Protector Forsikring ASA

OSE:PROT

Earnings Call Transcript 2022-Q2

[Henrik Høye, executive]

Welcome to quarter 2 2022 presentation of Protector's results. Remember to ask questions through e-mail during the presentation, and we'll answer them following the investment for the presentation and also at the end of the whole presentation. As always, I want to start with who we are, our performance culture. And we had a session with all employees this morning, where we picked 1 part of the 12 statements on the screen. That was bold, not because of my new hair style, but because we talked about equality, diversity and inclusion, and how we can create an open and diverse team. So we have some new ambitions that we will work on going forward in order to create that team. We work on this every day and also when we have bigger opportunities or challenges that we want to solve or take advantage of.

And then it is a pleasure to present the results today. They are strong. It's a strong set of figures with a combined ratio of 82.5% for the quarter. We get back to what the composition of that is and where the countries are. And also a very strong growth at 24% in local currencies or 25% in Norwegian kroner. And I'll also get back to the composition of the growth when I speak about that later.

In addition to that, I have looked at our values again and found out that we had a lot of activity in the financial markets, I need to find other competence to support me in presenting what has happened. So Dag Marius Nereng, our Chief Investment Officer, is with me today to take you through some of the activities we have been through and what effects those have on the investment side later. And the total result is profit is NOK 66 million with then a strong technical result and then a loss on the investment side. But that's a quarter, and we look at this in the long term, and the relative picture is also different. So Dag might as well get back to that.

Other than that, the key highlight is that the Board of Directors have decided to not distribute any dividend this quarter. And I will also get back to the reasoning behind it, but it has to do with mostly opportunities in the financial markets.

If I then go to the profitability, the first part of our first target or most important target profitable growth. The countries all contribute this quarter to profitability. But if I start with Norway, there are no large losses in the Norwegian market. So a normalized level is higher than what you see here, but still at a very strong level. We see price increases coming through and an effect of cleaning up the portfolio. So it's a good underlying situation in Norway.

In the Swedish market, we've had some large losses, but we've also had a reduction of a very large loss from quarter 1, which basically equal each other out. So the Swedish loss ratio of 65 is also slightly higher underlying.

In Denmark, we've had about what we expect on large losses, coincidentally. So that result is more in line with what we see as underlying and a strong position in Denmark. So that portfolio is changed in Denmark and underlying profitability good.

In the U.K., we've had -- that's where the large losses come from this quarter. So that is slightly better than what you see if you normalize. And in Finland, there is no concerns or even though the loss ratio is in the higher end. It's a very small portfolio, and that is volatile.

If we look at the totality then, you can compare everything else equal. If you adjust for large losses, normalized, '21 versus '22, adjust for runoff and adjust for other effects. And the other effects here is the COVID effect that we had in '21. Then you'll see a very similar loss ratio in quarter 2 '21 as we see in quarter 2 '22. And as I've said before, everything else is not equal, so there are elements that are different and the price increase -- we see the price increases coming through. So obviously, that is -- but there is a medium-sized layer of losses that are higher in '22 than what they were in '21. So we see a very strong development of the loss ratio in total and also when you look at the countries one by one. And with that, there is no point in going a lot deeper into the large loss and runoff situation other than just commenting that on a half year basis, with a combined ratio of 89.5%, we have what we would call a normalized large loss situation at 6.8%, close to 7%, which we say is the normalized level.

And then to the volume, which is actually even a bit stronger than what you see in the figure at 24% growth. All countries contribute but Denmark and Finland obviously has a very small quarter in quarter 2. So the percentages are high, but it doesn't have a big effect on the totality. There are technicalities in Finland that gives the growth. In Denmark, it's not about technicalities. It is about something that we are very satisfied with, and that is a one-team approach in securing clients, larger clients, with claims handling underwriting, broker service working together with the broker in order to secure the larger, attractive clients in the market. So we have a good new sales situation in Denmark.

