Good morning, everybody. Good morning. Welcome to this rather unusual quarterly presentation. There are basically no people in the room. I appreciate to have you close and have questions directly. We have received some questions before we went online now. Feel free to pop more questions during the presentation. Some of the questions will be answered throughout the presentation. Obviously there is room to do that at the end of the presentation as well. Since we gave an update to the market April 15th, I will try to focus mostly now in this walkthrough on what has happened and what is new information, which is released today relative to what we have said earlier. We will also spend a bit of time on the investment side, obviously, and our Chief Investment Officer, Dag Marius Nereng, will join me and hold that part of the presentation.
You know that I normally would like to prefer to start with the DNA of the company. This is who we are. We are different. Obviously, in a COVID-19 situation, we are also challenged by this very strange situation we all are into. I'm happy that we do have a DNA, and what we are trying to do is to inspire our people in Protector. Everybody basically working from home now to live the DNA, even from their home office location. The highlights for the quarter is obviously heavily influenced on the financial situation in the world, with a NOK 450 million loss on the investment side. In the long run, it's more about the technical development on the combined ratio side, which is more important.
As you can see on this slide, relative to the investment side, we have already got back around NOK 300 million or, to be more precise, NOK 324 million on the investment side after end of the quarter. Especially on the bond side, we have had a very strong comeback, with an accumulated positive result, close to one percentage points on the bond side. Obviously, we have also got some of the potential losses on the equity side back again. NOK 324 is up from NOK 180, which was the investment result April -to -date, April 15th, when we communicated with you last time. The combined ratio for the quarter is 98.3%, and that is possibly the most important figure in the presentation. I come back and comment a bit more on it when we do look into the different countries and the claims ratio as such.
If we go to the volume side, we have a 4% growth in Norwegian Kroner this quarter and zero growth in local currency. The growth is influenced positively on the significant price increases we have in the Nordic market. On the negative side is influenced on the client churn, which is slightly higher than normal. U.K. is not a big quarter one. As we have updated you on, we had a very big client in U.K. that increased their deductible, which meant that we reduced the annual premium to half, which is a GBP 4 million reduction, give or take, in U.K.
It's not really an issue, and we are pretty happy with the fact that we are on a zero growth situation or slightly on the positive side in Norwegian Kroner at the moment. Our expectation for quarter two, volume-wise, is negative growth in the Nordic market, but a pretty strong growth in U.K., and they may balance each other out. I guess we have some questions on the volume side. Would you, Amund, please give me?
It's more on the combination side.
Okay. These questions on the volume side, it's more what you call minor, and we can come back to that in investor and give some kind of feedback on these ones.
Yeah.
That's okay. We haven't given any precise guiding for the volume side in 2020. We have a long-term target now, sized five. We may be slightly below at the end of the year, this year, on the volume side. In the long run, you should expect us to come back on an acceptable growth path again. Simply because U.K. is doing very well and the U.K. is growing. We will lose some volume due to the COVID-19 situation, but not very significant. If we move to the claims development, it is an acceptably good quarter this quarter. When you add cost to the claims development, we end up in a combined ratio 98%. The important thing when you compare with last year is that last year, quarter one was influenced by reserve gains in the quarter, around 7% or 6.9% to be precise.
The figures in quarter one this year is not influenced by any losses or gains on the reserve side, meaning that the underlying reality is even better than the improvement from 99% - 89.7%. We are pretty happy with the first quarter when it comes to combined ratio. Here we have kind of a question.
It's about seasonality. It's from [Kristian Øier] . I looked at Q1s of past years. Q1 was very often the lowest combined ratio quarter of the year. Does that mean that your combined ratio for 2020 is likely to be higher than 98.3%?
That's a very relevant question. The answer is no. The reason why you have seen in previous years that the combined ratio has been lower in quarter one, it is mainly due to significant reinsurance commissions arriving in quarter one, which is kind of artificially improving the combined ratio in that quarter. Then you kind of miss out on these kind of commissions in the next three quarters to come. Typically, in 2014, 2015, 2016, 2017, and 2018, we had very significant commissions arriving, making the combined ratio look good. When we have changed reinsurance structure to a normal excess of loss type of property contract, these kind of margins will appear gradually through the different quarters.
