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Edited Transcript of GMA.AX earnings conference call or presentation 29-Oct-19 11:00pm GMT

Q3 2019 Genworth Mortgage Insurance Australia Ltd Earnings Call

NORTH SYDNEY Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Genworth Mortgage Insurance Australia Ltd earnings conference call or presentation Tuesday, October 29, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Georgette Cecelia Nicholas

Genworth Mortgage Insurance Australia Limited - CEO, MD & Director

* Michael Bencsik

Genworth Mortgage Insurance Australia Limited - CFO

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Conference Call Participants

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* Andrew Buncombe

Macquarie Research - Insurance and Diversified Financials Analyst

* Desmond Tsao

Goldman Sachs Group Inc., Research Division - Associate

* Simon Fitzgerald

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Genworth Mortgage Insurance Australia 3Q 2019 Earnings Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Ms. Georgette Nicholas, CEO and Managing Director. Please go ahead.

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [2]

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Thank you. Good morning, and thank you for joining our CFO, Michael Bencsik, and myself on the call this morning to discuss the third quarter 2019 results for Genworth Mortgage Insurance Australia.

If we start with Slide 4 of the presentation, overall Q3 performance was solid with the market stabilizing and in major markets of Sydney and Melbourne, home prices improved during the quarter. Alongside recent interest rate cuts, the overall economic conditions are encouraging first homebuyers back into the market. And as a result, our new insurance written was up 26.4% to $6.4 billion in the third quarter '19 when compared to the prior year. This was achieved despite only modest movement in the high loan-to-value lending market when compared to the previous corresponding period, and reflects the strong performance of our lender customers in writing new business.

This strong performance by our lender customers also translated to gross written premium which increased by 24.4% in the third quarter. To highlight the strength of this performance, it's the best gross written premium performance in 4 years for Genworth when we exclude the Bermuda transaction that we did in the first quarter of 2018. That translated into net earned premium for the third quarter also being up 11.9% to $76.2 million compared to the third quarter of 2018 and was trending above our expectations from our policy cancellation initiatives, and the business continuing to execute on the strategic program of work around products, data and technology. The loss ratio for the quarter was 52.9% and in line with our full year guidance of between 45% and 55%.

Statutory net profit after-tax of $25.1 million in the quarter was up from $19.6 million in the third quarter of last year. Underlying net profit after-tax of $26.5 million in the third quarter also rose 29.9% over the prior year. The major drivers of the growth in the quarter was an after-tax realized gain of approximately $9 million, and this was offset by net claims incurred.

From a strategic perspective, we remain focused on product innovation and leveraging data and technology which continues to be a priority as the market responds to regulatory changes and evolving borrower needs. Our focus is on developing new risk and capital management solutions that complement our traditional single premium LMI product and to build on our suite of offerings to meet the needs of our lender customers as they navigate the changing environment.

Our capabilities now include, in addition to our single up-front premium LMI product and structured and bulk transactions, we can now do excess of loss cover, bespoke risk management solutions that we write through our Bermuda entity. We can bury the fixed term and fixed cover of our product. We can share risk and more recently, we introduced our regular monthly premium product that we announced in July which provides borrowers with the option of not capitalizing new premium into the loan or coming up with the entire LMI premium up-front, providing them more options.

In addition to product innovation, we remain focused on optimizing our capital structure as demonstrated by the announcement today of an unfranked special dividend of $0.242 per share. Given the time taken to complete the most recent buyback, along with the time of year that we're entering into and with the level of market liquidity, the Board has decided the most effective approach to returning capital to shareholders now, given the level of PCA at the end of the third quarter, would be payment of a special unfranked dividend of $100 million.

Following the payment of the special unfranked dividend, shareholders would have received distributions of approximately $330 million through a combination of special and ordinary dividend and on-market buybacks this year.

We continue to evaluate a range of capital management initiatives to ensure that we have flexibility to grow the business and that excess capital is returned to shareholders in the most effective and timely manner.

I'm also very pleased to announce this morning the renewal of our contract with CBA and the extension of our long-standing relationship for another 3 years.

If we turn to Slide 5, economic growth slowed in the quarter largely from reduced consumer spending, low confidence, lower wage growth and tight credit conditions, although the flow of credit has started to open up with the reduction in interest rates.

Unemployment, a key driver of mortgage stress, remains reasonably stable at 5.2% at the end of September. However, excess capacity and underemployment in the labor market continues to pressure various regions.

