This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below
Disproving certain preconceptions of $NOL
Before I start out, there are certain pre-conceptions about $NOL people will probably have:
$NOL is a subscale Australia focussed life insurer and likely cannot compete with the big guys
At a glance it trades on a high P/E, so it is massively overvalued (will explain later)
Life Insurance is a low-growth market and so by extension, $NOL is an ordinary investment
A reminder of Australian Life Insurance landscape
Since 2015, all Aus banks have sold their Life Insurance operations to offshore players following the Hayne inquiry, with some big examples below
October 2016: Zurich Australia acquired Macquarie Life
October 2016: Nippon Life Insurance Company acquired 80% of MLC Life
February 2019: TAL Dai-ichi Life Australia acquired Suncorp’s life business;
June 2019: Zurich acquired OnePath Life (ANZ)
July 2020: Resolution Life acquired AMP Life;
April 2021: AIA acquired Comminsure Life, which CBA owned
These divestments were not a shock because of the rules around the Hayne enquiry and the lukewarm growth rate in intermediated life insurance market in Australia vs. the importance of banking to the Big 4.
Whilst this regulatory change had justification; the net result is actually that Australians are 'under-insured' despite the demographic of an aging population and high leverage.
What I like about NobleOak
Individual insurer: Whilst there are insurers which offer companies/super bundled insurance; the Individual Life market (where $NOL plays in) requires lower capital adequacy; hence why $NOL can provide insurance with $140m mkt cap
Mgmt are trying to slow broker/white label margin errosion: Management are chiefly focused on the "direct" strategy even if all the recent growth has been from brokers. As such, there is scope for margin expansion and importantly growth in ROE (c.10%)
Note - these should be divided into two types: a) strategic partners (e.g. brokers, who sell & customise their policies) and b) white label partners (e.g. selling a generic product with "Budget Direct" or "RACQ" badge on it). We prefer the latter
Reinsures appropriately: Nobleoak rightly has a strategy of ensuring with a longstanding relationship with 3x re-insurers, with Hannover RE being the main provider
Scope for more premium growth > lapse growth: As set out in the $NOL prospectus, they have one of the lowest-cost offering, this is before APRA has regulated the terms of some of their products via IDII.
Pleasingly heir Direct Lapse rate is still <10%; well below the industry norm, despite the industry wide regulatory change of IDII
Brand value exceeds size: $NOL have won a silly number of awards - https://mozo.com.au/best/best-life-insurance & this is despite them only being c.2% of the total market
Mkt share play, no overseas expansion required: There will unlikely be new entrants to the Life Insurance market in Aus because it is challenging to meet APRA regulatory requirements etc. I think the play for $NOL is simply to grow market share
True earnings multiple is c.15x: As set out below; the true earnings multiple is c.15x ($140m/$9.4m)
New products: The business has recently rolled out a Flexi product to accompany lending which they are rolling out via Heritage Bank
What I do not like about $NOL
Growth phase has only occurred recently: NobleOak has been around >100 years the business as we know it has only been growing since c.2011 (since Hannover RE commenced with them) so it is tough to know true run-rate earnings
This is partially allayed by the fact their prospectus assumptions were fairly conservative and as such they have exceeded these to date
Strategic Partners arent bound to $NOL: NEOS is by far NobleOak’s fastest-growing Strategic Partner and accounts for the vast majority of the $163m of in-force premium at Dec-21, however, the real concern is that they have partnered with MLC which could hurt FY23 NPAT by up to 5%
Illiquid stock: I consider this a benefit, however, the daily trade volume is very thin
Immature investments business: $NOL essentially just deploys excess cash into short-term money markets so this is a far way off from being "free float" play
Genus M&A is tough to assess: It is highly likely that $NOL will buy Life books in run-off. Whilst this is accretive from an earnings perspective; it is hard to know the nuances of the Genus investments because the policies have not been through the $NOL process
High-level valuation conclusions:
In this instance I won't share my full DCF, however, to demonstrate what I have assumed in my valuation below is some inputs:
Revenue - $50m in '23 and $60m in '24 (i.e. MLC steal some NEOS flows & industry will grow slower due to regulation)
Insurance Margin - c.22%
NPAT margin - 9% Direct/2% Strategic
Earnings will grow c.15% in FY23 driven by the Direct platform earning >4x margin
With 1.3x NTA multiple & <15x NPAT multiple (below 20x industry norm) I am comfortably buying into $NOL at a market capitalisation of $140m; with a target to load up predominantly closer to NTA where the opportunity arises.
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