Good morning, everybody. I would like to say a warm welcome to everybody. It is more than 80 people in the room now, and I know many of you are looking at the webcast presentation as well. There are some new faces here today, I am Sverre Bjerkeli, the Chief Executive of the company. I joined the company together with the chairman, who also is present today, as normally I would say. We started Jostein some 15 years ago actually, running from January 1st, 2014. From the very early beginning, we defined what we would call the DNA of the company, which is on this slide. It is always a slide which I normally start with, and why wouldn't I today as well? There are 12 statements on the slide. We do have a requirement that all employees in Protector should remember, gradually understand, and then live.
Obviously, when we do deliver poor results, it is even more important to reflect whether these words are words or realities. I would like to be open with you today. I will discuss credibility today. I would like to start with the word challenger. We are the challenger. Obviously today we are challenged. The first part of the presentation is about a challenge that has arrived recently. That challenge is a small bug, less than two centimeters big, basically harmless. It doesn't harm people, nor does it harm animals or buildings, unlike other pests you can find in Norway. On this page here, you can see more dangerous, small, and dangerous in brackets, dangerous small animals living in Norway.
This little chap here, he could actually eat a house, while the bug we have met recently, the Grey Silverfish in English, the guy here, does not eat buildings, does not harm people. Harm, how do you define harm? At least he is not dangerous in any way. Why is it so that the district courts in Norway have concluded that this little animal eating paper is a basis for a payment to a buyer of a house if this animal, who today is a very normal animal in Norway, arrived to your house? What are the consequences if that kind of practice will continue? That is the question which we will address towards the legal system in Norway in the following months and years.
However, we can't risk losing that fight, obviously we have taken a decision to exit that risk, obviously, because we can't wait for Supreme Court to arrive and to give a wrong conclusion at a later stage. We can't. We will, and we have excluded this little bug from the Change of Ownership product from November the 1st. I explain that further a bit later in the presentation. The question is, should we have seen it before? Should we have understood the problem earlier? Should we have communicated it earlier? Should we have taken losses earlier? Should we have taken other actions than what we have done recently? That is a reasonable question, obviously, which we discussed a lot together with the board yesterday, where we had a dialogue with the board.
Should we exit this market, or do we think it is profitable to continue in this market? The conclusion yesterday evening is that we will continue in the Change of Ownership area. We will not walk away from the market. However, we might end up with zero market share in that market, depending on the feedback from the market on the kind of activities we implement now. Let's go back a little bit. This little bug arrived, we think it arrived to Norway in 2013, this innocent little bug. We saw the first claim arrive in 2015. We think that this bug basically arrived from Africa many, many years ago. Today it exists all over the world. It's in Sweden, it's in Denmark, in Germany, in U.K., in Europe, in Asia, in Australia, in Africa, in the U.S.
It's everywhere. So it's not like a Norwegian kind of small bug. It's a little species which creates no harm and do not have attention in any other country than in Norway for some strange reason. We got three claims reported from quarter three of 2015. We do get around 4,500 claims a year within this sector, 20 claims 2016, then 38 in 2017. Pretty harmless, wouldn't you say? Suddenly something changes, and that happens gradually through quarter three 2018. What we see is a gradually escalating situation where there are more claims reported to Protector. However, there are no legal kind of conclusion at the moment. We can't really see why this should turn out to be a big issue. We can see 208 claims accumulated in 2008, gradually growing through the year, with September as the worst month by far.
We are getting more claims reported in September 2018 than the two first years here. Two first years, one month. It escalates, and it's moving faster and faster and faster. This sounds dangerous, doesn't it? It's a harmless little bug. We have to be correct. There is a fact now which we fully understood in late July and through August with three district court decisions in a row from small district courts, I think, different places in Norway. For you that are not familiar with our legal system in Norway, I think we have 470 or 476 district courts in Norway. It's the first instance. They go to appeal, then they go to Supreme Court, like in most countries in Europe. There are absolutely no appeal decisions taken so far. This is the first court level.
In late July through August, we saw that we might have a serious problem. Not might. We have a serious problem. September escalated with more claims. The actuary had to do what he should do, go into it, and try to find out what the potential reserve losses could be for the years previous to 2018, but also for quarter one and quarter two 2018, where we didn't see the problem in those two quarters. What's stated here is that gradually we understand it goes to alert status and then red alert status, and then the actuary waits a week or two until figures are ready to be analyzed, and a week later, and now we are in the beginning of October, it is what you could call a crisis. Okay? It's a crisis.
This crisis arise from an innocent bug where Norway is the only country in the world which compensates buyers of properties for a property value decrease. It came as a surprise. Obviously, I apologize towards you investors that we had to present the kind of figures based on normal actuarial analysis. Obviously it has been taken seriously internally in Protector to, one, try to understand, two, go back what could we learn, and three, and the most important thing, obviously, we can't do anything with history, take any actions necessary and move forward in that area. Obviously, we will not compensate new claims in that area now. We are of the opinion that the bug is normal. It do exist in Norway. It doesn't really harm.
Harm is, again, a word which is difficult to define, but at least it doesn't destroy or hurt people, animals, or buildings in that area. It eat paper, books, wallpaper, and things like that. Immediately after the actuary had done his analysis, a project called Grey Silverfish, the English word for the bug, was established. 10, 12 people, plus more, have worked obviously 10, 12, 14 hours a day the last 14 days in order to meet you today. Also to conclude yesterday evening in a board meeting. Whether we should walk away from this segment or whether we should stay in this segment. One project is about the silverfish himself. The other one is towards the real estate broker market and many other external parties which we are working closely together in order to discuss with influence on, if possible, agree on necessary action.
We have made hundreds of phone calls, have tens or 20 or 30 or 40 or 50 meetings with top management during these 14 days, and been out there in the market in order to prepare for a potential situation where we would continue. We will not continue if this bug could harm us in future. I explain reserve setting and figures a bit more pretty soon. We have obviously had a lot of internal activities. We have considered to shut down this business unit, which next year will consist of 8% of the total business. We have 92% to go. We could exit 8. Obviously, we could do that. We are not in a kind of difficult company position. Not at all. The question is whether we think we can earn money in this segment going forward or not.
Obviously today we think we can and we will. That's our position today. Obviously when you are in such a crisis situation in a segment, okay, a segment, 8% segment of our business, we have to consider to exit, we should also consider to go to the other side. There is an other side product here, which do exist in the market, which is a mature product, which have some kind of profitability in today's market. I will not conclude on this one. I shouldn't really tell the competitors that we will never, ever go there, but okay. I think that the situation is obviously like if we exit the Change of Ownership segment, we will actually not go on the other side. Okay? To the biggest player in that market, help, now you know, and that's okay. We won't go to the other side.
To real estate brokers, you know, we will not go to the other side. We either stay with you here or we walk away. You have a monopoly situation on the other side, which is the fact of the situation you know now. If we leave the market, there will be a monopoly situation in this market, which could be a challenge for these people here. Okay. The kind of Grey Silverfish project. One, who is the bug? What kind of view do we have on the bug today and in future? External activities. A lot of internal activities. Consider to go to the other side. The conclusion on that one is not at all.
Okay, the kind of decision which we have taken, the first one is communicated to the market already, is that we will exit this product from the terms and conditions in the product from November the 1st. The financial consequences of that, I'll be back in a second. We have changed claim handling practices, we have both before and after October 11th, a large set of activities which we have implemented. We saw the bug. We had them in the courtroom. We have discussed internally, we didn't have figures or an understanding before late in quarter three. Some of you might ask the question, why did you do buyback in July if you knew? An honest answer is that we didn't know. Not at all. These things could actually happen in an insurance market.
Very seldom that you see such a rapid development on a claim situation. Extremely seldom. This is not at all close to a pandemic. Seen from a figure point of view, you could argue it acts like because it's escalating and it's escalating very quickly in that area. Your question now is whether the reserve losses, which we have taken in quarter three, whether these reserve losses are prudent and if they are good enough. Are they conservative or on the other side? That's your question. Obviously we understand that question very well. Our feedback to you is that we cannot give any guarantees. How can we? That's not possible. Again, open is a value in Protector, we can't give guarantees when it's not possible to give them. You have to consider the risk that it could go worse, or it could go better.
You must remember that, with an exclusion November the 1st, there is still a period of time, around 3 months, where more risks arrive into our books. That's the behavior of the product. Okay? I won't explain that in detail. You can ask questions about it after presentation of Capital Market Day, it's the nature of the product. The exit November the 1st basically takes 3 months. Which means that you should expect a pretty poor quarter four, not because reserves will change, because there will arrive new risks during quarter four related to the bug. Expectation quarter four, you must be aware of that fact. However, when you enter the new year, new risks will very quickly disappear, basically beginning of February in that area. It's back to the reserve setting in that area.
The drivers for claims ratio development, and obviously also the underlying drivers for understanding whether reserves are good enough or not, is that can we do something with a basic problem? The bug is harmless inhabitant in Norway. If we win through with that kind of opinion, which I think common sense says it must be right, then we will have a reserve gain in future. Could we kill the little bug? There are a lot of resources also from Protector used now in order to kill the little bug. There has been some successes, and it has been some failures. During the last 18 months, we have been involved in some tests in the market. We have. We have got the feedback from professionals doing these kind of things that now we got it, now we killed it. Oops, six months, it's back again.
There will be methods to take them out, but it doesn't really matter, in our opinion, because it's a normal little harmless bug belonging to us here. Get used it in that area. It could be changes in courts of appeal, in claims practice, and in average claim size. These are the kind of elements which we are looking now. We think that if reserves are not correct, you could see a good scenario where we are getting around NOK 52 million reserves back again. That's a good scenario. You could see a bad scenario where we lose around NOK 38 million. That's a bad scenario. Obviously the question is, well, how do we define good and bad? I think that's kind of a realistically interval. However, it could go worse, and it could go better.
Neither of us can really know at the moment. This is the nature of insurance business and reserve setting. I will comment more on reserve setting seen from a company point of view in the capital market day. Then you can be more competent to evaluate the kind of reserve discussion you have here in a bigger totality. I think that what you will see is that you shouldn't really worry. That's my statement. You shouldn't really worry. That's an agenda because that takes a bit of time to explain for the capital market day, where we have announced that we will go through the historical to date reserves in the company, including Gray Silverfish, Change of Ownership, workers' compensation, property, motor, and many other products. Take a bigger picture, have a look, discuss with ourselves, what's your opinion in that area.
We have taken a loss. It could go better, it could go worse. There is a kind of realistic area where we are looking into, but think it through. It's your decision to take. I'm absolutely sure that these kind of people who this morning are very happy because they all were afraid that they lost their job today, they are extremely motivated to do as good as they can. The KPIs in that business unit is on a historical good level. We have strong signals from the market that they will accept exclusion of the bug. However, we can't be sure. If they do not accept, we walk away. Okay? Promise given. They don't accept, we walk away. There are strong signals that they will continue with us. Remember that we earlier have said that this segment have other profitability challenges as well.
We have left 25% of that volume going forward. That is also an element of the totality. However, I am of the opinion, the board is of the opinion that we will earn money in this segment going forward. Historically to date, combined ratio is still on the profitable side, even after Grey Silverfish. It has been profitable, and it is our opinion that it will be profitable going forward. I prepared some 20 minutes on the little bug, and I spent 26, I guess. Should we move on? Any question to the bug? Yep.
