NobleOak Life Limited (NOL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Noble Oak Life Limited HY '24 financial results presentation. [Operator Instructions] I'd now like to hand the conference over to Mr. Anthony Brown, CEO. Please go ahead.

Thank you, and good morning all. Welcome to Noble Oak Life's financial results presentation for the first half of financial year '24. I'm Anthony Brown, the CEO of Noble Oak, and I'm joined today by our CFO, Scott Pearson.. Today, I'll begin with an overview of the highlights from the half before handing over to Scott to cover off the financials in a bit more detail. I'll take you through an update on the business and the outlook for the second half, and we'll then open up for questions. So turning to our highlights on Slide 4. Firstly, I am pleased to report a strong first half performance, 24% annual in-force premium growth as well as we continue to outperform and gain market share. So we achieved strong profit growth and margin stability driven by robust underwriting and financial discipline and with higher interest rates remaining a tailwind for our investment returns and earnings. Importantly, our capital position was strengthened in the half with a regulatory capital multiple of 228% at the end of December, giving us sufficient capital to continue to execute our organic growth plans. In the half, Scott and his finance team put in an amazing effort to implement the new insurance accounting standard, AASB 17. This was a significant project across the whole industry, so we're really pleased that it's overall had a positive impact on capital and the profit for the half. It's good to see market activity continuing to improve across the industry. And with our above-market share of new business sales and lower lapse experience, we affirm our full year guidance for in-force premium growth of 15% to 20% in a market that appears to be growing at around 3%. Looking more specifically at financials, Slide 5 clarifies the story of strong growth in premiums and profits. As mentioned, in-force premium, the real value driver of our business grew at 24% year-on-year to over $351 million, reflecting continued market share growth, which increased to 3%. As the life insurance market activity continues to improve, we were pleased to see sales also increased by 23% with our new business market share tracking above target at over 13%. At the end of December '23, we had over 128,000 active life insurance policies, up 15% from the prior year, which is supported by our lapse rate of 9.1% across the portfolio, which remains below our long-term expectations and the industry average. Underlying NPAT grew by 16% to $7.8 million, driven by our disciplined approach to underwriting and expense management and the benefit of higher interest rates. Overall, we're really pleased with the financial performance, and we hope you are as well. I'll now hand over to Scott to provide a bit more detail on the financials. Thanks, Scott.

