Protector Forsikring ASA

OSE:PROT

Earnings Call Transcript 2023-Q2

[Henrik Høye, executive]

Hello, and welcome to the walk-through of Protector's Quarter 2 results. First, I have to ask you to read the disclaimer that is on the screen and also to ask questions as early as possible so that we can answer them at the end of the walk-through. Always start with our culture and cultural focus. And we have, as always, this morning had a walk through with employees, focusing on as we did in Quarter 1 best-in-class decision-making and our tool performance support where we aim to have clear targets and results for all employees so that we can go through that in the teams and discuss the performance behind so that we can improve.

So steering and improving in a clear environment with clear facts is the ambition there. And then to the results for the quarter and the first half year, where on the profitable growth side, we have a combined ratio at 83.9%, which is built up of a mix of results. So I'll get back to that on the claims side and underlying higher than 83.9%. So I'll also get back to that. The growth is in many ways old news since we announced the first of April growth in the U.K. public sector in the Quarter 1 walk-through. But it is also a strong total of 56% in local currencies for Quarter 2 and 34% in local currencies for first half year.

On the investment side, the biggest change in the quarter is increase in the underlying interest rates, which affects in different ways. I'll also get back to that. But the -- with the new accounting standard, there is a small loss on the investment side -- investment return in the quarter. But obviously, we look in the longer term on investments and first half is a bit longer, not very long in that either, but it's very strong. So that's volatile.

On the solvency side, we have a strong solvency position and the buildup is a bit more insurance risk due to the high growth, slightly lower market risk, but in sum together with result -- technical result and the investment result, we end up at a very similar level after dividends in Quarter 1 and the Board has also proposed to pay NOK 2 after this quarter.

So with that, I will dive straight into the claims results which, as I mentioned, are a mix of results with U.K. being at a very strong level. That is driven by property, which is very, very strong. And obviously, with fewer large losses than what the normalized situation should be. So U.K. is worse underlying than what you see obviously here.

And if I comment on the gross and net of the reinsurance side of this, you have an opposite situation in Quarter 1 and Quarter 2, where in Quarter 1 reinsurance result was negative. There was a reinsurance losses that contributed negatively more than the reinsurance premium in Quarter 1. Whereas in Quarter 2, there is a positive contribution from the reinsurance losses. So a gain on large losses. And in sum, that is, together with reinsurance premium, around 0, slightly positive result. So we tend to speak about the normalization of the loss ratio through adjusting for large losses on a normalized level.

So for the company, we've had 4.7% in Quarter 2, and we say that 7% is a normalized level. And if you add the runoff gains that we have in the quarter at 2.9%, you get 5.2 percentage points that needs to be adjusted upwards. And in addition to that, you have the discounting effect from the new accounting standards and the risk adjustment, which in sum is at 4.2% as an effect in the quarter. So underlying around our long-term targets.

And then if we look a bit further into the product side of the runoff and large losses, large losses come from both Norway, Sweden and U.K. equally contributed in nominal values. And parts of it in Norway -- from Norway is from the -- our share of the natural perils pool from 2 different claims, total large losses at NOK 111 million.

And the biggest difference and the biggest adjustment should be done then on Denmark and U.K. in order to normalize. When it comes to the runoff gains they are -- they come from the motor and the property products at 2.9%. And in addition to that, there is a large loss gain of 2% from claims in 2022, so 4.9% excluding those large losses then. But as always, on a quarterly level, you should expect that there is volatility in both the runoff and the large loss side and especially when you come to country-by-country level.

Regarding the growth we have, as I also mentioned, been through the U.K. 1st April growth. And all countries, except for Finland, which is very small in the quarter and in total, have strong growth in the quarter. That is driven by a high renewal rate, especially in the U.K. and in total at 106%.

Obviously, parts of it is price adjustments and exposure adjustments to counter inflation. And we have seen that we most likely are behind on motor because motor is the poor product on the profitability side. So that's where we need to have harder actions going forward, which obviously started after Quarter 1, 2023.

