Earnings Call: Q3 2021

Oct 20, 2021

Summary

Pricing and retention trends were strongest in Norway, while Sweden and the Baltics remained improvement priorities. Q&A also covered NEM’s Q4 premium contribution, bond yields, phased IT upgrades and dividend timing.

Good day, and welcome to the Gjensidige Q3 2021 results meeting for analysts' conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mitra Haghanipour, Head of IR. Please go ahead. Thank you. Hi, everyone. Welcome again to this analyst meeting. We will go straight to the Q&A. I'm sitting here together with Jostein and Kjetil. Helge will join us later in the meeting. He's busy right now. Please ask your questions. Thank you. Ladies and gentlemen, to ask a question today, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one for your questions today. We will pause for a brief moment to assemble the queue. Our first question today comes from Vegard Toverud from Pareto. Please go ahead. Hello again. I have a few more detailed follow-up questions. First of all, in Denmark, the NEM Forsikring, could you give us a number of how much premiums that have now entered the P&L from NEM Forsikring? Yes. It's zero. It was closed in the beginning of October. Okay. What's your expectation for Q4? The total premium volume is around DKK 190 million, so give and take around that number. Then, yeah, divide it by four, I guess. Thank you very much. That would be with full effect one quarter in Q4, just to get the details right? Yes. It came in in the beginning of the month. 10th? The 7th? Close to a full quarter. Not quite. It ended around the 10th or something like that, I think, of October. Yeah. It lapsed on- 10th of October? Yes. It's a day count. Yeah It matters a bit which day that was closed. I think it was around either the 7th or 10th of October that we closed the transaction. It got the formal approval. Or was it the end? No, it's No, it was in October. Yeah, 7th or 10th. Yeah, around that. Yeah. I don't have the exact date. Yeah. It's 190 annual premiums, and then just a number of the period that you have it in our books. Excellent. I have two more questions. One is a quick one on bonds at amortised cost. It seems like the yield or returns there have come up quite compared to previous quarters. Is there something you could, or some details you could provide to this, and what we should expect there going forward? Not the yield in cost, but I think the result is positively influenced by one matured bond. There's a realization in the portfolio, if I remember correctly, in third quarter. One rather large index-linked bond that matured actually and gave a positive effect. Then, of course, the unrealized reserve came down then slightly. An expected yield there now? Just a minute. The running yield for Just a moment. 3.3%. 3.3, that's right. Running yield on the whole portfolio or amortised cost book. Yeah. Excellent. The reinvestment rate was 2.5%. 2 and a half on reinvestment rate? That's right. Finally, the change of ownership product has historically, and going to, as I understood from Helge, been sold in a different way than the rest of your insurance. With that background, what do you target as a market share in this market going forward? First of all, we haven't been participating in the whole change of ownership market until now. This is a new market for us in Norway. But in Denmark, we actually have been a market leader in that product. It is distributed mainly through real estate agents. That's, I think, not 100%, but very close. It's a real estate agent-distributed product. But that might change in the future as well, but this is how it has been. We haven't specifically targeted any market share. But as Helge mentioned on the call, there has been estimates in the market for around NOK 3 billion market there. I think that was actually the CEO of Fremtind who stated that number in an interview here not too far ago. We'll see whatever it ends up. This is of course not an active market generally for us, so we'll see. Is there any numbers you could provide us, a market share you would need for this to be break-even or things like that? Well, I think as always, it is advantage to have a fairly large portfolio because that gives the proper risk diversification. In terms of fixed cost or anything that should require any specific size, it is not that much. I do not think I will give you a number on that one. But it is important over time here to get a fairly large market share to get the best possible data. Of course, when you distribute behind the change of ownership policy, you also have a lot of information about the risk object, which is beneficial to the ordinary property product as well. Because this is a new product, it also comes with a new requirement for the, we call it taxators, the ones with the surveyors who check the risk in terms of the kick-offs report in the region, and the wishes will be improved compared to the existing ones, which is also good practice. Excellent. If I understood you correctly, this would be a five-year product. Is the liability for one selling a property in Norway, is that limited to five years under the new regulation as well, or is there something I think it's the guarantee period that by law is that you have five years for this one. I think it's not something we have designed, it's regulated. Part of the regulation. Okay. Thank you very much for your answers. Thank you. As a reminder, that is star one for your questions today. We now move on to a question from Tryfonas Spyrou from Berenberg. Please go ahead. Yes. Hi, good morning all. I'm trying to understand, obviously remarks that appears are quite much better, and obviously you've been ahead in terms of pricing for the last two years. Excuse me. Sorry, can you hear me? Tryfonas Spyrou, your line is very poor. Could you start once again and also bring your phone closer to your mouth? Yes. Hi, can you hear me now? Better. Thanks. Yes. Hi, sorry about that. My question is around your margins, which are obviously way better than peers at the moment. You