The low interest rate environment, income tax cuts, government spending on infrastructure and a brighter outlook for the resources sector are providing signs of a potential lift in economic growth for the remainder of the year. And within this environment, the signs of stabilization in Sydney and Melbourne house prices have started to materialize in the quarter along with Queensland. Though Western Australia continues to be pressured, with the mining region showing improvement, with areas around Perth continuing to develop.

These conditions have resulted in the portfolio delinquency rate being stable between the second and third quarter of this year but elevated when we compare to the prior year. The elevated delinquency rate of about 5 basis points compared to the prior year is largely due to the extended aging of delinquencies that we first began to see in 2018. However, what is starting to emerge is lender customers prioritizing faster processing of delinquencies when combined with the traditional seasonal uplift had a positive impact on cures during the quarter.

Consistent with the seasonal trend we've seen in the second half of the year, the improvement in the overall stock of aged delinquencies have started to emerge. Importantly, there's more focus and attention by our lender customers on these aged delinquencies, and we continue to work through appropriate loss mitigation actions with them.

In terms of delinquency trends on a geographic basis, Western Australia and Queensland continue to experience the highest delinquency rates. Across both of these states, our stock of mining delinquencies declined in the quarter. However, non-mining delinquencies have risen due to aging, slowing cure rates and challenges to the economies in those areas, in particular in specific subregions when we compare it to the national average.

In Queensland, we're seeing new delinquencies in northern and central regions where unemployment is still elevated while in Western Australia, the mining regions are starting to stabilize but we're seeing pockets of weakness in specific subregions of metro Perth.

Within this changing environment, we're continuing to review our portfolio as the property markets begin to stabilize while maintaining our underwriting discipline.

On Slide 6, the high loan-to-value market has increased slightly at around 22%, despite moderating market conditions and tightening credit resulting in an overall contraction in the size of the residential mortgage market in dollar terms. The owner-occupied lending market contracted from the same period last year as a result of lenders implementing tighter credit measures to enhance responsible lending while the investment lending market contraction remains more pronounced and is a direct response by lenders to regulatory measures to tighten credit conditions around interest-only loans.

Despite the overall residential mortgage lending market being down about 16% in the first half of '19, the high loan-to-value market has improved, and this improvement has continued into the third quarter helping us drive the increase in new insurance written and gross written premium that we saw. In this environment, we continue to proactively engage with our lenders to support growth as is evidenced by our strong performance this quarter.

And with that, I'll hand it over to Michael to provide you with a more detailed update on the financials.

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Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [3]

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Thank you, Georgette, and welcome to everyone on the call.

Starting with our third quarter 2019 income statement on Slide 8, our third quarter result continues the momentum of growth since our first half '19 results and supports our full year '19 guidance which remains unchanged.

The gross written premium results of $298 million, excluding the Bermudan transaction in first quarter 2018, was up 12.6% year-to-date. This was driven by a combination of 2 factors, a solid third quarter growth in our flow business, reflecting the greater proportion of new LMI business written by Genworth lender customers. Our third quarter 2019 GWP of $114.6 million represented the highest quarter of premium written since 2015 when we exclude the Bermudan transaction in first quarter 2018. And secondly, the growth in our bulk portfolio business, the majority of which was written during the first half of the year.

As at third quarter 2019, the net premium increased 5.8% to $223 million and is anticipated to be at the top end of our full year guidance of between minus 5% to plus 5% by year-end. This result is attributable to a solid third quarter performance where NEP grew 11.9% to $76.2 million, primarily from a combination of our lapsed policy cancellation initiatives and the execution of our strategic program of work.

Our investment income earned on technical and shareholder funds was up significantly year-on-year from $66 million as at third quarter 2018 to $144.4 million as at third quarter 2019. This strong year-to-date performance of $144 million in 2019 is attributed to 3 factors: $62 million was generated from our fixed income portfolio due to reducing interest rates, $21 million realized gains reflecting a reduction in our equity exposures and $61 million from interest and dividend income. These year-to-date realized and unrealized gains, interest and dividend income are included in our underlying net profit after tax.

Third quarter 2019 underlying net profit after tax of $26.5 million was up 29.9% over third quarter 2018 and reflects the strong net earned premiums and investment income generated during the quarter, which was offset by higher net claims incurred which is a result of larger provisioning and higher underwriting and acquisition costs which are broadly in line with the new business written.

