Company Results – Page 18 – Digital Finance Analytics (DFA) Blog

QBE Under Pressure In 1H16 Results

QBE’s 2016 interim profit was $265 million, down 46% from $488 million in the same period last year, reflecting an adverse discount rate adjustment of $283 million compared with a benefit of $45 million in the prior period. The combined ratio increased to 99.0% from 95.3% in the prior period, again due to the decline in risk-free rates. The shares were marked down after the results.

Revenue was flat at $7.89 billion, up just 1%, as insurances prices came under pressure. QBE has a $150 million cost-cutting target for the second half of the year (equating to a 1% improvement in the expense ratio).
They are impacted by the fall in global risk-free rates – to the point that around 77% of global sovereign bond yields are now below 1% while around 40% are negative.

Excluding the impact of discount rate movements, the interim result was underpinned by a combined operating ratio of 94.0%, in line with FY16 guidance of 94%–95%, albeit with a greater contribution from positive prior accident year claims development than originally envisaged.

The Australian & New Zealand Operations, was supported by strong returns in long tail portfolios and lenders’ mortgage insurance (LMI) business. However, the result included a significant deterioration in the attritional claims ratio as a result of increased NSW CTP claims frequency, coupled with premium pricing pressure, higher than normal claims inflation and increased claims frequency in short tail portfolios.

They say that a swift and decisive response is required and will encompass a combination of price increases, tightened terms and conditions and improved risk selection. They anticipate that the actions taken will benefit attritional claims ratio in 2017.

Challenger 2016 Results Strong In Growing Market

Challenger released their 2016 results yesterday. It gives us a good view of momentum in the wealth management and annuity sector. They highlight the growing opportunities thanks to changes in regulation designed to enhance the superannuation retirement phase. These tailwinds support future growth.

Challenger Limited (Challenger) is an investment management firm managing $60.0 billion in assets. It is focused on providing customers with financial security for retirement. Challenger operates two core investment businesses, a fiduciary Funds Management division and an APRA-regulated Life division. Challenger Life Company Limited (Challenger Life) is Australia’s largest provider of annuities.

Normalised profit after tax (NPAT) rose 8% to $362 million while statutory net profit after tax was up 10% to $328 million.

The Group reported record annuity sales, up 22% on the previous year, boosted by superannuation industry moves to include Challenger annuities on investment and administration platforms. Sales accelerated in the second half with annuity sales up 45% on the prior corresponding period (pcp).

Normalised earnings per share were up 6% to 64.6 cents per share (cps) with earnings from higher normalised NPAT partially offset by a higher share count.

Normalised return on equity (ROE) was 17.8% pre-tax, down slightly due to the impact of Brexit and market disruption affecting Fidante Partners Europe earnings.

Challenger’s sustained growth allowed the Board to declare a final dividend of 16.5 cents per share, contributing to a full year record dividend of 32.5 cents, up 8%. Dividends have doubled over the past five years.

Chief Executive Officer Brian Benari said: “We have leveraged our leadership position in a growing retirement incomes market to deliver record annuity sales and record normalised profit. We’ve rewarded our shareholders with record dividends.

“Challenger is generating superior shareholder returns through a highly efficient, profitable and sustainable model. In our Life business we have been able to maintain consistent margins for the past four years which means the growth opportunities we are capturing feed directly through to our earnings and higher shareholder dividends.

“A key feature of these results has been sales achieved through our expanded distribution capability. Building scale via platforms is an important part of Challenger’s strategy with both retail and industry fund partners.

“Over the past year Challenger has launched a number of distribution partnerships to make Challenger annuities more readily available to financial advisers and super fund members. These are already bearing fruit. Sales momentum is building through our Colonial First State (CFS) partnership with sales volume through CFS doubling in the first year that our annuities have been on their platform. Notably this includes an increased proportion of lifetime annuity sales. In 2H16, 40% of sales from platforms were lifetime annuities.

“We are launching five new annuity partnerships in 1H17 including teaming up with Suncorp to white-label Challenger term and lifetime annuities.

“The bottom line is that more retirees are buying Challenger annuities because they better understand retirement risk and seek guidance from advisers who rate us highly and can access our products much more easily from a growing range of platforms.

