Protector Forsikring ASA

OSE:PROT

Earnings Call Transcript 2022-Q3

[Henrik Høye, executive]

Good morning, and welcome to the Q3 2022 presentation of Protector's results. I'm Henrik, the captain of the Protector team. And what you see now is just formalities when it comes to our responsibility. So we're basically not responsible for our mistakes. And please read that before you make your decisions based on what you see and what I say.

And then we go to Protector. And as always, we start with the culture of the company. And this morning, as always, we have talked with the team, with the people in Protector and the focus this morning was the values. And in the values, a small detail where we say that we will be credible, we will be open or innovative, we will be bold, but we are committed. It's a small detail in how we look at our values, but one that hopefully creates a bit more energy around understanding what our values mean in our everyday life, and that gives some more life to the team element of our culture. So it's not only about this slide, it's obviously about what we do every day when it comes to culture and Protector is about culture.

To the results, which you most likely have seen since they were published last night. It is a very strong quarter with a combined ratio at 84.9%, get back to the composition of it, of course, a growth of 8% in Norwegian kroner, but more importantly, the local version at 12%, and I'll also get back to the underlying realities and the composition of the growth later on. And then an investment result that is influenced by a technicality this quarter where the way one of our holdings has been booked due to holding size of above 20%, so now we're below 20%, and that gives an effect of NOK 92 million positive on the investment results for the quarter.

The actual transaction happened after Q3, but we know about it, and it has happened. So it is included in the investment result, which then would have been NOK 92 million lower if we had done it the same way we've done the accounting for that holding, B3 Consulting for some quarters. But from there, we have a solvency capital ratio increasing to 222%. I will get back to some of the composition and the dividend later on, but it is mainly driven by a percentage point increase in the discount rate and the capital requirement then reducing by quite a lot. The rest is basically balancing each other out.

So if I go to the claims and the profitability side, we have a combined ratio of 84.9%. And the combination is that all countries contribute positively, excluding Finland, but Finland is small, it's a quarter, and year-to-date it is also strong in Finland. Coincidently, the large loss level is on a normal level. So we have what we expect of large losses, but that's obviously a coincidence, but it makes it easier to normalize our profitability on that element, the large loss element.

And then on the run-off side, we do have some runoff gains. We also had some run-off gains in Q3 2021. But we do not have any COVID effects on the claims results this quarter. We did in Q3 2021. So if we adjust for large losses, runoff and COVID, it is a very similar result in Q3 '22 compared to Q3 '21.

On the country side, Norway is very low on the loss ratio, but there are no large losses in Norway, so that is normalized slightly higher. Sweden has some large losses, but also some reserve gains and the normalized loss ratio is slightly higher than what you see here.

In Denmark, the loss ratio is slightly above due to some run-off losses on the workers' comp side. So, it is a workers' comp effect that the loss ratio in Denmark is high. And as you know, all the reserves on the workers comp portfolio are 70% reinsured, and it's only a 30% effect then on the net side, which explains the difference between the gross and net loss ratio. The good thing in Denmark is that on the growing largest part of the portfolio, we have very strong profitability, meaning motor and property. And I'll get back to also some details around the growth in Denmark, which are on the positive side comes to renewals also.

And then in the U.K., it is coincidentally a very normal quarter. So large losses at expected level, and again, a quarter with normal large losses in one country, that is a coincidence and not something you should expect going forward. But that is a very normalized level. So it is a strong underlying reality in all countries and that's also the expectation going forward, because when we get to the growth, I will speak a bit about what that growth comes from.

So when it comes to the product side of the claims results, it is also a fairly normal distribution between the products on the large loss side where property has the largest share. And then when it comes to run-off gains, it is related mostly to the longer-tailed products, Norway, other illness and general liability in several countries. And then the losses then on the Danish workers' comp portfolio, which we don't sell standalone at the moment. So we don't grow on the workers' comp in Denmark at the moment.

And as you know, volatility must be expected. We say this in several different occasions, both on a company level quarterly, but obviously then on a country level quarterly. But what you do see is that if we look at a 4-year period, and we could of course have chosen different periods, but Q3 '18 to now, there is a very stable reserve development. And what we aim to do is to have best estimate on our reserves at all times, but there will be fluctuations and volatility in the run-off situation also going forward on a quarterly level.

