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Thank you for standing by, and welcome to the NobleOak HY '23 Financial Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Brown, CEO. Please go ahead.
Good morning all, and welcome to NobleOak Life's financial results presentation for the first half of financial year '23. I'm Anthony Brown, CEO of NobleOak. I'm joined today by our CFO, Scott Pearson. And today, I'll start with an overview of the highlights from the first half before handing over to Scott to provide some more details on the financials, and then I'll provide an update on the business, current trading conditions and the outlook for financial year '23. We'll then open up for questions. So turning to our first half highlights on Slide 4. I'm pleased to say that NobleOak has continued to outperform the wider market and gain market share in the first half of '23, an environment where many of our larger competitors are shrinking. The strength of our diversified distribution model is shining through despite lower industry sales activity. We have remained focused on executing our direct strategy with our strong brand and growing network of distribution partners, driving good growth. We've retained our strong financial discipline and high-quality underwriting, which has enabled us to maintain stable margins in an inflationary environment. Pleasingly, we are seeing market conditions turn and industry profitability improving with many long-term tailwinds for the sector. And importantly, we remain well capitalized to execute our growth plans in the near term. As you can see on Slide 5, our continued outperformance is reflected in our financial metrics with strong growth in in-force premiums and profits. In-force premium, the real value driver of our business, grew by 25% over the previous 12-month period to over $283 million reflecting continued market share growth, which was around 2.5% as at June 2022. While new business sales were down across the industry and down 46% on the previous period, having been impacted by significant reduced activity across the whole market, we continue to outperform the market and are back to our 16% share of new business market sales in financial year '22. At 31 December '22, we had over 111,000 active life insurance policies, which was up 18% on the previous corresponding period, supported by our lapse rates, which remain well below industry average at 6.4%. Net insurance premium revenue was up by 25% to $38 million with underlying NPAT growing by 19% to $5.4 million, driven by our strong premium growth and disciplined approach to underwriting and expense management. Operationally, we had a very active first half with the team remaining focused on continuing to provide excellent products and service for our customers. This resulted in us maintaining our high customer satisfaction ratings and status as Australia's most awarded direct life insurer. We also won Canstar's Direct Income Protection Award for an unprecedented eighth consecutive year. We made progress on our sustainability efforts achieving carbon neutral certification for our business operations from Climate Active in support of our commitment to net zero by 2030. Our finance team under Scott's leadership has begun the task of preparing for the implementation of AASB 17. This new accounting standard will have a fundamental change to the way we account for our business in the future. We're also managing the transition to update LPS 117, APRA's updated prudential standard focused on ensuring security of reinsurance asset exposure. In the Direct Channel, we continue to build our network of alliance partners, leveraging our strong brand and reputation in the industry. During the period, we added 5 new partners to take us up to a total of 40 alliance partners, including MoneyMe and National Seniors. During the half, we relocated to a new greener Sydney premises, bringing our whole team together on one floor for the first time in many years, which is already benefiting engagement as we encourage teams back to the office. On Slide 7, we've highlighted some of the key external market dynamics currently impacting the Australian life insurance market as well as a few elements that we believe are significant opportunities for the sector and for NobleOak. The industry is still recovering from impacts of various regulatory intervention, including APRA in-force changes to income protection products, which were launched in October '21. This has been compounded by the falling number of advisers in the market, which were predicted to be down over 30% in 3 years due to more onerous obligations and limits around revenue models. There are more changes on the horizon, including AASB 17, as I mentioned before, the new insurance accounting standard, changing how life insurers present financial performance, which will be a significant financial and operational commitment for us and the industry. We're actively managing the transition to the updated LPS 117, the updated APRA capital adequacy standard focused on ensuring security of reinsurance asset exposure, where we'll be extending existing arrangements and looking at some new and potentially more effective alternatives. But we do think there's significant opportunity ahead. Pleasingly, industry profitability is improving, and we're beginning to see the regulators take a more constructive approach as a result. Market sales are starting to bounce back, which is great to see, having been down significantly below historical norms. There is also the Quality of Advice Review, as some of you will be familiar with. It was released publicly by treasury earlier in February, which aims to improve Australian's access to financial advice and life insurance, including through direct channels. This is welcome news for the life insurance industry and, if it is accepted, is likely to help stimulate further growth for the market while benefiting direct insurers such as NobleOak, which provide access to high-quality, fully-underwritten products. Favorable long-term fundamentals are also in play. We believe the industry fundamentals are attractive to support future growth of our direct business, in particular, with increased record household debt, high underinsurance and reducing regulatory pressure expecting to drive longer-term growth. Turning to Slide 8. In a changing market, we continue to outperform and punch above our weight. While the market activity is down significantly, as mentioned, with new business down below historical norms as a result of the trends mentioned previously, we've maintained our strong market share of new business sales of over 16%, which is well above our in-force premium market share, showing that we are continuing to grow our share of the market. As you can see on the right-hand side, NobleOak continues to grow our market share of in-force premiums supported by our lower-than-market lapse rates. This shows that our model is working, customers are responding well to our differentiated products and excellent service. We do expect this trend to continue over the medium term as we scale. I'll now hand over to Scott to talk more about our financial results. Thanks, Scott.
