Welcome everybody to the Quarter Two presentation. To those of you who are not present in Oslo today, it's a hot summer day, which it has been for a period of time. Oslo is possibly one of the warmest capitals in Europe at the moment. As always, when I introduce our quarterly figures, I'll start with the DNA of the company. Our vision statement is the challenger. Obviously, today, you could argue that we are challenged because the combined ratio of Protector, which we have delivered to the market today, is what we would call very poor. Obviously, it's our job to turn that kind of situation around.
Our long-term targets, which we have had for the last 13 years, is based on an idea that cost and quality leadership should lead to profitable growth, which again should lead to a top three position in all segments we are present. Today, I think it's fair to say that when it comes to cost and quality leadership, our competitive position is unchanged. We are very strong on cost. We are probably a cost leader in the world. On the qualitative side, we have no news today, which means that our position is still extremely strong when it comes to deliver quality to the market. When we are looking on the third main target, which is stated profitable growth, what you see today is growth only without technical profits.
I will obviously stay around and would like to welcome questions on the profitability side, since this quarterly growth is not linked to an acceptable profitability. Let's have a look at the highlights. There are four elements if you have your long-term view on Protector, which is important. One is our competitive position. I've given a comment on that already. Cost and quality or cost and quality position remains stable and strong. It's nothing wrong with the competitive position of the company. 42, which is 14%, slightly higher in local currencies in that area. The third element to look for is the combined ratio, obviously, which is poor this quarter after also a poor Quarter One. The combined ratio, the technical profitability of the company is not at all good, and you should not expect that to turn around during 2018.
In insurance business, as you know, it takes a longer time before price increases are implemented to have their full effect. I'm sorry to say that the combined ratio for the full year will remain poor. Obviously, we have activities already implemented and more to come in order to improve that position going forward in that area. The fourth element is investment income. As you know, we do have an investment portfolio sized a bit more than NOK 10 billion. It's growing. A part of that money is free of charge. It's what we call float. Investment results in the quarter is what you could call good. Competitive position, strong growth, strong investment return, good technical is whether we could solve the fourth element and continue on the route towards future today. Let's talk a little bit about it.
There have been around 70% of the accumulated profitability of the company after tax. Return on investment is, as you know, the history and potential also, or rather obviously also in future. Have not been good at all on the technical profitability side. Since we are putting more focus on we do expect that the turnover in our customer portfolio will increase. We will price up and potentially out a higher the end of the year, you will see a reduced growth development, and that will continue. Is that you should expect a volume, not to end up close to 20%, but more around 16. We do not expect a growth pickup in Quarter Three and Quarter Four like we saw last year in that area.
Still, price increases that will be booked in quarter expect any figure lower than 16 at the end of the year. It's the probability to be on the north side of that figure is slightly higher than below that figure. Are changing the guiding then to saying significantly higher than 94. Like last quarter, we will not explicitly state for an interval or a specific target, but I won't comment exactly on that one. The cost ratio has not changed. A period of time, that you should consider Protector to be a strong growth candidate for future with around 15% that growth level to be lower. Potentially also a lot lower in 2019, today we will Is that we obviously think that our U.K. 20, and that growth level will kind of offset.
Yeah.
I'll be back to comment a bit more on U.K. at a later stage, a short comment now is that U.K. is on track, also after quarter two. One, based on the two last quarter you have seen there.
With the significantly below the 15%, could you be close to zero or even below zero as well?
No, we don't expect that at all. I don't think that we will be even close to zero in that area. It's too early to say. On the higher end, could be slightly higher than what I'm saying. Portfolio size three to NOK 400 million, which is possible to do if you are close to what, four point situation in many markets, especially in the U.K., but also market, it should be possible. Not in Denmark, we don't expect any growth. On the Nordic markets, we still think that it is more realistic to see some kind of positive growth coming out of. We are saying, yes, definitely below 15%, but I wouldn't say not even close to zero. No.
This is on the growth level. Is it then also fair to assume that both for 2018 and 2019, the net earned growth will be low?
In 2018, since parts of the volume product, where we cede more volume to the reinsurance world. Contracts will change in 2019, which means that we gradually will increase the earned premium for. Because we are changing potentially from, as we have communicated, to a normal excess of loss contract, which basically all competitors in the Nordic market is buying. In the short term, 2018. On the contrary, the next year, because it's a change.
Of course, commercial. Is it possible for them to have a slight indication of how much more that would be on growth side? If you're saying a 10% growth for next year on the growth level.
