NobleOak Life Limited (NOL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the NobleOak Life Limited Half Year Results Conference Call. All participants, there will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Brown, Chief Executive Officer. Please go ahead.

Thanks, Tyson. Good morning all, and [indiscernible] half year 2022 financial results presentation. My name is Anthony Brown, I'm the CEO of NobleOak. Today, I'm joined by our CFO, Scott Pearson. In today's presentation, I'll briefly touch on who NobleOak is and what makes the company unique before providing an overview of the highlights from the first half. I'll then hand over to Scott, who will go through the financials in more detail, and then I'll provide an update on the business, including the current trading conditions and outlook for the second half. We'll then open up for questions. Just before I start, I would like to quickly acknowledge the developing global situation, and our thoughts are with [ Ukrainian ] people for a peaceful resolution. Now just a brief reminder, who we are. NobleOak is an independent multi-award-winning Australian insurer based in Sydney, and we have a unique history going back over 140 years. We're an APRA-regulated friendly society and we manufacture and distribute life insurance products. These include term life, income protection, trauma, TPD and business expenses cover. We are more nimble than the larger more traditional life insurance incumbents, and we're operating in a AUD 10 billion Australian individual life risk insurance market. We offer a high-value, easy-to-understand and competitive life risk insurance products through a modern intuitive digital platform. We also enabled tailored products for our strategic partner distributed through advisers. We've developed an award-winning and trusted brand and have over 90,000 active policies and high growth with about a 69% CAGR in in-force premiums over the last 4 years. [indiscernible] business model, NobleOak, we have 3 distinct business lines, providing diversified revenue with exposure to different customer demographics. We're agile in a highly disrupted industry with multiple growth levers as well as strategic partnerships with leading product developers and distributors. In our direct channel, at the top, we manufacture and sell NobleOak brand and policies directly marketers and distributors through our digital platform and also to our network of alliance partners. These are without personal financial advice. We now sell RAC WA and budget direct policies through this channel. Our milder direct business accounts for less than a third of our in-force premium, it generates more than half of our underlying profits, reflecting the relatively high margin model and long-term attractiveness of this segment. In the last 5 years, we've established 3 strategic partners, bottom left, PPS Advance and Neos, through which we provide tailored white label policies to customers, earning a management fee and profit in exchange for insurance risk retained within NobleOak. While this channel accounts for around 2/3 of our in-force, it accounts for approximately 30% of our profits. Our Genus segment on the bottom right is relatively new business through which we provide administration services for legacy life insurance portfolios. We earn a fee for administering the portfolio. These portfolios are in runoff and will reduce over-time. However, we continue to look for opportunities to purchase other runoff books where appropriate and we're currently completing the purchase of its legacy insurance book from auto and general. We'll touch on this a bit later. It's our strong culture that really is the foundation of NobleOak success. Financially protecting your family's life insurance is so important, and we have a genuine belief that Australians deserve good value as well as transparent and honest dealings with their life insurer. Our 4 key values, which is nobility, simplicity, adaptability and delivery are in the culture and our staff is strongly aligned with these values. They also underpin our approach to ESG. And in 2022, we focused much of our attention on establishing a robust ESG framework, which is aligned to the UN sustainable development goals. The framework focuses on areas that we really feel strongly obviously aligned to our culture, and they include cultural and gender diversity, ethical standards and minimizing climate change. We look forward to disclosing our objective framework with measurable targets at the full year results. We're really pleased to report a very strong performance in the first half of '22. I believe our team is doing an outstanding job to outperform our prospective forecast, delivering in-force premiums, active policies and underlying profits in a pretty tough and still turbulent environment across all segments. At 31 December 2021, we had over 94,000 active life insurance policies, representing over AUD 226 million of annual in-force premiums. New business sales for the half were AUD 40.2 million, up 27% on the prior corresponding period as we continue to achieve strong market gains in both direct and our intermediated strategic partnership business. It's really our in-force premium that's the value driver of the business. It's effectively a recurring revenue stream. Our in-force premiums grew by 59% to be 12% ahead of prospective forecast, driven by strong Strategic Partner Segment and continued low lapse rates across both our direct and strategic partner segments. Underlying net profit after tax grew by 47% to AUD 4.6 million, again, ahead of prospectus forecast by 11% due to strong premium growth and our disciplined underwriting and expense management. So today, I am very pleased to reaffirm our prospective forecast for financial year '22, which I'll talk to in a bit more detail later. Our strong results was delivered against the backdrop of an eventful period for the company and the industry, including our ASX listing in July and of course, the most recent COVID-19 restrictions impacting Australia and of course, the globe. Our team did a great job to develop and roll out our new IDII, which is Individual Disability Income Insurance products, in time for the 1 October industry deadline, which was set by APRA. We will touch on that a bit more later. And importantly, this is while continuing to provide excellent service to our customers, which resulted in us maintaining our high customer satisfaction ratings and winning the prestigious plan for Life Direct Life Insurance Overall Excellence Award for the fourth year in a row and the CFO Platinum Trusted Service Award. So I'm very proud of the team to deliver such wonderful service to our customers. We're really a customer-led business, and we always focus on their satisfaction. Customer satisfaction, I think, is a very important leading indicator for us. More satisfied the customers, the lower of the lapse rates and the greater the referrals. We completed the acquisition of the A&G portfolio in Genus in October 2021 and expect to have integrated this portfolio by April 2022, while entering strategic arrangements with 2 major distribution partners. RAC WA, which launched in October 2021, and Budget Direct, which just launched this month. As we continue to build a strong brand and opportunities, we have a strong pipeline. As mentioned in previous updates, in 2019, APRA issued a directive to the life insurance industry to design and price IDII policies in a more sustainable way. After many larger players were losing money on these policies, all insurers were required to issue new higher-priced and lower featured IDII products by 1 October 2021. The market is currently going through a period of adjustment following the introduction of the new IDII policies as insurers benchmark their products and pricing to ensure they fit with their individual strategies and risk appetites. As mentioned, sales in both channels benefited from higher customer activity in the lead-up to the 1 October 2021 deadline for insurers to launch the new products. Since 1 October launch, fewer customers are switching insurers, which continues to support lower lapse experience for the industry, but also limit sales opportunities. We expect market activity to normalize in time, possibly towards the end of financial year '22. We expect the industry will be more profitable as a result of the regulatory and we believe that it's positive for nimble players like NobleOak that do provide good value fully underwritten products for customers. I'll now hand over to Scott to talk more about our financial position. Thanks, Scott.