When it comes to the larger countries this quarter, I want to start with the smallest one growth-wise in the quarter in Norway. We have a very strong renewal rate above 100% strong price increases. Norway is the price increase winner in Protector in quarter 2 and some new sales, but it is a very strong renewal situation in Norway. In Sweden, it is more about new sales. I see a strong renewal situation there as well, but lower than Norway, and it's more about new sales. And the new sales is in segments that we haven't been as present in before. We do it together with brokers, but it's a bit further down in segments, smaller clients in groups, facilities, and the majority of the growth from Sweden comes from 3 new agreements with -- and facilities with the brokers. So that's an exciting development and something that we see as an opportunity going forward in the Scandinavian countries.

And then U.K. has one of the biggest dates, 1st of April as a renewal date. And we have said before that the commercial market and especially on the motor side, has been very competitive, and with prices that we don't find profitable. We always try to search and find out if we are wrong or if everyone else is wrong, and sometimes when when the conclusion is everyone else is wrong, we have to question ourselves again and again because I don't really think that everyone else is wrong. But we have been -- at least we have been disciplined -- and there may be something we haven't understood on the motor side U.K. But we have not won a lot of volume there, at least. So commercial sector with very little growth in quarter 2, but a good renewal situation.

Public sector, however, has come back after a couple of years of low new sales. So it is public sector that is driving the growth in the U.K. with good new sales and good renewals on 1st of April and in May and June as well. So the total situation here is that we have a high renewal rate. We keep our clie . They want to stay and we manage to make them stay. And we have price increases that are lower than what they have been previously, but still above what we expect the inflation to be. And then we have new sales through known segments, public sector U.K., and some new segments but within a very known product in Sweden, motor.

And the summary of the countries altogether, I won't spend too much time on this. I just think it's important to say that -- last quarter, we said trust us. The underlying realities are strong on the profitability side. And if you look at first half year, you see a combined ratio that is more in line with our long-term target. And there is not a lot of volatility between the countries that is coincidental. You should expect that there is volatility on a quarter level between the countries.

With that, I want to invite someone who knows a lot more about investments than me, Dag Marius, please, and Dag Marius will speak about the activity during the quarter and focus on the interest rate environment.

[Dag Nereng, executive]

Thank you, Henrik. For those who don't know me, my name is Dag Marius Nereng, and I started as the Chief Investment Officer in Protector in 2015 when we in-sourced investments. The results from investments this quarter was a loss of 175 million. We focus more on the long term, but in the quarter, the underlying performance of the companies in our equity portfolio and in our fixed income portfolio was very good. So we are happy with the start of the year.

It has been an eventful quarter and a lot of volatility on the financial markets. So with interest rates rising, that has a lot of implications for Protector. So the risk, the cost of risk in the bond portfolio is increasing, but we have a positive solvency effect of the rising interest rates and the yield in the portfolio increases also. So on the left chart, we can see here that 3-year swap rates in our markets have increased by 50 to 100 basis points in this quarter alone, following a very high increase also in the first quarter. So that is very helpful for our yield.

And so to this date, the reference rates or the risk free rate in our portfolio is 1.8%. So if you do a weighted average of those swap rates, you can see that the average is higher. So we don't have the full benefit of the increased rate curve in our yield so far. So if it stays as it is, it will increase further in the future.

On the right chart, you see the development in the spreads in the high-yield market. So this year, the euro spreads has increased during a lot during the year. But in our home market, the Nordics, where we do our -- most of our high-yield investments, it has been a flat development, more or less until the end of June. But we have managed to increase high-yield investments with 0.5 billion the last -- in June mostly, with what we believe at very healthy returns going on in the future. But of course, we expect a higher cost of risk.

