Protector Forsikring ASA

OSE:PROT

Earnings Call Analysis

Solid Performance Amidst Challenges

In the third quarter results, the company showcased a strong performance, highlighted by a combined ratio that remains solid despite some minor volatility. Specifically, the quarter delivered NOK 7.1 per share when factoring in investment returns, which reflects healthy profitability levels even as specific challenges emerged in certain regions. A key contributor to this stability is the disciplined approach to growth, with a focus on renewal rates that show promise in maintaining overall performance.

Growth Drivers: Renewal Rates and Expansion into France

The company noted a significant emphasis on renewal rates, achieving over 100% in all regions apart from the U.K. A notable setback was the loss of a major client in the U.K., which contributed to a modest 5% growth rate in that region. However, the North European markets, particularly the Nordics, continue to see strong underlying growth. The company is cautiously optimistic about entering the French market, with newly secured broker partnerships set to bolster its position in this new territory, although concrete figures on how this will impact future revenue growth remain unspecified.

Profitability Insights: Managing Claims and Large Losses

Profit margins have been impacted by a higher share of large losses in Denmark, with 40% attributed to specific property losses. The underlying profitability is viewed as satisfactory when normalizing for these exceptional items. The third quarter has been characterized by a runoff situation that resulted in gains primarily from Norway and Sweden, although the U.K. and Denmark faced some losses. Overall, despite occasional volatility, the company anticipates that losses can lead to learning opportunities to improve claim management strategies.

Cost Management & Efficiency Improvements

On the cost front, the company has indicated a reduction in total costs alongside growth, albeit with no significant efficiency gains to report in the U.K. operations. The focus has shifted towards enhancing service quality and improving claims handling rather than seeking immediate cost-cutting measures. However, there are more substantial efficiency improvements in the Nordics, where capacity building and smarter work practices are being prioritized.

Looking Forward: Cautious Optimism

As for future guidance, while there's recognition of market volatility, the expectation for upcoming price adjustments in 2025 is set to be moderate compared to the previous year's potential peaks of up to 10%. Instead, a more stable pricing model appears to be on the horizon. The results and statements from this quarter lend a cautiously optimistic outlook regarding profitability and expansions, particularly in France, where the company plans significant growth in staffing and services, projecting to have around 15-20 employees by 2025, depending on hiring success.

Conclusion: A Conscientious Investment Opportunity

In summary, this earnings call highlighted a company that is navigating through some challenges while maintaining a focus on solid growth, especially in profitable sectors. The positive indications from the renewal rates, combined with cautious planning for expansion into France, make it a conscientious investment opportunity. Investors can derive confidence from the management's focus on quality and ongoing assessment of market risks, which together enhance the company’s ability to adapt in a competitive environment.

Earnings Call Transcript 2024-Q3

[Henrik Høye, executive]

Hello, everyone, and thank you for joining the presentation of our quarter 3 results. Today, I'm going to remember to say that you should ask questions. You can ask questions during the presentation, also in the webcast. But if you have any questions during the presentation here for who are physically present, please just raise your hands, we'll do that as well.

I will start with saying a few words about our focus this morning, which I normally do. So we've met all the team, all the employees this morning. And we haven't talked about anything that is on the screen, but we've talked about what is around it, and that is what we call one team. So it's a well-used and not very valuable expression in itself. But the point is that the topics that we have talked about has been all employees requiring that they get something out of our leaders who are part of a leadership development program because when we have that program, we can have fun, and we can be inspired, but that's only a sixth of the company, our leaders, who are there.

So what happens in between these events and in between the actual leadership development program is the most important. In order to make that work, the rest of the organization needs to require something from the leaders. So we've talked about that. That's about being one team and making each other good and then we have talked about the broker satisfaction index. I'll get back to that here. We've talked about France, and we've talked about cost leadership and increasing all teams, all individuals capacity to do more work by doing it smarter, not just by working harder. So that's been the inspiration this morning and the focus that we have set for developing our culture further.

