NobleOak Life Limited (NOL) Earnings Call Transcript & Summary

Good day, and welcome to the NobleOak Investor Information Session AASB 17 Insurance Contracts Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Anthony Brown, CEO, to begin the conference. Anthony, over to you.

Thank you, and good afternoon all, and thanks for joining us today. As you know, we'll be releasing our half year results to 31 December '23 next week, which will be presented in accordance with the new insurance accounting standard AASB 17, which came into effect on 1 July 2023. So we wanted to provide this information session today ahead of those results to really run you through how the transition has impacted the presentation of our financial statements. So I'm joined here today by our CFO, Scott Pearson, and Scott will talk through the impacts. Scott and his team have been working tirelessly over the many months to prepare us for this and I'm sure he's very much looking forward to getting back to his day job. At a very high level, the changes are largely presentational, which will come out today and they don't really impact the underlying economics of the NobleOak's business, although there is a tax advantage, which we will cover off later. We remain very excited about the great prospects for both our Direct and Strategic Partner channels. So for today's session, we'll focus really on the key concepts of the standard and their application by looking at the restatement of prior periods. Of course, we have to stay clear of the current half year results and outlook, which will be presented next week. So thanks again for joining us, and I'll pass straight over to Scott. Thanks, Scott.

Thanks, Anthony, and welcome, everyone to this information session this afternoon. It's a bit of a dry old topic and I'll take about 30 minutes. So I look forward to your questions towards the end of the session. We're going to work through the pack today by looking at the agenda in 4 different sections. The first one is a summary of the key messages we think you should take out of today's presentation. The second one is an overview of the key concepts that we think you need to be aware of as they are expected to impact NobleOak's results going forward. And we'll also show you the actual financial impact on transition of those changes. And lastly, we'll spend some time looking at the new presentational formats that the new standard requires. This is important for you to note that the numbers you see on the slides today are unaudited and there will be time at the end for questions. Okay. So as an intro, we'll start with what is AASB 17. AASB 17 is a new insurance contracts -- accounting standard covering insurance contracts and it's based on an international accounting standard named IFRS 17. The intent of that international standard that Australia is also adopting is to introduce consistency across insurance types by life in general and health and insurance to create greater comparability across jurisdictions and to provide some greater transparency in financial information being provided by insurers. As Anthony mentioned, the standard will come into effect this year. So FY '24 will be the first year NobleOak presents its results under the new standard. As part of this process and this transition, we will be restating out the history and that will include restating last year's financial result being FY '23 results and the opening balance sheet at the beginning of the parity period being 1 July 2022. Before we get into the detail though, I thought it was important to just call out those key messages that I think you should take out today. And as Anthony alluded to, the key message for NobleOak is that there's actually no change to the underlying fundamentals of our business. This is just an accounting standard. There are however, some key messages to take out of the presentation today. And the first one is that the opening balance sheet will be lower by $64 million. That includes, importantly, a recognition of a deferred tax loss asset of $27 million, which we expect to be very valuable to NobleOak in the coming years. Second is with respect to our capital and cash flows, as the standard has no impact on regulatory capital requirements and no impact on underlying business cash flows. So whilst it's important to say there's no impact on the underlying concepts here, both capital and cash flow projections will benefit from those tax payments being lower tax payments in the future that we've just mentioned. From an accounting perspective, we will see some greater volatility in the statutory reported profits. But after removing that volatility, our underlying results will see that at a group level, those underlying profits will be reported slightly earlier under the new standard. This pattern of profit is going to be a little bit different between business segments. But it's important to note that, that's just a timing difference as the profit over time will not change, this is just a change in the profit release pattern over that time of the contracts. Finally, the key message is that the formal presentations of the financial information in the financial statements will change. There will be limited change to the balance sheet, which we'll talk to, but there will be some further changes to the presentation of the profit and loss statement. And as such, NobleOak is going to introduce a new concept of management analysis in its reporting to ensure that the market continues to be able to get insurance metrics to allow to do its modeling and understand the results as it has traditionally done. So in short, the key messages are, overall, AASB 17 is going to have a positive impact on the business. From a financial reporting perspective, we will see those deferred tax assets reduce our future cash capital outflows. Profits will be higher due to the write-off of the DAC mentioned through this presentation and the profit release pattern will see slightly earlier recognition of insurance profits over the contracts life. So those are the key messages we hope you'll take out of today. So moving to some of the key concepts we think is quite important for you to understand. And I'm sure this is part of the session that everyone is looking forward to the most. There are 3 concepts I'm going to talk through. 