Thanks, Anthony, and good morning all. Yes, there has been a significant amount of investment and activity across the industry to transition to the new accounting standard. And as highlighted in our information session last week, the overall impact of AASB 17 on Noble Oak has been positive. I also note that Noble Oak has introduced additional reporting that provides visibility of the key metrics used by the industry. And as a review of the results today, we will look at these key metrics available from that management analysis. So beginning on Slide 7, I'll start with the financial performance of the group level. As Anthony said, we have increased our active policy count by 128,000, over 128,000, driving strong import premium growth of 24% as we continue to gain market share, which is now up to 3%. Against the backdrop of improving market activity, we are pleased to see sales increase by 23% this half year as we continue to treat a greater market share of new business. Overall, our net margins remained stable with our strong underwriting performance, delivering a stable underwriting gross insurance margin, importantly, net claims expense remained within expectations following our methodology changes in FY '23. Administration expense ratio was a little higher, impacted by additional investment in the business as we build capability in the first half, but this was more than offset by higher investment returns. As a result of this margin stability, we are pleased to report our underlying net profit after tax grew by 16% to $7.8 million. I'll now turn to our operating segments, which provide a picture of the key performance drivers of our business. In the direct channel, which is Noble's key long-term value driver. Australia continues to deliver results with our targeted investment in digital marketing and optimizing our customer experience is continuing to drive growth in market share. Our direct policy count increased by 12% to over 48,000 with in-force premium growing by 16% to just under $86 million. Pleasingly, we continue to achieve well above our target market share of sales. The underlying gross insurance margin remained strong with better-than-expected net claims experience. And the expense ratio, again, was up and impacted by nonrecurring technology investments. However, this was partially impacted by a favorable investment returns. Pleasingly, our stable margins has delivered underlying net profit after tax growth of 18% in the segment to $3 million. Just worth noting that both the half year in FY '24 and the half year, the restated prior period expense ratios are benefited by the transference and claim handling expenses to the claims line, which brings Noble Oak in line with its fees -- turning to the strategic partner channel on Slide 9. Our strategic partners continue to deliver strong growth with policies active, up 17% to over 80,000 policies. In-force premiums are up 27% to over $265 million, driven by new business sales that were up 28% in the period, benefiting from improved market activity. Noble Oak continues to gain market share, now 2.5% of the advised market, driven by our contemporary products, high-quality service and strong partnerships with Mesan PPS. Our strong underwriting performance delivered underwriting margin stability, began with net claims in line with expectations with the expense ratio remains very attractive and continues to benefit from operating leverage. Importantly, underlying net profit after tax in the Strategic Partner segment increased by 17% to $4.5 million. On the next slide, we see the performance of our administration services business, Genus. In-force prem under management stabilized in the period following the conclusion of the Freedom remediation program we've seen in previous years. Moving forward, Genus expects to see the lapse rates and in-force premiums to move to more normal runoff levels, which may be close to 10% reductions per annum. Underlying NPAT as a result slightly decreased in the period in line with in-force premium. So reflecting on those segments pleasingly, each of our segments continued to deliver good results in the half year. Turning to our capital position on Slide 11. As Anthony mentioned, in the first half, Noble Oak has seen a strengthening in this capital position, which will benefit from, firstly, a one-off change in the Acroprudential standards that reduced prescribed capital amount by about $2 million. Higher interest rates benefited in the period, seeing good investment returns and the benefit of the AASB17 transition saw lower tax payments in the period as we're utilizing our deferred tax losses. At 31 December '23, our capital base was $43.9 million, representing an improved multiple to 228% of regulatory requirements. This was up from 191% at June at the end of last year. With $13.1 million in surplus assets above our internal targets. Noble Oak Capital Vision remains sufficient to execute our organic growth strategy in the near term. I guess just to conclude on the numbers, just in recapping, last week, we disclosed to the market the impacts of the transition to AASB 17, the new global insurance accounting standard that took effect from 1 July. AASB17 was aimed to enhance comparability with noninsurance reporting in across jurisdictions as well as provide greater transparency in the financial information, and you should see that in the half year accounts that come out today. For Noble Oak, it's important to note that there is no change to the underlying business fundamentals of our strategy as a result of adoption of AASB 17. There were some impacts on transition as we spoke last week. We've created a $27 million deferred tax asset with the introduction of -- which is obviously going to provide us with some benefits to capital and cash flows in the near term in the future. The write-down of the deferred acquisition cost transition will provide a bit of an uplift in profits in the coming years. And we'll also see the changes to our profit release patents profits brought forward in the near term. There were some changes to the presentation of the P&L and balance sheet, which we spoke about as well. And the full impact on the change to AASB 17 is included in the pack we've lodged with the ASX last Wednesday, 21st of Feb. Overall, the implementation of AASB 17 was a significant investment in both financial and human resources been analyzed, but we're very pleased with the implementation and its success, and thanks for listening to you today, and I'll hand back to Anthony.

