Protector Forsikring ASA

OSE:PROT

Earnings Call Transcript 2022-Q4

[Henrik Høye, executive]

Welcome to the presentation of the full year and quarter 4 results for Protector. It is a long time since we've had some people physically present. So previously, it's been a small room to floors down from this and a couple of cameras, no people. So it's good to have at least some people here, but thank you also for participating digitally here. I'll jump straight in. We always show this one, but I won't spend time on it, but I will spend some time here.

We've just had a meeting with all employees physically with the people who work in Norway and then the people in the other countries participating from meeting rooms digitally here. And it's good to pick one of the part of what defines our culture to focus on at the time. And what we have decided to focus more on in 2023 is best-in-class decision-making.

Best-in-class decision-making has and has had for a long time, a simple definition in Protector, meaning that everyone should make decisions. And at least when you have competence to do so and within your area. And if you want a culture of everyone making decisions, you need to allow for mistakes. And if you allow for mistakes, you need to learn from them. And remember that not making a decision is a decision, it's usually the worst one.

So that has been the simple definition of best-in-class decision-making in Protector for some time. But we also see that there is a lot of potential in understanding what it means further.

As we grow, we need slightly more central and common processes and procedures, for example, within underwriting, risk appetite relative to our reinsurance agreement and relative to our common competence. And then the balance between what is central for everyone and the local decisions is important to define.

So we will spend time starting with the leadership development programs, defining and understanding how we can take advantage of something more on best-in-class decision-making.

So that's been the focus this morning and Protector is about the people and it's about our culture, and that is what delivers these results.

So I'm proud to present the very strong 2022 results with a combined ratio of 88.9%. Growth in local currencies of 21%. A strong absolute and definitely relative investment result, which gives us a profit after tax of NOK 809 million, equates to NOK 10.2 per share. And in addition to those key numbers, we have released some information about the growth January 1, which still is a big date in our portfolio in the Nordics, but it is decreasing in importance as U.K. is growing because in the U.K., 1st of January is a small date and other, it's spread more out throughout the year. That growth continues to be very strong at 17% in our most mature markets, and it's driven by strong renewals but also new sales, and I'll get back to the details behind that later on.

On the investment side, the biggest news here compared to a year ago is the development on the yield side. So I'll speak a bit more about that. It is a significant development on the bond portfolio. And then the solvency position is strong and the board has decided then to go for NOK 6 per share dividend on the 2021 results, getting us to almost 100% of that 99%.

But let's start with profitability. That comes first always. And if you look at the full year, which is more interesting than quarter 4 and orange line. Look at gross and net are exactly the same. That's a coincidence, of course. It's driven by the fact that on the reinsurance side, they have taken a hit on a large loss that has been increased reserve loss on a large loss and the poor performing workers' comp product in Denmark, especially, which is 70% reinsured up until October 2021.

So that's the reason why the cost of reinsurance is equaled out by money that the reinsurers have paid. So that's on the totality. And within that number, we have almost a normal level of large losses in 2022, 6.2% compared to 7%, which is our estimate of what should be normal. We also have some reserve gains, 2.3%.

So if you adjust for both of those 2 make the simple adjustment there, you'll see a slightly higher normalized level. That is obviously a big simplification of normalizing a loss ratio. But we have had a bit of luck on large losses and some reserve gains. So underlying reality based on those 2 is slightly higher.

At the same time, there are some areas, if I go to the country, if I break it down to the countries where in Norway, we have a few large losses, but some reserve losses on long tail products. In Sweden, we have more than normalized large losses, but some reserve gains in Denmark, less than normalized large losses and basically no reserve development in total, but we have reserved losses on the workers' comp area.

In the U.K., it's the same situation in Sweden, higher than normalized large losses, but reserve gains on the short-tailed products. And Finland is very small, of course. So I won't comment more there. One area that -- so I can get -- I can go to this one. One area that is affected by inflation is the reserve side. It becomes a bit more volatile when inflation moves a lot. So both for claims handlers and doing the case reserves, but also the actuary. And you see a sharp increase in inflation and you put a reserve on a claim, then that claim is most likely being reserved too much, and that's where the reserve gains are coming from in 2022.

So slightly higher reserves because of uncertainty on claims inflation. So there's nothing special, but it's on the short-tail products. And on the long-tail products, we have some reserve losses, mainly driven by workers' comp in Denmark -- if -- I think that it is possible to us since we are physically present. It's possible to ask questions as we go. So are there any questions to the claims side here in Norway...