Then to the volume and the underlying realities of the volume, which are stronger than what you see here. It is a small volume quarter in the Nordics. So U.K. is what drives the growth in the quarter. However, the poor growth in the Scandinavian countries are driven by some large clients lapsing or exiting, not renewing. And that goes mainly for Sweden and Denmark, where we have a very low renewal rate due to those large losses of clients. The majority of those lines are considered unprofitable by us. So we have decided not to go down to the level of price that we need to go to in order to retain the clients. And part of the losses are also related to contractor agreements that have inceptions over the air, which makes it run-off in a negative way. So we have known about it for a long time, and it still continues to affect the renewal rates.

The good part of the Scandinavian growth is that we achieved price increases on the portfolio still, and we consider it to be adequate to account for the increased inflation and possibly slightly better than that. So on the profitable clients, on the rest of the portfolio, other than the large clients that have not been renewed, there is a good situation on the new sales or on the renewal side. And then we have very strong new sales on the Affinity segment in Sweden. So on new agreements with some brokers, we have a good conversion rate of the broker's portfolios in the quarter and strong growth, which we expect to continue going forward. It's a product we know. We know the brokers very well, and there is fairly low risk in that portfolio and a stable profitability. So that's Scandinavia.

In the U.K., the renewal rate is very strong and actually slightly stronger than what you see here due to moving of an inception date of a client. But the good thing is that we have price increases throughout the portfolio at a lower level than we've had previously due to higher competition. So we need to protect our profitable clients. But we also managed to achieve good price increases on unprofitable clients. And some of that renewal rate is driven by a very large housing association in the U.K., which has doubled price and increased deductible levels, which is just an example of what is possible to achieve in the U.K. market.

There is also some new sales and some more momentum in the commercial side of the U.K. business, and mostly on property, then motor and then less on liability, but there is some momentum in the commercial side. And we keep on having a high hit ratio on public sector and housing association business in the U.K.

So with that, go over to the summary of the countries, and I talked about the growth and the loss ratio. So what's left to comment on is the cost ratio, and what you see is that the increase in the cost ratio compared to a slight increase, the cost ratio compared to Q3 2021 is due to the 2 largest countries in terms of earned premium, U.K. and Sweden, where there are commissions from brokers. So in that figure, you see on the screen, you have commissions included. And when the proportion of volume from the countries where we have commission increases, then that cost ratio increases, and that's where it mainly comes from. Other than that, the continued growth in the company supports a downward sloping cost ratio or upward sloping efficiency in the company, and you should continue to see the effects of scale in our cost ratio going forward. But at the same time, we are focused on quality. So we will not want a steep reduction in costs, but a gradual increase in efficiency.

So with that, we will continue with the investment side where there is a lot of activity in the quarter and the biggest one being on the interest side or on the bond portfolio. So the total result, I mentioned the accounting element of the biggest holding, B3 Consulting. So I won't go into detail in that. But compared to benchmarks, our equity portfolio is performing well in the quarter, but a quarter is short, and year-to-date is short. So we look at the longer picture when it comes to investments. And this is a good situation also because we obviously see a future expectation increasing as we are not getting the return year-to-date. What we don't know is how the market around us and the world will develop, and I don't think we will spend a lot of time trying to figure out what will happen around us. But the expectations on our holdings, on our companies is very high and higher than they've been for a long time.

If I go to the biggest element of the investment performance in the quarter, it is obviously the yield in the bond portfolio, increasing significantly to 5.5%, which is one of the biggest increases we've seen in that portfolio. And the good thing is that our view on the risk in the portfolio is very much the same. Of course, the cost of risk is increasing as some of the companies are more distressed. But the average quality of the portfolio is viewed very similar to what we have had on average historically.

And then when the duration of the bond portfolio increases and the interest rate keeps on increasing, then there will be a loss in the profit and loss. So that is a consequence in the profit and loss. But then on the capital side, the discount rate has changed a percentage point, which decreases the requirement on capital on the other side. So there is a balance there. And other than that, we will get back to the composition of the increase in yield, which is mainly driven by an increase in the interest rate, but obviously also of the spread, and the 3.1% on the interest rate, 2.4% on the spread. So -- and on this slide, we also have the comment that I made on the last slide with a very similar composition in our bond portfolio on the quality and risk side.

