U.S. Markets closed

Edited Transcript of VARDIA.OL earnings conference call or presentation 13-Nov-19 7:30am GMT

Q3 2019 Insr Insurance Group ASA Earnings Call

OSLO Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Insr Insurance Group ASA earnings conference call or presentation Wednesday, November 13, 2019 at 7:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anne B. Knudtzon

Insr Insurance Group ASA - SVP of Business Controlling & IR

* Espen Husstad

Insr Insurance Group ASA - CEO

* Hans Petter Madsen

Insr Insurance Group ASA - CFO

================================================================================

Conference Call Participants

================================================================================

* Jan Erik Gjerland

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Johan Ström

Carnegie Investment Bank AB, Research Division - Analyst of Financials

================================================================================

Presentation

--------------------------------------------------------------------------------

Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [1]

--------------------------------------------------------------------------------

Hello, everyone, and welcome to this third quarter presentation for Insr Insurance Group. I am Anne Knudtzon. And with us today are CEO, Espen Husstad; and CFO, Hans Petter Madsen. The presentation is streamed, and the webcast will be available afterwards. There will be a Q&A session at the end. Those following us on the webcast may [quote] their questions anytime during the presentation.

I'll first give the word to Espen.

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [2]

--------------------------------------------------------------------------------

Thanks, Anne. Let's then turn to the highlights. The strong underlying performance continues from the previous quarter. The profit for the continued business in Norway is NOK 7.8 million. The gross combined ratio is 92%, which is on our medium-term target -- on the medium-term target on combined ratio.

As announced in September, we have stopped writing insurance in Denmark. The operation in Denmark is now reported as discontinued business, together with Sweden. Nonrecurring items in the discontinued operation pulls down the total result in the quarter to a loss of NOK 12.5 million. Finally, in early October, we raised NOK 104 million in new equity in order to fuel our growth agenda. So that were the highlights for the quarter.

This graph shows the gross combined ratio, on a quarterly basis, including a trend line. For the second quarter in a row, we delivered a profitable insurance operation. Combined ratios are below 100%, both on a gross and a net basis. The trend over the last 2 years is clearly downwards, proving that our improvement agenda is now truly delivering. So combined ratios on the way down.

This graph compares Insr's net loss ratio to that other general Norwegian insurance market. Insr's loss ratio is in blue, the yellow bars are weighted averages of Fremtind, Gjensidige and If in Norway. In short, 2018 has been restated as Norway only. Insr's loss ratio, as you can see, improved significantly, down from 78% to 71% compared to last year. And this quarter, we were spot on in line with the rest of the Norwegian market. Again, improvements in the underlying business are being delivered, okay?

So let's continue with the development compared to our medium-term financial targets. Growth is green. Net earned premium grew by 12% year-on-year. Claims is yellow, even though the net loss ratio of 71% is almost at the medium targets -- medium-term target of 70%, but it's still above. Also, as Q3 normally benefits from seasonal variations, we aim for some further improvements, not much but some. Costs are on schedule, with an impressive, I would say, year-on-year improvement, with the administration costs are down almost 25% nominally. So it's a really, really -- it's truly a big cost reduction.

Finally, solvency margin is above our internal minimum when including the capital issued in October. And we expect it to stay that way.

So these were the highlights and the introduction. With this, I give the word to our CFO, Hans Petter.

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [3]

--------------------------------------------------------------------------------

Thank you, Espen. Let's take a look at our key figures. As Espen said, results now in the Danish operation is discontinued and not included in the operational results. Last year's figures has also been restated to be adjust for the segment of Norway. Our gross premium earned was NOK 328 million, in line with NOK 336 million same quarter last year. Gross claims was NOK 230 million, that is in par with last year. That gives us a gross claims ratio of 70%.

As Espen mentioned, costs are lower this quarter. Sales costs are NOK 32 million, and administration costs are in total NOK 40 million. This is equivalent to our gross cost ratio of 22% this quarter, which is on our medium-term targets. In sum, this gives us our gross underwriting profit of NOK 26 million in this quarter and a gross combined ratio of 92%, which is medium-term term target.

The seeded reinsurance result is NOK 15 million. Of this amount, NOK 9 million was related to our winning old case, where we had 90% reinsurance. This gives a positive net underwriting result of NOK 11 million. The investment result is very small this quarter due to a reevaluation of an investment in Tribe Holding. Therefore, the nontechnical result is a loss of NOK 3 million. The net result from continued operation is a profit of NOK 8 million. Discontinued business pulled down the result by NOK 20 million. I will comment on this more in detail later. The total result for the quarter was a loss of NOK 12 million.

Solid growth continues. This graph shows net earned premium, which is the retained top line after session to reinsurers. Year-on-year, we have a target for a low double-digit growth. This quarter, it was 12.5%.