When it comes to the results, that team has delivered very solid results. So the most important number here is the combined ratio. As always, profitability comes first, and I'll get back to explaining why that number is slightly worse than what you see on the screen if you adjust it and normalize it like we normally do. But it is a strong number. And then also explain the composition of the growth figure here in a fairly small quarter, but there are some volatilities in that as well. If you include the investment return, the quarter delivers NOK 7.1 per share. So a strong result in total if you combine those numbers.

Of other highlights, I will get into the broker satisfaction index. We have quality leadership as one of our targets. And then we need to define it and measure it. So I'll get back to that. And then I haven't brought any facts and figures for France, but there is a small update here. And the reason why I haven't brought any facts and figures is because there is nothing to show really. But there is a big milestone and the big milestone is that we have written confirmation from a client or maybe more than one client. But that's not the point, it is that we have a confirmation. That's a milestone that makes us understand that the brokers and the large professional clients, they have done the due diligence on Protector and accepted Protector into the market.

That means that the probability of actually accessing that volume, that market has increased. So when we have that signing, that written confirmation, the probability has increased. When that volume comes and how much it will be, especially in the short term, that depends on whether the market allows profitable levels because that's what we will quote that. So that's another other highlight, which are not shown in the figures there, but is happening in the quarter.

And due to that, and I'll explain that a bit more further, we think that it is wise to hold more capital because that probability has increased our tapping into the French market in addition to other growth opportunities that we have.

So to go further into the profitability and the loss ratio. These figures are improved from quarter 3 last year. And quarter 3 last year was also affected by a storm. So there were some adjustments there and the underlying realities were slightly better. But if you adjust the total number here, and we've included the large losses and runoff there, you can see that quarter 3 '24 is slightly better on a company level than quarter 3 '23. So that's also our view that the underlying realities are slightly better than what it was last year.

And the number that really sticks out is Denmark, where we've had a high share of large losses. So the large loss share is 40% in Denmark. It's a couple of property losses there. And at the time, just like I've said before and we have to then hold me to it if it is wrong in the future if this continues, but at the time, we -- when a claim has happened, there is an opportunity to learn. Both why did that large claim happen and is there anything we can do in order to prevent that type of claim from happening again? And also, how can we ensure that that claim is as small as possible when we manage the claim and settle the claim.

So it is an opportunity to learn. We can't really do anything about it when it has happened. But those few claims are still, in my opinion, considered volatility, and it is a coincidence that most of those have happened in Denmark in '24. That's the nature of the business we're in. And we're not completely done, and there are mistakes that we have made and that we have corrected. But half of those large claims, they're in the municipality sector. They could have happened in all the other countries as well, those type of claims. That's why we have a large loss share, and that's what we expect.

Other than that, there is a runoff situation and that is positive. So we have some gains in the quarter and also year-to-date. They are mainly present in Norway and Sweden as gains, and then there are some losses in the U.K. and Denmark. And that means that the very strong numbers you see in Norway and Sweden, they need to be normalized upwards. But they are -- if you add the cost ratios, low cost ratios in those countries, you will see that even by normalizing, it is a good quarter. But I want to remind you that quarter 3, especially in Norway, has a seasonality effect, so it should be better. Part of the quarter is summer holiday, so there is not as much activity and the weather conditions are also better both in general terms and this year. So you can adjust upwards also for that.

In the U.K., the large loss share is lower than normalized but there is some losses. So you need to adjust it slightly upwards, but that gives basically the level that the underlying realities are at and is still very strong.

And in Denmark, obviously, normalizing there, you get to a profitable level, you get below [ 100 ] you normalize for those large losses, meaning that the underlying profitability of the property and motor products there is on a decent level or satisfactory level.

And all the large losses are property driven. So it's not only Denmark but also U.K., but the majority comes from Denmark. And yes, as I said, the runoff gains, they are mainly from Norway and Sweden.

Then to the growth. There are some figures there that stick out. The low growth in the U.K. at 5% is driven by loss of one large client. It is volatile in a fairly small volume quarter. That's a client that we think could have been profitable in the future with price increases and the change of terms that we had made, but has not been profitable in the past. So that's life. That's what happens. Someone in the market took that client, and that affects the growth in the quarter.