Our solvency effect, we get a very positive solvency effect of NOK 200 million from increased interest rates due to discounting in this quarter. And this is very important for us. So since we have a history of floating interest rates in our bond portfolio and our liabilities have a longer duration, so this is a big impact on every quarter on the solvency. And now we have this big rate increases, and that's -- so the impact is very, very high.

So we have discussed during the years what to do with this kind of risk that we have because we have to set aside capital because we get punished every time the interest rates fall and we get the benefit when the interest rate increases like it has done this year so far. So with a higher -- very high interest rate, we have to set aside a lot of capital and with a lower interest rate, we do not really plan for a very, very negative interest rate.

So what we have been discussing historically then is that should decrease this risk and mitigate it by aligning the bond portfolio's interest rate duration with the liabilities. But in order to do so, we had to kind of lock in 0% interest rates. So we didn't feel that, that made a lot of sense. But now with the more normal interest rates, I'm not sure what normal interest rates is anymore, but at least higher interest rate. So we have gradually started to do that during the quarter. And the effect of that in this quarter is a NOK 30 million loss which is a part of the bond portfolio results in this quarter. But as I mentioned, we have a solvency effect of NOK 200 million, which is only a balance sheet effect. Doesn't hit P&L at all. But the total effect for Protector, the solvency is the most important part for us. It's a positive of NOK 170 million. And you can see the duration of the interest rate portfolio has increased to 1.1 during the quarter, and we expect to do more of it in the future.

But do remember, a big -- one thing to remember on this side is that since we now are moving in the direction of mitigating this risk, we will get more volatility on the P&L going forward, but more stability on the solvency which is the most important part for us.

So this is a portfolio statistics for us. The most important part for you to look at on this one is the bond portfolio is now yielding 3.9%. So it's doubling from last year. It's a 1.5% increase just in the second quarter alone. And as you can see, the bond portfolio is sized NOK 12 billion. So this is a massive increase in 1 quarter for us. And we don't have the full benefit of the yield curve yet in these numbers.

The rating in the bond portfolio is, a, which is the same as the last quarter, but it has been a lot of movement. So I told you that the high-yield portfolio is up by NOK 0.5 billion. But since we have started to invest longer for more interest rate duration, we have invested in AAA bonds, which has kind of mitigated the effect of the NOK 0.5 billion increase in high yield. So we still have a flat A rating, linear rating in the portfolio. We have to say that and repeat that these higher spreads, which we have seen in the last -- in June and continued in July, has increased our appetite for investing in higher bonds. So expect that to continue.

The spreads has widened with 52 basis points this quarter. And some of the kind of increase in the credit duration of 0.5 years, it's not only the interest rate when we invest in a 3-year bond duration. It's also that we like to lock in the effect of the increased spreads on longer duration, so we get more bang for the buck if that's good risk. And we feel that the underlying development in the bonds that we invest in is good and is at low risk. So even though we expect a higher cost of risk in the future, we still feel that a spread increase is much higher than the increased cost of risk.

The equity share is a little bit down from last quarter. Nothing much in that, but it's more due to the results being negative in the quarter. But our estimated intrinsic value is up during the quarter and this year, which is because we are very satisfied with the underlying performance in the companies. We acknowledge that there's increased risks and increased uncertainty in that number, but at least we are optimistic. And we try for the intrinsic value to be robust. So we are planning for in every forecast, in every intrinsic value calculation, we plan for at least 1 very bad year for every company. But now with the recession on our doorsteps, of course, we are more uncertain on that point.

To preempt a question that we got the last quarter, so the number of shares in our portfolio, equity portfolio has increased a lot. So the last quarter when -- in the first quarter, when Russia invaded the Ukraine, we saw a steep decline in a lot of stocks on the stock exchange. And we follow a lot of them in our watch list. So we took the opportunity to take a basket bit on 10 to 12 new companies. to benefit from that kind of development. But we are still no change in our approach to investing. So we like to invest in a concentrated portfolio. No changes to our largest positions during the year. And we are still -- we still think that -- if we have a combination of very good downside protection and very good upside potential, we kind of swing hard on those kind of actions.