If you correct the combined ratio reported figures with reinsurance commission changes, you will see that the first quarter in the year normally is slightly worse than what we normally end up in during the full year. My expectation now is that if the underlying reality continue to kind of pull in, you will see an improvement from today's 98% throughout the year. Okay, if we go to the next part of the presentation, what about large losses and runoffs? I have comment on the runoff side already. When it comes to the large loss element of this quarter, there is a new definition of large losses this year, which we previously have updated you on. We have increased the definition of a large loss up from NOK 7.5 million to NOK 10 million.
What we normally have done is to kind of cut off the large losses on NOK 50 million. We have increased that one to NOK 100 million due to the change in reinsurance structure with a deductible size NOK 100 million. Our expectation now is that a normalized large loss ratio will be around eight percentage points. In this quarter, we had 9.5%, which is slightly above what you could call a kind of a normalized large loss situation. These kind of large losses are also influenced by a couple of big storms, which have resulted in floods in U.K. They are called Dennis and Ciara. They are kind of integrated in a large loss element, and is what you could expect to arrive now and then. In the large loss definition, accumulated weather claims are incorporated like our peers do in the Nordic market.
Slightly on the negative side when it comes to large losses, meaning 9.5% against normalized figure size eight. On the slide here, you see one negative large loss, a green one, size NOK 24 million. That is normal to see some claims disappearing, and/or reserve reduction on certain claims. Accumulated NOK 123 million in the quarter, a bit higher than what you could expect as a normalized large loss ratio. Nothing much to say on the cost side. It will go slightly up this year. Don't worry, we are still number one in the world on the cost side, and not very interesting to do too many comments on, actually. If you look into the combined ratio based on a country by country level, you can see that Finland is positively influenced by reserve gains, and Denmark, on the contrary, with some kind of reserve losses.
That is, it's normal volatility. On an accumulated level, reserves are in balance. It's not really an issue. The important thing with the combined ratio development is the very strong improvement you see in Sweden, in Norway, and the fact that U.K. continues to deliver good results. Remember, the combined ratio in U.K. also include a couple of flood situation, not very significant ones, but it's not without large losses in U.K. Country by country volatility must be expected. The accumulated comment from my side is that I'm happy with the start and you may see this quarter to be some kind of a turning point for Protector when it comes to the combined ratio. We are in the insurance industry. There is volatility.
We can't be sure, certainly the very significant price increases we have seen the last 18 months, they not only start to materialize, but they will basically have full effect now during 2020, with a slightly stronger effect in quarter two than in quarter one. Price increases in quarter one was on average 13.5% in the Nordic market, which is obviously pretty high or even very high. On the bottom of the slide here, you can see a few comments about the future expectation. My expectation is that the price increases in quarter two will be even higher than 13.5%. It will go slightly down or somewhat down in the second half year of this year. My expectation today is that price increases in 2021 will be more limited. Exactly how much is too early to say.
We have to go for a quarter or two first before deciding on anything, obviously. My expectation is based on the underlying improvement on the combined ratio side, and I do not think it's necessary with anything close to what we have seen the last 12-18 months in 2021, which mean again, that the client churn will go down in 2021. My expectation is also that the client churn will go down in second half year of this year compared with what you have seen so far. We will guide less precisely going forward, as you can see now. When quarter two and quarter three and quarter four do arrive, we will not give you such a precise price update per country. I think it's slightly too much now, and we do not want to be so precise towards markets and our competitors anymore.
The reason why we have been very detailed in this is to try to build some kind of credibility on what we are doing on the price side. Hopefully, that credibility has been built now, we will take down the communication a little bit for good reasons and more like comment on the price situation like other Nordic companies do at the moment. Is it any questions on prices or volume or profitability, Amund?
You have one on new sales. 87.5% renewal rate plus 13% price increases implies no new client wins. Did you not bid for many new clients or not win due to rates?