[Unknown Analyst]

[indiscernible] Weather effect...

[Henrik Høye, executive]

Yes. I didn't give a comment on it. Now it's a Q4 comment, and Q4 is...

[Unknown Analyst]

[indiscernible]

[Henrik Høye, executive]

I can repeat the question. So the estimated effect of the weather in Q4. So it's a small quarter is volatile, and obviously, winter comes every year. So it's not that, but there is a small negative effect, less than 1% percentage points on the totality of the different or the bigger effect from weather, especially in the U.K., where there is not a lot of snow every year, but also in Norway when we came earlier...

[Unknown Analyst]

You give a comment, it was practices that we might reserve slightly conservative on short-tail products due to claims and then a bit later, you look of these reserves. Should we expect that to happen during 2023? Or is it not likely to repeat itself?

[Henrik Høye, executive]

So the question is about my comment on inflation and reserving. And that's a temporary situation when inflation is changing a lot, not when we have a better view of -- and it stabilizes. So it's a temporary situation. You should expect best estimates.

[Unknown Analyst]

It might be a little on the side, but you mentioned your reinsurance programs there a couple of times. There are some movements. It appears on pricing in the reinsurance space. So if it's possible, could you comment on what you see as a rather large user of reinsurance and if you're considering changing I know your programs now?

[Henrik Høye, executive]

Yes. And now I don't think I need to repeat the question because you had a microphone. So -- on the reinsurance side, it has been what at least the reinsurance brokers will name as a perfect storm. So it has been natural catastrophe losses above normal. We've had inflation or the reinsurance market has really woken up regarding inflation.

And then at the same time, interest rates are increasing and alternative capital in the reinsurance market is leaving the market. So that market has been very special for the renewal 1st of January 2023. We were early with our programs out in the market and have made 2 changes to the structure. One is that we has nothing to do with the pricing and the perfect storm, but we have not renewed the whole account solvency-based reinsurance agreement that we had.

So we see did 7.5% of our -- of all our premiums on that, and it was basically a safety net for market turbulence. That is not renewed because we don't need it, and it costs too much in a stress situation. So that will increase our retention then. And then we've made one more change, which I think was important in this renewal, and that is related to inflation.

So we -- the reinsurers, they are catastrophe claim providers. And when inflation increases in the way it has done now, what the layers that they have cover on. They become what they call working layers, so more claims come into the layers they insure. Our retention on property, for instance, NOK 100 million, more claims come into that layer than before due to inflation. So we increased our retention or you could say, deductible from NOK 100 million to NOK 200 million on the property programs.

And in order to cover that gap because we didn't 200 million retention, we have signed a new deal, which is a combination for both the risks of the fire program and the catastrophe program. And that -- so it's a multiline deal with one reinsurer and at what we deem as very attractive terms. I think that, that has made our renewal come in at basically flat levels, risk adjusted, which is a lot lower than what the market has done.

[Unknown Analyst]

And just a short follow-up on that. Does that mean that the solvency numbers at year-end reflects the change in the Solan RIAs? Or does that come into effect in Q1?

[Henrik Høye, executive]

That's a Q1 effect.

[Unknown Executive]

It's both. It's a Q4 effect and a Q1 effect, supposedly stated in 2022.

[Henrik Høye, executive]

Okay. So it's wrong, what I said mostly in 2022, and then there will be some in 2023 as well.

[Unknown Executive]

Anymore questions?

[Henrik Høye, executive]

Okay. So then over to the growth, the very strong growth. And what you see is that it comes from all countries and mostly in absolute or nominal terms from Sweden and Denmark, U.K., Sweden and U.K. U.K. is now our biggest country, and that is mainly due to a sprint in Q4, where there were some single very large renewals that are -- the way we see it profitable and at least as profitable as our portfolio.

So it's not a very big new sale in new segments in the U.K. It is what we know and on clients we know. Important to say that in Norway, renewal rate is above 100%. So very low churn and good price increase levels still.

In Sweden, we have high new sales on the facilities that I have mentioned previously, large broker-based facilities, mainly on motor in segments that are slightly lower in size than what our normal clients are. So very good new sales or converting of the broker's existing clients into those facilities with us and an okay renewal rate in the low.

In Denmark, we've had good new sales on motor and in public sector, especially in the housing sector due to market dynamics, no change from our side on margins, but a change from the competitors, some leaving the market. And the reinsurance conditions, they play in those markets as well. So some have higher prices or even less capacity or not capacity at all. And then strong renewals in 2022 in Denmark, but we've been late on price increases relative to inflation in Denmark previously. So we're catching up there on the renewal side.