Thanks, Scott. Now turning to our business highlights at a segmental level on Slide 15. In the direct channel, it was another really big year for the team. Our brand service and distribution continues to drive growth. We maintained our outstanding service to our customers and resulting in us also maintaining Australia's most awarded direct life insurer over the last 12 months. And this also included Canstar Income Protection Award, which we won for the ninth year in a row. I think any other competitors only won twice in a row, and we've managed to win that award 9 years in a row. So we're very proud of that. Our white label partnerships with RAC WA and Budget Direct continue to perform well, and both partners are very pleased with the relationship. And our network of alliance partners also grow and now with over 40, including Costco, who we partnered with recently, and we're currently undertaking a co-branded promotion to their more than 1 million Australian members, great business and a good partnership for us. In the strategic partner channel, our partners also continue to outperform the advice market with a 12.5% share of new business, driving our in-force market share up to 2.5% of the adviser market. And our claims and lapse experience remaining ahead of the industry. We recently partnered with a new global reinsurer to support the growth of the PBS portfolio, and our partnership with Neil's continues to deliver strong growth, benefiting from our high-quality service. Moving to Slide 16. Last year, we designed and commenced a 3-year project to road map and create a market-leading direct omnichannel customer experience. We've always had a leading service proposition, but we wanted to take it to a new level where both our digital and our phone-based service are completely linked. This will enable us to increase the quality and digital access of our service as well as efficiency of the sales and underwriting process through modernized IT platform. And after a significant upgrade and new data warehouse and redesigned front-end -- we're making excellent progress in our digital transformation program and remain on track to launch our new omnichannel customer experience in April this year, 2 months ahead of schedule. This transformation is really set to significantly enhance our customers' engagement with our products and services while also expanding our businesses' capacity to support future growth. Turning to the outlook for the second half of financial year '24 on Slide 18. Against the backdrop of improving market conditions, we do expect to continue to outperform and achieve above-market in-force premium growth. The high interest rates are a tailwind for Noble Oak, which significantly improved investment returns offsetting in Phase III impacts on our cost base. We will retain our strong financial disciplines, while investing for growth and capability, particularly as we implement the phase of the digital transformation. Our new omnichannel will be launched as mentioned and continually optimized. We remain well capitalized to continue our organic growth trajectory and we'll continue to selectively evaluate inorganic opportunities indirect wealth in line with our established strategy, and we'll naturally update the market as we progress. So with 11% in in-force premium growth in the first half of '24, we are also pleased to reaffirm our guidance of 15% to 20% in-force premium growth for the financial year '24 in a market currently growing at around 3%. I Overall, I'm very proud of the team in delivering strong results for our investors, and I really hope you are pleased as well. I'd like to thank the Noble Oak team for another huge year and fantastic efforts. They continue to punch up their weight. And while I'm proud of their achievements so far this year, we do acknowledge there's still a lot of work to do as we grow this business. I'd also want to make a special call out to Scott and the finance team, along with our advisers for their huge commitment and determination in implementing AASB 17, which has just been an unwelcome but huge investment in Pete's time, but we're so pleased that we got some positive results from that implementation. Thanks to the Board for their ongoing support and governance over this business, and of course, thanks to the shareholders for your continued support. We'll now open up for Q&A. Thank you very much.

[Operator Instructions] Our first question today comes from Philip Pepe from Shaw and Partners.

Congratulations on a good results, certainly solid growth coming through. Just curious to drill down more on your sort of investing for growth. So you talked about investing in some admin expenses or expenses to fuel growth in the second half and then potential strategic acquisitions. Can you give us a bit more detail is not one specific, but areas of growth that were a condition whether it can come from in the next sort of 2 or 3 years...

I've picked up the first part, Philip about, I guess, investing in growth. We continue to do so during the period. We'll continue to invest in people capability right across the business in actually quite a competitive market. But some of the things that will have impacted the ratio in the particular half, was us continuing to invest in our technology capabilities. And it's not just the IT transformation project we talked to that there was some more fundamental continue to invest in our BAU support and frameworks around underwriting capabilities and underwriting engines to ensure that we're leveraging our omnichannel going forward.

Yes. Sorry, Phil. Thanks. I'll try and answer the second bit as well when you talk about growth opportunities going forward. We've always had the 3 growth opportunities, organic growth obviously grow our existing products through sales. And we're inorganic growth where we do always look for other opportunities and our reinsurance risk exposure where we look to progressively take on more reinsurance risk. So we are continuing to invest in those. And as Scott said, the infrastructure of the new platform will help us get more scale with organic growth, and we'll continue to invest in marketing. In organic growth, we do keep looking at opportunities. We -- you'll probably remember, we did buy that the budget direct portfolio a couple of years ago, and we continue to have a pipeline but have quite a high return on capital target that we look to meet. So we'll continue that. And the reinsurance -- taking more insurance risk, we've increased our insurance risk exposure as well over the last couple of years, and we'll continue to monitor that and increase that if prudent.

