Thank you for standing by, and welcome to the NobleOak Life Limited Fiscal Year 2022 results conference call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. 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 Year 2022 financial results presentation. This is a milestone for us. It's our first year results as a listed entity. I'm Anthony Brown, the CEO of NobleOak, and I'm joined by our CFO, Scott Pearson.
Good morning.
Today, I'll start with an overview of the highlights from 2022, before handing over to Scott to go through the financials in more detail. We'll then provide an update on the business, including current trading conditions and the outlook for financial year 2023, and then we'll open up for questions. I'll just start with a nice image to set the scene.
As the Australian life insurance industry begins to emerge from what has been a challenging period with high regulatory intervention, low industry profitability, and the impacts of COVID-19, I'm very proud to say that NobleOak has always stayed true to our values. We remain solid and focused on our purpose, protecting Australians by providing life insurance cover they can trust and rely on. As the industry clouds start to part and we see positive industry signs, we believe we're very well positioned for further growth.
We hope that our investors are pleased with the results we're about to present. How did we go? Turning to the highlights for financial year 2022, I'm pleased to say that, despite the tough market, NobleOak has continued to perform very well, delivering strong growth in premiums and profits and exceeding our key prospectus forecasts on these two important measures.
We've done this while remaining operationally resilient, providing fantastic service to our customers and looking after our people, the backbone to our business. The team has kept an eye on the ball, executing our growth strategy while outperforming the market and further increasing market share. We remain well capitalized, strongly positioned for growth as the market continues to improve. More specifically, some of the financial highlights.
As at 30 June 2022, we had over 100,000 active life insurance policies, up 33% from financial year 2021. In-force premiums, which is the real value driver of our business, providing us with an annuity revenue stream. This was up by 40% on financial year 2021 to over AUD 250 million, 9% ahead of prospectus forecasts, supported by continued low lapse rates across both our direct and strategic partner segments.
While new business sales were certainly impacted by reduced market activity across the industry, the launch of the new IDII income protection products in October, we continued to outperform the market and take share in both direct and intermediated businesses. The new business volumes in the retail market have come off substantially, offset by the lower lapse rates, which I'll cover in a bit more detail later.
Net insurance premium revenue was up by 37% to AUD 63.7 million, 13% ahead of prospectus forecast. The underlying net profit after tax grew by 35% to AUD 9.5 million, 5% ahead of prospectus forecasts due to strong premium growth and our disciplined approach to underwriting and expense management.
The current numbers don't tell the full story, though, as we've also achieved a huge amount operationally as we build our business for the future. We continued to provide excellent products and service for our customers, which resulted in us maintaining a high customer satisfaction ratings and being the most awarded direct life insurer for the second consecutive year.
This includes winning the prestigious Plan for Life Overall Direct Life Insurance Excellence Award for an unprecedented fourth year in a row, and the Feefo Platinum Trusted Service Award, as well as a couple of other signature awards I'll touch on later. Our team did a great job to develop and roll out the new individual disability income insurance, IDII products in time for the 1 October industry deadline set by APRA.
Once launched, we also refined these products to ensure they remained competitive while within our risk appetite. We launched a new white label capability and new white label products with two of our new alliance partners, RAC WA, which launched in October 2021, and Budget Direct, which launched in February this year. Both are driving good volumes of sales and inquiries.
With over 30 alliance partners, we are building a strong brand and reputation in the industry, which opens opportunities and enable us to build a strong pipeline of inbound demand. Importantly, we maintained our very strong employee engagement at 86%, with our teams transitioning well into more of a hybrid working environment. Now, turning to slide eight. In a changing market, being relatively small and nimble really helps us continue to outperform and punch well above our weight.
As we spoke about at the half year results, the market is still going through a period of adjustment following the introduction of the new IDII policies, with sales in both channels benefiting from higher customer activity ahead of the launch of the new IDII products in October last year. NobleOak and our strategic partners have leveraged this disruption very well and taken advantage of the changing environment to accelerate our market share capture over this period.
Since then, market activity is down significantly, with new business across the industry down around 30%. The good news is that renewed focus by the industry on profitability is beginning to have a positive impact, and profitability is improving across the life insurance market. With our continued discipline, this gives us confidence in strong margins moving forward.