Thanks, Anthony. And beginning on Slide 10, I'll start by looking at our financial performance at a consolidated group level. As Anthony said, in-force premiums is a key value driver for NobleOak, an increase by 25% as we continue to gain market share. While first half sales were down due to lower industry sales activity and elevated sales in the prior period, we continued to significantly outperform the market and take market -- greater market share of new business sales. Overall, our margins have remained stable with lower underlying gross insurance margins, offset by lower administration expenses and significantly higher investment returns. Underlying NPAT grew by 19% to $5.4 million or 26% if you exclude Genus, showing the benefit of our financial disciplines and the emerging economies of scale. I'll now turn to our 3 operating segments, which provide a clearer picture of the key drivers of our underlying performance. In the Direct Channel, our strategy continues to deliver results with our ongoing investment in digital marketing, brand and alliance campaigns, all designed to drive market share gains. Our policy count increased by 15% to over 43,000 policies with in-force premium growing 17% to $74.3 million. This was supported by low lapse rates that remained well below industry average at 9.5%. Sustained investment in brand, technology and distribution drove our market share up to 0.7%, which was almost double since in 2019. Our strong growth and financial discipline continues to drive profit growth in line with in-force premium with underlying NPAT up 20% to $3.1 million. Importantly, our margins remained stable at significantly increased investment returns, offset a slight decline in the underlying gross insurance margin. Turning now on to the Strategic Partner Channel in Slide 12. Our strategic partners continue to deliver excellent growth with in-force premiums up 28% to $209 million, with NobleOak continuing to gain shares in advised market. As in Direct, lower market activity impacted new business volumes, which were down 52% to $16.8 million. However, this was partially offset by lapse rates remaining well below the industry average at 5.2%. Our underlying gross insurance margin was impacted by the change in mix across the strategic partners but has been offset by improvements in our underlying and our expense ratios, which benefit from operating leverage and increased investment income. This resulted in underlying NPAT increasing by 37% to $2 million. On Slide 13, you can see the performance of our administration services business, Genus. In-force premium under management reduced in line with expectations to $24.9 million following conclusion of the Freedom portfolio conduct remediation program in April 2022. Lapse rates in the portfolio stabilized in the first half of FY '23 following the completion of that remediation program. And as expected, this resulted in a slower rate of decline in in-force premium under management. Maintaining cost management discipline saw underlying NPAT reduce in line with in-force premium to $0.4 million. Now turning to capital on Slide 14. NobleOak remains in a sound capital position above the regulatory requirements, providing a platform for continued growth. As at 31 December 2022, our capital base was $43.1 million, which represents a multiple of 2.5x the regulatory requirement, with $14.6 million surplus capital providing a robust base to support our growth over the near term. We're actively managing the transition to LPS 117 and the implementation of the new accounting standard, AASB 17. We will provide more updates on the implementation of AASB 17 and its impacts in future updates. In summary, overall, we are very pleased with the continued growth and financial performance of NobleOak, and the stability of our margins are an ongoing feature of our business. With that, I'll hand back to Anthony.
