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Good day, and welcome to the Gjensidige Q3 2019 Results Presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Mitra Hagen Negård, Head of IR. Please go ahead, ma'am.
Thank you very much. Good morning, and welcome to this third quarter presentation of Gjensidige Forsikring. My name is Mitra Negård, and I'm Head of Investor Relations. As always, we will start with our CEO, Helge Leiro Baastad, who will give you highlights of the quarter; followed by our CFO, Jostein Amdal, who will run through the numbers in further detail. And we will have plenty of time for Q&A towards the end. Helge, please.
Thank you, Mitra. Good morning and welcome, everyone. I'm very pleased to report yet another solid set of results. Starting with a few comments on our third quarter results on Page 2. We generated a profit before tax of NOK 1.3 billion, significantly up from the third quarter last year. Group underwriting result amounted to NOK 1.1 billion, corresponding to a combined ratio of a solid 83.2%. Our results reflect effective pricing and reunderwriting measures as well as weather conditions more or less in line with what we should expect from the third quarter in the Nordic region.Our Norwegian operations recorded strong results and progress. Outside Norway was broadly in line with our plan. Large losses were lower and runoff gains were slightly higher than the expected level. And we continued to demonstrate good cost control. Our investment portfolio delivered returns of NOK 279 million or 0.5% in the quarter. Annualized return on equity year-to-date adjusted for the gain on the sale of Gjensidige Bank was 21.6%. This is well above our annual target of 20%. Jostein will revert with more detailed comments on the results.Then turning to Page 3. I would like to elaborate on the operational status in a few key areas. I'm very pleased with our operations both in and outside Norway. We have maintained our strong position in both the Private and Commercial segment while carrying through necessary pricing and reunderwriting measures in a highly competitive market. Retention remains very high, a strong evidence of a strong offering to our customers.Other pricing measures in the Private segment were somewhat offset by lower volumes in the quarter comparing with the same quarter last year. However, with continued positive momentum in new sales and a lower impact from the termination of the NITO agreement, we have seen Private segment volume rise compared with the second quarter this year, a trend we expect will continue.Thanks to the successful pricing measures, profitability from motor in Norway has reached a good level, while we see further potential for improvement for our private property line. We have continued our successful pricing efforts in the Commercial segment without shedding volumes. There are still pockets in this segment which we need to address, particularly among large corporates, and hence, we will continue to rise prices. We are very pleased with our cooperation with Nordea exceeding our expectations. Our reach towards the Private segment will be further strengthened through Nordea's real estate agent chain starting later this year. Operation in the Commercial segment has been approved by the SFA. We are in the process of preparing relevant processes and we'll start up right after new year.Our operations outside Norway are progressing according to plan, although with somewhat different progress and as a natural consequence of the segment's different starting points. Our efforts across the operations are the same, centering around analytics, digitalization and automation of customer interaction and processes. This will lead to improved CRM tariffs, sales effectiveness, and thus, in turn, more satisfied customers and improved competitiveness and a lower cost level. We are confident in our ambition of achieving an underwriting result of NOK 750 million, ex runoff, from these operations in 2022. We expect a back end-loaded progress towards this goal as it takes time for the measures to take effect.Then turning to Page 4. I am very proud to present the results of this year Ipsos Reputation survey released last week. Once again, we ranked #1 in terms of reputation in the Norwegian finance sector, and independent sector, Gjensidige ranked #6 among -- out of 100 companies in the survey. In Gjensidige, we firmly believe sustainable solutions are key to long-term value creation. Therefore we are very pleased to see that Norwegian customers recognize us as the most socially responsible company in the finance sector.Our sustainability goals are focused on 3 areas: contributing to a safer society, reducing carbon intensity and socially responsible investments. Our most important contribution to a safer society is claims prevention for the benefit of the climate, environment and health. Gjensidige has a long tradition in claims prevention, and a new action to get a better understanding of climate effects going forward is a cooperation with the acknowledged research institute, Norwegian Computing Centre. The purpose is to improve assessments of climate impact inherent in our risk assessment. This will, in turn, improve our ability to set the right tariffs. A better understanding of climate impact will also improve our ability of proactive claims prevention, for example, related to water. We have already established SMS alerts for significant weather incidents and we will improve this service going forward.We are also further developing claims prevention services related to personal health, mental health problems arising particularly among young people. Addressing this challenge, we have launched an online service providing mental counseling for our customers within the framework of child insurance. Our second goal is to reduce carbon intensity, both through lowering our own emissions so that we will be climate neutral by 2030 and by lowering claims-related emissions through claims prevention and circular claims handling solutions in close cooperation with our suppliers. On this end, we have entered into an agreement with the global ESG rating company, EcoVadis, who will track the performance of our largest suppliers across a range of ESG indicators and develop corrective action tasks where necessary.And last but not least, in terms of socially responsible investments, we continue to screen our investments and cooperate with our fund managers to ensure that our investments are in line with our sustainability goals.With that, I will leave the word to Jostein to present the third quarter results in more detail.