2 of them will have an impact on the profit release pattern, i.e. the timing of profit being recorded over the life of a contract. And the third one is going to be the concept that creates just a little bit more volatility in the results you're going to see going forward. So the first of those concepts is that impacts the profit release pattern is the concept of a contract boundary, a new term under the standard. And what a contract boundary is, in contract boundary it's define the cash flows that are included in the valuation of policy liabilities. Going forward, we need to define the contract boundary for gross contracts and reinsurance contracts independently. So we're going to do those separate calculations. For Strategic Partners segment, there will be no real change in the way things have worked in the past is both insurance and reinsurance contracts will be seem to have a long contract boundary, which is the same as what was implied under the old standard. For Direct segment, however, we will see that the contract boundaries are different for gross versus reinsurance contracts. Reinsurance contracts remains long, where we will be valuing all the cash flows for the full life cycle of the policies. However, for gross contracts, will be deemed short contract boundary, which will introduce a slight mismatch in the accounting for gross reinsurance, which will lead to our Direct portfolio profits being delayed compared to the Strategic Partner profits. The next slide introduces the second concept that will impact the profit release pattern. And that's the concept of coverage units. AASB introduces this new concept, which is designed to spread how you spread profits over the contract over time. This is most relevant for long contract boundary segments, which values the long-term cash flows of the contract. The chart to this slide is designed to help look through this concept. And if we look at the top chart, as I speak to this slide, the old standard AASB 1038 used premium as the profit carrier in most instances. So in Australia, with the prevalence of stepped premium, i.e., premium that increases with the age of the customer as an example. This meant that the profit would increase over the policy period in line with the increasing premium. This is illustrated by the black line in the top chart to the left, which shows the pattern of profit release increasing over time. The new standard, however, uses this concept of coverage units as the profit carrier. And a coverage unit under the new standard is the measure of the service provided under the contract, which is not premium. Now in most instances, this service will be measured by using the sum insured of the policy. And for most policies, people would understand that whilst the premium increases over time, the amount of cover either sum insured of that policy stays the same over the years. So as the chart illustrates, right through the orange line, the orange line is much more flatter, as you'd expect with the sum insured staying flat over the period of policy. Those can be seen within that chart. The old standard, black line, as it moves to the orange line, the new standard, you'll see that profit is going to be brought forward under the new standard knowing that total profits don't change over the full life cycle of policy. The chart at the bottom is just the inverse when we talk to how reinsurance contracts works. In this instance, however, what is being brought forward is the cost of the insurance -- of the reinsurance contract. And again, noting though that this is not changing the total cost of these reinsurance arrangements, it's just the timing -- over time that the contract costs are being recorded. So how does this actually impact NobleOak and we'll help you explain that by the next slide. So you can see that the 2 concepts, contract boundaries and coverage units are expected to impact NobleOak's profit release pattern. On this slide, you'll see on the left, it talks about the Strategic Partners segment. And as both the gross and the reinsurance are long contract boundaries, both the gross profit and the reinsurance costs will be brought forward. And given that the portfolio is profitable, the result will be net profits will be brought forward under the new standard. So when you see our results going forward, Strategic Partners segment, you should expect to see higher profits as the business grows. On the right-hand side though, is the impact on the Direct segment. In the Direct segment, we don't have gross and reinsurance matching. Gross contracts have a short contract boundary, so the profit will not be brought forward on the gross side. From a reinsurance cost perspective, the contract boundary is long and the reinsurance costs will be brought forward based on the coverage unit concept in the standard. So in the Direct segment, you should expect lower profits as the business grows. In both our Strategic Partners segment and the Direct segment, NobleOak is a growth business, so you should see these characteristics in our portfolio going forward. So what this tells us is whilst we've seen a slight increase in our consolidated profit, there will be expected to see some variation in the profit by segment compared to the past. But again, it's important to note that this is just a change in timing and there's no change in the underlying value of business, so drives up business. Just the last of the concepts I'm going to cover today that impacts NobleOak is this concept of onerous contracts. Now this is not a new concept to insurers, but it requires the new standard will create some further volatility in insurers' results. Insurers have always been required to assess their portfolio for losses if there were any to record those losses upfront. The new standard how requires this assessed to be performed at a contract