Earnings Call: Q2 2020

Jul 10, 2020

A warm welcome everybody to this quarter 2 presentation. As you probably know, the Norwegian society is gradually opening up again. And that's the reason why we have invited to our kind of normal meeting spot here in Oslo with the necessary 1 meter social distance between the guests in the room. So there are not too many in the room, but we have been we are giving that opportunity and thanks a lot to you that also have arrived here. My opening point in a quarterly presentation is normally to start with the DNA of the company. This is who we are. When we recruit people in Manchester, London and other places, we will always start with this kind of slide and say we are different. We believe in culture and here are over 12 statements. I do understand that you as investors you have questioned our credibility when it comes to one of our targets profitable growth lately. We have seen 4 years in 2018 2019 the question after quarter 1 was whether we have kind of passed the turning point and gradually starting to deliver a reasonable profitability or a good profitability gap. And it's good to be here today and continue to deliver then on the very important technical results. So my highlight for the day is the combined ratio size 92 on a company level 91 percent if you include change of ownership business where we still have some business as you know. So a 91% or 92% on the combined ratio side is what I would call acceptable or potentially good. And as I will kind of show you a bit later, I think it's fair to say that the underlying reality is in line with the figure you see here or potentially slightly, slightly better than what you see here. Other important elements from the quarter 2 is a continued strong price increase in the Nordic market and a very strong investment result where we are not only bouncing back together with everybody else, but delivering a profit potentially a bit above expectation. And I brought Chief Investment Officer, Dag Marius, with me today in order to kind of cover on the investment side. The solvency capital ratio is a bit above SEK160,000,000 which I guess is pretty close to your expectations after a good quarter 2 here. This has led to a profit after tax size NOK580 1,000,000. If we go to the volume update here, you can see a 3 percentage points growth in local currency because of fluctuations on the currency side a 16% growth in Noshtikroni. As earlier communicated, you can see that we are putting a lot of priority on the profitability issue in the Nordic market, while expecting to continue to grow in the U. K. Market. Remember when you see this kind of figure shares that quarter 2 is not really a big quarter in Protecto. It is in U. K, but not in the Nordic markets. So percentage points deviations on a pretty small quarter is not very important. It is not. As always, we have open up for questions when it comes to this presentation and feel free to pop them in during the presentation and we will either take them at the relevant place or at the end of the presentation. And we have got questions, I understand, on the volume side. Yes, we do. So a question from Vegar Tovre. Premiums are significant down in Norway. Could you discuss the development? Also, there is gross written premium down 20%, while net written premium is down 5%. Could you discuss the impact over the next quarters? So I'm if you do look at the slide here and if you take a look at the first half year, you can see that the deviations here and they are not that huge. So the Q1 was pretty good on volume and that's the big one in the Nordic market. And I don't really worry too much about some clients' loss neither in Norway nor in Sweden in quarter 2, in quarter 3 or in quarter 1. So in the Swedish market, we lost a very, very significant client, potentially the 2nd biggest in Protektur in quarter 2. It was an unprofitable client with a lot of frequency claims. It's pretty obvious to us that we must price up very hard. And if that client leaves us, it's kind of obviously we would prefer the client to stay, but then it must have been to a significant higher prices. If that is impossible, we say just let it go. So volume development in the Nordics where we are talking about here Sweden and other areas, it's a pretty small quarter. Profitability goes first. We leave some clients, don't worry too much about it. My expectation entering into 2021 is somewhat more positive when it comes to volume development in the Nordic market because the kind of necessary price increases and portfolio cleanup situations, they are basically history. So I didn't worry too much about volume development in the Nordics. We will be back in 2021. In the meantime, it's U. K. Driving the volume development as earlier communicated to the market. Is it any other on the volume side? Okay. So that's the volume side then. If you go to claims development, it's obviously a strong improvement relative to earlier periods. And I can make a comment on the different countries when we are having a look at the combined ratio slide. I think that's slightly more relevant. First here before commenting on the different countries, you can see a small reserve loss, it's 1 point 9, don't worry. It's within the normal volatility areas. So this is what should be expected. A little bit on the negative side or a little bit on the positive side, I wouldn't worry on need of that. The question is whether we see any effects from the COVID-nineteen situation. And our calculation today is that we see a small positive element coming out from reduced activity levels in Norway, Denmark, Finland and UK on the motor side. That is history now. Society is opening up again. Traffic is back to normal and it has been a small kind of positive