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Edited Transcript of VARDIA.OL earnings conference call or presentation 14-Aug-19 8:00am GMT

Q2 2019 Insr Insurance Group ASA Earnings Call

OSLO Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Insr Insurance Group ASA earnings conference call or presentation Wednesday, August 14, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Presentation

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

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Hello, everyone, and welcome to this presentation of the Second Quarter 2019 Results for Insr Insurance Group. I'm Anne Knudtzon, responsible for Investor Relations in Insr. With us today are CEO, Espen Husstad; and CFO, Hans Petter Madsen.

The presentation is streamed and will be available afterwards. Those of us following -- those of you following us online may type your questions anytime during the presentation. There will be a Q&A at the end when we will take those questions.

I'll first give the word to Espen.

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

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Okay. Thanks, Anne. So let's turn to the highlights. This quarter, we have a reason to celebrate. For the first time, the company records a profit from the ordinary business activities. The result for the quarter was NOK 6.7 million.

We are very pleased to report black figures, turning around an insurance company requires patience and stamina. We now start to deliver value, both to customers and our shareholders. This is a result of significant efforts from all my colleagues in getting right the strategy and operational setup.

As you'll also see, both the claims ratio and the cost ratio is moving downwards. And we report a continued strong growth and our price increases continue taking hold. So those were the highlights.

I just need one additional comment on the profitability. This graph, it shows the losses in the company back to 2013, first on an annual basis, and then from 2015 and onwards, on a quarterly basis.

And you see that Insr has spent a significant amount of shareholders' capital over the years. The accumulated losses have reached nearly NOK 1.5 billion, nearly NOK 1.5 billion, which is not really recorded in our balance sheet prior to this more normal quarter now. So it's been a long journey.

Profit. Okay. Let's continue with the development compared to our medium-term financial targets. Growth is clearly green. Claims is spot-on the 70% target this quarter, so also green. Due to seasonal variations, 70% in the second quarter is still slightly above where we want to be. So it's still slightly above where we want to be due to seasonal patterns. But we know we have only had partial effect of the price increases and the trend is clearly positive, okay? So green.

Costs are on schedule, moving gradually downwards. Still, a medium-term target has not been reached, so it's yellow, okay? That's costs.

Solvency margin is above our internal minimum and we are expected to stay that way, so also green.

Okay. Let me comment a bit more on the top line. The graph shows a development in the premiums earned for the quarter before insurance sessions. So that's a gross premium second quarter last year as compared to second quarter of this year, and you see we have a growth of 17.8%, okay?

The additional volume coming from this growth since last year is mainly coming from our wholesale partners, underpinning the strategic -- the sound strategic rationale behind the way we are operating them, okay? So this is -- this continues to be very reassuring, 17.8% top line growth.

Distribution through wholesalers, of course, give more top line fluctuations than in-house or franchise distribution, okay? For the volume, we think 2019, an increasing part of the growth stems from the price increases, of course, as they are pretty high. Okay, so that was the top line.

This graph shows the net earned premiums. So it means that we have taken the previous one and then included the effect of reinsurance, which is -- and in many ways, this is the real top line in an insurance company, the net earned premium. That's really what we have left, right? And that one, of course, is growing even more than the one on the previous page. So we have actually seen from the point of view of the top line that analysts are usually measuring us. We have a 49% growth since last year, 49%. That's high, okay?

So it shows that our program of gradually reducing the quota share reinsurance, which we started with 2.5 years ago, is most certainly paying off. But it takes time. Again, patience in this industry.

So let's now, finally from my side, revert to the pricing. This is the same graph as we have shown previously. It shows the development of passenger car premium in Norway, which is the biggest line, as reported by Finans Norge. We have indexed this back into the end of 2017 as a starting point to look at the price increases in the market.

For Insr, which is the thick blue line, we see that our recent price increases are high as we intended them to be. So we continue exactly what we have promised. And this is really the prices, the way they are in the portfolio. So this is now nothing about what we expect things to be or this is really, really the proof of the pudding, right?