had price increases, I guess for two years running, perhaps ahead of peers, and now you are talking about putting price increases in line with and above claims inflation. I am just trying to understand how can you stay competitive enough, given all these price increases over the last two years, and obviously these are expected to continue. That is my first question. My second question is on the run-off, it is currently running above your 1 billion, which are current expectations. Can you give us a sense of what lines are driving this? Does that have anything to do with trends around lower body injury claims in motor? Obviously should we expect that momentum to continue, going into 2022? Thank you. It is of course a balancing act of what price increases you are able to put through. But especially in Norway, the competitive position is strong. We have the best data both on the risk picture and the customers as such. It helps through the customer dividend model, which means that we have fairly good position here and are able to put through price increases. As we mentioned on the call or in the presentation earlier today, actually retention figures have been stable to slightly positive. Whether that can continue is of course something we try to be very light-footed there and see that we do not put through price increases that will lead to either mass exodus or a lack of new sales. So far, every sign is actually very positive. New sales is of course not included in the report because we report on earned premiums, which react to the lag. But I mean, the new sales is also growing quite well. The portfolio is growing both in terms of actual physical volume in terms of number of cars and number of customers in the private segment, but also the premium volume. Whether that can continue or how long that can continue is something that will be a speculation. Going into the very important 1/1 renewal for the commercial segment now with 4% of the portfolio renewing, our ambition is still to price above the expected claims inflation here in commercial Norway. Also for private property in Norway, being very explicit on the price above the expected claims inflation, whereas in motor it is more in line with expected claims inflation. In the other markets, our position is of course not as strong, but I think we are getting a really good traction now in Denmark and we are able to keep up the retention numbers and get through price increases, which are more or less in line with the claims inflation. When saying this, these are very broad statements. We look at pricing at a very differentiated way at very what we call micro tariffs, which are detail in terms of what type of risk, what type of clients are here. There is also client scoring models, where the pricing rates will depend on your history with us. My average number conceals a lot of details underneath, which are very, to a large extent, very much. Sweden, Baltics. You saw the margin improvement in Sweden, which is very good. Based on, I think, one to two years now, really solid work in terms of underwriting and risk selection. The Baltics, I think part of the problem we see there is that we have not been able to put through the price increases that we should have been, or have not been consistent enough in our pricing there. We are working on a number of measures to improve margin and get costs down there. Volume was actually picking up a bit again now in the Baltics after some weak quarters, two and three quarters earlier. Yeah, that is very helpful. I guess part of the reason I was asking questions, obviously, when Tryg talks about growth, especially in private, they are saying that the new customers on average are less profitable. I guess I am surprised a little bit, given you have such a high level of growth, at the same time, your underlying is improving quite a lot. I guess that is quite positive. But I guess that is what triggered the question on my part. The runoff by line, I think there are three major lines that have been part of the planned runoff releases that have been going on now for four or five years. This is workers' compensation in Norway. It is related to personal injuries in motor in Norway and workers' compensation in Denmark. These are the three lines. These are all very long tail lines of business, large lines of business. It has been going back to mainly to the vintages 2008 to 2014. So we see that with the benefit of hindsight, we were very too conservative in our reserving. I think it is a result of improved health and safety in workplaces, improved quality of roads and cars, which we didn't quite capture early enough that that trend was there. If we look at the bodily injuries in the motor line of business, I think it has been a long-term decline here. Maybe flattening out somewhat now, but it is still much improved compared to 10, 20 years ago. This is probably a result of both safer cars and safer roads. Number of accidents hasn't necessarily gone down so much, but the consequences have been less fatal or less serious than they were years ago. I guess, should we expect that trend to continue going forward? What is your view on that? Well, in the short term, I wouldn't expect any change, but maybe if you go a decade or two ahead, the quality of driving assistance systems and so on will take this trend even further down. I think one or two years ahead, I don't foresee any specific change there. But as you can hear, this is a prediction. I'm trying to look into a crystal ball here. I don't necessarily have any better views here than you have, but this is at least our view. Okay, thank you. We now move on to our next question, which comes from Phil Ross from Mediobanca. Please go ahead. Hi there. Just a question first on the IT system. You said you started rolling out with private Denmark. I just wonder what sort of timeline we're looking at for Norway, assuming that comes next. And what sort of extra capabilities does the IT system give you? I am not sure whether that would put you ahead of your peers, maybe? Or is it a process of