Helia: Higher Claims Still Expected but Higher House Prices Will Soften the Blow

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

Guidance for insurance revenue of AUD 420 million-AUD 460 million is unchanged, with our forecast toward the bottom end of the range. With higher interest rates and inflationary pressures, it is unlikely demand for LMI rebounds strongly in the short term. But population growth and wage growth, plus the prospect of lower cash rates, should improve demand for LMI in the medium term.

Low levels of paid claims and a reduction to claim liabilities again resulted in a claims benefit in the quarter. Our full-year claims benefit forecast of AUD 25 million implies AUD 30 million in claim expenses in the fourth quarter, but we acknowledge rising house prices could help soften the impact of rising delinquencies in the short term.

We retain our AUD 3.70 fair value estimate on the no-moat lender mortgage insurer despite lowering fiscal 2023 forecasts 7% on weaker investment income. While investment income was soft, due to unrealized losses from rising bond yields and falling equity markets, we still expect the higher yield environment to be a positive for future earnings.

Helia also announced Great Southern Bank was signed as a customer earlier in 2023. While good, the insurer needs to sign another major bank to move the needle on premiums. Great Southern Bank has a AUD 15.5 billion home loan book, compared with the smallest of the majors ANZ Bank at AUD 286 billion. Assuming 25% of the loan book turns over annually and 5% of loans have a loan/value ratio above 80%, we estimate the GWP uplift to Helia is less than 1%.