Welcome to the Gjensidige Forsikring Q1 2021 results meeting for analysts. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Mitra Hagen Negård, Head of IR. Please go ahead.
Thank you. Hi, everyone. This is our Q&A session for analysts. We're sitting here, [Flessum] and I, together with Jostein, and Helge will join us in a few minutes. So please proceed with your questions. And perhaps you can limit your questions to two per person so we can allow everyone who wants to ask a question to get the opportunity. So please proceed.
Thank you. If you would like to ask a question over the phone lines, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name before posing your question. Again, that's Star 1 to ask a question. We'll now take our first question. Caller, your line is now open.
Hi, everyone. Alex Evans here from Credit Suisse. Thanks for taking my questions. If I just start on, I think you mentioned on the call you found that IT system in Denmark's expected to help the cost ratio there. Is it possible to give any sort of details or, or guidance on, on how impactful you think that's gonna be? And then secondly as well, just on the, on the partial internal model, is there any update there, any, dialogue you've had with the regulator on, on some of the key areas there? Thanks.
[crosstalk]
No, we are, what do you call, in a soft launch mode on the, on the new core system in Denmark, private segment first, where we just select a few customers, all employees will be testing out. Then we are getting close to launching software for external customers. Then, when that is up and running, we'll follow up with the commercial segment afterwards. The main, the most easily noticeable effect will be reduced IT costs over time because the current system is a system we do not own ourselves and pay per kind of transaction-based or volume-based. So as we start moving business from policies and claims from the old business to new ones, IT costs should come down. And in the longer term, the new system is better.
So it's increasing our competitiveness in terms of being more quick to update products and prices, easier to integrate partner solutions and so on, in the future. So that is the effect. And then, of course, cost is most easily distinguished, whereas the others may more have an effect both on top and bottom line over time. We haven't quantified or given external information about the quantity of effects for neither of the costs of the new system. But it is large enough to be notifiable on the account itself. On the internal model, it's an ongoing dialogue. As I need to allow change was on the, we got some partial approval or we got approval on part of the market risk debate we had with FSA.
We're continuing with that and with other parts where we have a difference between the own calculation and the approved one. You know, the main items are the correlation effects between underwriting and market risk and modeling of storm risk where we use a well-recognized external model. That has been deemed by the FSA not to qualify as an internal model, which is a different practice we know from neighboring FSAs. So I think we're working with a long-term perspective with FSA to get further parts of the own calibration efforts.
Thanks. I mean, should we expect something sort of this year, next year? I mean, how does the timeline look on that perspective?
I'll abstain from giving any predictions there.
Okay. Thanks.
So, we'll let you know when we're there.
We'll now move to our next question. Caller, your line is open.
Yeah. Hello. This is Ulrik from Nordea Markets. I was just wondering if you could repeat or remind us what is the biggest issue for profitability in Sweden? Is it scale? Do you have to grow out of the current high combined ratio, or are there other steps you can take to improve it?
I can start. I think, first and foremost, we have to secure that we can reduce the cost position, because our cost ratio is too high compared to the large operators in Sweden. Then to secure that, we are working now intensively with Tata Consulting Group to look into a new type of concept in Sweden, a more digital concept, where we want to approach the customers in a more digital and pure digital way, and in, of course, combination with more automatic processes internally. And after we have done that, of course, it's also about scale, new customers and new partners on the distribution side. So actually, it's a totally relaunch of the Swedish business. We are working with it.
It's slightly challenging due to COVID-19 because we are working with people in Bratislava, and we are working with people in India, Norway, Sweden. But so far, it's relatively good progress in that work in Sweden. As you know, we will host the Capital Markets Day later this year, and I really want to dig into this in more detail when we see each other later this year on the Capital Markets Day.
Okay. I'll wait. Wait for that then. Thank you.
We will now move to our next question. Caller, your line is open.