Just, sorry. What are the implications for the seller and the buyer of a house when you have excluded this from the product? Does it mean that there is a claim of, say, NOK 1 million, can the seller, or can the buyer not make this claim? Or does it mean that-
The question is what is the potential consequences for seller and buyer of a property in that area. The consequence is that the buyer could put a claim on the seller, and the seller is running a risk, in future. That is the consequence in that area. We do not see that risk as very big, but they should be aware of it. The following consequences of that kind of thinking, if you are living in a building block with 100 apartments, and if there is a bug in the cellar in that building, there are 100 apartments there. What happens yesterday, the day after you find that bug, is that the value of those 100 flats might go down with 10%. Do you think it is reasonable? I do not think so. It is a bug existing in that area. Do not be too scared about that story.
I have given you figures seen from our point of view, but it is a rather stupid and silly situation we are discussing at the moment, in that area. If the other side would have been something else than an insurance company, I am pretty sure that even district courts would have said something else. Insurance company, deep pockets, let us go and make the buyer happy, even if this is the only country in the world where you compensate for that. Okay, we move forward and continue. No more questions about the bug. We have spent almost half an hour about that. I am here in the meeting through the day, we will skip the bug now. The question is: do you still think we are credible as a company after delivering kind of results towards the market? Let us discuss. Be open, in that area.
I understand that we have disappointed you the last couple of years with some kind of bad news. That's obvious. Have a look, think through, and feel free to give feedback whether there are something here missing on the list. You might say that we have something on the positive side as well, couldn't we? We have a pretty good story in some areas which might kind of make you think that we have some kind of credibility left, even if we have disappointed you in 2018 and also on some occasions earlier on. This thing is also something to have a look at when discussing credibility. For 10 years now, we have been pretty clear on our guiding on the volume side, and here is the jury.
There are very few companies, at least as I am aware of, that are so very clear on guiding and that go back and track, and backtrack what's happening here. We are guided on volume. Basically, we have delivered according to guiding or better. We have guided on combined ratio. Have a look at this slide later on, and conclude for yourself. Basically, what you will see is that we do not miss guiding very often. You could argue it's pretty credible, to give guiding and to deliver according to. Yes, there are some disappointments here. Two out of the three last years. Have a look. It's insurance. It's through a cycle. It's 10 years. It's obviously up for you to decide on that area. At the same time, I think it's okay to summarize in figures what has happened the last 10 years.
We have had an average growth rate of 21%, a combined ratio of 93%, return on equity 21%. We are cost leader in the world and quality leader in the market. I would say it's pretty good. I do understand that going forward is what we all are waiting for. History doesn't really help. That's it. When discussing whether you have faith in the company or not, have a look at the history, listen to the story, and take your own decision whether you think this is credible or not. We are into the results for 43, which you have seen previously in statements given from the company already. The only thing to pinpoint here is that exclusive of Change of Ownership, the bug related area at the moment, we have a combined ratio size 96. It's not very good, but it's not very bad either.
The question is whether that 92% of the business will improve from 96 going forward or at least not get worse. If you're growing 20% a year, we will not tax there, by the way, but we have. Okay, if you're growing and delivering a combined ratio size 92, it will create a lot of value. 94, it will create a lot of value. 96, okay, we start to discuss. 96 in long term is not a strong combined ratio, not at all, in that area. Okay, it's 96, it's not 104 or 117 or something like that. That's the company level. 98% of the business here, both year to date and in this quarter, is not too bad, I would say. If you see on the volume side, we are growing, and U.K. is the driver for growth.
Here is a bit of an update, which is a bit more detailed than what you normally see. You can have a look here at, for instance, the bigger business area, Norway commercial. You can see the year-to-date claims ratio, which is not good. We have been discussing with you so far what kind of actions to take in order to improve profitability in such a big area. You will have a better update on different business segments in Protector in order to consider whether the big area, the 92% area, commercial Norway, Sweden, Denmark, and then commercial U.K. We only have commercial. That includes the public sector and Finland, whether that will be healthy going forward or not. Remember that U.K. is pretty early, so you shouldn't worry too much of that figure. The net claims ratio is 115.
What I say here, don't worry, they are small figures. Here is another figure. This is the gross claims ratio. It's 66.9. It's pretty good. It's better than pretty good. It's very good. Don't be too happy. It's small figures. The gross figures are good, the net are bad, and neither have any value to look into. That will be slightly more explained in capital market day later. However, it's too early to say. Obviously, we have a plan to earn money in U.K., and Henrik will comment on that plan. But we are too small, too small figures, too early in order to say anything with a strong voice about the figures in U.K. today. That's not possible in that area.
What we will do, and have done, and are receiving feedback from the market today, is that since the other areas, the 92% of the business of Protector is not doing as good as it should be. Year to date combined ratio, 96. That's not good enough. We have to prepare for a quarter four, which normally and technically is somewhat worse. It will be slightly higher than 96 at the end of the year. Let's say we fly from 98, just to give a figure, it's not a guiding. Let's say we start flying into next year, we start on 98 on these 92% of the business area.
Be aware of the fact that we are increasing prices with more than eight in Norway, four in Sweden, 12 in Denmark, which will lead to clients will leave in Denmark, some in Norway, few in Sweden, in that area. That's a pretty important statement. The good thing is that the market communication in these areas are equal. Big competitors in the Nordic market, in our segment, say the same thing. Prices must up in Norway. Prices must up in Denmark, in our segment. workers' comp, like an example in that area. Price increases is implemented as we speak. We don't know the result of that, but we either will get them through or lose some clients. What we are fighting for is to keep as many as possible, obviously. To get rid of clients is easy.
It's difficult to convince them that they should accept a higher price. We won't back out of the kind of activities we have here. My question to you, is there any questions to the profit and loss statement as such for commercial sector or Change of Ownership? Yes.
Maybe a question on the outlook, because you say 2019 in the press release, it has acceptable combined ratio with the 92%.
I'll come back to the outlook at a later slide. For question about outlook, I take it when we are there. Yes, a question.
The price increases in Norway, as you say, many of your competitors are doing it as well. When do you think these are coming through your accounts? Is it through 2019 or is it the first of 2020?
When will price increases get through? Most of it will get through January 1st, 2019. Some of these kind of price increases started July the 1st this year. What I would typically say, that leaves at least 75% what we are talking about here. Higher in Denmark because the renewal date, January 1st, Denmark, is even bigger than in Norway. A significant penetration from 2019, give or take 75% penetration for the full year. Thanks for the question. It's a good one. Yes.
Can you comment on the profitability without the runoffs this quarter? If you exclude all the runoffs this quarter, it's still a combined ratio of 100%.
That's correct. What we have is reserve losses on the Change of Ownership area, and we have some kind of reserve gains from the commercial sector. As you said, the accumulated combined ratio is around 100%, slightly above if you exclude all runoff losses. It's a poor quarter. If you exclude runoff losses, the quarter 3 and Change of Ownership is very poor. One example, and in some areas as well, as communicated earlier, we will not have a healthy combined ratio in quarter 3 and 4. We said before the Gray Silverfish arrived that you would see gradually worsen situation for technical reasons during quarter 3 and 4. It's exactly what we see today in that area. Yes, you are right, that still the quarter 3 results exclusive of runoff totally is not at all good, you could say.
However, you should spend some time on the reserve setting in the capital market walkthrough, because what you will see is that in the commercial sector, it has been consistently runoff gains the last six years in that area. Let's say that the runoff gains, give or take, has been around NOK 600 million in commercial sector in total the last six year, which is not far from a correct figure. I'm not exactly up to date, but give or take 600. If you divide that with six, take a bigger picture, you will get NOK 100 million every year. What you will see is that there are some runoff losses which has arrived on average every year, the last six year in these kind of sectors, exclusive of Change of Ownership.
If you met me six years ago and we discussed reserves commercial sector going forward, you would have remembered that I said something. I said that you might expect a runoff gain in commercial sector going forward between 2 to 4. That kind of statement has been given in writing to you around six years ago. Look back and you will have a look. That was happening, and has happened the last six years. I wouldn't worry too much about resources. You are too much focused on short term reserve changes. Okay? You are too narrow in your view in that area. As an analyst, you should take a bigger picture in that area and we talk more about that in the capital market day.
Okay.
Okay. I have to move on, I think. One more question. Okay, thank you. I move forward. Unless you have potentially some questions coming up at the end of the presentation. Vibeke, you've got them. There are some questions coming in from the webcast area. Grenfell Tower property claim is settled. Reinsurance arbitration is postponed until May. For practical reasons, some illness on the other side, couldn't do anything about it. That will be May. The worst case scenario has been reduced from NOK 100 million to NOK 85 million. We don't like it, and we will be careful with placing a lot of reinsurance with Munich Re going forward, because we shouldn't have been in that kind of situation. Okay, we have to meet in May, so let's wait and see. We can't do anything for now. Investment performance is 0.5% return this quarter.
I talked about the results. The balance sheet is very strong. Our solvency capital ratio is 183%. Another company in Norway gave a statement to the market yesterday. They had a solvency capital ratio based on the same methodologies, I think I remember right now, 181%. What company? Come on, you were there. What company? Gjensidige. Gjensidige 181%, Protector 183% based on the same model. I understand. Gjensidige, based on a partial internal model is a lot higher. I know Gjensidige is selling a bank. I know they will pass 250%. I know they are extremely solid. However, yesterday we had an equal solvency capital ratio. We have a strong balance sheet, despite the fact that we have delivered a poor quarter three. Despite the fact that we did buyback in July.
The stress test, we can stand up to anything that you might think of and slightly more. Here is some kind of simulation on the stress test. There are some insiders buying more shares during summer. Not perfect timing. Okay. They bought in July and August. Then you know for a fact that at least couldn't see the Grey Silverfish. Here is my summary. We have a poor quarter and a poor year to date. We have excluded the Grey Silverfish from terms and conditions. We are growing. Profitability actions, price increases, and other initiatives in Norway, Denmark, Sweden is gradually kicking in, because it started not today, it started half a year ago. It will have a significant impact on the profit and loss account next year. Our 2019 expectation is that we will deliver on a company level, a healthy combined ratio.
Your question was?
What is the 92 is, in the press release it says acceptable, in this case, healthy. What would be a range that is healthy? Better than a 96, I guess, for Protector.
A good try. There is a reason why I say healthy and not give you a figure. We have a history of being precise on guiding. We have been precise for 10 years, but this is a situation with some kind of uncertainty, obviously. We don't know how price increases will penetrate, how much volume we will lose, and how Grey Silverfish will develop during the next few months. We know how it will develop during the next quarters or years. That's not an issue. We can't know in a very short term in that area. Acceptable or healthy, there are two phrases which I'll use. They are pretty similar. You find out. Yes.
On the claims inflation side, could you just give us an insight into how claims inflation has affected you during this year, both on frequency as well as the underlying inflation? Just to understand how your pricing is. Is it the pricing above your presentation, or is the pricing below?
Okay, how is the price initiatives we are taking relative to claims inflation? I guess that most companies in Norway, including the big consumer-oriented companies, have taken slightly by surprise because claims inflation, especially in the motor area, is higher than formal indexes should say. Formal indexes are looking at the wrong parameters in that area. What I will say is that absolutely all price increases we do, they are above expected claims inflation going forward. There is a margin to claims inflation. If not, a combined ratio wouldn't improve in that area. That differs a lot between countries and product areas. Vibeke, we have questions from the web call, I guess.
Yes. One question is, if you expect a bad underwriting quarter for Q4 related to the Grey Silverfish, why don't you reserve more?
Why don't we reserve quarter four? It's not normal practice in the insurance world that you are taking potential future reserve losses for policies not sold, or not put into effect. That's a very different kind of story. In our opinion, reserves are prudent, but we do expect a combined ratio above 100 in quarter four on a company level. Next question.
There's a question if there is room to do more share buybacks.
Share buyback was not an issue in the board meeting last evening, no. More questions?
With the equity market falling 10%-15% in October so far, are you getting more opportunities to put money in equities?