It is a fact that the new win volume is lower than what we normally have seen. There are two reasons why. One, there are competitors out there in the market who are slightly more aggressive than Protector. I think that that situation will, to a certain extent, continue. However, will be improved when our price increases is going down in the second half year of this year. I expect our win ratio to pick up again at the end of the year and certainly entering 2021. There is also one volume situation arriving due to the COVID-19 situation. What we can see in certain markets, like U.K., is that the brokers are gradually less active in churning clients. They tend to renew with present company slightly more often than normal.
Volume available for competition will be lower during the next quarters to come. That is to our benefit in the Nordic market. It is to our disadvantage in the U.K. market. Growth expectations will be slightly down, everything else equal, due to the COVID-19 situation. Any more follow-up questions, Amund?
Yeah, one from Andreas [Aaen]. Did you say that you expect full-year combined ratio to be lower than 98.3% and everything else equal?
It's not a firm guiding statement, but if history repeats itself, I'm saying that 98.3% will be better at the end of the year because quarter one is normally the worst quarter in Protector when you correct for the reinsurance commission. Yes, you are right. Not a formal statement, but everything's equal. That's a reasonable expectation. We will end lower. Another one?
Another one from Andreas. If you say no significant price increases in 2021, does that mean you expect current prices are enough to get you to the long-term target of 94%?
Yes. Okay. A small comment on U.K., basically saying that we are doing very well. It's a one-team slogan we are using. We have an office in London and a bigger one in Manchester. You can see a nice picture from some of the people working there. The reason why we show it is because the U.K. team was winning the prize to be the cultural lead in Protector in 2019, which is an honor and something everybody fight for in Protector. You may say that Protector is more Protector in the U.K. than in Oslo. It is a good team. They are growing. On the bullet number four here, you can see a couple of words, implementation of broker panels. That is a type of relationship which is pretty normal in the U.K. market.
It is a fact that when entering 2020, we have been invited to and have accepted to join two new panels with big brokers in the U.K. market. We do expect better access to new volume based on that fact. It's a modest statement on the slide here, but it is a pretty important statement. Our brand recognition in the U.K. is going stronger and growing stronger and stronger, and our relationship with the brokers is obviously very good and improving. A good comment from my side to what's happening in U.K. Comment on the corona momentum. First, I would just say that we have obviously organized a lot of new activities based on that kind of situation. HR issues, product issues, claims handling issues, and obviously related to capital allocation, investment, and results.
My feedback is simply that I am happy with the way we can handle the COVID-19 situation. Obviously, there are practicalities about people working at home. They are very minor relative to many other situations out there in the world now. It's doable. We can do business as normal. I think we can handle this at least equally good as our competitors. It has obviously been questions relative to the risk side. Will we see significant losses and/or positive effects out of the corona situation? My feedback is we will see a bit of both. A cumulative statement from my side is that we do expect a neutral impact on combined ratio in the longer term. Longer term meaning this year, 2020, and the following years.
Yes, there are some business interruption situations that may lead to some kind of payment, but that's not normal. It is very unusual to have coverages in the Nordic market, also in the U.K. market, that will cover any kind of business interruption due to the COVID-19 situation. You can't rule them out totally, but they will be very few. That's our expectation at the moment. Obviously, cars and vans and buses are driving less, which means that claims frequency is going down. That's preliminary on the positive side. We can see that. In total, it's our opinion that these two situations will balance out. There is a situation where the workers' comp product has been expanded to cover COVID-19 in Norway, and there are some kind of movements in that direction in Denmark at the moment.
We do, together with other insurance companies, have what I would call a decent and good dialogue with authorities on the issue. It is not expected to be any kind of significant losses arising from that kind of situation, but there is some risk element in it. In total, the COVID-19 situation as far as we can read the picture now, is that it will not be on the negative side nor on the positive side. They will balance out. That's our expectation at the moment. I think we had a question on the COVID-19 situation.
Yeah, you almost answered it with your last sentence, your quarter one combined ratio was 98.3%. How much of this was because there was lower motor claims due to COVID? What would you estimate your combined ratio would have been without COVID-19?