And in U.K., it's a very high renewal rate and very high new sales. Most of the new sales came from public sector and housing and are due to market conditions. And then we've reestablished activity with brokers following the pandemic and have access to more opportunities in the U.K. in the second half year. So it's been a very good growth situation there.

Yes, we have talked about the January volume before. Any questions to the growth?

[Unknown Analyst]

First, congratulations with 62% growth in the quarter, even if it's not the biggest one, it's wow. And I guess, Protector have to go 12, 14 years back before you can see such a growth in percentage points. So that's a big thing. I mean, previous quarters said that price increases has been higher than the claims inflation. So what's your comment today on price increases versus claims inflation in quarter 4 and on January 1 renewal.

[Henrik Høye, executive]

So in quarter 4, price increases at about inflation level. We have focused on maintaining profitable clients and markets, especially U.K., which is the biggest country in quarter 4 motor. We've had to reduce our expectations on price increases in order to retain clients. In January 1 renewal, it is lower than it has been previously, but still at a level that will cover and maybe a bit more claims inflation. Other questions on growth?

[Unknown Analyst]

Are you seeing any impact from the renewals with regards to the reinsurance side on the competitive environment? And do you expect that to impact your growth going forward?

[Henrik Høye, executive]

We -- I mentioned that we see something in the housing sector, Denmark and U.K. So where capacity is needed, a high capacity of high sums insured on the properties, then you can see something. And it's the most -- the best example is that there are a few competitors that are basically out of the market. So less competitors. And then other than that, I don't expect that we will see a lot of change in behavior due to both the fact that profitability is good in especially the Nordic markets and very good. So this is a very small part of -- if you have a 50% increase in your reinsurance premiums that are 1.5% of your premiums. It doesn't really matter that much, but also because -- so you'll see it on certain segments, but in general, not a lot.

Okay. So the only thing that we haven't talked about relative to this is the cost side. And the only thing I wanted to mention is that there is volatility on the cost between the countries and as you know, commissions is included in this, and it's present in some countries and not in others. But I can say that if you exclude commissions, the difference or the improvement is slightly bigger than what you see the improvement is when you include commissions, which is obviously because in Sweden and Denmark, there is commissions, and we grow more in Sweden, Denmark than the rest.

So then over to the area that Dag Marius is leading and where the rest of the company will look to be inspired for a better understanding of best-in-class decision-making investments. So our free money is growing, and that is good. Dag Marius has more to work with. And the results on the short term, 2022 are in absolute terms, very strong relative terms, even stronger.

So you've seen the numbers here, and I think they speak for themselves. And what I want to focus more on is on the bond side, the very big change, which is comprised of 55% reference rate development compared to Q4 '21 and the rest then on the spread widening. So it is a very big development there and obviously, changes are the ability to generate profits on the investment side. This is the biggest part, 83% at Q4 2022 of our investment portfolio.

And the total activity on the bond side, we have done something while interest rates have increased. So while the interest rate was around 0, we didn't see that the probability of it falling further as very high. Then we were not doing anything to steer the duration on this portfolio relative to our reserves. However, when you -- when the interest rate increases, probability of falling increases and we take down the risk by increasing the duration in our bond portfolio.

So the duration here, 2.5% is basically matching the reserve side. We have a bigger bond portfolio than we have reserves. So a bit higher duration than 2.5% on our reserves. So that has led to a lot of activity. Parts of it is increased credit duration by doing that, so locking in the attractive rates on secure papers. But that is also obviously a slightly increased risk in the portfolio.

And I think that with the environment now, there is a slightly increased risk and the number that you see at the bottom here, which is extremely low on the losses is -- there is a higher probability that something happens there now than it has been previously.

But the biggest news is the development which has happened gradually and you know about -- on the yield side, but it's at 6%, very big difference. This is the only area where we actually think that it's -- or it's simplest area to benchmark our portfolio, so the high yield. And there's been the benchmark benchmarks are volatile. But if you do a performance evaluation here, our high-yield portfolio is performing better than benchmark then in 2022.

On the equity side, we have also had a lot of activity during the year. Most of the increase in companies where some of you asked the questions, have you changed strategy? Are you going towards some kind of index here? The answer was no. However, when prices or the market dropped, there were more opportunities that we either had on the watch list or found that looked attractive. So we had increased with smaller positions, the number of companies in our portfolio.

