Gjensidige Forsikring ASA (GJF) Earnings Call Transcript & Summary

Good day, and welcome to the Gjensidige Q1 2021 results meeting for analysts. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Mitra Hagen Negård, Head of IR. Please go ahead.

Thank you. Hi, everyone. This is our Q&A session for analysts. We are sitting here [ Gisele ] and I, together with Jostein. And Helge will join us in a few minutes. So please proceed with your questions. [Operator Instructions]. So please proceed.

[Operator Instructions] We will now take our first question.

Alex Evans from Crédit Suisse. If I just start on -- I think you mentioned on the call, you signed that IT system in Denmark, [indiscernible] the cost ratio there. Is it possible to give any sort of details or guidance on how impactful you think that's going to be? And then secondly as well, just on the partial internal model. Is there any update there, any dialogue you've had with the regulator on some of the key areas there?

No, we are, what we call, in a soft junctional on the new core system in Denmark in Private segment first, where we just select few customers, probably all be testing out. And then we are getting close to launching also for, call it, external customers. And then the -- when that is up and running, we will follow up with the Commercial segment afterwards. The main -- the most easy [indiscernible] modified effect will be reduced IT cost all the time because the current system is consistent. We build on ourselves and pay per kind of transaction-based or volume base. So as we start moving business from policies and claims, from the old business to new ones, IT costs should come down. And in the longer term, the new system is better, so it's more -- it's increasing our competitiveness in terms of being more quick to update products and prices, easier to integrate partner solutions and so on in the future. So that is the effect and then, of course, cost is more easy to distinguished, where the others will more have an effect both on top and bottom line over time. We haven't quantified our -- we haven't given external information about the context of the effects or neither the cost of the new system, but it is large enough to be multipliable from accounts and so. On the internal, it's an ongoing dialogue. I think in the last change was on the -- we got from a partial approval or a very good approval part of the market risk. Debates, we have with FSA, and we're continuing with that and with other parts where we have a difference between the old calculation and the approved ones. And the main items are the collation effects [indiscernible] and market risk and modeling of storm risk revenues. Well recognized in external models, and that has been [indiscernible] not to qualify as an internal model, which is a different practice we know from neighboring FSAs. So I think we're working with a long-term perspective with FSA to get further parts of the own calibration approval.

I mean, should we expect something sort of the share next year? I mean, how does the time line look on that perspective?

So I'll refrain from giving any predictions there. And -- so we'll let you know when we give [indiscernible].

We will now move to our next question.

This is Ulrik from Nordea Markets. I was just wondering if you could repeat or remind us what is the biggest issue for profitability in Sweden. Is it scale? We have to grow out of the current high combined ratio. Or are there other steps you can take to improve it?

I can start, and I think, first and foremost, we have to secure that we can reduce the cost position because our cost ratio is too high compared to the large operators in Sweden. Then to secure that, we are working now intensively with Tata Consulting Group to look into a new type of concept in Sweden, a more digital concept, where we want to approach the customers in a more digital and pure digital way and in, of course, combination with more automized processes internally. And after we have done that, of course, it's also about scale, new customers and new partners on the distribution side. So actually, it's a totally relaunch of the Swedish business. We are working with it. It's slightly challenging due to COVID-19 because we are working with people in [indiscernible], and we are working with people in India, Norway, Sweden. But so far, it's relatively good progress in that work in Sweden. As you know, we will host a Capital Markets Day later this year, and I really want to dig into this in more detail when we see each other late this year on the Capital Markets Day.

We will now move to our next question.

It's Phil Ross from Mediobanca. I'm just curious about how you think about the weather impact in Q1. I think, Helge, you mentioned that it's been as cold as it's been in Norway for 10 or 11 years now. I wonder then if that means you sort of you think about the impact as perhaps a 1 in 10-year event or equivalent? Or do you not really quantify it, you're more agnostic in the sense that if there's weather, they're not expected and if there isn't a material weather impact, then that's good news? If you could just, yes, explain how you think about that, that will be helpful.

I will start and then take moment. As we earlier point out, it's not a deviation from a normal. They have a good estimate as normal. Last time was in 2010, so it's 11 years since the last time. But that's not, of course, a good basis for a tariff statistic on that one. But COVID -- during -- and as I said a couple of years, I mean, we expect more better productivity as such, but not necessarily for us. It could be more equipment, heavy rainfall and so on. And that's part of what we may need to price property more than the expected, same sensation as such because I think there'll be some more volatility. It's a long-term trend. And 11 years since the last time. Let me think, we need to be prepared that these things will happen from time to time. We have not had any heavy storms for a number of years, for instance. That should come again on the odds, but we're exposed as a non-life insurer up in Scandinavia. That is not something that makes us particularly stressed, but the [indiscernible] headquarter, it will start turning.