Thanks, Anthony. And I'm pleased to present today our first half year results since listing. NobleOak continues to deliver strong growth in both premiums and profits. Here, you can see the growth in in-force premiums split between our direct and strategic partner channels and the growth in NPAT with the split also including Genus. Today, in-force prem excluding Genus has grown to AUD 226 million at December 2021, a 59% increase on the prior year, which was 12% ahead of prospectus forecasts. This was driven by strong sales and continued low lapse rates. We delivered a net profit after tax of AUD 4.58 million, 47% higher than the corresponding period last year and 11% above prospectus forecasts, with all segments contributing above their respective prospectus forecasts. On this slide, you can see the growth in the half year in-force premiums, new business sales and underlying NPAT over the last 3 years. NobleOak continues to be the fastest-growing life insurer in Australia with 49% growth in in-force, again, driven by strong sales and continued low lapse rates. As Anthony mentioned, in-force premium is the key value driver for NobleOak. Our disciplined underwriting, insurance risk management, expense management gives us confidence that our profit margins will remain strong as the business continues to grow. As you can see, our key metrics remain relatively stable with profit growth closing in-force premium growth. Turning to our operating segments now, we'll give you a good view of the underlying performance of the business. In the direct channel, our strategy continues to deliver results with our ongoing investment in digital marketing and brand market share gains when many larger competitors have contracted. Our direct policy count increased by 23% with gross in-force premium, up 24% to AUD 63.7 million. New business sales of AUD 5.6 million were up 5% on the prior year with the strong Q1 largely offsetting a softer Q2 with half year sales finishing only marginally below prospectus forecasts. Lapse rates during the period as the impact of COVID starts to wear-off. However, lapse rates were still well below industry averages and the prospectus forecast. Pleasingly, this resulted in in-force premiums being 7% ahead of prospectus forecast in the direct channel. Again, strong disciplines continue to drive good performance in our key metrics with underlying gross insurance margins improving slightly following favorable claims experience. The admin expense ratio fell by 2 percentage points also with economies of scale more than offsetting an increase in expenses associated with building resource capability, those IDII product developments and ongoing investment in digital capability and our brand. Underlying NPAT in the direct channel rose by 52% to AUD 2.6 million, which was ahead of prospectus forecasts. The Strategic Partner Channel also delivered excellent growth with in-force premiums up 79% to AUD 162.8 million. New business were up 31% on the prior year to AUD 34.6 million, which was 30% ahead of prospectus forecasts. As with our direct business, this channel benefit from heightened customer activity in the lead up to the 1 October new IDII product deadline, with customer purchasing activity subsiding across the industry since then. Lapse rates have remained low at an average of 4% due to the fast growth of this channel and the high levels of new business on the books. This [indiscernible] have driven in-force premium growth to 15% ahead of prospectus forecast at the end of December. Again, in this segment, our strong disciplines have seen key metrics perform well, and you can see in the charts that underlying insurance margins improved during the year, also driven by favorable claims experience and the administration expense ratio remains low with one-off expenditures relating to those new IDII products, pushing it up slightly. Underlying NPAT of AUD 1.4 million in the strategic partner channel was up 98% from the prior year and 30% ahead of prospectus forecasts. The last of our 3 segments is the administration services business, Genus. Genus in-force premium under management decreased by 8% during the period. This reduction in policies under management has been slower than expected due to the delayed commencement of the Freedom remediation program. The program is well-progressed and due to complete in April this year. The expected reduction in in-force premiums in the Genus segment was partially offset by the acquisition of the A&G run-off administration portfolio, which added in-force premiums of AUD 4.1 million to the policies under management. The delay in the remediation program and the acquisition of the A&G portfolio resulted in both revenue and expenses being materially above prospectus forecast for the first half of the year. The net result being that Genus generated AUD 0.6 million in underlying NPAT, pleasingly exceeding prospectus forecast by 18%. Turning to capital. NobleOak remains in a strong capital position. As a life insurer, NobleOak is subject to APRA prudential standards, which stipulate minimum capital requirements for the business. NobleOak's capital management policy sets target capital levels above APRA's minimum to increase confidence in our financial strength. These requirements, of course, will increase over-time as the business grows, but we have maintained good headroom to support this growth. As at 31 December 2021, we had capital and excessive target of [indiscernible], which was supported by the IPO capital raise. This provides a robust capital base to support our investment in growth over the near term. So today, overall, we are pleased with the continued growth and financial performance in NobleOak. I'm particularly pleased to see each segment exceeded prospectus profit forecasts. And importantly, post IPO, we remain well capitalized, which puts us in a strong position to invest in our growth strategy. And with that, I'll pass back to Anthony.