We're also seeing some improvement in new business activity across the industry already, which we expect to continue. There are a number of other industry trends that are tailwinds for NobleOak, with the major incumbents still embedding acquisitions, a growing preference for consumers to buy life insurance directly, and favoring digitalized products like those we offer, and a strong regulatory focus on conduct and product development as a key ESG consideration.
As you can see on the right-hand side, one key outcome of all these trends is that NobleOak continues to swiftly increase market share, with our share of new business premiums far outpacing our in-force premium market share. This is affirmation that our model is working and customers continue to respond well to our differentiated offers. We do expect to continue to build market share and achieve above-market in-force premium growth. I will now hand over to Scott to talk a bit more detail about our financial performance.
Thanks, Anthony. We'll start by looking at the financial performance at a group level. As Anthony mentioned, in-force premium is the key value driver for NobleOak, and it was pleasing to see in-force premium grow by 40% in FY 2022, finishing 9% ahead of prospectus forecasts, supported by continued low lapse rates.
While new businesses with sales were down by 12% due to low market activity through the disruption introduced by the IDII products, NobleOak continues to take advantage of this disruption and increase market share. Strong premium growth, disciplined underwriting, and expense management drove the 35% growth in underlying net profit after tax to AUD 9.5 million, which was 5% ahead of the prospectus forecasts.
As you can see, our key metrics remain relatively stable, with profit growth closely aligned with in-force premium growth, which we expect to remain the case as we move forward. We'll turn now to our 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 marketing campaigns driving market share gains.
Our direct policy count increased by 19% to over 40,000 policies, with gross in-force premium up 20% to over AUD 69 million, which was 8% ahead of prospectus forecasts. New business sales of AUD 10.2 million were impacted by the reduced market activity as mentioned previously, and were down year-on-year, finishing 19% below prospectus forecasts.
While lapse rates increased slightly to 8%, they remain well below the industry average and are expected to remain so, while we do continue to see a trend gradually upwards as the portfolio ages. Strong discipline continues to drive good performance in key metrics. The underlying gross insurance margin remains strong at 31%, with a small decline due to the slight increase in lapse rates and marginally higher claims experience, both of which remain favorable compared to the industry.
The administration expense ratio improved by four percentage points, with economies of scale more than offsetting higher expense volumes as the portfolio grows. Overall, our disciplined growth strategy resulted in underlying net profit after tax in the direct channel increasing by 50% to AUD 5.4 million, 1% of prospectus forecasts. Turning now to the strategic partner channel.
Our strategic partners continued to deliver excellent growth with in-force premiums up 49% to AUD 185 million, 10% ahead of the prospectus forecasts. Lapse rates remained low at an average of 4% due to the fast growth of this channel.
New business sales were down 12% on the prior year with higher customer activity in the lead-up to the 1 October new IDII products deadlines more than offset by a decline in customer purchasing activity across the retail market since then. We are pleased with the growth of our strategic partners who have taken market share and in this disruptive market as we expected.
Again, our disciplined approach has seen key metrics remain stable, with underlying gross insurance margins benefiting from favorable claims experience and the administration expense ratio remaining low after one-off expenses in developing the IDII products.
Underlying net profit after tax of AUD 3.2 million in the strategic partner channel was up 52% on the prior year and 11% ahead of prospectus forecasts. In our administration services business, Genus, in-force premium under management decreased by 21% during the year due to the Freedom portfolio conduct remediation program that completed in April, which resulted in a one-off lapse spike.
This was as expected. The expected reduction in in-force premium was partially offset by the acquisition of the Auto & General runoff administration portfolio during the year, which added in-force premium of AUD 4.1 million to the policies under management, and drove expenses and net profit after tax up to exceed prospectus forecasts at year-end.
Genus's generated underlying net profit after tax of AUD 0.9 million, exceeding prospectus forecast by 6%. Moving forward, a much more gradual reduction in premium under management is expected as lapse rates are expected to return to or even lower than industry averages. Turning to capital on slide 14. NobleOak maintains a strong capital position above the regulatory requirement, with our capital efficient model providing a strong platform for continued growth.