Thanks, Scott. Growing in a sustainable way remains really important to NobleOak. And following the introduction of our ESG framework in financial year '22, we have made further progress in the first half. Our new office in Sydney has the highest 5-star NABERS rating, improving our ability to more accurately measure our carbon emissions and contribute to our sustainability initiatives. During the half, we achieved carbon neutral certification for our business from Climate Active after measuring and reducing our carbon emissions and purchasing 100% Australian Carbon Credit Units. Fortunately, our carbon footprint is not significant, and neither was the investment. We'll provide a further update on our ESG progress at year-end. In the Direct Channel, our strong brand and diversified distribution continues to drive good growth. Our new partnerships of RAC WA and Budget Direct are up and running, and they're delivering good lead volumes as we continue to develop and convert our pipeline of other potential distribution partners. Our omnichannel platform technology upgrade remains on track for the end of this calendar year, and it will enable us to increase the efficiency of the underwriting process and our online servicing that we continue to invest in. We're also continuing to invest in talent in our Direct business, which will power our growth moving forward. You can see the benefits of all this on the right-hand side of the slide as we continue to gain market share with our share of new business sales significantly higher than our in-force market share, which is now nearly 8% of the direct market. Turning to our Strategic Partner Channel on Slide 18. As I said earlier, the industry new business activity does remain subdued in the advised market as the market continues to settle post the introduction of the new IDII products, compounded by the reduction of advisers in the market. With the new IDII products launched, we continue to support our strategic partners and they refine -- as they refine products to meet market expectations and risk appetites. We have modestly increased our retention on the PPS book as we build confidence in the portfolio performance. Our strategic partners continue to remain very important to us and to deliver good market share growth with a 16% share of new business, driving our in-force share up to 2% of the advised market. Turning to the outlook for financial year '23. It's pleasing that market conditions are improving. And while industry new business volumes remain below historical levels, they are recovering so far in 2023, as is industry profitability. Against the backdrop, we expect to continue to achieve above-market growth supported by lapse rates that are expected to remain below the market while slowly increasing as we emerge from COVID lows. Rising interest rates are a tailwind for NobleOak with significantly improved investment returns and the fact that our products do contain inflationary adjustments that offset inflationary impacts on our cost base and do protect our margins. The industry continues to be impacted by regulatory change, which does require operational focus. And we do expect the Quality of Advice Review to be a tailwind for us, supporting our direct model and providing options for moving into adjacent areas of direct advice. We're also using the implementation of the new accounting standard as an opportunity to enhance our own operational capability. We remain well capitalized with healthy regulatory capital surplus and well positioned to continue our strong growth trajectory. With in-force premium growth of approximately 11% in the first 6 months of financial year '23, we are reaffirming our expectation for full year in-force premium growth of approximately 20% in a market that's predicted to grow by around 3%. We expect our disciplined approach to keep margins stable while investing in both growth and capability. I'd like to thank the passionate NobleOak team for their efforts on another tough but rewarding first half. They continue to work incredibly diligently to deliver our strategy while providing wonderful service to our customers, which is the foundation of our business. We are excited to be leading the way with our direct model in a world where the advised market is struggling, and we are confident of continued growth and opportunities as we look ahead. Thanks very much to our shareholders also for your continued support. We'll now open up for Q&A. Thanks very much.
[Operator Instructions] Your first question comes from Nick McGarrigle with Barrenjoey.
I just wanted to run through obviously in-force book really strong, thanks to sort of step inflation and also lower lapses. But just wanted to get a handle on the cost base. Has there been a bit more inflation and investment in the cost base in the half year?
Thanks, Nick. It's Scott here. I guess NobleOak, as it's growing, is constantly investing in its capabilities and its team. As a result, its cost base is going up itself as we grow. During the period, we will, of course, be impacted like everyone with inflation and staffing and employment costs. But nevertheless, what we've done is try to maintain -- we've managed that discipline in that cost growth in line with revenue growth. So we've seen stability in the expense ratio.
