Welcome to presentation of the full year and quarter four results for Protector. It is a long time since we've had some people physically present. Previously it's been a small room, two floors down from this, and a couple of cameras, no people. It's good to have at least some people here. Thank you also for participating digitally here. I'll jump straight in. We always show this one, but I won't spend time on it. I will spend some time here. We've just had a meeting with all employees, physically with the people who work in Norway, and then the people in the other countries participating from meeting rooms digitally here.
It's good to pick one of the parts of what defines our culture, to focus on at the time. What we have decided to focus more on in 2023 is best in class decision-making. Best in class decision-making has and has had for a long time a simple definition in Protector, meaning that everyone should make decisions and at least when you have competence to do so and within your area. If you want a culture of everyone making decisions, you need to allow for mistakes. If you allow for mistakes, you need to learn from them. Remember that not making a decision is a decision, is usually the worst one. That has been the simple definition of best in class decision-making in Protector for some time.
We also see that there is a lot of potential in understanding what it means further. As we grow, we need slightly more central and common processes and procedures. For example, within underwriting, risk appetite relative to our reinsurance agreement and relative to our common competence. Then the balance between what is central for everyone and the local decisions is important to define. We will spend time starting with the leadership development programs, defining and understanding how we can take advantage of something more on best in class decision-making. That's been the focus this morning. Protector is about the people and is about our culture. That is what delivers these results.
I'm proud to present the very strong 2022 results with a combined ratio of 88.9%, a growth in local currencies of 21%, a strong, absolute, and a definitely relative investment result, which gives us a profit after tax of NOK 809 million, equates to NOK 10.2 per share. In addition to those key numbers, we have released some information about the growth January 1st, which still is a big date in our portfolio in the Nordics. It is decreasing in importance as U.K. is growing, because in the U.K., January 1st is a small date and other it's spread more out throughout the year.
That growth continues to be very strong at 17% in our most mature markets. It's driven by strong renewals, but also new sales. I'll get back to the details behind that later on. On the investment side, the biggest news here compared to a year ago, is the development on the yield side. I'll speak a bit more about that. It is a significant development on the bond portfolio. The solvency position is strong and board has decided then to go for NOK 6 per share dividend on the 2021 result, getting us to almost 100% of that, 99%. Let's start with profitability. That comes first always.
If you look at the full year, which is more interesting than quarter four, the orange line, look at gross and net are exactly the same. That's a coincidence, of course. It's driven by the fact that on the reinsurance side, they have taken a hit on a large loss that has been increased. A reserve loss on a large loss and the poor performing workers' comp product in Denmark especially, which is 70% reinsured up until October 2021. That's the reason why the cost of reinsurance is equaled out by money that the reinsurers have paid. That's on the totality.
Within that number, we have almost a normal level of large losses in 2022, 6.2% compared to 7%, which is our estimate of what should be normal. We also have some reserve gains, 2.3%. If you adjust for both of those two, make the simple adjustment there, you'll see a slightly higher normalized level. That is obviously a big simplification of normalizing a loss ratio. We have had a bit of luck on large losses and some reserve gains. Underlying reality based on those two is slightly higher.
At the same time, there are some areas if I go to the country, if I break it down to the countries, where in Norway we have few large losses, but some reserve losses on long-tail products. In Sweden, we have more than normalized large losses, but some reserve gains. In Denmark, less than normalized large losses and basically no reserve development in total. We have reserve losses on the workers' comp area. In the U.K., it's the same situation as Sweden, higher than normalized large losses, but reserve gains on the short-tailed products. Finland is very small, of course, so I won't comment more there. I can get to, if I can go to this one.
One area that is affected by inflation is the reserve side. It becomes a bit more volatile when inflation moves a lot. Both for claims handlers and doing the case reserves, but also the actuary. You see a sharp increase in inflation and you put a reserve on the claim, then that claim is most likely being reserved too much, and that's where the reserve gains are coming from in 2022. Slightly higher reserves because of uncertainty on claims inflation. There's nothing special, but it's on the short-tailed products. On the long-tail products, we have some reserve losses, mainly driven by workers' comp in Denmark. If I think that it is possible to ask since we are physically present, it's possible to ask questions as we go. Are there any questions to the claims side here in Norway? Thomas.
Is it possible to estimate or could you estimate, sort of the weather effects, on?