Hi there. It's Phil Ross from Mediobanca. I'm just curious about how you think about the weather impact in Q1. I think, Helge, you mentioned that it's been as cold as it's been in Norway for 10 or 11 years now. I wonder then if that means you sort of, you think about the impact as perhaps a, a one in 10-year event or equivalent, or do you, do you not really quantify it? You're more agnostic in the sense that if there's weather, then that's expected. And if there isn't a material weather impact, then, then that's good news. If you could just, yeah, explain how you think about that, that'll be helpful.
I will start and then take my turn for a minute. I think, as we were clear to point out, it's not a deviation from normal. We haven't a good estimate of normal. Last time was in 2010, so it's 11 years since last time. But that's not, of course, a good basis for a thorough statistic on that one, but going forward, and as you said, a couple of years, I mean, we do expect more weather volatility as such, but not necessarily frost. It could be more frequent heavy rainfall and so on, and that's part of what we said when we need price property more than the expected claims inflation as such because we think there'll be some more volatility as a long-term trend, and 11 years is the last time.
I mean, I think we need to be prepared that these things do happen from time to time. We have not had any heavy storms for a number of years, for instance. That could come again, so we are a bit more exposed as a non-life insurer up in Scandinavia. That is not something that makes us particularly depressed, but the exact quarter hits, it will hurt earnings.
Yeah. But I think we could call it extraordinary. In 2010, I think we then operated, and that's 10, 11 years ago. I think the figure.
379.
379, yeah, and 319.
16 now.
2016 now. So it was, and the difference between 2010 and this year was, I don't think it was any snow in 2010. It was really cold. So that was a harsher quarter, actually, compared to what we experienced now. Long term, we will see this kind of this type of volatility increase going forward. And therefore, we also long term have to secure that the pricing will take into consideration that the volatility in weather will affect us on the property side.
Yeah. So, yeah. Then also, I mean, this is a part of what we talked about, that we would like to increase our efforts in climate-oriented claims pricing. So it's good for us and it's good for the customers and society at large.
Okay. Thank you for that.
Okay. I'm sorry. I may answer a bit late, but, I mean, we got the question about because in 2010, we did continue to see freeze-related damages, all through the second quarter as well. And as Helge mentioned, the main reason for that was that ice froze in the ground. And when it thawed, when spring came, we saw more claims. I think this year has been at least in the most populous areas, more, more snow. Now, so that's, it's probably, and we do not expect that kind of claims pattern, for this second quarter as we saw back then.
Okay. Thanks for the detail. Appreciate this.
We will now move to our next question. Caller, your line is open.
Yes, hello. This is Vegard from Pareto. I have a couple of questions, both relating to the solvency slide in the presentation material. I believe it's slide 36. If we look at a calculation of the premium provision and the impact thereon on funds, that's increased quite substantially. Could you give us some details into what's driving that? Is that, that's the first question?
When you say it increased, you compared it to the last quarter or the first quarter of last year?
both.
Yeah. Usually, the calculation of premium provisions is a correction of the own funds, due to the profit inherent in policies written and due to the renewal patterns with a high degree of renewal January 1. This number will typically be highest in the first quarter, because 40% of the commercial book is renewed at January 1, Norwegian commercial book. It's also a function of the level of expected profitability within the premiums written, so with more positive view on the future premium or future profit in the premiums in the policies, that will increase and vice versa. That's the main two reasons for that to change.
So it keeps seasonal pattern more in the first than in the last quarter and it's more slow-moving depending on the profit level in the policies in force or policies written. Other than for that, there is no specific changes in principles or anything related to that number or that high.
There's no.
That range.
There's no discounting or anything that impacts that number positively?
It's correct to say it is the net present value of the future profits. Okay. So discounting has an effect.
The reason why I'm asking is that NOK 1.1 billion from last Q1 and or NOK 0.5 billion from Q4?
Mm-hmm.
It's obviously supportive for the solvency position. The second question, though, is more or less the same, but for the pension, which has been fluctuating somewhat. It was down last quarter to 1.5 from 2.4 and now up again to 1.9. Do you have any comments to that development as well?