Yes. We can take a note of that question and we could update you at a later stage. All contracts. At the moment, our intention is kind of uncertainty in that answer. Yes, we can come back with an update to you and the market on that question. Obviously, hopefully after the meeting if you would like.
Thank you.
On the volume side already, what you see is that, as expected, we have a significant in Norway that has been communicated to the market and is profitability reasons. One, April the 1st, and another one June. In line with previous guiding given to the market. U.K. possibly slightly below expectation. However, U.K. volume-wise. Not big surprises actually on the distribution of the volume development in quarter 2. Obviously on the claims ratios side, there is in the quarter. If you do have a look at the reserve study. It's fair to remind you once more that historically to date, Protector has been kind of overall spot on on the reserve. If you do the calculation, you will see that we are set aside slightly higher reserves than what was necessary in order to cover claims for future.
Seen from an overall about the reserve situation in Protector. That's obviously in general, which are on the poor side claims-wise. Our comment to the reserves is that they have been prudent and they are prudent. On the Change of Ownership side, we have a number of. We have been basically, not constantly, but very often been on the wrong side reserving Change of Ownership. While after, we have been even more on the conservative side since the accumulated figure. Not only the overall reserve statement, but the mix of the reserve statement. That should be kind of a volume in Protector going forward is linked to the commercial sector, including public. Right? While today, around 10%. If you have a question mark to the reserves of Protector, I do understand.
Historically, we have been missing out on Change of Ownership in a number of years, while being more on the conservative side on the commercial sector. As you will see a bit later further in Change of Ownership, because part of that portfolio is unprofitable. That will happen during quarter three and quarter four. On the poorer side, if I should summarize, I would say that in the art of underwriting, 12 to 18 months has been too late and done too little. Too late, too little, and now it takes time in order to turn that technically met. We gave some kind of communication that it's not a total surprise that rates are under pressure. We have seen that for a number of years, three, four years. Rate pressure in Norway, rate pressure in Norway, rate pressure in Norway.
Now we see that the consequences of this rate pressure are area. We did obviously start out more than a year ago, first in Denmark, then in Norway, in order to increase that after quarter one. The communication now is that in Change of Ownership area, we have priced out one of the biggest distribution channels we have there, which have an annual premium sized channels which are on the smaller side. We do expect here on the Workmen's Comp side in Denmark. The kind of new prices we have given to the market has been clients leaving today with an. Some clients will obviously accept the price increases and will stay.
Seen that some very significant price increases the last six months has been successful, we have seen that clients do follow in the same segment, do communicate exactly the same situation like us. You have seen a couple of companies coming out in the market. If you read through the different reports, especially report from Tryg, which are more precise, see the same message from the market, we know that other competitors also are pricing up. Increases do not necessarily need to mean that we are losing the clients. Some will stay, but at a higher. I'm ready to give a few more comments on the different segments. As always, we have a few comments here when it comes to the different markets.
We have talked about Change of Ownership, around 25% from a bit north of NOK 500 million to around NOK 400 million in annual premium. Obviously, that will lead to some kind of a leveling and will gradually happen. It's not. Claims will be reported gradually during the next five years. That kind of staff reduction will take place basically during the next 12 to 18. A kind of natural turnover in the company. There are no difficult situations at all in Protector when it comes to Denmark. It's not too much to say. We have been through the Workmen's Comp situation in this, except from the fact that we can see a slight improvement taken, but we need to be stronger going forward, and we do expect the portfolio to be reduced a lot from January 1st, 2019.
When it comes to public and that some products like Motors still is doing. Obviously, price increases must be stronger. In our portfolio, they will be stronger than what NCD communicated this morning. Average increase in Motor prices going forward, which according to NCD, is in line with claims inflation in that sector. In Plus, we think clients basically will accept because it is short-term, it is easy to read the figures, and it is. Price increases has been done already, and some more will arrive in the Norwegian market. Obviously, when Norway, when it comes to public and commercial and Change of Ownership, that influences a lot in the profitability situation in the company as such.
It is to profits which we do expect will happen in during quarter three and quarter four, even though some pricing increases. There is more to come, and the full effect, you will not see it before in 2019. Finland is too early to say. Small volumes. Comments on Finland. The Finnish figures are integrated in our reporting. As always, for a new company with limited volume in the Norwegian. Too early to say. Sweden is doing well. You still see a good combination of volume growth and profitability in development in Sweden is obviously catching up on commercial sector Norway. When Norway is going slightly down, you can see that with the strong growth level we see in Sweden is catching up and are getting closer and closer. There is an. Sweden is on target.
