ClearView Wealth Limited (CVW) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the ClearView Wealth Limited FY '20 Results. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, to Mr. Simon Swanson. Thank you. Please go ahead.

Welcome to ClearView's Financial Year 2020 Results Conference Call. Today, I'm joined by ClearView's Chief Financial Officer, Athol Chiert. We will aim to keep this presentation relatively short to leave as much time as possible for questions at the end. I will provide a high-level summary of ClearView's full year results in the context of an extremely difficult current market condition and COVID-19. I'll also detail our response to key challenges. Athol will talk about the financial year 2020 results before I wrap up, giving an update of ClearView's strategy and an overview of the outlook for the operation. We will then take questions. This morning, ClearView announced an underlying net profit after tax of $14.7 million for the year ending 30th of June 2020, down 41% on 2019, and a reported profit of $13.1 million, up 230% on the previous year. The financial year 2020 result was adversely impacted by an increase in life insurance claims, particularly income protection and death claims, along with material changes to claim assumptions. This reflects broader industry trends amidst extremely difficult market conditions, which have been further compounded by the impacts of COVID-19. COVID-19 is also likely to drive a further increase in income protection claims from the secondary economic impacts of the pandemic. The life insurance industry's life insurance products lost $1.65 billion for the year ending the 30th of March 2020, largely attributable to a $1.4 billion loss on income protection. This extended the last 5 years' income protection losses to nearly $3 billion. This deteriorating performance across the industry has recently seen APRA intervene to start to force structural change. APRA's action included a range of income protection sustainability measures, including a review of the design and pricing of income protection products, a ban on the sale of certain underperforming income protection products and a Pillar 2 capital charge on all life insurance participants that sell income protection products. ClearView is very supportive of APRA's measures to address the poor performance of income protection and move it to a sustainable basis. The effectiveness of APRA's intervention will be important for the industry to achieve longer-term margins. ClearView has sought to move faster than the rest of the industry in addressing the income protection issues. Our view is that the industry's concern of first-mover disadvantage has now changed to a first-mover advantage. Therefore, in response, ClearView has acted swiftly to address challenges presented by both deteriorating industry profitability and COVID-19. ClearView has prepared its income protection action plan, which includes a body of work to ensure the group's products are appropriate and to satisfy the regulators' intent and requirement. ClearView made an early decision to cease the sale of agreed value income protection contracts in mid-March, earlier than that required by APRA, and shifted its focus to policy retention to manage price changes and COVID-19 impacts, including providing alternatives to customers to improve premium affordability. ClearView also implemented price changes to its flagship LifeSolutions product from April 2020 and launched the new simplified Indemnity 60 income protection option as a more affordable alternative to the existing indemnity products in the market. The business increased its focus on claims management, including resourcing and assessment of automation of systems to improve case management outcomes. Changes have also been made to lapse and claims assumptions to allow for price increases, increased claims and reinsurance costs and potential impacts from COVID-19. To be more specific, we have allowed for COVID-19 shorter-term impacts for the next 2 years to both our best estimate assumptions and embedded value calculations for both claims and lapses. Despite the challenges presented by COVID-19 and ongoing regulatory and structural change, ClearView reported a significant improvement in life insurance lapse performance in the second half financial year 2020 due to the implementation of both repricing and retention strategies. The group also continued expanding its distribution footprint in -- for financial year 2020 with 60 financial planning groups adding LifeSolutions to their approved product list, bringing the number of advice groups to almost 592. Over 4,000 financial advisers can now sell ClearView's life insurance products. The Wealth Management and Financial Advice segments performed relatively strongly. There was a significant uplift in net inflows of $189 million into contemporary Wealth products and adviser numbers increased by 37 to 264 as 16 advisory firms joined the group's B2B dealer service offer, LaVista Licensee Solutions. Overall, ClearView remains well positioned to meet its obligations to customers, staff and shareholders and has a strong balance sheet and a recurring revenue base. I'll now hand over to Athol to walk you through the financial year 2020 results.

