Protector Forsikring ASA
OSE:PROT
Earnings Call Analysis
Q4-2023 Analysis
Protector Forsikring ASA
Protector's full-year 2023 results exemplify the potency of their disciplined growth strategy, displaying an impressive combined ratio i.e. the sum of incurred losses and operating expenses divided by earned premium, at 88.5% along with a robust growth rate of 37%. Over the past six years, the company has transformed its portfolio, prioritizing shorter-tail insurance, such as property and motor coverage, which now comprises 88% of volume. This strategic shift towards more predictable and manageable risk profiles reflects a conscious decision to move away from longer-tail, more uncertain products, especially salient in a low-interest rate environment.
The 37% growth in 2023 was not solely attributable to the UK market; the Nordics have also shown strong renewals and new sales, which were 22% higher in 2023 compared to 2022. However, the UK market has been particularly receptive, with the public sector book growing significantly. Protector acknowledges the existence of market opportunities that allowed for a higher hit ratio, without a shift in their risk appetite or margin expectations. The company also explains the volatility in their results due to factors such as large losses, interest rate fluctuations, and inflation, which, while not within their expertise to predict, are influences that the company actively manages through pricing adjustments and cost control in claims.
Cost discipline remains a cornerstone of Protector's strategy. Despite the growth in premiums, the company has managed to reduce overall cost ratios from 8% to 6.4% in 2023. The investment side of the business has also responded positively to the growth, yielding robust returns of 7.9% for 2023, albeit with a slightly lower running yield than at the start of the year. The company's investment approach maintains a focus on a lower-risk profile, with less high yield and shorter credit duration but retaining the same average rating.
On the capital front, a Tier 2 bond issuance has fortified the company's equity side. The dividend proposed in relation to 2022's results corresponds to a payout ratio of 92%, with a commitment to continued quarterly dividend assessments. The company's solvency ratio is monitored through a distribution policy that is responsive to the balance of risks and opportunities, with insurance growth being a priority. This disciplined approach to capital management ensures the company's ability to navigate market fluctuations while delivering shareholder value.
Protector's profitability target has been adjusted to a combined ratio range of 88% to 90%, up from the previous 90% to 92%. This adjustment demonstrates confidence in their ability to maintain attractive returns on equity without the necessity to set the combined ratio below 90% when quoting new business. The executive team noted that the current market conditions no longer require a ratio lower than that to achieve satisfactory returns.
As the company looks forward, it emphasizes its commitment to disciplined expansion in both current and new markets. Notably, an application for a branch in France is underway, targeting public sector opportunities. The company's expansion strategy is underpinned by a steadfast focus on human resource capabilities, reflected by their meticulous approach to training and readiness, particularly considering the linguistic and market-specific challenges posed by the French market.
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And welcome to the quarter 4 and full year '23 presentation of Protector's results. We always start with the culture of Protector and statements. And this morning, as always, we meet the employees, and we had to focus on our main targets because evaluating that for '23 is what we do in order to decide if we go on a trip or not. And together with profitable growth, we had cost and efficiency development and something that has to do with people and the one team.
And it was a tick on all of them. So we're going to Italy together in May and June. So that's exciting and deserved, I think. And the reason why it is deserved is on this slide. So this is the summary for '23, and I will focus on 23 and not quarter 4, both because quarters are volatile and in insurance. And the full year gives a better picture of where we are, I think.
So with a combined ratio sized 88.5% and a growth of 37%, which we announced 22nd of January. The combination of profitable growth is very strong in January. The combination of profitable growth is very strong in 2023. So I'll get back to the composition of this and if you look at that in a wider picture, from '18 to '23 end of '23, our portfolio has changed significantly, not only with an average growth size 19% annually, but also in the type products we have.
So the tail distribution. We have a significantly lower long tail type of business in '23 than '18, and that development had been going on for a long time before '18 as well, but was part of the cleanup up period in '18, '19, '20 as well, getting out of the longer tail more uncertain products in a very low interest rate environment and into the shorter tail, that is more -- it's easier to predict the results and do something about problems. And when it comes to segments, there's been a big shift actually in '23, but our public sector book of business has grown a lot. So we're close to 50% public sector and commercial is -- commercial affinity is the rest, and that was 31% in 2018.
And most of that obviously comes from U.K. and the growth that basically comes from public sector then in that country. So of the short tail and product mix, we have property and motor insurance together then at 88% of the volume. So this is part of disciplined underwriting. One thing is how we set our margins when we underwrite business, both in renewals and in new sales. And the other thing is what type of business we go into. And we should do what we know and not what we don't know. Short-tail business is something we believe we know and we have data to calculate where that -- Short-tail business is something we believe we know and we have data to calculate where that should be.