Bringing all this together, third quarter 2019 statutory net profit after-tax was up 28.1% for the quarter or 84.1% year-to-date to $113.2 million.

Turning to Slide 9, this illustrates a quarterly view of new insurance written by product since third quarter 2017 and the LVR mix of our LMI business. Both charts exclude our excess of loss insurance business and business written through our Bermudan entity.

During third quarter 2019, our new insurance written increased by 26.4% to $6.4 billion compared with $5.1 billion in third quarter 2018, which reflects the change in the mix of our business.

When we look at flow LMI and the quantum and value of new insurance written, this was also higher across each LVR band compared to both 2Q 2019 and 3Q 2019 periods. Importantly, the value of new insurance written in the above 90% LVR band has performed well, resulting in an average original LVR of 88%.

The level of new business that we write had 2 consequences for our business, namely: The average price of flow business and GWP; and secondly, the level of regulatory capital required to support these new policies.

Slide 10 provides some further detail on our gross written premium performance during third quarter 2019. The left-hand chart shows GWP and the average flow price since third quarter 2017 indicating the recent shift to a lower LVR mix contributing to a downward impact to our overall average price.

The average premium dropped from 1.82% in third quarter '18 to 1.79% in 3Q '19. This has been through a combination of lenders tightening credit policies and risk appetite, the cost of capital in a low interest investment yield environment and thirdly, lower price levels in property markets in prior periods.

The right-hand side chart shows the drivers of change in the level of GWP with the year-on-year increase of 24.4% to $114.6 million between third quarter 2018 and third quarter 2019 primarily due to the $28 million increase in volume this quarter from our lender customers in writing new business.

The key features of our loss performance is shown on Slide 11. Net claims incurred for third quarter 2019 was $40.3 million or $4.5 million above the $35.8 million as at third quarter 2018. The number of paid claims in third quarter 2019 of 361 was up from 320 in third quarter of 2018.

Pleasingly, the average paid claim was down from $115,700 in third quarter '18 to $97,900 in third quarter 2019. This decline is a result of the stabilization of mining regions. However, we are still seeing challenging market conditions across non-mining areas such as Perth Metro and some specific subregions. This has the effect of keeping the average paid claim higher than historical averages that we experienced before the mining losses in 2017.

As we continue to see challenging market conditions in these non-mining areas, we increased our reserving by $4.9 million during the quarter. This reserving behavior is consistent with our earlier decisions in the first half where we proactively position the portfolio ahead of any potential impacts from weaknesses in specific housing market conditions that may eventuate to losses.

The favorable movement of $1.2 million in reserving and non-reinsurance recovers in the prior period of third quarter 2018 compared with the additional reserving undertaken during this quarter, resulted in net claims incurred up by $4.5 million. This is included in the loss ratio of 52.9% for the quarter.

Slide 12 highlights the delinquency roll and incurred loss drivers. Delinquency rates increased by 5 basis points from 55 basis points in third quarter '18 to 60 basis points in third quarter '19 but was flat when you compare this to 2Q 2019. This is largely attributable to Western Australia and Queensland and the earlier book years with mining.

When comparing quarter-on-quarter performance since 2018, the gradual increase in delinquencies has been the result of the longer aging of delinquencies that we first called out in 2018, but we are seeing a faster processing of these delinquencies by lenders emerging this quarter as we work through appropriate loss mitigation actions with them. This highlights the loss mitigation capabilities and the strategies that we have in place across our portfolio that are aimed to achieve the best outcome for both lenders and borrowers.

In terms of new delinquencies, third quarter 2019 performance of 2,622 was favorable compared to third quarter 2018 of 2,742. We have also been encouraged by the stronger performance in cures during third quarter 2019.

Cures of 2,439 this quarter was 61 higher than 3Q 2018 and 283 higher than the second quarter 2019 continuing this improved trend. This resulted in the number of closing delinquencies in third quarter 2019 being 7,713, which is up 4.9% against the prior corresponding period of 3Q 2018. However, compared to second quarter 2019, closing delinquencies dropped 2.3%, which reflects some of the traditional seasonal uptick of the portfolio that we normally experience in the second half of the calendar year.

At the bottom of the table, you see the new delinquency reserves in 3Q 2019, which was $41 million compared to $38 million in third quarter 2018 and includes the additional reserving noted in the previous slide.

The cures line represents the release from reserves of these delinquencies that naturally cure being $39 million as at third quarter 2019.