Yeah. I didn't give a comment on it now. It's a Q4 comment, and Q4 is.
Can you repeat the question, Henrik?
I can repeat the question. The so estimate the effect of the weather in Q4. It's a small quarter. It's volatile, and obviously winter comes every year. It's not that. There is a small negative effect, less than 1 percentage points on the totality of the different or the bigger effect from weather, especially in the U.K. where there is not a lot of snow every year, but also in Norway then, and it came earlier.
You gave a comment that it was kind of a practices that you might reserve slightly conservatively on short-tail products due to claims inflation. A bit later, you lock up these reserves. Should we expect that to happen during 2023, or is it not likely to repeat itself?
The question is about my comment on inflation and and reserving, and that's a temporary situation when inflation is changing a lot, not when we have a better view of and it stabilizes. It's a temporary situation. You should expect best estimate. Vegard?
It might be a little on the side, you mentioned your reinsurance programs here a couple of times. There are some movements, it appears, on pricing in the reinsurance space. If it's possible, could you comment on what you see as a rather large user of reinsurance, and if you're considering changing any of your programs now?
Yes. Now I don't think I need to repeat the question because you had a microphone. On the reinsurance side, it has been what at least reinsurance brokers will name as a perfect storm. It has been natural catastrophe losses above normal. You've had the inflation or the reinsurance market has really woken up regarding inflation. Then at the same time, interest rates are increasing and alternative capital in the reinsurance market is leaving the market. That market has been very special for the renewal first of January 2023. We were early with our programs out in the market and have made two changes to the structure.
One is that we has nothing to do with the pricing and the, and the perfect storm, but we have not renewed the whole account solvency based reinsurance agreement that we had. We ceded 7.5% of our, of all our premiums on that, and it was basically a safety net for market turbulence. That is not renewed because we don't need it and it costs too much in a stress situation. That will increase our retention then. We've made one more change, which I think was important in this renewal, and that is related to inflation. The reinsurers, they are catastrophe claim providers.
When inflation increases in the way it has done now, what the layers that they have cover on, they become what they call working layers. More claims come into the layers they insure. Our retention on property, for instance, NOK 100 million, more claims come into that layer than before due to inflation. We increased our retention or, you could say deductible, from NOK 100 million- NOK 200 million on the property programs. In order to cover that gap, because we didn't want NOK 200 million retention, we have signed a new deal, which is a combination for both the risks of the fire program and the catastrophe program.
That it's a multi-line deal with one reinsurer and at what we deem as very attractive terms. I think that that has made our renewal come in at basically flat levels, risk adjusted, which is a lot lower than what the market has done.
Just a short follow-up on that. Does it mean that the solvency numbers at year-end reflects the change in the solvency ratio or does that come into effect in Q1?
That's a Q1 effect.
It's both. It's a Q4 effect and a Q1 effect. It's mostly taken in 2022.
Okay. It's wrong what I said. Mostly in 2022, and then there will be some in, 2023 as well.
Thank you.
More questions?
Okay. Over to the growth, the very strong growth. What you see is that it comes from all countries, and mostly in absolute or nominal terms from Sweden and Denmark. U.K., no Sweden, U.K., U.K. is now our biggest country. That is mainly due to a sprint in Q4, where there were some single, very large renewals that are, the way we see it, profitable and at least as profitable as our portfolio. It's not a very big new sale in new segments in the U.K. It is what we know and on clients we know. Important to say that in Norway, renewal rate is above 100%, very low churn, and good price increase levels still.
In Sweden, we have high new sales on the facilities that I have mentioned previously, large broker-based facilities, mainly on motor, in segments that are slightly lower in size than what our normal clients are. Very good new sales or converting of the brokers existing clients into those facilities with us. An okay renewal rate in the low 90s. In Denmark, we've had good new sales on motor and in public sector, especially in the housing sector, due to market dynamics. No change from our side on margins, but a change from the competitors, some leaving the market and the reinsurance conditions they play in those markets as well. Some have higher prices or even less capacity, or not capacity at all.
Strong renewals in 2022 in Denmark, but we've been late on price increases relative to inflation in Denmark previously. We're catching up there on the renewal side. In U.K., it's a very high renewal rate and very high new sales. Most of the new sales came from public sector and housing and are due to market conditions. We've re-established activity with brokers following the pandemic and have access to more opportunities in the U.K. in the second half year. It's been a very good growth situation there. Yeah, we have talked about the January volume before. Any questions to the growth?