So other than that, on the growth side, it is obviously extraordinary 2023 when it comes to growth, a focus on the local currency element, but it's not only coming from the U.K. also in Scandinavia, there's been strong renewals throughout the year, also in quarter 4 and 1st of January '24, but new sales are 22% higher in '23 in the Nordics compared to '22. So like I mentioned in the quarter 3 presentation, market conditions are favorable also in the Nordic market or at least competition seems rational, so it's possible to win business.
And just to repeat the reasons for the extraordinary growth in the U.K., that has to do with market conditions, allowing for higher hit ratios because what we have done is basically exactly the same as we have done since 2016 when we started in the U.K., same risk appetite, same type of clients, same margin expectations basically and then something happens in the market as a growth side, on the profitability to give a bit more flavor here as well and history, we have not recalculated '18, '19 and '20 to IFRS, but we're showing then this period here. So if you focus at '21 to '23 here, there are the volatile elements of our figures. Large losses, which I will get back to, same with the runoff on the next slide. But then the discount rate, which obviously is something that we don't think we know a lot about where we'll go. So -- but the fact is that in 2023, and coming into '23. There has been a lot of volatility in the interest rates, both the actual interest rate but also the curves. So that gives us some volatility there in the results. But I just wanted to point out, and most of you will understand this and know this from before, but the inflation element.
So when we underwrite our price insurance policies, we do that for 1st of January policy 2021, we do that somewhere before the end of the year. And that's -- and then we have the history on inflation going backwards. And we're not experts at saying what that will be in the future, but we have to make an educated guess on it. And we -- with that as an example, we did see that there was an increase, and we did think that it would increase, but maybe not to correct on prices and the same happened the year after. So it continued. But when does it start reducing again the inflation. That's something we're not experts at.
So that's, in a way, an external factor that we need to be aware of that we need to work on and do something about. One area we can do actions on is pricing. The other one is on purchasing of the claims or the repairs and rebuild area. So with a short tail book of business, it is possible to make these corrections fairly quickly. But it is challenging to predict exactly where that inflation will be going forward. When it comes to large losses, our best estimate on that area is that, that should be 7% over time. It does -- it will change when our book -- our product mix and country mix changes over time, but it is approximately 7%.
And if you look at the last 3 years, that has been 5.7%, meaning that you should increase if you normalize, which should increase by 1.3 percentage points. And on the runoff side, we say best estimate. That's both when it comes to the actual claims reserving, the case we're serving and on the actuarial side, it's best estimate. That's our practice. And that will fluctuate mostly due to large losses. So there could be some of the smaller losses that can have reserve losses or gains from one year to another or one quarter to another. But it's mostly the larger losses that will develop.
So a large fire happened in -- at the end of 2023, could develop either becoming smaller or bigger in '24. But over time, it should be 0. And this time period, it shows that it is basically 0. When we look at the countries on the loss ratio side for '23, there is one country that is on the power side, and that's both absolute terms and relative to last year. That's Norway. It's driven by power motor results. Part of it is related to inflation also caused by exchange rate differences. So we import a lot of parts from other currency countries and with a weak Norwegian currency that affects that.
There are also some smaller employee benefit products that are not performing so well. So there are some rooms for improvement and we have obviously started taking action on the Norwegian market. Other than that, the second half of 2023 has improved the results on Sweden and Denmark. -- where we also started more on the power side, especially on motor. And the U.K. has been strong the whole way. If you normalize the countries, both Norway, Sweden and Denmark would be slightly worse normalizing for large losses and runoff. U.K. would actually be slightly better.
So there is still room for improvement and market conditions allowing for it in Sweden, Denmark and Norway. On the cost side, there's a different numerator and denominator on GAAP compared to IFRS. But in general, what happened in '18, '19 was that we probably had too low cost, especially with the correction and the cleanup of the portfolio at that point. But that was actions we're taking. We increased cost in 2020. And then it's basically stable if you compare apples and apples in accounting standards between '20 and '21, slightly up in '21 compared to 2020.
But then from there, if you correct for broker commissions, you see that now the cost is decreasing from 8% to 6.4% in 2023. So the cost development is good, and it's driven by growth. So we don't really -- we wouldn't have managed to catch up with FTEs at the same speed as we grow on premiums even if we wanted to. Now we don't want to. We think there is scalability and efficiency will come. So we, like I said, in Q3, we believe that there are big potential potentials in both.
