Alm. Brand A/S (ALMB) Earnings Call Transcript & Summary

[Foreign Language]

Yes, good afternoon, everyone, and welcome. My name is Lars Holm from Investor Relations in Alm. Brand, and I'm sitting here together with CEO, Rasmus Werner Nielsen; and Senior IR Officer, Mikael Bo Larsen, and we are ready to present to you our Q4 results for 2020. As always, we are going to make a short presentation of the results. And then afterwards, we will be ready to answer any questions you may have. And with this short introduction, I will leave the floor to you, Rasmus.

Thank you, Lars. Good afternoon, and thank you for taking the time to join us on this call on the Alm. Brand's result for the full year results 2020. Certainly, I'm very satisfied with the result that we have delivered and the progress we have done in the past year. In a year, heavily influenced by COVID, we are taking important steps in transforming our company. Now Alm. Brand is in a much better position to cope with the challenges that we see ahead of us. Now update today, I will start with a recap of the full year, and then I will focus on what we have achieved in the past quarters. Please turn to Slide 2. For us in Alm. Brand, 2020 has been a year for execution. This is important because when COVID-19 changed the world, we had already made the first changes to Alm. Brand in January, with the creation of a new organization to better meet our customers. And with this, a reduction in headcount, which cut our cost by DKK 100 million on an annual basis. So when entering into the lockdown period and the more challenging business climate, we had a good starting point that allowed us to navigate successfully and assist our customers whenever they needed it. As a result, our underlying business has performed well. And on top of this, we have made a good investment result, as financial markets have had a generally strong development after the last dip during March. It was also a top priority continue to find a good solution for our banking activities. And with the sale and subsequent formation of a partnership with I believe we have achieved a win-win solution. A solution that not only has freed-up capital and management resources but has also created a stronger distribution for our insurance products. Looking into the year to come, our focus will be to make sure that we are able to execute and create excellence in our core functions. We will revisit the full value chain and identify whatever we can do to be better on claims handling, procurement and customer servicing. And we will ensure that we will meet a lot more customers. 2021 will, in some respect, we especially in terms of investing in the future. The new partnerships that we have entered into with both will be back by start-up costs to create a strong digital and meaningful value proposition to our customers. Please turn to Slide 3. While the impact of COVID-19 on our financial results has been significant, all our businesses have delivered improved underlying performance and execution on their strategic objectives. Our full year pretax earnings amounted to DKK 824 million compared to our guidance of DKK 700 million to DKK 750 million, excluding runoff result for the last quarter. In all fairness, it should be noted that the general positive development has been supported by favorable weather conditions, few major claims, reduced activities and therefore, fewer claims in general as we -- as a very -- as well as a very positive investment result. However, putting this aside, the changes that we made early in the year have generated the operational improvement that we expected. Bottom line, with strong results and our strong balance sheet allow us to pay out the all earnings after tax, which translate into a dividend of 4 krones per share. On top of this, the Board also proposes to pay out the postpone dividend from '19 that is 3 krones per share, which means that the total dividend will amount to 7 krones per share. And of course, we should not forget that we're back in early January paid out an extra dividend of 8 krones per share following the sale of the bank. Please turn to Slide 5. The Non-life business made a pretax profit of DKK 311 million in the fourth quarter of the year, driven by an extraordinary strong technical result of DKK 237 million and a positive investment result of DKK 74 million. The technical result benefited from a good development in underlying business as well as favorable development in both weather-related and major claims but also from fewer claims because of lower activity during the lockdown due to COVID-19, which have added around DKK 45 million to our result. All in all, 2020 has shown a very positive development with a lot of tailwind. We are pleased that this has been the case, but we also acknowledged that the nature of our business is that this will not necessarily be the case every year. Our investment strategy is a long-term strategy with respect to overall portfolio exposure. And consequently, we have profited from the continued positive development in both equity and bond markets. Then on Slide 6. Premium income grew by 1.5% in the quarter, i.e., in line with what we have experienced in the previous quarters. For the full year, growth totaled 2%, which is somewhat lower we forecasted . And to some extent, this is the flip side of the general lower activity following the COVID-19 lockdowns. In general, we are seeing customers being relatively more hesitant in signing up for new insurances and in doing more business. The claims