First, congratulations with 62% growth in the quarter, even if it's not the biggest one, it's wow. I guess Protector have to go 12 years, 14 years back before you can see such a growth in percentage points.
Thank you.
That's a big thing. You have in previous quarters said that price increases has been higher than the claims inflation. What's your comment today on price increases versus claims inflation in quarter four and on January the first renewal?
In quarter four, price increases at about inflation level. We have focused on maintaining client, profitable clients and markets, especially U.K., which is the biggest country in quarter four. Motor, we've had to reduce our expectations on price increases in order to retain clients. In the January first renewal, it is lower than it has been previously, but still at a level that will cover and maybe a bit more claims inflation. Other questions on growth?
Are you seeing any impact from the renewals with regards to the reinsurance side on the competitive environment? Do you expect that to impact your growth going forward?
We, I mentioned that we see something in the housing sector, Denmark and U.K. Where capacity is needed, a high capacity of high sums insured on the properties, you can see something. It's the most, the best example is that there are a few competitors that are basically out of the market. Less competitors. Other than that, I don't expect that we will see a lot of change in behavior due to both the fact that profitability is good in especially the Nordic markets and very good.
This is a very small part of, if you have 50% increase in your reinsurance premiums that are, 1.5% of your, premiums, it doesn't really matter that much. Also, you'll see it on certain segments, in general, not a lot.
Thank you.
The only thing that we haven't talked about relative to this is the cost side. The only thing I wanted to mention is that there is volatility on the cost between the countries and, as you know, commissions is included in this, and it's present in some countries and not in others. I can say that if you exclude commissions, the difference or the improvement is slightly bigger than what you see the improvement is when you include commissions. This is obviously because in Sweden and Denmark, there is commissions, and we grow more in Sweden and Denmark than the rest.
Over to the area that Dag Marius is leading and where the rest of the company will look to be inspired for better understanding of best in class decision making, investments. Our free money is growing. That is good. Dag Marius has more to work with. The result on the short term, 2022 are in absolute terms very strong, relative terms even stronger. You've seen the numbers there, and I think they speak for themselves. What I want to focus more on is on the bond side, the very big change which is comprised of 55% reference rate development compared to Q4 2021 and the rest on the spread widening.
It is a very big development there, and obviously changes our the ability to generate profits on the investment side. This is the biggest part, 83%, at Q4 2022 of our investment portfolio. And the total activity in on the bond side, we have done something while interest rates have increased. While interest rate was around zero, we didn't see that the probability of it falling further as very high. We were not doing anything to steer the duration on this portfolio relative to our reserves. When the interest rate increases, probability of it falling increases and we take down the risk by increasing the duration in our bond portfolio.
The duration here, 2.5, is basically matching the reserve side. We have a bigger bond portfolio than we have reserves. And a bit higher duration than 2.5, on our reserves. That has led to a lot of activity. Parts of it is increased credit duration by doing that, so locking in the attractive rates on secure papers. But that is also obviously a slightly increased risk in the portfolio, and I think that with the environment now, there is a slightly increased risk. The number that you see at the bottom here, which is extremely low on the losses, is there is a higher probability that something happens there now than it has been previously.
The biggest news is the development which has happened gradually and you know about on the yield side, it's at 6%, very big difference. This is the only area where we actually think that it's or it's simplest area to benchmark our portfolio, so the high yield. There's been the benchmark. Benchmarks are volatile, if you do a performance evaluation here, our high-yield portfolio is performing better than benchmark then in 2022. On the equity side, we have also had a lot of activity during the year. Most of the increase in companies where some of you asked the questions, "Have you changed strategy? Are you going towards some kind of index here?" The answer was no.
However, when prices or the market dropped, there were more opportunities that we either had on the watch lists or found that looked attractive. We had increased with smaller positions the number of companies in our portfolio. Now some of them were wrong, are out and then, others have met the hurdle rate and, are out, so we're slightly down again. I think the, obviously, when you, look at the performance of the investment department, you look, long, and if you look historical to date or from October 2014 when that was taken in-house, there is a very high return. Relative to benchmarks, big outperformance and even bigger after 2022, which, also had, an outperformance.