“Our Funds Management business is achieving double digit organic growth in FUM, benefiting from strong underlying flows of $2.4 billion in FY16. In Europe our boutique growth plan remains on track, however our listed fund capital raising business has been affected by uncertainty in the run up to Brexit. This has reduced Funds Management earnings.”

As at 30 June 2016, Challenger Life held substantially more capital than required by the Australian Prudential Regulatory Authority (APRA) capital standards comprising $1.1 billion of excess regulatory capital and group cash. Challenger Life’s prescribed capital amount ratio of 1.57 times is at the top end of its target range.

Looking at the segmental contributions:

1. Challenger Life had average assets under management (AUM) over the year of $13.2 billion, up 8%. Margins continued to be stable at 4.5% which meant AUM growth in the Life business fed directly through to higher cash operating earnings (COE) of $592 million, up 9%. Life’s COE margin has consistently been in the range of 4.4% to 4.5% since 1H13.

Annuity sales were supported by new distribution initiatives through investment and administration platforms. This contributed not only to volume but also to longer tenor of annuities. An increasing proportion of lifetime sales and longer tenor term annuity sales resulted in new business tenor for FY16 extending to 6.5 years and, for 2H16, 7.2 years.

Total annuity sales were up 22% to $3.4 billion. They comprised term sales of $2.8 billion, up 22%, with sales increasing in all quarters relative to the pcp, and lifetime sales of $0.6 billion, up 21%. Lifetime sales accounted for 21% of 2H16 annuity sales, up from 14% in 1H16.

FY16 total Life net book growth was 11.1%. Challenger’s annuity book grew by 8.5% and a Guaranteed Index Return mandate contributed a further 2.6% growth.

Sales of the CarePlus aged care product, which was launched in August 2015, accounted for $60 million, with $32 million of that being in Q416. CarePlus will be available on the CFS FirstChoice platform by September 2016.

2. Funds Management. Despite challenging markets, average funds under management (FUM) rose to $55.1 billion, up 11% once allowing for the derecognition of $5.4 billion of institutional client FUM from Kapstream Capital following our sale of that business in July 2015. The Funds Management business continued to generate strong organic net flows, amounting to $2.4 billion. This comprised $1.3 billion from pre-existing Fidante Partners boutiques, $1.0 billion from Fidante Partners Europe and $0.1 billion from Challenger Investment Partners.

Funds Management has a broad base of boutique fund managers and has a strong track record of growth. FUM has more than doubled from $24 billion five years ago at an annual growth rate of 19%, twice system growth during that period. Despite volatile markets, the business has achieved 11 consecutive quarters of positive organic flows.

In FY16 Challenger Investment Partners expanded its offshore client base, including $0.4 billion in new property and fixed income mandates from offshore investors which contributed to a 14% increase in third party FUM.

However, Funds Management earnings before interest and tax (EBIT) was down 15% to $37 million due to a loss in the Fidante Partners Europe business that was previously flagged to the market. This was impacted by capital markets uncertainty which stalled UK capital raising activity, including in the closed-end alternative investment trust segment in which the business specialises. This market is expected to normalise as uncertainty subsides. Excluding Fidante Partners Europe, Funds Management EBIT was up 7%.

3. Distribution, Marketing and Research. Challenger continues to entrench its leadership in the retirement income market through new distribution partnerships, leveraging the strength of the Challenger brand and investing in product and service capabilities.

Five new partnerships with superannuation funds and investment and administrative platforms have launched or are expected to launch in 1H17. From July 2016, Challenger annuities have been available to financial advisers through Clearview Wealth Solutions, which utilises a CFS private label platform.

In August 2016, Challenger formed a strategic relationship with Suncorp. From December, Suncorp’s financial advisers are scheduled to sell a Suncorp-branded annuity, backed by Challenger, through its national branch network.

In the industry fund sector, a previously announced strategic partnership with Link Group, which services 10 million fund members, has led to Challenger annuities being made available to members of Local Government Super and legalsuper from Q117 while caresuper is to launch Challenger annuities in Q217. These three funds combined have more than 400,000 members.

We strengthened our position as a retirement income leader through our life expectancy brand campaign, launched in 2H16, which addresses customer concerns of outliving their savings. In May 2016 Hall & Partners research found that 52% of 55 to 64 year olds would now ask their financial planner about buying annuities.