Do we have more opportunities on the equity side since market is down 8, 10% now? The question will be answered by Dag Marius in the capital market day in one and a half hour or so. Okay, thanks a lot. Is there more questions from the audience here? Thanks a lot. I hope most of you will stay in order to have a deeper look into who we are and how do we view the future. We will talk to you about the company development as such. We will talk to you about investments, about big changes in the reinsurance structure, and about U.K. I hope I see many of you in 11 minutes. Thanks a lot for your patience. Thank you.
Okay. Welcome back to the Capital Market Day. The first part has been a more normal investor presentation, even if the time spent has not really been normal. I'm very happy to see all of you again, potentially also a few new people on the webcast. The agenda we have today is that you won't get rid of me at once. I will spend some time on a total company view, leave the word to Dag Marius on the investment side, on Fredrik here on the reinsurance side, and finally, U.K. We save U.K. at the end of the agenda to make sure that you are not leaving too early then. Many of you would like to have a deeper look into the U.K. type of agenda. My agenda is the company overall status and a special look at the historical to-date reserves.
Remember that historical to-date reserves has not been a topic because of the Grey Silverfish. It was actually a topic we would like to discuss with you before the quarter three for the end. In many quarterly presentations, I think it's too much focus on the quarterly level. Let's take a bigger view, a longer view, a higher view, and update you on how at least we view the reserves the last 10 years. Let's not spend time on the DNA of the company. We talked about it later on. I won't obviously not walk through this again.
At the bottom of this kind of presentation here, you see a statement that we are a fast growing company with a healthy combined ratio or a good combined ratio, with an average return on equity size 21, even in an interest rate level, which has been historically low for a few years now. It would have been easier to deliver return on equity size 20 or higher if interest levels has been better. I guess you agree with me on that one. Hopefully going forward, we won't see the same situation like the last years. I wouldn't know. Let's wait and see. The question is, how is the present status when it comes to cost leadership, quality leadership, growth, and other elements? I talk a little bit about cost and quality, and growth expectations here.
Also, I will obviously go deeper down after reserve walkthrough on other important elements in Protector. We are not spending the company resources at the moment on a bug. We do not. We spend resources on several other areas, which long term is much more important than the kind of thing we have discussed for 25 minutes in investor presentation. We are cost leader in the world. What's my expectation for future? You should go here and see cost the real way, which is the company cost ratio, inclusive of claim standing costs, less commission. That's the real cost ratio of an insurance company. There are two companies in the Nordic market who delivers basically these kind of figures every quarter. It's the market leader, If, and it's Protector. The other ones do not.
It's a bit of a difficult situation to compare apple to apple our cost ratio towards the other ones. However, I have challenged analysts the last five years in Norway, Sweden, Denmark, Finland, U.K., Germany, France, U.S., Canada, and other places in the world, have you ever seen a company with a lower cost ratio? I have never, ever been challenged. Okay? My prospect for future is better. We will reduce cost going forward. It's a pretty easy statement. It's not that easy to do. It's easy to say. It's a fact because it's happening when we speak. If you think about this, it's pretty obvious. We don't have critical mass in U.K. We have a cost ratio which is very high in U.K. at the moment. Henrik will update you on the figures. When volume doubles, cost ratio will go down rapidly because we have scalability.
In many claims handling areas, we have not critical mass at the moment. When we reach critical mass, cost ratio will go down. In some areas, we have just received critical mass, and cost ratio is going down now as we speak. Pure logic says that this is true. While other companies struggling with cost ratios, not too many in the Nordic, they are very good on cost ratios in the Nordic market. It is one of the most efficient insurance markets in the world. Cost ratios in the Nordic market is very good. They are good, the other ones as well, but they are not even close to Protector. It is obviously easier for Protector to reduce cost ratio when growing compared with other ones who have zero growth. Basically, everyone have zero growth except Protector.
My guiding to you on cost going forward is that the distance we have towards the others will at minimum be kept. I think it will slightly improve the next two to three years. Please come back. Some of you have followed the company here, and even here, when it peaked up. I said at that time, "Don't worry. There are reasons why it will go down." It has. To predict cost ratios to Protector is pretty easy. We are cost leader in the world, we will keep or slightly improve. We are quality leader in all markets. We fight every day in order to stay at that position. It is challenging. It is a lot of work. We need to be better in order to deserve that position going forward.
I come back with a couple of initiatives which might influence on the quality opinion on Protector going forward. We have been growing 20% a year. However, we have said now we will slow down in 2019. We will slow down in 2019. Profit is more important than growth if you are getting closer to 100. We are either close to 200 or 100 or above 100 at the moment, depending on how you view reserves and how you view segments and totality. At the moment, combined ratio is too high, and that is not only Grey Silverfish or Change of Ownership insurance. I have been through that kind of story in investor presentation here. Growth will not be 20% a year going forward. I will be a bit more precise later in the presentation on my expectation on that area.
It is not updated after quarter three. This is at the end of 2017. This is worse today. You saw it in the investor presentation. This is three quarters more, so give or take. I think that both are correct. I am pretty sure both are correct, but there are two different time periods into that. Return on investment has been better than peers. Also, when you look into it, seen from a risk-adjusted point of view. Again, Dag Marius will talk more about investments in the capital market day. Let's go to the historic to date reserves. This is lagging. If someone with more technical skills than me could help, I would appreciate that, because it takes a few seconds every time I push the button. I hate to wait seconds.
Here are the people who are the most important people, when it comes to the reserving in Protector. Obviously, the actuary, the chief actuary here. We have external actuarial services because this is the kind of system we have in Norway. You have to have two parts involved in the process. It's the CFO. I've been working together with actuaries since late 80s. The Chairman, who is present now, he is a reserve expert, obviously, actuary with background and with 30-35 years of experience from insurance and reinsurance sector in that area. I would say that probably have acceptably good people on this side. The question is whether we do the figures right in that area. How do we do it? I would say we do it the traditional way. There's nothing on the page which is nothing special.
Any company would give the same statement. There is one element which I could comment on, is that no discounting is implied on reserves. Some companies do because they are allowed to, and they have a different accounting practice in their country. If you go to Denmark, you discount some of the products in the reserves, meaning that your claims ratio will be slightly lower. In previous years, where risk-free interest rate was higher, you could see a combined ratio, Gjensidige Norway compared with Topdanmark in Denmark, that it was a significant difference because discounting happens in Denmark, not in Norway. However, today that difference is minimal. It's close to zero because interest rate level is what they are in that era. You know, because in Europe and in the U.S., it could be different practices and different ways of doing it.
No discounting is done in the reserves here. This is not special at all. It's normal. The process itself is not special, it's normal. The actuary have a direct reporting line to the board and to the FSA. That's normal. The actuary talks to business, that's normal, and there are meetings because no model is perfect and you have to combine model and prudent work with your figures, with understanding what's happening in the business. I think all companies in the Nordic market have a pretty good type of dialogue between actuary and the business side. No difference here. I think we are slightly closer to business now because we have an internal actuary. Some three, four years ago, we had an external actuary. Okay?
Both good, but one is sitting in the business, which normally is slightly better because you're closer to business, you understand what's going on. That's good. Normal process. Is it difficult? Yes. It's not easy. Can you do it? Probably not. Some of you can. I know. There are, I guess, 5-10 people in the room who are competent to do what we are talking about here. You don't have to be an actuary in order to be good at it, but you have to be very, very good on figures. Things that influence the complexity of the reserve setting is history. Are you old or young? The older you are, the easier because you have more figures. What type of clients do you have? Commercial, slightly more difficult than consumer because there is more volatility. Products, we have normal products.
That's not an issue. We have five countries. That's also normal. I would say same. However, we are growing 20% a year. The other ones are not growing. When you grow fast, it's more difficult than if you don't grow. If you grow fast in a new country, slightly more difficult. It's not a big issue. We do the same products in the same countries like most others, Nordic companies. It's not an issue. Tail, we actually don't have that much long tail. You think we have a hell of a lot of long tail, we do not. We are according to market, over market. It's not a big issue, but you talk a lot about it. I would prefer to talk less, but there is an issue in that area. Business relationship, closer. Process, talked about. Is it difficult? Yeah.
I think we have competent people. They are committed. We have a good process. The question is: What are the results? You might argue that with a company coming from zero growing to something, which is us, go from one, two, three, four, five countries, it's pretty difficult to do the reserves right. Here is the jury. Is that we have historically to date, even after the bug arrived, a reserve gain sized exactly NOK 147 million. There are a couple of analysts here who have done these kind of figures. Ulrik, I saw your There you are. Ulrik, for instance, did an analysis a couple of years ago where I think you concluded that reserves are prudent. Right, Ulrik?
Say again?
He is saying, "I didn't know about workers' comp in Denmark," lucky you, that was not a big issue, was it? workers' comp in Denmark didn't really destroy your conclusion, did it? He said no. Thanks a lot. We didn't really prepare this dialogue in that area. I know that if you are a competent analyst, you must find that answer because it's in the annual reports. Go back home and do the figures. You will find exactly the same figure. We haven't released these kind of figures on quarter three basis, so you can't do it today. The conclusion is that on some products we have gains. Some losses, some gains, large gains, very large losses, some gains, and this is the estimated written premium 2019 on the different product areas. The list is too long. It should be 24.
This is only there are at least two here, and two here. That's right. Adds up to 24, which is good in that area. What you see is that we have been prudent on reserves. There is one big reserve problem through history, and that's that one. We have consistently been wrong. That's not good, there are many reasons why. In the board meeting last evening, we discussed that very thoroughly because we had to. What we discussed yesterday was whether we should go out of Change of Ownership or not. The chairman, the actuary, and the committee before the board meeting, the actuary, the board, and CFO, with myself and others, we were involved, obviously, in reserve discussion in Change of Ownership yesterday, which is not a new discussion in that area. That's not good.
All other products, commercial sector, 92% of business going forward, they have been on the prudent side with a figure, give or take, I haven't really calculated it properly, give or take NOK 600 million on the right side last six years in that area. That's okay. Even if we have been mistaken here, and I do not blame the actuary, not the old one and not the new one, because how could he? This is not what an actuary could or should have seen. Grey Silverfish. Wow. Is this an actuarial problem? Not at all. When you have some figures and talk to the business, you take the losses in that area. The results are pretty good. Questions to historical to date reserves? Yes.
I totally agree with you. This is very, very interesting information. If we could have some help in finding the reserve releases per product in the reports, that would be very helpful. Also, I have struggled to find the separate line for the Change of Ownership insurance. If you could also point us to where we could find the reserves and also the reserve strengthening or losses for that historically, that would be very helpful for us as well.
Okay. You on the webcast there, I will repeat the questions and the comments. An analyst which has been following Protector for the last 10 years or something like that, Vegard, asking the questions. First, I guess you said that this is very valuable and interesting information. Thanks a lot for the update. He would like to see a more detailed walkthrough on the different business segments, through history in order to understand more about it. The feedback to that is that, we will be slightly careful to release everything what you're asking for. We can discuss it a bit more after the meeting. We should carefully consider your request for information when closing 2019 books. We will obviously consider it. It's a pretty relevant and good question.
There are, as you know, reasons why we shouldn't be too open on anything and everything in that area. We have to balance investor information with other discussions at the same time. Good question. We can discuss more. It's obviously more than what you see here in our annual reports. It's obviously more. Other questions? Credible or not? I'm nodding. Huh?
Oh, come on, nod a little bit now. The new investor from the Netherlands are smiling at least. He nodded, I saw you. Thanks for introducing yourself to me. We have a Dutch speaking person in our company as well. Is Leonard here today?
No.
