Earnings Call: Q2 2018

Jul 13, 2018

Welcome to everybody to a quarter 2 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. So 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. And 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 reposition 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, very strong on cost. We are probably cost leader in the world. And on the quality side, we have not news today, which means that our position is still extremely strong when it comes to deliver quality to the market. But when we are looking on the 3rd kind of main target, which is stated profitable growth, what you see today is growth only without technical profits. And 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. So let's have a look at the highlights. There are 4 elements if you have do 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 our cost and quality position remains stable and strong. So it's nothing wrong with the competitive position of the company. 42%, which is 14%, slightly higher in local currencies in that area. The 3rd element to look for is the combined ratio obviously, which is poor this quarter after also a poor quarter 1. So 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 longer time before price increases are implemented to have their full effect. So 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 4th element is investment income. As you know, we do have an investment portfolio sized a bit more than SEK 10,000,000,000. It's growing. A part of that money is free of charge. It's what we call float. And investment results in the quarter is what you could call good. So competitive position, strong growth, strong investment return, good technical recession is whether we could solve the 4th element and continue on the route towards future today. So let's talk a little bit about it. There have been around 70% of the accumulated profitability of the company after tax. So return on investment is, as you know, the history and potentially also or rather obviously also in future. Have not been good at all on the technical profitability side. So since we are putting more focus, we do expect that the turnover in our customer portfolio will increase. We will price up and potentially out a higher level at 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%. So we do not expect a kind of a growth pickup in quarter 3 and quarter 4 like we saw last year in that area. But 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. Our changing the guiding then to saying significantly higher than €94,000,000 But last like last quarter, we will not explicitly state for a interval or a specific target, but I won't comment exactly on that one. The cost ratio has not changed. And as you 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, potential also a lot lower in 2019. But then today, we would is that we obviously think that over U. K. 'twenty and that, that growth level will kind of offset. I'll be back to comment a bit more on U. K. At a later stage, but a short comment now is that U. K. Is on track also after quarter 2. So on based on the 2 last quarter you have seen there. With them significantly below 15%, could you be close to 0 or even below 0 as well? No. We don't expect that at all. I don't think that we will be even close to 0 in that area. It's too early to say on the higher end, could be slightly higher than what I'm saying. For your size, NOK 300,000,000 to NOK 400,000,000 which is possible to do if you are close to what, 4 point situation in many markets, especially in U. K. But all sorted, 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 so we are saying, yes, definitely below 15%, but I wouldn't say not even close to 0%, no. This is on the gross growth level. And is it then also fair to assume that both for 2018 'nineteen, the net earned growth will be low. In 2018, since parts of the volume developed product where we see more volume to the reinsurance world. Contracts will change in 2019, which means that we gradually will increase the earned premium for us because we are changing potentially from as we have communicated to a normal XL contract, which basically all competitors in the Nordic market is buying. So in the short term 2018, while on the contrary the next year because it's a change. 10% growth for next year on the gross level? Yes. So you could we can take a note out of that question, and we could update you at a later stage or contracts. But at the moment, our intention is kind of uncertainty in that answer. But yes, we can come back with an update to you and the market on that question. So obviously, hopefully, after the meeting, if you would like. Okay. 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. 1, April 1 and another one, June 1, and in line with previous guiding given to the market. And U. K. Possibly slightly below expectation. However, U. K. Volume wise. So no big surprises actually on the distribution of the volume development in Q2. Firstly, on the claims ratios side, there is a number in the quarter. And if you do have a look at the research fair to remind you once more that historical to date, Protector has been kind of overall spot on the reserve. We if you do the calculation, you will see that we are slightly set aside slightly higher reserves than what was necessary in order to cover claims for future. So seen from an overall about the reserve situation in Protector. That's obvious in a row which are on the poor side claims wise. But our comment to the reserves is that they have been prudent, they are prudent. That on the change of ownership side, we have a number right. So we have been basically, not constantly, but