A key competitive advantage for Challenger is its distribution capability which rates highly with financial advisers. Challenger was ranked first of 20 fund managers, including the leading wealth brands, for overall adviser satisfaction in the 2016 Wealth Insights Fund Manager Service Level Report. This comprised number one ratings for five key categories, including: our business development team, for the fifth straight year; technical services and contact centre teams; and, image and reputation.

NAB’s 3Q16 Trading Update, NIM Soft?

NAB has released its brief 3Q16 trading update and capital proforma. Unaudited cash earnings were around $1.6 billion, 3% lower than the quarterly average of the March 2016 half year, and 3% lower than the prior corresponding period. Statutory net profit was similar at $1.6 billion.

Revenue was broadly stable, but Net Interest Margin (NIM) was lower. Group NIM was 1.89% in March, no update was given today. Expenses fell 1%. The charge for bad and doubtful debt for the quarter rose 21% to $228 million. This included increased charges from mining and agricultural collective provisions, and changes from the low 1Q16 provision base. The ratio of 90+ days past due and gross impaired assets to gross loans was 0.81%, up from 0.78% in March.

The Group’s CET1 ratio was 9.5% at 30 June 2016, compared with 9.7% at March, reflecting the interim dividend payout. Tier 1 ratio was 11.5%, down from 11.8% in March.

The Group leverage ratio on an APRA basis was 4.9%, down from 5.3% in March and 5.5% last September. The quarterly average liquidity coverage ratio was 125%.

They did not comment specifically on the impact of the 25% IRB mortgage risk weighting, but a quick estimate suggests a circa 9% CET1 outcome.

Overall, not surprises, although growth in revenue was slower than expected, and margin is under pressure, with provisions rising as little.

Of course the bank is now insulated from UK/Brexit issues after the split last year.

Westpac 3Q16 Update, Ditto

Westpac released their 3Q16 update today, with a focus on capital, funding and asset quality. Pretty similar to other recent bank updates, with some rising delinquencies, but stronger capital. They also face higher capital risk weights later, and higher funding costs.

One point of note was a potential 5% fall in non-interest income, thanks to lower levels of debt market transactions in the institutional bank and higher insurance claims.

Looking at housing loans, they show higher 90+ delinquencies, especially in the mining heavy states.

This translated into higher portfolio risks, and a small rise in the number of properties in possession.

That said, WBC has a higher proportion of their portfolio in the lower risk states.

Consumer credit delinquencies are also on the rise.

Looking at the commercial lending sector, we see some stress points, especially in agriculture (mainly NZ dairy), wholesale and retail trade in mining related areas, services and construction, where there are some specific single name issues. 1.36% of the mining portfolio is impaired and 3.15% graded as stressed. 14.28% of the NZ Dairy portfolio is graded as stressed, up from 10.04% in March 2016.

Taking a step back, stressed exposures were up 12 basis points to 1.15%, although impaired assets were $52m lower. The watch list and substandard assets (though fully performing) was up $1.4bn.

Westpac’s common equity Tier 1 (CET1) capital ratio was 10.1% at 30 June 2016, down 40 basis points. from 31 March 2016. The (CET1) capital ratio on an internationally comparable1 CET1 capital ratio was 14.1%. This places them in the top quartile globally.

Changes in the calculation of RWA for Australian residential mortgages are
expected to see the ratio of total mortgage RWA to EAD rise to 25% from currently around 16%. This will reduce the CET1 capital ratio by approximately 110bps.

Westpac’s APRA leverage ratio was 4.9%, down 10 basis points since 31 March 2016. The decrease was primarily due to growth in exposures over the quarter and a $0.2 billion reduction in Tier 1 capital due principally to the determination of the 2016 interim dividend partially offset by Additional Tier 1 capital raised from the issue of Westpac Capital Notes.

Westpac stable funding ratio was 84% at 30 June 2016, up 70bps over 3Q16 and the liquidity coverage ratio was 126% at 30 June 2016, compared to 127% at 31 March 2016. They noted that funding costs are rising across both wholesale markets and customer deposits.