At 30 June 2022, our capital base was AUD 41.8 million, representing a multiple of over 3x the regulatory requirement, with AUD 17.5 million in excess capital over target levels from the IPO capital raise. This provides a robust capital base to support our investment growth over the near term. Overall, we are well pleased with our continued growth and financial performance at NobleOak, and I'm particularly pleased to see each segment exceeding prospectus profits forecasts. Having said all that, I'll pass back to Anthony.
Thanks, Scott. On slide 16, I just want to touch on the fact that in 2022, we've retained our position as Australia's most awarded direct life insurer. There were a couple of new developments. We were delighted to have won Money Magazine's Direct Life Insurance Cover of the Year 2022. The first time this award has actually been offered, and NobleOak won the award based on our competitive premiums, range of insurance options, and outstanding personal service.
Really builds on our credibility, you know, with the wider market. It's also very pleasing that our sales team was named the number one sales contact center in Australia by a leading external consulting group called Grist, who conducted research using mystery shoppers to assess their experience across contact centers from a range of industries, not just life insurance. They benchmarked us using over 20
Over 70 behaviors displayed on calls that have been proven to be the most successful when winning business and also providing good customer experience. It's been an aim of our head of sales for a few years to take out this award, and it really helps explain our better than industry conversion rates and very satisfied customers. In the direct channel, we continued to convert our pipeline of potential distribution partners and have also broadened this pipeline.
As mentioned earlier, we recently launched the white label products with RAC WA and Budget Direct, which sees our products marketed to over two million potential customers Australia-wide. Both have started very well. In July, we also announced some new partnerships with Heritage Bank, which will see NobleOak's life insurance products promoted to over 230,000 members Australia-wide.
Heritage Bank is Australia's second-largest mutual bank and is in the process of merging with People's Choice, which, if successful, will make it the largest credit union in Australia. Heritage puts members at the heart of everything they do and is a great commercial and cultural fit for NobleOak. We continue to have commercial discussions with a number of other potential distribution partners and grow our 18 strong professional association partnerships.
We also continue to prudently invest in the NobleOak brand. Our targeted investment in brand-building activity does drive increased market awareness, and our new advertisements due to launch in October this year will support our value proposition of providing competitive prices, personal service, and secure cover. This is all supported, of course, by our digital marketing program, which continues to drive strong traffic to our channels.
As we further grow our brand awareness and reputation, so too does our ability to convert leads. We'll continue to invest prudently in our brand going forward. We support our strategic partners as they continue to grow in the advice market, and we see further opportunities with them moving forward. With the market being reshaped, as mentioned following the introduction of the IDII products.
We completed a review of the commercial arrangements with each of our strategic partners to ensure there is ongoing alignment. We've launched new IDII products with both PPS and NEOS, and we are working with both partners to ensure the product features and market positioning meets respective risk appetites and remain attractive to customers.
While the advice market evolves partly in response to outcomes from the Royal Commission, with numbers of advisors decreasing, the strategic partner channel remains an important part of our business. We expect to continue to take market share, despite previously subdued market activity. However, our direct channel remains the key driver of business value.
At the half year, we talked about our values-led approach to ESG and committed to providing an update on our progress alongside a framework which will guide our approach. We have worked with a range of key stakeholders to develop an ESG framework that aligns with the UN Sustainable Development Goals and focuses on areas that we feel very strongly about and are appropriate for a business like NobleOak.
These include cultural and gender diversity, ethical standards, and of course, minimizing climate change. Being a business that's closely aligned with its values means that we are well-positioned in many areas, and we'll report our progress periodically as we progress our efforts.
Now, turning to the outlook, we're very pleased to have achieved our key prospectus forecast for financial year 2022, coupled with really strong growth in in-force premiums, the key value driver in the business, and stability in our margins driving strong profit growth. While industry-wide customer purchasing activity does still remain subdued since the launch of the IDII products, green shoots are fast appearing, with market in-force premiums growing by 5% over the last 12 months to March 2022, and industry profitability appears to be significantly improving also.