No. Okay. Yeah, I apologize. You have to stay on English then. What about reserves going forward? They will be prudent. We have been good on 92, bad on 8. We will be prudent. Questions? Okay. Thanks a lot. Any questions on the reserve side, Vibeke, from the webcast? Well, no questions on the reserve side. Let's move on then. Let's have a company look going forward. Not talking about U.K., not talking about reinsurance, not talking about investments. I will not go into details on other countries either, because when we go into details in Sweden, the country manager Sweden will be here, or Denmark, the country manager will be there. It will not be an in-depth presentation or walkthrough of the different business units. This is more like a company story.
Three subjects will be on the agenda for the rest of the meeting. Here is the people. We are fit for fight. Dag Marius, he says, "I love what I do even higher than Liverpool Football Club." Which is okay. Henrik, you will have a presentation later on. I started Sweden and Denmark, finally something big. Henrik, where are you? You are, okay. Finally, I look forward to listen to your presentation. Kind of don't be too serious always. Let's have a little bit of fun, even if results quarterly is not that good. We are through. Most of these people have been around for many, many years. We have been a part of the history and the story, and some are new. Lars Ola is pretty new here. Leonard is pretty new, a year.
Thomas, the new country manager in Denmark, is 14 months old in the company. The other ones have a pretty long background from Protector. We are a rather young company, but okay, they have been there for a while. What's our strategy? It starts with the DNA of the company, and it ends with the people. When discussing strategy in Protector, it's culture and people. In between, there is strategy. Culture and people is more important, okay? Is more important. However, we need a strategy, and we don't like to change. If you change too often, it doesn't end good. Investments are core. Balance sheet is important. Profitability comes before growth, and claims handling. Top 8 is the eight most important strategy products in Protector. Okay? This is the perspective when we on the board of directors discuss strategy.
Let's have a look at the 8. That is claims handling, profitable growth in Nordic, U.K., return on investment, like Dag Marius, peer knockout, and peers are not you. That's difficult, okay? Peers are the other insurance companies. I know we have an ambition to do better than everyone in the room as well, Dag Marius. We hope you do extremely well. If you are better than other insurance companies, risk adjusted, we are happy. Protector University, I come back to it. IT, world-class headquarter, and matrix organization perfectly. This is the top agenda for Protector going forward. I talk about Falcon. Henrik will talk about U.K. I have talked about profitable growth Nordic already. Dag Marius will talk about return on investments. Reinsurance is a part of the totality and important and will be covered.
That has implications both for the Nordic and U.K. market. Okay. That's the slow moving technical thing. Let's talk about the Falcon. The Falcon is the symbol for improvements in claims handling. 40%-45% of all people in Protector work in claims handling. It is the moment of truth. This is who we are. This is what we do. Whether it is a car accident, a personal injury, a workers' compensation claim, or Grenfell Tower. This is who we are. We should be good. The symbols here mean clean desk, efficiency. The Falcon is a symbol for efficiency. Rolls-Royce is for take care of your money and the client's money. Recourse and reduce, RR quality, Rolls-Royce. Perceived customer quality, and the robot here is kind of altering the market and checking out quality every day.
Here are the results on the most important strategy project we started 18 months ago in Protector. It will continue basically forever, with a reasonable focus, at least at the end of 2020. It takes time. The Rolls-Royce level is NOK 420 million versus target NOK 375. We are not known as a company to set small targets. We are ahead. Clean desk, we are the most clean company in the Nordic market. We are not delayed in claims handling. 20,042 out of 20,861 man days so far this year we have been clean. The kind of figures you see here, you have never, ever seen any insurance company update you on, right? Hand in the air. You analysts that talk about claims handling with competitors. Have you ever seen it? No, you have not. How often can we see it? Every day.
Do we have a management information system? Yes. Is it up and running? Yes. Can I have a look every day? Yes. Do we look every day? Yes. However, we didn't have a management information system sniffing out the Grey Silverfish. We have to figure out a better management information system there. Okay, I take that. At least clean desk, we are pretty good. Not pretty good, we are very good. Instant customer feedback. Wow. The robot tells us that client is very happy. That's good, isn't it? When you increase prices, it's a good idea that claims handling is good. If claims handling is viewed as poor, you lose a hell of a lot of clients. If claims handling is looked upon as either prudent or good or very good, it helps because it matters for the client. What matters for the client matters for the broker.
Instant customer feedback is very good. We are 13.4%, I'm afraid, not percentage points, % better this year. Sorry about that. Compared with last year. That's pretty good, isn't it? Because finally, we have put claims handling efficiency on the serious agenda, because finally, we have critical mass in many product areas in at least three countries. Obviously, we are not even close to critical mass in U.K. Claims handling cost in U.K. is obviously very high. It will be next year as well. However, in 2020, it will not, in that area. Now efficiency is 13.4 versus a target of 14.7. We are behind target. I don't really care. It's about what it should be. The Falcon project, the number one strategy project in Protector, is doing very well. I'm happy.
Why struggling with a little bug or rate pressure in the Norwegian markets the last five years, which has end up in a combined ratio which is too high. We do other investments and initiatives, and we train and educate people, we improve systems, and we release new systems 800 times a year in order to improve what we do. The speed of innovation in Protector is pretty good. Sounds like a nice story. What we all are looking for is to see that transferred into figures. My opinion is that, yes, it will. Yes, we deliver poor figures now. Our history has been good. You will, in my opinion, see a good future as well. We do other things than look at what was good or bad and the quarterly reserves or motor Norway or Sweden or whatever. We have a top picture.
This is important. What about written by a Norwegian. We have Ibsen. Henrik Ibsen and others. You know the author Henrik Ibsen. I won't say names on the kind of authors in Norway I don't like. Great attempt work will start in February, and the opening speaker is one of the top managers from Hannover Re, which Jostein, Chairman and myself, had a dinner with in Monte Carlo a couple of months ago. He has never ever been to Norway. He has been a top manager in Hannover Re, one of the biggest reinsurance companies in the world, for 20, 25, 30 years. He has been in business in 37 years, I guess. He will be the opening speaker in February.
He should either go to London to do investor presentations like always or be the opening speaker in our management training program. He actually decided to go to Oslo, which is very good. He has confirmed, we discussed it when we met him last Easter. We invest a lot of money, time, and resources in management development, and I look forward to Great Effort starting in February. We think we can do more developing our own people. I think that since we are quality leader in all markets, you could argue our people have the right attitude and good skills, and we train. We train too little, so we must train more. One way of training is to do e-learning, obviously. We have been pretty bad on e-learning up until 2019.
When we decided to move around nine months ago, we are moving quickly, as always. Today we have around 250 e-learning modules supporting new employees and people who have been here for a year or three, and gradually this will be developed also to support some of the best people we have in Protector. It's a project which has been up and running for nine months. The IT supplier of the tool here are giving the kind of feedback to Protector that they never ever have seen such a rapid development on such a quality level. They would say, "I've never ever seen anyone produce 25 modules in six months. Never ever." We are talking about big organizations buying a tool here. We move quickly when we decide to move, and the e-learning platform on Protector is improving a lot at the moment.
The challenge is to get it closer to on-the-job kind of situation in that area. We invest in more education and training in order to prepare for future. My final comment to my opening presentation is that together with struggling with short-term issues, which we will and shall, we obviously have eyes in the future, feet on the ground, and are trying to combine using resources both short and long term in that area. Thanks a lot for your attention on the opening session. I guess I've saved a couple of minutes of what we were behind, because we were 10, 12 minutes late, and now we are only five. Is there any kind of questions to me before leaving the word to Dag Marius? Then there will be a break half an hour from now. Any questions? Okay. Thanks a lot.
An applause to Dag Marius then. Okay.
Thank you. First slide. This is our asset and management development the last 10 years. Rapidly growing company. This is NOK 2.3 billion in equity, NOK 1.25 billion in subordinated debt, and the rest is float. That is prepayments from customers. It's about NOK 10 billion now. The seasonality, you can see in the last quarters there. We get the prepayments in the first quarter from Norway and Denmark and in the second quarter from the U.K. Another point to highlight here is the equity share. That is down to 11.1%. That is not us being very smart that we foresee the correction in the stock market the last weeks. It's just due to us not having good enough investment ideas on the equity side the last couple of years. Spoke a little bit about it last year also, that I didn't have any good ideas. I got one suggestion.
That was a good suggestion. We didn't take it. More suggestions, please. We have a low share now, and you can see that it's only in 2012 we had a so low equity share of our portfolio. On the bond side also that we'll come into later on, it's more than 50% AAA-rated bonds. This is due to the very low credit spreads and the bond terms also are worsening. We are prudent. We'll wait for an opportunity. Hopefully, the market will fall more. It was a question earlier on today that I should answer. If the stock market correction of 10% made us invest more? I would say that that's helpful, but we hope for more. We've been praying for this for so long and many times, but maybe have an in on God now. Hopefully. Yeah. One, two seconds late. Yeah.
You have already seen this. Good results historically. This is due to some skill, some luck-The interest rate in Norway being 1% higher than in Sweden and Denmark the last eight years. Some of our competitors are based in Sweden and Denmark. Also we have had a slightly higher market risk than peer average in the period. The investment process went through in depth last year. We always try to improve it. We have made some changes the last year, and I will come back to them. What I will talk most about today is our capital allocation, how we approach it in Protector. This is our main alternatives. The main one, insurance underwriting, and then we have investments, mainly equities and bonds. We can do buybacks, and we have done it. We can pay back debt, and we can give you back the money through dividends.
First, when we do this, we first have to determine our minimum hurdle rate. We have to individually calculate returns and risk on every alternative. We deploy the capital where we get the best returns that reaches our hurdle rate. We release underperforming capital, and then we repeat. This is our target on return of equity. As you can see, we have reached it the last years. When it comes to solvency capital, we don't only have equity. We also have a subordinated debt. One-third of our solvency capital is subordinated debt that we pay less than 5% for. To get a return on equity of 20%, that equals a return on solvency capital of 15%, just above 15%. Every insurance product ties up different amounts of capital.
You have a long-tail product, it ties up a lot of capital, and then we need a low combined ratio for it to reach our hurdle rate. A short-tail product will tie up less capital. We can also see that if the interest rate are increasing, that will help us. We can tolerate a higher combined ratio and still get the same returns. Overall, the insurance business has been very good. Almost all products have had very high returns. That's a bit challenged now, but the history has been very good. One thing that I need to comment is that we have a target of above 150% solvency capital ratio. When we look at how much we tie up in every insurance product, I have to multiply it by 1.5, or else we won't reach the target.
Looking at investments, that's been challenging the last years due to the low credit spreads and all-time high stock markets. This is a bit technical, but I think it's important for you to understand how we think about it. It's very dynamic also, so it changes all the time. We will never be forced sellers of our equities. That's so important. If we ever will be that, we have failed. Selling at the worst possible time, that's not a good idea. We have to have enough capital. We have to withstand that the financial crisis will come tomorrow or the next years. That's what we plan for. It ties up 50 to 60. It's better that I use this.
I think so.
50%-60% equities, a share price collapse of that magnitude. If the stock markets fall that much, that means that we have even less solvency capital that we can use, so it ties up even more. The Norwegian FSA said that after a market crash of 50%-60%, we have to prepare for another 29% fall. That also ties up capital. The equity market has already fallen 50% in that scenario. That will only be 14.5%. We have a positive diversification effect. When we look at equities, the float for us is free, we can only use 20%-30% when we invest in the stock market. The tier 1, tier 2 capital is cheap.
We have to get a 20% return on the equities due to the return on equity target that we have. When you translate this, that means that every equity investment we do when the market is at all-time high levels, as it has been for last three years, we have to at least get about 11% yearly return. That is a return on solvency capital of 15%, and that will translate into a return on equity of about 20%. Of course, our forecast ability on the stock market is not that good. I know every company, we have to have a safety margin on that as well. We have done some changes this year. Earlier on, now we have about 16% hurdle rate before we invest.