Changes to factors for determining interest rate risk in the banking book (IRRBB) after 30 June 2016 will be impacted by:
• Basel Committee on Banking Supervision expected to finalise new arrangements (Basel IV) by end 2016. These include:
– Adjustment to advanced models for credit risk
– Revised standardised credit risk
– Advanced RWA floors based on standardised approach
– Fundamental review of trading book
– Counterparty credit risk changes
– Operational risk to standardised approach
• APRA consultation on Basel IV expected to commence in 2017 with implementation from 2018

CBA Juggernaut Motors On, Uphill

The CBA have released their full year results to June 2016. They announced a statutory net profit after tax (NPAT) up 2% to $9,227 million, Cash NPAT up 3% to $9,450 million, Cash return on equity of 16.5%, down 170 basis points and cash earnings were $5.55 per share, same as last year. All pretty much as expected, so no surprises, but some signs of stress ahead.

The Fully franked final dividend is $2.22 per share, taking the full year dividend to $4.20, flat on the prior year, and representing a cash dividend payout ratio of 76.5%.

However, looking below the hood, operating income was up 5%, helped by volume growth, and trading income, but hit by a 2 basis point NIM fall.

Net interest income was up 7% to $16,935m, net interest margin was down 2 basis points to 2.07%.

Comparing the two half years, asset pricing was up 1 basis point, reflecting keen competition in the mortgage sector, funding costs rose, thanks to elevated short term costs, the portfolio mixed helped, thanks to savings growth, and capital and treasury fell thanks to the impact of lower rates. The last six months is the better indicator of future trends.

Customer deposits were $518 bn, up 8%, and represents 66% of total funding, up 1% from last year. They have 11.3 million deposit customers.

Operational expenses rose 4% to $10,429m, with an improved cost to income ratio of 42.4%, down 40 basis points.

Loan impairments were up 27%, thanks to higher provisioning for resource, commodity and dairy exposures.

Home Loan arrears were stable year on year. WA and QLD portfolios continue to experience stress, mainly due to mining towns, while NSW improved. Personal Loan arrears remain elevated mainly due to economic worsening in WA and QLD.

The state differences are clear – here is the home loan book arrears by state.

Bank West has the higher delinquency rates.

Investment loans are performing better than other mortgage loans.

Wealth, showed a rise in funds under management, but compared with FY15, investment experience fell.

During the financial year, the Group responded to increased regulatory capital requirements and raised $5.1 billion through an entitlement offer for all shareholders. As at 30 June 2016, the Group had a CET1 capital ratio of 10.6% on an APRA basis, up from 9.1% as at 30 June 2015; and a CET1 capital ratio of 14.4% on an internationally comparable basis up from 12.7%. They claim to be well within the APRA top quartile.

The larger capital base impacted return on equity which was down 170 basis points to 16.5%. Liquid assets of $134 billion and a Liquidity Coverage Ratio of 120%.

The APRA leverage ratio is calculated at 5%.

ANZ Trading Update, Steady As She Goes

ANZ released a trading update for the nine months to 30 June 2016. The results are unaudited. Essentially, in a slower-growth environment, overall revenue is flat, costs are controlled, and bad debts are managable, though consumer delinquencies are rising slightly. No real surprises.

The statutory net profit is $4.3 billion whilst the Cash Profit (“Adjusted Proforma”) was $5.2 billion, down 3%.

The profit before provisions was up 5%, with income increasing at a faster
rate than expenses. Increased technology, D&A and project costs were offset by productivity savings including lower employee (FTE) numbers. FTE reduction continued at a steady rate through the period.

The group Net Interest Margin (NIM) was stable at 2.01% assisted by portfolio rebalancing in Institutional offset by increased funding costs and asset pricing competition.

The total provision charge was $1.4 billion comprised of individual provisions of $1.34 billion and collective provisions of $60 million. The third quarter individual provision charge was in line with the average of the First Half. The 3rd Quarter loan loss charge was circa A$480m and a little higher than expected.

APRA Level 2 Common Equity Tier 1 (CET1) ratio was a strong 9.7% at 30 June. However, it would fall under the higher IRB mortgage risk weighting.

Excluding the payment of the 2016 interim dividend (net of the dividend reinvestment plan), CET1 increased 44 bps in the third quarter, primarily driven by cash earnings generation and capital benefits from the continued reduction of lower return assets in Institutional.

Here is an interview with the CEO Shayne Elliott.

The Retail businesses in both Australia and New Zealand performed well. Retail experienced modest asset growth and margin pressure in a competitive market for mortgages and deposits. Small Business Banking remains an area of good growth in both markets, while conditions in Corporate and Business Banking remained highly competitive.