Yes. I think we could call it extraordinary. In 2010, I think we then operated, and that 11 years ago. I think the figure...

SEK 379 million?

SEK 379 million. And SEK 319 million now, SEK 316 million now. So it -- and the difference between 2010 and this year was -- I don't think it was any snow in 2010. It was really cold, so that was the harsher quarter actually compared to what we experienced. So long term, we will see this kind of -- this type of volatility increase going forward. And therefore, we also, long term, had to secure that pricing. We'll take into consideration that the volatility in weather will affect us on the property side.

So yes. Then also, I mean, this is a support of what we talked about that, we'd like to increase our efforts in climate or as these claims were paid [indiscernible]. But it's good for us and it's good for the customers and society at large.

If I may, I'm sorry I'm a bit late, but I mean, we got the question about -- because in 2010, we did continue to see increased related damages all through the second quarter as well. And as Helge mentioned, the main reason for that was that [ hard snows ] in the ground and network. And when spring came, we saw more claims. I think this year has been, at least in the most populous areas, more snow. So it's probably -- and we do not expect that kind of claims pattern for this second quarter as we saw back then.

We will now move to our next question.

This is Vegard Toverud from Pareto. I have a couple of questions, both relating to the solvency slide in the presentation material. I believe it's Slide 56. If you look at a calculation of the premium provision and the impact there on own funds, that increased quite substantially. Could you give us some details into what's driving that? Is that -- that's the first question.

When you say it increased, do you compare it to the last quarter or the first quarter of last year?

Both.

Usually, the sum to the calculation of premium provisions is the correction of their own funds due to the profit earned in policies written. And due to the -- and the renew patterns, there's a high degree of renewals January 1. This number will typically be highest in the first quarter because of 40% of the commercial book is renewed at January 1, Norwegian commercial book. It's also a function of the level of expected profitability is it in the premiums written. So with more positive view on the future premium -- to future profit in the policies, that will increase and vice versa. That's the main 2 reasons for that change. So it keeps seasonal pattern more in the first than the last quarter and a bit more so moving depending on the profit level in the -- how this enforced or poses within. Other than that, there is no specific changes in principal [indiscernible] related to that number.

And there's no discounting or ending that impacts that number positively.

It is correct to say it is the present -- net present value of the future profit, so discounting [indiscernible].

So the reason why I am asking, it's up SEK 1.1 billion from last Q1 and SEK 0.5 billion from Q4. It's obviously supportive for the same proposition. The second question, though, is more or less the same, but for the pension, which has been fluctuating somewhat. It was down last quarter to 1.5 from 2.4 and now up again to 1.9. So do you have any comments to that development as well?

The reduction last quarter was related to taking into account the movements from capital certificates, all pension accounts, assuming lower margins in that business than they wanted to have. I think that is the main reason there.

I would assume that the interest rate impact is larger there.

Yes. I'll -- to give you a more precise answer here, I'll...

We'll get back to you, we'll get back to you later.

We will now move to our next question.

This is Jan Erik from ABG. I just wonder about the new client in commercial. It looks like your book has sort of increased quite much inside the accident and health. So hope you could shed some light into the change in the portfolio into Q1 versus that new client. Is it sort of linked to any particular reason why it's just accident and health? Or how should we read it?

I mean, you never comment on single customer relationships, as you know, when we gain them. So it's -- we talk about one large new client, and I guess it's fair to assume that, that is part of the explanation why the accident and health premium increases more than usual.

It was more that you have one kind of a contract into that kind of business and try to win more into motor and property with the client [indiscernible] so that it's more linked to this kind of product alone.

It's one large contract in the commercial segment more than [indiscernible] I think [indiscernible] yes.

Jan Erik, it's important to also comment that it's only part of the strong momentum and growth in the commercial business. It's generally very strong in renewals. And as you know, 1st of January, 40% of the business are renewed. So it's one large contract. And as you have heard, it hit towards accident and health for that contract. But in general, it's a hard market. It's strong in renewals, and they have a very balanced -- good balance between premium and volume growth in general.

