U.S. markets open in 8 hours 12 minutes

Edited Transcript of CVW.AX earnings conference call or presentation 25-Feb-20 11:00pm GMT

Half Year 2020 Clearview Wealth Ltd Earnings Call

SYDNEY, NSW Mar 23, 2020 (Thomson StreetEvents) -- Edited Transcript of ClearView Wealth Ltd earnings conference call or presentation Tuesday, February 25, 2020 at 11:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Athol Chiert

ClearView Wealth Limited - CFO

* Simon Swanson

ClearView Wealth Limited - MD & Director

================================================================================

Conference Call Participants

================================================================================

* David Birrell;Croxon Capital

* Glen Wellham;MST Financial Services

* Philip Pepe

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for standing by, and welcome to the ClearView Wealth Limited HY '20 Results Conference Call. (Operator Instructions)

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you for joining us today. This presentation has 4 parts. I'll take you through the first half before handing over to Athol to go through the half year result in greater detail. I'll then wrap up with an overview of the regulatory changes and ClearView's business outlook before inviting questions.

Turning now to Slide 3. This provides a high-level summary of ClearView's business profile, financial performance and earnings and capital position. In short, there is a fundamental need underpinning demand for ClearView's products and services despite extremely challenging market conditions. ClearView is currently implementing a range of initiatives with more to come to address the group's poor claims and lapse experience and with a focus on the LifeSolutions income protection product series. This coincides with APRA's recently announced individual disability income insurance sustainability measures, and I'll expand on those later.

So turning to Slide 5 and ClearView's history. ClearView, in its current form, was established in 2010 and has grown steadily, primarily organically. The business did acquire the Matrix dealer group in 2014 to give us distribution access, but our strategy and biggest opportunity set has always been focused on the independent financial adviser channel. This channel now represents over 90% of our Life Insurance new business.

Turning to Slide 6. ClearView was established to meet an identified gap in the market for a customer-centric Life Insurance and Wealth Management business. With the large incumbents tied up and distracted dealing with legacy issues such as outdated products and pricing as well as problematic group Life Insurance divisions, our aim was to deliver a range of complementary contemporary solutions to the advised segment. Initially, our focus was on small to medium-sized AFSL holders who had been neglected by the large manufacturers. This was partly because we're effectively locked out of doing business with licensees and advisers aligned to the big end of town, but also because we identified an opportunity to look after the needs of this under-serviced segment.

In more recent years, with many institutions exiting personal advice, we've also turned our attention to larger displaced quality licensees that want to partner with a company that is committed to the advice market and providing great adviser and customer service. The strategic rationale for setting up ClearView still remains relevant 10 years later in 2020.

Turning to Slide 7. There is fundamental demand underpinning ClearView's products and services. As a diversified financial services company, ClearView is well positioned to meet the needs of consumers by delivering both life insurance and wealth management products. Factors such as compulsory super, rising levels of household debt, Australia's aging population and the increasing complexities of life mean that people need financial advice and they need compelling products and solutions.

Slide 8 overviews the 3 key segments, which ClearView operates in: Life Insurance, Wealth Management and Financial Advice. Life Insurance remains the group's main profit driver, and our flagship ClearView LifeSolutions product series is well supported by independent financial advisers. The group's diversified model and strong presence in the IFA market ideally positions us to cause new relationships and support a growing number of advisers. From a standing start in 2010, LifeSolutions has been recommended by over 556 AFSL holders and has won numerous awards over the years. In terms of Life Insurance new business, LifeSolutions has a decent share of the IFA market.

In addition to our products, as articulated on Page 9, ClearView is widely recognized as Australia's leading licensee with Matrix Planning Solutions named CoreData Licensee of the Year for the last 3 consecutive years. While the numbers of advisers in our network dipped slightly in the half, this was primarily because a number of advisers retired and some chose to gain their own AFSL. This self-licensing trend led ClearView to launch LaVista Licensee Solutions in late 2018. And interest in our B2B offering is strong. It gives ClearView another way to support and partner with own IFSLs.

On Page 10, we'll talk about our compelling offer, which is fundamentally focused on quality, not quantity, and how we're positioned in each of our core segments. I've already touched on Financial Advice, so I'll focus on Life and Wealth. In Life Insurance, our strategy is to deliver sustainable and relevant products and services to both advisers and their clients in order to earn the right to do business with more financial planning groups. I'm proud that ClearView has a strong service culture and is being recognized by independent research agencies, including investment trends and Beddoes Institute.

In Wealth Management, our goal is to build a material business by offering competitive products and leveraging our strong life insurance relationships to grow our share of wallet.