Thank you, Simon. Underlying NPAT, the Board's key measure of group profitability and basis for dividend payment decisions, decreased 41% to $14.7 million, and fully diluted underlying EPS decreased 41% to $0.0234 per share. Reported NPAT increased by 230% to $13.1 million, and reported diluted EPS increased 235% to $0.0208 per share. The decline in profitability was predominantly driven by poor underlying claims performance in our Life Insurance segment, which had a $12 million -- $12.5 million impact, and material changes that were made to claims assumptions, including an allowance to reflect an expected increase in COVID-19-related claims. The change in claims assumptions had a further $5.9 million impact on the FY '20 results. As noted by Simon, the result reflects broader industry trends and should be viewed in light of overall industry performance and extremely difficult market conditions. I'm pleased to report that there was a significant improvement in lapse performance in the second half of the financial year, reflecting the implementation of repricing and retention strategies, including some distribution initiatives that were implemented in FY '19. The FY '20 result also included the benefits of expense management and the impacts from the results in light of the group's COVID-19 response with the granting of both premium waivers for financial hardship requests and the capping of certain income protection price rises that overall had a $1.3 million impact on the FY '20 results. As part of its response to managing risk in relation to COVID-19, we assess certain stress test scenarios. These stress test scenarios consider business impacts on both capital and profitability from COVID-19, including direct COVID-19 claims impacts based on assumed infection, mortality and morbidity rates; indirect claims impacts from economic downturn-related matters; asset value impacts; adverse impacts on the delivery of key projects; reduced sales and elevated lapses; and premium suspension impacts. ClearView Life's regulatory capital position is resilient to each of these scenarios. Despite substantial uncertainty in relation to the impacts of COVID-19 and, for example, the impact of the second wave in Victoria and the removal of certain government support measures, based on the current available data and trends in Australia, the baseline view is that it seems unlikely that there will be a high number of direct COVID-19-related insured death claims. We note that mortality to date has tended to be in the older uninsured segment of the population and the number of cases in Australia has been relatively low. As such, the secondary economic impacts of the pandemic appears to be the key risk areas. This is likely to drive an increase in claims and lapses in the months ahead. Given the evolution of the COVID-19 pandemic and the operating environment, the initial scenarios have been updated as part of the business plan process, with 4 key environmental factors being considered as part of this process. These factors included the economic impacts of the pandemic; structural changes to our distribution channels; the size of the market; return of rational pricing and longer-term sustainability of margins within the life insurance industry amidst regulatory intervention; and the increased cost of doing business, including reinsurance, regulatory and compliance costs. Profitability can be sensitive within each scenario, in particular to claims and lapse assumptions. Simon will talk further to the FY '21 guidance that we're providing today. Suffice to say that FY '21 is considered a base transitional year and that ClearView has a strong foundation for materially improved performance in FY '21. ClearView remains focused on its strong balance sheet and recurring revenue base. It has net shareholder cash of $212 million at 30 June, with shareholder capital conservatively invested. The business is now achieving underlying self-funding capability. In light of the adverse impact due to COVID-19, the challenging market conditions, prudent capital management, and in line with APRA's communications to consider limiting discretionary capital distributions, no FY '20 dividend has been declared. ClearView also does not intend to undergo any on-market share buyback activity given the current environment and market conditions. The group is also actively investigating a Tier 2 debt issuance with the intention of repaying at least part of the debt funding facility and to fund to further support the needs of our regulated entities from time to time. This is in line with putting in place a permanent capital solution as previously communicated to the market. The debt facility has been extended to April 2024 and fully drawn down to $60 million at balance sheet date. I'd like to end off with the embedded value, that is circa $0.95 per share at 30 June 2020. This reflects the strong cash flow generation of the in-force portfolios. It also includes the effects of the repricing, material changes we have made to claims and lapse assumptions, including the potential impacts from COVID-19 and potential premium affordability issues and increased reinsurance costs. I'll now hand back to Simon to further provide details on the outlook.

Thank you, Athol. The world is facing unprecedented circumstances, including significant economic, social and health challenges caused by the COVID-19 pandemic. In these difficult times, and whilst ClearView is not immune to the challenges faced, we are fortunate to have a sound business model, a strong balance sheet and recurring revenue base that creates a level of security for our customer base, adviser network and stakeholders. As Athol said, financial year 2021 is a base transitional year and the focus is on the profitable, sustainable growth of the Life Insurance business. Group underlying net profit after tax guidance of $20 million to $24 million in financial year 2021 is provided. A key factor critical to achieving this guidance is the secondary economic impacts of COVID-19, in particular, the flow-on effects to our income protection claims and affordability of premiums. While estimates and allowances have been made in the updated claims and lapse assumptions used, given the fluidity of the COVID-19 pandemic and operating environment, potential impacts from any further deterioration in economic conditions or unanticipated delays in the development of a vaccine, the actual experience relative to the revised assumptions adopted will need to be closely monitored. As the industry shifts over time to rational competitor pricing, increasing life sales and sustainable product features, this will likely lead to improvements in underlying profit margins and return on capital. Initiatives are now underway to achieve more sustainable income protection claims and pricing outcomes, in particular the APRA income protection sustainability measures that could lead to a return of rationality to the market, which is important for the achievement of improved margins. ClearView commenced repricing of its Life Insurance portfolio in April 2020, and the focus has been on customer retention and income protection claims management. More recently, and very importantly, other market participants have started to also increase pricing. ClearView is focused on accelerating the development of its Wealth Management business and building out a self-sustaining Financial Advice business. ClearView's current actions to build customer loyalty, simplify and improve products and invest in technology are focused on ensuring ClearView is easy for advisers and customers to do business with. This strategy is likely to underpin the improvement of the medium to long-term performance objectives. Today's landscape is changing rapidly due to ongoing consolidation by larger international players, the exit of banks from personal advice and the introduction of new legislation. The fundamental purpose and need for quality life insurance and wealth management products and professional advice has not changed. Australia's aging population, compulsory superannuation system and rising household debt levels underpins demands for ClearView's high-quality products and services. While there are many challenges ahead, ClearView is focused on delivering value for our customers and helping them navigate life's ups and downs to achieve their goals. I will now take questions.

