Protector Forsikring ASA

OSE:PROT

Earnings Call Transcript 2021-Q2

[Henrik Høye, executive]

Good morning, at least, in Europe, to Protector's Quarter 2 Result Presentation. It is my first result presentation and I am fortunate enough that the team has delivered strong results for me the first time.

So to get to the numbers. Let's start at the highlights. In the quarter, our combined ratio is strong, 83.9%, I'll get back to the composition of that. The growth is 22% in local currency and 11% in Norwegian kroner. So the Norwegian kroner has strengthened compared to the other currencies in the quarter. Our investment result is at 1%, so a good quarter. And all of that has increased our capital but our capital requirement has also decreased. So the capital solvency ratio is at 235%. That has been the basis for a decision taken by the Board yesterday of distribution of NOK 1.67 per share as a dividend.

And other highlights we have are, one, on the quality side, a setback in a broker satisfaction survey that we conducted in May 2021, and I'll get back to that later. And we still continue with our profitability measures. There are -- despite a very strong result on the totality, segments, products that have a need for price increases still.

And then if I start with the claims side, the 83.9% compared to last year or the 76.3% claims ratio compared to last year's 81.9% has several elements to it. If we neutralize large losses of 3.9% in quarter 2 2021, and 5.7% in last year's quarter 2 and then neutralize the runoff effect, the difference is slightly above 7 percentage points. So you could argue that the underlying reality is 7 percentage points better in quarter 2 2021 than in 2020.

COVID effect is still present. Our estimation is mainly based on motor. There are some losses on the property, business interruption side in the U.K. But on the motor side, it is a reduction of frequency. 1.4 percentage points in the quarter is our estimates.

Other than that, the claims ratio in the quarter is composed of an extremely strong result in Sweden. The reality is not as good. There are runoff gains on property and motor mainly. And in the U.K., the claims ratio is composed of an okay running ratio and some run-off losses. So slightly better underlying. But as we have said many quarters, there is volatility per country on the claims ratio side and in particular, in the U.K., where you have a large loss element that is big. So we've had 2 large losses in U.K., which is not a lot in the quarter, but several medium-sized losses then.

I've commented the large loss side and runoff. So I won't spend time on that one. You can read it afterwards. When it comes to the growth, it comes from Sweden and U.K. only. U.K. has a big renewal date, 1st of April, and we won less volume at 1st of April, we've communicated that previously as well than what we expected. But there is still -- it is still a big quarter. It is more of a performance from Sweden to grow by NOK 40 million in this quarter.

And the other component of the growth other than new sales is on the renewal side. We have a churn in the quarter of 10%, meaning we lose 10% of the volume. Approximately half of that is soon to be profitable. So there are some clients, we would like to keep that leave us, but 10% is a strong number. And the price increases here have to do with all countries. Previously, we communicated Nordic price increases. This is about the Nordics and the U.K., so the whole company. And we are achieving price increases in the U.K. market, slightly below this average figure. So the Nordics are then slightly above the figure of 9.2%.

As you then understand, we are still behind guiding, but we don't change it. We've had a strong start to quarter 3. And if we go to the cost development on the gross side, you should expect that to increase going forward due to commissions in Sweden and U.K. where the growth comes from. But cost the real way, excluding commissions and including claims handling costs, is down in quarter 2. There is some volatility due to a long-term bonus plan that some people in the company have and that is linked to the share price. So if the share price increases today, we have increased costs. So there is some volatility there. But we have addressed the cost situation. It costs money to clean up the portfolio. We have addressed that situation. And the job we have, the ambition we have is to balance cost reduction or better processes with ensuring quality, both out toward -- towards the market and internally.

I've mentioned the differences between the countries on the claims side and the volume side. So I won't spend any time going through this slide, but these are the accumulated figures results per country. So you can read that following the presentation. And those results compile to the fact that we are ahead of guiding on profitability. We are behind on growth, which I mentioned. And just a small comment, the return on equity row here is not annualized, obviously. So you'll have to try to calculate what that number could be yourself.

So then to our challenge this quarter. We have presented a #1 position as feedback from the brokers in the Nordics for many years in a row. This is our own internal survey, but it has corresponded well with broker associations surveys and also the broker's own surveys. In May, we had our Nordic surveys, and we have received poor feedback in the Nordic countries. I think we expected that we would have a slightly worse feedback than we've had previously. But it was a bit of a surprise that it was this bad. But then we have to do something about it. And it could be easy to just explain this type of feedback by high price increases, tough renewals, tightened terms which is what we have been doing for some time, but that's too simple. So when we start speaking with the brokers and looking behind the figures, we see that we have a job to do on the claims handling side. We need our claims handlers to be more out with the brokers. We see that we have the same issue on the service side in Sweden. And that's not the case in Norway. We've got good feedback on the service side, but on the claims handling, it is -- we have a job to do.