We started -- our prices started increasing summer of 2018, a year ago, and you see that we are up more than 10% now. And as this is lagging when it comes to earned premiums, this is then on a portfolio basis, which later comes into the earned premium. The effect on the results will come increasingly stronger over the next quarters, okay? And this, of course, shows why the claims ratio is coming down and will continue coming down.

We could also comment that for motor, Q2 and Q3 are normally stronger quarters. But we also see that with these heavy price increases, we will -- we seem to be able -- or we expect to be able to counter claims inflation also for the fourth quarter.

Okay. One final remark on this slide. Of course, we see that the whole market is moving upwards. Most of the companies are increasing motor prices, which is, of course, good for our competitiveness, okay?

I now give the word to Hans Petter, our CFO, to run through the financials.

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

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Thank you, Espen. Let us now take a look at our key figures, starting with the quarter. Our bottom line is a profit of NOK 7 million. We are pleased to see that our company is now becoming a normal company that creates value for other shareholders.

The same quarter last year, we had a loss of NOK 17 million. So let's start from the top. Our gross premium earned was NOK 405 million. That's, as Espen said, 18% up from last year when it was NOK 343 million.

Despite this, claims of NOK 281 million is actually lower than the NOK 292 million last year. This quarter, gross claims ratio was then 70% compared to 85% last year second quarter. The reinsurers have taken part of -- their part of the losses over the year, and this quarter, they have taken a part of the profit that we have generated. So the earnings for the reinsurers are NOK 13 million.

The commission that we received from the reinsurers for the premium they received are NOK 39 million. That correspond to 23% of the premium they received. So this is an okay level, giving the claims results that we have this quarter.

Our sales costs are NOK 53 million and administration costs are NOK 52 million. This equal to our gross cost ratio of 26% this quarter. Both sales costs and administration costs are largely as expected and are on track to gradually coming down as we have forecasted.

In sum, this gives us a gross underwriting result of NOK 20 million and a gross combined ratio of 96%. The investment return on our portfolio is NOK 4 million for the quarter.

If you look at the results just for the first half year. While the second quarter was profitable, we have a result for the first half year of a loss that is NOK 63 million. This is due to the severe losses that we have in the first quarter.

This graph compare Insr's losses due to general Norwegian markets. Insr gross loss ratio is in gray and our net losses are in blue. The yellow bars are the weighted average of Fremtind, Gjensidige and If in Norway.

As you can see from the yellow bars, the general market in Norway had a similar loss ratio this quarter as 1 year ago. They have an improvement of 2% points. While Insr's loss ratio improvements is within 14% to 15% compared to last year.

Runoffs is a positive contribution to our results. However, please note that the total claims reserve have increased during this quarter. So despite that we had a runoff gain, we have strengthened the reserve degree further. Note also that the runoff gain is in -- more or less, in line with the -- what we have seen from our competitors this quarter.

So to the investment assets. We -- the investment portfolio, including cash in the bank, is stable since last quarter. We have settled some balance to the reinsurers, which likely reduced the cash balance this quarter. We expect a continue in the positive cash flow going forward.

So to the solvency ratio. The solvency ratio is now 132%. The solvency capital requirement, the SCR, increased slightly due to the higher insurance risk from our own account. Available capital development is not mirroring perfectly the equity development quarter-on-quarter as certain balance sheets elements are treated differently in the IFRS accounting and the solvency balance sheet. We expect Insr to stay above 130% level without any additional capital.

Then I give back the word to Espen.

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

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Okay. Thanks, Hans Petter. So again, to summarize the quarter, we have a profit, not huge, but black figures are black figures. And we also expect this to be the case for most future quarters, okay?

Earned premium keeps growing primarily due to our wholesale proposition but with the price increases becoming a more important part. Even more important than adding to the top line growth, the significant price increases improved the claims result. So that was the key takeaways.