The re-balancing of the Institutional business continued with further
reductions in lower yielding assets supported by business restructuring.
The ongoing focus on reducing and improving the quality of Risk Weighted Assets (RWA) has delivered a $15 billion decrease in Credit Risk Weighted Assets (CRWA) on a constant currency basis. Momentum has been consistent throughout the year to date with approximately a third of that total reduction in CRWA occurring in the third quarter.

Divisional revenue decreased by a lower percentage than the reduction in RWAs. At period end cost growth was in the low single digits benefitting from prior period productivity initiatives. The re-balancing of the business had a positive impact on the Division’s margins of approximately 5 bps (excl Global Markets). Including Global Markets margins declined 5 bps. Global Markets income was $1.5 billion, 90% of which came from Customer Sales flows.

‘Fearful’ corporates stifling future growth: UBS

From InvestorDaily.

The decision by business leaders to preference dividends over new investment spending is undermining the potential for future economic growth, says UBS Asset Management.

Head of investment strategy at UBS Asset Management Tracey McNaughton said workers, consumers and business leaders have been weighed down by what she called the ‘fear factor’ since the global financial crisis.

Business investment has been “lethargic” worldwide, and inflationary pressure continues to evade the world’s developed economies – as indicated by Australia’s low inflation reading last month, Ms McNaughton said.

On the consumer side, the savings ratio in Australia has averaged 9.8 per cent of income since the GFC, more than double the average of the 20 years prior to 2008 (3.9 per cent), she said.

“Just as the Great Depression left lasting scars on the household psyche, the GFC has left workers, consumers and business leaders fearful and conservative,” Ms McNaughton said.

“Yield-hungry” conservative investors are encouraging companies for paying dividends and conducting stock buy-backs instead of undertaking new capital investment, she said.

“The preference by corporates for dividends is putting downward pressure on new investment spending, thereby undermining potential growth in the future,” Ms McNaughton said.

Somewhat ironically, low interest rates are turning fixed-income assets into long-term investments and making equity assets more short-term in nature.

“Lower interest rates reduces the cost of debt and so encourages government and corporations to issue longer dated bonds,” she said.

“As a result of this, the average duration for most bond indices has increased significantly since the GFC, making these investments more sensitive to changes in market interest rates.

“Based on current yields and assuming no uplift from capital growth it would take an investor in the Australian bond market 22 years to double their investment. The equivalent for an investor in Australian equities is 10 years,” Ms McNaughton said.

Bendigo FY16 Result, Pressures Increase

Bendigo and Adelaide Bank have announced an after tax profit of $415.6m, for the year to 30 June 2016. Cash earnings were $439.3m, up 1.6% on 2015, however, cash earnings in the second half were down 4% on the first half.

Earnings per share were 95.6 cents, a 0.6% increase on last year. Net interest margin fell 4 basis points compared with FY15, from 2.20% to 2.16%, though increased 1 basis point in the second half, thanks to retail deposits up 8%, to 82%, but against the headwind of fierce mortgage competition.

Return of tangible equity was 12.94%, down 34 basis points on last year, and down 44 basis point 2H16-2H15. Return on equity was also down from 8.94% in FY16 from 9.09% in FY15, a fall of 15 basis points. The dividend, however, per share rose to 68, compared with 66 last year.

The overall results are mixed, and shows the pressure on the bank. On the plus side, mortgage volumes and deposits were up, the asset quality is good – other than perhaps concerns in the rural portfolio, and Great Southern is becoming less of a problem. Finally, expense control is pretty robust, with more headroom, later.

However, the net interest margin is under severe pressure, and the latest competitor moves on home loan rates and deposits will only make this worse. Bendigo only passed on 10 basis points of the RBA cash rate cut. Term deposit competition is rising. Homesafe contains some property price risks, and the bank still has more to do on buttressing its capital base, compared with its peers. In the current low interest rate for longer scenario, Bendio will remain under some pressure. Whilst advanced IRB when approved, may help, a little, but it is not likely they will get to a 25% rate like the majors.

Overall it will be an uphill struggle. Dividends may have to be trimmed to square the circle, into 2017.

Looking in more detail:

Home lending benefited from the relaunch of Adelaide Bank Broker Direct proposition and a new retail mortgage “Connect Package”. The Mortgage Manage portfolio stablised.