The reduction last quarter was related to taking into account the movements from capital certificates to all pension accounts, assuming lower margins, less business than, than the ones we had. I think that is the main reason there.
I would assume that the interest rate impact is larger there.
Yeah. That's all. I'll give you a more precise answer, Veg.
We'll get back to you with,
Yeah.
We'll get back to you, Veg.
Okay. Yeah.
Thank you very much.
We will now move to our next question. Caller, your line is now open.
Hello. It's Jan Erik from ABG. I just wonder about the new client in commercial. It looks like your book has sort of increased quite much inside the accidents and health. So how could you shed some light into the change in the portfolio in Q1 versus that new client? Is it sort of a link to any particular reason why it's just accidents and health, or how should we read it?
I mean, we never comment on single customer relationships as in, whether we gain them or lose them. So it's, we talk about one large new client, and I guess it's fair to assume that that is part of the explanation why the accident and health premium increases more than usual. But, we don't really.
So it's more that you've run kind of a contract into that kind of business and tried to win more into motor and property with the client, or is it so that it's more linked to this kind of product alone?
It's one large contract within the commercial segment, more or less. I'll, I'll stop there, I think. Jan Erik, yeah. Yeah.
Okay. Okay. Perfect. Thanks for your time.
Jan Erik?
Jan Erik?
Jan Erik?
Jan Erik?
Yes. It's important to.
Yes.
Also comment that it's only part of the strong momentum and growth in the commercial business. It's generally very strong renewals. And as you know, 1st of January, 40% of the business are renewed. So it's one large contract. And as you have heard, it's tipped towards accidents and health for that contract. But in general, it's a hard market. It's strong renewals. And we have a very balanced, good balance between premium and volume growth in general.
When you say that it's challenging and more hard.
[audio distortion]
Yeah. When it's harder to.
Harder.
Harder to get the clients on. Sorry.
It's hard to get the clients.
Hold on. No, it's.
Yeah.
Just another question then. When it's tougher to get the clients on, as you say, but you have the good renewals, is it so that competition has increased versus earlier? Or, is it sort of stable? Or how should we read your sort of, saying that it's harder, now?
More, the market is hard. That means it's stable. It's not soft. I use the word hard versus soft. And soft market, you know, then prices are pressed down. So the market is hard. Then we have strong competitive position. We see that our main competitors increase prices significantly also, as we do. We gain new customers, and we have a very strong 1st of January renewals, the best ever. And, as I said, the one new big contract is only part of the explanation for that 11% growth. So the situation is very good.
Common sense.
It's un.
Yeah.
Unchanged.
Is it possible to say how much the out of the 11 that contract is?
No. We haven't.
It's not possible.
Got into those details.
Okay. Thanks a lot.
We will now move to our next question. Caller, your line is open.
Good morning all. It's Daryl Goh from Citi here. So a couple of things. The first one is just on the growth outlook, from the perspective of private versus commercial. I know you said earlier that the private side was impacted by lower travel volumes. How might it then normalize through, yes, through the rest of the year? And then also on the commercial side, are there any volume growth over there? Or is it just purely price? And then the second question is just on Danish property. So just tagging onto the comments that you made about Norwegian property, on sort of longer term, what the volatility is, are you also pushing through, you know, that view into your pricing measures in Danish property? Thank you.
Yeah. Thank you. I can start with the first one, and Jostein can prepare the second answer. I think I said that we are really pleased that when we look at the current premium growth in private, 6.1%, it. I think I said it's 60/60 split between volume-driven and price-driven for motor insurance. And that's the first time for many years, actually, because we have increased prices significantly. And the premium growth within motor insurance has been on the price side. So we have a very good balance between volume and price-driven growth, strong competitive position. And I also said that we expect the claims inflation in the span between 3% and 5%. So we have to see continued with price increases.