catching up peers' IT capabilities? The second question I had is just on the dividend. Mainly out of curiosity, really. I wonder why you decided to pay now and not wait till year-end, or is that more of a formulaic calculation timing thing? Thanks. We have a new IT system from Sapiens. It is in our view the best system that is in the market now. When that is in place, we will have a better system than our main competitors, which have chosen that in the earlier stage. It is a system that will reduce our operating costs in Denmark. After that, probably Sweden, before we go to Norway. We decided to roll it out in that order and not do all geographies in one go to contain risk. Because these core system rollouts in financial institutions are somewhat risky, and we have seen a number of their successful implementation in other financial institutions. With some degree of, how to call it, cautiousness, we have done it in this way. It takes longer to then get the new system in place in all the geographies, but it happens with a lower risk in my view. When it will be in Norway? There is still a couple of years before we start rolling out this in Norway. We are now working on private Denmark, and that is where the system is in place. Next part going live is the commercial business in Denmark, and then move on to Sweden and then to Norway. Also part of the reason for doing it in Sweden and Denmark first is that the systems we have there were both more costly and less efficient in other ways than the system that we have in Norway at the moment. Also, systems in Sweden and Denmark were, in a way, not owned by us, but by FTC, whereas the system we have in Norway is owned by ourselves. Timing of dividend. You could argue in both ways, I guess, in terms of whether it should be now or later or earlier, for that matter. It is a fact that since we sold off the bank in 2019, we had a very high capitalization, and we said at the moment that our optimal way of using the proceeds from that sale was to invest in new non-life insurance business, inorganic growth. That hasn't taken place. We've given ourselves a couple of years. We haven't bought anything big. Small acquisitions we can, in terms of different generating capacity or earnings capacity we have underlying. This was a good timing. Also remember that in 2020, we were restricted in a way from paying out dividends due to ongoing COVID-19 situation. It was a separate dialogue, I would say, with SFSA if we should have done this in 2020. Sure. Got it. Thank you very much. That was very helpful. It's also, I think, fairly consistent if you go back a few years ago, where it was done in the third quarter a couple of other times. Sure. Thank you for that. Thank you once again, ladies and gentlemen. As a reminder, that is star 1 if you would like to ask a question today. We will pause for a further moment. We now receive the question from Alexander Evans from Credit Suisse. Please go ahead. Hi, Jostein. Alex here. Just on customer retention. If I look at your targets, you seem on track in Norway, and obviously outside of Norway is I think about 6 percentage points behind. Is it possible to give a breakdown of where you sit in Denmark relative to Sweden and the Baltics and how you think about that target going forward? Thanks. I'll talk a bit while I try to find the numbers. What we have in Norway is a bit specific, especially because of the customer dividend model because of the strong brand recognition we have here. These are, I can say, the two most driving forces of the high retention level in Norway. We don't have a customer dividend model outside of Norway, and we have a brand which is less strong at this. I think it's picking up really in Denmark now for our efforts over a number of years building it and also now focusing our brands in Denmark towards the one working at DDM. We lag still in Sweden and the Baltics. It's also related to the weaker retention, also sort of related in Sweden and the Baltics a bit to how they sell the product. The larger extent to selling one product at a time, rather than selling the whole customer relationship. That is keeping the retention levels down. Our mission of 85% is still there because we are working on broadening all the customer relationships, and also we are doing things to keep their retention at a higher level in Sweden and the Baltics where it is weaker. If you look at the- I mean if- Sorry? Sorry. I was just going to ask on product per customer. How would that relate in Norway relative to what you are seeing in Denmark? It sounds like Sweden and the Baltics are more around the one to two, is that right? I think in what we call the core private part of the portfolio, which is either through what we call it, the ACV advantage program or affinity programs. I think we have something like 4.1 or something products per customer, if I remember correctly. Yeah. Whereas when we are talking private segments, that is where this probably makes most sense to talk about. But in Sweden and the Baltics, we are between one and two products per customer. It is important to have a breadth in the customer relationship to get the retention up. If you look at it as specific, we think that to get to this 85% outside Norway, we probably would get somewhat above 85% in Denmark and then get it closer to 80% in Sweden and high 70s in the Baltic segment. We might touch upon this in the capital markets day in November as well. Where we are at the moment in third quarter with the 79 outside Norway, it is 81.5% retention in Denmark and 78.68 in the Baltics. I think it is an ambitious target, but it is also achievable. Or at least it is also achievable, but yeah, over some time now will be achievable. And it is improving. Okay, thanks. Thanks very much, Jostein. Thank you. At this time, we have no further questions in the queue. All right. Thank you everyone for dialing in here, too. We are available for you. Just contact us whenever if you have any questions. Other than that, we hope that you stay safe, healthy, and we will speak to you soon. Bye.