And then now some of them are wrong are out and then others have met the hurdle rate and our outs were slightly down again. I think the -- obviously, when you look at the performance of the investment department, you look long and if you look at historical to date or from October 2014 when that was taken in-house. There is a very high return, but relative to benchmarks, big outperformance and even bigger after 2022, which also had an outperformance.

And then if you look at the intrinsic value estimation here, you see 40% in -- by the end of Q3. So that's what we said then. And then we've had a good quarter 4. So then obviously, that goes down, not by the same as the return because the most important for us or for Dag Marius and his team is that it's the first bullet here, and it's the first strong operational development in our companies, and that's our view. So they have -- that view has been strengthened through Q4 -- on the Q3 reporting. Any questions to the investment side?

[Unknown Analyst]

My question is on capital allocation. The market risk in your SCR is NOK 1.3 billion, with 200% solvency ratio, that's NOK 2.7 billion roughly. With 6% running yield, you make 25% return on equity on your investment portfolio in bonds. So my question is really how much capital should you be allocating to Dag Marius and his team during 2023?

[Henrik Høye, executive]

No, Dag Marius is sitting here, can answer the question. But it is it is an important observation or -- and it's correct. I think that we -- in quarter 2, we said that there are good opportunities that we see. There could be some extraordinary opportunities. At the same time, the risk is increased. So we did say we would like to wait and hold a bit more capital at that point. And that's where we start. So you can look at the returns like you do. But what's important for us is that we always have the capital and the capacity to act when the opportunities are the biggest.

So we go bottom up on capital, and that's why I wanted to ask the motors to answer the question because I know that he would focus on the capital side and the solvency side when he answers as well. But you can say what you want, Dag Marius.

No? We'll get to solvency in capital a bit closer now. So first, profit and loss, that's simple. I think I want to speak about the capital. I can speak about the increased risk here. So it's mainly driven by -- on the equity side, higher requirements per Norwegian krona. But also then that we have an increased exposure in the equity market. On the bond side, it's 2 elements. One is the credit duration, increased credit duration. And the other one is that when we have -- we have a slightly higher risk or slightly lower rating in our portfolio, which requires more capital.

So those 2 factors are the biggest on the market side. And they are bigger than they have been previously. So that has been fairly stable previously, but -- so there is a change there. It's also an example of that there are very many factors influencing solvency, which takes me to this point, which is a change in our distribution policy.

And the change is made to reflect the realities in a better way. The way we wanted to do that is to -- so previously, there was a line that said 180% and no colors to the left. The 150% was the same.

There are some reasons why we can argue that we want to increase the upper level here that are stated on the lower right. But the most important part here is the flexibility in this that hopeful -- that I hope gives you enough transparency in understanding how we evaluate this. So we say that as long as -- or if we see very good opportunities for insurance growth. That's priority #1. We -- or we see big opportunities in the investment portfolio, either single segments or because of an event or there is a lot of turbulence, a lot of risk where we don't really -- we're not really able to assess what that is.

We will move towards the green part of this until that situation changes or the opportunities are taken. On the other side, we'll move towards the pink one if we don't see a lot of insurance risk or if the macro environment is more stable or no allocation opportunities in the investment portfolio that are different than what they are today.

So a bit of flexibility there, but you should expect that over time, we will distribute capital above 200 million. There are a lot of factors, and this is not absolutely not the only number that decides how much capital we have in excess. But you should expect that when we are in that range in the middle, you should expect that we do thorough and good evaluations of the risks and the opportunities and that we make decisions on distribution dependent on those valuations.

So for the 2021 profits then and the Q4 dividend at NOK 6. And then we will have these quarterly assessments of this situation to assess how we deal with 2022 profits. Questions to this or feedback? Is it clear?

[Unknown Analyst]

Very well described.

[Henrik Høye, executive]

Thank you. No change in long-term targets. Obviously, the most important target we have is the one to the right. That's what we have to evaluate on everything we do, but it derives from the combined ratio on the insurance side and obviously, investments -- so then we are at the summary and any potential other questions?

[Unknown Analyst]

We saw in the presentation that U.K. past Sweden is the biggest country, possibly slightly helped by the currency situation in Sweden, where the Swedish kroner has been a bit depressed. So it was on the margin -- but U.K. is #1. So could you give any more comments on the further U.K. development, opening new offices in new cities. There are regional brokers. There are more facilities. There are a huge number of opportunities in U.K. So could you comment a bit on your biggest country, please?