Yes. I mean normally, we'd expect to see some operating leverage. I guess in the direct book margin, underlying NPAT margin was flat. I mean do you expect that with investment income rising into the second half that we start to see expansion in underlying NPAT margin again?
I think it's a fair assessment, Nick. As the business grows, we'll be continuing to look to maintain, I guess, that discipline. And we're not at scale yet, and we continue to expect to see that scale improvements as we -- in the coming years.
Was there a significant investment to get some of these new alliance partnerships up and running? And presumably, they've yet to drive significant policy sales?
Yes. Nick, it's Anthony. There was, yes. Both RAC and Budget Direct were white-labeled products. It's the first time we've actually done that on the direct side. So there was quite a significant investment there in technology and staff to get that all done, so we will leverage that going forward. And as Scott mentioned, there's been some inflation. We've obviously put increased salaries to keep everyone nice and happy here and engaged. That's worked out very favorably, but we do expect greater impacts of economies of scale over the next 12 to 18 months.
Okay. That's great to understand. I think you mentioned that investment returns are likely to offset -- potentially even more than offset inflation for the second half. Can you just talk through investment returns? I guess the total interest income was about $1.1 million in the first half, but you mentioned some portfolio changes. Is there potential that we see an improved and even better return going forward?
I think, Nick, we're continuing to evolve the portfolio into those shorter duration fixed interest for asset portfolios. As that -- obviously, that portfolio shifts over time as we've got variety of previously, I guess, fixed term deposits rolling off at maybe lower rates of return. So the portfolio in the second half should continue to improve.
And you mentioned -- I mean, there are sort of 2 comments. One is about improved market activity, and the other was about subdued adviser activity. Can you just balance those 2 for us?
Yes. Look, there are definitely 2 forces in play. As you know, adviser numbers have gone down, and market activity has been subdued really from October '21 when the new IDII products were launched. But I suppose what we've seen, therefore, is the underinsurance problem actually increased, and consumer debt has also increased over that period. So there is a greater need for life insurance. And therefore, we believe that direct has a much greater opportunity going forward. People are becoming more confident in direct as well. And the regulators will -- and certainly through the Quality of Advice Review, appear to have appetite to support more of a direct model so customers can access products directly. We're a leader in that market. We want to remain a leader. We want to keep investing in the business. We do see good opportunity. So we think that does offset the downside with the advisers, and we see plenty of opportunity. We just want to make sure we keep investing in the business and leveraging what we've got so far and not losing the opportunity.
And I mean in terms -- when you say the market is improving, that's sort of more a comment around the direct business? I presume that you've seen increased inquiry levels. Has that tracked better into the new calendar year?
I suppose. And anecdotally, Nick, we are seeing just general market activity improving, not just within NobleOak, but across the whole industry. I think there's a general feeling that January and February have been stronger than the previous year. So we're hoping that, that continues. I think it's probably, hopefully, hit a stage where we sort of hit that tipping point, and we are seeing more of a medium-term recovery on the horizon. So there is more adviser activity, there's more purchasing activity. So yes, let's hope it continues.
And just -- I mean, obviously, strategic partner sales were down significantly. Do you feel like that's a symptom of the industry and just maybe people are not writing as much risk? I mean the -- or is it more a symptom of one of the bigger channels bringing in a competing policy?
Yes. There's actually a few factors in that. So our strategic partners benefited hugely when the new products were being launched. So adviser activity increased significantly before October '21 when they were quite aggressively promoting the previous income protection policies. So NEOS PPS in particular were significant beneficiaries of that. So they got heightened sales activity through that year. And then when the new IDII products came in, in October, the entire market, including our strategic partners and our direct, was significantly reduced. So some of it was just a bit -- the activity was so high then, so it makes the change look more a stronger change. And the other element was when these new products were launched, these new IDII products, NobleOak was relatively conservative in the market. We launched products which were on the more conservative side of other products that were launched. And for a small period of time, we did lose some of the market share to other more aggressive competitors. Over that period, that's kind of normalized. We've improved our products. We've adjusted them. Some of the competitive products have actually been forced to reduce the -- some of the features in their products, so they've stabilized. And we're now back to the same market share of new sales than we were prior to October '21.