The other part of our basis for profitable growth is quality leadership. And we haven't announced this surveys before, but we had some issues following our cleanup in '18, '19, '20 with the brokers in both Norway, Denmark, Sweden and Finland. U.K. has been on top, 6 years in a row. In 2023, the survey has shown that Norway and Denmark were back on top. So that's good to see. I think it has something to do with our improvement but also competitors that have deteriorated and maybe more of the latter than our improvements. And then we still have some work to do in Sweden and to a certain degree, Finland.
The Finland climbed from 6 to 2. So that's -- it's a good climb at least. In Sweden, we still have work to do. And we believe we know what, but it will take some time. That's our own survey when we ask all our brokers with a set of questions. We also have proof of that or we have service from the Norwegian broker association, certain brokers, such as Soderberg & Partners in Norway and Denmark's WTW, who has basically 50% market share in Denmark, and they confirm that quality leadership. So we are in 2023, good, but there's still potential on both the cost development and the quality side with the brokers.
And here, if you look at the different countries, what you see is that, obviously, U.K. has a very steep reduction in cost from '22 to '23. And especially if you then -- so from 15% to 12%. And the Nordics or Scandinavia, very flat. So if you correct for broker commissions there, it's basically flat. So we haven't had any efficiency development in Scandinavia. And we are recruiting -- so investing in capacity in order to deliver quality to brokers and quality internally, both claims handling and sales underwriting services and see the recruitment activity going into '24 is higher.
So in Q4, it's higher in Q4 than what it is in '23 as a whole. But then that will flatten out and we'll have capacity to handle the further growth. The country overview I usually just go through the cost here, but I've been through your costs. So this is for your benefit. You can look at that there. So I'll go straight to the investment side. And on investments, we with the growth, there is a tail on how the float grows. But now you see that it's growing.
So obviously, we have more money to invest now. And the results from '23 are very strong on the fixed income side on a relative scale, okay on the equity side, but one area is short, total 7.9% income, and that's exclusive of the insurance finance in technical accounting terms. But I'll speak about it here because the 2 points I want to make and I draw your attention to, it's the running yield, which is slightly down from where we were coming into '23, but so is then the risk in that portfolio with a bit less high yield, shorter credit duration, but the same average rating then.
So still a very high running yield in that portfolio. And if you look at the equity side, it looks fairly similar, both in a number of positions, but also on that, what we call discount to intrinsic value. So we think we have good positions on the equity side for the future. And these are the accounting numbers. So we'll look at them, nothing special to say outside of what I already commented on. On the capital side, we have issued the Tier 2 bond. And that has obviously increased our equity side. The positive, the technical result contributes positive there.
And then the suggested or the decided dividend of NOK 5 per share, that's the opposite. And on the requirement side, insurance is growing relative to the investment risk. So with the very strong growth we have, the share of insurance risk is higher than what it was coming into '23. And we said that would come back to, on the target side. Growth is something we said disciplined as a target. So we don't have -- we don't communicate growth targets. We have them internally, obviously.
But on the profitability side, this -- if you compare this to our previous long-term target of 90% to 92%, this is a slightly higher combined ratio because that interval would then be 88% to 90%. We don't know what the interest rate would be, but that's a normalization of that or transferring that to IFRS. And -- but we also see that return on equity -- we don't need to have below 90% as a combined ratio target when we quote business and when we renew business.
So 1 percentage point up compared to that. And the other target has to do with our solvency and then it's basically back to the distribution policy here, where as a repetition, we look bottom-up at risks which also can be opportunities and opportunities continuously in order to assess what we think we need to have of capital. And if we see many risks and opportunities with insurance growth being #1 priority, then we will be in the upper end. And if it's a soft market everywhere, irrational and the world is stable, we will be further down in this band.
But the dividend for -- that is then related to the '22 results will give a 92% payout ratio from the '22 results, and we will still have quarterly assessments of dividends. So that's back to the highlights or the summary and I'll call it a summary, but it's exactly the same. And then I will also say a couple of words on further opportunities and expansion. So we have decided to send an application for a branch in France. So the project is progressing and no red flags so far, market size in where we have risk appetite from the beginning in the first part of a possible entry is approximately EUR 900 million.
So that's public sector, basically. And our risk appetite within that, the first 3 years would be around half of the EUR 900 million. So that's where we will start. Timing. It depends on when we have -- when we are ready, and it has a lot to do with people. So we have -- the 2 first employees are on board. They will be in Manchester and Copenhagen.