Thank you, Helge, and good morning, everybody. I will start on Page 6. We delivered a profit before tax of NOK 1.3 billion in the third quarter. This is considerably higher than the third quarter last year, driven by the significant increase in underwriting result. Our Norwegian operations are the main contributors to the improvement, but Denmark and Sweden also delivered higher results. Underwriting results year-to-date are NOK 3.1 billion, and similar to the quarter, driven by improvements in Norway, Denmark and Sweden.Profit from our Pension business was slightly higher than last year whereas investment portfolio generated a lower return.Turning to Page 7. Earned premiums were up 3.3% or 2.7% adjusted for currency effects. In the Private segment, we continued to put through price increases, primarily from motor and property. This was somewhat offset by a lower business volume compared with the third quarter of last year. However, as Helge pointed out, the positive trend in new sales and churn continued in the third quarter, resulting in higher volumes compared with the second quarter of this year. Together with the successful turnaround in motor and our strong competitiveness, this continues to provide us with ample flexibility going forward.Our pricing initiatives in the Commercial segment continued into the third quarter, resulting in a healthy 7.2% growth in earned premium. We will continue the price increases to at least reflect expected claims inflation, but in a different database so that for some customers and segments, the price increases will be higher. Earned premiums in Denmark and measured in local currency were broadly in line with third quarter of last year. We have been through a period of significant repricing and reunderwriting for both the Private and Commercial customers. And although we still see some areas requiring further pricing actions, we are starting to reach a point where we can expect growth in line with the rest of the market.Our Swedish operations saw a 9.3% decline in earned premiums in local currency. 4 percentage points of this was due to termination of 1 large unprofitable contract. Our new motor tariffs have been received well by the market. However, the significant price increases have resulted in loss of volume as expected. We need to continue improving the quality of our Swedish portfolio, increase prices to reflect inherent risk premium. The Baltics reported a higher top line than the same quarter of last year. Competition in this market is fierce putting pressure on prices. However, we experienced good demand, particularly for health and motor products.Turning over to Page 8. The loss ratio decreased by 5.9 percentage points to 69.1%. Although this was somewhat helped by lower large losses, it was primarily due to improvement in the underlying frequency loss ratio. This was a result of the significant pricing measures we have continued to put through across all segments in addition to somewhat better weather conditions than last year.Runoff gains were somewhat lower than the same quarter of last year. Our plan to release excess reserves remains unchanged at NOK 1 billion per year through 2022. Our loss reserves have recently been confirmed through a review carried out by a third-party.Profitability for motor in Norway remained at a good level in the third quarter. We expect claims inflation to remain stable at around 3% to 4% excluding the impacts from currency movements. With the continued pricing efforts reflecting expected claims inflation, we expect profitability to remain around the current good level going forward.Profitability for the private property line improved compared to the third quarter of last year, following better weather condition. However, we are not satisfied with the current profitability level and we'll continue to put through necessary measures, both in terms of pricing and adjustments of terms and conditions to improve profitability in this line going forward. And I'm very pleased with the improvement in the profitability of the Commercial segment. Denmark and Sweden generated stronger underlying profitability on the back of improvements in both the private and commercial banks. And our Baltic operations showed a higher underlying frequency loss ratio.Let's turn to Page 9. We reported NOK 888 million in operating expenses in the quarter, corresponding to a cost ratio of 14.1% and 13.3% excluding the Baltics. I'm very pleased with this level, thanks to continued cost discipline and efficiency measures across the group. The ratios were down 1.5 and 0.2 percentage points, respectively, from the third quarter of last year. The decline is primarily a result of the restructuring provision of NOK 80 million recorded in the Corporate Centre during the third quarter of last year. Higher premiums also contributed to the decline. We will continue our focus on simplification of processes, automation of internal operations and further digitalization. We expect further efficiency gains from our efforts, particularly in Sweden and the Baltics.A few comments on our Pension operations on Slide 10. The pretax