very often, been on the wrong side reserving change of ownership. While 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% so 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. And as you will see a bit later further in change of ownership because part of that portfolio is unprofitable. That will happen during quarter 3 and quarter 4 on the forward side. And if I should kind of summarize, I would say that in the art of underwriting, how we held to 18 months has been too late and done too little. So 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 kind of a total surprise that rates are under pressure. We have seen that for a number of years, 3, 4 years, rate pressure in Norway, rate pressure in Norway, rate pressure in Norway. And now we kind of see that the consequences of these rate pressure are area. We did obviously start out more than a year ago, 1st in Denmark, then in Norway in order to increase that in after quarter 1. And the communication now is basic 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 panels, which are on the smaller side. And 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 communicated. Clients leaving today with an accumulation. Some clients will obviously accept the price increases and will stay, but seen that some very significant price increases the last 6 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. And then if you read through the different reports and especially the report from TRIG, which are more precise communicating, see the same message from the market. And we know that other competitors also are pricing at leases. Do not necessarily need to mean that we are losing the clients. Some will stay, but at a higher. And then and again, I'm ready to give a few more comments on the different segments on it. 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 SEK 500,000,000 to around SEK 400,000,000 in annual premium. Obviously, that will lead to some kind of oiling and will gradually happen. So it's not kind of an action. Claims will be reported gradually during the next 5 years. So that kind of staff reduction will take place basically during the next 12 days a kind of natural turnover in the company. So there are no kind of difficult situations at all in Protector when it comes to Denmark. Nothing 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 1, 2019. When it comes to public and that some products like motors still is doing obviously price increases must be stronger. And in our portfolio, they will be stronger than what Jensidier communicated this morning. Average increase in motor prices going forward, which according to Jensid is in line with claims inflation in that sector. And plus we think clients basically will accept because it's short term. It's easy to read the figures. And other price increases has been done already and some more will arrive in the Norwegian market. Obviously, when Norway do when it comes to public and commercial and change of ownership, that influences a lot in the profitability situation in the company as such. So it's profits, which we do expect will happen in Q3 and Q4, even though some pricing increases, but there's more to come and the full effect you won't see it before in 2019. Finland, it's too early to say, small volumes as we comment on Finland. The Finnish figures are integrated in our reporting as always for a new company with limited volume in the Norwegian, let's say. Sweden is doing well. You have you still see a good combination of volume growth and profitability in allotment in Sweden is obviously catching up on commercial sector Norway. So when Norway is going slightly down, you can see that with the strong growth level we see in Sweden, Sweden is kind of catching up and are getting closer and closer. There is an internally. Sweden is on target. I know that Asura is sitting behind here. Our Director in Charge of Public and Commercial Sector, Lidna are in a hurry obviously because they should be number one position before U. K. Tax should have an ambition to ever be number 1 when it comes to volume. Obviously, there is another competition which is more important that is linked to the level of profitability and comes to level of profitability in that area. So Sweden is doing well. I do have a separate slide on the U. K. But before that, a question? And your competitors are also focused on mobile, Whereas in the communication you had, when you released the report, you said that loss of license. So it seems like a much broader range of products where you have claim issues. Could you talk a little to that? Okay. So the reason why I mentioned motor 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 basically according to expectation, while Motor was the very negative kind of surprise in Q2 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 'twenty nine situation where you should expect a more rapid development because one loss of license client is out with effect from June July 1. So on the loss of license area, I can't guarantee you that it will turn to profitability during quarter 3 and 4. The positive consequences on that product quickly. So 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 2, 3 quarters. But I think we have had a bit of a luck in the last group life, other illness and workman'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. But what you have seen in the last at least 6 months, possibly a bit more, is that we have been very disciplined when it comes to renewal and this group life, other illness, workers' comp and accident in that area. The very big client lead these type of products. So it's a bit more complicated totality. The rate level indeed, it