But going forward, of course, due to the competitiveness, new sales, strong position towards car dealership channel, we expect volume growth to be strong also going forward. On the private property side, we have strong premium growth, but that's purely price-driven. We maintain our customers, but it's hard to actually gain new customers when we increase prices more than claims inflation as we do for private property. On travel insurance, we have price increases, but we have volume drop. So that's negative development in volume and positive price increases, roughly slightly on the negative side if you look at premium growth for travel insurance. Going forward, you maybe saw my last comment today. We are in a very good position. The underlying frequency loss ratio is down. Our competitiveness is strong. Our volume growth is better compared to last year.
Our new sales is very strong. So we really think we have some really good quarters down the road, because we are in a good position now.
Yeah. Sir, help me. I think it's probably my bad. So what I was meant to ask, this is the question specifically related to the Danish business?
Yeah. The second question was no, this is this was Norway.
Yeah.
The Denmark is coming now.
Yeah. That's because it.
Okay. Got it. Got it.
That's perfect. Thank you.
The comments on price and volume, all the comments on price and volume from Helge now were related to Norway.
Norway. Yeah.
Private Norway.
On the Danish business, we have not seen the same effects on cold weather on our property side in Denmark. I saw there were some comments in all of our competitors' releases a couple of days ago, but we haven't seen that in Denmark. But still, there is a need to increase prices in property, both on the private and commercial side in Denmark. And we will go through with that over time. So it's also the comments we made on the increased volatility due to climate effects applies for Denmark as well. So we will cater for that in our pricing decisions.
Yep. And sorry, just a small follow-up. In terms of the growth outlook for Denmark this year, so just the first quarter seems a bit low, especially considering what you did last year. I know that this might be temporarily impacted because of the high level of private travel volumes. Will that then kind of normalize in the future quarters and the growth rate maybe, you know, between Q2 to Q4, it's a bit closer but not quite at the same level of you did last year for Denmark?
I think, yeah, I'm going to guess the Q2. The comparable figures in, in Q2 2020 will have the same depressed effect on the travel insurance side as we expect to see in Q2 2021. So then that should take away that quarter-to-quarter negative effect that we have on travel insurance this quarter. And then, as we also talked about, an additional factor in Denmark is to depress auto sales. And of course, more auto sales gives more auto insurance, and we get our share of that, hopefully. So that's part of the, of the explanation for why it's somewhat lower growth in the private segment in Denmark this quarter.
As we talked about in the, in, at least I mentioned in my speaking notes, is that we have a good growth in the commercial part of the Danish portfolio, and slightly negative growth in the Danish private part of the Danish portfolio. If I may add one technical curiosity, maybe we could see it, but that is, I know it sounds a bit trivial, but last year was what you call a leap year. We had one more day last quarter than we had this quarter. And it's actually the premium is per day. So it's 1.91% or approximately 1% negative premium growth due to that leap year effect this quarter. Sounds trivial, but it actually means something in numbers for one quarter. And then it wobbles out throughout the rest of 2021.
Yep. Got it. Thanks. Thanks all.
We will now move to our next question. Caller, your line is open.
Hi, everyone. This is Tryfonas , from Berenberg here. I have two questions, sort of more broader ones. The first one is, how do you think about your strategic position across the Baltics? Obviously, the market dynamics seem to be very different from the rest of the Nordic business in terms of competition, etc. Could you perhaps give us an insight if the business is earning the return on capital that you're expecting? And I guess thinking longer term, is this an area where you want to allocate more capital perhaps either to improve returns from achieving a bigger scale or because there simply aren't that many opportunities for growth in the Nordics? The second question doesn't relate to this quarter, but I appreciate it's quite niche.
But I was actually wondering if you could give us some insight on how you handle motor accidents in vehicles that could be partially autonomous. For example, we saw some headlines regarding a Tesla crash this week with the driver apparently not being at the wheel. I mean, ultimately, how is the liability determined in cases the driver isn't at fault? Thank you.