Earlier on it was a bit lower, and we didn't think that was enough for us because we didn't have that foresight into the companies that we looked at. The framework, when we look on the bond side, it's just the same. In the financial crisis in 2008, there was a severe spread widening all across the different rating classes as well. This example on the high yield, the BB-rated bond, it fell for a two-year duration. The spread widened with about 1,000 basis points, meaning that the price decline was 20%-25%. We have to hold that capital. On the interest, we pay tax, so we get that back. The same happens when we lose money on the bond side. We can use less of our subordinated debts that counts as solvency capital.
The Norwegian FSA, after market crash, will still say that it can fall more, so we have to hold that capital as well, and we have positive diversification effects. On this example then, a BB-rated bond yielding 5%. We have to try to calculate the cost of risk. In this example, it's 2%. The cost of risk is the probability of default, multiplied by the loss given default. In this example, it yielded an expected return of 3%. If that ties up 20% solvency capital, it will return a return on solvency capital of 15%. That will transfer into a return on equity of 20%. That's how we think about this. If the spread levels increases, then we don't stress it that much. It's probably a much better investment also.
This is the reason for us being kind of prudent the last years and taking down the risks. Now we really hope for more volatility. Buybacks. Sverre, that's your slide.
Okay, you can We kind of agree that when it comes to buybacks, kind of my comment, not the chief investment officer. I think that the story is pretty easy. We have a lot of capital, and in quarter two, a very solid company. We can see that the share price, in our opinion, is below intrinsic value. Why shouldn't we invest some of the excess capital we have in a buyback situation? At the same time, we have fewer investment ideas, and we are taking money off the table, both on the bond side and on the equity side. We can kind of invest more in our own equities if we would like to. At the same time, we have a situation where we have profitability issues on the insurance underwriting side, and we can see that we will grow slower going forward.
The position in the company and in the board changed during quarter 1 and quarter 2. We saw that the growth rate, everything else equal, going forward would be lower. Let's consider buyback, and then we decided it. Some of you have asked whether we do buyback in order to protect the share price. Come on. We never do that. Why would we? We are long-term investors. We would never, ever think the idea. That's too silly, isn't it? At the moment, we thought, and we still think, that it was a prudent investment to do with excess capital, expecting lower kind of growth going forward, in that area. It's that simple. Any questions to the buyback situation? We have all already asked the questions, whether we consider it now. Now, not yesterday. We didn't have that on the agenda at all. We did not.
I think you guessed the reason why, in that area. We didn't have it on the agenda. We did what we did during the summer. It's not on the agenda, and you shouldn't expect anything moving forward in that area. Okay. Thanks a lot.
Other alternatives for us, giving back the money to you. For us, it might be easier, you might think, because with the money, we can use the float as well to invest and then get the gearing effect. We can pay back our subordinated debt, but that's cheap solvency capital for us, so that's not a good idea. Holding too much excess capital, that's a significant headwind for returns. They're a problem for us. Then again, we rather be prudent, and we will not invest if investment don't reach our hurdle rate. This is an update on the equity portfolio. This is our 10 largest holdings. We say that we always look like five years ahead at least. At the end of quarter 3, we had 15 companies in the portfolios. It's a concentrated portfolio, so you should expect volatility in it.
With 15 companies every year, you should expect us to sell three companies and buy three companies. We have sold five, and that's a high turnover in the portfolio. The problem is that in three of those companies, these three, the investment case changed, so we had to do something. We sold them. When the investment case changed, we usually lose a lot of money. We lost money in XXL and Wilh. Wilhelmsen, but in surplas, the market disagrees with us. They still believe the investment case is intact, so that was a very profitable investment. Industrivärden and Medistim, we reached our intrinsic value estimate, and then we exit the position. History to date, the results have been good. Only four years, so too short period to evaluate. A flattish development the last year.
Some of the reason for the flattish development is this one. I will come back to it. This is our optimistic approach to our investment today. We believe that we will get 16% return on the 10 companies that you saw on the last slide, plus the four that we didn't show you. That's optimistic. Given what has happened the year, we're not that good in forecasting. It doesn't look like that way, because if this one is not balanced, if it's not 50/50, then we won't ever reach that return. So far this year, we have had to downgrade our intrinsic value with more than 10% in six cases and only one upgrade. That's not too good. What do we do then? We expand the Too Hard Pile. We have made investments that's probably too hard for us.
We're not smart enough to invest in every company. We have to understand it and where the company is in five years at least. We have obviously been too positive. It's a short time period, and hopefully it's better. As I told you earlier on, that we have increased our Hurdle Rate, so more Margin of Safety. We're also not satisfied with not utilizing all the risk capital that we have. Don't deliver on this point, we don't deliver on this point, and this one is seemingly good, but with our history today, we downgrade more than we upgrade. Hopefully that will change. These are the companies. When they're red, then we sell the position. One of them is Medistim that we have sold in October. You can probably guess that two other ones are not on the top 10 list. Might be.
I won't tell you. Some positive here is that we have done this for three years, and this is the highest number that we ever had. We're more optimistic now on the portfolio. It's half the size that we want it to be, but we're more optimistic on the portfolio as we hold than we've ever been so far, and that's after these disappointments in this year. On the bond side, we try to do the same comprehensive analysis. Won't have a lot of time going through this. Unless on the equity side, we also have to look at the bond terms. That's very important before we invest. Some comments here when we take a stress rating because we do our own analysis of what is the cost of risk.
In most High Yield cases we invest in, we feel that the spread level is wrong. We believe it's too high, that the cost of risk is lower. When we stress the company or the investment, if it's a BB-rated bond, we stress it or expect it to behave like a BB-rated bond if the financial crisis hits once more. We don't believe that the market will agree with us when the financial crisis will hit again. If we believe it's a BBB-rated bond and market says it's a BB, we will expect it to behave like a BB-rated bond. We allocate capital. It ties up a lot more capital. We're not optimistic in that respect. We have a Margin of Safety. This is the development of the fixed income portfolio, about NOK 9 billion. Yield of 1.8%, not that much. Interest Duration is only 0.3 years.
That's because in the Nordics there are floating rates in the bond market and the credit duration is 2.3 years. Here we can see the change in the rating buckets. There's a very high increase in the AAA and tune down the BBB portfolio because our analysis is that during a financial crisis, these companies will spread out a lot and then it ties up a lot of capital in our books and the returns are not good enough. That might change, then we will invest. We have a well-diversified portfolio and this is the sector distribution. The comment here is that the largest part of the Norwegian high yield market is oil services, and we have no oil services exposure. The highest market share in the Swedish market is the real estate market, and we have a 2% position there.
We kind of doesn't mind what is the market cap of each sector. We do our own analysis and invest in what we think is the best. The performance has been good so far, but when you look at bond portfolio, we have to look at it through a credit cycle because it can be when the trouble hits, that's when we can see how good it is. So far our outperformance has been during more volatile times. That's what we expect in the future, but let's see. To sum up, investments are core in Protector. Historical to date return on investment has been good. We have patience. We are willing to wait. We will only invest if investment is above our hurdle rates. Questions or is it later on or yeah?
Questions.
Yeah.
The question on the yield of the bonds portfolio.
Yeah.
How does that translate into return on equity or return on solvency capital? It maybe depends on how much capital.
Yeah. You can say that.
Repeat the question.
Okay. Yeah. That's how does the yield on the bond portfolio translate in the return on solvency capital and the return on equity? If you have excess capital invested in AAA rated bonds. That part kind of ties up, it doesn't tie up a lot of capital, but we get a lot of excess capital that we don't get a return on. I can say to you that our investments that carries capital in the bond portfolio, it reaches our targets or else we will sell them. We have a lot of excess capital at the moment. We have a very strong balance sheet and we're looking for investment opportunities and that's dragging down the results. Yeah. Questions, Vibeke, from the web for me?
It's more about the share buyback, but I don't know if we should do it later, maybe. It's more for Sverre.
Question for Sverre on share buybacks.
There's a question about share buyback. What kind of question?
How do you define intrinsic value for Protector and what would trigger a share buyback? Do you have any ratio in mind, sort of what Buffett had with Berkshire until this point?
Okay. I think how they define intrinsic value, where Dag Marius you are more capable than to answer the question than me and I think that pop that question to our IR department and we send you some kind of information back instead of making a simple answer now. Is that okay, Dag Marius? Was it another question, Vibeke, now?
The share part in 2009 was nearly 25%. How much share can you have or equities can you have as a percentage of the portfolio?
I can answer that one. That depends on how much risk we have in the bond portfolio and how much equity. When we bought back shares then we have less excess capital. As Svein told you, that was something that we appreciated because we have very much idle capital at the moment. We have a bit less and it depends if you tie up a lot of capital in the bond portfolio, then we have less for equities. But normally it has been no problem for us to have 20% equity share. It might be higher, but then we have to take down on the bond side and it depends on what we do on the buyback side and what kind of profits we get from the insurance business and the growth in the insurance business. It varies all the time. Yeah.
Can also Dag Marius comment on the maximum equity position which is a mandate given by the board.
Yeah. That's 20%.
That could grow into-
Twenty-five
if you have a return on the kind of investment you have done in that area.
Yeah.
That is a mandate given by the board. However, at the moment as Dag Marius says, we are taking money off the table, and today we are slightly lower on the equity side that compared with the end of the quarter. Slightly lower today compared with the end of the quarter. More questions, Vibeke?
Ownership related question. That would be what would you expect the combined ratio for this sector being going forward, and what will the other players do?
Okay. The question is related to Change of Ownership insurance. What's your expected combined ratio going forward? As you have understood by the walkthrough with Dag Marius, we are looking into how much capital will that probably consume. We will walk away from that segment if we didn't think that the combined ratio delivers 20% return on equity. Exactly where that hurdle rate is, we will not comment on because we won't give that information away for the market, at least not at the moment. Any other question? No. Thank you. I hope you appreciate that Dag Marius leaves the value of Protector call open when walking through the investment philosophy of Protector. We're not trying to hide bad stories either. 106 is on the right side. It's a pretty open statement, isn't it?
I think that again, you seldom see that kind of openness from other companies. Hope you appreciate it. Don't be afraid. We will continue to be open with you through that openness, hopefully to build credibility. Now there's a break. It's half an hour. Quarter past eight we will be back, possibly five minutes later, 8:15. Thanks a lot, and there is something to eat outside. Hello again! Welcome back to the rest of our capital market presentations. I would like to introduce now Fredrik Øyan, who is not only in charge of reinsurance in Protector, but has also held the position as a director in charge of property and casualty products in the company. He is one out of the two people working now setting up Protector in the U.K. market. His competencies is not only on product or insurance, but also on risk management.
He is actually one of the very few people who many years ago educated himself as a risk manager at the university in London. I think your English is slightly better than mine, Fredrik. Very welcome to you.
Thank you very much.
Fredrik.
Thank you. Yeah. It's gradually improving, this English of mine. As Sverre said, I'm a bit of an all-rounder, but my focus very much is on the reinsurance and particularly the U.K. P&C business at the moment. Perhaps by way of introduction, I should perhaps also mention I've been with Protector for the past 10 years. It's actually coming up to the 2nd of November, so only a few days away.
Wow.
Together with Henrik and Sverre and many others, I participated quite a lot in our entry in Sweden and Denmark. Now primary focus is on the U.K. and the point that Henrik will touch on a bit later. Can you hear me okay in the back? Brilliant. A lot of thumbs up. That's great. I thought when it comes to reinsurance, there are a few things that we'd like to touch on today. One is the purpose, sort of why and how we buy reinsurance. We'd like to take you on a bit of a journey as to where we come from in terms of reinsurance arrangements and sort of purchasing patterns, and where we are today.
