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Edited Transcript of CVW.AX earnings conference call or presentation 28-Aug-19 11:30pm GMT

Full Year 2019 Clearview Wealth Ltd Earnings Call

SYDNEY, NSW Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of ClearView Wealth Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Athol Chiert

ClearView Wealth Limited - CFO

* Simon Swanson

ClearView Wealth Limited - MD & Director

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Conference Call Participants

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* Philip Pepe

Blue Ocean Equities Pty Ltd, Research Division - Senior Industrials Analyst

* Tim Lawson

Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the ClearView Wealth Limited FY '19 Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Simon Swanson, Managing Director. Thank you. Please go ahead.

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Simon Swanson, ClearView Wealth Limited - MD & Director [2]

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Good morning, and welcome to our full year results conference call. Today, I'm joined by Athol Chiert, ClearView's Chief Financial Officer. ClearView lodged its full year '19 results with the ASX this morning, including an investor presentation which we'll take you through now. There'll be an opportunity to ask questions at the end.

On Slide 2, there are 3 sections to this presentation. I will take you through the first section before handing over to Athol to go through the results in detail. I'll then wrap up before inviting questions.

Turning to Slide 3. Today, ClearView reported an underlying net profit after tax of $25.1 million, down 22% on full year '18 and a reported net profit after tax of $4 million. This is a disappointing result, which reflects the current challenging market conditions and higher-than-expected claims and lapse experience losses. It also includes the costs of remediation programs, the upfront implementation expenses for the cost transformation program as well as impairment write-offs.

However, the result does not reflect the key responses completed in full year '19 to reset the business strategy. There is now a clear strategy in place for adapting to the changing financial services landscape, and we continue to build, expand and strengthen our relationships with the independent financial adviser market. This, combined with our investment in technology and execution of our IT road map, will support medium to long-term growth. In the shorter term, the business is focused on effective cost management, lifting the quality of business to improve both lapse and claims performance and executing its reinvigorated IT strategy and road map.

ClearView reported an embedded value of $0.99 per share or $672.7 million as at the 30th of June 2019. In light of the current share price and the discount it is trading at to embedded value, it is intended that a share buyback program be commenced after the release of today's results. The FY '19 year-end dividend has been suspended as the buyback is considered to be a better use of capital and in the interest of shareholders.

Turning now to Slide 5. Slide 5 illustrates ClearView's integrated structure and the various licenses it holds. The business operates in 3 segments: Life Insurance, Wealth Management and Financial Advice. And it's focused on building strong relationships with financial advisers by delivering exceptional products, service and support.

Turning to Slide 6. ClearView was formed in 2010 with the objective to build a challenger brand in a market dominated by the Big 4 banks and AMP. We are proudly non-bank owned and we remain committed to supporting financial advisers through this period of unprecedented structural change.

The next 3 slides provide a brief snapshot of our operating segments. Life Insurance on Page 7 remains our main profit driver. Our award-winning product series ClearView LifeSolutions is only available through financial advisers in conjunction with personal advice. Currently, we distribute our products through our relationships with 532 Australian financial services licensees or AFSLs.

Slide 8, the Wealth Management segment manufactures, administers and distributes investment solutions through financial advisers, leveraging existing Life Insurance relationships. Our 2 core platforms, WealthFoundations and WealthSolutions, are used by around 40 AFSLs.

Our Financial Advice segment on Page 9 consists of 2 established dealer groups: Matrix Planning Solutions and ClearView Financial Advice, and our new outsourced licensee services offer, LaVista Licensee Solutions. Our dealer group licenses support 225 financial advisers and Matrix recently received the 2019 CoreData Licensee of the Year award for the third consecutive year, cementing its position as Australia's leading licensee.

I will now hand over to Athol who will take you through the full year results in further detail.

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Athol Chiert, ClearView Wealth Limited - CFO [3]

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Thank you, Simon. A breakdown of our results is on Page 11. The FY '19 results is reflective of: a challenging market environment, poor lapse and claims performance in our Life Insurance segment, a reduction in Wealth Management fees due to subdued flows, our wrap technology falling behind and some investment underperformance and increased compliance and restitution costs in our Financial Advice segment.

The poor claims and lapse performance is holding us back from translating solid growth of the in-force Life Insurance premium portfolios into corresponding profit growth. Pleasingly, our in-force premium was up 12%, and our efforts to expand the distribution footprint led to an increased number of advisers able to access our products and services. In the shorter term, ClearView is focused on effective cost management, improving lapse and claims performance and executing on a reinvigorated IP strategy and road map.

