Communication is key as TRYG prepare investors for IFRS 17
The companies in the Nordic insurance industry are getting ready to implement the new IFRS 17 standard. Or at least, they should be.
IFRS 17, which takes effect at the earliest in January 2022, is likely to be a big change for the insurance sector. Even though everything still isn't set in stone, it's clear that it will have a great effect on the accounting, the capital market and the investors.
Investor Relations Officer at TRYG, Gianandrea Roberti, and Thomas Ringsted, Partner at Deloitte and person responsible for IFRS 17 in the Nordic region, recently sat down at Deloitte in Copenhagen to talk about the challenges, solutions and benefits of the IFRS 17.
“The problem with the insurance industry - and this is of course a general statement - is that it is a somewhat complex business. And the accounting of the business is probably even more than somewhat complex,” says Gianandrea Roberti.
“Because of this, any effort that moves the sector towards better comparability and more transparency is therefore, a positive one,” according to Gianandrea Roberti.
An unfamiliar communication challenge
However, implementing the new standard is a difficult and far from well-known task.
“The way we at TRYG understand it so far, is that for us, the P&L and balance sheet will look different and more in line with industrial businesses. You are going to have revenues, costs, operating margin and such like. And just by that alone, the jargon and all the key items will be different compared to the current situation,” says Gianandrea Roberti.
TRYG is slowly starting to get questions about the consequences of the changes from investors, especially from Insurance investment managers around Europe.
“It doesn't really matter if this starts in 2022 or 2023. We need to be out there relatively early, and not just when this goes live with a whole new set of names and numbers. That would be very problematic,“ says Gianandrea Roberti.
“There is going to be a period of adjustment, of course. That will require a lot of work in terms of communication and in trying to make things as smooth as possible for analysts and investors. And it is not a simple task,” he adds.
A part of TRYG’s plans for ensuring a smooth transition is to come out with an investor newsletter. The idea is to come out relatively early explaining the likely changes, including the new jargon, and show some of the most important key indicators.
Start in front, stay in front
A point Gianandrea Roberti keeps coming back to is that despite the challenges, the overall purpose of IFRS 17 is both necessary and laudable. And that TRYG now feels fairly ready to take on the tasks that come with these challenges. But “the jury is still out”, he says. And the fact that TRYG already has a very good starting point when it comes to making the business and accounts understandable can actually turn out to be a challenge in itself.
“I think we are already quite good at communicating and explaining what we think is important for the capital market to know and understand. But explaining these new changes is different. It is more radical than what we have seen before,” says Gianandrea Roberti.
He emphasizes that for TRYG, it is even more important because an important part of the company’s valuation in the market is based on the transparency and simplicity of the message compared to an often too complex sector.
Thomas Ringsted sums up the point in a simple ‘before and after’ scenario:
“So, in other words, you and your Nordic peers are already considered transparent and relatively easy to understand and it is important that this continues after the new standard,” he says, and Gianandrea Roberti confirms.
A step up from Solvency II
Looking at IFRS 17 from an IR perspective can bring some light to the challenge of the implementation as compared to Solvency II, including the worries beforehand and the challenges as they occurred.
“IFRS 17 is going to be a different challenge because it is a larger change. Capital is very important for financial institutions, but accounting & reporting represents the cornerstone of the investment case. So this will be more fundamental than Solvency II,” says Gianandrea Roberti.
Thomas Ringsted adds, “To some extent, IFRS 17 will be audited. With Solvency II, you can discuss whether it is actually audited”.
Gianandrea Roberti agrees, but still sees the issue of making the accounts more understandable as the most important one.
“Of course, the fact that IFRS 17 is audited can add more comfort as far as knowing that the figures are true. But the reality is that the current accounting/reporting standard are still complex, and the sector implied cost of capital remains fairly high. And that's really the issue here.”
The benefit scenarios
Some analysts are worried that the number of options to accommodate the industry's wishes are too high. Too many options will erode the goal of more comparability and transparency, whereas fewer options will restrict the room for maneuvering of the insurance companies.
Gianandrea Roberti sees this as a fact that will have to be addressed to achieve the overall purpose:
“Despite a lot of talk to make the companies more comparable, there are still a lot of differences. So, I guess it's a matter of diplomacy. If it is left up to every single company in every region, it is unlikely that we will ever come up with something that is fully comparable.”.
Seeing the glass as half full, Thomas Ringsted emphasizes the complexity of comparability in the industry.
“Life insurance is something that is very much integrated in the different welfare systems all around the world. So, the mere thought of bringing that type of business into the same accounting model is a massive task. It may not be entirely correct in the first “go”. But I still think it's a fairly big achievement just to get there in the first place,” he says.
Gianandrea Roberti agrees and returns to the point of the impact on bigger or more complicated businesses. He noticed that Europe’s largest insurers seems to be making a lot of effort to get ready for IFRS 17. This turns the conversation to the costs and benefits.
But as Thomas Ringsted points out, the implementation costs are just a “one off”. There may of course be some additional cost when everything is up and running, but there should also be some financial benefits.
“It doesn't require a lot more transparency or decrease in the cost of capital before the implementation costs are weighed out. Overall we believe it will be beneficial for the industry - and that benefit can be shared between policyholders and shareholders,” he points out. He goes on to discuss the possible financial benefits.
“If the business becomes more comparable internationally, you should be able to benefit from that, and also from actual lower cost of capital. If you have some loan financing from Solvency II, you could also have some benefits from having lower cost there,” he adds.
“That's correct. We will have to see, but I agree,” Gianandrea Roberti concludes.
To learn more, watch the video of Gianandrea Roberti below, where he gives his perspective on the challenge and benefits of IFRS 17, as well as how it will affect the sector and and company like Tryg.