Our next question comes from Nicholas McGarrigle from Barrenjoey.

I just sort of ask a question around what the result would have been under the old standard. I'm not sure you may not have gone to the extent of the hassle of doing that given you've adopted the new standard, but just curious on that as the starting point.

You're right. We've made a significant investment in dollars and financial resources to produce one AASB 17. So we did not prepare one on the old standard. But fair to say what you're seeing in the results today is a stability in margins and growth that is growing, I guess, in line with the growth by -- across each segment. So you might expect that the under the old standard, you would have seen I've seen growth at segment level with similar stable margins, Nick. So I've not done the sums for you there, but I suspect you would have still have seen the profit growth prior period and probably a little bit -- but it would have been a little bit lower than what you're seeing today, given there's been profitable for a number of new standard.

Yes. Okay. And then as the -- I mean, the strategic partner books growing very quickly, and the profit margin there has obviously stepped up under the new standards. If you maintain sales at this rate and the book continues to grow. I'm just trying to get a sense of, does the profit profile change over time given the strategic partners book is kind of front loading the profit recognition versus the prior standard. I'm just trying to understand the dynamics around if direct or partners are growing faster than any other does that change kind of the profitability in any given period.

Yes. Nick, it is a good question and one you raised last week. I think the key is, as I endeavored to say last week is that when you're looking at the relativities to both the stands, what you have seen in the half year is actually the -- whilst both -- whilst the strategic partners have stepped up and the director step down, you're actually seeing growth in each segment that actually the lines not immaterially from their in-force premium growth. But we will see that normalize over time, though, Nick, as you -- as we saw in those graphs last week over the medium term, you would imagine that the direct channel will actually increase a little bit faster than the strategic partners channel. But in the near term, we will see growth in both channels, which will be in line with in-force growth.

Okay. Cool. And then I guess given -- you gave us the restated full year last week and you've given us the half year, it implies that you were sort of 6.8% first half, 5.8% NPAT second half. Was there specific investments that you made? I know that there were some adjustments in admin expenses that were kind of one-off in nature during FY '23, but just want to get a sense of is there any seasonality in the profit recognition? Or should we expect that given you've got a steady investment base now, you would naturally grow profit in the second half of in-force benefits...

Yes, I think what we -- what I -- we may have spoken to in the full year results last Nick was the second half was impacted by some methodology changes in our reserving for IP claims, which we we've not seen that sort of experience in the first half. So you wouldn't -- we would hope not to see it in the second half as well in so the prior year -- the half -- the second half last year was impacted by claims reserve strengthening, which we would hope to not see again.

Yes. So all those being equal, you would expect the first half '24 profit to grow into the second half as the in-force benefits you and costs are more -- there's not that kind of one-off impact that you've done that was in the prior period.

That -- as a growing business, that's what you would expect. That's right.

Right. That doesn't constitute firm guidance at a broad enough statement. Just in terms of the strategic partners look, there's been a strong rebound in growth there. Can you just call out particular channels that's driven that? Is it kind of a normalization of the broader market when it comes to income protection. Just trying to get a sense of what's changed there and maybe the outlook for strategic partners.

Yes. Thanks, Nick. It's Anthony. Yes, look, we're really happy with the growth in both strategic partners and direct. There is a bit of a normalization. You'll probably remember when the new IP products came out. We had a really big kicker in sales because we were selling a lot of the older products, and then there was a readjustment and now there's a normalization. So we're pretty we're pretty confident with the level of sales we're getting from strategic partners. We don't really see any reason why that should significantly change in the future. But of course, we always keep an eye on the competitive dynamic and so on.

In terms of the run rate of sales, there's nothing one-off to call out and pretty predominantly to continue to outperform the other partners?