Retail Deposits grew, especially the useful term deposits, whilst wholesale funding and securitisation reduced in the funding mix.

The banks costs rose 1.5% year on year, and the expense to income ratio rose from 55.1% to 56%.

The jaws momentum, tells the story. Expenses are controlled, and they are targetting flat growth in FY17. The efficiency programme generated gains of $7m this year, and more next year. There was in increase in the capitalisation of expenses, and the advanced IRB status, when achieved will create more capacity in this regard.

Looking in more depth, NIM tells an important story, with the drop from 2.20 last year to 2.16 in FY16.

The trend is not pretty, reflecting the competition in the home loan market, pressure to capture retail deposits, and a reduction in securitisation.

The monthly movement underscores the issue.

Bad and doubtful debts were down 35% from FY15 at $44.1m.

Business loans and mortgage arrears were stable, though the bank introduced an A$4m collective provision overlay for rural dairy exposures. Overall, rural loan arrears lifted quite noticeably in the last quarter. Total arrears before Great Southern rose by 16.4% in 2H16 and total impaired assets were down 2.0%.

Great Southern provisions are behaving as expected with provisions down from $323.8m to $171.3m. Specific and collective provisions at June 2016 were $23.7m and $19.1m respectively. Collective provisions reduced by $6.1m and total borrowers fell from 3,321 to 1,821.

Homesafe contributed $54.5m in 1H16 and $25.2m in $H16, thanks to 10.8% rise in prices in Melbourne, and 9.2% in Sydney (Residex). Total funding provided is $343.6m. $6.4m of overlay was released in 2H16, reducing the total overlay to $23.6m. They assume 3% increase in property prices for the next 18 months, before returning to a long term growth rate of 6%.

The banks indicative net stable funding ratio was 115% and the liquidity coverage ratio was 118%. Basel III CET1 ratio is 8.09% and total capital 12.21.

However the CET1 ratio was 8 basis points down from 1H.

Suncorp Full Year Results, Feeling The Pressure

Suncorp reported their full year results to 30 June 2016. They made a net profit after tax of $1,038m compared with $1,133m the previous year, down 8.4%. The earnings per share is 85.41c, down 8.3% from last year. The return on average shareholder equity is 7.8%, down from 8.5% last year. The ordinary dividend is 68c per share, down 10.5% from last year.

Suncorp has taken a number of important steps to refine the business model and drive efficiency, but the complexity of General Insurance, Life and Banking divisions, and operations in Australia and New Zealand make it a complex management challenge. It is exposed to claims from natural disasters (all be it hedged) and to the housing sector, as well as market investments. A finger in very pie means risks across all sectors. Trade this against the potential to cross-sell across business lines. A tough ask.

Looking at the segmentals.

Suncorp bank increased its NPAT by 11% to $393m, thanks to home lending growth of 5.9% from $41.8 bn to 44.3 bn (though with notably slower growth in the second half) and business lending by $255m to $9.7 bn, so total assets grew by 4.5% or $2.4bn to $54.3bn before provisions. 81% of assets are housing. 35% of commercial lending was for property investment.

Looking at housing in more detail, 30% of the portfolio is investor lending, half of all loans are in Queensland, and 65% are originated via brokers.

7% of loans in the home loan portfolio are above 90% LVR, but only 1% of new loans are above 90%.

Loan to deposit ratio was 66.7%, up from 65.8% last year. At call deposit growth was 7.1%. Net interest income was $1.1bn an increase of 2.4%, with an increase in the NIM to 1.86%.

The cost income ratio was 52.5%.

Gross impaired assets decreased by 5.5% to $206m, or 38 basis points of gross loans. This was higher in the second half, from 33 basis points in the first half, but lower than last year, partly thanks to the write off of three mid-sized exposures totalling $19.9m. Past due loans increased by 1.1% to $610m and represents 1.12% of gross loans and advances.

Impaired losses were $16m, or 3 basis points, well below the typical 10 to 20 basis points. Last year impairments were $58bn.

The Banks CET1 was 9.21%, above the target level of 8.5% to 9%. The bank is operating as an advanced IRB bank, and the detailed review process with APRA for formal accreditation continues. They issues $3.6bn of wholesale issuance in the year of 3 and 5 year durations.

