Protector Forsikring ASA

OSE:PROT

Earnings Call Transcript 2021-Q4

[Henrik Wold-Golfetto Hoye]

Hello, and welcome to Protector's presentation of the quarter 4 and 2021 results. We just came from a session with all employees this morning, where we have, of course, talked about our DNA. And today, we focused on the value open, and we had a panel discussion with some of the leaders in the company, and also a quiz involving both result questions, but also questions about some of the people in the company. So coming from that, I am always proud to be working in Protector and to be the captain of the Protector team, and especially humble today when we deliver very strong 2021 results that are a result of a lot of hard and good work over time. And the summary, the highlights are that we are basically spot on the guiding we changed in quarter 3, where we said that we kept the 10% local currency growth guiding, which we ended up with. It's 8% in Norwegian kroner, but 10% local currency for the year and 88% combined ratio for the year, which we slightly outperformed, and we also said that, that was a bit on the conservative side, which also some of you commented on. And that, together with a great investment result of NOK 955 million, driven by the equity portfolio. It gives us, for the first time in Protector history, a profit after tax above NOK 1 million at NOK 1.2 million or NOK 15 per share. And the solvency ratio is NOK 246 million, or actually, NOK 239 million, if you subtract a Tier 1 debt that has a call date in March. And if you go from there and include the proposed dividend of NOK 7 for the 2021 results and the special dividend of NOK 3 for the 2020 results, you end up at NOK 199. NOK 206 if that Tier 1 debt is still in our solvency. So that's the highlights. Obviously, strong figures, and I assume according to at least the analysts' expectations. If I go further into the claims update, the weak number in today's results is related to the U.K. and is on the profitability. And I'm very happy that I have Stuart Winter, our country manager in the U.K., with me today to go a bit deeper into both the figures and the status in that business unit. But as you can see on the full year claims ratios, the net result is a lot worse in the U.K. in 2021 than what it was in 2020. That is largely driven by a few very large losses on the motor side, personal injury losses, which are larger in the U.K. than what we are used to in the Nordics. And in quarter 4, there is also a storm claim in the U.K., and I'll get back to those on the next slide. The other figure you see here on the negative side is the gross combined ratio -- or claims ratio, sorry, in Denmark at 103%. It has improved from last year. However, affected by some losses on the Workers' Comp portfolio, which you know we have a loss transfer reinsurance agreement on; 70% of that goes to reinsurance agreement. That is one of the reasons why the difference on gross and net is so big in the claims numbers in Denmark. The other reason is a reserve increase on 1 large liability claim, mostly going to reinsurance program. And then to the large losses. In total, on a gross level, the large losses are just a percentage point below the normalized level. And that's what we would say is slightly lucky on large losses, but not very lucky. The special thing in 2021 is that most of those large losses have happened in the U.K. And those large losses are not necessarily related to the 2021 year, but there are losses that incurred earlier and that have had new information during 2021 that have increased those claims. And as I mentioned, there was a storm claim in the U.K. in quarter 4. And the net runoff losses are very stable or no effect basically for the full year compared to 2.2 percentage points in 2020. If I move on to the volume and the growth during the year, the contributors are Sweden and U.K., as you have seen previously. And we also updated you on the growth, including 1st of January -- or in January. So the 10% local currency growth is supported by very good renewals during the year, and you've seen that in the previous quarterly reports, and also a total price increase level for the company in 2021 of 8.9%, which is above what we estimate as inflation. And we talked a lot about inflation last time, so I'm not intending to spend that much time on that today. And then when it comes to the January 1 renewal, which is 40% of our portfolio, and mainly the Nordics, it is very strong growth at 11% in local currency. A lot of it comes from public sector where both renewals have been strong, so a low client churn, few clients leaving our portfolio and a good level of price increases. And then there is some growth in the commercial sectors in all countries as well, but in particular in Denmark. So that's the growth side. We have looked at the claims statistics and the volume country by country, but here you see the totality with combined ratios as well. And as I've mentioned before, the weak point is the net combined in the U.K. The very strong point is Sweden. And I would say that both of those numbers are, they are closer together if you look at the underlying realities. Sweden is slightly worse than what you see due to reserve gains from previous years that we don't expect will repeat itself going forward and some positive COVID effect on motor side, whereas on the U.K. side, I've talked about the large losses. Other than that, strong results in Norway, Denmark and Finland. So to summarize, compared to the guiding, slightly better on combined ratio, spot on the volume guiding. And that's not intentional, like I also said last time, if we end up a lot above, I would be worried if I were you. If we end up a little bit below, I would not be worried, but this ended up spot on and that's just the fact. I've talked about the solvency, and we will get back to that later as well. And now it is a pleasure to give the word to the country manager in U.K., Stuart. He comes from a long background in the insurance industry, much longer than me, of course, and has been both on the carrier side, insurance company side, but recently, he came from the broker side as CEO of JLT Retail and has a lot of experience in the claims handling area, which is important for us. So Stuart, please take over.