[Operator Instructions] And our next question in queue is from Philip Pepe from Blue Ocean Equities.

Just on the extra loss rate assumptions, did I understand correctly that that's for 2 years of extra COVID-related claims? Or is that higher loss rates across the board for the entire forecast period? How do I interpret that?

Thanks, Phil. I think there's 2 elements to it. What there is, is there was a change in claims basis, in which we increased the underlying claims assumption across the income protection portfolio by around circa 35%. And at the same time, what there was is there was a COVID overlay, which allowed for an increase in income protection claims from the sort of secondary impacts of COVID for the next 2 years. That $5.9 million was broken up around -- $3.1 million around the change in claims basis and around $1.2 million for COVID, and then there was around $1.6 million for the change in the IBNR assumption. So overall, it had a just under $6 million impact on the FY '20 year. And obviously, those change in assumptions, the basis and the company years of COVID has a flow-through to the best estimate assumption.

Fair enough. And if I can sneak in a second one. Just on the outlook for $20 million to $24 million, there remained a reasonably wide range. Is the swing factor potential claims? Or is it some uncertainty in terms of new premium growth in the next 12 months as well?

No. I think that as we sort of outlined, the main sort of factors is around claims and lapses. I think it's a relatively uncertain environment as all entities are going through at the moment. And I think the wider range is driven predominantly by the unknown in the secondary economic impact and unemployment and then the falloff of JobKeeper and other government support mechanisms in March.

[Operator Instructions] Our next telephone question is from Glen Wellham from MST Financial.

Well done on the result in difficult circumstances. Just a question on the pricing. Now that you've seen some pricing increases from competitors, are you a market price leader in a lot of your categories? Or are they sort of catching up with you? Or where is that sort of sitting now? Can you just give us a general sort of comment?

Glen, there's no doubt that they're catching up to us now. There's a few more to go. But the general trend is going in the right direction from our perspective. I think the biggest issue in the future is APRA's response, so -- on income protection. And that, combined with the design and distribution obligation legislation that comes in October next year, effectively resets the whole industry. And our hope is that it resets the margins in the industry. So our view in the next 6 months, you'll see more price increases come through. And we'll just make a decision, probably towards the end of the year, how we respond to those price increases and do we go again. But we'll make that call later in the year.

And do you anticipate -- I suppose it depends what happens. But do you anticipate what -- if there's going to be any further action from APRA at this stage? Or do you think things are sort of finally tracking towards what they'd like to see?

Yes, it's certainly tracking that way. I think it will be on a company-by-company basis. So if a company doesn't take the appropriate action, they will get a further Pillar 2 adjustment would be my response to that. In other words, it's not going to be an industry-wide issue.

Excellent. And just another high-level question, I suppose. When we're sort of assuming COVID impact for the next 2 years, is that -- how is that done? Is that a deterioration of what we're seeing now in terms of the effect on the lockdown and lapses, et cetera, et cetera? Or is that a deterioration or just the same as it is now?

Yes -- you go, Athol.

Yes. I think the way to think about it is around -- it's an overlay to the best estimate assumption. So lapses, as an example, you would see that our lapse performance in the second half of the year, what we articulated was good and broadly in line with the best estimate assumptions. The COVID and pricing overlay is done as a shock lapse assumption for the price changes and inclusive of a COVID overlay, the 5%, and then that falls off to 2% in -- 2.5% in year 2. From a claims perspective, it's the expectation of an increased claims cost over and above the change in claims basis or the best estimate assumptions. So to be clear, we changed both the best estimate assumption for claims, so income protection going up 35%, some debt claims going up by 20% to 25%, depending if it's LifeSolutions or the closed portfolios. And over and above that, we've assumed an overlay, both for termination rates for income protection, meaning how long they stay on claim for, given the difficulty of returning to work as well as the number of claims we expect to get. Obviously, those sort of assumptions are quite subjective, and we have used a lot of industry data and our own sort of actual assumptions around that. There hasn't been many life insurers that have gone before us, with the year-end being June, but it's something that we had built in. And what we've articulated relative to the guidance that's been provided that, obviously, those will be the things that we monitor pretty closely around the actual experience.

And that's all reflected in the embedded value, too, Glen.

Yes. And I think that is an important message that the embedded value follows the best estimate assumptions. That includes the shock lapse assumptions over the next 2 years as well as the COVID overlays for additional lump sum and income protection claims that we consider appropriate at this point in time in the current environment, knowing that is a relatively uncertain environment.

Hopefully, it doesn't go for another 2 years, but yes.

Well, just let me know the company if it's got the vaccine and I'll buy their shares.

It does get -- but it is harsher in the first year than the second year, but there is a throughput through that.

[Operator Instructions] There are no more further questions at this time. I'd like to hand the call back to the speakers for closing remarks. Please continue.

I will just thank everyone on the phone. We're excited about the next year. As we said, it's a transitional year, but the future is underwritten effectively through Australia's high debt-to-income ratio at a household level, compulsory superannuation and the complexity of the systems we have around Financial Advice. I thank you all for your time today.

Ladies and gentlemen, that does conclude the call for today. Thank you for all participating. You may all disconnect. Goodbye.