what they're seeing that may not be coming to through the data. They may provide some insights to that. Now clearly, nobody actually knows, and it's not going to be until those deferrals end, but we get the real, hard data around that. But we're trying to tackle it from both sides. -------------------------------------------------------------------------------- Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [23] -------------------------------------------------------------------------------- I see. No, that makes perfect sense. Just final question, too. I just want to confirm that the top-up in the reserving for the third quarter was at 17-point-something million that was ripped off -- sorry, $17.6 million, which was the movement in reserves, there's no other measures that could sort of see that move around if that's totally the top-up of the third quarter. Is that correct? -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [24] -------------------------------------------------------------------------------- Yes, that's probably correct in terms of the reserve. So -- and we -- that includes the change in the risk margin we also talked through the quarter. So thank you, Simon. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Okay. Your next question comes from the line of Siddharth from JPMorgan. -------------------------------------------------------------------------------- Siddharth Parameswaran, JPMorgan Chase & Co, Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Yes. Just a couple of questions from me. Just firstly on -- just the loan deferrals. Just -- I think you showed there that there's about [$13.8 billion] which is basically deferred in terms of exposure, which is about 5% of your insured amount, but you say that the number is much lower. I think it's about 3% of your loans which are in deferral. I'm just wondering why is there such a differential between those 2. Is there anything we should take away about which loans are in the deferral? Can you give us some guidance to that? Or any color around what -- where these loans are, regional versus metropolitan areas? Are there any sort of color which might explain why there's such a differential also just in the sum insured versus the actual numbers that are in deferral? -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [27] -------------------------------------------------------------------------------- Yes. Look, in terms of the deferrals, I think we've got 31,000 loans that geographically are at sort of 23% related to Victoria. We have seen around 42% come down off its peak. So when we look at the share of insured loans in force, which is related to just the level of insured loans, it does -- there's a difference in terms of excluding some of our New Zealand book and excess of loss insurance. Really, when you're looking at the deferrals, we do expect to see these come off quite markedly over this -- November -- end of November period as the deferral program actually ends. And also, I think the critical thing will be around how the banks move forward extending those deferrals and the type of restructuring or curing that will occur. And this is what we will continue to work forward with the banks. -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [28] -------------------------------------------------------------------------------- I mean I'll just add a little bit to that. That reality, I guess, of a high percentage by dollars than by numbers is consistent with what we've seen across the industry. The APRA data is showing that by dollars, it's 7.4% across the industry of loans that are in deferral; and by number, it's 6%. So it's not inconsistent with what we're seeing there. The other thing to remember is that the -- that dollar number that you've picked up actually refers to the loan size at inception, not the current loan size taking account of repayments between now and inception because that's the data we have. -------------------------------------------------------------------------------- Siddharth Parameswaran, JPMorgan Chase & Co, Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Okay. And can you just give us any color -- any other color, though, just as to where these risks are, regional versus metro? You guys -- I mean you said Victoria, but just anything by industry? Or any color you can give us? And the second question just around that is, I mean, you mentioned that you're expecting it to drop -- to fall off quite markedly. Out of the ones that will remain, do you have any insights at the moment as to how you and the banks plan to work through them? Are you going to take a longer time frame in working through than you might have in the past? -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [30] -------------------------------------------------------------------------------- Yes. So we're looking at that on a case-by-case basis. Clearly, it's in no one's interest to flood the market with properties at the -- all at the same time. And so we've sat down with our lender customers and started to segment the portfolio to make sure that we're doing the right thing by the borrowers, by the industry, by our shareholders, by the country and the economy as to how we work through these portfolios, which lenders we -- sorry, which borrowers we think will benefit from more time to recover and which borrowers are unlikely to benefit and we're better to work with more actively sooner because they're going to end up in more trouble. So that is a huge piece of work that we are very, very actively involved in. And we have effectively decision trees with our different lenders that we've agreed with our different lenders as to who falls into which bucket. Of course, [what we're waiting to see], of course, is how many would fall