[Stuart Winter, Country Manager UK]

Thank you. Thank you, Henrik. So first of all, it's a real privilege and a pleasure to be here today reporting continued growth in the U.K. As you would have seen from the slide, 22% year-on-year. Could it be more? Well, we always ask ourselves that question. The answer is, undoubtedly, yes. There's plenty of opportunity for further growth in the U.K., but we've maintained discipline and discipline is very important to us and very strong focus in 2021 on retention. The team has grown. We've seen more modest growth in 2021 than we saw in 2019 and 2020, but that was deliberate. We front-loaded the recruitment of our team in order to prepare and plan for the expansion of the business with the overriding objective that it should always be people first. That way we can continue to service the business. We expect to see more modest growth in headcount in '22 in continuation of that plan. As Henrik referenced earlier, our combined operating ratio isn't where we thought it would be or would like it to be. And principally, that's been caused by the need to strengthen reserves on a couple of large personal injury cases that go back to the 2019 and 2020 underwriting of policy year. In fact, if you were to reproduce the table in front of you showing those losses allocated to the policy year, you would see a deterioration in the results in 2019 and 2020 and a more positive result in 2021, but that isn't how it happens. So we expect that, that combined operating ratio will normalize more in the future, and we'll cover that a little bit further in the presentation. So what's aided us on our journey so far, if you put the next slide on, please? Well, I think for me it's summed up by 3 words and those words are culture and One Team. We always expected to employ a large number of people over the last couple of years as we grow the business in the U.K., but we certainly didn't expect to be employing them remotely, onboarding them remotely, and then operating for the best part of 2 years on a remote working basis, but we've managed to do that. And the pandemic has really taught us how to undertake that process well and to manage it well. And we've got some great new colleagues that have joined the business. We've continued to build on the Protector culture and values, which were in place prior to Protector entering to the U.K., and really developed this One Team philosophy where we work across both London and Manchester as one team regardless of geography. I've had some experience of working in regional businesses in the past and getting people to work together is always very difficult. I've never witnessed anything like the One Team approach that we have in Protector and that's to the credit of the people in the team. As we say here, every year, we don't just concern ourselves with how the team operates, we look at how succession is planned for the future in the business, how we manage and organize the team. And with the growth in numbers that we've had over the last couple of years, we've looked at the management of the business across both commercial underwriting, public sector housing underwriting, claims and risk management, and we're growing the management team. On a flat basis is the way that we've always operated it, but to build in additional strength for the future and that's starting to show real good success. And we also ask our broker partners what they think of what we do, how they rate us, how they consider our services compared to the rest of the market. And what's really interesting is that for the fifth consecutive year, Protector has been rated #1 in terms of service provision by the brokers. The next slide will just show you the comparison to the market. And as you see, not only are we ahead of our competitors by some fairly clear ground, but when you compare us to the average of our competitors, there's a very clear margin of differentiation. The brokers like us and the brokers support us, and they recognize that we do what we say we're going to do, and that helps us for the future. Then we go on to look at the operational status of the business. As we said before, there's plenty of opportunity in the U.K. We saw a large volume of business. We typically quote quite a lot of public sector and housing business, pretty much all that we have the opportunity to see. And we're more selective in the commercial sector. That's just the way those 2 sectors operate, but we maintain our discipline in our approach. We undertake thorough risk analysis. We involve our risk engineers. We involve claims. We involve the entire business in looking at the risks that we underwrite. We had some relatively low hit rates, particularly, as we said there in public sector and housing, that market runs a little bit counterintuitive, maybe behind the rest of the market, maybe even against the