Protector Forsikring ASA

OSE:PROT

Earnings Call Analysis

Protector Reports Q3 2023 Results and Growth Plans

In Q3 2023, Protector delivered a combined ratio of 91.6% slightly affected by weather-induced large losses. Growth was strong, mainly in the UK driven by public sector and property, contributing to a high renewal rate of 107% indicating average price increases close to 15%. There are growth opportunities in Scandinavia and the UK despite expected future competition. Investments reflected a poor equity performance but healthier bond results. There is optimism for upcoming efficiency improvements despite a projected stable cost ratio of around 6.5% in Nordics and 7.2% in the UK. No dividends were distributed this quarter in light of potential growth and investment opportunities, as the company evaluates the market for suitable capital allocation.

A Look at Protector's Ambitious Three-Year Plan and Q3 2023 Results

At the heart of Protector's growth strategy lies a vision to redefine itself as a challenger within the next three years, leveraging the strengths of its people, brokers, efficient processes, and quality margins. Despite a respectable combined ratio of 91.6% for Q3, the quarter's profitability seems tarnished by taxes and underlying realities suggest a better performance than reported. Growth across the U.K. and Nordic regions drives performance, with the U.K. contributing significantly amid a very strong, albeit unsustainable, public sector performance.

Claims Update: A Mixed Performance with Tactical Improvements

The third quarter saw a varied claims outcome, with Norway experiencing higher gross loss ratios due to abnormal large losses, primarily from weather events like 'Hans' and fires in the public sector. Nevertheless, Sweden and Denmark showed marked improvements over the first half, and while U.K. losses appear elevated due to large losses, the actual underlying results for the U.K. were positive when adjusting for these factors. Despite fluctuations in large loss and runoff numbers, the underlying reality remained stable and similar to Q3 2022, with an expectation for continued normalization over time.

Growth Trajectory: Momentum in the Nordics and Cleanups in Sweden

The company is witnessing positive growth momentum, particularly in the public sector in Denmark and motor facilities in Sweden, where portfolio cleanups are underway. However, this cleanup is negatively affecting growth figures by SEK 30 million in the quarter. In the U.K., public sector growth continues to be strong, driven mainly by housing associations and leasehold but is expected to normalize with the emergence of competitors, and thus growth in Q4 for the U.K. is forecasted to be lower than previous quarters.

Cost Management and Efficiency Gains

On the cost side, there appears to be a slight increase both for the quarter and year-to-date, attributed to higher commission levels from areas of growth. Adjusting for this, there's a 0.7% improvement in quarter-over-quarter costs and a 0.5 percentage point improvement year-to-date. Despite strong growth, the company emphasizes the importance of efficiency improvements, particularly in areas such as the public sector and motor, which is expected to contribute to positive developments in profitability over the coming years.

Investments: Navigating Equity Losses and Bond Strength

Protector faced challenges with equity investments, leading to notable losses. However, expectations for the shares' future performance have improved, despite a slight deterioration in underlying development. The bond portfolio, on the other hand, saw a strong performance in the quarter despite a slightly reduced yield due to risk reduction measures, including shortening credit duration and shrinking the high-yield bond portfolio.

Solid Growth Aided by Market Conditions and Investment Strategy

Steered by a pragmatic approach to interest rate steering and the priority to sustain solvency without taking undue risk, growth for the quarter has benefited modestly from investment income. The company is leveraging positive market conditions and broker relationships in Scandinavia and has identified potential growth opportunities across its substantial market share, despite expecting competition to eventually normalize the market. Strategic investment decisions are being made cautiously to maintain return versus risk balance without specific call-outs for this quarter.

Region-Specific Strategies for Scandinavia and the United Kingdom

The company is experiencing hardening conditions in Scandinavia and aims to capitalize on strengthening broker market standing and low churn rates. Price increases in Norway on the motor portfolio are set to be significant, starting January 2024. Sweden's motor performance has improved due to portfolio cleanup and operational measures and is expected to continue improving due to proactive pricing actions and normalizing large loss occurrences.