effect from the COVID-nineteen situation in quarter 2. I think we will see some smaller elements on the negative side in the following quarters in that they will balance out. So to us as far as we can see and at the moment, we think that the COVID-nineteen situation will balance out through the year and also on some long tail projects through the coming years here. A bit on the positive side, a bit on the negative side, Nothing we know at the moment, which is kind of significant on a kind of company level. When it comes to large losses, we can see a pretty normalized situation, slightly above normal. So our expectation is that large losses will be around 8% every quarter. It's 9.6% in quarter 2. So somewhat above a kind of a normalized level. It's a large number of claims size, euros 10,000,000 or €15,000,000 or €20,000,000 It's not kind of a single event out there, but a big number of large claims, but not very big here. It mostly in the property area, but also something on the liability side and 2 or 3 of them on employee benefit type of products also. So runoff situations, they vary a little bit between countries, a limited loss on reserve side, slightly positive figure on the COVID-nineteen side, a bit behind normal on large losses. In totality, that's the reason why I say that our accumulated combined ratio 92% or 91% including change of ownership that underlying reality is potentially slightly better because if you take out these kind of one offs in that area and if you sum those one offs up, you will see that underlying reality that we could argue that underlying reality is slightly better than 91% or 92%. And I we didn't have any questions there. When it comes to the combined ratio situation, I do have a statement on in the center of the slide there. Quarterly volatility must be expected on country level. So I wouldn't worry too much if a country like Denmark or Sweden in quarter 2 is somewhat above SEK 100. And I wouldn't be too happy if a country or 2 like U. K. Or Finland is a lot better than expected in a quarter. We have been on the lucky side in U. K. In Q2. We have been on the unlucky side in Sweden in Q2. I do understand that there is a question here. Yes, just about that. Did something happen specifically in Sweden to raise the claims ratio? Yes. So the question is whether something happened with Sweden because you can see a combined ratio here size 102.7. My question is, yes, we had above normal number of large losses on the property side in Sweden. So when I say that on a company level, we were kind of 2 percentage points higher than normal. We were a lot higher in Sweden. So higher than normal, large losses in Sweden on the property side, more on the positive side in U. K. Basically it balance out pretty well. So I wouldn't worry about the Swedish portfolio. If you go 2 years back, we had another situation or 18 months back, then we had kind of high claims ratios in motor business in Sweden, which is the biggest product by far. And the reason was that we were lagging on prices and that claims inflation was higher than expected. And I guess we had the same problem like other players in the corporate market, in the motor fleet market. That is kind of an issue that it takes kind of 18 to 24 months to fix, while a large loss incident or a set of incidents in Sweden in quarter 2 is nothing to worry about. And as we can see from the half year results, despite the fact that we are significant above normal in Sweden on the large loss side, we still have a combined ratio size 96 in Sweden. So my expectation is that 96 in Sweden will improve during the second half year. No guarantees given, large loss element leads to volatility. However, nothing special in the Swedish market. Any other questions on the profitability side? No? Okay. My COVID-nineteen summary, I think I've given it. This is kind of the follow-up structure we have in Protectoy. I have one more comment on it and that's linked to a couple of the Nordic countries then. So if you have a look at the slide here when it comes to COVID-nineteen and that is the statement number 34 on the bottom of the page here. You can see that we continue to reduce our presence in Wirtmanskomp in Denmark. And the reason why is because capital consumption on that product is very significant and risk free interest rate is gone. So the glory days of Warren Buffett saying that workers' comp is beautiful and I would like to buy workers' comp portfolios in order to invest money to earn it. That's history. Now you need a combined ratio far, far below €100,000,000 in order to give an acceptable return on capital. So Wirtmanskomp in Denmark is getting into a corner where it's basically an impossible product to earn money on. Then you must see combined ratios down to 70% and that's not kind of accepted in the market. So we will continue to reduce workers' comp volume in Denmark not to 0, but to a very small number. When it comes to Norway, it's a bit of a special situation that authorities they have kind of implemented COVID-nineteen as an element in the mandatory workers' comp product in Norway. You could argue that is done retroactively and it's a bit of a strange situation. So they are asking insurance companies in the shorter run and then end clients in the longer run to pay the premium for COVID-nineteen as a burden's comp type of illness. We do have a dialogue with authorities in Norway on the matter together with Finanx Nordic. I think it's a reasonable dialogue we have with government And we support the government a lot when it comes to COVID-nineteen. We think they are pretty good or actually very good in handling the situation in Norway. But in this one area, we are not too happy about it. It could lead to prices in health sector and in