As mentioned, discontinued operation pulled down the results by NOK 20 million. This is primarily due to a late information on negative development in the run-off of Swedish portfolio that we sold to Gjensidige in 2016. This impacts our common reinsurance commission for all business, and it's been reduced by NOK 15 million this quarter.

Denmark has higher cost than income, including nonrecurring related exits around NOK 3 million. The overhead from the office -- in head office has normally not been allocated to segment Denmark, but it's now corrected, so it's included in the discontinued business.

Taking into account a ruling by the NFSA regarding conduct of cross-border operation in Denmark, Insr initiated a closedown of the Danish business. With this, Insr can focus now on a profitable growth in Norway. Most of our Danish colleagues will have finalized their work by the year-end, and the remaining task are transferred to Norway or partners in Denmark.

Net Danish premium earned this year was NOK 124 million and had a gross combined ratio of 116%. Written premium and sales cost will be very small in fourth quarter for the Danish operation and will be 0 from next year. Earned premium will gradually reduce the next year as the solvency capital requirement also will be gradually reduced from the contribution that we had from the Danish operation.

We were pleased with a strong investor support when we decided to utilize the authorization from general meeting to increase equity by 10%. In addition to giving increased financial flexibility to support our growth, this improved the use of the Tier 1 hybrid loan issued last year in our Solvency II capital. The equity was issued with less than 5% discount to same day close. Given the limited discount and limited size, we did not run our repair issue.

In addition to our current investors continue believing in us, new investor contributed with 40% of the issued capital. The solvency ratio was 116%. A more relevant figure is the pro forma solvency, including the additional NOK 104 million in equity issued. This pro forma solvency ratio is on the right in blue. The internal target for the yellow -- as you see the yellow line, has been increased and normally being above 150%. The solvency capital requirement, the SCR, included -- increased due to higher insurance risk for own account as well as technical adjustment from the European regulator. Available capital development is not mirroring the -- perfectly the equity development this quarter as certain balance sheet elements are treated different in the IFRS and Solvency II rules.

As will be explained on the next slide. We expect that we will stay above the 150% without additional capital. The available capital falls by NOK 35 million, which is significantly more loss than in this quarter. I will run through the main changes in the capital. The changes came from the loss in this quarter with NOK 12 million. The solvency is calculated unconsolidated for the mother company due to unconsolidated results for the quarter is then NOK 4 million below the group's result due to a higher loss from closing subsidiaries.

Reduced unearned reinsurance commission pulls down available capital by 11% -- NOK 11 million. There's also other shift in the balance sheet, which take away another NOK 4 million. When the Tier 1 capital falls, less of the Tier 1 hybrid may be included. This affects with NOK 8 million.

On the positive side, more Tier 2 and Tier 3 capital is permitted when is the higher SCR figure. NOK 12 million higher gives NOK 6 million in additional year-on-year solvency capital.

When the net NOK 101.5 million proceeds from the additional equity issue in October is included, the pro forma available capital increased by this amount as well as NOK 25 million in additional [Tier 1] hybrid capital.

The investment assets is still growing. The investment portfolio, including cash in the bank, increased with a positive cash flow of NOK 60 million. The year-on-year increase is more than NOK 150 million. We expect a continued positive cash flow going forward.

On the 6th and 7th of October, Insr experienced a ransomware attack, where third parties gained access to parts of the Insr's computer infrastructure. The attack was stopped and customer data was not exposed to third parties. The attack thus constituted a security breach but not a data breach. Due to the fact that parts of the computer network affected by the attempt of attack have been considered compromised and therefore, restored from backups, the organization has experienced some operational inefficiencies in October. Restoration of affected files will continue throughout fourth quarter. Most of the losses related to this incident are recoverable through Insr's cyber insurance.

I give back the word to Espen.

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [4]

--------------------------------------------------------------------------------

Thanks, Hans Petter. Okay, then to summarize. The underlying performance is on track, okay? So underlying performance on track. Even though the result is down to a loss by the discontinued Swedish and Danish business, the underlying performance on track.

As communicated, when launching the private placement, the additional capital will contribute to insurance growth. Growth through reduced reinsurance and growth through a stronger competitive position, enabled by IT investments, being a more solid counterparty and generally increased financial flexibility. You will hear more about that on our Capital Markets Day. The Capital Markets Day has been moved to the Annual General Meeting Day in May. That involved the exit from Denmark, and the additional capital will be properly included. Meanwhile, we will put the capital to work and continue delivering results.