rest of the market. And we didn't feel the pricing in 2021 was really at a level that we felt we could support, but we still grew. In commercial, it was a bit more positive, although the motor market is starting to prove a bit challenging, and we are seeing some pricing that frankly doesn't meet with our models. So we'll focus on discipline. We'll continue to look at retention as being a very important part of our strategy and we're delighted with the fact that we've managed to move right forward quite successfully in those sectors. In terms of claims handling, this is really our shop window. This is how we demonstrate to our clients that they should buy our services and remain with us. We have what we call very strong clean desk. That means we have no backlog. We settle as many claims as we receive in a year. That's an important metric for us. We don't get behind. And we focus very strongly on cost reduction. We want to settle claims quickly and efficiently, but we want to do so at a cost level that's realistic. If I just mention 2 things from that list there, the first is that we've invested very heavily in our motor-engineering capability in the U.K. The reason for that is we've recognized that repair costs are escalating and we need to do all we can to mitigate the increase in costs and make sure that we're competitive with the market. The other is in terms of recoveries. We settled quite a few property claims in the U.K. over the last few years, and we have a number of cases where we're pursuing recovery against the insurers of other negligent parties. We anticipate that many of those recoveries will be progressed further in 2022, and that will have a positive impact. So what are our thoughts for 2022? Well, in terms of gross written premium, we recognize that a large volume of our increased growth will be delivered by new sales. That's not surprising. As we said earlier, there's a good pipeline in the U.K., good opportunities, and we feel that we're well positioned to be able to respond to those. There will still be some rate strength. So we still will get some price increases. And it's very likely that there will be some additional price increases consequent upon increased exposures as the U.K. economy returns to more normal levels following 2 years of restrictions that have been posed due to COVID-19. But we also have to recognize that at the same time, if there's opportunity, there's also the potential for churn as well. Other insurers will see our customers as opportunity for their development. So we take a kind of wider view on churn in 2022 as well. Whilst we don't present any numbers on these slides, that's deliberate. What we are saying here is that we are well prepared for the potential churn on our book. We will get some exposure growth, and we anticipate new sales will be strong as well. But obviously, the important focus is not on growth, it's on profitable growth. So we've done some analysis on our combined operating ratio, which you'll see in the top table there as well. When we look at 2021, we ask ourselves some questions about what we'll replicate in 2022? As we said earlier, we wouldn't expect the motor large losses to be at the same level as they are in 2021. In fact, we wouldn't have expected one of those claims in 5, maybe 10 years, certainly not too in the same year. So we expect that will normalize. But we have to be cognizant of the fact that also there will be large losses, that's part of our business and property large loss could be larger. Those 2 areas are quite volatile. So if we try to predict where we get to, we'll probably be precisely wrong. But our instinct is that that's where our positive development will be in 2022. We will see some tailwinds from price increases that we've implemented in 2021. So we expect that there will be some residual impacts in 2022 from rate increases. And we also expect that some sectors of the market will see price increasing greater than inflation. So there will be some continued price increasing in 2022 as well. As for COVID, well, we think motor will return broadly to normal levels. So we won't see the same sort of benefits that we had in '20 and 2021 in relation to reduced usage. And we had a very small involvement in coinsurance of COVID BI losses. The vast majority of those will have been settled in 2021 or will be concluded early in this year. So we don't think that will have a net impact. And in terms of costs, well, as we said, we front-loaded our employment costs. So we expect that those will continue to normalize, and we will see some improvements through both increasing scale and efficiency gains. So there's every reason to feel very, very optimistic and positive about 2022. I think it's a challenging market, but I think the challenger is ready and well placed, and we've got a great team of people working on it. Thank you.