Regarding 2019, we expect a continued reduction in the loss ratio due to seasonal patterns as well as pruning and pricing measures taking hold. We also expect a lower cost ratio with the new organization settling in and also the fact that sales is strong heavy on first half year, which affects the sales ratios -- sales cost ratios.

We are aiming for profitability in 2019. Given the loss year-to-date, this will be challenging but the profit this quarter is encouraging.

Okay. And then let's finally reiterate because we reiterate the medium-term financial targets of low double-digit growth; gross combined ratio, 90% to 92%; and solvency ratio, above 130%.

Okay, then I give the word back to Anne to run through the Q&A session.

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Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [5]

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Thank you very much, Espen and Hans Petter. We can start with questions from the audience, if there are any. If not, we can start with one question we have received online from [Jonas].

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Questions and Answers

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

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When and to what extent will you be able to put the float/investment assets to work compared to today's close to 0 return?

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

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I think the return is 2%, which I think is quite okay, actually, given our risk profile. I don't know if you have additional comments, Hans Petter?

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

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I think we need to strengthen the solvency ratio a bit more before we start investing with a more riskier profile.

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

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Yes.

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Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [5]

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And then we received a second one from [Jonas] online. Will future cost ratio improvement primarily come from efficiency improvements or price increases?

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Espen Husstad, Insr Insurance Group ASA - CEO [6]

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I think it will come from 3 things, maybe even. One is, of course, as we are now growing with 17%, 18% whilst we have said that over time, we will have low double digit, which is more like 10-ish-plus. It's actually so that the difference between growing 10% and 18% in terms of sales cost, that's a tremendous difference. It's not so that you can double the sales cost, but it's -- because we also pay some sales cost on the portfolios but you could increase it very substantially.

So if we foresee that the growth will be more in line with what we have set as the medium-term targets, then of course the sales cost ratio will come down by itself. So that will be one contributor. And then he's probably right that it, otherwise, will come from both, the 2 others.

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

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Yes. And I think we'll come back to -- we will have a Capital Markets Day in November and we will come back to this area more in detail then.

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Espen Husstad, Insr Insurance Group ASA - CEO [8]

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Yes.

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Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [9]

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We have a third question from our webcast followers, from [Nicholas]. We have 2 actually. The first one, could you please specify where the runoff gains come from this quarter?

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

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This is primarily from some older years on the personal lines and also on motor.

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Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [11]

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And secondly, could you say something about what measures you have at hand to strengthen the solvency ratio should it fail below -- fall below the 130% level?

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Espen Husstad, Insr Insurance Group ASA - CEO [12]

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I think when it comes to the measures we have, I mean generally, either we need to reduce then the SCR or increase the available capital. To reduce the SCR, we could buy more reinsurance. To increase the available capital as we have now exploited or utilized most of the opportunities for using debt in Tier 1 -- with our Tier 2 and our Tier 1 hybrid, the only option would be normal shareholders' capital.

So that would essentially be the 2 options. But then again, we have planned to make a profit, right? And then as the profit, as Hans Petter alluded to, is over time correlated with the development of the available capital, we expect to stay above the 130%.

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Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [13]

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Then we have a question from [Christopher Calombaris]. How will you be able to increase solvency ratio given the currently limited profitability?

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Espen Husstad, Insr Insurance Group ASA - CEO [14]

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By becoming more profitable.

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Hans Petter Madsen, Insr Insurance Group ASA - CFO [15]

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Yes.

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Espen Husstad, Insr Insurance Group ASA - CEO [16]

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Yes.

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Anne B. Knudtzon, Insr Insurance Group ASA - SVP of Business Controlling & IR [17]

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Do we have any questions -- any further questions? If not, I think this was all we had for today. Thank you very much for coming and joining us.

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Espen Husstad, Insr Insurance Group ASA - CEO [18]

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Thank you.

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Hans Petter Madsen, Insr Insurance Group ASA - CFO [19]

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Thank you.