ratio, excluding runoff gains, was 76 -- 67.7 against 73 in the fourth quarter of '19, including this is a one-off positive effect from fuel claims in the quarter of 3.3% point due to the COVID-19 situation. The expense rate was 16.8, slightly down from 17.0 in the fourth quarter last year due to the effects from the cost savings program, but set off by start-up costs related to the partnerships. And all in all, this leads to a combined ratio, excluding runoff gains, of 84.5, which is well ahead of our expectations. The runoff result amounted to a gain of DKK 24 million, which corresponds to 1.7 percentage points against a large loss of 2.9 percentage points in fourth quarter last year. On this, we have seen positive results from especially accident and motor insurance. The combined ratio, including runoff gains, amounted to 82.8. And now please turn to Slide 8. Both from Asia and weather-related claims, we have seen a very favorable development in the fourth quarter. In total, these claims amounted to only DKK 89 million in the quarter against DKK 109 million in the fourth quarter last year. Compared to previous quarters, this is a relatively low level, and we would expect a return to a more normalized level going forward. And then on Slide 9, the overall improvement in combined ratio down on both the private and the commercial segment. For the private segment, the claims ratio was down 4.8 percentage points in the quarter against fourth quarter last year. In most of the quarter, we have seen restrictions and social distancing having a direct impact on general activity and the number of accidents. And similar to especially Q2, this can be seen in the numbers. Runoff gains amounted to 5.8%, which is satisfactory, and the expense ratio kicked up as we start allocating costs to fund start-up of the new partnerships. Please turn to Slide 10. For the commercial customers, the combined ratios improved to 89.7, i.e., significantly lower than the fourth quarter last year. The key driver here was a reduction of 8.8 percentage points in the claims ratio, driven by lower weather related in the major claims, but also claims and real estate. Also here, the latter effects are partly due to the situation of COVID-19. The expense ratio amounted to a satisfactory level of 14.7. Now please turn to the life business on Slide 12. Pretax profit for the fourth quarter of 2020 amounted to DKK 20 million, which led to a full year result of DKK 112 million against DKK 96 million last year. The result reflects a continued satisfactory development in the expense and risk result, which amounted to DKK 11 million as well as an improved interest result of DKK 12 million against sale in the fourth quarter last year. The technical result then amounted to DKK 21 million. The return on the policyholders' investment assets were 2.6% in the fourth -- in the quarter, and full year returns totaled 5.8%. The growth rate is at 15.2%, which in the current economic environment, we're still seeing as a satisfactory level. And then on Slide 13, premiums totaled DKK 396 million in the quarter, is up by DKK 222 million in regular premiums and DKK 174 million in single premiums. The development in the last quarter of the year relative to fourth quarter last year was slightly down. And for the full year, growth was 2%, being below our medium-term target, but partly expandable by the situation around COVID-19 and to some extent, also by customers having a preference for market return products. For 2021, we have announced a customer rate of the for new customers. And regardless of any regulatory changes imposed by the FSA, we will have a setup that also in the future of customers that prefer our value proposition. And then please, please turn to Slide 15 for the outlook for 2021. We guide for a full year pretax result in the range of DKK 600 million to DKK 650 million, which is the sum of an expected pretax profit in Non-life of DKK 575 million and pension of DKK 100 million for the bank and net true cost of DKK 50 million. Our guidance is based on the fact that a number of positive factors, which we saw in 2020 numbers will not repeat themselves in '21. First and foremost, the direct positive effect from COVID-19 on claims frequency is expected to be lower. We believe that we will have tailwind in the first quarter. But after that, we think and we also hope that things will be normalized. Secondly, for both major claims and weather-related cases, we budget for something close to normal. And thirdly, we anticipate only a modest investment result. Further, as you know, after the sale of the bank, we had a pool of cost that used to be allocated to the bank and the remaining part of these will be allocated in the Non-life in '21. Sydbank will pay some of these in '21 for services to receive, and this is included in our numbers. And lastly, as usual, we never include bonus results in our guidance. I think there's 2 key numbers that you should notice in this guidance. Cost rate in Non-life is expected to pick up a bit this year to be between 17% and 17.5%. But regardless of this, the combined ratio is expected to be around 19%. We are comfortable about this. I see no changes in the financial targets for '22, with cost rate around 16% and combined ratio in a normalized world with no COVID-19 around '19. In total, our guidance reflect a business with all major parts moving more than we would like it to. And for us, 2021 is all about execution. And with this, I conclude my presentation. I hand over the word to our moderator. Thank you.