When you say that it's challenging [indiscernible]

[indiscernible]

When it's harder to get the [indiscernible] sorry.

[indiscernible]

No. Just another question then. When it's faster to get the clients, as you say, but you have a good renewals. Is that why that competition has increased versus early year? Or is it sort of stable? Or how should we read your sort of saying that it's harder now?

The market is hard. That means it's stable. It's not soft. I used the word hard versus soft. And soft market, then prices are passed on. So the market is hard. We have strong competitive position. We see that our main competitors increase prices significantly also as we do. We gain new customers, and we have a very strong 1st of January renewals, the best ever. And as I said, the one new big contract is only part of the explanation for that 11%. So it's -- the situation is very good. It's unchanged.

Is it possible to say how much the -- out of the 11% that contract is?

No. We haven't got into those details.

We will now move to our next question.

It's Derald Goh from Citi here. So a couple of -- the first one is just on the growth outlook from the perspective of private versus commercial. I know you said earlier that the private side was impacted by lower travel volumes. How many then normalize through the rest of the year? And then also on the commercial side, are there any volume growth over there? Or is it just purely price? And then the second question is just on Danish property. So just tagging on to the comments that you made about Norwegian property on sort of longer-term weather volatility, are you also pushing through that view into your pricing measures in Danish property?

Yes. Thank you. I can start with the first one, and Jostein can prepare the second answer. I think I said that we are really pleased that when we look at the [ turn ] premium growth in private, 6.1%, is -- I think I said it's 50-50 split between volume driven and price driven for motor insurance, and that's the first time for many years actually because we have increased prices significantly. And the premium growth within motor insurance has been on the price side. So we have a very good balance between volume and price-driven growth, strong competitive position. And I also said that we expect the claims inflation in a span between 3% and 5%, so we have to see continued with price increases. But going forward, of course, due to the competitiveness, new sales, strong position towards our [indiscernible] channel. We expect volume growth to be strong also going forward. On the private property side, we had strong premium growth, but that's purely price driven. We maintain our customers, but it's hard to actually gain new customers when we increase prices more than claims inflation as we do for private property. On travel insurance, we have price increases, but we have volume drop. So that's negatively development in volumes and positive price increases roughly -- slightly on the negative side, if you look at premium growth of travel insurance. Going forward, maybe -- so my last comment today. We are in a very good position. The underlying frequency loss ratio is down. Our competitiveness is strong. Our volume growth is better compared to last year, and our new sales is very strong. So we really think we are -- we have some really good quarters down the road because we are in a good position now [indiscernible].

I think it's probably my bad. So what I was meant to ask, this is the question specifically related to the Danish business.

Yes. The second question was. No, this was Norway, and Denmark is coming now.

[indiscernible] and volume all comes on pricing volume from [indiscernible] relates to Norway.

Norway, yes.

Private Norway. On the Danish business, we have not seen the same effects on cold weather on our property side in Denmark. I saw there were some comments in all of our competitors released a couple of days ago, but we haven't seen that in Denmark. And -- but still, there is a need to increase prices in property, both in the private and commercial side in Denmark, and we will go through with that over time. So it's -- and also the comments we made on the increased productivity due to climate effects price for Denmark as well. So we will cater for that in our pricing decisions.

Yes. And sorry, just a small follow-up. In terms of the growth outlook for Denmark this year. So just the first quarter seems a bit low, especially considering what you did last year. I know that this might be temporarily impacted because of high level of private travel volumes. Will that then kind of normalize in the future quarters and the growth rate maybe between Q2 to Q4, it's a bit closer, but not quite at the same level as you did last year for Denmark?

I think -- yes, I guess, Q2, the comparable figures in Q2 '20 will have the same depressed effects on the travel insurance side as we expect really to see in Q2 '21. So then that should take away that quarter-to-quarter negative effects that we have on travel insurance this quarter. And then as we also talked about, an additional factor in Denmark is the depressed auto sales. And of course, more auto sales gives more auto insurance, and we get our share of that, hopefully. So that's part of the explanation for why it's somewhat lower growth in the Private segment in Denmark this quarter. As we talked about in the -- as I mentioned in my speaker notes is that we have a good growth in the commercial part of Danish portfolio Slightly negative growth in the Danish -- in private part of the Danish portfolio. If I may add one technical and [indiscernible], maybe we could see it and -- but that -- and that is -- I know it sounds a bit trivial, but last year was what we call a leap year. We had one more day last quarter than we have this quarter, and it's -- actually, the premium is per day. So it's [ 191 ] or approximately 1% negative premium growth due to that leap year effect this quarter. Not sure about it if it actually means something in numbers for one quarter and then it waters out throughout [indiscernible].