And so I mean in terms of the run rate, maybe doing $50 million or $60 million a year of new sales was unsustainable, but I presume that doing $16 million to $17 million a half is also lower than you'd expect it to be at in a stable environment.
Yes. We've not provided an outlook at individual segment sales results. But I guess first half versus second half analysis you're putting is not far from the truth.
Can you just talk through your prescribed capital amount and how that may change? Given now the industry factor profitability, do you think that the regulator will assess maybe the Pillar 2 adjustments that were enacted for IDII purposes?
I mean it's always a hard question because we can't answer on behalf of the regulator. But we -- all the insurers, this is public knowledge, do have the opportunity to provide a business case to the regulator during the year, addressing some of their industry concerns that they had across the whole life insurance industry, and that gives them the ability to assess the Pillar 2 charge. Now the appetite for whether they reduce it or not, we don't really know. I don't think anyone really completely knows, but we'll certainly be working closely with APRA to try and optimize the chance of that adjustment being reduced.
Okay. And then maybe just a final question for me, and I'll give someone else a chance to ask their question. Just can you talk us through the implications of AASB 17? What will be taken through the underlying profit going forward and just the background to that regulation change?
Thanks, Nick. As a business, NobleOak is working actively through its implementation plans. It's a little bit too early for us to be describing the financial impacts and consequences of the standard. We will be developing communication plans to actually engage with the sales in the market as we work through that implementation. It's probably worth noting that the -- this is an accounting standard, so it's not going to change the underlying cash flows of individual policies. So -- but the standard will have insurers reassess the time frame over which they're accounting for those cash flows under the new standard. So fundamentally, it's a timing and presentational issue rather than a fundamental economic change in relation to the standard. And I guess in broad terms, Nick, we currently don't expect the changes to negatively impact the way that the profit will be emerging from NobleOak's results. There is one particular item which we're contemplating, which is deferred acquisition costs, which we've discussed in the past, Nick, that are on our balance sheet, which ultimately may get expensed through transition. If that was to occur, that would likely improve profit -- reported profit going forward. But we will be providing more updates on how the standard is -- will be implemented and impact the results as we progress.
I mean there's an adjustment item between underlying NPAT and reported NPAT of $600,000 this half. Is that the potential impact of the new standard? Or that's the cost for you to get ahead to do the work to understand that standard?
Yes. So those costs are the implementation costs, not the cost of the accounting adjustments as a result. And so we're obviously -- so those costs are partway through the project, Nick, as well. So there's further costs to come as we continue to complete the implementation of that program.
Right. And so the potential impact in terms of underlying NPAT is TBC, negative or positive? Or we don't know yet? I'm just trying to get a sense of if the underlying NPAT, why its reportable change [ is indefinite. ]
It is TBC. Well, I guess, what I was indicating, that there are whilst a number of changes with the result, the most significant one that's under consideration is that deferred acquisition costs balance that's on our balance sheet at the moment, which we're contemplating may end up being written down through the expenses on transition through retained earnings, which would likely increase profits going forward. But that's one of many things that were being considered through the process, and so we'll provide more updates in the future.
So Nick, sorry, it's Anthony here. So I think what we really can pretty confidently say at the moment is that it's unlikely to have a negative impact on P&L, but we're still yet to work through the scenarios. But obviously, we're hoping the opposite of that, but there's a lot of work to do. And the other element that a lot of the insurers are contemplating at the moment with the tax office is if they were to expense their deferred asset back on their -- from their balance sheet, then they may be eligible for a tax advantage, a tax deduction effectively, which would be positive on their capital base. So we're not saying that, that will happen, but it's something that is being contemplated in the industry that could potentially be a positive scenario.