I know that Åshild sitting behind here, our director in charge of public and commercial sector. Sweden are in a hurry, obviously, because they should read number one position before U.K. takes should have an ambition to ever be number one when it comes to volume. Obviously, there is another competition which is more important that is linked to the level of profitability. When it comes to the level of profitability in that area. Sweden is doing well. I do have a separate slide on the U.K., before that, a question?
Your competitors are also focused very much on Motors. Whereas in the communication you had when you released the report, you said that Loss of License.
Yes.
It seems like a much broader range of products where you have claim issues. Could you talk a little to that?
The reason why I mentioned Motors and not the other ones, the other ones are in the written report, is that last time when we met, we talked about the other type of products in that up basically according to expectation. While Motors was the very negative kind of surprising quarter two in that area. Increases has been implemented already and will continue to be strong. You will gradually see effect out of that with a full effect from 2019. Situation where you should expect a more rapid development because one Loss of License client is out with effect from June. On July 1st. On the Loss of License area, I can guarantee you that it will turn to profitability during quarter three and four. See positive consequences on that product, quickly. On health and Loss of License, it's okay.
On Group Life, it's a bit more of a challenge. Group Life this quarter acceptable the last two, three quarters. I think we have had a bit of luck in the last Group Life, Other Illness, and Workmen's Comp, three important products, which normally is bought together. Products only, you have to price clients, and you have to take initiatives in order to make sure that you have a sufficient client profitability. What you have seen the last, at least six months, possibly a bit more, is that we have been very disciplined when it comes to renewal Group Life, Other Illness, Workmen's Comp, and Accident in that area. The very big client these type of products. It's a bit more complicated totality. The rate level in these, it couldn't or shouldn't go any further down. That's not possible.
That's one of the reason why we are saying that you should expect lower level of growth going forward, because we will obviously keep the discipline and take strong. In summary, I would say that we have been too late and too little on the pricing side. That's what we see today. Obviously, there is also an element of what you could call normal insurance volatility. I wouldn't say that we have been hit but the level of medium-sized in some areas, you could argue, is slight. It's a bit early to say on that. Not a very easy answer. Rates will not go down in these market areas, Group Life, Workmen's Comp, Other Illness. They must up again. We are costly in we are absolutely sure that competitors, they do see the same picture.
My summary today on the U.K. is we are on track. We have an acceptable growth. That is combined with a poor new sales situation in public sector, good in commercial sector. The commercial sector is huge. It is 10 times the size of sector. It is obviously more important than public sector, but you know that we do specialize on public sector. That is including here. What you will see gradually in Q3 and Q4, and the matter of kind of picking your targets. Both net and gross claims ratio are good. These are the Q2 figures last year, which is obviously the 70s here. That is a kind of good quarter in the U.K. Again, remember, figures are not big. They will be volatile. The claim ratio going forward, that is not our expectation in that area.
These figures are obviously good. They are volatile. In a quarter where Scandinavia is doing poorly on the technical side, it is kind of good to see that U.K. is doing well. I would not say very well, even if the figures. We have communicated earlier, based on the Grenfell Tower situation, we will take years to finally settle. Arbitration coming up with our reinsurance company. Documents are exchanged, and we do not have any new position. It is going on. We go to an excess of loss normal contract January the 1st, 2020. I am pretty optimistic about the Property reinsurance structure. I am not at all afraid of a situation where reinsurance will be too expensive. The structure will be in our favor seen from a profitable point.
Improve the profitability on the Property product going forward. Seen from a pure, just to illustrate, in 2020, we can afford a Property Grenfell Tower loss every year on a yearly basis. We have large portfolios with a mix of risks inside. On the Property reinsurance submission which we delivered today, which is a 40-page document moving on to the market. Also on this side. Could take slightly more time, but normally we see some kind of result. As you have seen in the latest days, both in the Norwegian press and other press, Brexit is up for discussion. Our plans, neither operationally nor formally. This is kind of for us, a thing we have to do some work around.
We have a good dialogue with the authorities in the U.K. government that they will handle over in due time with a good margin before any. Do not expect any challenges at all between the FSA in Norway and in the U.K. We will have later today about the matter. At the moment, we do not see that we need any support for a hard Brexit. Q1 next year has been communicated to you earlier. It is. Then all the names of the first people that will move into that office. There are people in order to continue to expand to six to 10 cities in the U.K. I think we will end up with many offices in the U.K., but 20 potentially one more location. Then we have to come back and have a look on the further development in the U.K. market.