We will now move to our next question.

This is the Tryfonas Spyrou from Berenberg here, and I have 2 questions, sort of more broader ones. The first one is, how do you think about your strategic position across the Baltics? Obviously, the market dynamics seem to be very different in the rest of the Nordic business in terms of competition, et cetera. Could you perhaps give us an insight if the business is earning the return on capital that you're expecting? And I guess, thinking longer term, is this an area where you want to allocate more capital, perhaps, either to improve returns, achieving a big scale or perhaps -- or because there simply are not many opportunities for growth in the Nordics? And the second question doesn't relate to this quarter, but I appreciate it's quite [indiscernible]. I was actually wondering if you could give us some insight on how you handle water accidents in vehicles that could be partially autonomous? For example, we saw the headlines regarding a Tesla crash this week. The drivers apparently not being at the wheel. I mean, -- ultimately, how is ability to determined in case the driver isn't at fault?

Yes. I mean, we've been in the Baltic since 2005. This was when we had the first acquisition. Profitability has been volatile anywhere until COVID hit us. I think on -- actually, a good part there. And we wouldn't be going on if we didn't think that we would make a profit there over time. That was more than the cost of capital that we tie up in that business, and our aim is clearly to make much more than the cost of capital in where we allocate capital. That's how we create value to the shareholders. But of course, given Q1's number, definitely not anything where -- anything we're happy with, and we've been very open about that. So -- but going forward, out of COVID, given the measures we are taking on our hands to get costs further down, we believe that we will create value by having capital allocated to the Baltic market. The second question was about self-driving cars, if I understood correctly, and [indiscernible] a story in the U.S., I guess, a couple of days ago on car colliding and [indiscernible] and it could have in the driverless system that was at fault. I don't think we had any accidents so far here that I'm aware of. That has not been the issue. So it needs to be -- if there is one, I think it will need to be handled as an exception, and I don't think we -- I can say now what we actually will be extensive discussion around that. But in the -- according the [indiscernible], the driver has the responsibility, no matter what, whether it's with a car on self-drive or whatever. In Norwegian law, the driver has what we call objective responsibility. He needs to be in charge.

Do you think this is something that is principally going to be a much bigger debate as -- going forward as we -- the industry sort of make a shift towards a motor and vehicles?

In 2014, I think we predicted the sunset of motor insurance business as of Capital Markets Day and -- due to the increased amount of self-driving cars and the value of safety systems. And since then, that has been the fastest-growing business line. So it's -- we might not be the best predictor of what's going to happen in the future on the motor insurance side. Currently, it is growing. I say, I it's 50-50 around price increases in volume in Norway, and it's very profitable. Whether self-driving cars will come and be an important part in 5 or 10 or 15 years in the short term, definitely not. In the long term, I am not sure.

We are talking about the third wave, and it's also OMG companies. And then we are talking about 2014 and [indiscernible]. So we are talking about really long a time before this will be a real impact, actually, in our markets.

And before the next question, I'll just get back to a question I quite heard on the premium provision change from the first quarter of 2020 to the first quarter now. It is a combination of volume growth and premium growth, a little bit been fairly high in the -- especially in the commercial segment from -- in that one year. It's -- the second major part is an improved combined ratio, our profitability level, which has -- these are the 2 main drivers of the increase. And then there are some more technical effects in addition, but these are the 2 main drivers.

We will now take our next question.

It's Jon Denham from Morgan Stanley. Firstly, is there a reason why the SCR should fall in the second quarter?

One reason. It's payment of dividend, so we have less assets. Otherwise...

You have the normal impact from the 80% formulized dividends being applied on the earnings -- the IFRS earnings.

And did you say capital requirements?

The capital requirement, okay. I thought it's on the margins.

As we said [indiscernible] capital requirements or did I miss that, Jon?

No, the capital requirement.