On page -- on Slide 11, I should say, we talk about our distribution opportunities. The graph in the bottom right-hand corner of Page 11 illustrates the steady growth of ClearView's distribution footprint. This trajectory is expected to accelerate due to the breakdown of the institutional vertically integrated model. A consequence of this is that the formally aligned advisers are now moving to establish their own AFSLs or join a noninstitutionally owned licensee. Out from under institutional control and influence, they are able to freely choose the most appropriate products for clients, which present an enormous opportunity for ClearView and is in the best interest of customers.

On Slide 12, we talk about how we're addressing the issues in the business. The main area of focus is, of course, life insurance, as we work through APRA's income protection and sustainability measures and seek to turn around the performance of our income protection portfolio. We have commenced a comprehensive review of the LifeSolutions' income protection product series, including repricing of the product, reviewing the product design and underlying claims assumption. ClearView also ceased selling agreed value income protection policies in March and further, we'll offer a new indemnity-type IP auction -- option with a lower maximum monthly benefit at a reduced premium, also in March. We're also starting to make use of analytics and early intervention techniques to improve claims outcomes in addition to optimizing resources.

We continue to work with our reinsurer to develop more sustainable products and pricing, and with further initiatives underway to improve lapse performance. Our intention is to create efficiencies for advisers by improving ease of doing business and automation of back-office functions. In line with this strategy, we have a project to upgrade major elements of our core life insurance technology, and our proof-of-concept is underway for a new policy administration system.

In Wealth Management, a major project is also underway to deliver simple and transparent products across platforms and to address and close out the tax credit issue in our super fund. We are also focused on developing a sustainable revenue base in our Financial Advice business.

I'll now hand over to Athol to take you through the half year '20 results in further detail.

--------------------------------------------------------------------------------

Athol Chiert, ClearView Wealth Limited - CFO [3]

--------------------------------------------------------------------------------

Thank you, Simon. As the table on Page 14 shows, underlying NPAT, the Board's key measure of the group profitability and the basis for dividend payment decisions, decreased 23% to $10.2 million and reported NPAT decreased 15% to $9.8 million. This is a disappointing result. Recent periods have been very challenging for the industry, and this has also impacted heavily on ClearView's financial performance despite underlying premium top line growth.

Income protection claims, in particular, has had a material adverse impact on both the industry and our results. The half year '20 result was also impacted by other challenges including unprecedented regulatory change, ultra-low interest rates and unsustainable competitive pricing. That said, we believe that ClearView remains well positioned to outperform over the long term. Our Life Insurance in-force portfolio is up 8%. And whilst there's further expansion of our distribution footprint, the opening of approved product list is creating further opportunities to reach new audiences. The half year '20 result also does not reflect the key strategic priorities and actions that are underway that are likely to have a longer-term positive impact on the business, including a range of strategies that are being put in place to improve the performance of our income protection portfolio. Here, this focuses on further improving lapse performance, reviewing our pricing profile and addressing the fundamental issues with income protection products that are currently up in the market.

Taking a look -- a closer look at the performance on Slide 15 of the underlying segments, Life Insurance reported an underlying NPAT of $8.7 million, down 27%; and a reported NPAT of $7.5 million, down 39%. The Life Insurance result was adversely impacted by a claims experience loss of $4.7 million, mainly attributable to the income protection portfolio and a lapse experience loss of $1.4 million despite a significant improvement in lapses in the second quarter of the financial year. Wealth Management reported an underlying NPAT of $1.7 million, down 19%; and a reported NPAT of $1.7 million, down 18%.

Whilst the segment experienced a significant improvement in net inflows into contemporary products and positive investment performance, these gains were offset by pricing changes and mix of business written, leading to a reduction in overall fees. Financial Advice reported an underlying NPAT of $0.6 million and a reported NPAT of $3 million. Net financial planning fees are broadly neutral with costs impacted by the advice program and certain compensation costs.

On Slide 16, for operating expenses, following a reset of the business in 2019, we continue to focus on effective cost management and executing our reinvigorated IT strategy. Half year '20 reflects a 14% decrease in cash cost and a 7% decrease in operating expense cost base.

On Slide 17, notwithstanding an 8% increase in Life Insurance in-force premiums to $268 million, key issues impacting our new business flows included: weaker market conditions, the deliberate termination of certain life insurance distribution relationships in the last financial year and unsustainable pricing from competitors. Despite these weaker market conditions, we managed to maintain our share in the declining IFA market. Life Insurance in-force returned to new business market share over time.

The slides on Page 19 and 20 really sum up what's been impacting us at the moment, but it's also indicative of what's occurring across the broader industry. Individual disability income losses, as reported by the APRA statistics, reflect losses over the last 5 years of more than $3 billion. APRA has attributed this to poor product design and pricing, in particular, around income protection products. As mentioned, we are currently undertaking a comprehensive review of the ClearView LifeSolutions' product series, including reviewing the underlying claims assumptions.