into each bucket. But we are fully very comfortable with the work that our operations team has done around that. -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [31] -------------------------------------------------------------------------------- And probably just to [further just Pauline's comments and just to] give you some more color. Really, when we look at the remaining deferrals, majority of these deferrals really relates to book years of 2017 to 2019, so mostly recent years. And really, 12% of these payment deferrals that we're seeing at the moment really relate to policies which are really a shorter period of 12 months in force. Some other color, I guess, we need to sort of segment the deferrals. About 22% relates to investment loans, and around 19% relates to interesting-only loans. And the color that we're trying to work through with the banks is how those loans will be restructured post the deferral periods or extended, whether that will be extended through interest-only or [welfare]. So they just started [on working those]. I guess on Slide 9 of the investor deck, we've also got -- where you see where they fit into, particularly split by stage, showing the makeup of those (inaudible) provides us (inaudible) -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [32] -------------------------------------------------------------------------------- Yes. And you can see there Queensland overrepresented due to the tourism industry in that state. -------------------------------------------------------------------------------- Siddharth Parameswaran, JPMorgan Chase & Co, Research Division - Research Analyst [33] -------------------------------------------------------------------------------- Yes. Great. Okay. Okay. If I could just ask a question then just about your liability adequacy test where it looks like, compared to the 31st of March, your premium liabilities have actually fallen, $1.227 billion from $1.228 billion. I'm just a little surprised by that given that it seems like what you're saying is above -- you're actually increasing most of your assumptions, peak unemployment rate, your -- the peak-to-trough house price depreciation. I mean maybe just a question around why you're assuming that. And also, given that you're saying that a lot of your loan deferrals are actually in very recent years where there hasn't been much price depreciation at all, maybe just why the loans -- the new business that's coming on, we've had a significant increase in volumes, 25%, I think, versus the pcp. Why is it that the actual premium liabilities are falling when the risks are rising -- when the volume of risk is rising? Your own assumptions seem to say that you're assuming that things are worse than you were 6 months ago. -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [34] -------------------------------------------------------------------------------- Yes. Like I just said, really, I mean, the main driver of the LAT surplus really has been on 2 fronts here. One is really the growth in unearned premium that we've seen in terms of new business volumes. And the new business that we're writing is of quite high quality. When we updated our central estimate, particularly around unemployment and house price depreciation, that has certainly been maintained in the bands that we had at the half year and also the first quarter. So there's been not a material change in what we see as the outcome of future claims in terms of premium liabilities. So that's why you're sort of seeing it at the quarter, a similar, flat LAT surplus. We're quite comfortable with the LAT forecast and the premium, which we obviously look at every quarter. But there's nothing many more to read into that. The other benefit, I think, we are getting is really, if you're looking at the -- less deferred reinsurance costs and, I guess, the DAC, which is somewhat lower than sort of prior periods. But we're comfortable in terms of where we are with our assumptions at the moment, and that's why we sort of published them. -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [35] -------------------------------------------------------------------------------- Yes, it's -- the decrease is actually -- is not driven by assumptions. It's driven by business volume. And you can see that run down on Page 26, that very bottom table there, the insurance in force, how that's run down slightly over the 12 months. And that's driving it, not assumption changes. -------------------------------------------------------------------------------- Siddharth Parameswaran, JPMorgan Chase & Co, Research Division - Research Analyst [36] -------------------------------------------------------------------------------- Okay. Great. And just the last question, just around your expense ratio on a go-forward basis. Given that you're saying that you're going to work through more of these loans, should we think that there might be some upward pressure on expense ratios on a go-forward basis? Or -- yes, if you could just give us some guidance around that. -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [37] -------------------------------------------------------------------------------- I think the [largest businesses], there's always upward pressure on expense ratios, and it's our job to counter that. So I would say that's just part of BAU. I don't see that -- to be honest, the increased volume had caused [a little bit of expense pressure on our] operations team. But I think it was money well spent, and we've managed to bring in the expense line well even given that. -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [38] -------------------------------------------------------------------------------- Yes. The variable in our expenses is on acquisition costs, so that will sort of track in line with business volumes. But what we're trying to do consciously is net that up against sort of other underlying operational cost savings that the business has been working on over the last 6 months. So I think you will see very much a flat to slightly declining cost/income based on where the delta is in terms of revenue going forward, but we're actively managing that. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Okay. And we do have another question on the line from Andrew Martin from Peak Investments. -------------------------------------------------------------------------------- Andrew Martin, Peak Investment Partners Pty Ltd. - Portfolio Manager [40] -------------------------------------------------------------------------------- I was just wondering, do you expect the average paid claims to increase over the next 12 months given the repayment deferrals that have been in place and there's less incentive to foreclose, I suppose? -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [41] -------------------------------------------------------------------------------- Yes, look -- when you look at the -- if you're looking at a guide, we can say, in terms of history, if you look at sort of the nondeferral policies that we really had on our books, the average claims size has been around sort of 98 sort of thousand. I think [we might be falling in] that sort of region. With the deferrals, what Pauline mentioned is we're still working through potentially what of those deferrals -- healthy deferrals might come back to be delinquent. We would expect, potentially depending on the structure of those loans, the claims size to be aiming marginally above that sort of level. But we're still working through the processing of that with the lenders. So I think the guidance we've given before at that $94,000 to $98,000 is a good indicator. -------------------------------------------------------------------------------- Andrew Martin, Peak Investment Partners Pty Ltd. - Portfolio Manager [42] -------------------------------------------------------------------------------- Okay. And just last question. The 2 key economic variables that play out for you, unemployment and house price deflation, they're tracking better than your central estimates. So I mean, are you being -- sort of more erring on the conservative side than you need to be? Or I suppose you're taking a glass-half-empty approach as opposed to a glass half full. -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [43] -------------------------------------------------------------------------------- We're taking -- we're trying to do our best to come up with hand-on-heart what we think is the central estimate in a very, very uncertain environment. But then it's always hard to make the assumptions, even harder at the moment. So no, we're certainly not deliberately being conservative, but we need to be cognizant to that. Whilst we're seeing some really good signs come through in unemployment, particularly, at the moment, there are a lot of employed people who are still working zero hours. And so when JobKeeper ends, that will come through on unemployment. In addition to that, there's no guarantee we won't see further economic impacts in Australia because the pandemic is not finished yet. So we've got to weigh all of those things up and try it with our best estimates -- assumptions. -------------------------------------------------------------------------------- Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [44] -------------------------------------------------------------------------------- And another [booking] for you, Andrew. I think with the latest RBA forecast coming out to be about 8.1%, that still does include, as Pauline mentioned, some of those workers that may be on a JobMaker sort of program -- or JobKeeper program. So it's very consistent with us, sort of 9.1%. We've also adjusted for casual work as we've stated for part of the demographic of books, which are also the headline unemployment rates that you see published externally. So the unemployment forecast is reticent to how we look at our [sort of books]. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- (Operator Instructions) Okay. I appear to have no further questions. So for now, I might hand back to you to maybe wrap up. -------------------------------------------------------------------------------- Pauline Blight-Johnston, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [46] -------------------------------------------------------------------------------- Thank you, Miles. And thank you, everyone, for your time today and for your good questions. As I've said, we are operating in unusual times. It's been encouraging to see the slow improvement in the economy and it being -- possibly haven't turned into some of the worst scenarios that people had feared, but we are early days to this pandemic. Really, for us, I guess, this is to say a case of we're trying to reserve ahead of what may come. We're still waiting to see visibility, and the real information for us will start to come through as the repayment deferrals conclude. We're seeing the first round of those being [really received in] September and October, but it will be early next year when we really start to see that data come through. So we're really pleased with the results that the business has delivered in this environment, that those aspects are within our -- more within our control are being well managed. The team is operating well. And we will closely monitor what comes out as new information comes to hand. So thanks for your time today. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude today's conference call. Again, thank you all for participating today. You may now all disconnect.