So is there any questions for me?

[Amund Skoglund, executive]

Yes, one. You have said that yield curve is upward sloping, and you haven't benefited from it or all of it. Could you give an estimate of how the underlying reference rate or your portfolio will be in 12 months if the current market expectations are unchanged.

[Dag Nereng, executive]

Okay, so if we go back to the chart that I showed you on the 3-year swap rates -- so if you take the average of those swap rates at the end of the second quarter, they were probably around 2.5%, and our reference rate is 1.8%, which we show in this table in front of you. So the difference at the end of the quarter was 0.7% which we will get if the interest rates stayed the same as the expectations. But after the quarter, the interest rates have fallen a little bit more. So the difference now is probably 0.5%, and we don't know the movement, of course. But we haven't fully getting all the benefits so far from it.

[Henrik Høye, executive]

Thank you, Dag Marius. And then we move on to -- and then to the next one. We have the balance sheet and Dag Marius has talked about the most important movement in the quarter, the NOK 200 million due to the change, significantly increased discount rate. And if we go to the next one, that is the same. The biggest change is about the discount rate. And of course, we grow on the insurance side. Profit and loss, we've been through the key elements of that through the claims growth and now the investments. So you can have a look at that.

And then I wanted to finish this off by repeating the process we have continuously, but formally quarterly when it comes to assessing both what kind of capital we have, capital situation we have. But the more important part, discussing risks, both the risks that are obvious insurance and market risk, but also all the risks that we can think of and that we need to consider when we look at our total capital situation.

And when we do that, there is one top priority, obviously, to do the right things in order to maximize shareholder return. And insurance is always a #1 priority if it is possible to find profitable growth. And as you've seen, in quarter 2, it has been possible to find growth. Let's see if it is profitable, that is later on. But we obviously expect that it is profitable growth that we see. So there are many opportunities in the Nordic markets. And in the U.K., we are disciplined, but we also see an upswing in attractive opportunities on the commercial sector as we speak. And let's see if that will turn into actual clients now in quarter 3.

In addition to the existing markets, we have also brought up the old analysis of new markets or other markets in Europe and Continental Europe, in particular. We have talked about the Netherlands and Belgium previously as you know, but we have also looked at other countries, again, and refreshed the analysis on Netherlands. At the moment, we have compared Spain, which looks more attractive than a lot of the other continental Europe countries with the Netherlands and at the moment, Spain looks more attractive than the Netherlands. So we are in a process of evaluating where it could be attractive to copy the formula of Protector. And we have no rush, and we have not decided to go anywhere, but we will go further into the analysis and try to understand what opportunities we have in new markets and Spain will be thoroughly evaluated.

So there are opportunities on the insurance side. And when there is turbulence, when there is -- when there are a lot of events in the financial market, Dag Marius, has mentioned, the higher -- attractivity of the high-yield bond market. opportunities that we didn't see yesterday or today, they can be opportunities tomorrow. An example could be the real estate market a bit further down the line. But there are other opportunities that we also can find attractive returns on risk return. And there will be -- there is an increasing number of opportunities where we see that it meets our hurdle rate of above 20% return on equity. So with that, we have obviously evaluated and considered buyback and dividend in the quarter as we say we will do. But due to the situation, we, the Board of Directors has decided that this quarter, we keep the capital in case there are very good opportunities that we should be ready to take.

And with that, it is just the summary of the results, which we have been through before. So a strong quarter on profitable growth and good underlying development of our equity and bond positions, with a big effect from the interest rate on our solvency position and a gradual reduction of that risk has been done and will continue to be done and then potential new opportunities with that turbulence in the market.

So then I would like to ask you, Amund, are there any questions?

[Amund Skoglund, executive]

Yes, we have gotten some. Firstly, on inflation, how are you thinking about the claims cost going forward? How big impact has the inflation on your claims costs for already written premium?