But -- and I don't really like adjusting for a loss and saying that everything else equal, but just to show you the effect of it and the size of it, if you do that, the renewal rate is above 100%, meaning that all countries, except for the U.K. then has a renewal rate of above 100%, and we do lose some clients. So we have some price increases and some inflation on top of that. They're single digit in the quarter, so is the churn, and then we end up above 100%.

So growth is driven by very strong renewal rates. And then there's a very small number in Denmark, and then you get very big percentages on the growth side. But it comes from public housing type of business and very strong renewal rates.

Sweden, we've talked about the negative growth in Sweden previously coming from exiting some previous initiatives. That is now done. And then you see that quarter 3 without a big hole in the bottom, and that is closed. The underlying growth is stronger, which I also have communicated previously. So very strong in the Nordics countries. I wouldn't say that that's the growing -- the growth rate -- the underlying growth rate in Scandinavia because there are some volatility in it. But a strong renewal rate is something we've seen over time and something we expect going forward as well. The main point on the growth is, as always, that we need to stay disciplined on only going for profitable growth, both in our renewals and in new sales.

So then the only thing I haven't talked about is the cost side, which is reducing with the growth we have. So you can see, if you correct for the difference in commission levels there, that we're still going down on the cost side. There is not, again, a lot of efficiency gains that we have, small steps improvements across the business units and some areas more. For example, in the U.K., we get the effect of growth. We don't manage to recruit enough people to keep up with that, but we don't need to either. So there is a scale in that business. But in the U.K. business unit, there is not a lot of efficiency improvement at the moment. We are focusing on keeping quality, delivering quality to the brokers and improving quality in claims handling. And that's -- so we don't have a lot of efficiency initiatives there.

In the Nordics, we have more efficiency improvements as we speak, and there is a lot of potential to increase our capacity to do the work and work smarter also in the Nordics.

We've just brought this in, you have all these figures. So you could make that slide yourself. But just to kind of -- instead of just saying volatility must be expected, I say that every quarter, I will show you that this is -- these are the quarters. So there is volatility and especially if you divide that that volatility by the margin that is left and not the claims ratio, right? So look at it over the long run, it will go a bit up and down from quarter-to-quarter.

This is an interesting area and something that we're obviously proud of. So one part of measuring our quality is to understand if we have delivered what we've told the brokers that we should deliver. And that's done in a better way than our competitors. We following the cleanup in our portfolio with price increases and making some mistakes in how we did that. We are now back on top in all countries, except for Finland, but that's a small market, very low broker share, we're not growing. So it's kind of -- it's not a country where we focus on gaining that position, but it's good to measure anyways. So in our main markets, in our large markets, the brokers give us the feedback that we are delivering the best quality. So they perceive us as the highest quality provider.

It is also supported by external surveys such as broker associations and broker houses own surveys. And that goes both for the definition. So what they ask for in their own surveys, it's similar to what we ask for. But also in the result of it. So that's a confirmation that there is some significance in the results that we get from this survey. So that's being proud of it. But it also gives us a unique opportunity because this needs to give business, profitable business. That's the point of it. We can't just be quality leader. I actually think it could be fairly simple to be quality leader if you just do exactly what the brokers tell you, give them the lowest price and pay out more in claims, and you can be accommodative and too accommodative. But the point is that this should give us business.

And then we really need to understand what matters to the brokers. And this gives us a great opportunity. When they say you're delivering better than everyone else, it gives us a great opportunity not only to use those responses to understand where we should focus in improving but also to require something from the brokers. Now we can require that they are part of improving our common value chain because we're one team with the brokers. We don't have distribution. This is the only distribution channel we have. So in the long run, we want this total value chain to be competitive and improve the competitiveness. And then we can require more from the broker in making their value chain more efficient and our common value chain.

That can be done by obviously technology and technological development, but also in ensuring that we reduce double keying and double work which is happening today. So we enter some information into a system, they do exactly the same. Let's not do that. So we need to require something from them, and data quality is a part of that. So that's the important part about the survey, a great opportunity to prioritize what we should focus on improving, both for our business, but also our common business with the brokers.