There's nothing really to call out. PPS is a different style of business to Neil. It's a longer-term business of the nature of it. It has a savings account attached to the product. So the longer term market and the greater the investment builds up in the saving product, and therefore, the more valuable the policy is for people. So we always thought it would be a slower growth -- have a slow growth profile, which has proven to be the case, but it is growing nicely, and it's contributing really well to the portfolio. So we're really happy with both the partners.

And in terms of the competitive dynamic, I know Neos introduced another policy, you haven't seen any debt comment to your ability to write new business in that channel?

Yes. We haven't really seen any surprises, Nick. Remember, when it happened, we're sort of saying -- it's targeting a different market. We didn't really think it would have a material impact on sales. We still believe that we haven't seen any material deterioration in sales or lapses.

And just to move on to the direct book that this new sales there were only up circa 4% on last year. Presumably, that's not quite the level of growth that you'd like to see in that book. Just a comment on that.

Well, I'll jump in, Nick. I think there's probably 2 key factors to articulate there is that the direct book didn't have as big an impact from the stabilized market in the last few years. So I didn't have as much to rebound as you might have -- as we've seen in the strategic advice space. And the second one, we actually reasonably -- whilst we like to continue to see the sales growth, we actually did achieve it was 15.8% of market share of sales in the direct segment, which has actually continued to be very healthy. So we are continuing to see very, very strong market share of direct sales.

Would the comment be that the market for direct sales is not necessarily firming maybe in the context of kind of macro pressures on the consumer because I guess market shares are well and good, but I suppose you would like to be growing new sales on PCP at a better rate than 4%?

We certainly haven't had the tailwinds of a significantly growing market. We do think the market has bottomed out, and we are certainly seeing it improving, which is pleasing. But as I stated, I think that the market is really only increasing by about 3% a year, and that's the retail market. So that includes both advised and direct. We do feel there's built up demand because there's clearly a lot less advisers. When there's less advisers, there's just less market activity overall, and that includes direct. So we love market activity has helped stimulate the direct portfolio as well as our advisers. So we think that will change. Nick, we haven't really had those tailwinds of a growing market. But as Scott said, our market share is significantly higher than new sales than it is of our in-force. So we are really pleased with how that's growing. And maybe in the next year or 2, the market will continue to improve and we'll see a little bit of tailwinds as well.

And can you just comment maybe on lapses and the kind of step or inflation in policies, which line do you book like if someone reduces their cover, does that go through as a partial lap? Or does it go through as a kind of a negative in the kind of inflation or a step line.

From an accounting perspective, obviously, all movements in premium goes through, I guess, premium revenue under the management analysis and -- but under insurance services revenue under the new standard. But from a lapse -- from a statistical perspective, partial lapses do go through the lapse rate. And so you'll see that coming through there. Price increases obviously are not netted off against the lapse rate.

Right. And would you call out any trends on lapses as it has obviously stepped up obviously well below industry averages that stepped up on recent years. Is that predominantly partial or complete lapse?

I think primarily the key message of our increasing lapse rate is that is twofold, is that our assets mature has had very low lapse rates given the policies haven't been nonfood for many long period, and our lapse rates are increasing as expected as the portfolio matures. But obviously, in the last few years, we've also seen that coming off of the pandemic lows. So I think increasing in lapse rates is something we continue to monitor closely. Obviously, sustaining policies on our books is a key value driver for us. But we're not being started or by the increase in lapse rates it's actually as expected.

All right. Great. Maybe just to comment on some of the new alliance or affiliate partners that you've got in the direct channel. Have we seen a run rate benefit from some of those deals in the last 18 months in that first half as?

Yes. We certainly have. I mean RAC and Budget Direct are sort of 2.5 years in now, and they're growing really nicely as per expected. The newer ones of Costco and Singapore Airlines. And it does take probably a good year before we get traction with alliance partners, but Costco, in particular, has got traction possibly faster than what we originally thought. So we are really confident that Costco in particular will have quite a material impact on our growth going forward. And we're also really confident that RAC and Budget Direct will continue to grow as well as our digital channel, where we've seen quite a bit of growth.