We thought we'd give you a bit of a current status of the treaties, look a little bit at the ratings of our insurers, and also try and shed a little bit of light on what the future holds. Please feel free to ask questions as we go along. I'll try to be as clear as is possible. I think we'll start with the DNA and sort of our power of ideas. When it comes to reinsurance, it's very much to do with relationships. Today we've got something like 44 reinsurers reinsuring different parts of our portfolio, with whom we've got longstanding and strong relationships. It's very much a mutual trusting relationship that we need to build on a number of programs.
Some of the other programs we'll touch on a bit later are more like commodity, some of the cat programs, particularly on the employee benefit side. Relationships are key, and that's why we invest a lot of time and people in spending time in, whether it's Munich or Hannover or Cologne or London, and we travel around and we explain to people what we do on the direct side in order to generate that reciprocal trusting relationship. I think that's quite important. I think also what you'll see today on the coming slides, that we want to be very open with you in terms of the structures. We'll go into detail as far as the various reinsurance structures are concerned. Please feel free to ask questions as we go along. I guess we all understand the purpose of reinsurance.
Perhaps more to the tune of what we think about it. When we say why it has to do with appropriate protection, that's to do with protection that really sits with the risk profiles that the different portfolios represent. Certainly has to do with reducing volatility. It has to do with capping potential larger losses or looking at portfolio-wide, more proportional treaties as we've had historically. In other words, it functions as an alternative to capital. Historically, we've had proportional treaties. We've had excess of loss treaties. We've had alternative risk transfer structures, and we've had quota share treaties. What you'll see later on today is a bit of a shift. I think touching on unique relationships has a lot to do with engagement. It has to do with a tremendous amount of meetings.
It all has to do with analysis and how well can we present our portfolio. How in detail can we analyze this and communicate that clearly to reinsurers? Make sure that we have 100% transparency in terms of the inherent exposure that sits in our portfolios. How can we position that to get as favorable outcomes of renewal negotiations and reinsurance placements as we can. We also use a professional intermediary, in other words, a reinsurance broker, to broker all our existing placements. We certainly draw value from that relationship. If we go back a few years, I've split this into a few epochs, as it were. We go back to the very start in 2004, from our sort of cradle. Back then, which we could term the early days in Norway, we had an alternative risk transfer program, effectively smoothing out our results.
A quota share treaty across all products. We even had excess of loss protection. We had a very low retention. We also had a rather low limit in terms of the type of risks we could write. Effectively, on an estimated maximum loss basis for property of about NOK 150 million. We'll touch on what these limits are a bit later today. Gradually we are moving into 2007, 2010, where we've got a significant surplus treaty on the property side, and we've got excess of loss treaties covering employee benefits and casualty. This is very much a continued growth. At this point in time, we're still solely in Norway, so geographical complexity or other product lines have not yet been introduced. Again, a very strong development and expansion in terms of capacity of the reinsurance program.
Something happens in 2009, and that is that we are not successful in renegotiating the renewal terms on the property surplus treaty. What then happens is that that opens up space for another rather large reinsurer, mentioned earlier today, steps into that place, and has effectively had that position, a strong position on our property surplus treaty over the past eight years, since 2010. During that time, we expanded to Sweden in 2011, Denmark in 2012, Finland and U.K. a few years later, thereby expanding our reinsurance programs. It's not necessarily straightforward, because what we require, particularly on the property side, but also on the U.K. casualty side, in order to function, operate, and maneuver properly in a market, we require rather significant limits. As we enter the U.K. market, we don't really have any business.
Effectively, that trust that we built up in the Nordics was thankfully transferable to the U.K. That goes for really all the treaties that we have in place. There is also a Solvency-based quota share structure in place, which we will touch on a little bit later. But I think, as I mentioned, on the property side, we are expanding capacity quite significantly from NOK 250 million to NOK 800 million over this period. It is very much a gradual expansion. I think that is the word that needs emphasis. We feel at the moment that the treaties we have in place effectively facilitate the business we want to write and helps us maneuver as efficiently as we desire in the market.
If we look at 2019, and this will be the focus towards the end of the presentation, what we will have from the 1st of January 2019, instead of a property surplus treaty, we will have a property risk and a property cat on an excess of loss basis. In other words, a non-proportional structure, whereas we have historically had proportional structures on the property side. For all other products, that is to say, employee benefits and casualty, both in the Nordics and in the U.K., which are separate treaties due to the nature of the markets, are pretty much unchanged. But we will have a very brief look at that. I think it is perhaps a little premature to speculate on what the future holds when it comes to reinsurance, but we are certainly discussing solutions associated with aggregate covers, possibly cross-class business or cross-product line.
This is something we will again engage with a few of our reinsurance partners in looking at what can be sensible solutions going forward. That is a little bit of the backdrop. Now to the existing reinsurance structures. Please, again, raise your hand and ask if there are questions. I am trying to illustrate this as simply as is possible. On the pillar to the right, we have effectively got our Nordic surplus treaties. They carry a capacity of NOK 800 million, consisting of a treaty capacity of NOK 775 and a retention of NOK 25 million. In the U.K., which is the pillar in the middle, it is a very comparable and pretty much identical structure, just with a little bit higher capacity of NOK 100 million within the treaty and up to GBP 4 million retention. That is in pounds. Just between NOK 40 million and NOK 50 million.
A little bit higher capacity and a little bit higher retention. On the very left, we have got our cat treaty that covers natural catastrophes. Natural catastrophe as a peril is singled out or excluded in its entirety from our surplus treaty in Denmark. That is why we have to buy that separately. On the cat events, we would have a retention of DKK 50 million, and with a significant capacity relative to the portfolio structure and portfolio profile our current portfolio represents. I think already here you have got two different structures. The ones on the right are proportional in nature, and dependent on the size of an individual risk, we cede either more or less. For the larger risks, we will have a greater degree of cession to the treaty. For the smaller risk, we will retain a greater share.
Every single individual risk underwritten forming part of our portfolio will be ceded individually to these treaties. For both of those treaties, we have a facultative facility, which sits quite effectively on top or above the treaty. This facility is in place. It's pre-priced, and it's in place to cater for primarily individual buildings exceeding the treaty capacity.
Like?
Like hospitals in Norway, like large town halls in the U.K., like large warehouses in Sweden. It's effectively a structure, a combination there of a treaty and a facultative facility, which allows us to write risks with estimated maximum loss levels up to NOK 2 billion or GBP 204 million. It's a rather big step from where we were back in 2007, I will say 10 years ago, when we had under a quarter of a billion NOK, in terms of what we could write. That's developed and very much a gradual development. Any questions to property? I'll go to the next one because here we are illustrating how this program will change. The proportional surplus treaty that we've had in place for a number of years, there are individual treaties in the individual markets that we find ourselves, has been a very good structure.
It's been an excellent reinsurance contract from commercial points of view and also from a capacity point of view. Over time, we have certainly discussed, and evaluated, and moved towards an excess of loss structure. It follows a natural expansion of a rather vast portfolio that we currently hold, and will effectively allow us to retain more of the written premium, but also consequently retain more of the claims that we'll incur going forward. The new structure will have a capacity of NOK 1 billion or GBP 100 million in the U.K. The placement has been completed. Our main property treaty covering all our property portfolios in all countries, including public segment, commercial segment, housing associations, all the Nordic countries in the U.K., is in place. It was a placement that was completed two days ago.
That is a placement that will come into effect 1st of January 2019 with a 12-month duration. We are very pleased with both the markets participating on this treaty. We are pleased with the terms. I think, again, we are very pleased that it's finally placed after having worked in preparatory mode for the past half a year, really. In addition to that, there'll be a separate catastrophe excess of loss treaty in place, effectively, very much along the same lines as the one currently in force.
Excuse me.
Yep.
Could you just give us an example of the different layers to the right there, layer one, two, and three, how that works when they come to risk? If you could use maybe Grenfell Tower as example.
Right. Absolutely. If we were to say that the property loss for Grenfell Tower, just for sake of argument, would take a round figure. Let's say NOK 250 million. Effectively, we would, on a single loss like that, a single large fire, we would retain the first NOK 100 million of a loss. The first layer, which is NOK 100 excess NOK 100, would be entirely exhausted. It would go NOK 50 million into the second layer, effectively exhaust the bottom part of the second layer.
As I just understand it, if you meet the NOK 200, you will then be covered by the next NOK 200, and then on top of that, you will need to take some more on your own book. Is that correct?
No. We will not sit anywhere higher up in the structure. We will only represent the retention of NOK 100 million. Layer one, two, and three are all placed to the tune of 100% with a group of eight reinsurers.
Okay.
All of whom we have longstanding and existing relationships with, all of whom understand our book of business.
Would you typically take a syndicate in each of the layers, or do they cover different parts of it?
So-
Repeat the question please.
Yep. The question is related to the layer structure and whether certain reinsurers sit low down in the hierarchy or higher up. Typically, for Nordic property, that is not the case. The reinsurers would tend to rise an equal share across all layers. If you look to U.K. casualty, for instance, in other words, liability and motor, you will find very clear preferences. Where some reinsurers would prefer to attach at a much, much higher level, in other words, being far removed from the sort of normalized loss at one, whereas others want to be much more hands-on and even take part in what you could almost deem to be attritional losses. The structure and the participation that we'll look at on the next slide, when it comes to U.K. casualty, I haven't included who sits where. Again, it's much more fragmented structure. Yeah.
Thank you.
Yeah. Good. We'll come back and touch on the property, I think. Say again? Sorry. Yeah.
How would this change the cession level you have for property from first January? Also, is there any changes to the profitability of those cession figures?
Yeah. Two questions. How will this change our cession level as at 1st of January, and will the profitability be expected to change going forward? Yes? Okay.
You have a later slide on it.
We do have a later slide, yeah. Shall we hold on to that? Yeah, let's do that. It's a good question, of course. I thought just to bring you up to speed as far as the current casualty in the Nordics and employee benefit structures are concerned. Here we've got two excess of loss programs. Both excess of loss programs cover our operations in the Nordics. On the left, we've got Nordic Casualty, which effectively covers all classes of liability business, whether it's products liability, public liability, or financial lines related to PI, D&O, et cetera, directors and officers, all sorts of liability products are covered within that structure, as well as motor third party liability.
The structure affords a capacity of NOK 200 million for all liability products and an unlimited cover for motor third party liability, which of course is in line with what we offer on the direct side. This structure has been led by one reinsurer for the past eight years. Knows us well, followed the book for a long time, and has been a program characterized by relative stability, both in terms of our retention and over the past couple of years also in terms of the limits. When it comes to the employee benefits products, I'd say, treaty, rather, I think it's fair to categorize this very much as a catastrophe treaty. We carry a retention of NOK 100 million, and the NOK 400 excess of NOK 100 million is catered for by the treaty.
This has to do with huge tragedies triggering either one or a combination of employee benefits products. Neither of these two programs have historically sustained any sizable losses, the profitability to reinsurers in these two programs has just been very good. Of course, like and as per normal, the reinstatement level, and I thought I'd just mention that, is between two and four reinstatements in the event of a claim, and it varies a little bit layer to layer.
Could you explain reinstatement?
Right. If we have a loss which exceeds our retention, and goes into a program and exhausts a certain share, a certain part of the program. For instance, if we have a loss of NOK 60 million when it comes to a casualty claim, we will represent the first NOK 20 million, and then the treaty reinsurers will pick up the subsequent NOK 40 million. Upon that loss incurring and upon that being advised, which we do immediately, to our treaty reinsurers, the capacity will not have been eroded, it will have been reinstated. It's an automatic reinstatement of the capacity exhausted within one or more layers.
You pay once more.