Yeah. I mean, we've been in the Baltics since 2005. I mean, we had the first acquisition. Profitability has been volatile, and we were, until COVID hit us. I think on actually a good, good path there. We wouldn't be going on if we didn't think that we would make a profit there over time. That was more than, more than the cost of capital that we tie up in that business. And, and, and our aim is clearly to, to make much more than the cost of, of capital in where we allocate capital. That's how we create value to the shareholders. But of course, given Q1's number, definitely not anything we're satisfied with, anything we're happy with. And we've been very open about that.
Going forward out of the COVID, given the measures we are taking on our hands to get costs further down, we believe that we will create value by having capital allocated to the Baltics markets. The second question was about self-driving cars, if I understood correctly. I mean, there was a story in the U.S., I guess, a couple of days ago on a car colliding and Elon Musk saying it, there couldn't have been the driverless system that was at fault. I don't think we've had any accidents so far here that I'm aware of that this has been an issue. It needs to be if there is one, I think it needs to be handled as an exception.
I don't think I can say now what we actually will do if there's a discussion around that. But according to the Norwegian law, the driver has the responsibility no matter what, whether it's with the car on self-drive or whatever. Norwegian law, the driver has what you call an objective responsibility. He needs to be in charge.
Do you think this is something that is potentially going to be a much bigger debate as going forward, as we the industry sort of makes a shift towards more autonomous vehicles?
In 2014, I think we predicted the sunset of the motor insurance business as a Capital Markets Day, and due to the increased amount of self-driving cars and the value of safety systems, and since then, that has been the fastest-growing business line, so it's, we might not be the best predictors of what's going to happen in the future on the motor insurance side. Currently, it is growing. I think it's at 60/50 around price increases in volume in Norway, and it's very profitable. Whether self-driving cars will come and be an important part in five or 10 or 15 years, in the short term, definitely not. In the longer term, I'm not sure.
Oh, we are talking about the third wave when it's also [OMG] companies. And then we are talking about 2014 and 2045. So we are talking about a really long time before this will begin to really impact actually in our markets.
Very clear. Thank you so much. Thanks.
Yeah, before the next question, I'll just get back to a question Vegard had on the premium provision change from the first quarter of 2020 to the first quarter now. It is a combination of volume growth and premium growth. I mean, it's been fairly high in the, especially in the commercial segment over that one year. The second major part is an improved combined ratio or profitability level, which is, yeah, these are the two main drivers of the increase. Then there are some more technical effects in addition, but these are the two main drivers.
We will now take our next question. Caller, your line is open.
Hi. It's Jon Denham from Morgan Stanley. Firstly, is there a reason why the SCR should fall in the second quarter?
One reason is the payment of dividends, so we get less assets. Otherwise,
You have the normal impact from the 80% formulaic dividend being applied on the earnings, the IFRS earnings.
This is the capital requirements, yeah.
Oh, the capital requirements.
Yeah.
Okay. I thought you said [audio distortion].
But you said it's all the capital requirements, or did I misunderstand you?
No, no, the capital requirements.
Yeah. The capital requirements will drop when dividends are paid, ordinary dividends, which was approved at the General Assembly in March 2024 or 2025, whatever it was. That NOK 3.5-ish billion is out. Then the reduced assets that requires the market risk will then drop somewhat. Otherwise, no, I don't think there is, there isn't much seasonal pattern otherwise. If there has.
Okay. Perfect.
If there is more clear short tail in the first quarter, then the loss reserve will drop somewhat in the second quarter because typically weather-related losses are short tails being paid out fairly quickly. But that's.
Okay.
The primary effect, the major effect would payment of dividends.
Brilliant. And the weather number given on the call, I think you said NOK 136 million in private, NOK 107 million in commercial. That was a benign versus a benign 2020, I think. Do you have a figure of kind of what those numbers were either for the group or for the divisions versus your normal expectation?
No, I'm sorry. We don't have that calculation. I don't know what is the normal amount for these type of claims.
Okay, and then just finally.
Just to be fair. Just to be fair, I mean.
Sorry.