Enhanced Profitability Projected through Pricing Strategies

Protector has managed to achieve an unusually high renewal rate of 107, which implies an average price increase close to 15%. This will impact both future volume development and enhance the company's profitability. The potential inflationary pressures are not expected to diminish the benefits of these price increases.

Efficiency Improvements on the Horizon

The company is focused on advancing efficiency improvements over a three-year period, with significant investments being made currently but tangible progress on cost improvements is not foreseen until after 2024. The commitment to improve the efficiency includes both claims handling and overall operational expenses, where Scandinavia, in particular, has room for further efficiency gains.

Earnings Call Transcript 2023-Q3

[Henrik Høye, executive]

Good morning to you in Oslo and also you watching on the live stream to the presentation of the quarter 3 2023 results for Protector. Now the picture is updated so I can't joke about that anymore, but I need to make this work.

This morning, we met all our employees, obviously not all employees physically but the Norwegian employees here in Oslo, and then live streamed to the business units and countries. And we discussed the challenger and the definition of the challenger in 3 years. So we've had a process where everyone has been involved in some way to give input to what we think the challenger will be in 3 years.

Obviously, it has to do with people. It has to do with our brokers. It has to do with processes, so efficiency improvements. It has to do with quality, that's on the margin improvement side. And it has to do with the investments. None of those are new, we've had them for many years. But it's about setting an ambition together with the team and its energy in defining the challenger in 3 years.

But then to quarter 3 results. So combined ratio of 91.6%, okay. And I'll get back to the underlying realities which are better, and then a very strong growth driven by the U.K. but also the Nordic or Scandinavian countries at least. The profit for the quarter looks lower than if you calculated the combined ratio here and added the investment result, but that is due to tax elements then.

So of other highlights that I will get back to. We've had a storm in Norway that affects the Norwegian profitability result, Hans. And we have also decided, due to big opportunities for growth and large growth previously on the insurance side but also a higher probability of good investment possibilities, going forward not to pay dividend this quarter despite the fact that we have a good dividend capacity.

So if I go to the claims update here. It is a mixed bag for the quarter with Norway being very poor at 101% gross loss ratio. That is due to more than normal large losses on the property side. One is the weather Hans, and we've also had a couple of fires in the public sector. Some -- so parts of the Hans effect comes from our share of the Natural Perils Pool, so that's NOK 56 million for the quarter. But we also have business interruption or loss of profit type of losses that are consequences of the weather that are in the Norwegian figures here, so some schools and leisure halls in the Norwegian public sector in particular.

And then Sweden and Denmark look a lot better than what they did for first half year and there is improvement there. But there's also an element that we need to remember. This is 1 quarter. It is volatile. And let's wait until we could say that profitability is back in Sweden and Denmark. But the motor side is definitely better in Sweden -- a lot better in Sweden than what it was for first half year. And also in Denmark, we also had very little large losses in those countries for the quarter.

In the U.K., we both have large loss -- runoff loss. So the runoff loss that we have on the company level is basically coming from the U.K., and it's related to large losses. And we also have large losses in the quarter. So U.K. is underlying better than it looks here then.

In total, we -- so in total, you can see that it looks similar on the quarter, '23 over '22. If you adjust for the large losses and runoff, you'll see that quarter 3 '23 looks better than quarter 3 '22. And the reality is that -- the underlying reality is more the same. So it's very similar. And that is due to a lot of smaller products especially in Norway being poorer than what it was in '22.

So if we look at the product side on the runoff and large losses, it's property-related large loss: Hans on one side, and then also in the U.K., property related. Whereas the runoff and those large losses is both a property loss and a liability loss. And as we always say, even though we end up at something that could be a normalized level, we have not yet calculated exactly what the normalized level is with new accounting standards and a change in the mix of the portfolio.