Rising interest rates are expected to be a tailwind for NobleOak, with expectation of improved investment returns. While we are not immune from inflation impacts on our cost base, our products do contain inflation adjustments, and our strong culture and high employee engagement helps protect our margins.
Our experience has shown us that life insurance is traditionally resilient in times of economic stress, such as high inflation and high interest rates, as policyholders become increasingly risk averse. This is expected to further support favorable lapse rates moving forward, which will support in-force premium growth for NobleOak. We remain well-capitalized and strongly positioned. Of course, we continue to invest in our people and technology and are moving to new headquarters in financial year 2023, where we'll all be on one level. We're currently on one and a half levels.
We've been improving our data and actuarial capabilities, which will support our transition to a new international accounting standard called AASB 17. We're also in the process of upgrading our policy administration system, which will make our underwriting processes more efficient. We're confident in our long-term growth opportunity in the AUD 11 billion addressable market.
And we believe we're very well positioned to benefit from structural industry tailwinds. In financial year 2023, we expect our strong brand and low lapse rates to continue to drive above-market growth in in-force premiums with our disciplined approach delivering continued profit growth. To conclude, I think NobleOak's a great business with a noble purpose, and I love being part of it. Looking ahead, we really expect to continue to outperform the market.
We will do this while staying true to our values, doing the right thing by our customers and our people, while remaining focused on quality implementation. We'll continue to invest for long-term growth, acknowledging that we must further evolve our capabilities in digital technology and adapt to an ever-changing landscape.
We are well positioned with a strong balance sheet, capital-efficient model that gives us flexibility to sustain this growth in the near to long term. I'd like to thank the passionate NobleOak team for their amazing efforts during the year. They've continued to punch above their weight, delivering our strategy while providing wonderful service to our customers at a time when they've needed it most. Thanks also to our shareholders for your continued support, and we'll now open up for Q&A. Thank you very much.
Thank you. If you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you're on a speakerphone, please pick up the handset to ask your question. The first question today comes from Philip Pepe with Shaw and Partners. Please go ahead.
Hi, guys. Congratulations on a good result, beating prospectus, and for taking the questions. Certainly, not many, not all companies are beating guidance in this market, so well done. A couple of questions, if I may. On the new income protection policies, I guess, when does the sticker shock wear off from the price rises? What have we seen since the March data, or particularly in the last two months, you mentioned some green shoots. Have we seen volumes coming back or is the sticker shock still the play through in that space?
Thanks, Philip. Good. Yeah, good questions. I might just put the IDII into perspective just to remind people that APRA required all insurers to launch new income protection or IDII products on 1 October last year in response to industry losses that had been made by income protection claims being higher than premiums.
That didn't impact NobleOak, but you know, being an insurer and APRA regulated, we had to follow you know, the same process, and we had to launch products as well. The products launched in 1 October were higher priced, lower featured, as you referred to, Philip. What happened was there was an acceleration in sales of the old product prior to 1 October as people sort of got in at you know, on these lower priced products.
Post-1 October, of course, there was a significant drop in sales 'cause there was a new, more expensive, lower-featured product portfolio that everyone had issued. It was new to everyone. No one really knew what to expect. No one really knew how long that reduction in sales would go for.
It was quite significant. We've quoted around 30%, and that's from other industry data that we've seen that retail sales reduced. We are now seeing a recovery already, which actually isn't all that far from 1 October, and we're really seeing it through inquiries and applications. It'll start to filter into sales next year.
Some of the industry data does show that there is some recovery, you know, taking place, which is good to know. I think importantly as well, at the APRA statistics showed that in-force premiums across the industry grew by 5% in the last twelve months to March 2022. Even though sales were down, the overall in-force premium has increased, showing that it's been more than offset by lapse rates.
Does that?
Yes.
Yeah, absolutely. Perhaps some price rises as well by the looks of it.
Yeah.
No, no, thank you for that. Just the focus, thinking a second one, investment income positive this year compared to negative last year, which is a great turnaround. Recent interest rate rises, can you quantify the potential benefit to the portfolio from those? Have you done anything different to the portfolio to capitalize on rising volumes?