Norwegian kroner in our investment portfolio at the moment. Here you can see the kind of equity development. The bond portfolio is basically rather equal, like last quarter. Payable still. The average rating is what kind of methodology to use in order to calculate that average, and that is communicated. We do communicate the A+ as a linear kind of totality if you do the rating. Meaning that we are from AAA to high in that area, which gives a higher risk seen from a WARF perspective. We will be back in a capital market day during the autumn, based on a linear rating position, which we understand most competitors do as well.
The investment % totality, which we will say is kind of a normal return on, has been rather stable while you have seen some spread development, smaller hits for those players who have a different distribution of their bond portfolio. Seen from a kind of a Nordic point of view, this should be rather to benchmark or slightly poorer in quarter two on the equity side. In total, we would say, Yes, the question?
Just on your asset allocation.
Yeah.
You still have ambition to increase that to 20% or are you more comfortable with the 15% number? How should we think about that?
Far we have had a kind of trouble to get good enough ideas in order to change that position upwards in that area. We still believe in the companies we are invested in. Good opportunities in the equity side. If you are capable of finding anyone, we will invest. As you know, the balance sheet is very strong and it can obviously go to 20% if we would like to. We have been slightly careful on. Yes, the president in the U.S. is starting out and we are at the moment rather stable, but we could change position moving forward. Not to precise. If you have a good idea, let's go for it and invest. Our balance sheet will support it. You have seen a rather stable situation. I wouldn't support it to be in quarter four. I wouldn't be surprised.
Just to
That's right.
Also with new premiums now coming into the investment portfolio, you are putting those into bonds first until you get any good ideas from the equity side?
That's correct. For those who didn't hear the question here. When new money is arriving into Protector, they will probably go to the bond side. However, if we can find good equity ideas later, a careful kind of statement from my side, maybe expect that to be rather stable going forward. That could change depending on the situation. You could do today, obviously. It's to buy a certain insurance company in that area. Okay, here are the results. I think I beat slide you see here. Solvency capital ratio is extremely strong, and according to the standard formula, stronger than what you can see they reported this morning, I think it's fair to say. Here is a new foil. Obviously, constantly allocate capital the best possible way. Looking at the moment, you know that we changed dividend policy a year ago.
Obviously, we had too much capital. We haven't really talked about it much. That could change. We do have good analysts and a good team looking every day in order to see whether we can find a good idea. Please share them with us if you have one, or some, even better, in that area. Since margins are under pressure, we are obviously also putting more focus on what kind of return on invested capital we do have on different products in our portfolio. Read, some long tail, high capital consuming products, we will be slightly more careful going forward, while on the other hand, very short tail, low consuming capital products is even more attractive, relatively speaking, than the other ones at the moment.
The first 10, 12 years of the history of Protector, we didn't really need to have a deeper look into it, because with a combined ratio size 88 or 87 or 90 in most product areas, they could carry the capital cost, all of them. That's not necessarily the situation now. Margins under pressure, risk-free interest rate, historical low, we have to dive deeper into it. We do in that area. Obviously, what we are looking for is to optimize shareholder value, and our long-term return on equity target is unchanged, and it is 20, and we have delivered that kind of figure, as you know, historically to date. No significant changes on the shareholder side. Obviously, some management. At least I'm obviously happy that there are some people which are in my management team and insiders that do continue to invest in Protector.
In summary, good growth level, strong compared to later little on the underwriting side in that area. Do we have any questions from the webcast?
We do.
While waiting for that one, another question here.
Yes. I think you have significant capital that were, as I've understood it, built up to be able to fund the expansion into U.K.
Yep.
With the significant buffer on top of that. Now that both our capital requirements out of both Denmark and Norway, what will you use all the capital for?
Obviously, as stated both today and earlier, we are looking for equity investment opportunities every day. If we can find them, we will invest. Secondly, I think that there is some kind of a buyback indication in your question. That could be considered going forward. At the same time, even if we are guiding down volume, we still are on 16% this year, and we are not even close to your question earlier about zero of next year. We still see a strong growth situation going forward, even though lower than earlier expected in that area. That's the consideration. Profitability development of the company with some kind of uncertainty as we speak on the technical side. To predict return on the investment portfolio is rather difficult. There will be growth in future.