You effectively pay, adjusted for the amount exhausted, not for the time remaining of the reinsurance treaty. For the amount of a layer exhausted, again, at 100%. Yep.
If you're at the end of the year, on the Christmas Eve-
Yeah
You have something, and you want to reinstall it-
Yeah
for the rest of the year.
Yeah.
You have to pay whatever it is-
Yeah
for that six days or seven days.
To pay 100% of that cost of the layer, adjusted for the amount exhausted, and it only represents four or five days after the year. That's what you do.
That's very clear.
Yeah.
Would you take that risk on your own?
Instead of having those seven days insured?
There is an automatic structure associated with most reinstatement clauses. In a way, it is to give something back to your reinsurer who has sustained a substantial loss.
You could, but normally it's priced very low, so normally you wouldn't.
It's not prudent normally.
You could, but you wouldn't.
Yeah. Right. Okay. Lastly, this is the last slide in terms of the current structures. This is our U.K. casualty program. In the illustration on the left-hand side, we have liability. Again, employers' liability, public liability, products liability, and any liability extensions that we offer in either housing associations, public segment or the commercial segment. That has a retention of GBP 1.5 million. On the right-hand side, we've got motor, where we have considered it preferable from a commercial and pricing point of view to retain a little bit more exposure and have therefore a differentiated retention between the two product classes covered by the treaties. Our motor excess loss retention is GBP 3 million. The capacity within the treaty is GBP 25 million, and we have a facultative facility which sits on top of the treaty, representing another GBP 25 million. Again, motor in the U.K. is also on an unlimited basis.
I thought I'd just mention a couple of things, because this is a rather new treaty, where it was first placed 1st of March 2016. The first renewal of the treaty was to take place shortly after Grenfell tragedy happened, and shortly after the Ogden discount rates, which is effectively related to an assessment of bodily injury claims and lump sum payouts. We found ourselves in a very difficult environment. It's also the fact that U.K. casualty, and perhaps particularly U.K. motor, is not a reinsurance market that is overflowing with capacity. It's a rather tight number of reinsurers willing and keen to write this type of business. It's not as easy to maneuver as it would be, for instance, when it comes to Nordic casualty. A challenging renewal, the first renewal.
We have now just completed on the 1st of September this year our second renewal for a 14-month period, taking us up to 31st of December 2019. Our view is the work put in by the team in order to prepare for this renewal has been phenomenal. The marketing efforts have been phenomenal. The result is a reinsurance rate which is higher than we would hope for. It's certainly at a level where we can maneuver on the direct side in the U.K. casualty market, but we do expect going forward to see that reduce. It's absorbing or taking out too much of our gross written premium at the moment. We're in early phases in the U.K., and of course, as the portfolio grows, we'd expect significant improvements there.
Majority of the markets reinsurers that is writing this treaty are also reinsurers that we've worked with for a number of years. They are located typically in London, so they are not necessarily the people that we have the closest relationships with. We have with their organizations. Over the past three years, a lot of work has gone into forging those relationships, some of which are new. Just perhaps to instance the type of risk that we'd be looking to cover here. For instance, if we look at the ambulance trusts in the U.K. consisting of 10,000 vehicles, that would be catered for by this treaty. If we look at large employers' liability programs for large retail chains in the U.K., that would be covered by this treaty. Just to instance a couple. Just one word, really, or a couple of words on reinsurance ratings.
Our panel sits between A minus and double A minus. The average rating, if you weigh it by signed line, sits somewhere between A plus and double A minus. We have strong reinsurers with us. I've just instanced this through the various programs. The excess loss CAT, employee benefits, Nordic Casualty, property surplus, and U.K. casualty. On the very right-hand side, the composition from a rating point of view that our reinsurers for the property excess of loss program as at one, 2019 holds. As you see, there's a lot of purple and pink, and to a lesser extent, A minus rated companies. This is important to us, of course, something we monitor continuously, and we'll most certainly continue to do so. I thought also just to bring into play a couple of comments associated with the renewal of one, 2019.
As I mentioned, a lot of work on the analytical side goes into this, and we furnish reinsurers with a very substantial renewal submission. It's a huge document, and it's our way of explaining as thoroughly and in as much detail to reinsurers what our portfolio consists of and where we expect to go forward. To instance a few, when it comes to the property submission, again, a very analytical and data-driven process. If I were to list some of the sort of key takeouts, as it were, it has to do with low exposure and low risk. It has to do with a healthy property portfolio over time, having produced very good results. Our pricing being based on a highly significant database. On the property side, we've got more than 80,000 billion NOK worth of insured values or exposure, to say it another way.
That allows us to have a rather significant and rather high degree of clarity view on large loss loadings, large loss provisions, attritional losses for different types of trade. It's valuable. Yep. Strong results again, a well-defined underwriting strategy. This is what we provide, then we have subsequent discussions, and it should arrive and has arrived with a very sound program for 2019. Similarly, on the U.K. casualty, slightly different angle, of course. We're looking at reduced risk and return to normal. I mean, early days when building a portfolio, the portfolio composition. It's not necessarily as balanced as one would've liked. We can grow a little bit here, then perhaps a bit less there. Over time this will balance out. We are more in a normalized portfolio composition at the moment.
Continued Nordic support, certainly, a reduced risk profile, both in terms of the class of business and where we grow and what products. Also the, again, type of trade and vehicle compositions of our portfolios. We say pricing is too high relative to portfolio, and we expect improved terms going forward. When it comes to the other two, I guess we've touched on this. Relative stability expected, no change to the lead reinsurer of either program, and as I mentioned, ample capacity in the market. Smaller programs, stable programs over time. One slide to highlight a few faces, and I've been as humble as to include myself there as well. We work in preparations for renewals very closely between risk engineers and underwriting. That is absolutely key, that collaboration.
It also includes when presenting to reinsurers, we always bring our best risk engineers and underwriters. It's not just the analytical side, but it's very much the visceral and visible part, which is represented not by a reinsurance department, but by the people actually writing the business and making the decisions. It is extremely well received. Of course, there is an element of negotiations where we've got, again, very hands-on involvement, both as a discussion partner throughout the process, but also in decision making when it comes to the final placements of the programs. Right. Solvency-based reinsurance solution is in place. What?
I said I'm sorry.
Yep. covers all lines of business. This was actually gone through last year. Similarly, there is a minimum cession of 10%, and a cession on a whole portfolio basis, which can increase up to 50% given a need for that. Effectively it's a shock absorber and can provide also capital relief. I think this might be the last slide we've got. Just a couple of comments on the property side. With the change from surplus to an excess of loss structure, our net earned premium obviously will go up dramatically, so we're not ceding to the surplus treaty anymore. Claims will go up in terms of claims volume. Commissions will evaporate. They don't exist from an excess of loss structure. The net result or the contribution that the property portfolio has when it comes to underwriting profit or bottom line is expected to increase.
A few figures on the right. As a final comment here, perhaps should mention that the surplus treaty is on a risk attaching basis. Every single risk in our portfolio that is either currently in force or renews or incepts between now and the new year, will for the duration of that policy period, be covered by the surplus treaty. Every account, every policy that incepts or renews from 1st of January onwards will be covered by our new excess of loss treaty. This is yeah.
We are up for a final question. Obviously this is a rather thorough walkthrough of the reinsurance programs and changes. We will be back after quarter four, after full year result and talk a bit more about practical consequences, kind of the slide you saw before this one. Your question Vegard. There will be more quantitative feedback a quarter from now, but this is a pre-update on what's happening entering 2019. Okay. Thanks a lot to you, Fredrik.
Thank you.
We are not really running late, because my summary is not really 15 minutes. It's more like 2 minutes. It means that the next speaker, Henrik, will have his half an hour in order to go through the U.K. Let me introduce to you the country manager in U.K. Also, the person working very closely with myself and very small group of other people. The key person setting up Sweden back in 2011, and setting up Denmark back in 2012. Like a few other people in Protector, he is also a sportsman, as his background is cross-country, like any Norwegian you could say. Educated in the U.S. You are, as far as I remember, and do remember, you are the national champion for universities in the U.S. You have been celebrated in the White House. That was with one of the Bush presidents.
A warm welcome to Henrik.
Winning cross-country competitions in the U.S. is not that difficult. All right, U.K. Flag we can skip, I guess. If this works. Not to tire you with these slides again. I think it is extremely important. First question we got when we introduced the U.K. was, what's the biggest risk? The biggest risk in the U.K. is getting the wrong people on board, and/or not being able to align them to live our culture. I think when we meet new employees in the U.K., we say we are different. This slide is not different. The words on it are not very different, but it is the fact that we spend a lot of time on understanding it, and then trying to live it. There are a couple of things that are different, and I'll get back to some of them when I speak about the people.
One thing has to do with best-in-class decision making. In the U.K., the hierarchy is stricter and stronger than what it is in Norway. When we speak about best-in-class decision making, that is not the management making decisions, it's about empowering people, making sure that everyone makes decisions. That's difficult for people who have experience from working in the insurance industry in the U.K. That's a big difference. The summary here is that we are on schedule in the U.K. We've met some speed bumps. I've illustrated the speed bumps in the middle here. One is Grenfell, another one is reinsurance, and then we've had a financial rating requirement in one of our segments. Some of the speed bumps are related to market access. The financial rating has been a requirement in the housing association market.
That means that we have not had access to all clients. Reinsurance has not really been a speed bump in terms of access to market. Fredrik mentioned it's a bit too expensive, which means that over time, we believe that we will be able to be more competitive, because we will have better reinsurance prices. Grenfell has more to do with something that reinsurance also is related to, and that is the capacity it takes to deal with a large claim in an event like Grenfell, and the fact that we need to present our portfolio, which is basically nothing in the U.K., to reinsurers at the same time as we have one of the largest claims, and you have a change in the Ogden discount rate. Of course, it has to do with the capacity of key people working towards this market.
I'll get back to this slide at the end, you have read it. The one thing that is extremely important for us to understand is that there is an order in our four main targets. Cost and quality leadership will lead to profitable growth. Those are our main competitive advantages. That's extremely important to get right first time. That will lead to a top three position. Okay. Grenfell first, an update there. Public sector is a segment that we know very well. We're the market leader in the Nordics. We have a very consistent way of doing our risk assessment in the segment. Municipalities or local authorities are fairly similar. Our job is to select the ones that are not bad out of all those similar clients. In order to do that, we systemize a lot of information.
We systemize, obviously, claims history, exposure histories, but also publicly available statistics and our own inspections. We have seen more than 12,500 properties or buildings in the public sector, Nordic and U.K. We have systemized all the findings, all the pictures, and can benchmark one local authority or municipality against everything else on building class, on the standard of buildings, on deviations like waste containers placed outside the properties. We have experience in the sector, and our key role is to find those details that separate these types of risks. We believe that after doing that type of a risk assessment on Kensington and Chelsea, where Grenfell Tower is, we have done that. First of all, the first time we did it a very thorough way, because it is a large client in the new market. We had more meetings.
We did more inspections than what is normal. Secondly, we've done that underwriting at least three times now, because we had to do it again in order to see if we did something wrong. We did it again when we renewed the client. We are still of the opinion that this risk is a good risk. They just happen to have Grenfell Tower. On 14th of June 2017, we established these four projects. We've been through them before. You've seen it before. In order to focus our efforts after the Grenfell tragedy. One of the issues was to find out what is our role in such a tragic event. That is for two reasons. One is in the communication externally and internally, but another one is to prioritize where we spend our time. This has so many aspects to it.
There is a public inquiry involving all types of experts from around the world following this event, and we are just an insurance company who happen to insure that risk. What do we do? Should we be involved in all different parts of this, or should we find out what we are good at and where we need to do something? That is what we have done, and we formulated some sentences around it, where correct settlements to the injured parties. It is about doing the correct claims handling, not about settling with too high figure or too low figure, but what is correct. Understand what we are doing, professional claims handling. There are other events similar to this, where the total payments from the event have been 70%-80% to third party, mostly lawyers, and not to the injured parties. The challenger, that is who we are.