Yeah. As NobleOak's business matures, we have also matured our investment strategy. We have moved into short duration fixed interest portfolios, which we've actually referred to in the past. As a result, we would expect to see some improved returns as the market interest rates rise. Keeping the duration of the portfolio short will also mitigate against the mark-to-market adjustments you might see in other portfolios.
Thanks, sir. Thank you. Well done again.
Thanks, Philip.
The next question comes from Nick McGarrigle with Barrenjoey. Please go ahead.
Good day, guys. Thanks. Just a question on conditions. You made the comment that things have remained tough, or subdued into FY 2023. By the sounds of it, I guess you've only got industry data to March. Can you comment on your experience in sort of July and August or even in the fourth quarter, when it comes to new sales in the direct book?
Yeah, hi, Nick. Thanks for that question. I mean, all we can comment is, yes, we are seeing an improvement in new business in both direct and the strategic partner channel, you know, across NobleOak. We're not providing any guidance, obviously, today, but we'll be able to provide a little bit more flavor probably at the AGM.
I suppose we remain really optimistic about the market because the need for insurance remains just as strong today as it did, you know, two or three years ago. We've got under-insurance, the population's older, debt is at a record high. We just think it's inevitable that it will recover. It was just a matter of when, and I suppose positively for us, we're actually starting to see that recovery now.
Yeah. Okay, when you say improved conditions, I assume you're referring to improved versus when the income protection changes came in in October, as opposed to necessarily growth on the prior year.
Yes. Improved since the October. Yeah.
Yep.
Yeah, that's correct.
Cool. Can you explain to us how the average direct consumer has such an awareness of those income protection changes? I would've thought that the average direct policyholder wouldn't be as sensitive to that, unlike the advised channel, where maybe they sign policies ahead of those changes and there's obviously a lag to then, you know, the pipeline filling back up again. Why was direct, in your view, so, you know, new sales not stronger in the second half?
Yeah. It's a good question, Nick. I mean, direct is not as impacted, there's no doubt about it, as the wider retail market. We've seen our direct portfolio certainly not impacted to the degree of the wider market. We do like activity 'cause a lot of our customers are switching and a lot of the competitive products for us are both direct products and retail products.
Market activity does help stimulate NobleOak activity as well. Because switching has been quite low across the industry, lapse rates have been a little, you know, lower than that does have some impact on our sales. You're certainly right to say it is less than the industry impact. As we build our pipeline, especially of partnerships, we just see more and more opportunity for the direct model, you know, going forward.
Maybe just on the strategic partner channel, it looks like expense ratio there was lower than expected. Obviously was a fair bit lower, look by the looks of it, in the second half. Can you talk through what's driving that better experience? 'Cause it feels like profitability there has been higher than anticipated.
Yeah. Thanks, Nick. I think you'll see that we describe our I guess the outcome of those disciplines we described earlier, as that strategic partner channel with in-force premium up 10%, we've continued to manage the expenses effectively, including the refinements to the commercial arrangements with our partners, which has seen the ratios benefit from economies of scale, I guess, Nick.
Yeah. Okay. That was just better than you'd anticipated in terms of that prospective forecast you were expecting, yeah, the 20 bit difference.
Yeah.
versus what you achieved. Yeah. Like I said, you did 2.1% admin expense ratio, but I think the implication for the second half was an even lower number than that. Presumably the run rate for 2023 is better.
The key for the equation when you look at the dollars, Nick, will be the revenue, obviously. Our revenue increases outstrip the cost increases, which therefore, to the extent that that continues, you'd expect to see the ratio outcomes to be the same.
Is there any initial feedback on NEOS bringing on a new insurer into their suite of products?
Yeah. I think we mentioned both at the IPO and the half year update that NEOS has a multi-insurer strategy, and they were about to bring on a new product, which was with MLC. It's called Encompass. That launched in around April this year. We did mention that it was unlikely to have a material impact on NEOS sales, and we found that is the case.