Okay. Basically, nothing of the positive elements we can see on the motor side in quarter one is linked to COVID-19. Norway was closing down March the 13th, Denmark slightly before. There is a time lag on reporting claims, which is normally between 10 and 14 days. We have had a nice winter in Scandinavia this year that has influenced positively, while the COVID-19 situation basically has influenced at all. If I should take a guess, 98.3%, would that be 98.1% or 98.2%? Something like that. However, you will see a positive influence in quarter two relative to that question. I leave the word to our Chief Investment Officer, talking a bit more about what we have done on the investment side. Dag Marius, feel free.
Thank you, Sverre. This is one of my favorite slides, showing the development in the asset under management. It's been steadily increasing the last years. This consists of the company's equity, the Tier 1, Tier 2, the debt, and the float. If you translate this NOK 12.1 billion into how much it will be per share that you own in the company, this is almost NOK 150 per Protector share, not the NOK 31 that we priced in at the moment. We invest NOK 150 per share in the bond, in the fixed income, and the equity market, and you will get that return, minus the interest on the Tier 1, Tier 2 debt, plus the insurance results. The big news in this quarter is that, as of today, the bond portfolio now yields around 4.2% compared to 2.1% at year end.
That is 93% of these assets under management. We also have 7% invested in the stock market. I will speak more on that later on. A large loss this quarter of NOK 452 million. Year- to -date returns has improved with NOK 324 million in April. The loss is now down to NOK 128 million. Our equity portfolio had a weak performance in the first quarter with a decline of 33%, excluding the put options. That is despite that companies that we own have no direct exposure to the oil price, or the COVID-19 situation. At the end of the quarter, we had good protection from our put options. We started buying put options in 2018, to secure the downside in our portfolio. That cost us money in 2019, but this year we got some money back then.
The prices at the quarter end of our options was more or less at the market at that time. Our discount to intrinsic value is at a record high now, that hopefully bodes well for the future. The returns of the equity portfolio in April was yesterday evening, 13%. We have NOK 11 billion invested in our bond portfolio, which yielded 4.3% at the end of the quarter, before cost of risk. This is an increase from 2.1% at year end. We added NOK 1.7 billion in our high yield portfolio during the quarter, or during March, which more than doubled the high yield portfolio. End of April, as Sverre also told you, but I have to repeat it, our return is 1% year -to -date in the fixed income portfolio. To put that into context, at year end, the yield was 2.1%.
We have now moved one third into the year. Our year-end expectation for us at the end of April was 0.7%, and we have now a return of 1%. We're really proud of that. Covered bonds and cash make up more than 50% of the bond portfolio. In the last weeks of March, we bought these five, I would call, solid credits for more than NOK 600 million almost in one week. They have returned or increased in price with 15%-22% since that period, and we have taken profits in some of them. Increasing our high yield exposure also carries some risks. We have four credits which we have downgraded in the quarter. They are all first lien, and we expect to get a recovery of more than 70% of today's market value if they default.
We have a very low oil and oil service exposure in the portfolio, 2%, compared to the 21% in the Nordic corporate high yield market. The same goes for real estate. The last three years, we have done a large reallocation in the bond portfolio. Our AAA portfolio has gone from just about 10%, end of 2016, to about 52% year-end 2019. The credit duration, we have decreased from four years to 2.2 years. We have removed all BBB risks, which gives a very poor return, taking into account the capital consumption on those bonds. We have decreased our overall high yield exposure from 30% to 60% year-end 2019, increasing to now to 28% at the quarter and then increasing even more in April. Duration of the high yield portfolio was also down from three years to 1.9 years.
We have shown a high discipline on credit quality at historically low compensation for risk taking. I have witnessed few investment ideas that have kind of reached our hurdle rates, and we acted on that. We have low risk going into this turmoil. We have delivered consistent positive returns for both the total and the high yield portfolio the last five years. We have delivered more or less the same returns as comparable crossover funds with significantly less risk and capital consumption. Of course, it's hard to say that I think Sverre has stated that we have less risk in our portfolio all this time, but it's hard to show it. Of course, on this slide, you can see that Sverre was totally right on that. When the market turmoil started, our portfolio outperformed the market with a substantial margin.
