ClearView Subordinated Notes (BB+ Fitch)
The ClearView Subordinated Notes (BB+ Fitch) look exceptional value versus the Tier 2 insurance opportunity set. For those investors not wanting to play in AMP Ltd/AMP Life, this would be a good alternative. As a result of the royal commission, most ADIs and AMP have exited their wealth, life, and advice businesses to focus on traditional banking activities.
This bodes well for independents like ClearView, which can act swiftly and flexibly, by providing them with good long-term growth opportunities. ClearView equity is also up 16% over the past year, which allows the issuer more flexibility if they needed to do an equity raise to protect the balance sheet.
ClearView is Australian Prudential Regulation Authority (APRA) regulated, which monitors risks and financial conditions, conducts stress tests, and sets minimum capital benchmarks. Currently, ClearView is well in compliance with a capital adequacy multiple of 3x prescribed capital requirement (PCR) and 2.9x PCR at the core life business and company level respectively. In our view, it will take time for the APRA initiatives to play out to rectify the structural issues in the Australian life insurance sector.
However, the end result for the Australian life sector will be higher premium rises and improved claims performances, which will benefit ClearView’s subordinated note holders for years to come.
The ClearView Subordinated Notes offer a 1.5% discount to the Genworth Subordinated Notes II and between 0-1% discount to the respective AMP Subordinated Notes. In our view, ClearView is arguably better placed from a credit perspective than both Genworth and AMP, given the near-term headwinds those companies face via structural and temporal issues.
Liquidity will be lower in these notes because they’re not ASX-listed, are a relatively small issue size, and have a low free float. Thus, illiquidity may impact the actual yield to maturity achieved through trading (on?) the secondary market.
Chart 1. Relative Value: Tier 2 Insurance Opportunities
ClearView is a relatively small and diversified financial services business listed on the ASX (CVW AU). Life Insurance is the company’s core business, while the two smaller divisions, Wealth Management and Financial Advice, respectively, provide earnings diversification, synergies, and alternative growth avenues. As a specialist operator, the company is well placed to benefit from structural change in the Australian financial landscape – which has seen ADIs and AMP largely exit their wealth, life, and advice businesses.
The individual income protection (IP) insurance division of the Australian life insurance sector has been unprofitable for several years. In a difficult environment, ClearView has remained profitable and well capitalised, but the challenging conditions will weigh on the credit profile over the next few years.
APRA recently initiated several IP product reform measures to enact structural change and improve profitability and financial stability for the life sector. These include banning certain types of IP products, reviewing the design and pricing of individual products, and imposing a capital charge for all life industry providers of individual IP insurance.
Early signs are positive, with the March 2021 quarter the first profitable quarter for the IP division of the Australian life insurance sector since September 2017.In our view, it will take time for the APRA initiatives to play out, but the end result for the Australian life insurance sector will be higher premium rises and improved claims performance.
Lingering risks remain from COVID-19, which may impact the affordability of life insurance products (and thereby lapse rates), new business flows, and possibly claims. However, this risk is mitigated, as around a third of ClearView’s life insurance premiums are essentially funded through superannuation and by its niche focus on the middle- to upper-income market segment.
Furthermore, the experience of living through COVID-19 could highlight the benefits of having insurance – which may potentially aid sales. ClearView remains well capitalised with enough Common Equity Tier 1 (CET1) capital to fund the company’s planned growth over the medium-term. The company’s core life insurance business (ClearView Life), which is independently subject to APRA-imposed minimum capital regulatory requirements, retains strong capital adequacy metrics.
As at 31 December 2020, ClearView Life had a capital adequacy multiple of 3x PCR. At the company level, the regulatory capital base stood at AUD147m, and was comprised of AUD75m Tier 2 capital and the balance in common equity capital. This represented a ratio of 2.9x the PCR of AUD51.2m versus 1.96x as at 31 December 2020.
Chart 2. Financials
|Profit & Loss|
|Premium Revenue from Insurance Contracts||260.0||243.1||215.2||177.7|
|Outward Reinsurance Expense||-85.8||-71.6||-56.7||-43.1|
|Net Life Insurance Premium Revenue||174.2||171.5||158.4||134.5|
|Fee and Other Revenue||130.2||123.1||127.7||116.5|
|Net FV gains on Financial Assets||-123.8||68.1||41.2||62.4|
|Net Operating Revenue||286.5||453.8||413.4||395.9|
|Commissions & Other Variable||-125.5||-127.8||-129.9||-120.5|
|Other (incl. D&A & Impairments)||-7.3||-30.5||-10.4||-13.6|
|Life Inv. & Risk Policy Liabilities||-3.7||-75.4||-50.7||-78.4|
|Controlled Unit Trust Liability||17.1||-64.8||-55.7||-44.6|
|Profit/(loss) before income tax||6.5||4.9||32.5||16.2|
|Income Tax (expense)/benefit||6.6||-0.9||-5.9||3.1|
|Total Comprehensive Income/(loss)||13.1||4.0||26.6||13.2|