municipality workers comp sector where prices is multiplied with 10 or 50 or 100 or it could lead to insurance companies just exiting these kind of segments in the market. There is an issue. To protect it as a company it's not very important as it looks today. But it's a matter of principles and we need a dialogue for the dialogue with the authorities on the matter. So Wirtmanskomp reduced presence going forward and continue to have a dialogue with authorities in the Norwegian market. When it comes to the Nordic statement, I think I've given it already, price increases are strong and they will continue. So we will continue to increase prices rest of the year. And my expectation is that it will be price increases in the Nordic market also in 2021. So a question from Ruben Wieser. On the second bullet, the renewal rates. How can you be so confident that the renewal in the Nordics will improve? So what we see here is that in quarter 2, we have a renewal rate size 75 in a Nordic market. Our normal renewal rate is around 85, 85, 86, could be 88 in a good year, could be down to 82% or something like that in a poor year. So this renewal rate is obviously pretty low. But remember, one client lost in Sweden here far, far above SEK 50,000,000 annual premium influences a lot on that kind of figure. That was done for profitability reasons. And we have a history of more than 10 years in the Nordic market where we see a pretty normalized renewal rate mid-80s. And my expectation is that after significant price hikes during the last 18 months that situation will normalize entering 20 21. It's also good to hear that some competitors still do price increases which makes it slightly easier to get them through the market. One more question from Ruben on the Workman's Comp Norway. How big is it? And has it been profitable in recent years? So the Workman's Comp volume Detleven Norway is around €200,000,000 or give or take €200,000,000 in annual premium and the kind of reduction we are doing is in health sectors only. Then we are talking about more like SEK 25,000,000 of reduced volume relative to the COVID-nineteen type of situation. So that kind of reduction potentially slightly more. So the reduction we do expect from that situation in Norway is very, very limited compared to an annual premium of around SEK 1 point 4,000,000,000 in that market. So we're talking about 2 to 3 percentage points reduced volume in Norway in 2021 due to the COVID-nineteen type of situation. We are not exiting workmanscomp as such because in all other segments it has been profitable during the 10 to 12 years we have been in the market. So we are happy to stay in the Workmans' Comp market in but not in the health sectors. Hospitals, caring people working in the municipality, traveling out there to elderly people in order to take care of them. That's the kind of segment which will be influenced negatively on the COVID-nineteen type of situation insurance wise. That's okay. No more questions. So on the U. K. Side, we can see a 80% growth in local currency. And the quarter 2 is pretty big in U. K. Because the main renewal date in public sector is related to April 1st, not January 1st like we see in the Nordic market. So a significant growth in a pretty big quarter. And the reason why we are growing more now is because competitors are increasing prices, while we are basically delivering the same prices towards the market like we did 1 or 2 years ago. So it is to a certain extent what we could call a hardening market in U. K. Where many competitors are driving prices upwards and it's a bit easier to get access to volume to what we could call acceptable or good prices in the market. At the same time, our presence with the big brokers are growing and we are getting more opportunities even if it's a slight kind of setback due to COVID-nineteen because it's bit more difficult to meet brokers and meet clients. Virtual meetings, they work very well. However, in order to convince that Protector may be a good alternative, it's slightly more difficult through the web channel relative to physical meetings. So we hope we can meet brokers and clients again in the U. K. But in the meantime, we are happy to see a strong growth in U. K. As you have seen, it has been at least then lately combined with a very healthy profitability as also in that area. The churn is very, very low. So we hardly do not lose clients in U. K. But that is also pretty normal for a new company because you normally hold a client for 4 years. So we haven't really reached that kind of situation that we are starting to lose clients in U. K. You lose some, but the renewal rate is closer to 100% as it should be in a new market when you open up. Is it more questions to U. K? I believe you covered it in the presentation. Okay. So then we are on to the investment side. And my short introduction to Dagmarius is that, as you know, we kind of in sourced the investment department 5, 6 years ago into Protected in order to manage that kind of portfolio ourselves. And we have, as you also know, prepared for 2 or 3 years and taking money off the table to see whether any opportunities do arise. And still from an investment point of view, it has been kind of an interesting period now Dagmarj. So feel free. Take the word. Thank you, Sverd. Strong investment results in the 2nd quarter with a gain of SEK639 million. Year to date, the return has been 1.5 percent with the bond portfolio yielding 2.9% and the decline of the equity portfolio of 13.2%. The return on the bond portfolio has been SEK441 1,000,000 in the quarter. And that has come on the expense of the yield that has declined from 4.3% at the end of the Q1 to 2.5% now. You can also see that the risk free reference rate has decreased this year