Okay. That sounds good. I mean I assume with the Costco policy, the consumer goes in wanting to buy $1 million policy and they walk out with a bulk pack for $10 million. Is that usually the upsell...

Spot on Nick. That's exactly the way it works. Well, actually, with Costco, it's a very strong business in Australia. It's sort of -- the brand probably isn't well as well-known as some of the bigger brands, but the sales numbers that they do are amazing. And they've relied very heavily on their membership program. So their promotions through their newsletters and online directly to their members. And the members actually get benefit if they purchase the life insurance does actually seem to work very well. So we're really hoping that, that does build, and we do like the nature of their brand as well. In the current environment, when people worry about costs, the connection is very strong for us with cost curve.

When we look at the Genus business, I think, Scott, you've mentioned that's been resilient in terms of gross prior premium revenue that you've been booking the in force hasn't really run down. Profitability obviously under a bit of pressure. I assume that's administration expenses. If you continue to see, as you've alluded to, 10% reductions every year, how do you -- how do we think about the profitability of Genus as a segment is the cost recognition in that segment more of an allocation of group costs, so you can manage that direct to revenue? Or how do we think about property top line decreasing 10% year?

I think you picked up the key components in your question, Nick. It is a volume game and being efficient. Having said that, we're a part of the group. And what we've seen in the past is actually the Genus business has actually been quite a fantastic nursery for providing resources and skill sets across our business. And in fact, our back offices are now pretty much being merged together. So -- but what you'll see is -- what we're seeing is, obviously, depending upon whether we acquire any new books to acquire going forward as the in-force runs off, there'd be less -- much of the costs in the business is actually just human resources to manage calls and manage claims and each policy activity. And we would have managed to wind out those resources in that segment, which is quite beneficial to the extent that the other business segments are increasing. We just reallocate those resources to the growing direct book.

Is the best way to think about Genus profit is it kind of maintains that $300,000 to $350,000 per half year run rate of profit as you reallocate those resources of the premium tree?

I think what you have to see is you should -- what you might expect to see is a similar margin as the in-force frame falls. So it wouldn't necessarily stay at $350,000 when the in-force was gone, if that makes sense.

No, that's helpful to understand.

Our next question comes from Fred Woollard from Samuel Terry Asset Management.

Congratulations on what looks like a good result. A couple of questions from me. First, can you explain the impact of the AASB 17 changes, how it affects PCA. I saw in your presentation at reduced PCI, but if you can explain further why this is so. And also explain from a cash perspective, the -- its impact on the cash that the company will have to pay over the next 2 or 3 years.

Thanks, Fred. I'll take those 2 points. The first one, I'll just clarify. PCA fell in the half year that had, in fact, nothing to do with AASB 17. It was an APRA prudential standard that changed the way you would calculate regulatory requirements about operational risk, and in fact, too much detail. But essentially, rather than using importer going forward using earned premium for a growing business, it does just a little bit lower. So the PCA went down not due to the new accounting standard, but due the change in the prudential standard, the average standard -- your second question around how does the standard impact cash flows going forward. The key is that underlying cash flow as a policy level haven't changed at all. But we have -- what we will see the benefit going forward is on transition. We wrote down the assets by $90 million. Most of that was the DAC assets, which created some deferred tax assets defer tax loss assets, which means for the coming period, that was about $27 million in deferred tax assets for the coming period where we've got profits, we'll see lower tax payments, which will clearly improve our cash flows into the future, but also as tax losses exist. Hope that answers your question, Fred?

Great.

And ladies and gentlemen, with no further questions at this time. I would like to hand the call back over to Mr. Brown for closing remarks.

Well, thank you very much. Thanks for your engagement, and thank you very much for the continued support from our shareholders. I hope you're happy with the results, and we look forward to catching up with many of you in the coming days. Have a great day. Thank you.

This does conclude our conference for today. We thank you for participating. You may now disconnect the lines.