level whereas the old standard required this assessed at a much higher level, we allocated portfolio groupings together at a higher level. As you can expect, all insurers have parts of their portfolio that are more profitable than others. So the new standard will see some individual contracts assessed as onerous and which will require those onerous contracts to be -- for the losses on those onerous contracts to be recorded upfront and then released over time. So whilst the portfolio level has not changed, it's important to note that this will provide more transparency on the portfolio itself, but will create more volatility in the statutory results for reporting going forward. And it will be NobleOak's intention to provide information in underlying results to ensure that we remove that volatility so that market can actually see the underlying performance of the portfolio. Okay. That's the end of the context and thanks for bearing with me for that fun bit. We'll next move to how these concept impacted NobleOak. We'll do that by looking at how it's impacting NobleOak on transition and we'll do that with 3 slides. The first will be how it's impacting the opening balance sheet; the second will be how the last year's results were restated, i.e., the FY '23's net profit after tax; and we'll also show a slide that indicates that capital has not changed, the [ contours ] haven't changed the transition. All right. So on the first of these slides, we're looking at the impact on our balance sheet at 1st of July 2022, which was the beginning of the comparative period. As noted upfront, net assets were reduced by $64 million from $112 million that was reported at the 30 June '22 accounts to $48 million after the restatement required under AASB 17. We had foreshadowed in earlier presentations that upon transition, we're expecting to result in the write-down of the deferred acquisition costs. We had a transition and that has been the case. Going forward, deferred acquisition costs will be called assets for insurance acquisition cash flows, that's a mouthful, so I'm going to still keep calling it DAC, deferred acquisition costs. So that transition, we have written down that DAC balance and that was approximately $80 million at transition date. There have been some other impacts on the change in policy liabilities at transition date and they are as a result using fair value approach in a number of parts of the portfolio and the establishment of an opening loss recognition provision for onerous contracts that exists at that time. The 2 of those items, amongst others, will result in a further reduction in net assets, a transition of $11 million, seeing a total of $91 million reductions in net assets due to increase in policy liabilities. Importantly, this material change will have an effect on NobleOak's tax obligations as a result. Writing down net assets by $91 million will create a tax loss, a transition that will result in us generating a deferred tax asset of $27 million at transition. NobleOak is a responsible tax paying entity. But clearly, this will mean that NobleOak will be paying lower tax for the coming years as we utilize those tax losses, which is obviously going to be a material benefit on a capital outflows basis. The return to how it impacts profit and loss statement now. This slide looks in a waterfall fashion at how it's impacted FY '23's results, where you can see that we're using underlying results to help you understand that movement. To the left of the chart, you can see that NobleOak's net profit after tax when we reported it under AASB 1038, at the end of last year, it was $10.3 million was NPAT, whereas to the right of the, you can see that under the new standard, net profit after tax, when it's restated will be about 20% higher or $12.6 million, a $2.3 million increase. So you are seeing that profit will be being brought forward under the new standard. Key drivers, as we alluded upfront was that the profit release pattern for our Strategic Partners segment has been brought forward, which has increased profits by $4.1 million. And the profit release pattern for our Direct segment has been delayed, as we noted, which will have reduced profit in FY '23 by $1.5 million. There are a number of other small items, including the fact we now need risk adjustment and risk margins on our claims reserves and the like, but they have not had a material impact on our profit for FY '23, and we expect it going forward. In the new standard there was a sundry $0.3 million adjustment, other than those 2 profit carrier adjustments. So as noted upfront, the net effect of the new standards to bring forward profits with a $2.3 million higher profit under AASB 17 and whilst there are some variations by segment. Last financial impact I want to cover off is the impact on capital. As noted, there is actually no impact on capital -- regulatory capital requirements. Of course, there is lower net assets transition. These assets were not included in regulatory capital calculations and therefore, there is no regulatory capital change or a change to our surplus assets to reported at the end of last year. As noted though, our cash flow -- our future cash flow and capital projections will benefit from the lower tax payments we're expected to have over the next few years. So summary of the financial impact is net assets down at transition, profits being brought forward with some variations between segment and no change to our capital position. Just moving to the less fun section about understanding how the financial statements will be presented in our financial reports going forward. We're going to talk to this by looking at how the changes it might impact the income statement and the balance sheet. Separately, there has been some changes to the income statement with the limited changes to the balance sheet. So we first look at the income statement and there is a bit of information in this pack and I'll only go through a number of the higher points to help you get -- to come to -- come and look what the changes are. The new approach