profit came to NOK 43 million, somewhat higher than the third quarter of last year. Continued growth in our customer base and an increase in assets under management resulted in a higher net operating income. This was partly offset by lower financial income, driven by lower returns on property investment. Annualized return on equity came to 16.8%. Assets under management increased to NOK 35 billion at the end of the quarter, reflecting a positive market trend. The ratio of shared customers with our general insurance business is high. As of the end of the third quarter, 68% of the customers in our Pension business were general insurance customers as well.Moving on to the investment portfolio on Page 11. The investment portfolio yielded a return of 0.5% in the quarter, reflecting the market conditions in the quarter. The total investment portfolio amounted to NOK 57.5 billion at the end of the quarter. The Match portfolio yielded a positive return of 0.5% on a portfolio of NOK 35 billion. A large part of the Match portfolio consists of bonds at amortized cost, which yielded a return of 1.3%. The running yield in this portfolio was 3.7% at the end of the quarter and the average reinvestment rate during the third quarter was 2.7%. Unrealized excess value amounted to approximately NOK 0.9 billion. Return of the Match portfolio was negatively impacted by redemption on Danish mortgage bonds, prompted by the interest rate demand. The free portfolio, which amounts to NOK 23 billion, yielded a return of 0.5% in the quarter. Good returns on property investments were partly offset by the development in emerging market securities impacting our investments in other bonds and current equity. We also had low returns on our PE funds.Looking at the capital position on Page 12. As you can see on this slide, we have introduced a new illustration of our solvency margin development. The purpose is to provide you with a better overview of the main drivers of our capital elevation. The solvency margin according to the approved internal model as of the end of the third quarter was 235%. This is down 7 percentage points from the second quarter, following a slight increase in eligible funds and the relatively higher increase in capital requirement. Eligible own funds increased with the Solvency II operating earnings and the financial results from the free portfolio. This was, to a large extent, offset by the formulaic dividend based on an 80% payout on IFRS earnings. The main driver of the increase in the capital requirement was changes in exposure and asset allocation in the free portfolio during the quarter. We have tightened our solvency target range to 150% to 200% in connection with our annual ORSA process. This range supports both our rating ambitions and the necessary financial flexibility for the group. Our remaining financial targets are unchanged. Gjensidige's capital position is strong, the solvency ratio well above our target. We have given ourselves some time to explore different M&A opportunities in our marketplace. We do not have any new communication on this. We will stay disciplined and rational and return excess capital to our shareholders over time if these opportunities do not arise. Next point in time for our Board to address the topic of dividends is in connection with our fourth quarter earnings release.Finally, a few words on the latest development of our 8 operational targets on Slide 13. I'm very pleased with the progress on these metrics, which support our efforts to deliver on our financial targets. We have increased customer retention outside Norway. Sales effectiveness has risen to currently up 6.8% compared with our baseline year 2017. The share of automated tariffs has risen further, thanks to the latest inclusion of tariffs on travel and content. We have also increased delivery of online claims supporting and claims straight-through processing now at 69% and 18%, respectively, in Norway. I will then hand the word back to Helge.
Thank you, Jostein. Then to sum up on Page 14. We delivered a strong third quarter result. We had carried out significant pricing measures in Norway while at the same time maintaining our superior position. This is a strong vote of confidence from our customers and confirms our attractive offering. Our insurance portfolios outside Norway are improving according to plan, thanks to our significant pricing, reunderwriting and efficiency measures. We prioritized profitability over growth, hence, we will continue making sure our prices and terms correctly reflect risk premiums. This means that we will continue to raise prices where necessary. We continue to implement efficiency measures across all segment. This has given strong results, and we still see more to come. We have a solid financial position and we remain firmly committed to exert strong capital discipline. Sustainability is at the core of our business. And we strive to have strong environmental, social and governance standards and continuously improve as opportunities arise. This is a win-win for us and all our stakeholders. I will now open for the Q&A session. Thank you.