As shown on Page 12, this is the first year that ClearView has not reported growth in its underlying NPAT since FY '15. However, key actions completed in the financial year position ClearView for future growth. These actions included: a material cost transformation program, IT strategy review and a resetting of the business in the second half of FY '19, product repricing and repositioning in our Life and Wealth Management segments, the launch of a new dealer group pricing model and LaVista Licensee Solution to capture opportunities arising from the wave of advisers exiting the banks and institutions, the finalization of remediation programs and the resetting of expense, claims, lapse and discount rate assumptions based on recently observed experience.

We believe our investment in technology, alongside the expansion of our distribution footprint, is likely to support medium to long-term growth notwithstanding short-term headwinds. In FY '19, the embedded value calculations remained relatively flat, impacted by changes to claims and lapse assumptions and the impairment of software and financial advice books, partially offset by adjustments to the discount rate adopted.

I will address the individual segment results in the next few slides starting with Life Insurance on the next slide.

ClearView's expanded distribution footprint and new business volumes led to a 12% increase in in-force premiums which underpins the growth profile. That said, the segment's profitability over the past 2 years has been impacted by poor claims performance mainly attributable to the income protection portfolio. As a result, our claims assumptions have been adjusted at 30 June 2019. The changes to the income protection assumptions also impacted on the FY '19 result with an adverse $1.8 million after tax increase in the claims expense.

Due to the small size and nature of our portfolio, volatility can have a material short-term impact on profitability. Adopting a longer-term view, claims experience is expected to fall in line with best estimate assumptions that have been updated at 30 June 2019.

In terms of addressing the segment's poor lapse performance, ClearView acted decisively in FY '19 to terminate certain distribution relationships with some poor performing businesses and reposition ClearView LifeSolutions. These actions are likely to result in reduced sales in the shorter term but should lead to improved business quality and profitability in time.

As mentioned, the Wealth Management segment on Slide 14 was adversely impacted by reduced inflows and investment underperformance, leading to a slight dip in FUM and a 5% reduction in fees to $34.4 million.

In response to aggressive competitor pricing, ClearView repositioned and repriced its wrap platform in FY '19 and introduced a number of new model portfolios. We have also commenced a strategic review of our wrap platform which is outsourced and has fallen behind its competitors in terms of functionality, plus conducted a review of our approach to Wealth Management. These initiatives will be a core part of the business focus in FY '20.

Turning to Financial Advice on Page 15. Adviser numbers in the dealer group remained relatively flat in FY '19. There's a lot of change happening in the advice industry driven by heightened regulation, greater scrutiny and vertical disintegration with some institutions voluntarily selling or closing their dealer groups.

To support disenfranchised advisers, ClearView launched LaVista Licensee Solutions in November 2018. LaVista is an outsourced B2B licensee services offer designed to meet the needs of a growing number of self-licensed financial advisers and third-party AFSLs. We're also rolling out a new flat membership fee structure across our dealer groups from 1 November 2019, and we continue our investment in the front end compliance and supervision monitoring system.

As part of the LaVista roll out and repositioning of our dealer groups, the intention is to replace grandfathered revenue streams and remove the cross-subsidies that exist in the business and thereby develop a sustainable Financial Advice revenue base. It also has the ability to provide services to high-quality advisers seeking their own license or those that are shifting out of the larger institutions.

The slide on Page 16 aims to summarize the costs considered unusual to the ordinary activities of the business that we incurred in FY '19. These costs are mainly associated with the reset process and included a material cost transformation, the write-off of impairment of $6 million in software and $12.9 million in goodwill and intangible, the costs associated with the finalization of the remediation programs and those associated with the Royal Commission.

On Slide 17, you can see that ClearView had net assets of $439.1 million, down 1% on FY '18 with a net capital position of $5 million above our internal benchmark. ClearView has net cash of $188 million with conservative investments in cash and short-term interest-bearing securities.

In light of the current share price, as Simon mentioned, the Board has decided to suspend the final FY '19 dividend and immediately commenced a share buyback program. The debt funding facility will be used as a bridge to the implementation of a longer term capital solution with certain capital initiatives under consideration.