Then we're over to the investment side, where it's in a way kind of boring and coincidentally, a bit similar to the year-to-date figures. But I guess the next slide is where I can spend a bit of time where the biggest change in the quarter is on the bond portfolio, which is the, by far, largest part, where there is a reduction in the running yield from 5.4 to 5.2 and it is mainly driven by the reduction in spread in the portfolio and also then a reduced risk in our portfolio. So we have a lower high-yield share now than what we had in the beginning of the year. So that's -- it's a good [ bull market ], then the reward is slightly lower and it doesn't match the risk in our opinion.

On the equity side, there's not a lot of changes. But if you look at kind of the result of our evaluation of the development of the companies that we own, so the actual development of those companies, we are positive. So it's a good development of those holdings that we have, meaning that even though that doesn't matter a lot to you, we expect good returns in the future on that. So nothing special happening on the equity side, but it's -- we think we have a good set of companies there.

And then we're over to the summary of everything. So you'll have this in the actual presentation, we've made this section of large losses and runoff and discount rate and risk adjustment in percentage so that it's easier for you instead of nominal values. Other than that, this looks the same, and it's just a summary of the rest of the figures. And the balance sheet, we're growing. So the requirement increases, but our capital increases with the result. And one thing that decreases the requirement is the reduced risk in the bond portfolio, so the lower share of high yield, which is not necessarily a normal situation. It's just due to the market, and the average high-yield share has been higher than what we have today. So going forward, we expect that over the long run, that should be higher, we hope.

So the composition is fairly similar to -- there's not a lot of change there, slightly lower market risk and higher insurance risk. But we have a solid capital position. But when we presented this the first time, we said that we will continuously make assessment of all the risks in the company and our capital situation. So we do that continuously. But this is then both a short-term game in assessment, but it needs to be a long-term game in how we act.

And the second bullet move towards pink is not really relevant now. And that's our main point that we cannot say that there are limited growth opportunities going forward. And as I said previously, I don't want anyone to expect that all of a sudden, 2025 is a huge French influence to our figures and that we today know that we're going to win a lot of volume relative to our portfolio in total. But what we have seen and what is confirmed, is that the French brokers and a few clients, they've said this looks like a good proposition, and we believe in it. So now there is a big market that is opened. And over time, we believe in it. We believe that we will succeed in France. There have been no red flags still. So then that probability has increased. Then it's right to think that we should keep that capital to deploy it in growth if that growth is profitable.

And with that, we're back to the highlights or the summary as we call it on the last slide, and then we can take some questions if you have any, and I think we have some, Håkon, yes?

[Håkon Astrup, analyst]

Håkon Astrup, DNB Markets. First one question on France. I know it's very early days, but can you say something of, say, on hit ratio? How is that compared to the same stage in the U.K.? The first question.

[Henrik Høye, executive]

So in the U.K., we had a very low [indiscernible] ratio in the beginning. So the first large inception date was first of April 2016, and we won -- I think we won 3 clients on that day. And the market is slightly different in France. So what we see is that the competition is not as fierce at the moment. So I'd say that we have access to a lot of volume. and we will most likely see a slightly higher [indiscernible] ratio than what we had in U.K. the first year in public sector.

[Håkon Astrup, analyst]

Perfect. And then my last question on renewal, and you have a strong renewal shown you said that you expect that also going forward. What is that -- is this driven by the discussions with your clients up to January 1? Or what is this expectation driven from?

[Henrik Høye, executive]

Basically, it's we don't really know too much about -- the public sector is a bit different because we send out those renewal terms earlier than in the commercial sector. But it is based on our -- the facts we have, the history we have that the market is disciplined, meaning that the clients stick and the brokers know that. So -- and that can change, of course. So there could be someone changing. In the Nordics, I don't see that happening. I mean there are -- even competitors are saying what they do in the future and in terms of price increases, which -- it's a bit special. But it is a disciplined market.

[Unknown Analyst]

[indiscernible] from ABG. Three questions, if I may. The first one, a follow-up on France. What type of risks are you writing there? Is it sort of a shorter-term risk like in the U.K. motor and property? Or is it also a long tail risk? I don't know the French market that well. So if you can shed some light to that?