[Operator Instructions] And the first question comes from the line of Matti Ahokas of Danske Bank.
A couple of questions on the -- or 2 questions actually. First one, on the investment income, the mark-to-market or the free portfolio bond return was very low even though market was very good. What -- was there anything specific behind that? And then the second question is more of a general nature. Even though you mentioned that you will not comment on the M&A front at the moment, but obviously one thing which has happened in the market is that interest rates have come down quite a lot even though up slightly recently. But has -- in general, have you seen in your markets a more willingness of many players to sell assets because of increasing pressure coming from lower interest rates and solvency pressure caused by that?
Okay. Okay. On the investment income in the bond part of the free portfolio there is a reduced interest rate, which is positive, but on the other hand, we also have exposure towards including that towards emerging market debt, which has not been that positive in the third quarter. So that is, I guess, is the main explanation for any surprise there. On the other part, M&A rates down, I don't think that has really had a huge impact on the movements within that space.
But do you think that could be a trigger for increasing willingness to sell insurance assets within your region?
Lower interest rates is mainly a negative for the life and pension companies more than for the nonlife insurance companies, although it does also hurt our earnings, but it's easier for us to compensate through higher underwriting profits. And we are, as you know, mainly interested in nonlife.
Overall, we think compliance and technology investments and the need of scale will drive actions going forward more than the interest level.
The next question comes from Jonny Urwin from UBS.
Two, please. So firstly, it sounds like this is the case, but can you confirm pricing in aggregate is in line with claims inflation across the book? And then are there any parts of the book you'd highlight where pricing and claims inflation are running at different levels? And then, secondly, just some exposure. So obviously, premiums up 3.3%, but it looks like pricing is a big driver of that. But can you just try and break out the premium increase by price and exposure? And of the exposure, where is most of that coming from? Is it personal lines or is it commercial?
I can maybe comment the claims inflation and pricing first and Jostein maybe the second question. To take the main product areas, I commented motor and Jostein also. We expect claims inflation to remain stable at around 3% to 4%. And we will at least price up in line with the expected inflation going forward, and you know what we have done recently. When it comes to private property, we expect around 4% going forward when it comes to inflation. And Jostein also commented private property in his presentation. And we have done several adjustments toward the tariff. And we have also, in addition to that, a flat 5% to 6% increase in prices behind us from October 1, 2018. And if you look forward, we will price above the claims inflation based on what Jostein commented. So we will do adjustments to the tariff, we will price I guess twice above the index in the market. So we have pricing initiatives going forward. Yes.
The second part of 3.3% overall growth. As Helge commented, 0.6% of that is due to currency movements, so it's really 2.7% if you adjust for currency movements. And then as I've pointed out on one of the slides here, it's mainly due to pricing. And if we look at -- take segment by segment, in Private, we have increased prices, and as we stated, quarter by quarter -- quarter-on-quarter, there is actually a negative development in the number of objects insured or customers insured. But from second quarter to third quarter, we see a positive trend. In Commercial, the volume is more or less stable, so the earnings growth you see is price-driven. Denmark, you've seen that we do need to raise prices and we underwrite, meaning that we do lose some on the volume side but increase prices. Sweden, negative growth. And of course, there is an underlying negative volume growth there and then the price level increases. Baltics is under pressure, we have some business or volume growth as well in addition to price increases. Overall, the 2.7% for the group on the earnings growth is, to a very large extent, price-driven.
[Operator Instructions] Our next question comes from Erik Gjerland of ABG.
It's Jan Erik Gjerland from ABG. Regarding your profit in the Private segment, sort of looks to be weaker development than sort of expectations. Could you share some moments on what you think could be the further underlying trend there? Is it because you're not making volume growth as expected as price increases are in line with your expectation? Or is it so it's higher claims again?
Well, no comment, Jan, on expectations. But our results are somewhat...
It is down from [ NOK 584 million ] in Q2 though if you think over the 15 % down -- takedown.