It doesn't appear to have materially impacted NEOS sales, pleasingly. NEOS remains on that multi-insurer strategy, so they will introduce other products, you know, with potentially with NobleOak and potentially with other insurers in the future. We support that strategy. If things are launched, they will be products that don't directly compete with the, you know, with the NEOS products. I suppose also, Nick, Budget Direct, as you know, does remain the key value driver for us. We still see a lot of opportunity with NEOS and PPS.
You know, thanks for clarifying that. That's helpful.
Yeah.
Just in terms of just to build on Phil's question around the investment returns. I mean, can you give us a sense of. We've obviously had significant increases in the cash rates, say, let's say for 100 basis point improvement in cash rates, assuming that holds in terms of the yields on the instruments that you're in, what's the approximate NPAT benefit? Just on a FY 22 pro forma basis, I think you might have disclosed something similar to that in the prospectus.
I think, Nick, when you see the balance sheet and you'll see our cash and investments on those balance sheets. We do have, I guess, a reasonable sum of operating cash, which will be at lower investment levels. But the vast majority of those assets will be in term deposits or in the fixed interest portfolios, which are actually shifting in line with, you know, relatively risk-free plus the rates you'd expect in the marketplace. I guess, looking at how interest rates are moving on the fixed interest portfolio and term deposits are a pretty good guide on what you might expect the majority of our cash and investments to move to.
Great. Thanks. I might just ask one more question, and then I'll let someone else have a go. I think if we look at the Direct book and we look at the partners book, there was some reasonable inflation or step growth in in force, which obviously helps the overall growth, even though sales maybe were below prospectus. But how should we think about that? I think the numbers in both books of business was around 12% increase year-on-year from, I guess, predetermined inflation or step policy. Is that? Am I reading that correctly?
Yeah, I think, sorry, Nick, are you asking how much does the book sort of automatically increase through-
Yeah.
Inflation and stepped premiums?
Yes. Yes.
Yeah.
'Cause people may be circumspect on new business growth.
Yeah.
You get a fairly high degree of growth from policy inflation, particularly at the time when your lapse rates are low. That obviously helps the in-force growth.
Yeah, it does. I mean, without giving precise numbers, generally, we've found that the increase in the premiums due to the two factors, being inflation growth and the step premium as you're increasing your age, does outweigh the lapse rates that we're experiencing. We do expect that to continue next year. As the book matures, of course our lapse rate will increase, but we think that it will remain under market and it will remain as a, you know, a competitive value driver for us.
Great. Thank you.
No problem. Thanks, Nick.
Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. The next question comes from Fred Woollard with Samuel Terry Asset Management. Please go ahead.
Good morning, gentlemen. Again, congratulations on what looks like a pretty good six months. The only slight curiosity, only thing I would ask about was looking at the operating segment review for the strategic partners division.
It appears that new business sales annualized premiums actually fell about 50% from AUD 34-odd million in the first half and AUD 31 million the previous corresponding period to AUD 16 million. It's basically cutting it in half, which is more than the 30% industry fall that you referred to in your speech. Interested to hear more color on that strategic partners new business sales.
Yeah. Thanks, Fred, for the question and thanks for your continued support. I think that the key, the simplest response to that, Fred, is that as we have sort of flagged, it's flagged that in the period leading up to 1 October, which in the first half saw a significant, I guess, a rush to market for a number of players to see them get their products that were higher featured, lower prices prior to the change. We saw the first half really benefit from that high sales experience.
The second half, industry-wide impacts have been 30% lower. From half one to half two, you do see a differing. It doesn't show a 30% drop. It's because essentially the first half also had artificial inflation in it around that pre-1 October sales activity. If that answers your question.
Yep. Great. Thank you.
Fred, thanks for the question. Just confirming too that both channels are continuing to increase our market share. Even in this, you know, we're seeing subdued trading conditions, our market share has been significantly higher than in force in both channels, and we do expect that to continue as things recover.
There are no further questions at this time. I will now turn the call back over to Anthony Brown for any closing remarks.
Thank you. Well, thank you all for the questions, and thanks for your continued support. We hope you're as pleased as we are with the results. The team's really looking forward to another strong year, and we remain excited about our business in the future. Look forward to speaking to some of you in the coming weeks. Thank you very much, and have a great day. Thank you all.