They will train together with the teams there, and we will not establish a Paris office or an office in France until we have trained enough that we're comfortable because it is a different language. And it's not English that most Scandinavians know and the English people, it is French. We do have a few people who speak French well in the company, and they are with us when we meet brokers and I understand the French market. But that's where we are. So it's exciting.
And it's exciting not because we need market opportunities at the moment. So that's not the point. It's -- this is about Protector Always developing. And we want to have development opportunities for all people, and this looks like a good opportunity. It doesn't matter when we need to be ready, but it looks good for now. Questions.
What's your market share in the U.K.? And what is your growth, planning for growth in the U.K.?
Okay. So the question is market share in the U.K. and plan for growth.
I can do the first one -- the last one first. The plan for growth is disciplined. So we will do the same as we do. And we will do a gradual expansion of the segments that we look at. We work with some brokers today. We will expand that and work with more brokers going forward and possibly also other segments, but that depends on if we get enough data and understand the market and have the right people to do it. The market share in the U.K. On the commercial side, it's very small. It's a very small single-digit percent number. On public sector, it's different. So total market in public sector in the U.K. is around GBP 900 million, and we have GBP 200 and something. And we don't even have risk appetite for all of those GBP 900 million. So that has grown a lot. And it's kind of -- it is a limited market. Commercial is more extremely big, and we don't really know how big it is...
[indiscernible] from ABG. Two questions from my side. You're below 91% risk appetite. Is that sort of a -- do you want to increase your sort of risk appetite when you write the new businesses? Is it because you have shorter tailed business or you're sort of are aware that you can actually take a little bit more risk. Is that the reason why you changed it a little bit more aggressive, if you can color that?
It's because we see that in today's environment, it's not necessary to be lower than that. We get more than good enough return on equity at that level. So -- but whether sort of comment on what we need to do in the market is that's more short term because that's volatile, how -- whether it is a softening or a hardening market and it's different from place to place. Geography to geography.
And then secondly, then in England or the U.K., have you used this below 91% for your new business written in '24, but did you also use it to fund the business you've written in '23?
Well, I don't think -- there's not a big difference between 90% to 92% and 91% and being very precise. If we only wrote very large motor clients and no third-party responsibility or third-party cover, then it will be possible to predict. But we -- so to be exactly or exact on those predictions is difficult. So we -- but that -- those are the areas we work for or towards.
Could I just add 2 follow-ups. The first one on the U.K., you said that the market was sort of ready for you and suddenly something happened. Could you just give us some more flavor or color to what happened? Was it the usual suspects that actually came out with worse combined ratio, so they actually had to withdraw a little bit because we have been very, very good holding back on your U.K. growth in my view.
And now we see the benefits of it. And in the Nordics, you said that the renewal was quite good, both last year and this year. What happened to the competition in the Nordics because also I speak to say that Protector has sort of taken steps a little way, but you say now that is the whole market looks very good. So what happened in the Nordics as well.
In the U.K. I mean we don't really know what happened. But what we have seen, what we have observed is that some of our competitors, they were MGAs, agencies with backing from reinsurance. They have high cost levels. And we did see that the pricing levels that were in that market looked very low. Therefore, we lost a lot of business. And you could assume that with the high cost levels and the pricing they did, they had very poor profitability. So they lost capacity when capacity left the reinsurance market.
So there were actually some competitors that are not there anymore. So they're out of market. And then the large ones, and the incumbents, the Zurich municipal in the U.K. market and RSA to a certain degree. They have most likely also had poor profitability for some time and therefore, pulled back. So I think that's the reason, but obviously don't know, but different behavior from competitors, some left. In the Nordic markets, I think it's a rational market.
There is nothing very big happening in the Nordic market. It's a rational market. And obviously, when you have high inflation that comes from behind that there is a lag on, then you will have different views on what that inflation will be in the future. So in certain periods, there will be different types of pricing. But in general, it's a rational market, and it will be fluctuate to who will win.
Thomas Svendsen from SEB. In the U.K. market, are there any changes there now in the market that should imply that you should get a lower hit ratio or put another way, why shouldn't the growth be very, very high in 2024 as well?
I think that it is the pure logic that, that count last. And we do see some new entrants into that market, which is very natural and very expected. We haven't seen any that have come in as a full service provider for all the types of products that we quote yet. And we don't really know what the usual suspects or the incumbents will do for the first -- large 1st of April renewal. So -- but I would say that we shouldn't expect that this lasts for a very long time. That's -- but it will -- we haven't seen it turn, flip around yet. And that will probably happen gradually.