Yes. Quarter-by-quarter is 1 percentage point improvement in the underlying frequency loss ratio. And as we've already commented, the motor profitability is where we think it should be. So it's a really good level. We do have kind of competitiveness there, so we can capture the volume growth and the market going forward and we've seen positive trends from second to third quarter. And I actually believe we already commented that in the second quarter as well, that we saw during the second quarter that we had an underlying improvement in business volume. Private property, as we have already mentioned a couple of times, we're not happy with the profitability level as such there. There is a slight improvement from third quarter last year but mainly driven by weather improvements. Or more beneficial weather. Most of the business lines record kind of small improvements in the loss ratio compared to the same quarter of last year. And as already mentioned on the previous question from Jonny, there is a negative volume development from third quarter to third quarter, but no change during the -- from second to the third quarter.
Maybe just add that -- note that although we don't have seen the extreme weather in third quarter this year, we had several local heavy downpours, particularly in Eastern Norway. I think our competitors also commented that. So adjusting for the total amount quantified in the third quarter '18 related to frequency claims is not correct actually. So we had some weather also in third quarter this year.
Okay. Just to follow-up Matti's question then. Is it so that you have ended more sort of exotic bond markets to get yields out there? So why is it so that you have most of your bookings still in Norway and these now exotic bonds have been the exception?
It's still throughout most of the book in Norwegian kroner. And the Match portfolio matches both the currency and the duration of the insurance assets, whereas in the free portfolio, we have a wider mandate to invest globally but within a fairly limited overall risk appetite, I would say. There are other asset classes there. We do have a high-yield bonds that could include from time to time emerging-market debt, for instance.
And finally, just on the free portfolio, you don't FX hedge that free portfolio at all, either on equities side or the bonds side?
Yes. We -- overall, we hedge -- as a general rule, we do hedge within a band each asset class or each mandate on the free portfolio.
Our next question comes from Jonathan Denham of Morgan Stanley.
I've just got one more, and sorry to bring it back to private property. But I was just wondering how claims inflation has changed in that line over time. I think you said it's currently running at 4%. But what is the driver of that?
I think over time, it has been quite stable around 4%. The building index is a type of indication for what -- the cost to replace claims and it's 3.1% for 2019, that's the common building index in the market. Then you have some new standards for replacing bathrooms and things like that. So I think it has been around 4% for many years actually.
So what's causing you to have, I guess, less than ideal profitability there? Is it just the competitive market?
Well, I think, as Helge also mentioned on the previous question, there is an increase if you look at the longer trend on more kind of weather-related losses in property for whatever reason, be it climate change related or not. And we saw also in the third quarter some downpours. But the main problem is getting it through the kind of necessary price increases in the short enough time frame really. And I think that is a market problem, not just a Gjensidige problem.
Our next question comes from Blair Stewart from Bank of America Merrill Lynch.
Just a clarification on the Match portfolio again, please. There was a loss in the current bonds line. I think you mentioned the redemption of Danish mortgage bonds in your prepared remarks. And then under the Q&A, you talked about emerging market bonds being issued. So I'm just a little bit confused as to what caused the loss there in that particular line. And secondly, in the free portfolio, you talked about an increase in capital requirements. Is that due to changes in your asset allocation? And if so, could you just talk about it a little bit more?
Yes. Sorry if I was unclear. The negative drop on this line, current bonds in the Match portfolio, is related to the Danish mortgage bond issue, as you correctly state. My comment on the emerging market debt as being part of the other bonds in the free portfolio. So I'm sorry if that was unclear.So on the increase in the capital requirement for the free portfolio, within this, as I stated, a fairly limited mandate on the asset allocation and risk-taking on the -- in the free portfolio. There will all the time be a variation in the capital requirement because it is based on the actual allocation decisions by the investment department. This quarter, there is an increase of 0.3 there. It is not dramatic. There is some in the -- if you look at the market risk in the solvency capital requirement, this -- it's around NOK 7 billion. Part of that is related to the Match portfolio, part to the free portfolio. But as a percentage terms, it's like 5% to 10% maybe change and it is maybe slightly higher than average, but it's nothing abnormal.
Our next question comes from Steven Haywood of HSBC.
I just wanted to have a quick question on your cost ratio. I don't know if I missed earlier, but it significantly improved in the third quarter this year, down to 14.1%, I think. Can you tell me whether this is a new trend or this is just the summer lull in the expenses?
I think the right answer there is that our target is to be below 15%. And as we have communicated before, below 15%, we will be able to invest into a completely new legacy system. We will be able to invest heavily into all kind of initiatives to develop the business on the technology side. But to manage that, we have to drive the cost base further down. So it's the same type of target going forward. But I also commented that we have been quite effective and we see further potential actually.