How do we deal with that challenge? That is to work with the broker and the client in order to set up schemes where we can minimize those payments to the third parties and make sure that the injured parties get most of it. I will get little bit back to it. Lastly, has to do with risk management and understanding what went wrong in the Grenfell situation. Learn and then contribute in preventing this from happening again. That is also about being open towards our competitors, for instance, and everyone. We are not hiding findings that we make in this process. We will share it. I spoke about the property claim, which is settled, so it is good to have that behind us. The liability is obviously far away from settled, and liability is not concluded at all.
A couple of the actions that were done together with the client and the broker, in order to minimize payments to third parties, is to set up schemes. For example, a rehabilitation program for the survivors, where instead of having 600 lawyers for 600 people, there is one person making a decision that everyone trusts. Made a bit simple. That should make sure that that money goes to the injured parties and not the lawyers. Since liability is not established, there is obviously opportunities here for recovery. We are, at the moment, together with our reinsurers, paying out money without prejudice, so without the liability being established. We will meet with potential liable parties in order to see if it is possible to get a solution there. That is also a way of avoiding too much lawyer cost.
We have had feedback from the chief of insurance from Kensington and Chelsea, and CEO for the broker in this case. Very good feedback after the property claim has been settled. We are satisfied with that, and it gives us time to work with the liability claim going forward. This is about sharing risk management reports. We have a report, about 40 pages, where we go through, in a simple way, the claims handling process, but spend a lot of time on our findings from inspections of 400 tower blocks in the U.K. We also put this in a context with the 12,500 other properties that we have seen in public sector. I think that this document should be interesting for players in the U.K. public sector, so the local authorities, the brokers, and our competitors. It should also be interesting for the Nordic countries.
We can learn something from this. This is some examples of what we've done on the risk management side. We have categorized all the tower blocks in our portfolio, all the tower blocks we have in our databases, and we've made assessments of those tower blocks, and are starting to understand how we can register using an online tool where the people on the ground can log information, so that we can collect information about the fire security in these properties, then we can share it with the relevant parties later on. I just wanted to mention that when it comes to people in the U.K., the biggest risk management team in the whole company is in the U.K. They are important in many ways, not only when we have an incident like Grenfell.
When we look at new risks, they're an active part and an important part of our risk assessment process. They are also very often the most credible party when we meet the broker and the client. They are extremely important in making the risks better, which is the normal way of looking at risk management. Improving the risks that we already have on board. A transportation fleet who is poor at registering claims and learning from the mistakes they do, or is poor at understanding what kind of training their drivers need. That's a client that we can take on board and actually believe that we can improve. Okay.
When we started U.K. analysis, we knew the market was big, and now we have, with the help from the same consultant that we used in our initial analysis, some more figures on how large the market in scope for us in the U.K. is. I'll go quickly through this. You have the Sorry. Basically, by looking at the total market, we see GBP 10 billion as in scope for us. If you adjust for the brokered part, then that figure is GBP 8 billion. The largest brokers, the national brokers, they have by far the biggest share. If you multiply these percentages with the market size here, you understand that also the smaller regional brokers could be much bigger than any broker in the Nordic market. We need to look into also some of the other brokers here. They're very large companies, very large brokers.
They could fit our culture and way of working, even better than some of the larger ones, we don't know yet. There's a job to do in order to find out where to go. Geographically, we need to understand how the U.K. market works. All these geographical circles, they are more than big enough for us to establish an office. Question is more, when do we establish an office? We are in this region with the Manchester office now. London will be the next, that will happen in the beginning of 2019. We need to be in London. We probably need to be other places because the competitive situation shows us that the larger companies, they are located in the different location, that means that the brokers in those regions, they have access to a big market.
They don't need to go to Manchester or to London in order to find insurance companies. We will then be basically outside their scope. Therefore, we will have to look into establishing in other parts of the U.K. as well. When we entered the U.K., or before we entered the U.K., what people said was, "It's a very big market," and we understand that, and now we know a bit more. They also said it's highly competitive, and very different from the Nordic market. What you see here is that the larger players in the market, they have a large share of the market, and that is better for us. We can challenge the big ones just like we have done in the Nordic markets. Okay. Over to the team. Here's some pictures. That's the team now.
Some of them are so new we don't have pictures. I think an important element here is I started out with saying that best-in-class decision making is different than what they are used to. Our understanding of that phrase. Another important element for us is that all business is local business. You see that there are some faces that you all of these are Norwegian faces in the middle here. It's probably a poor way of illustrating it, but we're not sitting on top of the U.K. team. It is not controlling the U.K. team. They know what they're doing. Many of these people have been 30, 35 years in the market. Of course they know what they're doing in terms of insurance. What our job is to support that team with our strength where they are weak.
In some ways, for the more experienced people here, it has to do with structure and analytical capacity, and that's something we have from Norway and we can support with. Most importantly, it has to do with helping this team understand our culture, and make sure that we live that every day. We have an experienced team. We're starting to cover all the key roles, and then we fill up with capacity of highly educated graduates who do well on our tests and are committed to living our culture. People are obviously important in the perceived quality, and you've seen this result before. It is our broker survey from 2017, where we received very good feedback. This is early. We did not have a lot of time to make mistakes at this time.
At least the brokers believed that we will deliver quality when we sent out this survey. We are probably today, sending out the survey for this year. It's very exciting to see what the brokers think after we've had one more year of operations. I think the ambition of ending up at the same nominal score as 2017 is very high. The most important element about these surveys is that it is a great basis for discussions with the brokers, on where to improve. To prioritize either strong sides of Protector, continue being good, or where we have done something poorly and need to improve. It's a very good basis for those discussions. It's between 60 and 80 questions, depending on how you define a question. Okay. Segments. Just go quickly through a status on the different segments here.
Starting out with public sector, where we started, we have communicated previously that we had a poor 1st of April, which is by far the biggest renewal date in this segment. The main reason for not winning a lot of this volume, had to do with price. We were too high. In many cases, a lot too high compared to our competitors. Then the question is, well, if you could do it again, would you go down and win it? The answer is yes and no. Mostly yes. If we knew where the market was, we could have gone there. We believed in the opportunity for very high margins. We didn't understand where the market was. In some cases, we, right or wrong, think that the market is pricing the risks too low, for instance, on some liability products.
We have 80 public sector clients in the portfolio spread in the green areas here, and a consistent way of selecting risks. I don't think we should be in a hurry to win volume in this segment. That will happen. This is a big market. The clients are out for tender, every four or five years. They're in deals, and they have to tender because of public procurement. We will see the market. When we get the clients on board is not really that important. That's public sector. Commercial sector, that's where the real potential is. We are gaining traction. The way we gain traction is to be out with the brokers, get to know them, or use existing relationships from our employees in Manchester. We've seen 500 tenders. Only 60% quoted.
In the Nordic countries, we are more at 80%, 85% of what we see, quotation rate. The reason is that we have not clarified our risk appetite in a good enough way with the brokers. They're testing us to a certain extent, so they send us what we see as poor risks, then we say no. It's a process of learning. Them understanding who we are and we understanding who they are. We're a bit careful on the liability side because we don't have enough data to understand where this ends. We're a bit on the cautious side when it comes to liability. A lot of the volume is on the motor side, and I think it's a simple reason for it. It has to do with cost leadership. On the motor side with frequency of claims, that's where cost advantage is most important.
The brokers understand that, clients understand that, and when we say that you cannot find someone who will give you a better price over time than us, then they believe us because they see that we have a large cost advantage, and it is the truth. We are increasing the inbox for property and liability. Ten broker houses right now that are in focus, but only some geographical locations from them, naturally around us, in Manchester. We are in the process of systemizing all the brokers, not only offices, but also names, their portfolios, and finding out where to focus our efforts going forward in the market. The last segment is housing associations. It's as or like motor, a home turf area for Protector. Its cost advantage is extremely important. It's a data-driven risk assessment. Lots of data. These clients have very low deductibles.
We see a lot of claims, the relative share of large loss provisions is small compared to a lot of other segments. Volatility is smaller. We have a good relationship with the broker. We've had some, as mentioned in the beginning, some speed bumps, especially on the rating side. Some of these housing associations, fairly small. It could be 500 units in a housing association. They require A rating from their insurer. Kensington and Chelsea and large local authorities, they don't require A rating. It is about to disappear, and we've had a lot of engagement with the people in the market here in order to make that happen. In summary, it's on schedule where 2018 has been some positives. I would say the biggest positive is that we're gaining traction in commercial sector.
Some negatives on the volume side, on the growth side. You've seen this, so the estimates. It's a bit difficult to estimate something when the opportunities are so big. These are our best estimates at the moment. To comment a little bit on costs and the key figures here.
A little bit.
A little bit. Cost is high in the beginning. We have not reached critical mass. Around 20% in 2018. 2020 is when we believe we will reach critical mass. Fredrik spoke about the reinsurance, so you'll see that on the net figures, that it is expensive. On the loss ratio side, has to do with reinsurance and the fact that we have some clients with high deductible levels, so claims will be volatile with a small portfolio. That's the summary.
Questions to Henrik? No. No question? Everything is okay?
Maybe you can comment on specific niches within the segments which you are strong. You mentioned motor given the high claims, but maybe in the liability side or the property side, are there certain niches that you are particularly strong in?
I think that it could be a long comment. In general, we target a broad part of the market.
Remember, one of our targets is top three. In order to find where to go, we need to understand what's out there. We are in the process of understanding what the brokers have and what our risk appetite should be. It's not a clear answer to it other than that the housing sector is a good segment, public sector is a good segment, and motor is easy to say that it's a good general segment for us.
There's one more question then we'll go to Ivan.
How many employees have you got in the U.K.?
Thirty-five.
35 employees. Okay, thanks a lot to Henrik.
Yeah.
My summary is rather short. I think it's fair to say, if you compare Protector with Nordic companies, we are different. The first statement from Protector, which is very different from any other Nordic player, is that we consider insurance and its investment to be core business, both of them. While most competitors, or basically all, say we do insurance. I think you should more compare Protector with other players in the world with the same two statements. Investment and insurance is what we do. If you believe in that leads to a second statement. Growth is good. As long as your combined ratio is healthy or good. The two most successful insurance companies in the world the last 30-50 years is probably Berkshire Hathaway and Markel. That's more companies which we would like to look at, not really the Nordic competitors.
Not saying anything wrong about the Nordic competitors. They are very good at what they do. They are good. They have a different approach. Which is not bad, it's different. Our approach is an alternative. Insurance and investment is core business. That means growth is good. If you can manage that with an acceptable profitability, you will create a lot of value going forward. Remember, our history so far as cost and quality leader has led to profitable growth. We have demonstrated the last 10 years a combined ratio of 93%, which in this kind of perspective is good, and we have delivered return on investment, which is good, and return on equity of 21%.
Every insurance company, also Berkshire Hathaway, Warren Buffett, his company, and GEICO, the daughter company of Berkshire Hathaway, and Markel, they have through their history, have a look, they have met years where they have been unprofitable on a technical level. Go through history and see. It will happen. Even with Berkshire Hathaway, GEICO, or with Markel or with Protector. This is our first year where combined ratio is above 100%. Apologize for the poor result of this year. We will be back. The strategy remains. If I may add at the end of this walkthrough, we are a bit ahead of Berkshire Hathaway and Markel after 14 years. Thanks a lot for your attention and for spending either three or four hours together with us today. We are two minutes after schedule. We won't take any more questions now.
Thanks a lot, and have a nice day.