What is normal? Things are becoming very, the weather situation is shifting very strongly, which is the reason why we, as we've been speaking today, see the reason to increase the prices on the property insurance line. So normal doesn't have the same meaning now the way we see it as it used to before. Things are becoming more volatile. So that's why we found it more useful to carve out those numbers compared with last year.
Okay. Is that to say that last year was benign?
Yes.
Yes.
Last year was benign, and this year was extraordinary. And I haven't, maybe some of you have dug into Eika Gruppen. They released some figures this morning as well for their insurance business. And as you know, Eika Gruppen is SME and private business, a very stable profitable business. And they increased the combined ratio from 90.7% - 95.6%. And we commented over estimates to NOK 316 million and 4.5 percentage points. So I think that's a good proxy actually. They are in the same type of market, property, cars, SMEs. It's central around the eastern part of Norway. And their business are quite stable actually. But last year benign, this year extraordinary. Last time we had this extraordinary situation was in 2010.
Thank you. And just finally, there's a comment on the call about the 6% hurdle rate for M&A. Can I just clarify what that is? Is that the cost of equity used in, I don't know, an NPV calculation to make it positive? Is it not your hurdle ROI?
That is correct. It is the cost of equity after tax used in that kind of calculation. And then on top of that, we need to have a big positive NPV to create value. That's how I think about it.
Brilliant. Thank you.
We will now move to our next question. Caller, your line is open.
Hi, yeah. Alex Evans from Credit Suisse again. I just had one follow-up really, just about sort of weather and obviously a greater focus on sustainability. I just wondered if there's any sort of preventative measures that you are taking or could be taking to mitigate some of the weather volatility and also the impact on claims as well.
I think we have more frequent communication with our customers, sending them SMS, related to weather forecasts and giving them tips and information about how they can secure their assets. That's increasingly type of communication we have. It's nothing special, I would say, related to the cold weather. It has been cold for many, many weeks, during first and second month this year.
Okay. Thank you.
Just as a reminder, if you wish to ask a question, it's star one. We will now take our next question. Caller, your line is open.
Yes, Jan Erik, just one for technical follow-up. In Denmark, your amortization has gone down from NOK 14.1 million last quarter to NOK 3 million , and almost NOK 25 million a year ago. Was this something you have done on taking out the cost, the one-off cost, which I missed somewhere? Or could you just shed some light into that, please? Thank you.
I'll give you a moment.
Give me a sec, Jan.
Give me two minutes, Jan, and I'll get back to you on it.
no problem.
We will now move to our next question. Caller, your line is open.
Hi. Hi, morning everyone. This is Claudia Gaspari from Barclays. On your earlier point around more frequent communication with customers around the weather volatility, I was wondering, is there anything you can do around terms and conditions perhaps? Are you planning to do anything there? Are you seeing competitors doing anything there? Because, you know, very often, I guess, it can be more effective than price, I guess, depending on circumstances.
You know, long term, I mean, we are also working with sensors and tech partners on the tech side to install all kind of claims prevention installations related to water damages.
Mm-hmm.
To these, etc., etc., and we have done this for many, many years. Actually, we had also a large problem with agriculture business many years ago, and we financed and installed fire equipment for more or less all agriculture and farmers in Norway, and we prevented lots of fires 10 years ago. Today, we work towards private customers and commercial customers with sensors related to, as I said, water and all kind of installations to prevent water damages and fires, and of course, when we have situation like we had now in first quarter, it's about giving customers also tips to what they can do from day to day to prevent cabins and houses and boats, etc., related to wind, temperature and in the season also heavy rains.
We are increasingly good at identifying these periods and communicating with our customers. We have lots of partners on the technology side to install preventive equipment in houses and for farmers and for the SME customers.
Okay. Thanks.
And just as a reminder, that is star one for any questions. We'll pause for just a moment to allow everyone to queue. Star one. It appears there are no further questions, so I'd like to hand the call back to our hosts for any additional or closing remarks.
Thank you very much, everyone, for your participation and good questions as always. Feel free to contact us, later today or going forward. Have a nice day, all of you. Bye.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.