In the past year, on Slide 18, the EV has decreased to $673 million or $0.99 per share. The EV is based only on the in-force portfolio and excludes the value of any future new business and the related growth potential.

I will now hand back to Simon to provide an overview of ClearView's future outlook.

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Simon Swanson, ClearView Wealth Limited - MD & Director [4]

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Thank you, Athol. Moving to Slide 20, I'd like to touch on the Royal Commission final report. We had closely reviewed the report and continued to assess the potential impact of recommendations. Already, action has been taken on recommendations in relation to governance, culture and remuneration. In addition, ClearView has been proactively pushing for reforms that promote the long-term sustainability of the industry and strengthen consumer protections.

Our 3 advocacy priorities are: a life insurance choice of insurer, i.e., open approved product lists; stable life insurance commission rates with no additional changes; and tax deductibility of financial advice fees, including life insurance advice.

ClearView has long advocated for the abolishment of restricted approved product lists because they make it difficult for advisers to meet their best interest duty obligations and they don't lead to optimal client outcomes. While we acknowledge the Royal Commission's comments in relation to life insurance commissions, we strongly believe there should be no additional changes to life insurance commission rates. A ban on life insurance commissions will destroy the life insurance and financial advice industry and put professional advice out of reach for the average Australian.

Given the Life Insurance Framework reforms are only partially implemented and will not take full effect until the 1st of January next year, it is too soon for the government to consider tinkering with commission caps again. Even after the 1st of January next year, it will take some time for the effects of the LIF reforms to flow through. Therefore, any review of commission caps should ideally take place in 2022 and should look at both the quality of advice and the levels of under-insurance in the Australian market.

In terms of the outlook on Page 21, there are still plenty of reasons for optimism notwithstanding significant headwinds. Fundamental demand for financial products and services that ClearView manufactures, distributes and provides is underpinned by regulation and social economic and demographic trends. As a customer-focused organization with strong adviser relationships and a diversified business model, ClearView is strongly positioned to ride these tailwinds.

Furthermore, as a relatively new player, we are not constrained by cumbersome and expensive legacy systems, process or thinking. Our ongoing, strategic investment in technology infrastructure and development will make it even easier for financial advisers to do business with us. In the short to medium term, tough economic and operating conditions are expected to persist which will impact on the overall industry sales volumes, lapse rates and performance.

ClearView is not immune to the challenges facing the broader industry. That said, key strategic decisions made early on, in particular, the businesses focused on individual life advice market has provided clear direction and setup for the future growth. Pleasingly, ClearView does not participate in the besieged group life insurance market currently being impacted by the government's Protecting Your Super reforms or the consumer credit insurance market.

Following a reset of the business in the second half of financial year '19, which included a cost transformation program and IT strategic review, ClearView is well positioned to take advantage of structural changes in the market. Shorter-term profit growth will be achieved by effective cost management, improving lapse and claims performance and execution of our distribution strategy.

ClearView is likely to be the beneficiary of industry disruption and the consequent opening up of life insurance approved product lists which will see previously aligned advice businesses gain access to our suite of products and services. Additional distribution relationships, combined with the maturation of our existing life insurance approved product lists, will lead to a material increase in in-force premiums, noting in the shorter-term focus on business quality.

Already, we are benefiting from the breakdown of institutional vertical integration. As the CoreData Licensee of the Year for 3 consecutive years, Matrix is strongly positioned to pick up quality advisers looking for an experienced, well-resourced dealer group with a continued focus on quality over quantity.

The launch of LaVista Licensee Solutions in late 2018 gives IFAs another way to engage with ClearView. Early interest in LaVista is encouraging with a strong pipeline of potential clients.

Other key areas of focus for financial year '20 including -- include: upgrading major elements of the core Life Insurance and desktop technology; repositioning the Financial Advice segment and rolling out LaVista; completing a strategic review of Wealth Management platforms and technology with a focus on simplification; additional work on pricing, positioning and retention strategies for both Life Insurance and Wealth Management; and further investment in the risk and compliance functions.

Turning to Slide 22, we will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Tim Lawson from Macquarie.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [2]

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Just 2 quick questions. Can you talk a little bit more about the platform strategic review and also just give us a bit more color around the reset of the assumptions and what you expect to touch going forward for lapse and claims in the Life Insurance business.