Hello, First of all, congratulations on the results. In U.K., you have a very strong combined ratio. And even though there are some large losses and weather-related incidents there, can you give us some more flavor of why that is as strong as it is and what we can expect going forward if there's a reason why that should go up or should stay at the same level?
So when we say that normalizing U.K. on the company level large losses, that's a bit too simple because the large loss rate should be higher in the U.K. What that number is, we don't really know yet exactly. But we have some -- we obviously have a view when we underwrite, but we don't know that. So the U.K. market will be -- profitability will be volatile from year-to-year. And part of why it is so good now is a very large share of property business. And the business that we have written 1st of April is written at margins that will be at least temporarily higher than normal. When there is not a lot of competition, you can have a bit more margin.
One question more. In France do you have any plans or expectations for when we can see there being sold insurance there? When will be the first date there? Or don't you know quite yet.
Now like I said, the timing is not the size, we're applying for a branch now. It could be that if everything goes exactly the way it should go, which we probably want, then there could be some business 1st of January '25, but that would be very little, I would expect. But if it's 1st of January '26, we get very little -- that doesn't matter. We need to be ready.
[indiscernible]. Congratulations Henrik for the history books. If you could please move to Slide #11. I do have a question around your cost ratios because when I look at peers in the Nordics, where there are available figures, there are some interesting things going on because Protector's cost ratio, as shown in this slide is around 6 percentage points, exclusive of commission. If I look at Tryg and if in corporate and industrial segments, which are comparable with what Protector is doing. You can see that Tryg is around 11% if you subtract something for commissions and If is around 16%.
So you either have half the cost of Tryg or 1/3 of cost of If. And my view is that Tryg is possibly the second best company in the world on costs here. My question is, what kind of visibility do you have in the U.K. on the cost side. So your competitive advantage relative to cost is obviously incredibly strong in the Nordics, but probably even stronger in the U.K. So do you have any more facts now compared with earlier years on your expected cost ratios on the peer side in U.K.
Not really. And so we haven't spent a lot of energy finding out. It's obvious that we have a cost advantage and it's bigger relative to Scandinavia. In the U.K. and finding out exactly what it is hasn't really been our priority. But what we do know is that we -- some larger competitors are MGAs. One has had a 20% market share in public sector as an example, they have 17% commission as an agent. And then there is a cost element from the carriers as well. So -- and our cost is very low, lower than that figure in public sector.
So I think that it's also a mix of public sector, which is more efficient in all our countries and the commercial sector. And what's important is to be the cost leader and the most efficient where it really matters, not on complicated property business or liability business, but where frequency business where it really matters. And there, we have an advantage.
So if I try to summarize your feedback. Cost ratios in U.K. is higher than If.
Yes.
Vegard Toverud from Pareto Securities. You showed a slide with -- on your float. So if you're assuming that the 16% increase in Scandinavia is what you will have for the full year, just for the sake of argument, and that you're paying out all of what you earn, what should we expect the float to increase within that scenario for 2024?
So exactly you should expect it to be. I can give you -- so she will have a tail from the '23 growth on this. You need to consider that part of it. And then you need to make an assumption on how the duration of the new products are. I would say that the duration of the further growth should be assumed to be very similar to what we have right now.
The average outlook or what do you...
There is nothing that makes us think we will grow a lot of long-tail business in '24 to put it that way. So...
And Q4 was a strong quarter, although with some challenges in Norway. If you look outside the window, challenges in the market seems to continue. Do you have any preliminary reflections around Q1 after the first weeks this year?
No, not really. I mean, we've had some large losses, but that's normal. We -- normally, with the storms that happened -- so in Norway, we get our share of the natural perils pool, and there hasn't been anything very large in the other countries. So that's where we are. And I think it's probably wise to expect that the seasonality effect continues at a high level in at least Norway, most likely Sweden as well on the motor side. But we don't know what has happened in our book exactly.
And then just lastly, when you entered into the U.K., there was some argument about that growth requiring slightly less solvency capital due to the balance and then as I understood it diversification. How does the solvency requirement for further growth now look? And does that change when you're entering into France?
There is not a lot of diversification effects for entering into France. So it will be very similar there. And going forward, it's about the duration of the products and our risk appetite and the market is fairly stable from what it seems at present. So then I think it's very similar.
So with the increase in solvency requirement for insurance in line with the premium growth, be best way to look at it?
Yes, I'd say that's the best way. And technically, you obviously know that we do the requirements that we show, they are based on a longer picture anyways where we are required to. No more questions? Okay. Thank you very much for taking the time to listen or be here.