So let us now refer to the pricing in order to say something about the next quarters, okay? This graph, which we have shown also earlier, it shows the development of the passenger car premium in Norway as reported by Finans Norge. It's clearly our largest line. We have indexed this back to the end of 2017 as a starting point. For Insr, the thick blue line, we see that our recent price increases are high as we intended them to be. Our prices started increasing after second quarter 2018 as you see from this graph. Since then, the average price in the portfolio has increased closer to 15%, okay?

This shows why the claims ratio is coming down and more importantly, will continue coming down. So it's coming down and will continue coming down. This already implemented and accepted price actions, I think they should be viewed as huge investments in future profitability due to the delay in how these things are earned. So it's a huge investment that we have made over the last 1.5 year in future profitability.

Moreover, we reiterate 2 of our medium-term financial targets, low double-digit growth and -- in net earned premium and the gross combined ratio of 90% to 92%. The Solvency ratio target has, as was communicated when launching the private placement, will increase to normally being above 150% to Insr sufficient stakeholder comfort and Insr's solidity.

That concludes the presentation part. I then give the word back to Anne to run us through the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [1]

--------------------------------------------------------------------------------

Thank you very much, Espen and Hans Petter. We now open for questions both from the audience and from those of us following -- those of you following us online. There's a hand raised already.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Jan Gjerland from ABG. On the Swedish discontinued operation, the -- is it any more risk to see more losses coming from that operation going forward? It was a NOK 20 million, if I understood it correctly, in this quarter?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [3]

--------------------------------------------------------------------------------

It was NOK 15 million.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

NOK 15 million, sorry. I thought it was NOK 20 million.

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [5]

--------------------------------------------------------------------------------

Yes. It's a risk both ways because this includes -- this is a reserve. So it could also be reverted if the risk...

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

Okay. So this is a run-off loss, so to speak or provisioning?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [7]

--------------------------------------------------------------------------------

This is a run-off loss that's -- affect our combined reinsurance contract where we have a common profit commission -- sliding scale commission.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

Okay. I see.

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [9]

--------------------------------------------------------------------------------

With the reinsurers.

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [10]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

So out of those NOK 15 million, how much was to the reinsurance and how much was to you?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [12]

--------------------------------------------------------------------------------

That was...

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [13]

--------------------------------------------------------------------------------

Everything was reinsurance.

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [14]

--------------------------------------------------------------------------------

That was for the reinsurance.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Okay. Exactly. So nothing of those, and it really ended up at your net loss or...

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [16]

--------------------------------------------------------------------------------

No. This is our loss...

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

This is your loss.

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [18]

--------------------------------------------------------------------------------

And we certainly have to pay back to the reinsurers because we have got done in initial commission and then when the result is poor than expected, then you pay back some of the commission that you have earned.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

Okay. I see. Okay, [I don't] understand it. The technical issues on the solvency side, you described it a little bit but if you could probably go back to Slide 7 or something. The -- are the reduced deferred acquisition costs to the reinsurance or to the NOK 11 million there, is that something that we should -- is that a sort of a one-off? Or is it sort of that -- it also could be at risk in the later stage? You had NOK 11 million minus on the RDAC.

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [20]

--------------------------------------------------------------------------------

I could comment one thing on that, and that is the fact that I think if you go 1.5 years back in time, we had NOK 120 million in this RDAC thing, which is now down to NOK 60 million or something. So we have reduced it very significantly over 1.5 years already.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

So this is going to continue to be downwards trending, so to speak? So you have -- you will then take a little bit out of this every quarter? Or is it something that we should leave in the balance sheet as it is now?

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [22]

--------------------------------------------------------------------------------

I think if we continue reducing the reinsurance programs as we plan for, it will gradually reduce, but we don't have an exact forecast on it.

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [23]

--------------------------------------------------------------------------------

It's also mirroring the unearned premiums. This is the reinsurers part of the unearned premium, it's a mirroring. So that's why it's going up and down from quarter-to-quarter due to the fact that you have a change in nonpremium. So when you are high written premium first quarter, then the unearned premium is increasing again.

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [24]

--------------------------------------------------------------------------------

So it could go up, but the trend over time will be downwards.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [25]

--------------------------------------------------------------------------------

Okay. Then just finally then on the solvency. The other balance sheet changes is that to the interest rate changes to the EIOPA, or is it something else? You had some NOK 5 million minus or is it just that increasing your technical reserves?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [26]

--------------------------------------------------------------------------------

It's some of more minor things that's within the balance sheet. So it's a small thing that's within the balance sheet.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [27]

--------------------------------------------------------------------------------

And finally then, on the reinsurance side, you are at roughly 40% today, what is your aim for next year?

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [28]

--------------------------------------------------------------------------------

We haven't communicated any exact percentages, but we have communicated that we will reduce it.