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Simon Swanson, ClearView Wealth Limited - MD & Director [3]

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Tim, vis-à-vis the first one on platforms, we're just looking at reviewing exactly where we lead our platforms. As you know, we've got our own one which runs our WealthFoundations suite of products, and that's going quite well so far. The other one is a private label for Avanteos, which is Colonial First State's FirstWrap. And we're just reviewing what's the most economic way for those to be run in the future.

With respect to the reset of the assumptions, there are a number of key issues, and I might get Athol to chime in, too. The first one in Financial Advice, we obviously took out all the goodwill in Financial Advice. The fundamental reason for that is twofold. Firstly, there have been some sales of dealer groups in the last few months. You would remember Count Financial being backed into CountPlus. And you saw the valuation on that. The second one is, as always, changes go through for remuneration of advisers and education of advisers. The relationship that used to be between the adviser and the dealer group cum platform is now going to be between the client and the adviser. And what I mean by that, I know this is a long answer, the issue is, we're now moving away from paying or having advisers pay us based on life insurance premiums, splits which are based on asset fees, et cetera. And we have now moved the whole dealer group to a situation where they pay a fee for the service that we provide as a dealer group. So it changes the whole assumption sitting underneath that. So that's on the Financial Advice piece, and Athol will chime in on a few others.

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Athol Chiert, ClearView Wealth Limited - CFO [4]

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So the other core sort of set of assumptions in the EV tended to be around lapses, claims, expenses and then discount rates. I think we've historically talked about lapses. I think overall, the core of the book is sound and has the appropriate lapse rate. I think the lapse rate is being reshaped according to some of the distribution relationships that, in effect, we've terminated as we've highlighted and that has a faster runoff. So the way to think around the lapse assumption is really a weighted average of the runoff of the book and a resetting of that and reshaping of the lapse assumptions to take into account the observed experience.

Claims is predominantly driven by income protection. And income protection claims assumptions were changed by a change in the termination rates. And what that means simplistically is that we've assumed that claims will stay on the book for longer. And that's why that partially an impact on the FY '19 result, the $1.8 million after tax because that relates to claims that are in the course of payment at the moment in the income protection book. So that is why that change in assumption had an impact on this year's result as well as going forward.

The other one is expense assumption which got reduced in line with the cost transformation program. And the last one, the discount rate. As you're aware, we haven't changed the risk-free rate for a substantial period of time. And in light of the low interest rate environment, we considered appropriate to reset the risk-free rate and linked assumptions around that, for example, inflation and the discount rates got amended accordingly. So those are really the 4 key assumptions and rationale broadly for the changes.

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Operator [5]

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(Operator Instructions) Your next question is from Philip Pepe from Blue Ocean Equities.

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Philip Pepe, Blue Ocean Equities Pty Ltd, Research Division - Senior Industrials Analyst [6]

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Just curious on your plans for increasing the underlying NPAT more specifically for in-force premium growth or just premium growth. Can you elaborate a bit more on the distribution part of the plan to increase NPAT for next year?

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Simon Swanson, ClearView Wealth Limited - MD & Director [7]

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I think there's 2 parts to it, Philip. The first one is, we're obviously getting on a lot more approved product lists and dealer groups. And as the verticals are slowly breaking down, i.e., BT exiting financial advice, CommBank exiting financial advice, we're actually seeing people go do their own licensee or to other dealer groups which we already have a relationship with. So that's the first point. So that's why we think we can continue to grow our in-force premiums.

The second point is that, the way this works obviously, the age-based increases and so on will also fundamentally give us growth in our portfolio. And I think the other thing is, the reset of the assumptions around both claims and lapses will allow us to continue to -- or not continue to, to increase our profit next year.

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Athol Chiert, ClearView Wealth Limited - CFO [8]

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I think the other concept, Philip, is that the new business is quite a material component of the in-force book. So the quantum of new business that's been written is a large proportion of the in-force book, which in itself leads to natural growth in the in-force which then theoretically drives your profit growth.

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Operator [9]

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Thank you. There are no further questions at this time. I'll now hand back to Mr. Swanson for closing remarks.

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Simon Swanson, ClearView Wealth Limited - MD & Director [10]

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Thank you, Jody. Look, I think Tim's question was clearly the killer question and the answer almost knocked him unconscious. So look, thank you very much for your time today, and we will look forward to seeing everyone in due course.

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Operator [11]

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Thank you very much. That does conclude our conference for today. Thank you all for participating. You may now disconnect.