The aging of $38 million represents the natural increase in reserves for delinquencies which remain on our books over the quarter.

Finally, the net claims gap line represents a small release of reserves on settlement of claims in the quarter. What is evident by this slide is that we remain well reserved at the time a delinquency becomes a claim.

On Slide 13 highlights the continued strength of our balance sheet. The asset side of the balance sheet includes a $3.2 billion investment portfolio, of which 82% continues to be held in cash and fixed interest securities with a minimum rating of A- or better.

As at 30 September 2019, $83.2 million was invested in equities with an allocation of $587 million invested in non-AUD income securities. This investment portfolio plus our potential reinsurance recoveries are essentially what is available to our policyholders to meet our claims obligations, providing us with over $4 billion of claims paying resources. The right-hand pie chart that you see shows the composition of our unearned premium reserve by book-year. We have retained $1.2 billion of unearned premium which we will earn over time.

On Slide 14, our regulatory capital position remains strong with our PCA coverage ratio at 1.98x capital. The chart on the right highlights the trend of a declining probable maximum loss, which is being driven by the lower LVR business being written and the seasoning of larger bank books, meaning that the amount of capital we are required to hold is reducing over time.

As at 30 September 2019, the regulatory solvency ratio of 1.98x the prescribed capital amount was well in excess of our Board's target of 1.32x to 1.44x.

Some notable changes in the composition of our solvency [ratio] as at third quarter 2019 included the payment of a full year '18 ordinary franked, final franked dividend in March 2019 amounting to $39 million, $36 million unfranked special dividend of $0.219 per share as part of the share buyback conducted in first half 2019, $37 million for the full year '19 interim ordinary dividend of $0.09 per share fully franked, and the reduction in the probable maximum loss of $111 million which is net of new business capital requirements together with the seasoning of back book capital levels under the APRA 1 in 200 regulatory model.

If you adjust for the payment of the $0.242 per share special unfranked dividend announced today, our regulatory capital solvency ratio would be in the vicinity of 1.87x capital, still above our Board target.

This special dividend combined with our Tier 2 debt and our reinsurance program reaffirms our message to our shareholders that we'll maintain a broad capital base to ensure both capital efficiency and flexibility.

Slide 15 sets out our reinsurance position as at third quarter 2019. Our reinsurance program took effect at the beginning of 2019 and follows the successful renewal, which maintains the excess of loss reinsurance levels implemented last year. We are currently in the process of renewing our program for 2020.

The decision to maintain the same level of reinsurance reflects the reduced probable maximum loss to $1.65 billion of the business and the desire to maintain an appropriate and flexible level of reinsurance under the APRA guidelines.

With that, I will now hand back to Georgette for the wrap up.

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [4]

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Thanks, Michael. If we turn to the outlook on Slide 17. Looking ahead, the fundamentals remain sound with foundational support on multiple fronts, including historically low interest rates, tax cuts and continued infrastructure investment at a state and federal level. We expect this to provide momentum into the fourth quarter, along with the strong export and pricing of commodities, supported by the level of the Australian dollar.

Counterbalancing these positive factors is the continued geopolitical uncertainty and the impact of trade tensions which have the potential to impact the global economic growth over the remainder of the year.

House prices are expected to continue to stabilize in Sydney, Melbourne and Brisbane while Perth will still experience a challenging market, in particular in some non-mining subregions.

In light of all of that though, our 2019 full year guidance remains unchanged. We anticipate our net earned premium to be at the high end of the range of down 5% to plus 5% compared to 2018 and the full year loss ratio to be between 45% and 55%.

Our underlying business and customer value proposition remain fundamentally solid, and we're focused on continuing the momentum of our strategic program of work, especially around product innovation and leveraging technology and data. We're pleased to see the growth in our new insurance written and our gross written premium along with the impact of our loss mitigation activities. And on the capital front, we remain committed to actively evaluating all options available to ensure we return excess capital to shareholders in an effective and timely manner while having flexibility to grow the business.

The company is well capitalized with a solid balance sheet and a net tangible assets of $3.89 per share as at September 30, 2019. And importantly, our track record of delivering solid profits and attractive shareholder returns continues.

You will have also seen the announcement this morning that I'll begin the transition into retirement at the start of the new year and an acting CEO, Duncan West, has been named to help facilitate this transition.