And then the duration of our bond portfolio is increasing, and it is increasing due to what Dag Marius talked about in the Q2 presentation that we assess the risk of an interest rate falling when it is at 0 as fairly small. And then we don't need to increase the duration of our bond portfolio even though the insurance portfolio has a longer duration. But when you increase the interest rate, there is a bigger probability that it can fall. So then we steer that by looking at the risk we take and the capital we need to hold, and that is the reason for the increased duration in the portfolio.

So if I go from there to the profit and loss statement. It contains what you have heard previously and seen previously, so nothing special there. I have mentioned that the biggest change in this -- on the solvency side is the capital requirement and a change in the discount rate. So that has a big effect reducing the requirement and the rest is more or less balanced out. And yes, the composition is also something I have mentioned, but we are still seeing that due to the economic environment and the world around us, our assessment has not changed compared to Q2, that there is more risk, there is more opportunity. So even though the solvency capital ratio is at a very high level, 222%, we see no big changes from Q2. And the Board of Directors have decided then to not pay dividend in this quarter. But I want to remind you of the fact that we have a stable, good insurance portfolio year-to-date, and the yield on the bond portfolio is increasing, and we do make quarterly assessments of the dividends in Protector and the solvency in general.

So with that, we can summarize by just repeating combined ratio of 84.9% in the quarter, a growth that is 12% in local currencies, but the underlying reality is being slightly better. And then in investment performance that is mainly driven by the big increase in yield on the largest part of our investment portfolio, the bonds, and all of those results in an earnings per share at NOK 1 without the accounting element of the B3 Consulting and NOK 2.1 including it, and then a solvency capital ratio of 222%.

And I did forget, as I have done many times, to say that you should ask questions during the presentation to our [e-mail] e-mail, but that has also been mentioned in the invitation and on our website.

[Henrik Høye, executive]

So we are at the question-and-answer section. So do we have any questions and answers or questions, so that I can give some answers, Amund?

[Amund Skoglund, executive]

Why are there no run-off losses giving high inflation? Should not that hit larger than NOK 10 billion in reserves significantly?

[Henrik Høye, executive]

It's a good question. And our reserves are composed of case reserves, so what the claims handlers set for the single claims. On the short-tail products, claims inflation is accounted for. So that's a current assessment of what inflation is. It will cost X today and did cost Y previously, and the difference is inflation. So that is accounted for on the short-tailed products. On the longer tail products, there is the actuarial side of it where we look at inflation and where that has an effect on top of what we can do on the case reserve side.

So the answer to the question is that we have both seen that inflation or increased inflation will come, so premiums have increased and that is accounted for in the premiums. But we obviously also see that an account for it on the claims reserving side, both parts of it.

[Amund Skoglund, executive]

Given your solvency situation, what are your capital allocation priorities?

[Henrik Høye, executive]

Number one priority is always insurance. And in turbulent times, there could be more opportunities on the insurance side, but I don't think there will be any situations in the near future where we can deploy a lot more capital in the insurance business, but that is #1 priority.

Number 2 priority is on the investment side. And there, we don't really see anything that where we can really deploy a lot of capital at the moment, but there could be opportunities in the near future or the medium future, such as what I mentioned another time, the real estate market, but we are not there yet. And then we have to look at opportunities to see if there is -- we've had organic growth the whole time, and we will most likely not go in the strategic acquisition track, but there could be opportunities in the market in turbulent times that could be attractive. So -- and these are not elements that we have anything specific on, but they are examples of what I mean by opportunities in turbulent times. But I think that at the moment, capital allocation is also to be prepared for the unknown risks, the ones we don't see. So we see some risks that we consider to be increased due to the macroeconomic environment. But we also understand that there could be more of them that we don't know about and that will arise in times like this.

[Amund Skoglund, executive]

Do you target a duration closer to the insurance portfolio given the high running yield?

[Henrik Høye, executive]

Yes. So I mentioned this previously, but we -- as the interest rate is increasing, we need to hold more capital in order to account for a potential decrease in interest rates. And when that happens, we will adjust compared to the insurance portfolio and then get closer to what the duration in the insurance portfolio is. But we have no clear plan on going towards 100% matching of that, but it's about the risk.

[Amund Skoglund, executive]

Thank you, Henrik. That was all.

[Henrik Høye, executive]

Okay. Thank you very much for listening in and asking questions, and have a good day.