Turning to Wealth Management on Slide 21. ClearView saw significant improvement in net inflows into contemporary products and reduced outflows from the closed Master Trust product in the half year period. This resulted in increase in funds under management of 10% to $2.88 billion and overall net inflows of $66 million across products. In recent years, a number of trends have emerged with consumers and advisers becoming more price-sensitive, evidenced by the rise of passive investing and margin pressure in platform administration. In response, ClearView has repositioned its wealth management products to simplify and align its fee structures in contemporary products, introduce new strategic model portfolios and lower-priced index models and currently has a major wealth management project that is underway that Simon talked to earlier in the call.

Slide 21 reflects the capital position as at December 31, 2019. We had net -- our net assets increased to $449.4 million. The net capital position above internal benchmarks is broadly neutral across the group. The Board is currently investigating longer-term capital solutions, such as the issue of Tier 2 subordinated notes. The proceeds from the issue of such notes is intended to be used to repay at least part of the debt and further for capital management purposes, including to fund or support regulated funding requirements of our Life Insurer, ClearView Life, from time to time. The ClearView Group does not currently anticipate the need to undertake further capital management actions beyond these projects and actions. The Board will continue to adopt a limited and cautious approach to the on-market buyback program, and the declaration of any FY '20 final dividend will need to be considered at the time of the full year results and the outcome of the capital initiatives outlined above.

In half year '20, on the next slide, ClearView achieved underlying self-funding capability. The business generates positive cash flows from its in-force portfolio, which is subsequently reinvested into the business. The in-force capital generation reflects a combination of the underlying net profit after tax achieved and deferred acquisition costs collected from the in-force portfolios in a particular financial year. The reduced capital needs over time reflects the growth in in-force portfolios given the increased scale of the business. The capital generation from the in-force portfolio now provides us with the ability to start to use these cash flows over time.

The next slide reflects an embedded value of the group, which is $669 million or $0.99 per share. The EV is both only on the in-force portfolios, excluding the value of any future growth potential.

I'll now hand back to Simon to provide an overview of the regulatory changes and an outlook for the business.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Athol. The next 3 slides deal with the significant regulatory reforms that the industry is implementing. As noted earlier in the call, APRA is in the process of implementing measures to address industry issues associated with income protection products. ClearView is undertaking a body of work to ensure our income protection products are appropriate for our customers and satisfy APRA's requirements. ClearView is supportive of APRA's recently announced sustainability measures with respect to income protection, and we are very well positioned to implement any necessary changes relatively quickly.

Both APRA and ASIC have also renewed their focus on risk culture across the industry. ClearView is responding and has commenced initiatives to improve its focus in this area. There are more changes ahead as the industry commences the implementation of the Royal Commission Final Report recommendations and the regulatory reform agenda. We've also tried to highlight those changes, which are more -- most relevant to ClearView and provide a high-level summary of our response to them. Key changes include ASIC's design and distribution obligations and product intervention powers and life insurance-related reforms, such as the application of unfair contract terms to insurance and treating claims handling and settlement as a financial service. Overall, ClearView is supportive of any reforms that aim to strengthen consumer protections, address poor practices and ultimately improve customer outcomes.

Turning now to Slide 28. Wrapping up, we believe that ClearView is very well positioned to outperform, notwithstanding significant short-term headwinds. Key foundational decisions made from the outset, such as our deliberate decision to establish a diversified business model, focus on the advice market and primarily pursuing organic growth strategy, mainly during this period of enormous change, we are in a strong position to adapt to change and capture opportunities arising from disruption. These are, without a doubt, challenging times for the financial services injuries -- industry as it grapples significant structural, regulatory and economic changes. The landscape is also changing rapidly during -- due to the ongoing consolidation by larger international players, the exit of banks from personal advice and the introduction of new legislation. For a customer-centric company like ClearView, it also creates opportunities to better support the increasing number of customers and advisers.

The fundamental purpose and need for quality life insurance and wealth management products and services, along with professional advice, has not changed. Australia's aging population, compulsory superannuation system and rising household debt levels underpins demand for ClearView's high-quality products and services. We retain a positive longer-term outlook. And we'll now take questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Glen Wellham from MST Financial.

--------------------------------------------------------------------------------

Glen Wellham;MST Financial Services, [2]

--------------------------------------------------------------------------------

Yes. It's Glen Wellham here from MST Financial. Just a quick question on the events in China and how your reinsurance may work, if this becomes a pandemic?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. As you may be aware, Glen, the reinsurance through Swiss Re is around 75% to 80% of the portfolio. The point I'd make about the coronavirus, generally speaking, we see it at this point more of a business continuity issue. People traveling in and out of the country, et cetera, the impact on economics. You can see that in the share market generally today. The other point I'd make is if you think about -- and this is just the truth of the coronavirus, is that the people who seem to be dying are those who are old and young, which is not the insured population.

