ClearView Wealth Limited (CVW) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the ClearView Wealth Limited HY '21 Results Call. [Operator Instructions] I must advise you that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Managing Director of ClearView, Simon Swanson. Thank you. Please go ahead.

Thank you for dialing in today. I'm joined this morning by Athol Chiert, ClearView's Chief Financial Officer. In a moment, Athol will take you through ClearView's half year '21 result. But first, I'll provide an overview and business update. There will be time for questions at the end. Page 2 provides a results snapshot. Despite challenging market conditions, the business performed strongly due largely to improved claims management outcomes. For the half year, operating earnings increased 39% to $13.1 million, and reported net profit after tax remained flat at $9.7 million. Life Insurance in-force premiums rose 8% and gross premium income increased 7% to $133.3 million. Life Insurance accounts for 95% of the group's operating earnings. Overall, the business has proven very resilient to COVID-19 impact, leading to the Board's intention to reinstate the financial year '21 final dividend, subject, of course, to second half performance. FY '21 is an important transitional year for ClearView with key transformational projects underway, including the development of a new life insurance policy administration system, underwriting rules engine and life insurance product series. I'll provide an update on ClearView's multiyear transformation program in a moment. Turning to Page 3. Group underlying net profit after tax increased 29% to $13 million in the first half '21, buoyed by a 55% increase in Life Insurance operating earnings. Amidst ongoing structural and regulatory change, ClearView's strong first half '21 performance was driven by improved claims management outcomes and limited COVID-19-related claims. That said, ultra-low interest rates continue to adversely impact earnings on physical cash. The implementation of income protection price increases during the half also contributed to a lapse experience loss. A positive half year '21 Life Insurance result should also be viewed in the context of overall industry performance in extremely difficult market conditions. For the year ending the September 30, 2020, the life insurance risk industry products lost just over $1.5 billion, largely attributable to a $1.3 billion loss on income protection. This extended 5-year industry IP losses to over $3.3 billion. In response to this, deteriorating overall industry performance, APRA has intervened to start forcing structural change in the industry. Following APRA's letter to insurers in late 2019, ClearView was the first to cease the sale of agreed value contracts and subsequently implemented price changes in the region of 15% on average across the portfolio, commencing in April 2020. Improved rationality in the industry is starting to take effect across the market. Pages 4 and 5 outline ClearView's strategic priorities and our progress towards these objectives. The next 12 to 18 months are critically important for ClearView as we work to deliver key milestones across our 3 segments of Life Insurance, Wealth Management and Financial Advice. These projects will enable ClearView to deliver simple, effective products and services that are fit-for-purpose and provide greater certainty for customers and advisers. They will also ensure that ClearView remains easy to do business with for both customers and advisers. Importantly, our transformation program will lay a strong foundation for ClearView's future growth and success. And our transformation program is on track. And we have commenced the build of a new contemporary policy administration system, underwriting rules engine and life insurance product series to meet the 1st of October deadline for APRA's sustainability measures. In Wealth Management, the focus is on transitioning our wrap platform to HUB24 to deliver greater choice, functionality and flexibility for both customers and advisers. Repositioning our wealth business to scale is a key strategic priority as the integration with our Life Insurance business is an important strategic imperative. In Financial Advice, ongoing investment in technology and governance to attract high-quality financial advisers to our dealer group and our dealer services business, LaVista Licensee Solutions is a key priority as the group builds towards scale. To date, 28 AFSLs have joined LaVista since its inception in late 2018, and we have a strong pipeline, given the structural shifts that are occurring in the market. As articulated on Page 6, demand for the products and services offered by ClearView remains strong. This demand is underpinned by Australia's unique compulsory superannuation system, complex tax and social security rules, aging populations and rising levels of both wealth and debt. The rapid onset of COVID-19 only reinforced the importance of value of financial products like life insurance. Pleasingly, ClearView was ranked #1 by advisers for supporting customers suffering financial hardship due to the impact of COVID-19. While the numbers of Australians who have succumbed to COVID-19 has been relatively low compared to other parts of the world, it is reminded us all that sickness, disease and possibly death can strike anybody at any time. It has highlighted the tangible benefits and enduring relevance of life insurance for individuals, households and to some . Staying on the subject of life insurance for a moment. The industry is undergoing significant change. The table on Slide 7 outlines APRA's IDII sustainability measures and ClearView's response. It also reinforces our deliberate decision to participate only in the advised life insurance segment. I'll now hand over to Athol to talk about our half year '21 results in further detail.