to the standard will focus more on insurance services and reinsurance activity of the business and we'll be summing what former P&L items into those summary categories, so there can be more transparency and clarity around the performance of the insurance contracts and reinsurance contracts separately. You can see that by the new line items -- 4 line items of the top of the income statement. I guess the other new key feature of the income statement is the new line called net insurance financing line. And what this line does is separate out the impact of economic adjustments like discount release over time or the change in interest rate movements. And so as you can see from this income statement, it actually looks quite a bit different to the old one. The next slide recognizes whilst NobleOak acknowledges the simplicity of the new reporting framework, we also note that the new format no longer allows visibility for a number of the traditional insurance metrics that the market might use to model or assess NobleOak's performance. As such, NobleOak intends to introduce the concept of a management analysis in its reporting, which will provide those -- the visibility of those insurance metrics to allow analysts and the market to understand the business in a traditional fashion as well. On next slide, we've provided an example of how this is expected to look in our reporting going forward. It's a busy slide. But to left, you can see an example of the profit and loss statement, which presents both the income statement in the statutory format at the top of the page. And also provides the management analysis. In the middle section of the page you'll be able to see by -- if you look closely at the numbers that the operating insurance profit in both of those sections of the statement add to the $15.8 million, which just shows it's a different presentation of how those statement will look and because we will allow that the -- into the right you'll that will provide a reconciliation to what people understand the transparent between -- the movements between one and the other. This will actually provide that transparency understanding and also provide -- keep our regulatory compliant along the way. Next slide we show that NobleOak will also continue to provide a reconciliation of any management adjustments that we believe are appropriate to make to allow you to understand the underlying performance of our business. The slide shows an example of how that reconciliation is going to work and shows how you can move from statutory net profit to the management analysis of underlying net profit. And you'll say that we'll ultimately be showing those adjustments in the form of whether there are recurring adjustments like economic changes, discount rate movements or those onerous contract adjustments or any nonrecurring one-off things like ASSB 17 costs, which we'll have in the last 12 months. I guess the last of the slides on the presentation of the results is the change in the balance sheet. And this slide actually helps you understand that there's less amount of change on the balance sheet with the main changes reflecting that -- those are line items that relate to the insurance activities or the reinsurance activities have also again been combined. So things like trade payables or trade receivables are now added together and accumulated into reinsurance assets or liabilities or insurance assets and liabilities. So it's consistent being what you saw from the profit and loss statement where they're consolidating and making reinsurance and passive insurance, things more combined. We will be writing notes from the accounts to allow people to understand those aggregations going forward. So thanks for bearing with me today on those sections. We covered off the key concepts and the financial impacts that the expected -- they had to NobleOak transition. And we've also looked at the presentational changes. But I might just recap on the key summary points and the key takeouts that we thought we should take from today. So again, there were no changes to the underlying economic fundamentals for NobleOak as a result of this standard. As we said, the opening balance sheet will be lower by $64 million, but we will be as a part of that recognizing deferred tax loss asset of $27 million, which is expected to be quite valuable to NobleOak in the coming years. With respect to capital and cash flows, there's no impact to the regulatory capital or underlying business cash flows, where the capital and cash flow projections will benefit from lower tax payments in the coming years. Again, from an accounting profit perspective, we'll see some greater followed volatility in the statutory reported results. But after our normalizing adjustments, underlying results, you'll see that the profit has been brought forward slightly with the pattern by our segments being variable. But noting that this is just a timing difference with the overall profit of business not going to change over lifetime cycle of the policies. From a formal presentation results perspective, we've said we've noticed that the financial statements will have some change in the income statement with a limited change in the balance sheet. That's important note that management will introduce this concept of management analysis to ensure the people looking at our accounts and trying to model our performance and future expectations will have those metrics going forward. So in closing, the overall impact from AASB 17 to NobleOak has probably generally been positive, particularly around the deferred tax assets we're going to have carried going forward. But obviously, this is a timing item, but it's valuable to NobleOak. The profit lease pattern will be improved because of the brought-forward profits that is also the fact that we've written down the deferred tax exits at transition. So overall, we believe that these results will provide a fair and good outcome for NobleOak and how's been presenting our business going forward. So thanks for listening to me today. And with that, I'll open to questions.