The last three years, when we had a low appetite for high yield bonds, we prepared for a situation where the prices were more right. We did the analysis on the companies, we studied the loan terms, and was ready to active when opportunity arose. It happened. This started in the high yield market Monday in the 9th of March. The same day, we sat down with all relevant parties, and that being very easy in Protector because we are, the investment department is located literally next door to Sverre's office. We called the CFO, Ditlev, and Chief Risk Officer, and we talked about what do we do now? How does the stress test looks? What is the solvency situation? What is the risk of a hit on the insurance results?
We discussed our way forward and set up at least daily meetings going forward then. We saw flow-driven forced selling in the bond market, the prices in the high yield market was as much down as in the stock market. Very early on, we concluded that the opportunity for the capital allocation this time around was in the high yield market and not the stock market. We started bidding carefully in the market, but it was low liquidity, so we only got some money invested. In the week starting Monday, the 16th of March, we witnessed extreme movements in the foreign exchange markets with the Norwegian Krone falling 10% in a day, and that happening several days that week. That led to high yield funds getting margin calls on their currency exposure, so they had to be forced sellers in that market.
There was a lot of liquidity. The Norwegian government also informed that the crisis fund was to be established. We then decided to buy aggressively in what we believed was very solid credits. We were one of few buyers those days with a lot of appetite, and we were more or less dictating the prices. At the end of March, the markets calmed down, and we couldn't get hold of much volume. We then started to buy Nordic high yield funds to get even more invested. In April, we have continued to buy high yield funds. This has more or less kept our yield on the bond portfolio intact, even if we had large profits in April.
Bear in mind that the yield is before cost of risk, and now with more uncertainty in the market, we will expect to have losses in the portfolio, and even more so because we have bought high yield funds, which have more of a average rating of B+, which carries a lot more risk. Expect substantial losses, but we think we are in very strong position going forward. I'm going to leave the word back to Sverre to-
Summarize.
... summarize the investment.
Okay. Thank you, Dag Marius. What you are noticing is that we are being very open on our communication. Open is a value in Protector, and we are very open on the communication on the investment side. We deliver more detailed information to you than any competitor in the Nordic market at the moment. We think it's good. Remember that Protector, they do insurance as core business. We do also have defined investments as core business. It's a part of our DNA. Historically -to -date, around 60% of the profits of Protector have arrived from the investment side. The rest from the technical side. A bit more information, especially in these days, I think, I hope you appreciate it and find it valuable. My summary is that we have taken money off the table for three years now.
I said it to you in 2018, first half year 2019, second half year 2019. We take money off the table, off the table, off the table. It hasn't paid out until now. We have been well prepared to act rapidly when this kind of situation arrived. We are fully aware of the fact that the jury is still out. There is a lot of uncertainty in the market. Capital allocation in these days are even more important than in normal days.
At least we follow up on a daily basis and take fast decisions with all available people around the table, not only the investment team acting on their own in that area. I feel comfortable today, and I think we have a good position. However, there is a lot of uncertainty in the market. To give a guiding on it's you to tell me then on the investment side. I think there is a question on the capital side. Is that right, Amund?
On the yield or on the solvency ratio? It's just to clarify, I guess. You said the 9.2% is the yield. Is that the Q1 end or today? Yeah, just to clarify it.
It's the 4.2% is the yield as of today. It was 4.3% at quarter end and decreased to 4.2%, but that decrease is a lot less than you would have expected given the strong performance in April, but we have increased risk during April.
Was it another one?
What return do you expect on the bond portfolio on a yearly basis, taking into account the cost of risk?
We don't actually comment so precisely on that kind of situation. You know the running yield. We have updated you on the fact that cost of risk is higher today than in a normal situation. You figure out. If we go to the profit and loss statement, I think the highlights from the profit and loss statement has been given to you already. It's not really necessary to repeat on that one. When we go to the balance sheet, we have a solvency capital ratio based on the standard formula, size 142 at the moment. We have changed methodology to a volatility adjusted model like many companies, as far as we understand, in Europe and in the Nordic market either have done or are doing at the moment. It's also a fact that we have had an opportunity to draw on the solvency based reinsurance program.