I'd like to take this opportunity to thank the Board, the senior leadership team and all the great Genworth people for their efforts and their commitment to the business and myself over the last years. And to our shareholders, thank you for your continued support over the years and for the ongoing support of Genworth Australia.

And with that, I'll open it up for questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Simon Fitzgerald with Evans & Partners.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [2]

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I've got 3 questions here. I'll ask them one at a time. The first one, obviously, some encouraging signs at the top line there with new insurance written in the half and GWP and NEP both increasing as well. Just wanting to get a bit of a breakdown from you, more specifically in hearing about the growth rates between, say, the major banks and some of the non-bank lenders and what trends you might be seeing there.

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [3]

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Yes. So good morning, Simon, thanks for the question and others to come. I think, again, when we look at the overall market, we've been seeing movement between the customer base some -- we saw, again, probably early last year the nonregulated ADI segment grow and pick up some share. I think we're starting to see that level out and some of it come back to some of the majors or your large regional lenders, so we have seen pick-up in some of those customers.

I think though, when you step back, right, we do believe that there's been an uptick in the overall market, and you saw that, again, in kind of the size of the high loan-to-value market up a couple of percent. So while the whole market is contracting, we are seeing, again, with lower interest rates as well as some of the lenders starting to have their systems in place around borrower expenditures and all of the other types of technology that they were using to increase responsible lending criteria. That settled down and we're starting to, again, see some traction. The flip side is also with first homebuyers and where Sydney and Melbourne prices went to, a lot of them have gotten into the market and that's also been a benefit.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [4]

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Okay. Second question relates to the cure rates. Again, encouraging to see that they've turned the corner. I was interested to know what you think might be driving that? Is this something to do with obviously rates decreasing but also home price improvements, is there a natural effect there? Or are there other drivers you can point to?

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [5]

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Well, I'll start and then Michael can certainly add on. I think when we talked about the first signs of some of the aging that we were seeing, the reduction in cures was really coming off of the Royal Commission. And I think, again, as we chatted at that point, we had a lot of -- there's a formal hardship process that a lot of lenders were doing other types of programs and I think there was a lot of discussion on whether those programs could continue, whether there would be changes to those. I think what we've seen is some of that settle out, some changes being made to those programs and result, the focus has picked up around that but also we've started to see movement in those delinquencies. So we think that's part of it. And certainly, again, with where Sydney and Melbourne is, some of those -- that cure pressure was in New South Wales, I think we're starting to see auction clearance rates come up and have an impact on, again, those cure rates.

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Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [6]

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Yes and I think it's an improvement in general sentiment. I think we've been working with the lenders -- our lenders around sort of reducing the backlog of delinquencies on our books and that improvement of delinquencies is certainly driving cure rates, and we do expect to see that sort of continuing as we continue to work through that with our lender customers.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [7]

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Okay. Good. And final question just relates to effective LVRs. Obviously, in the first half, I remember there was a slide that showed there were 3 vintages, '17, '18 and '19, where the effective rate had increased above the original rate. That wasn't repeated in these slides and appreciate you don't show them on a quarterly basis. But just wondering if you can give any sort of level of -- or any sort of color in terms of where those rates might have gone? And I'm thinking that they would have improved just given house prices have improved. Is there anything that you can mention there?

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [8]

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Yes. No, I think, again, some -- we do it, again, on a half year and full year basis just, again, historically. But I think what you've seen is, again, with home prices stabilizing, especially in Sydney and Melbourne, you've had -- they're up about 5% over the quarter to date. So I think you're seeing a little bit of improvement there. There's probably still a little pressure in those newer books, which is something we certainly take into account when we think about our policy and how we're thinking about the buffers in our underwriting but also the LVR levels.

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Operator [9]

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Your next question comes from Andrew Buncombe with Macquarie.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [10]

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Just 2 questions from me, please. The first one is on the new CBA deal, where it says that the new deal will be meeting your pricing and return on equity profile. Just interested to get any color on whether that target profile has changed with what's been happening recently with bond yields?

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [11]

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Yes. Thanks, Andrew, and good morning. No. I think again, certainly, we have felt some pressure because of yields and, again, the single premium product but we've certainly incorporated that in some of the pricing increase rates that we've done previously. And so again, we think that that contract is very similar on terms, again, looking to meet our low to mid-teens threshold.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [12]

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Yes. Excellent. And then the other question I had was in relation to the net claims incurred, Slide 11. The last few quarters now, you've had increases in reserves, so in that movement in reserves line. I think the terminology on the call was that you are proactively managing that line ahead of anything that could potentially come. How much longer should investors be expecting that additional movement in return -- reserves to be coming?