We will obviously do that for the full year, but 7% is not a bad estimate now either. So even though we are at 7.8%, slightly above that normalized level, there is volatility in these numbers, of course. And the runoff gains we have in the quarter, they're related to the Scandinavian countries. So all the Scandinavian countries have a small runoff gain, so runoff losses then made up by the U.K. loss.

Then to the growth. So first, just to comment on the Finnish numbers here. So it's workers' comp and a technical element there that makes that negative. It is not important. It's a small country and a small quarter.

But we have growth in Norway and Denmark. So even though it's a small quarter, we have a momentum in the growth there, especially in public sector for Denmark. And in Sweden, it's about motor facilities. So it's a motor growth that we see there. But we are also cleaning up the portfolio through 2 schemes that we've had. So that has a negative SEK 30 million effect in the quarter.

U.K. is still growing in quarter 3 a lot and mostly public sector growth, mostly housing associations and leasehold. Leasehold is single apartments in properties. So very little accumulation of large loss exposure on the leasehold portfolio, low deductibles, a lot of attritional losses, water -- escape of water claims. Housing is similar but also with some larger exposure. So there is some large loss exposure. In total, this growth is giving us basically an average large loss exposure compared to previously. So it's not changing the exposure in the total portfolio significantly. But we have more property, of course.

And when it comes to the market situation in the U.K., which we have seen through all of 2023, we obviously know what 1st of October is. And we still have strong growth, not at these levels but strong growth on 1st of October in the public sector. And the rest of the year is more motor business, which is a softer market. So there is more competition, more lower hit ratios for us there. So you should expect still growth in quarter 4 for U.K. but not at these levels.

Going forward, I would be -- or I think we are naive if we think that no one comes into this market and -- so unless we do something completely wrong and understand it completely wrong. But that's hard to see, especially on the attritional type of clients, escape of water claims which repeat itself year after year.

And I think we are naive to think that a market situation where we have hit ratios, like you saw 1st of April of above 60% in the housing and leasehold sector, will not continue for a long time. There will be competitors coming in. We hear some rumors. We haven't seen anything in action yet, but it should normalize the market situation in the U.K. public sector over time.

I can comment -- we've seen the other numbers, the growth numbers and the loss ratio numbers on the previous slides. But I can comment on the cost side, which looks stable or even a bit up both on the quarter and year-to-date level. But as I mentioned in the half year presentation, we grow where there are commissions -- we grow more where there are commissions, which is included in that number. And if you adjust for the commission level, then you have a 0.7% improvement on the quarter-over-quarter side and 0.5 percentage points improvement on the year-to-date.

And in a way, we should expect that with a very strong growth. So there's not a lot of efficiency improvements in that number. It's -- we're growing and we can take more volume per FTE. But over time now, you should expect to see efficiency improvements because we see potential in that the next 3 years. It's a strong cost level and especially where it matters the most, so public sector, attritional type of clients, motor. We have a very strong cost position in all countries, maybe except for Finland.

And I have a black screen. We're back to investments. And the quarter is, as you've seen, very poor on the equity side or a big loss there. That is something we've said several times that, that's a -- it's a short period of time, even year-to-date here. The more important element is that the underlying development of the companies which we comment on. Normally, we have said that, that has been good. Now we say okay.

So there is a slight deterioration in the underlying development, but still okay. And as you also have seen on the next slide, you see the future expected development of those shares is up 10 percentage points since last quarter, a lot of it because their value has decreased, of course.

But the bond portfolio is -- the yield, running yield is slightly reduced in spite of the reference rate increasing, and that is because of risk reduction then. So both the spread is coming in and we have a shorter credit duration than previously. Part of it is due to the high-yield bond portfolio, the fund portfolio that has decreased. But a strong result on bond side in the quarter.

Just want to comment on one thing here. We have previously mentioned that we do the interest rate steering or matching, and that's not a perfect matching. So there will be some mismatch elements to it. This quarter, that helps us slightly. So these 2, the net income from investments, net insurance finance income or expenses, if we were perfectly matched, they would have been lower or worse in this quarter.