General Insurance NPAT was $624m with a reported ITR of 9.9% from a trading result of $782m. Total Gross Written Premiums increased 1.8% to over $9bn.

Personal Insurance GWP improved by 1.6% to $4.8bn, whilst commercial insurance was flat with growth in Australia offset by falls in New Zealand. CTP grew 9.2%

The General Insurance CET1 is 1.21 times the PCA, slightly above the target of 0.95 to 1.15. They purchased additional reinsurance protection for 2017, allowing for a net reduction in the natural hazard allowance for the 2017 financial year to $620m. Net claims were $5.7bn.

Suncop Life in-force premiums increased to $1.03bn, up 6.4%. Profit after tax was $142m, with underlying profit $124m, up 9.7%. Superannuation funds under administration was $8.2bn.

The group capital position is strong.

Genworth 1H16 Offers Mortgage Book Insights

Whilst Genworth, as one of the two independent Lender’s Mortgage Insurers in Australia, will have a skewed mortgage portfolio compared with the market (higher Loan-to-Value (LVR) loans which the banks prefer not to cover internally), we get a good feel for the market from their results today. Whilst the proportion of new loans with a high LVR is falling, delinquencies are rising especially in the mining heavy states.

Now a public company, the level of disclosure from Genworth is useful. They reported statutory net profit after tax (NPAT) of $135.8 million for 1H16. After adjusting for the after-tax mark-to-market move in the investment portfolio of $22.9 million, underlying NPAT was $112.9 million.

They show that Gross Written Premium declined 33.5% decreased 33.5% to $189.8 million in 1H16. The decline in GWP is consistent with the broader industry trend of a reduction in the proportion of mortgage originations above 90 per cent LVR. The result also reflects changes in the customer portfolio in 1H15.

New Insurance Written decreased 20.9% to $14.0 billion in 1H16. NIW in the greater than 90% LVR segment decreased 49.1% while NIW in the less than 80% LVR segment increased 10.9%. The decline in the proportion of high loan-to-value loans originated reflects changes in lender risk appetite and focused regulatory oversight in the Australian mortgage market. The result also reflects changes in the customer portfolio in 1H15.

The Net Earned Premium increased 1.4% reflecting higher earned premium from prior book years and the benefit from the premium earnings pattern revision adopted since the second half of 2015.

Net claims incurred increased due to an increase in the number of delinquent loans relative to a year ago and a higher average claim amount. The overall portfolio continues to be supported by strong performance in New South Wales and Victoria. However, the performance in Queensland and Western Australia is challenging, reflecting increased delinquencies, particularly in regions exposed to the slowdown in the resources sector.

They showed an interesting evolution of Genworth’s 3 month+ delinquencies (Flow only) by residential mortgage loan book year from the point of policy issuance.

Each line illustrates the level of 3 month+ delinquencies relative to the number of months an LMI policy has been in-force for policies issued within a specific year.

The 2008 Book Year was affected by the economic downturn experienced across Australia and heightened stress experienced among self-employed borrowers, particularly in Queensland, which was exacerbated by the floods in 2011.

The 2010 to 2015 Book Years are performing favourably relative to the previous five years (2005-2009). The recent increase in the 2012 and 2013 book years is due to increased delinquencies, mainly in parts of Queensland and Western Australia.

Finally, the delinquency population by months in arrears (MIA) aged bucket at the end of each reporting period. Over the past two years, the MIP percentage as a proportion of the total delinquency population has been trending down. This reflects strong housing market conditions and the low interest rate environment in which a mortgagee in possession (MIP) generally progresses faster to a claim, or sold with no claim situation, which in turn leads to a relatively lower claims pipeline. The 3-5 months MIA bucket, shows a seasonal uptick in the second quarter of each year, consistent with historical observed experience.

The Group’s capital position was strong as at 30 June 2016 with a regulatory capital solvency level of 1.56 times the Prescribed Capital Amount (PCA) on a Level 2 basis and a CET1 ratio of 1.43 times PCA. The decrease in CET1 capital reflects $114.9 million of dividends and the $202.4 million capital reduction paid to shareholders during 1H16, partially offset by $135.8 million reported NPAT. Tier 2 capital decreased due to the redemption of the remaining $49.6 million of the 2011 subordinated notes.