We haven't done. We don't think it's necessary. We will not spend the money to buy up more on the solvency side in order to strengthen the solvency capital ratio. As you would know now, when we take into consideration the fact that we have had more than NOK 300 million profits on the investment side in April -to- date. Today, the solvency capital ratio is a lot higher than the figure you see here now. We don't calculate these kind of figures on a daily basis, obviously not, but it's significant north of 150%, potentially closer to 155%. You can figure it out yourself because it's pretty easy to calculate, actually. It was one balance sheet question, I guess, Amund.
Yeah. No, that's correct. How do you reconcile the NOK 2,660 million cash as per end of Q1 2020 with the balance sheet?
Okay. That's well spotted. We have a significant amount of money invested in banking deposits at the end of the quarter and during quarter one, simply because bank deposits, which are fixed for a certain period of time, not a very long period, a rather short period, deliver a better yield than other investment alternatives like AAA or AA kind of paper in the market, give or take, in that area. That's the reason why the cash position has been higher than, or a lot higher than normal in a quarter or two, or for a short period of time. What you should expect now is to see a significant reduction on that kind of bank deposits, because money is now put into play, where we think that the return on investment and return on capital consumption is a lot stronger.
Yeah.
One more, I guess.
One more question from Ruben [Vatnan]. How did large reductions in the solvency ratio in Q1 impact your decisions on investing and underwriting?
I would say that the kind of reduction on the solvency capital ratio haven't really influenced on any underwriting decisions at all. Possibly, except from one thing, is that our appetite for workers' comp products, both in Denmark, but to a certain extent also in Norway, is even more limited than earlier on because it consumes a lot of capital and risk-free interest rate is basically zero or even worse in some kind of situation. We are continuing on reducing our risk appetite on the most capital consuming products like workers' comp in Denmark and in Norway.
When it comes to other type of allocation situations, we feel that we have a strong balance sheet. We do whatever we need to do on the stress side. We have a good downside protection from solvency based reinsurance contracts and from put options on the equity side. I think that we have a strong balance sheet and strong enough in order to maneuver and then to allocate more capital to the high yield side, which we find very attractive in the kind of period we have had and still find very attractive today. Any more questions on the balance side? No.
No.
Priority capital wise now is the bond market and the high yield market. We have more opportunities on the equity side, obviously, but we do expect a bit more turbulence to arrive or possibly a lot more turbulence to arrive on the equity side. We don't have plans to aggressively go higher on the equity side at the moment, but no guarantees given, obviously, in that area. Bond and high yield, very attractive at the moment, but there are also other alternatives available, as you know. If I go to the long term financial objectives, it's nothing much to say. They are unchanged. My only comment on the volume side, I guess you have heard it. We may see a pretty low volume development this year. Whether it's five or somewhat lower, it's too early to say.
Don't expect too much growth from Protector in 2020. If everything develops like we expect and that's obviously a question. You will see some kind of growth coming back in 2021 is my expectation. This is a long-term guiding. It's not precise in the shorter run, and we are very comfortable to continue with the long-term guiding that we have given before. Here we are at the end of the presentation. Is it any more questions, Amund, before I close?
Yeah, you have one question about Storebrand. Storebrand had a big profit warning and high combined ratio. Can you help explain why they differ so much from you and why you will not have that risk?
No, I can't. I understand they have delivered figures this morning. I haven't seen them, and if I had seen them, it's not up to me to comment on a competitor's figures in that area. We are not equal companies. We are doing a lot different business. I think that I give my comments on behalf of Protector, and then you will find out then and compare the two. My summary is that we are happy with the combined ratio in quarter one. It's not a very strong figure. In the consumer sector in the Nordics, figures are brilliant. In the kind of market we are playing in, where we and competitors have struggled for a year or two on the combined ratio, I'm happy with the kind of figures we see.
It's a strong improvement. The underlying reality is somewhat better than what you can see at the moment. Big investment losses with a lot of it turning back in April month, obviously. It's obvious that investment side and the capital allocation situation in the company where, how should we act in a rapidly changing market is on top of our agenda still, obviously. Thanks a lot for joining in a kind of unusual environment. I hope we can meet next time personally, but it may take a bit longer time. Have a nice day, and celebrate May 1st tomorrow, if you would like to. Thanks a lot.