And it will take some time before that has effect because we decide the renewal terms before 3 months or more before the inception date and then needs to incept and then we need to earn the premium at the higher levels before we see the effect, of course. But -- so parts of it is price increases and exposure increases in the quarter, which we will see the effect of later and parts is that clients grow naturally.

So a high renewal rate, low churn, especially in the U.K. again, and the highest price increases are also in the U.K. And to comment on the last element of profitable growth, which is the cost side. You we can look at the slide on the screen now, where you can see that the cost ratio increases in Quarter 2. And there is some volatility in cost ratio between quarters and especially by country, so repeating myself, for growth, claims ratio and the cost ratio.

But the drivers here are U.K., which is at a higher level, both because there is commissions in the U.K. and because we are approaching or still reducing the cost ratio due to reaching critical mass, which we are at on the total level in the U.K. So with U.K. having commissions and being higher than the company in total that -- and growing a lot, that increases the total cost ratio, and Sweden is a mix of schemes with higher commissions than the portfolio in total, so increase on the commission side, but also an increase in FTEs due to the strong growth we've had in slightly more resource-requiring areas.

And part of that will be countered when we have done some of the profitability actions on motor, which also includes exiting 2 of the most different schemes we have in Sweden due to poor profitability going forward.

So that's the cost ratio side. And then over to investments, where the steering of the interest rate from a capital perspective is affected by the change in the interest rate curve at 0.6 percentage points in the quarter, which gives us a loss on the swaps and the fixed income locked for the future. And then poor equity result or a negative equity result, but with good underlying performance of our holdings, which is the most important part there.

And for the interest or the yield in the portfolio, it increases basically by the increase in the ref rates even though those are not 1 to 1. And parts of it is then increase in the underlying rate and parts is the increased risk in the portfolio with a higher high-yield bond share and also the increase of duration, which partially comes from that.

So a half year, which is very strong and a quarter that is weak on the actual result side and the biggest news and the biggest difference in the quarter is on the interest rate side. The profit and losses for the second time now for us on a new format. So I have covered most of the elements that are in this, but please help us and ask questions so that we can make it more clear how the new accounting principles work in order to understand our business better.

Mentioned the balance sheet where we have the positive technical and negative investment result and then the proposed dividend and then market risk, if I go to the next one, reducing relatively due to the high insurance growth.

And then we're back to our culture and a creative new summary that is slightly different than the highlights but with the same figures, of course. So with that, Amund, do we have any questions?

[Amund Skoglund, executive]

Yes, we have. Can start with the volume growth in Norway and Sweden. They came down somewhat from a strong Q1. Could you say something about what's driving that development year-over-year?

[Henrik Høye, executive]

Yes. So it's a continued strong growth with new sales at a good level. But churn is in Sweden and Denmark, slightly higher than what it was in Q1. And -- but there is nothing special in the figures for Sweden and Norway growth in Quarter 2 and they are small quarters, small numbers.

[Amund Skoglund, executive]

One can see that wage growth is increasing across Europe. Do you see any meaningful downside risk to Protector's reserves if this develops -- this development continues, for example, in workers' compensation?

[Henrik Høye, executive]

In workers' compensation, we obviously monitor so the reserves, both the case reserves but also the actuarial reserves based on a view on what wage inflation will be. So that is accounted for, whether we are right in our estimations of what the wage inflation will be, that remains to be seen, but it is obviously accounted for.

[Amund Skoglund, executive]

Yes. You mentioned shortly that in Sweden, we have a couple of schemes that we will exit. Is the underlying or the underwriting performance in Sweden or the deterioration in that due to bad luck, would you say or is it underlying weakening or is it specific to those schemes?

[Henrik Høye, executive]

That's a good question, and that's what we ask ourselves now. So after the situation is fairly similar to Quarter 1 where motor is the poor one, but in Sweden, we also have weak property results on the commercial and affinity side.