--------------------------------------------------------------------------------

Johan Ström, Carnegie Investment Bank AB, Research Division - Analyst of Financials [29]

--------------------------------------------------------------------------------

Johan Ström with Carnegie. Some questions on the solvency capital as well from my side. First of all, the 150%, can you give us some background how you -- what the discussions were behind going up to 150% as a minimum target solvency ratio?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [30]

--------------------------------------------------------------------------------

We have just one comment is that we have said that 150% is what will be the targets that we are focusing on. We won't really have a problem if it's going a little bit up and down around that level. But when we have looked in the market, it seems like that's the type of levels that stakeholders would expect. But...

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [31]

--------------------------------------------------------------------------------

This is not a minimum level. So we could fall a little bit below 150%, but it's not a minimum level. So it's a target level for going forward.

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [32]

--------------------------------------------------------------------------------

It's not an issue if it goes a little bit up and down around that level.

--------------------------------------------------------------------------------

Johan Ström, Carnegie Investment Bank AB, Research Division - Analyst of Financials [33]

--------------------------------------------------------------------------------

But your clients, your counterparties, they don't require 150% by you?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [34]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [35]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Johan Ström, Carnegie Investment Bank AB, Research Division - Analyst of Financials [36]

--------------------------------------------------------------------------------

On the Danish discontinued operations, looking at the slides, reduced SCR but not immediately. Can you just explain that one more time? Are there no impacts from the discontinuation of Denmark now?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [37]

--------------------------------------------------------------------------------

Yes, it's -- as I said before, the capital ratio is calculated on the mother company. And so the losses in Denmark has been accounted for the group level earlier on, but the new write-off, the shares of the company in Denmark, you get a loss in the reduction in capital for the mother company. The other part is that when this gradually reduced premium, it's about premium, and claims are input into the SCR calculation. And when that's -- are reduced, then it will reduce the SCR going forward isolated. But of course, we will have growth that will compensate the other way. So you can't just deduct it from the SCR.

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [38]

--------------------------------------------------------------------------------

But I mean -- so really, the answer here is that in the short run, in this quarter, ironically, even though we then stopped writing something, which is taking down the risk, we only got negative effects on the solvency. No positives at all that comes in during the next year.

--------------------------------------------------------------------------------

Johan Ström, Carnegie Investment Bank AB, Research Division - Analyst of Financials [39]

--------------------------------------------------------------------------------

Yes, perfect. Yes. And then on the SCR, just -- I understand the numbers. So is it up NOK 12 million in the quarter? But then your -- the SCR impact on the Tier 2 and 3 capital is up NOK 6 million. So net out NOK 6 million on those 2 sides. But on the SCR increase, how much is due to the EIOPA new discount rates and what is due to volumes?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [40]

--------------------------------------------------------------------------------

It's not -- it's a rather technical part because this is now more -- it's a little change of what you calculated into the premium provision, for instance. So that increase is also the volume. So it's not -- it's part of different things that's evolving both the changes from EIOPA but also with the increase of expected premium in the future. So -- but most of it is from the technical side.

--------------------------------------------------------------------------------

Johan Ström, Carnegie Investment Bank AB, Research Division - Analyst of Financials [41]

--------------------------------------------------------------------------------

Most is from the technical side, not expected increase in volumes?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [42]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [43]

--------------------------------------------------------------------------------

Just one follow-up. On the Danish operation, which you will discontinue, if -- when that is sort of exited, if it should take everything away today, how much would that have been increasing your solvency ratio if you have a calculation on that?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [44]

--------------------------------------------------------------------------------

Decreasing by increasing the ratio?

--------------------------------------------------------------------------------

Espen Husstad, Insr Insurance Group ASA - CEO [45]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [46]

--------------------------------------------------------------------------------

I think we said 14 percentage points. And we haven't -- when we launched whereon we inform the market about that. And I don't -- 12 or 14 percentage points. And we haven't made any new calculation on that, no.

--------------------------------------------------------------------------------

Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [47]

--------------------------------------------------------------------------------

We have one question from our online audience from [Tulista Elisa]. He asks, can you comment on the development of the number of insurances within the property and motor segment from the first to the third quarter in 2019 and your expectations going forward?

--------------------------------------------------------------------------------

Hans Petter Madsen, Insr Insurance Group ASA - CFO [48]

--------------------------------------------------------------------------------

Yes. The number of the volume and the number of insured object has been reduced a bit. But it's partially compensated with the price increases. So we have done a lot of new measures to get more sales volume, and we are working closely with also new -- a lot of new partners that will deliver growth in the future. So we expect that we will stop the fall in the number of insured object and will start growing again when the increased sales capacity has been implemented.

--------------------------------------------------------------------------------

Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [49]

--------------------------------------------------------------------------------

Are there any further questions? If not, thank you very much for your time and look forward to seeing you again in a quarter.