couldn't or shouldn't go any further down. That's not possible. And that's one of the reasons 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. And it will take an over. Obviously, there is also an element of what you could call normal insurance volatility. But I wouldn't say that we have been here not, but the level of medium sized in some areas, you could argue, is slight it's a bit early to say on that. So not a very easy answer. Rates will not go down in these market areas, group life, workers' comp or the illness. They must up again. And we are cost we are absolutely sure that competitors are do they do see the same picture. My summary today on U. K. Is we are on track. We have an acceptable growth. That's combined with a poor new sales situation in public sector, good in commercial sector, a small quarter in that segment here, the commercial sector is huge. It's what? It's 10 times the size of sector. It's obviously more important than public sector. But you know that we do specialize on public sector that is including here. But what you will see gradually in quarter 3 and quarter 4 and the matter of kind of picking your targets, your broker, both net and gross claims ratio are are good. This is the 2 quarter two figures last year is obviously in the 70s here. That's a kind of good quarter in U. K. But again, remember figures are not big. They will be volatile. The claims ratio going forward, that's not our expectation in that area. These figures are obviously good, but they are volatile. And in a quarter where Scandinavia is doing poorly on the technical side, it's kind of good to see that U. K. Is doing well. I wouldn't say very well even if the figures we have communicated earlier based on the Grenfell Tower situation, we but will take years to finally settle. And arbitration coming up with our reinsurance company. Occupants are exchanged. We don't have any new position is going on. We have go to a XL normal contract, July January 1, 20. And I am pretty optimistic about property reinsurance structure. So I'm not at all afraid of a situation where reinsurance will be too expense structure, will be in our favor seen from a profitable point, improve the profitability on the property product going seen from a pure just to illustrate, seen from a pure move and in 2020, we can afford a property Grenfell tower loss every year on a yearly basis. So we have a large portfolio with a mix of risks inside on the property reinsurance submission, which we delivered today, which is a 40 pages document moving on to the market and also also on this side, could take slightly more time, but normally we will see some kind of result out of As you have seen in the latest days, both in the Norwegian press and other press is that Brexit is up for discussion over plans neither operationally nor formally. So this is kind of for us a thing we have to do some work around. We have a good dialogue with the authorities in by government in U. K. That they will handle over in due time with a good margin before any and don't expect any challenges at all in between the FS in Norway and in U. K. And we will have the letter today about the matter. But at the moment, we don't see that we need any support for Brexit. It's quarter 1 next year. It has been communicated to you earlier. It's and in all the names of the first people that we move into that office, there are people in order to continue to expand to different from 6 to 10 cities in U. K. I think we will end up with many offices in U. K. But 2020, potentially one more location and then we have to come back and have a look on the further development in the U. K. Market. In our investment portfolio at the moment, Here you can see the kind of equity development, SEK 14. The bond portfolio is basically rather equal like last quarter payable still. And the average rating and what kind of methodology to use in order to calculate that average and that is communicate. So we do communicate the A plus 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 risks in 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 percent 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 1 their 1 portfolio. But same from a kind of a Nordic point of view, this should be running to benchmark or slightly poorer in quarter 2 on the equity side. But in total, we would say Yes, the question? Just on your asset allocation. Yes. You still have ambition to increase that to 20%? Or are you more comfortable with the 15% number? How should we think about that? So far, we have had a kind of trouble to get good enough IDs in order to change that position upwards in that we still believe in the companies we are invested in. So good opportunities in the equity side. If we are capable of finding anyone, we will invest. And as you know, the balance sheet is very, very strong and we can obviously go to 20% if we would like to. But we have been slightly careful now. Yes, the president in U. S. Is starting out. But we are at the moment rather stable, but we could change position moving forward. So not too precise. If we have a good idea, let's go for it and invest. Our balance sheet will support it. But you have seen a rather stable situation. I wouldn't support the 3rd quarter 4. I wouldn't be surprised. That's right. And also with new premiums now coming into the investment portfolio, you are then putting those into bonds first until you get any good ideas and exercise? That's correct. So for those who didn't hear the question here, so when new money is arriving into protector, they will probably go to the bond side. However, if we can find good equity ID related, 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. So