Okay. That's good. So you are taking out costs obviously, but you're going to reinvest in the business so we shouldn't really think about changing the 15% going forward?
I think our target is a good starting point for -- yes, for this.
[Operator Instructions] Our next question comes from Jonny Urwin of UBS.
Just this 1 follow-up, please. So I guess on the underlying loss ratio development, if you strip out the abnormal weather effects from the prior period, there's just over 2 points of improvement, which I think was behind consensus. I just wonder, is that because you're using some of this kind of margin improvement [indiscernible] a bit higher to build more conservatism into the reserves?
Our reserves are, at best estimate, if you take away the communicated planned reserve releases, we still believe we are reserving our best estimates at the second quarter as well as for second and third quarter, so kind of no increased conservativeness or anything in the reserves.
And just to point out what Helge said previously that it wouldn't be correct to adjust for the full weather effects that we quantified last year because we have experienced heavy downpours this quarter impacting the private property lines.
Can you help us with the quantum of that just so we can get -- we have like-for-like improvement figure?
We've shied away from providing precise estimates on that and it is, of course, to a lesser extent than what we saw in 2018, much lesser extent. Whether this is the new normal, it just needs to be in a normal volatility around what is the normal for this kind of rates.
Our next question comes from Phil Ross of Mediobanca.
Just one for me. On the start of the call, you mentioned progress outside Norway was broadly in line with plan. I just wondered if you can give us anything specific on sort of what things you are seeing that's in line with the plan. Or is it just that, generally speaking, that's heading in the right direction, albeit progress is back end-loaded?
Well, if you look at actual underwriting result excluding runoff outside Norway, yes that is actually quite good. But we comment according to plan, we're looking more at this kind of measures that we plan to take to receive that NOK 750 million in 2022 and there we are progressing according to plan. There will be kind of volatility from quarter to quarter, and this time, the volatility has kind of been on the good side. Measures we are taking is, if you look at the cost ratio in Baltic and look at the nominal costs in Sweden, cost ratio in Sweden has suffered somewhat because of the top line -- negative top line development, but we have new tariff in place in motor. And it's these kind of measures that we're talking about when we talk about the measures needed to reach that NOK 750 million in 2022, and they are progressing according to plan.
Our next question comes from Johan Ström of Carnegie.
First, on the premium side. The volumes that you had to say goodbye to during the quarter, the churn, I'm just curious on how you look at the kind of the quality of the retention level. I mean if we look at Q1 and Q2 in particular, I remember you commented that the retention was strong on the best customers. It's still a trend that you're seeing? And then, secondly, on the capital side, where in the 150% to 200% do you intend to be? Is it still in the higher end of that range?
On the churn, as we have commented on previous quarters, there was an increase in churn over the first 2 quarters because we did lose a very good agreement with NITO, the engineering organization, at January 1, and of course, that led to an increased churn as we started selling on that one. However, we see that the losses from that portfolio is tapering off now in the third quarter. So I think we'll say as expected. We also had in 2018 this -- the change in the regulation around third-party liability insurance for motor in Norway, which led to an influx of kind of single-product customers in private Norway, which kind of where low quality -- they are less profitable customers if you have only one small policy with us. So that we also see a higher churn there. But taking away those 2 special effects, churn is down to a very comfortable level, I would say. So not that concerned about the insurance situation really, private Norway. On the capital slide -- and Commercial, we already commented. In earlier quarters, we did get through quite high price increases, especially at the January 1 renewals without any increase in churn at all. So it's -- very kind of happy with the competitive position we have in Norway. 150% to 200% the new solvency margin range, we're not repeating that in the higher end of that range. We think that is a comfortable range to be in compared to the rating target we have and giving us enough financial flexibility. So it's kind of within that range, not in the upper end of that range.
Thank you. And as there are no further questions in the queue, I would like to turn the call back to our speakers for any additional or closing remarks.
Thank you. Thank you for the attention, everyone. We will be traveling out on roadshows after this quarter 2: Oslo today, London, Paris, Amsterdam and Brussels tomorrow, followed by Stockholm, Frankfurt, Milan, Lugano and Munich later this month and in November. Thank you for your attention today, and goodbye.
Thank you.