with 1 percentage point, which hits our investment return with SEK120 1,000,000 annually, which is not a good thing. But however, at least in theory, insurance companies in Norway and in the Nordics should compensate for that by increasing insurance prices. So time will show. High yield portfolio totaling SEK3.5 billion at the end of the quarter. On the equity portfolio, the return has been 25.6% in the quarter. Our portfolio companies has delivered overall good quarter 1 results, making us upward adjust our intrinsic value estimates on the portfolio with 2%. But however, there has been a decline due to the strong performance. The discount to intrinsic value has decreased from 57% in the Q1 to 47% now. On the right hand side, you can see our performance since inception. It has been good long term, but disappointing in the last 2 years. And now to a recap of what we have done on the bond portfolio side in the last 4 or 5 years. So we have, as you can see, significantly increased the AAA part of the portfolio going from 10% to 15% 4, 5 years ago to above 40% now. So now we have more of a barbell strategy. We have also reduced the credit duration from 4 years in 2017 to 1.9% now, which then consumes less capital. We have removed all long BBB risks, which consume a lot of capital and have a very poor return on when we look at return on solvency capital. And I will come back on the high yield portfolio that we have done in the last years in the coming slides. This is the return. When you look at bond portfolio and try to evaluate it, it's very important to evaluate it over credit cycle. So, so far they have delivered a strong performance with low risk and low capital consumption. And as you can see, we have performed well during volatile periods as it was in the Q1 of 2016 and what has happened now in the Q1 of 2020. And the portfolio has witnessed very few losses the last 5 years. This slide shows you the high yield share of the portfolio, how it has changed quarterly in the last since the Q4 of 2015, moving from 35% to 15% in 2019. That is due to the spread levels decreasing all the time, the risk reward getting poorer, so then we're taking money off the table. And now with the spreads increasing again, as we told you in the Q1 presentation, we heavily increased our allocation to the high yield. So now it's moving back up to 27%. We have also reduced the credit duration in the portfolio from 3 years in 2016 to 1.9 years now. The last slide on the investment side. This shows you kind of the short period here what we have done. And we told you about the large investments at the end of March and start of April when the spreads peaked. And we have made a gain of SEK380 1,000,000 in that period due to those actions taken, mostly coming in March April and beginning of May. And as you can see, as the risk reward has it's not so good anymore. We have taken money off the table, and we expect that to continue going forward, of course, depending on the development in the financial markets. So I will leave the word back to you, Sverd. Is it any questions, Amund? Okay. So thank you, Dagmarius. So just also kind of follow-up on Dagmarius here and the question we have in the corner of the slide here is what now And what Tag Marius is saying that no guarantee is given on what we are doing now. However, as Tag Marius says, the spread level is now more closer to normal. And our expected return on capital on the high yield side has been significant reduced at the moment. So we may start taking money off the table during the next weeks or months. However, we are considering carefully. And obviously, there is a lot of uncertainty in the market. So we are well aware of the risks. And the fact that the market economy is bloody red in many areas. So hopefully during the kind of last two quarters, we are building back on our credibility when it comes to delivering profitable growth in Protectoid. The first word is profitable, the second is growth. And as you are very, very aware of, we have prioritized the profitability situation a lot stronger the last 18 months. We think that that may balance out. We will never ever forget about the profitability part, but we think that kind of actions needed in order to take, they are kind of more limited going forward. Yes, price increases will continue in the Nordic market, but not at the same level as we have seen lately at the end of this year and entering 20 21. The 42 story have then kind of ended up in the kind of figures that we have talked about and showed you a profit for the period size €580,000,000 and a combined ratio size €92,000,000 percent, exclusive of change of ownership and €91,300,000 inclusive of change of ownership. And here you see the slide X and ink then. When we go to Berlin side, the Solvency capital ratio is a healthy 161. And we are also happy with the fact that the 2 instruments we have for downside protection is they are there. 