here are the results. I think our beach slide you see here. The solvency capital ratio is extremely strong. And according to the standard formula, stronger than what ENCEDA reported this morning, I think it's fair to say. Here is kind of 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 have too much capital. We haven't really talked about it, but 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. And since margins are under pressure, 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 saw the history of protectoid. We didn't really need to have a deeper look into it because with a combined HSI is 88 or 87 or 90, in most product areas, they could kind of carry the capital cost to all of them. That's not necessarily the situation now. Margins are in the pressure, risk free interest rate, historical low, we have to dive deeper into it and we do in that area. So obviously, what we're 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. So but at least I'm obviously happy that there is some people which are in my management team and insiders that do continue to invest in Protecto. In summary, good growth level, strong competitor late to little on the underwriting side in that area. Do we have any questions from the webcast? 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. With a 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 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. We are not even close to your question earlier about Sirov next year. So we still see a strong growth situation going forward even though lower than the earlier expected in that area. So that's kind of 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. So obviously, in the long run, we are stronger than needed. And as you know, we do also have a solvency based reinsurance contract that could be triggered in a certain situation. So the balance sheet situation of Protector is in real life even stronger than what you can 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. How would you 2 follow ups, if I can. How would you then evaluate buyback program versus reinstating the dividends? And also, with then the strong capitalization, would it make sense to go out of the solvency reas agreement that you have entered into? I don't think I should comment more on the dividend or buyback kind of situation. I've kind of 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 kind of an acceptably priced insurance policy on the solvency side, which could be useful in a certain situation. So we will stick to that agreement for in my opinion, for a large number of years for many, many years for a month. Thank you. Other questions, Wiebeke? So have your long term combined ratio target changed? Or will it still be the target after or from 2019 onwards when the price increases have been implemented fully? Okay. So we haven't done any formal changes on the long term combined rate to target. Obviously, the question is understandable, but we haven't changed so far. And 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? Yes. 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, And we don't really care because it must be profitable in that area. But you have seen situations in different market segments where it's possible to go north of 25%. So it shouldn't be ruled out for future, but 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 currently earnings? Obviously, our expected return on investment going forward is lower than historical to date since the interest rate level is a lot lower than 2, 3, 4, 5, 6 years ago in that area. So 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. I we do have a situation now where you can question that. I understand that. But I wouldn't say that the attitude of Protector has changed in any significant way. But 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 ratio anymore, but more like 92% or potentially 94%. And then we have delivered a couple of quarters, which in hindsight obviously could be correct for a size as too late to 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 plus percentage growth in this segment? Or are you no longer The risk profitability, there is a risk being an insurance business. So welcome to the real world. So there is risk in what we are doing, and it will be in future. I think that we have managed that risk properly. Historically today, the question to you is whether you believe in that story going forward. I do. I'm not selling the shares today. That's the promise. And I think that we have basically the same management team and the same and writers today like we had 3, 4 years ago. In addition, we have kind of got some new competent people on board in order to support that management team. I think they're capable to turn the kind of technical poor situation they 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? So 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 and commercial sector Norway. If you didn't expect a reduced profitability in that area, you haven't really listened, okay? So the one single most important factor is an external factor, market prices going down, We follow in that area. Obviously, there are multiple kind of things that we can and will improve. And 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? What pros and cons did you see? Not really. And 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. So we have not considered no. Well, I will obviously think through your question during the day. Okay. Thanks a lot. Have a great summer. I hope I didn't kind of damage your plans for the summer and that you still can afford to take a well deserved vacation then. We will be back stronger.