[Henrik Høye, executive]

Yes, it's motor and property. So -- but we are slightly more focused. I think I mentioned that previously, but we do public housing, that's one segment, and then municipalities and it's property and motor there, property first, and then we do commercial motor fleets but no other products there from the beginning. So -- but I also want to say that the motor product personal injuries in France is more similar to personal injuries in the U.K., meaning that that part of the product is longer tailed like it is in the U.K. than in Scandinavia. .

[Unknown Analyst]

Okay. And the competition in France, who is the usual suspects, the big ones? Or is it any special niche players in the municipality markets and in these commercial markets?

[Henrik Høye, executive]

In the commercial motor, then it's usual suspects and obviously, [indiscernible] is big in France. In the public sector, there is a niche player. So it's a bit the same as it is in all other countries. There is a mutual [indiscernible] that is there. And then some of the larger players that we also see in the U.K. are present in the public sector, but more in parts of the segment. So it's one big one. We have a large market.

[Unknown Analyst]

Okay. Then just on premiums. You said that you will continue to do disciplined pricing. Should we read you out that you are sort of pricing above the current claims inflation or more in line as you sort of have an overhang of your price -- previous price increases still with you? So how should we read your competitive situation today?

[Henrik Høye, executive]

Well, we price the profitable products in line with inflation or to counter inflation. But then we have some products that need further correction. So they will be priced above inflation. In total, that will be a bit above.

[Ulrik Zürcher, analyst]

Ulrik from Nordea. Two questions, very broad. But given the claims inflation trends you are seeing in the Nordics, is this '25, will that be another 10% repricing year or has that dropped? Are we talking like low single digits as...

[Henrik Høye, executive]

Very broad, I'd say that due to the decreased inflation expectation, it will be lower than what it was in '24, but not on a low-level single digit, more medium to slightly higher, I would say.

[Ulrik Zürcher, analyst]

Back to max 10%?

[Henrik Høye, executive]

Yes.

[Ulrik Zürcher, analyst]

And then one on the U.K. On the retail side, a lot of the companies are saying that in claims frequency on motor didn't go up as much as was expected. So now you're overshooting on retail on the premiums. And I'm just wondering, is -- have you seen the same on your motor exposures in the U.K.? And then the follow-up is, like now that all the -- some of your competitors are doing much better on the retail side, does that have an impact on SMEs like your business?

[Henrik Høye, executive]

On the motor side, we see that -- only in Q3, the only area where we have a bit higher churn due to price increases. So there were probably touching some kind of price increase ceiling. And -- but what we also see is that -- it is the cycles in the U.K. motor market, they are fairly short. So this -- in my opinion, this is about staying disciplined over time and not be part of that cycle at least not going down. So you'll see more volatility in the growth than -- and we still have some profitability actions to go through with on motor U.K., especially commercial sector. But commercial market is different from public market on motor as well. So in motor it's -- now it's -- we're remaining a bit more business commercial model.

[Ulrik Zürcher, analyst]

Then in general, you see with good growth in the Nordics and then you win or lose some business. But within the U.K., maybe it's -- the repricing will be a bit less like on the whole market than it is in the Nordics?

[Henrik Høye, executive]

Yes, that could be. There is also more competition and a higher probability of irrational competition coming in and out of that market. So yes, that cycle is short.

Thomas?

[Thomas Svendsen, analyst]

Thomas Svendsen from SEB. First, back to France again. So what is the planning for staffing or, let's say, next 6 months? And will we see ahead of France?

[Henrik Høye, executive]

Yes. The plan for staffing is that at current, we have very soon 4 French underwriters sitting in Manchester, working on French cases and U.K. cases and learning how we do things. The first employee has now been there for a year and will soon move to the Paris office. So that's the most experienced person we have, at least Protector experience, and will move to Paris at least before the summer. And then we have 2 people in Copenhagen, underwriters sitting there, doing commercial motor, together with the team that -- or at least a person that built a Swedish motor business from the beginning. So learning how we did that. And then we have 2 people in the French office today. That will in total increase. So we -- at the moment, we need 2 or 3 more for exactly what we're doing now. And then obviously, we will add people on the underwriting side and also on the claims handling side.