[Henrik Høye, executive]

Thank you. So we have talked about inflation previously. And and we follow inflation closely, both on a country level, but also on a product level and even further down because there are differences how inflation hits the different types of products and the different types of claims that we have, whether it is high share of labor cost or a high share of raw materials. And it is also a difference between smaller claims and larger claims. So there are many factors that play into the inflation factor. And when we say price increases above expected claims inflation, that is an evaluation that is weighted towards the portfolio that has inception in quarter 2, so the product mix there. So if that is 30% motor and 30% property and the rest other than that inflation factor that we base the statement on is a weighted inflation on that product mix for that quarter. So we follow that closely. I think it is more confusing than clarifying to speak about an exact number because quarter 2 is different from other quarters, and -- but we follow it closely. And we still believe that it is possible to achieve price increase, slightly above what we expect inflation to be.

[Amund Skoglund, executive]

Another question is with the rising interest rates, the insurance float becomes more valuable. Do you think that will have effect on the market in general? And do you expect some combined ratio increase and increased competitiveness?

[Henrik Høye, executive]

Yes, so that's a good question. And yes, we expect that the long tail products, the products that have a long duration and creates more float will become more competitive than they have been with 0 interest rate where you have to have all your profits from the technical side. And I think that it will most likely be more on the very long tail products. And it will take some time, but the important part is to evaluate -- for Protector is to evaluate the risk itself in an underwriting perspective.

[Amund Skoglund, executive]

About U.K., you have good results and low claims currently. The market is huge, it has a long history. You have big incumbents. What factors make you comfortable in calculating the right or correct risks or losses? And what do -- what do not competition see?

[Henrik Høye, executive]

If I knew the answer to the last one, I think I think we would probably do better or grow more. But I -- the market is huge, and we need to gradually learn. In the U.K., there was a comment in the presentation that said more activity with brokers started in Q2 and increasing in quarter 3. And so it's not only about the competitive element of the motor product in the U.K. It's also about our activity towards the brokers, so that we can see everything that we should see and get the opportunities we have. On the underwriting side, the factors that we evaluate is simply said. Avoid the red clients, the poor clients. That's what we try to do because the poor clients, they have an unproportional large share of the large losses. And then it has to do with with underwriting the client as a whole. So understanding that as an insurance company, we take -- we buy a part of that company. We become a part of that company by taking the responsibility for the risk they have on properties, on especially on the liability, their operations or their cars or the people. So underwriting the client, avoiding the wrong clients is the most important start in underwriting. And all the factors are different in public sector and commercial sector. And I can speak about this for hours, but I'm not going to do that today.

[Amund Skoglund, executive]

Yes, a follow-up was that what under -- or what segments or niches do you take market share in?

[Henrik Høye, executive]

So it is in the public sector. So we're in the U.K. still -- is that -- it is in public sector and housing associations where we take market share in quarter 2.

[Amund Skoglund, executive]

Yes, I have one more question on investments. So the relative attractiveness between the equities and bond portfolio in terms of risk reward given the changes in the market.

[Henrik Høye, executive]

Dag Marius is up here, so you get a better answer.

[Dag Nereng, executive]

Thank you. So we think they both are attractive. And they both reach our hurdle at 20% return on equity. Everybody understands the difference of the certainty in the bond investment compared to an equity investment. So we have if our intrinsic value estimates are correct, the upside is better in the equity portfolio, but the risk is higher. So -- both are very good at the moment, but we also see that this increased risk these days. So it's harder to be certain.

[Amund Skoglund, executive]

Then I can't see any more questions, but you can still ask questions to [e-mail], and they will be answered by writing.

[Henrik Høye, executive]

Okay. Thank you, Amund. And then it is just for Dag Marius and me to wish you thank you first for listening today and wish you a very good summer. And we'll see you for the quarter 3 presentation. Thank you very much.