[Operator Instructions] And your first question comes from the line of Nicholas McGarrigle from Barrenjoey.

Thank you for the very thorough run of the accounting standard changes. It's been enlightening. I just wanted to ask if the Strategic Partners book continues to grow new sales at a faster absolute rate than Direct? Is it still going to be the case that there's a kind of a more positive recognition of profit with that growth? I mean, if the both books just stood still, what would be the kind of adjustment versus if both books are growing and then relatively if one is [indiscernible] other?

I think the key is that these changes, whilst they are just a timing of profit over time of the policies, Nick, as a growing business, you see the characteristics of the profits being brought forward in the Strategic Partners and being blade in the Direct segment. You will see that both of those characteristics continue as both portfolios are expected to grow -- continue to grow going forward.

And then just so like if the Strategic Partner book doesn't -- is there a difference, I guess, between the kind of recognition of profit on existing policies versus new policies?

No. In complying with the standard, we've had to go fully go back and fully retrospectively apply the standard to the former policies. So the old policies, in-force policies are also being accounted for under the standard. The key will be, though, Nick, that as the business grows, you'll have these characteristics. It's clear that as the Strategic Partner business continues to grow and maybe the growth slows, so will the profit. But in the Direct book, whilst the profits being delayed, you'll expect those profits to escalate over time. So you'll see the reversal of both those circumstances in both segments over time.

Yes, I guess that's probably my point. If the Strategic Partners' book continues to grow and grows at an accelerating rate of new sales, you'll continue to be recognizing upfront profits?

We'll talk about...

[Technical difficulty] on the Strategic Partners profit was.

We will see -- and we'll talk more about -- we'll be able to talk more about this at next week's half year results. What you'll have seen in the past that our in-force growth in both portfolios is actually normalizing out across both the segments. So you might find that you'll see the characteristics of the profit trajectory in both segments being similar from their new reset base. If that makes a little bit more sense Nick?

[Operator Instructions] And your next question comes from the line of Philip Pepe of Shaw and Partners.

Thanks very much for the detailed presentation. Just let me know where to sign, so I can get my CPD points. Just on what this means practically, I mean I understand it's all accounting, doesn't change the cash flow. It does impact profit. So does that impact the KPIs of the business of the management or you manage the business in any different way given the profit is generated at different rates from the different divisions? Or is it very much business as usual? Do you need to tickle with the strategy given how your KPIs might work over a 3-year period?

Thanks, Phil, it's Anthony here. Yes, that's a real good question. We obviously have to reset the magnitude of the KPIs because some of the number dynamics have changed. But it doesn't impact our business strategy or the spirit behind the KPIs or the nature of them. We still think it's a wonderful business. We're very confident in the direct business. What we realize in the short term, there is an impact on profit over the long term that will just catch up. So we -- and we've got a leadership position in there. So we'll continue to grow Direct as a core part of business and Strategic Partners will be a natural hedge against that as well. So it's great having the 2 streams of the business. We will continue to grow both. And as Scott alluded to, profit is obviously really important from an investor perspective, but the business fundamentals are unchanged. So we're still equally, if not more confident in growing both sides of the business and continuing with our strategy.

[Operator Instructions] As there are no further questions at this time, I'd like to hand back to our presenters.

Okay. With that, thank you very much. Thanks again for attending. I hope you did find that informative. And we really look forward to presenting the results next week, too. So we hope to see some of you there. But thank you for your interest and attendance and we'll see you soon. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.