Thanks, Scott. In the direct channel, we continue to grow our network of partners, and we've got a really -- possibly the strongest we've had. We recently signed distribution agreements with Illawarra Credit Union and BlueRock Private Wealth. And as mentioned earlier, we launched our new direct distribution arrangements with RAC WA with over million members and Qudos Bank in October 2021. These will see our products market have then distributed to more than 1.1 million potential customers Australia-wide. In addition, budget direct launch this month on time and is expected to contribute immediately to incremental revenue. We continue to have commercial discussions with a number of other potential distribution partners, and we expect to provide an update in the second half. There are some examples on this slide is how we are investing in our marketing and brand just to keep market share in the direct channel by stimulating customer demand and also opening up alliance opportunities. We continue to grow our brand awareness and reputation. The pipeline of opportunity grows, and [indiscernible] our ability to convert leads. We invest prudently. We don't spend a lot on brands, but we make sure all of our touch points are consistent and we continue to grow our brands for the medium and long term. A key element of NobleOak's value proposition is the service we provide it has been. And as consumers become increasingly [ bigly ] savvy, we have continued to adapt our service to more of an omnichannel environment, where we provide personal service and a straight-through online experience where the customer can select whether they would prefer online or to speak to agents. This has been very successful to date and we'll continue to invest in this area. We have Stage 2 of our projects, OCE, which is called Optimal Client Experience. It's now activated and will further optimize over 100 touch points that we have with our customers across the whole value chain. We also continue to support our strategic partners as they continue to grow in the adviser market, and we see opportunities with them moving forward. With the market being reshaped following the introduction of new IDII products, we've taken the opportunity just to review the commercial arrangements with each of the partners and just ensure that they're aligned for the future. The Avant product closed new business [indiscernible] which we mentioned last year, and we are working with them now just to assess options for a potential new product launch. The outcome of the reviews will have a limited financial impact in financial year '22, but will be an important driver of future performance, while the diversification provided by our direct business is also an important differentiator for NobleOak. Turning to the outlook comp, I'm very pleased to report that we're on track to achieve our financial year 2022 prospectus forecast. Given the strong start to the year and the continued low lapse experience of our in-force premiums, we expect it to be above the forecast. Along with our strong underwriting approach and the launch of our new partnerships, we're also confident in reaffirming our financial year '22 prospectus profit forecast. While industry-wide customer purchasing activity does remain subdued since the launch of new IDII products with fewer customer switching, we are partly offsetting the impact with the launch of our new distribution agreements we mentioned in the direct channel and of course with lower lapse rates across both direct and strategic partner channels. We do expect to finish the year [indiscernible]. In the second half, we'll continue to execute our strategy. We think there's plenty of opportunity in the AUD 10 billion industry for a nimble player like NobleOak as we continue to evolve, and we'll keep investing in our people, customers and systems to take advantage of it. We'll also continue to bed down our new alliance partners, work with our strategic partners to maximize opportunities, embed the new auto and general administration business, be able to convert some of our strong alliance partner pipeline, closely manage our capital while we're progressing our ESG and managing the ongoing impacts of COVID. The market remains challenged in the short-term, I really believe the long-term opportunity is as attractive as ever on our progress at our full year results in August. I also believe NobleOak is a great business. And as a small player in a large addressable market and with multiple growth drivers, we're really well positioned to take advantage of this occasion. And this is all supported by a strong balance sheet, clear and simple strategy and our customer-first mindset. Finally, I would like all the passionate, hard-working NobleOak team members for their efforts during the half. They've continued to deliver on our strategy while providing excellent service to our customers in a COVID environment. So we really hope that you're pleased with our progress. Thank you very much for tuning in, and we'll open up for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Nick McGarrigle from Barrenjoey.