[Henrik Høye, executive]

Yes. So in terms of new offices, and we won't do that. It's not necessary. That's our -- at least now, that's our assessment. In terms of new brokers, that's a gradual process. So we have included 2 more brokers in -- during 2022 compared to 2021. And we'll continue to develop that. That will also lead to potential opportunities in other segments.

So whether it is going down, we have very large clients in the U.K. So going down to the segment we basically are in the Nordics, in the U.K. that requires some other brokers. It needs to be done gradually. And we'll see where the profitable opportunities are, but we're going that gradual development. And then one last comment I want to make is that there -- if we go into something like the Swedish new motor facilities in the U.K., which we obviously explore and are interested in understanding, then we will do that not with exactly the same organization we have in the U.K. now, but with a separate setup inspired by Sweden.

So there are -- that is the U.K. market. There is -- there are a lot of opportunities. Right now, market dynamics in public sector are favorable. That may change for 1st of April, who knows. But in 2022, they have been favorable. So we have good growth there, and we focus on that and then let's see.

[Unknown Analyst]

Yes, looking at your combined ratio in this quarter and comparing it to same quarter last year and then adjusting for runoff large losses and also, COVID are yet worsening or uptick in a combined rate of 6% percentage points roughly. Is this just volatility? Or is it any underlying development here?

[Henrik Høye, executive]

It is -- the majority of it is volatility, medium-sized losses, Norway especially. And -- but there is also -- there is also some elements that are with a portfolio of -- so we're going into -- we're growing a lot in the housing segment as an motor, fairly low deductibles. And it's the same as I explained with the reinsurers.

So inflation makes frequency go up because more claims come into or above deductible level. So there is -- that is part of it in Q4, where you have high frequency from before. Don't expect that to continue in the annual cycle, but we see higher frequency in Q4, not only because of weather.

[Unknown Analyst]

You are maintaining your targets, but the running yield on your bond portfolio have increased from 2% to 6% during the year. What is the ROE impact of 6% return on the bond portfolio versus 2% as it was last year?

[Henrik Høye, executive]

I don't have that exact number. But I think that it's important that we maintain the long-term financial targets. This is long term. It's not only any. But do you have that number did impact of it, it's probably possible to calculate on the go, but is complicated.

[Unknown Analyst]

4% times NOK 11 billion. So that should be NOK 400 million then...

[Unknown Analyst]

It's a leading question. And on the U.K. for...

[Unknown Analyst]

Aberration in 2022, we have 4.1% now we have 6 revenues, we have to start of -- so obviously, it has a significant positive at that point.

[Henrik Høye, executive]

Significant impact compared to 2021. But yes, leading question, but that is important to see here it is.

[Unknown Analyst]

On U.K., you had very, very low claims in the quarter. What should -- or what do you expect as a more normalized claims level in U.K. going forward?

[Henrik Høye, executive]

Long term, there is a much more large losses in the U.K. are bigger and a bigger share of the totality. So is more volatile on all products, also motor.

No more questions?

[Unknown Executive]

A couple from the e-mails. So a couple of investors asked about the geographical diversification or expansion. If you could comment on that?

[Henrik Høye, executive]

Yes. So we are looking at new markets, we have mentioned that Spain has been an interesting country for some time based on facts looking at many countries at the same time. From the first fact-based analysis of Spain until now when we've met many of the brokers, the market size has reduced.

We are still waiting to get data, enough data to understand what to do and how the market works. And that is a firm criteria before we make any decision of doing anything in Spain. So it's proven to be not as attractive, and we are continuing to work there, but also looking at other possible opportunities. It's not really that we need to go somewhere else to find the growth, but it's an attractive process with all employees to look -- we learn a lot from looking at new markets, other markets where we can find either something that is done poorly or very well and learn from it.

So we will continue doing that going forward, but no firm decision and the facts will make the decision whether we do it or don't.

[Unknown Executive]

Yes. One more question is have you -- due to the changes in interest rates, have you changed your exposure to medium and long-term duration products in insurance portfolio?

[Henrik Høye, executive]

We have -- we obviously look at the required combined ratio for return on equity target with changing interest rates. And that requirement is lower now. We can have a higher combined ratio on the long-tail products than we could before. What we see is that some of the long-tail products in -- at least in Norway, they are very competitively priced. So there are someone else who calculates this home with increased interest rates, and we don't see the right return on equity at those price levels. So we're not winning a lot of that.

[Unknown Executive]

Yes. The other question is either directly or indirectly answered by your walk-through, I guess.

[Henrik Høye, executive]

Then thank you very much for showing up here today. I hope we see even more people next time, and thanks to everyone who's been there digitally.