[Henrik Wold-Golfetto Hoye]

Thank you, Stuart. And from my point of view, I think that you should expect us to say clearly if we are worried about something and then address what we will do about it. And when we say that we are not too concerned, like Stuart now have said about the U.K., then that's our honest opinion and best estimate. Of course, we could be wrong, but that's who we are. We say what we mean.I was just reminded that I should remind you to post questions. There is a link with the e-mail address on our website. So please send us questions if you have any during the presentation, so that we -- there is a bit of a lag here, so that we have those questions when we are ready for those.And then over to investments, a very large part of our profit in 2021 and an important part of our business. The investment portfolio grows or the money that we can invest, I've been through the summary of 2021. I think it's more interesting to show you the bond and equity portfolios in a longer term.And for the bonds, important thing in 2021, I think, is that the running yield is not changed from quarter 3. There have been no losses in the portfolio in 2021 and very few losses in a longer horizon. And as you have seen, some of our overperformance in a historical perspective on the bond side has come in turbulent times.And then on the equity side, the interesting aspect here is that when you have more than 40% return during a year, and the expected future return is unchanged from a year ago, something must have happened. And that is both due to some changes in the portfolio. You have seen our largest position, before we sold it, was Multiconsult. It's sold and there's also been other changes in our portfolio. But a very good element within that still high expected future return is that the operational performance of our portfolio companies have been very strong.And then, again, here it's the long term that matters and the long term has been very strong. And of course, both the investment department and we are more concerned, now that we've had good results, very strong results, than what we would have been if the results were worse, just as a small comment to how we do this.And then it's over to some of the formal figures. Profit and loss, as I mentioned, first time above NOK 1 billion in profits for a year. The balance sheet is strong and the solvency capital ratio is, as I mentioned, actually 199, if you adjust for both the dividends and that Tier 1 debt that has a call date in March. No large changes in the composition of risks.Of course, we have grown, so the insurance risk is slightly higher. The investment portfolio and the equities have had a positive development that increases those, but no big change in the composition. And we have some more capital, of course, from our operations available.And then to our process. I mentioned in quarter 3 that we would do a solid job on identifying risks, understanding our risks and evaluate if we should change our shareholder distribution policy and capital management in the quarter 4 presentation.And what we have done is we're focused, obviously, on the risks. Investments have always been there, and we've been through that in a thorough way with what we would say are conservative stress tests.On the insurance side, we have, of course, stressed, but this time we've gone much more in detail there and also on some of the other risks, known and unknown. So what we have focused on is on the risk side. That's what's important to us, what can we face in a stressed scenario and how can we mitigate that if there are instruments available. So we have done that. We will continue to do that, continue to learn more. And when something changes, we may also change how we look upon the capital management in general. So that's why we also have this quarterly process.But the conclusion from everything we did is that what many of you have given feedback on is a good shareholder distribution policy and capital management process. It does not need to be changed now. So this is the same. And you see that with what the Board proposes for the Annual General Meeting in April and the special dividend for the 2020 results. We are coming down on the solvency capital ratio. So below 200, then if you adjust for that Tier 1 debt.And then we will continue to have quarterly assessments going forward. And then we will evaluate the risks, the results, if they are as we expect them to be throughout 2022. You can all see that there could be an opportunity to distribute more of the capital.You've seen this. And then we are at the summary and very strong numbers with a growth according to the guiding and combined ratio slightly below a very strong investment result and a solid position going into 2022.So then we are ready for questions. And I think we have received some at least, Amund?

