Helia: Profit Growth in the Face of Shrinking Demand Likely a Short-Term Phenomenon

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

While the dynamics propping up earnings now are positive, new policies being down materially will likely see earnings fall in 2024. The stress on homeowners from higher rates is yet to flow through to borrower arrears and delinquencies, with Helia benefiting from a release of claim reserves in the quarter. We expect claims to normalise in the second half of 2023 and into 2024, and there is a risk they overshoot.

Our fiscal 2023 claim expense forecast is lowered to AUD 100 million from AUD 150 million following the update, implying a claims ratio of around 27%, but we have left long-term forecasts unchanged. We estimate claims as a percentage of net written premium averaging around 40% over the next 10 years. This compares with an average claims paid since listing in 2014 of around 30%. This was arguably a benign period given low interest rates, generally high employment and rising house prices. Claims in fiscal 2024 are likely to be higher as the full impact of the higher rate environment, affecting serviceability and unemployment, take hold. We forecast claims closer to 50%.