But we have the competence we need. So we have the competence on the formalities through a finance, compliance type of resource that we have on board already that is working in the Paris office. We have some claims handling [indiscernible], we need more on different products. And the underwriter side is covered both by the resources that are dedicated to France, but also to -- from the people who we use, especially in the U.K. market, but also some from the Swedish. So we'll be -- in 2025, maybe we'll be 15, 20 people in France, depending on if we find the right people. And then the second question was now -- I forgot the second question was...

[Thomas Svendsen, analyst]

Just when will you see a head of France?

[Henrik Høye, executive]

Like in the U.K., where we said that we need we'll spend some time before we have a head of U.K., and we don't believe in bringing an external head of France in, we will see whether it's possible to recruit that person from internally. So some of the people who are now training could be candidates for being ahead of France. In the meantime, we have Hans as Head of France, our Deputy CEO. So he's heading up that together with a few other resources from the existing countries. .

No more questions here, but then did we have some written questions?

[Dag Nereng, executive]

Yes. So further on France...

[Henrik Høye, executive]

Do you have a microphone on you?

[Dag Nereng, executive]

I have a microphone on me. Could you say something about the market opportunity, the size of the market relative to, for example, U.K.?

[Henrik Høye, executive]

So the public sector market is similar to the U.K. market, slightly smaller. And where we start is approximately half of the U.K. market because we have selected some brokers and some parts of segment. But going forward, that market be U.K. size, but there is a lot of municipalities in number, many, many small ones. There is a small share of the -- so it's 80-20 there. But yes, they comprise 20% of the market. So 80% of the market are the large ones that we will target from the beginning, and we target housing sector first. .

On the commercial motor, it depends very much how you define that market because that market in total is a bit smaller than the U.K. market, but the target that we have now is more similar to what we have targeted in the U.K. from the beginning market size wise.

[Dag Nereng, executive]

You have touched a bit on it on the high frequency of large losses recently in Denmark. But are you comfortable with the current pricing?

[Henrik Høye, executive]

We are doing corrections on our pricing in certain segments in Denmark. And that is both due to better understanding of large losses, but also inflation and the opportunity to do that. But in general, I'm comfortable with the pricing level following those short-term actions that we will make.

[Dag Nereng, executive]

Last question is, what is the time line for further geographical expansions?

[Henrik Høye, executive]

Yes. obviously, we don't know. But I think that we're learning a lot from France. We learned a lot from U.K. lot from Denmark and Sweden when we've done -- and Finland. So continuing to explore new opportunities is something that we will do that we are doing, and we're not in a rush at all. But it is an opportunity for hungry and smart people in the company, up and coming stars to look into further markets. So we look into, again, the other European markets in order to understand them better, follow up on what was the reason for why we didn't change it last time, has anything changed. And we look across the Atlantic as well to understand what opportunities are there. But I mean, I don't -- now we're focusing on the existing markets. That's the #1 priority. And then France is #2 priority, and we will not enter a new market in the short and medium term, but we will prepare because that teaches us something we learn something from it, and it gives our people development opportunities, which is what we're about.

[Dag Nereng, executive]

Thank you. No more further questions from here.

[Unknown Analyst]

Just one follow-up, sorry. No dividend, right, on the slide here. Is that just for Q3? Or should we not expect anything for Q4 as well because of the growth you expect in France?

[Henrik Høye, executive]

Well, we will be wiser as we go on those growth opportunities. But of course, it's not only a short-term comment when we say that the probability has increased. And France is not a short term. We're not just dipping our toes and then leaving that market. So preparing for that is also related to a bit longer term, but what that will be is something I can't tell you now. But we'll be doing exactly what we do on the capital side, continuous evaluation of the risks and opportunities and then we'll act accordingly on the capital side, adjust that.

Okay. It looks like we are done with the questions. So thank you, everyone, for joining both physically and online. See you again in February.