The point about saying this is that we speak with the brokers, they are our only distribution channel, our only friends. And we are in the process now of getting feedback for what we can do better, prioritizing those actions and then delivering on it, because the target is obviously that we get back in the #1 position.

So investments. It is coincidentally a normal quarter on the investment side, 1% return, which is good absolutely or in absolute terms, relatively probably slightly below. Important point here is that our bond portfolio is yielding 1.8% compared to 2% last quarter, at the end of last quarter. And we have sold the largest holding we had during the quarter, which has reduced our equity share. And then I won't spend time going through the profit and loss statement. You can read that later.

On the solvency, on the balance sheet, the solvency capital ratio, I mentioned the reasons for why that increases to 235% in the beginning. And here you can see the composition of that. This is our capital allocation principles or guide, and that is relevant to how we have done an evaluation this quarter. But remember that a quarter is short time. And despite very strong results now -- it -- there is volatility. And you've now understood why the solvency capital ratio has increased. It also has to do with a reduction on the equity side. But the Board has decided to distribute NOK 1.67 per share as a special dividend this quarter, and we will continue to do those assessments every quarter. But we have to do a total assessment of the capital situation. And remember that we have time to allocate our capital.

And then at the end, I am pleased to announce that Hans Didring, previously country manager in Sweden, started in the company in 2011, takes on the role as Deputy CEO, not only as a backup, but as Deputy CEO; and Fredrik Landelius is #2 for a long time, steps up as country manager in Sweden. Other than that, the management group is the same. And we are aware that this management group is comprised of only men, and we are working on changing that and expanding that group further as we speak.

And then we are at the summary and the numbers speak for themselves. So I think that before we wish everyone a good summer, are there any questions, Amund?

[Amund Skoglund, executive]

I have some questions. You have a combined ratio 87.4% for the first half year and you guide on 90% to 92%. And you have previously said that Q1 is the worst quarter. Why don't you change guiding?

[Henrik Høye, executive]

That is due to -- there is still seasonality. Q3 is our normally the best quarter. Q4 is similar to Q1. But we've had a few large losses as you have seen. So normalizing for large losses will increase that combined ratio we've delivered so far. The other point is that there is extraordinary claims inflation due to COVID and that could increase the claims ratio going forward.

[Amund Skoglund, executive]

And approximately the same goes for the volume. Why don't you change volume guiding if you are behind and 70% of the volume is already in this year?

[Henrik Høye, executive]

And there is a safety margin on the profitability side, and that there is no safety margin on the growth. But we've had a good start, strong start to quarter 3. U.K. has a distributed seasonality with a lot of volume coming in, in the third and fourth quarter. So there are still lots of opportunities to grow in -- especially in the U.K.

[Amund Skoglund, executive]

One last question as of now. We see that material prices on steel and wood are increasing a lot. How do you counter that?

[Henrik Høye, executive]

We've also -- we haven't seen it in our own portfolio, but we understand that, that is happening. There is a lag in our statistics. But we have implemented increased costs, both on the property side and on the motor side in our models. But it's important to understand where that applies and where it doesn't applies. So we have implemented that and as I said, that's also 1 of the reasons why the profitability could be worse in the second half year.

[Amund Skoglund, executive]

Yes. One more question. Your solvency capital ratio is sky high at the moment. Why don't you pay any larger special dividend or buyback shares? What are you supposed to do with all the excess capital?

[Henrik Høye, executive]

As I'd mentioned in on the dividend slide, this is a longer-term evaluation we need to do. And even though we have quarterly assessment, we can't react on all elements of a quarterly result. So this is -- this will happen over time. And we believe that we also have other options to deploy our capital going forward.

[Amund Skoglund, executive]

Thank you. There was one more question now. Yes. They're taking in because of a delay, but it's more or less the same as you have answered before. So if you have more questions, please send them here, and I will answer them by e-mail or send me an e-mail to [e-mail] protector. And then we will answer them there.

[Henrik Høye, executive]

Thank you, Amund. And then I think it's just left for me to wish you all a great summer. I will have a hopefully, low-risk, high-reward summer in Norway. We're not traveling, even though I have an Italian wife. So we will stay here and go to the zoo in Kristiansand. So that's -- those are my plans, and I will be -- have holiday for 4 weeks. Have a great summer.