However, we didn't say anything about that in quarter 1 and quarter 2, then it was the other way around. In total, year-to-date, it should have been a bit worse. So that's just a comment on this element. And it's not straightforward. We have a pragmatic approach to the interest rate steering. And the most important is that we don't take risk on the solvency side. That's the purpose of the steering.

On the balance sheet, we have -- so the equity is then only affected by the result. And the requirement is up on the insurance side due to high growth and down on the market risk due to the reduction of the equity portfolio and the reduction in the bond portfolio. So in total, we are at a similar level as previously, but adjusted for then the poor total result or the contribution from the results. Yes, we see that here. So the ratio between the insurance risk and the market risk is then slightly changed towards the insurance risk in the quarter due to the very high growth.

So we're back to the summary and open for questions.

[Henrik Høye, executive]

Thomas?

[Thomas Svendsen, analyst]

Yes. Just a comment on the tax slide this quarter...

[Henrik Høye, executive]

Yes. We can -- we have the lavalier. I think it's better to have. Is your question about the tax situation?

[Thomas Svendsen, analyst]

Yes. It's because of the loss on the equities.

[Vegard Toverud, analyst]

Vegard Toverud. The Board commented on the opportunities for growth and also, as I understood it, investment opportunities in the financial market. Is it possible without saying what the Board -- or explaining what the Board thinks, but is it possible to give some more detail or color to what you see both in terms of growth opportunities with then impacting this obviously and also investment opportunities.

[Henrik Høye, executive]

Yes. So now everyone has heard that question so I don't need to repeat it. On the insurance side, it's a combination of the situation we have in the U.K. So like I said, it's naive to think that new entrants or the market doesn't come back. But we are in a situation where we have access to 1/5 of that market every year. And if there is little competition, there will be a lot -- it's a big market. There will be a lot of volume. And that can continue for some time.

And in addition to that, we have hardening and hard markets in Scandinavia, and we're in the broker market where we have come back on top in most other countries in quality surveys and there is a positive growth environment. In addition to that, we have low churn, high renewal rates. So the -- so we have a high starting point with the addition of possibilities for new sales. On the investment side, it is more about the uncertainty in the market and that we are closer on certain classes and certain areas to where we think we can have the right return versus risk. So there is no -- nothing in particular or specifics that I want to comment on. Nothing we have done.

[Vegard Toverud, analyst]

Is it possible to say something about the time horizon for it? Because the first on the insurance side seems to be more on a yearly basis or that you can manage the capital over some quarters. Whereas if you see some opportunities in the market right now, it could be more of a quarterly basis, and therefore, also the decision to withhold quarterly dividend. Or am I taking too much conclusion out of this one decision?

[Henrik Høye, executive]

I think you're taking too much. So remember, we did the same last quarter 3. But -- so I think you're putting too much into it. This is -- this comes from evaluating lots of probabilities that are slightly higher, and then the total of that makes us think that -- and the Board think that now it's okay to utilize the flexibility of quarterly payouts and then see how that develops. Because if it continues to develop, then it's right to be there on that position.

[Thomas Svendsen, analyst]

It's Thomas. So in motor Sweden, what -- you talked about the improvement there. So what happened during Q3?

[Henrik Høye, executive]

Well, first of all, there is a -- we some of the very unprofitable parts of the portfolio, they're out. The consumer scheme that we had, parts of that is now out of the portfolio. That improves the profitability. We have had price increases along the way. This -- as you know, the first quarter was poor as well, and then you have time to get some higher price increases than originally planned through. And then there are some elements of -- which I have mentioned, luck or less large losses on the motor side in Sweden. So yes, so it's a mix of actions that have effect and some volatility. It's going in the right direction, even adjusted for the volatility.

[Thomas Svendsen, analyst]

And motor in Norway, what's the outlook there?