[Amund Skoglund, Executive Assistant & IR]

Yes, we have. So great results, and then many applause the results, of course. A question about growth. You have started 2022 very good. Is it reasonable to assume about 10% growth in local currency in 2022 since U.K. seasonality will kick in during 2022?

[Henrik Wold-Golfetto Hoye]

Yes. We've said disciplined growth is what we will refer. And of course, we have a good start with what we experienced in the Nordics 1st of January. But I think the answer needs to be slightly boring. And the reason is that the markets are volatile, at least where we see the biggest growth opportunities in the U.K. with the COVID situation making it a bit unpredictable how much of the good opportunities will we see, how hungry will our competitors be, and where will the price levels be? So what I can promise you is that it will be disciplined growth. Profitability is important and the most important. But of course, we've had a good start. And we've also had some positive news in the public sector side, U.K., before 1st of April, but it's very early, and it's very small numbers when we speak now.

[Amund Skoglund, Executive Assistant & IR]

Yes. Moving on to profitability. If should take a back of the envelope calculation, it looks like the profitability for 2022 will be better than long-term guiding. Is that a fair assumption?

[Henrik Wold-Golfetto Hoye]

Yes. I think it is a fair assumption that it could be at least in the lower end of the long-term guiding. But I think that what you need to look at is, the large loss side is on a gross level. And I assume that you asked the question about net, and that situation could be slightly different than it is. So it's more of the difference in 2021. We've had less of the medium-sized losses, which you don't see in that overview, than a normalized situation.The other element is that there is a bit more uncertainty, I talked about it before, on the inflation side. But if you calculate straightforward with normalizing for runoff and large loss and with some price increases, then I agree with the statement.

[Amund Skoglund, Executive Assistant & IR]

Good. Do you have any interesting updates in terms of your reinsurance?

[Henrik Wold-Golfetto Hoye]

No, they're not very interesting because they are very similar. So we've had a very good process in renewing our reinsurance agreements. The structures are mainly the same. We've increased our retention on a couple of programs, the CAT program and U.K. casualty. The reason being that we see better value for money, a little bit higher up, but still within our maximum retention of course. And then the solvency-based reinsurance deal is still in place and we would have said something about it if it wasn't with mainly the same terms, a slightly lower session to balance the agreement out.

[Amund Skoglund, Executive Assistant & IR]

Yes. You touched upon this, but for the cause of repetition, what would you say is the expectation or normalized U.K. profitability or combined ratios?

[Henrik Wold-Golfetto Hoye]

Yes. I think that's easier to speak about in a longer term because what Stuart showed us was a normalized large loss level for motor or personal injury and then one for the property side. And what we know is that very unlikely that we hit a normalized level. It will either be below or above. But to answer the question, it will be slightly higher combined ratio in the U.K. than what you will see in the Nordics. And the reason is that in a new sales situation, there will be slightly lower margins than what you will have in the renewal book where it is possible to correct poor-performing clients with price increases.

[Amund Skoglund, Executive Assistant & IR]

Yes. If profitability stays as expected, high, you will keep on gaining solvency capital ratio. Is there any other tools you could use than dividends?

[Henrik Wold-Golfetto Hoye]

Yes, for distribution, there is, of course, another tool. And I guess that the question is about buyback. We have discussed it, but we have also had feedback. In our opinion, at least in European markets and in Norway, it looks very similar. And for you to choose what you want to do with that money is what we think is the best way to do it. But of course, we're open to get more feedback on that.

[Amund Skoglund, Executive Assistant & IR]

I received no further questions, but we are open for more questions at the e-mail address stated on our web page. So please feel free to add questions and we will come back.

[Henrik Wold-Golfetto Hoye]

Thank you very much for participating. And we did reach a milestone actually yesterday, passing NOK 10 billion in market cap at 10:10, I was told. So actually been some very happy shareholders who've given a small attention to all employees in Protector. So thank you all for listening and being part of our journey.