1 is the solvency reinsurance contract where we haven't taken any actions in quarter 2. It's not necessary to trigger any increase on the solvency reinsurance side. It's there if a dramatic situation appears in the market. So it's a good safety net. And we also have option protecting the downside on the equity side. And we have kind of filled up that kind of option totality to basically balance out the present equity portfolio. So if you see market dropping close to 20% or more, we are fully protected for downside. We are on parts of that kind of cover better protected because we are kind of in the money situation on some of these kind of instruments then. But we have been buying up more on the option side lately. So we have 2 good elements when it comes to downside protection options, protecting equities and a solvency based reinsurance agreement that we can call on if we would like to. At the moment, we have a healthy kind of balance sheet. And I guess it was a question here. Yes. One question from Megha Todre on the balance or if you can say something about when you will take a decision on what to do with your own treasury shares or the shares we bought? Yes. Okay. So we have a bit of NOK 4,000,000 or NOK 3,200,000. Okay. So we own 4,200,000 shares ourselves. And my expectation is that they will be canceled. But we haven't really had any discussion in the Board lately on the matter. And we will not call for any extraordinary general assembly or something like that. But my expectation is that they will be canceled at the timing maybe the right one when it comes to April next year. More questions on the balance side? Okay. Thank you. The shareholder structure as always. And then my final comment is that we are happy with a combined ratio around 92 in the quarter. The underlying reality is potentially slightly better. Obviously, an incredibly strong investment quarter, which is a combination of a bonds pack in the market and actions taken in a high yield market during the turbulent times at the end of March and in April. So we look forward to the summer. I hope you all will enjoy, and thanks for following us. There could be more questions here. So we are on the Q and A session. And there is one more question, yes? Two more questions. Two more questions. Two more. From Torlef Elestar. Is your long term strategy Okay. So we very seldom look into merger and acquisition. We have been looking at some companies during our history. So it's not kind of totally ruled out to take any actions. I think it's more likely to see a situation where we buy portfolios and not companies. If that appears opportunities that would again be more likely to happen in U. K. Or in Sweden. That's the most realistic scenario. There are more portfolios out there in Sweden compared with other Nordic markets and there is a pretty big opportunity for portfolio acquisitions in the U. K. Market. But first, I think we will concentrate on organic growth and to grow a strong enough organization in U. K. Before potentially start to take over for free that happens or buy portfolios in the U. K. Market. We have been presented for some opportunities lately, but we have said no thank you to those opportunities at the moment. I think they will be there, but we are not in a hurry. So one question from Patrick Edgren. The last few years, Protected's cost advantage hasn't translated into superior financial performance. Do you expect the company's advantages advantaged cost position start resulting in either a higher growth rate or lower combined ratio than competitors going forward? Okay. So that's a good one. Not saying that the other ones wasn't good. So it's pretty obvious that the cost leadership we have in the world, one, is there, it's strong, it will continue. And like in U. K, we obviously use that kind of cost advantage first to take volume on board in order to get critical mass. Then at a later stage, the cost ratio also in U. K. Will gradually go down to a lot better than competitors. And potentially the difference in U. K. Will be bigger in Scandinavia because Scandinavian insurance companies are pretty efficient, while they are not in the U. K. Market. So I think that it's not really an easy answer to the question whether we would prioritize to try to take super profit back from the cost advantage in some markets or invest that cost advantage to growth. What we are looking for is a return on equity sized, let's say, 15 to 20. And whether that happens through giving some of the cost advantage to the market or being more disciplined on underwriting and trying to take a better profit out of the market, just it doesn't really matter in that area. So the question varies a lot from the different markets, but it is reasonable to think that we could end up with a slightly better margin than competitors in the same segment in the Nordic because of the cost advantage we have, While we probably will invest more for getting growth up in U. K. And kind of throw the cost advantage to the market in order to get up to a more significant portfolio in U. K. So we will try to balance. Return on capital is the easy answer. To translate that into reality is slightly more difficult. There has come up a couple of more questions. One from Thomas 95% on the 95% on the combined ratio side is on the longer side. 94%. 94%. Have you been guided on the volume side lately, Dikle? 5%. Okay. So it's more like 5. So I have to be reminded by the CFO here. So long term growth target around 5 percent 94 percent on the combined ratio side. So the last one from Kjellbjorn, Helane. When do you expect to start to pay a dividend and what to what level do you expect the dividends to be? Okay. At the moment, we are in turbulent times. We are very happy with a solvency capital ratio size 1 61, but we must be prepared for volatility. So at the moment, I think that we are looking for investment opportunities and see how we can deploy the capital we have either for growing insurance business or for using capital on the investment side. If investment result is normalized and the technical result continue to stay good or even improving slightly more than what you can see now. It's pretty easy to project that the solvency capital ratio could go further up, which means that we will have excess capital where the Board had to go back and to discuss whether dividends or buyback situation is on the table again. So I wouldn't expect any kind of decision to be taken in the near future, but it's a relevant question. And certainly, the Board will discuss that potentially when the next quarters materialize.