At the same time, we are very strongly capitalized, and in the longer run, we have too much capital. In the long run, I'm a shareholder. I don't like a company with too much capital. Obviously, in the long run, we are stronger than needed. As you know, we do also have a solvency-based reinsurance contract that could be triggered in a certain situation. The balance sheet situation of Protector is in real life even stronger than what you see here. We can kick in capital if needed, in a situation where a world trade is escalating, for instance. Another question?
Just following up on that. Two follow-ups, if I can. How would you then evaluate a buyback program versus reinstating the dividends? Also, with then the strong capitalization, would it make sense to go out of all the solvency re- agreement that you have entered into?
I don't think I should comment more on the dividend or buyback kind of situation. I've given a few comments on that, and it's up to the board to decide. If we go either routes, which one to pick potentially then, in that area. The second question is no, we will not go out of that solvency-based reinsurance contract. We could, if we would like to, but it's not at all on the agenda. We think that that is an acceptably priced insurance policy on the solvency side, which could be useful in a certain situation. We will stick to that agreement, in my opinion, for a large number of years. For many, many years from now.
Thank you.
Other questions, Vibeke?
Have your long-term combined ratio targets changed, or will it still be the target from 2019 and onwards, when the price increases have been implemented fully?
Okay. We haven't done any formal changes on the long-term combined ratio target. Obviously, the question is understandable. We haven't changed so far. If we do, we will be back and update the market.
Is the issue in Norway that you have hit a natural market share beyond which is difficult to grow without dragging market prices down?
Yeah. Our market share in Norway is potentially around 25% of the broker premium, depending a little bit how you calculate that. It is difficult to go further from that. At the moment, it looks totally unrealistic to go further from that. We don't really care because it must be profitable in that area. You have seen situations in different market segments where it's possible to go north of 25. It shouldn't be ruled out for future. At the moment that looks extremely difficult.
It seems like you focus more on income versus growth now. Is it the low financial income returns influencing your decision in growth versus the current year earnings?
Obviously, our expected return on investment going forward is lower than the historical to date, since the interest rate level is a lot lower than two, three, four, five, six years ago in that area. That creates a necessary discipline on the underwriting situation. I would say that our long-term target has always been profitable growth, with profit first. We do have a situation now where you can question that. I understand that. I wouldn't say that the attitude of Protector has changed in any significant way. We have been following down on rates to a level where we expected that the super profit of the history kind of disappeared, not kind of 86, 88 on the combined rates anymore, but more like 92 or potentially 94.
We have delivered a couple of poor quarters, which, in hindsight, obviously could be characterized as too late, too little on that area. Our attitude is the same, possibly slightly stronger because of lower expected return on investment. Today, absolutely stronger because we should and have to take stronger actions now.
Due to the different strategy in Change of Ownership and the staff reductions, will we ever see new quarters with 18%+ growth in this segment, or are you no longer-
The risk profitability, there is a risk being in the insurance business. Welcome to the real world. There is risk in what we are doing, and it will be in future. I think that we have managed that risk properly, historically to date. The question to you is whether you believe in that story going forward. I do. I'm not selling the shares today. That's a promise. I think that we have basically the same management team and the same underwriters today like we had three, four years ago. In addition, we have got some new competent people on board in order to support that management team. I think we are capable to turn the technical, poor situation we have at the moment, going forward. A final question, I guess.
One question. Too little and too late in Norway, couldn't that be translated into lack of underwriting discipline and therefore lack of management quality? What is the one single most important reason why Norway has lost track?
I think that we have communicated to you investors, I guess 5 years in a row, rate pressure is developing in commercial sector Norway. If you didn't expect a reduced profitability in that area, you haven't really listened. Okay. The one single most important factor is an external factor. Market price is going down. We follow in that area. Obviously, there are multiple kind of things that we can and will improve. It's not as easy to give a single factor. I can't do it. The world is slightly more complex, and the discipline of underwriting is slightly more complex than that one. Okay, another question.
The results clearly caught both the buy side and the sell side by surprise today. Did you discuss issuing a profit warning with the Oslo Stock Exchange or what pros and cons did you see in doing that?
Not really. Since also the kind of figures are out very early, the kind of period we have been working on the figures are only a extremely limited number of days in that area. We have not considered, no. I will obviously think through your question during the day. Okay. Thanks a lot. Have a great summer. I hope I didn't damage your plans for the summer, and that you still can afford to take a well-deserved vacation now. We will be back stronger again