If you look at the intrinsic value estimation here, you see 40% in by the end of Q3, so that's what we said then. We've had a good Q4. Obviously that goes down, not by the same as the return, because the most important for us or for Dag Marius and his team is that the, it's the first bullet here in the first sense. Strong operational development in our companies, and that's our view. That view has been strengthened through Q4 on the Q3 reporting. Any questions to the investment side?
Thank you. My question is on capital allocation. The market risk in your SCR is NOK 1.3 billion. With 200% solvency ratio, that's NOK 2.7 billion roughly. With 6% running yield, you make 25% return on equity on your investment portfolio in bonds. My question is really how much capital should you be allocating to Dag Marius and his team during 2023?
Dag Marius can, he's sitting here, he can answer the question. It is a important observation or, and it's correct. I think that we... In quarter two, we said that there are good opportunities that we see. There could be some extraordinary opportunities. At the same time, the risk is increased. We did say we would like to wait and hold a bit more capital at that point. That's where we, that's where we start. You can look at the returns like you do. What's important for us is that we always have the capital and the capacity to act when the opportunities are the biggest.
We go bottom up on capital, and that's why I wanted to ask Dag Marius to answer the question because I know that he would focus on the capital side and the solvency side when he answers as well. You can say what you want, Dag Marius.
Nothing to add.
No. We'll get to solvency and capital a bit closer now. First, profit and loss, that's simple. I think I want to speak about the capital. I can speak about the increased risk here. It's mainly driven by on the equity side, higher requirements per Norwegian kroner. Also then that we have an increased exposure in the equity market. On the bond side, it's two elements. One is the credit duration, increased credit duration. The other one is that when we have we have a slightly higher risk or slightly lower rating in our portfolio, which requires more capital. Those two factors are the biggest on the market side. They are bigger than they have been previously.
That has been fairly stable previously, but there is a change there. There's also an example of that there are very many factors influencing solvency. Which takes me to this point, which is a change in our distribution policy. The change is made to reflect the realities in a better way. The way we wanted to do that is to. Previously, there was a line that said 180% and no colors to the left. The 150% was the same. There are some reasons why we can argue that we want to increase the upper level here that are stated on the lower right.
The most important part here is the flexibility in this, that I hope gives you enough transparency in understanding how we evaluate this. We say that as long as or if we see very good opportunities for insurance growth, that's priority number one, we or we see big opportunities in the investment portfolio, either single segments or because of an event or there is a lot of turbulence, a lot of risk where we don't really, we're not really able to assess what that is, we will move towards the green part of this until that situation changes or the opportunities are taken.
On the other side, we'll move towards the pink one if we don't see a lot of insurance risk or if the macro environment is more stable, or no allocation opportunities in the investment portfolio that are different than what they are today. Bit of flexibility there, but you should expect that over time, we will distribute capital above 200%. There are a lot of factors, and this is not, absolutely not the only number that decides how much capital we have in excess. But you should expect that.
When we are in that range in the middle, you should expect that we do thorough and good evaluations of the risks and the opportunities, and that we make decisions on distribution dependent on those valuations. For the 2021 profits then, and the Q4 dividends, it's NOK 6 . We will have these quarterly assessments of this situation to assess how we deal with the 2022 profits. Questions to this or feedback? Is it clear? There are some thumbs up.
Very well described.
Thank you. No change in long-term targets. Obviously, the most important target we have is the one to the right. That's what we have to evaluate on everything we do, but it derives from the combined ratio on the insurance side and, obviously investments. Then we are at the summary and any potential other questions.
We saw in the presentation that U.K. passed Sweden as the biggest country, possibly slightly helped by the currency situation in Sweden, where the Swedish kroner has been a bit depressed. It was on the margin.
Yeah.
U.K. is number one. Could you give any more comments on the further U.K. development, opening new offices in new cities? There are regional brokers. There are more facilities. There are a huge number of opportunities in U.K. Could you comment a bit on your biggest country, please?
Yes. In terms of new offices, we won't do that. It's not necessary. That's our, at least now, that's our assessment. In terms of new brokers, that's a gradual process. We have included 2 more brokers in during 2022 compared to 2021. We'll continue to develop that. That will also lead to potential opportunities in other segments. Whether it is going down, we have very large clients in the U.K. Going down to the segment we basically are in the Nordics, in the U.K., that requires some other brokers. It needs to be done gradually. We'll see where the profitable opportunities are, but we're going that gradual development.