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [13]

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Yes. So I think I'll start and Michael can add some color. I think you'll always see development on that line because a lot of it is related right to our new and depending on, again, the level of cures that you're getting. And so I think if you go back in time, right, our cures were exceeding our new delinquency development depending on where those delinquencies were. So just because it's positive doesn't mean I think that there's pressure.

I think what we're seeing is we are seeing Perth and areas -- specific subregions around Perth that aren't rebounding like we would have expected. And so I think we're cautious about where home prices are going to go there. Certainly, we're not seeing some of that development to date but we certainly are anticipating that there could be some additional pressure given that economy hasn't rebounded like we would have expected at this point.

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Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [14]

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Yes. Most of the reserving we do, Andrew, the review we do every quarter is just around looking at the structure of the portfolio. This particular reserving is around particularly the non-mining centered on, as we mentioned, the Perth Metro sort of area. And these relate to sort of pre-2015 books. We're just starting to see, as Georgette and I covered in the sort of presentation, an uptick in those sort of delinquencies but we'll continue to review the adequacy of our reserving going forward over the next quarter.

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [15]

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And I think just to add on to that, Andrew, you did -- we've seen some movement around concessions, right, whether that's around stamp duty or some discussion around other incentives in those areas. And so that certainly has an impact go-forward that we certainly are anticipating.

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Operator [16]

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(Operator Instructions) Your next question comes from Desmond Tsao with Goldman Sachs.

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Desmond Tsao, Goldman Sachs Group Inc., Research Division - Associate [17]

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I just have 2 quick questions just around premium growth. As you pointed out, very strong third quarter performance, our strongest GWP growth performance in 4 years. Given the much improved housing market backdrop and macro tailwind still to flow through, is the third quarter run rate a good indication of expectations into the fourth quarter?

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [18]

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I think we're encouraged, right, that we've seen the rebound. I think we're cautious about whether that's a trend that will continue, given, again, some of the other influences in the market right around still some tightened credit conditions as well as certainly a view of some of the responsible lending still working through the system of what that impact is on, again, what people can borrow. So I think we're cautiously optimistic. We feel -- again, we've seen the high loan-to-value market has stabilized and -- for a couple of years and now ticked up, but we're -- I guess we're being cautiously optimistic.

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Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [19]

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Yes. We have seen most house prices in the Sydney and Melbourne markets over the last quarter, I guess, have rebounded stronger than anticipated. There has been sort of the demand with those same [houses] coming back into the market. But there is still a really deep backdrop of sort of those regulatory changes. But also, as lenders work through their credit and risk appetite frameworks, we do expect -- we'll see how that progresses over that fourth quarter. But certainly at the half year, we have started to -- since the half year, seen a pickup in sort of underlying volumes at the moment.

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Desmond Tsao, Goldman Sachs Group Inc., Research Division - Associate [20]

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No, problem. Very helpful. That may sort of provide some color for the second question that really is just around the NEP guidance. You're tracking above the minus 5% to plus 5% target. Are you being a bit too conservative with that just given the fact that you sort of highlighted you're being cautiously optimistic? Or is there something to sort of highlight into the fourth quarter that may slow down some of the growth that you're seeing through the third quarter?

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Georgette Cecelia Nicholas, Genworth Mortgage Insurance Australia Limited - CEO, MD & Director [21]

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Yes. I think a great question, Desmond. I think one of the things we've been focused on that's helped increase the net earned premium line is around our policy cancellation initiatives. If you go back last year, we started to use third-party data sources and some of the new technology that we had put in place to basically accelerate some of the information we were getting directly from lenders. And so that allowed us to really get more of a benefit from those -- on the premium line from the cancellations. And so we've continued to do that. It's kind of a regular rhythm. And so we do have the opportunity to do more of that as we come in the fourth quarter, but there's probably some process that we have to go through and so it's not guaranteed. And so that's what we're being thoughtful about.

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Michael Bencsik, Genworth Mortgage Insurance Australia Limited - CFO [22]

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Yes I mean, on Georgette's point, a lot of the ability to look at our cancellation initiatives needs the agreement of our lender customers and we're still working through that. So that's why we're optimistic. Until we have their consent, we need to sort of work through that process.

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Operator [23]

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We're showing no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.