[Henrik Høye, executive]

It's obvious when -- on the motor side, when the results are so poor that it is possible to use those claims to increase prices significantly. So the price increases 1st of January 2024 will be significantly higher than what we thought they would be coming into '23. So there will be double-digit and higher than average price increases on the motor portfolio in Norway from 1st of January '24.

[Unknown Analyst]

[indiscernible], [ Invest ]. Could you flip back to the volume slide, please, Henrik? I have a couple of questions to the volume side. The first one is relative to Sweden. You are stating that you are taking out SEK 30 million in a quarter and so 3 more quarters to go. Should we read that as another SEK 90 million down? And is -- and are those evenly distributed between quarters? Or is it different? So size and distribution of -- what should we -- how should we understand the Swedish cleanup situation when it comes to volume?

[Henrik Høye, executive]

They're not exactly evenly distributed but it's not very far from. So the total size of this is about what you indicated.

[Unknown Analyst]

So then my second question, incredible and more interesting actually, that is related to a figure on the screen there, which is 107. So you have a renewal rate size 107, which I think Protector never ever, ever seen in history. And if I do a top of my head calculation on that and say that your clients' renewal rate is very good, let's say it's 92. That will end up to an average price increase around 15 in that area, which not only influences on the volume development going forward but on the profitability side. So how wrong am I when saying that 15 might be acceptably close to the true figure?

[Henrik Høye, executive]

You're not very wrong. So there's a -- it's a good price increase quarter, strong price increase quarter. But it's also a fairly small quarter in the Scandinavian countries. So just to -- so it will not have a lot of effect on quarter 4 profitability in Scandinavia but -- and the U.K. is where we get the highest price increases as well. So it's -- you need to have a very pessimistic view on inflation in order to not get a profitability improvement from the price increases in quarter 3. That's correct.

[Unknown Analyst]

I have one question on the combined ratio side. So you may flip to the combined ratio situation. It's not possible to see one of the most important points here on the cost side because then you had to go to the quarterly report and deep down on page something, 20 or whatever.

Then thanks a lot for updating us on commission level relative to cost internally in your own country. And we did the mathematics yesterday afternoon, and we can see that you have a cost ratio, exclusive of commissions year-to-date, sized 6.5. And what you see on the screen here is 10.8 down there. So there is a huge cost difference there, which is interesting. And thanks for getting these figures and the transparency you have on it. So it's incredibly interesting.

My question is if we look at the Nordics, you have a cost ratio close to 6, and it looks like it has flattened out in the Nordics. And in U.K., you have 7.2. And if you weigh those 2, you will get to 6.5. You talked about efficiency gains and the probability to improve. Does that count for Scandinavia as well? Or have you reached the bottom around 6? Obviously, you can't go lower than 7.2 in the U.K., I understand that, because you're dropping very rapidly in U.K. So where should we think efficiency improvements could end up in Scandinavia and in U.K.? And how fast do you think you can move on it?

[Henrik Høye, executive]

I think that there is one element that you could also add to that cost ratio which tells the true story, which is a number we've shown previously, and that includes the claims handling costs. So that's the number, 6.5 is excluding claims handling cost. That's in the claims ratio then here. But if I speak on those terms, the situation is fairly similar. It's slightly better improvement. So there is some improvements on the claims handling side also, obviously when we grow quickly. But there is still lots of potential for efficiency improvements in Scandinavia as well.

[Unknown Analyst]

And timing-wise?

[Henrik Høye, executive]

I think that it's -- I think the 3-year period -- over the 3-year period, there will be visible improvements on the efficiency. And in '24, not really a lot of visible improvements. That's more investing, which we are doing at the moment as well and then going forward, everything else equal then.

[Unknown Analyst]

Congratulations being the leader on cost and still improving.

[Henrik Høye, executive]

Thank you. Any more questions?

[Unknown Executive]

None from the web. So in the room, more questions?

[Henrik Høye, executive]

Thank you very much.

[Unknown Executive]

Thank you.