Yes. The capital requirements will drop when dividends are paid, the ordinary dividends, which was approved at the General Assembly in March 24, 25, whatever it was. That's SEK 3.5-ish billion is out, and then they have reduced assets that requires -- the market risk will then drop somewhat. Otherwise, no, I don't think there is not much seasonal pattern otherwise. If there is more claim, the short tail in the first quarter than the loss reserve will drop somewhat to the second quarter because, typically, with related losses are short take. They paid out very quickly. But that's the minor effect -- the major effect of [indiscernible].

And the weather number given on the call, I think you said SEK 136 million in private, SEK 107 million in commercial. That was a benign -- versus a benign 2020, I think. Do you have a figure of kind of what those numbers were, either for the group or for the divisions versus your normal expectation?

No. I'm sorry. We don't have that calculation at all, no, what is the normal amount for these type of claims.

Just to be fair, I mean, what is normal? Things are becoming very -- the weather situation is shifting very strongly, which is on -- the reason why we -- as we've been speaking today, have seen the reason to increase the prices on the property insurance lines. So normal doesn't have the same meaning now the way we see it that it's used to before. Things are becoming more volatile. So that's why we found it more useful to carve out those numbers compared with last year.

Okay. Is it fair to say that last year was benign?

Yes.

Yes. Last year was benign, and this year was extraordinary. And I haven't -- maybe some of you have digged into ICA Group. They released some figures this morning as well for their insurance business. And as you know, ICA Group is SME and private business, a very stable, profitable business. And they increased the combined ratio from 90.7% to 95.6%. And we commented of estimate to SEK 316 million and 4.5% points. So I think that's a good proxy, actually. They are in the same type of market, property, cars, SMEs. It's centered around the Eastern part of Norway. And their business are quite stable, actually. So -- but last year, benign. This year, extraordinary. Last time we had this extraordinary situation was in 2010.

And just finally, there's a comment on the call about the 6% hurdle rate for M&A. Can I just clarify what that is? Is that the cost of it pretty used in an NPV calculation to make it positive, it's not your hurdle ROI?

That is correct. It is the cost of equity after tax. You've seen a kind of calculation. And then on top of that, we need to have a big positive NPV to create value. That's how we think about it.

We will move to our next question.

Alex Evans from Credit Suisse, again. I just have one follow-up, really, just about sort of weather and, obviously, a great focus on sustainability. I just wondered if there's any sort of preventative measures that you are taking or could be taking to mitigate some of the weather volatility and also the impact on business as well?

I think we have more frequent communication with our customers, sending them SMS related to where the forecast and giving them bits and information about how they can secure their assets. That's increasingly a type of communication we had. It's nothing specialized we'll say related to the cold whether. It has been cold for many, many weeks during first and the second month this year.

[Operator Instructions]. We'll now take our next question.

Yes. Jan Erik from ABG again. Just one for technical follow-up. In Denmark, your amortization has gone down from -- to SEK 3 million from SEK 14.9 million last quarter and almost SEK 35 million a year ago. Was this the -- something you have done on taking that cost -- one-off costs, which I have missed somewhere? Or could you just shed some light into that, please?

Give me a moment.

We'll get back to you.

Give me a minute, Jan Erik. I will get back to you on it.

And we will now move to our next question.

Claudia Gaspari from Barclays. On your earlier point around more frequent communication with customers around the weather volatility, I was wondering, is there anything you can do around terms and conditions perhaps? So are you planning to do anything there. You're seeing competitors doing anything there because, very often, I guess, it can be more effective than price, I guess, depending on circumstances.

Long term, we are also working with sensors and tech partners on the tech side to install all kind of claims prevention installations related to water damages, to fees, et cetera, et cetera. And we have done this for many, many years. Actually, we had also a large problem with agriculture business many years ago, and we financed and installed higher equipment for, more or less, all agriculture and farmers in Norway, and we prevented lots of fires 10 years ago. Today, we work towards private customers and commercial customers with sensors related to, as I said, water and all kind of installations to prevent water damages and fires. And of course, when they have situations like we had now in first quarter, it's about giving customers also tips to what they can do from day to day to prevent cabins and houses and boats, et cetera, et cetera, related to wind and temperature and, in the season also, heavy rains. So we have -- we are increasingly good to identify these periods and communicate it with our customers, and we have lots of partners on the technology side [ without ] preventing equipment in houses and farmers and for the SME customers.

[Operator Instructions] It appears there are no further questions, so I'd like to hand the call back to our hosts for any additional or closing remarks.

Thank you very much, everyone, for your participation and good questions, as always. Feel free to contact us later today or going forward. Have a nice day, all of you. Bye.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.