--------------------------------------------------------------------------------

Glen Wellham;MST Financial Services, [4]

--------------------------------------------------------------------------------

Okay, excellent. And just another question on income protection, just regarding your initiatives in March. What's been the response by others in the industry? And have they adopted similar-type initiatives, or they lagging what you've done?

--------------------------------------------------------------------------------

Simon Swanson, ClearView Wealth Limited - MD & Director [5]

--------------------------------------------------------------------------------

They seem to be lagging, but I can't guarantee you that. So we are going early. And by the look of it, so we're launching in 2 weeks' time, income protection benefit, which has a 60% income replacement ratio, i.e., it replaces 60% of your income. It has a 25% bonus in the first 6 months, which obviously takes it up to 75%. That is certainly consistent with the direction that APRA wants the market to go in, and I'm sure companies are working through right now, all the pricing impacts and system changes that they need to make to bring in new income protection products, which aren't as generous as the ones that we have today. So the answer, I think, Glen, is the market is going to do 2 things. It's going to reprice the products and also change the terms of the products to make them less generous than they are today.

--------------------------------------------------------------------------------

Glen Wellham;MST Financial Services, [6]

--------------------------------------------------------------------------------

Excellent. Cool. And just one final question, if I may. Just on the wealth management and the strong inflows experienced there, just give a little bit more detail about why you think the inflows are coming in? Is it mainly cost that you're providing? Or what's the main driver?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think there's 2 things to it. The first one is, we've learned a few lessons from the industry funds. So what we have now in our WealthFoundations product, a simple model portfolios, dynamic strategic index-type funds at a fairly good cost point. And I think that's actually encouraging a lot of advisers to actually place their business through ClearView. On the WealthSolutions, we're saying, if I can -- and this is a long-winded answer, but you've almost got 3 types of advisers now. You've got the investment specialists, you've got the risk-only people, and you've got the generalists in between. Our market is very much focused on the generalists called wealth management. The people who actually charge a fee for their financial planning advice. That fee is not normally asset-based. It's actually a flat fee. And we see that as the real growth in the adviser market in the future. Those advisers who are holistic advisers, giving true financial planning advice, charging a fee. As their remuneration unhooks from the platforms, they'll charge their independent fees, they'll look for a product, which is simple, effective and transparent, and that's where we're targeting our growth solutions -- I'm sorry, growth foundations offer.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Philip Pepe, Blue Ocean Equities Pty Ltd, Research Division - Senior Industrials Analyst [9]

--------------------------------------------------------------------------------

Just a question on the AP. You updated your assumptions at the full year, but then the experience losses were worse in the first half of this year. Presumably, you re-tested the assumptions as at 31 December, and you're happy with the line item, so does that occur at the end of the financial year?

--------------------------------------------------------------------------------

Athol Chiert, ClearView Wealth Limited - CFO [10]

--------------------------------------------------------------------------------

I think, so what we said is, in terms of a large part of their claims experience was related to income protection. As we've sort of outlined in the pack, there's certain initiatives around the income protection, which includes a repricing of the product. And as part of that process, there's a review of the claims assumption. And what we have said is that in terms of that repricing, the intention of that is to sustain margins, and therefore, the underlying embedded value in relation to part of those initiatives. So the short answer is that the EV, based on the change in the claims assumption that will come for the full year and the repricing, should remain neutral across the sustained profit margin.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from David Birrell from Croxon Capital.

--------------------------------------------------------------------------------

David Birrell;Croxon Capital, [12]

--------------------------------------------------------------------------------

Just a quick one from me on the status of the Tier 2 that you might be issuing. I'm imagining that you've been waiting for a bunch of capital issues around APRA with IDII and Swiss Re concentration issue and the tax credit issue within the CRP to be kind of finalized. Are there any other things that you would be needing to wait for to proceed and finalize that Tier 2?

--------------------------------------------------------------------------------

Athol Chiert, ClearView Wealth Limited - CFO [13]

--------------------------------------------------------------------------------

No, I think the sort of language we've used is that it's subject to regulatory approval process and market conditions. So the short answer is no.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. I will now hand back to Mr. Swanson for closing remarks.

--------------------------------------------------------------------------------

Simon Swanson, ClearView Wealth Limited - MD & Director [15]

--------------------------------------------------------------------------------

Look, thank you very much for the opportunity of presenting our results today, and we look forward to taking your questions in the future. So thank you very much.