Hi team, well done on a great first half. Maybe if we just start with the direct segment, can you just talk through some of the investment costs that might have been born in that segment as you were getting the budget direct and the RAC WA agreements up and running. I assume that they came with a bit of cost and not a lot of profitability.

Yes. Good question, Nick, and nice to hear from you. There has been upfront investments in Budget Direct and RAC WA, particularly in the technology part because we've never wavered our direct product before, which means that we've taken our direct premium life direct product and with brand fully branded at Budget Direct and RAC from the PDFs right through all forms of communication, including letters and renewals and so on. So it's been a -- to actually implement that new technology feature that we've never had before, which -- so it means in the future, if we find other large partners that want a white label with NobleOak area of investment that we've made. Otherwise, the relationships aren't that different to other partners that we have.

And I right in assuming that, that was a drag on earnings potentially and you'd expect some new policy sales from those partnerships to come through more into this calendar year?

We have budgeted, not a material some uplift in this financial year for sales, but we do think it's next financial year where we'll see a more material impact. Some of the costs were capitalized and some of them were expensed. So we'll also see some of the amortization in future years. I might just pass it to Scott in case of anything else you wanted to note.

That's correct, Anthony. The costs were about AUD 400,000 to get those 2 white label matters up and running with much of those costs capitalized and will be amortized over 4 years.

Okay, great. Yes. So not through the underlying impact that we see. Can you talk through trends on new business sales in the direct book? And I assume that the average consumer that you're targeting doesn't necessarily have a great awareness of the IDII changes, and that probably hasn't been a pull forward in demand? Is that fair to say?

Yes. It's actually a mix, to be honest, because a lot of market activity for new sales is actually driven by the adviser market. So even though our direct product is advised, the sales are far more active when the adviser market is more active and people are therefore more aware of life insurance and they're more likely to surf on the NobleOak proposition. So I think through a few different factors, including a sort of a reduction in that market activity after October and probably COVID-19, meaning that people were often keeping their policies towards the end of COVID. So lapse rates reduced, but the size activity also reduced meant that while some of the top line hasn't quite been there in the second half, lapse rates, it's compensated for it because less people are switching and our lapse rates are really at significantly lower than market. So the market laps rates are lower and NobleOak and our strategic partners remain lower than market.

Yes. Okay. And maybe just on that point, moving on to strategic partners. Can you talk through, obviously, a huge result on new policy sales, but imagine that there was a fair pull forward of demand, but can you comment on sales momentum from that point?

Yes, that's right. Sales were brought forward because [indiscernible] October. So the whole market has reduced in the short-term immediately after that as competitor sort of reassess their product and adviser activity has reduced. It is already just starting to kind of unlock a bit and competitors, including us, to their products. So we will remain highly competitive going forward. So while we can't predict the future, we don't think that the reduction in activity will last very long. We sort of think by the end of this 9 months, it will probably restabilize because the demand is absolutely there, people are still underinsured, rely on life insurance as an important revenue stream for them. Population is increasing. So all the dynamics are still there for a relatively swift recovery. Nick, one thing I would also say about that just offsetting it is while some of the top line is less certain, the market will recover and it will increase. Importantly, it's the in-force premium that's the real driver of value and the lapse rate is -- when sales are down, lapse rates are also down. And the net result is our in-force premium remains really healthy with less switches. So we're still pretty confident that the real value driver of the business will just continue to grow.

I mean, you're obviously running well ahead on the in-force premium, but you've signaled, I think, in the guidance, just to clarify that you don't think -- you think that the second half sales rate will not be -- obviously, not be as strong and you'll end up with a new business results through FY '22 in line with prospectus, but in-force well ahead because of [indiscernible].

That's right.

Yes, correct.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Brown for closing comments.

Well, thank you. Thank you all very much for attending the half year results. We really hope you're pleased with the [indiscernible]. We're looking forward to another successful 6 months ahead and beyond and we thank you for your ongoing support. And of course, I'd love to thank the NobleOak team for such a wonderful effort and great results. Thank you very much for attending, and we hope to see you all soon.

Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect your lines.

Thank you. See you.

Thank you very much.