And those schemes that we have done is a onetime decision to enter a segment at a level and we have not been able to fix the profitability and we don't see an opportunity to fix the profitability for those schemes. So there, it is -- has to do with a poor decision, but it was a conscious decision. We knew about the risks. And then when we realize that we -- the probability of fixing it was low, we exited.

The remaining part of the portfolio is more interesting to understand. We have a motor and that goes for not only Sweden, but all countries, underestimated inflation when we have set our indexes, but there is a lag on it, as I explained previously, when we send the renewal decisions and when we start earning.

So we continuously learn here. And then the question is whether we have underestimated or the COVID effect. So how big was the COVID effect. And now coming back to normal is the difference bigger than we thought it would be. We haven't concluded on that for all countries yet. And then it is about discipline in getting the rates up in our renewals and obviously also in the new sales, but that's easier to just implement.

So there is no real conclusion on that. But we are curious, and we also see the opportunity to fix the problem that we have on motor and property in Sweden.

[Amund Skoglund, executive]

Yes. In Denmark, could you say something about what explains the premium growth in Quarter 2?

[Henrik Høye, executive]

That is both. I don't have the details there, but it is both new sales and lower churn than what we have in Sweden and Norway. But yes.

[Amund Skoglund, executive]

There's more questions. But yes, even with the higher large losses, the profitability in U.K. is currently outstanding and it appears that this could be due to the current competitive environment. Should we expect the combined ratio of around 80% in this question over the next couple of years?

[Henrik Høye, executive]

No. The lower combined ratio due to the competitive environment is also countered by inflation. So there is inflation in the U.K. And obviously, there is an opportunity to have slightly better margins, but the uncertainty is also larger with a lot of new clients.

So should not expect that. And there will be volatility in the U.K. We've said that with a slightly higher duration on the total portfolio due to motor having higher duration and higher large loss shares and also property and liability. So there will be volatility. The normalized large loss share in the U.K. is higher than in Scandinavia.

[Amund Skoglund, executive]

Yes. Further on U.K., do you expect the same exceptional growth opportunities in U.K. going forward or are you seeing some changes in the market?

[Henrik Høye, executive]

We have not seen large changes in the market. There have not been a lot of market activity or opportunities that have been concluded since we had the 1st of April presentation. But we have -- we continue to win some and we've also lost some. So we haven't seen a big change in that, but it's not going -- becoming further hard.

[Amund Skoglund, executive]

Yes. On the growth in the Nordics and given that motor is poor this year, what do you think about the growth going forward in 2024 with regards to probably a mispriced and won too much motor?

[Henrik Høye, executive]

So we have seen low churn even though we have price increases, but we have possibly been slightly too soft on it. So you could see a bit higher churn on the motor product. And of course, there will be some churn from the exit of the 2 schemes. So it will affect the growth going forward that we need to improve the profitability on motor.

[Amund Skoglund, executive]

Yes. It seems that questions are about to stop. One last one before we round off. Do you have an update on the future expansion plans to new countries?

[Henrik Høye, executive]

No update other than -- so it's a similar update as we had last time where we are -- we continue the research phase and gathering facts for France. And the situation is improving regarding facts, but we still have a long way to go before we are comfortable and understand the market and can make a decision that that's what we want to do. We're learning as we go.

[Amund Skoglund, executive]

Yes. The rest of the questions have either been answered directly or indirectly through your presentation or will be answered written and keep the questions coming, and we will get back to you in writing or otherwise.

[Henrik Høye, executive]

Very good. Thank you for the questions, and thank you for your time. And then it's just from us in Protector to wish you all a great summer. We had only 10 days to put together the result this time. So we had to get some help from artificial intelligence to draw a picture of summer with some Protector colors. So from all 482 in Protector, I wish you a great summer, and thank you very much.