Thank you, Simon. Turning to Page 8. Our operating earnings for Life Insurance increased 55% to $12.4 million. Life insurance contributes 95% of group operating earnings. Material improvement in life insurance profitability in half year '21 is driven by the strong underlying claims performance that is measured relative to the material changes that were made to the assumptions at 30 June 2020, including an allowance for potential COVID-19 impact. The key performance drivers included: our strong claims performance in half year '21 compared to assumptions; lapse performance adverse to expected overall with some variances in performance between products; the impacts of the reduction in interest earned on physical cash backing; and the impact on expenses from the investment in key projects, claims management and the retention focus adopted in half year '21. In the second half of FY '21, ClearView's focus remains on retention initiatives considering the repricing and COVID-19 impacts. Claims management continue to review our pricing profile and addressing the fundamental issues with RP products offered in the market. It is anticipated that structural change, the return of rational pricing, the implementation of the new contemporary platform and the launch of new products will see new business volumes increase over time. Turning to Wealth Management. Funds under management increased to $3 billion. However, funds management fees declined to $15.5 million due to margin compression and a changing business mix. The segment's cost base has also increased due to the higher cost of shared services, technology and regulatory costs. Our sweet spot remains in the advised mid-market looking for unitized super and non super solutions. Our broad range of implemented model portfolio is giving investors the flexibility to make manager and asset allocation decisions based on their needs, objectives and risk profile. On the next slide, financial advice operating earnings before tax increased to $0.8 million during the half, up 60%. Net financial planning fees decreased by $1.7 million or 19% to $7.1 million. Membership fees increased from the implementation of the new pricing model and the transition of older franchise agreement to the new pricing model. Changes to remuneration and fee model in the dealer groups we introduced on November 20, 2019, representing a fair more sustainable revenue base. The launch of LaVista also allows ClearView to provide business support services to advisers who have obtained their own AFSL with recruitment now gaining traction. The fee income generated from membership fees as a result of these changes, increased by $0.9 million, including a contribution of $0.6 million from LaVista. The increase in sustainable revenue was offset by a reduction in grandfathered revenue streams and a material decline in the financial support received from other ClearView entities. Operating expenses reduced by 30%, driven by decreased overhead costs and completion of the advice remediation programs. These outstanding remediation programs have now been completed. On Slide 14 (sic) [ Slide 13 ] the balance sheet reflects net assets as at December 31, 2020, which increased to $462.2 million and the net asset value per share of $0.726 per share. We have a strong balance sheet that now includes the $75 million raised by the Tier 2 capital raising. We have an embedded value of $635.7 million or $0.94 per share that reflects the recurring revenue nature of the in-force portfolio and is in effect a discounted cash flow without taking into account new business flows. We have $25.9 million surplus capital above internal benchmarks at 31 December, with the buildup of the tax credit issue resolved and the asset concentration risk addressed in the medium term. Our capital base is backed by net cash and investments of $350 million or $0.52 per share, and the capital base is resilient to various stress scenarios. I'll now pass back to Simon to talk about the business outlook and wrap up.

Thank you, Athol. FY '21 is a base transitional year as the industry shifts over time to rational pricing, increasing life insurance sales and sustainable product features. In light of the group's first half performance, the Board has provided updated FY '21 guidance of underlying net profit after tax in the range of $21 million to $25 million. And the Board has indicated plans to reinstate the FY '21 dividend, subject, of course, to second half performance. This includes a $1 million impact on underlying net profit after tax in the second half from interest costs associated with the subordinated debt that was raised in November 2020. Dividends are now based on the operating earnings after tax metric to better reflect the impact on earnings of the ultra-low interest rate environment and changes in capital structure of the business for the successful issuance of Tier 2 notes. The business has proved resilient to both the health and economic impacts of COVID-19 to date. The APRA Individual Disability Income Protection sustainability measures are likely to improve industry performance in the medium term with underlying margins and return on capital improving. ClearView has a strong balance sheet and capital base resilient to various stress scenarios. There are early signs of traction from key actions, including the shift to a line of business structure, improved capability and capacity. The business is on track to meet its full year '21 goals and a view to launching new products on a modern technology platform, thereby accelerating new business growth. That said, we continue to keep a close eye on COVID-19 developments, prioritizing the health and safety of our staff and customers. While roughly 90% of staff are back in the office 2 to 3 days per week, we will quickly adapt our responses, if required. In closing, I'd like to thank you for dialing in today. I'll pass back to the operator to open up for questions.

[Operator Instructions] Your first question comes from Glen Wellham from MST Financial.

Just a couple of questions from me. First of all, well done on a great result. As part of the life company, there's been considerable improvement in the experience. I'm just wondering what the outlook, as you said, going forward for that experience would be.

I think, Glen, from a perspective, look, I think we've been pretty pleased around the claims outcomes and the process that they've been put in place. I think we've tried to encapsulate that into the guidance. I think what we will reassess at June is the COVID overlays or the COVID assumptions. We have said through the documents that, at this point in time, given the potential effects of JobKeeper, whilst the economic data is a lot better than initially anticipated, at the same time, the effects of government assistance programs and the like are yet to come off. And once we've got a few -- a bit of flow through that, we'll be in a better position at June to reassess that assumption as well as the shift to the new IDII tables as part of the APRA DI action plans. So I hope that answers the question with this.

Yes. I might add a bit to that, too, Glen. The -- I think through COVID, when we did the assumption changes, we expected a bit of a spike in claims. I think a couple of things have played out differently apart from the economic impact. There's also been the rise of Telehealth. And I think Telehealth has helped people have conversations a lot earlier than they normally would have done. And therefore, the interventions happened earlier, therefore, the outcomes improved. So all in all, it's been an interesting year as far as managing claims go. So -- and I agree with Athol totally that we'd visit assumptions in June and take it from there.

And just on the quantum of the COVID provisioning, what were we talking? How much were you provisioned?

I think we talked about a lot of detail in the June annual report in terms of what we're allowed for in RP was both an increase in incidence of claims as well as then a change in the termination rate, which was an allowance around how long people would be on claim for. And the reserve change for that off the top of my head at June was around $1.8 million that was in the numbers that affected the overall June result because that affected the balance. So I think it's something that just -- you still assume for the second 6 months in terms of the same assumptions as we outlined at June. And we'll reassess it at June for the further outlook that will come up with at the full year.

Yes, we had a, I think, 2.5% increase in suicide allowances on lump sums and for this financial year, 1.5% for next financial year.

Okay. And just on that new policy administration system to the life company, what kind of benefits can we expect longer term from that?