One last comment I want to make is that there, if we go into something like the Swedish new motor facilities in the U.K., which we obviously explore and are interested in understanding, then we will do that not with exactly the same organization we have in the U.K. now, but with a separate setup inspired by Sweden then. That is the new U.K. market. There are a lot of opportunities. Right now, market dynamics in public sector are favorable. That may change for the 1st of April, who knows. In 2022, they have been favorable, so we have good growth there, and we focus on that. Let's see.
Yeah. Looking at your combined ratio in this quarter and comparing it to same quarter last year and then adjusting for run of large losses and also COVID, I get a worsening or a uptick in a combined ratio of 6 percentage points roughly. Is this just volatility or is it any underlying development here?
It is the majority of it is volatility, medium-sized losses, Norway, especially. But there is also some elements that are with a portfolio of. We're going into, we're growing a lot in the housing segment as a, and motor, fairly low deductibles. It's the same as I explained with the reinsurers. Inflation frequency go up because more claims come into or above deductible level. That is parts of it in Q4 where you have high frequency from before. Don't expect that to continue in the annual cycle, but we see higher frequency in Q4, not only because of weather. Thank you.
You are maintaining your targets. The running yield on your bond portfolio have increased from 2% to 6% during the year. What is the ROE impact of 6% return on the bond portfolio versus 2% as it was last year?
I don't have that exact number. I think that it's important that we maintain that long-term financial targets. This is long-term, it's not only. Do you have that number, Detlev? Impact of it? It's probably possible to calculate on the go, but a bit complicated.
4% times NOK 11 billion. That should be NOK 400 and-
It's a leading question, you can just do.
On U.K.
You can't add four. In average in 2022 you had 4.1. Now you have 6% running, so you have to start on 2.4. Obviously it has a significant positive impact, but not that high.
No. No. Significant impact compared to 2021. Yeah, leading question. That is important to see here. It is.
On U.K., you had very, very low claims in the quarter. What should or what do you expect as a more normalized claims level in U.K. going forward?
U.K., as we've said, always, it is volatile. We have a higher than normalized large loss level, but the runoff gains, they counter some of that. The underlying realities are slightly higher than the 2022 result. You should expect U.K. with the growth rate that U.K. has to have slightly higher combined ratio than the other countries.
Okay. Thank you.
Long term. It is a much more volatile, large loss, large losses in the U.K. are bigger and a bigger share of the totality. It is more volatile on all products, also motor. No more questions?
A couple from the emails. A couple of investors asked about the geographical diversification or expansion, if you could comment on that?
Yeah. We are looking at new markets. We have mentioned that Spain has been an interesting country for some time based on facts, looking at many countries at the same time. From the first fact-based analysis of Spain until now, when we've met many of the brokers, the market size has reduced. We are still waiting to get data, enough data to understand what to do and how the market works. That is a firm criteria before we make any decision of doing anything in Spain. It's proven to be not as attractive, and we are continuing to work there, but also looking at other possible opportunities.
It's not really that we need to go somewhere else to find the growth, but it is also it's an attractive process with all employees to look. We learn a lot from looking at new markets, other markets, where we can find either something that is done poorly or very well and learn from it. We will continue doing that going forward. No firm decision. The facts will make the decision, whether we do it or don't.
Yeah. One more question is, have you, due to the changes in interest rates, have you changed your exposure to medium and long-term duration products in the insurance portfolio?
We obviously look at the required combined ratio for return on equity target with the changing interest rates. That requirement is lower now. We can have a higher combined ratio on the long-tail products than we could before. What we see is that some of the long-tail products in, at least in Norway, they are very competitively priced. There are someone else who calculates this home with the increased interest rates, and we don't see the right return on equity at those price levels, so we're not winning a lot of that. However, in the U.K., we have now built competence on the liability side over time, a bit more data, understand it a bit better.
There we will have more appetite and obviously going forward than we've had previously. We look at it, but there are many factors. We still don't do workers' comp in public sector Norway due to other reasons. COVID.
Yeah. The other questions is either directly or indirectly answered by your walkthrough, I guess.
Thank you very much for showing up here today. I hope we see even more people next time. Thanks to everyone who's been there digitally.