[Operator Instructions] Your next question comes from Nick McGarrigle with Barrenjoey.
I'm back. If I look at the $1.1 million of interest income and the $53 million of cash, it implies a pretty healthy interest rate of more than 4% annualized. Am I missing something in that analysis?
You're effectively asking increase in returns versus the increase in the asset values. It's probably worth noting, Nick, that we talked a moment ago about the implementation of remediation processes around managing reinsurance concentration risks earlier with the implementation of LPS 117. That has seen us implementing a number of claims funding arrangements with our partners to secure those assets. That will have seen inflows of cash to support those on a claims incurred basis rather than a claims paid basis, which will have seen increased cash in bank. Note 7 in the accounts when you get -- sorry, Note 8 in -- I'll get it right in a minute. Note 6 in the accounts, policy liability note flags the financial consequence of that. At 31 December, they will [ rein ] $30 million in assets on the books that are supporting those reinsurance exposures for which, importantly, Nick, there will be a freeze associated with those. So to the extent that we might have been earning investment income, there's likely to be an offsetting costs to the -- to pay the reinsurer for that support.
Right. So just annualizing the implied interest rate on the cash balance on the $1.1 billion of investment income is not the appropriate treatment because there's offsetting pay-aways. Is that the right...
Yes. The short version of that is that you look at the cash on the balance sheet you go and look at that policy liability in there to see how much we've actually got in support of those assets. And it's the net balance that you'll probably see, the investment income benefit of the business going forward.
Your next question comes from Philip Pepe with Shaw and Partners.
Congratulations on a good result, and apologies for joining the call late. Just on the -- your performance relative to industry on Slide 20. You're confident that you'll keep your lapse rates well below industry rates, which are increasing. That can mean 2 things. That can mean better service or that can mean you're keeping the poor quality risk. So how are you ensuring that you're retaining the more profitable customers on a better phrase in your book?
So you're describing...
Industry lapse rates are increasing, but you remain materially below. What are you attributing that to? I guess, it's a great outcome, but what are you attributing that to?
Okay. Do you want me to...
Yes. Sure, yes.
Yes. That's a good question. I mean we've always remained below industry lapse rates pre-COVID and during COVID and post COVID. And it's generally due to the nature of the product. So our direct product, we sell directly. We don't have an adviser in between who may switch products out. And the products are very competitive and people are serviced extremely well, so the likelihood of them switching is very low. Generally, the lapse rate is due to people aging or getting to the stage where they can afford the policy. They very rarely switch out of the NobleOak policy. And on the NEOS and the PPS side, they've both got very unique elements as well. PPS has a bonus account, which attracts people when they've got a record low lapse rate here and in South Africa. And NEOS' premiums are very competitive and their service is excellent in the advised market. So they've managed to remain very competitive. We've also -- I might just let Scott touch on some of the...
So it's probably also worthwhile just to -- because the premise of your question, I guess, is ensuring that the portfolio going forward after lapses is still sound from a profitability perspective. Following the IDII product releases, there's been ongoing review of the in-force books. And across all of our portfolios, we'll have seen some repricing activity to make sure that the in-force book under the old products are priced effectively at the granular level. So it's important to recognize each portfolio will have a repricing in the last 12 months or so.
Yes. Makes sense. And then second question on the same slide. Good to see new business volumes starting to improve. I missed the start of the presentation. Did you talk about performance in January and February to date? Have we started to get to normal levels of volumes? Or they're still yet to play through as we roll off the higher prices from last calendar year?
Yes. They're still really yet to play through, Phil. So the comment was probably more general. The market activity is -- has improved, and I guess we're in line with what we expected for '23 so far.
There are no further questions at this time. I will now hand back to Mr. Brown for any closing remarks.
Well, thank you very much. Thanks, Nick and Phil, too, for your questions. That was very helpful. We're really pleased with how we're positioned. We're really looking forward to a great 2023. So thank you for your support, and we hope to see many of you soon. Thank you very much.
That does conclude our conference for today. Thank you for participating. You may now disconnect.