[Operator Instructions] Our first question comes from the line of Asbjorn Mork from Danske Bank.

I have a couple. One relating to your Non-life guidance for 2021. So Rasmus, just to be sure, I understood it correctly. So basically, Sydbank will compensate you the full 50% of the DKK 5 million for 2021. And then next year, that will be more or less neutral because you will be able to take out those costs, but Sydbank will not compensate you. So the net-net is going to be around 0 this year. And I guess, around 0 for 2022. Was that correctly I understood?

Yes, that is correct. It's almost neutral this year. And of course, we have an effort to do throughout this year in order to have a 0 effect next year. Yes.

All right. And then just to clarify on the COVID-19 effects. If I understand you correct, you have included some estimated tailwind for Q1 and then headwinds for Q2, Q4. So just you could add some numbers to that, what is the sort of the tailwind you expect to get in Q1? And what is the full year effect that you expect for 2021?

Yes. I would say the numbers we have seen in Q4, the DKK 45 million is more or less what we have included in Q1 for '21. And then I would say, after that is normalized, another headwind or tailwind.

Okay. So you expect the same tailwinds in '20 in Q2 to Q4 as you -- as the tailwinds you had in 2020 basically?

No, no, no. We do not expect any COVID-19 effects in Q2, Q3 and Q4, is normalized level without corona.

Okay. So in your guidance, if I take you... No. Just to on your full year guidance, you have DKK 45 million in Q1. And then basically, I guess, Q2, Q3, Q4 will have a headwind versus 2020 where you had the tailwind. So net-net, yes, in your guidance, you have a net headwind for 2021. Is that correct?

Yes, you're right about that.

Okay. Okay. All right. That was the first question. Then taking on the cost ratio, so you're saying that the cost ratio should come down to 16% from the 17%, 17.5%. But then you still say that 90% is sort of a combined ratio level going forward. So does that mean you don't expect -- you basically expect that the cost benefits in the next couple of years, you will lose that in competition on the claims side?

I would say no. What we discuss it here is 2022. And here, we say that it's rather ambitious that we move from 17% to 17.5% to 16%. We will take an effort, of course, but we think we can get there. And then we still have to see how everything will develop throughout '21 with corona and all that. But we still guide for 90% as the combined ratio.Yes.

Okay. But I guess, lower cost, I mean, there's no reason why you wouldn't -- I mean why your claims ratio should be impacted in an upwards trend from your lower cost?

No, you're right about that. But there's also an element of competition here that we will have to take into account.

Sure. Okay. On these new partnerships, what is the combined ratio on your new clients versus your current clients, is there a big difference there?

No, I would say, in general, we provide the same products as we have on the shelves today with the same combined ratio. So there's a -- so nothing different. Of course, there is a start-up cost for the 2 strategic partnerships. But if you exclude that, then it's pretty much the same business as we have today.

Okay. Fair enough. And then on Life, if I look at your growth this year, of course, there's good reasons why it wasn't as good as it could have been. But then you also mentioned the base rate adjustments from the FSA, the whole low rate environment that we're in. And I guess, the fact that unit link is going to be more and more through Sydbank. So I was just wondering, what should we really expect? Are you still so positive on the top line for the next couple of years? Or should we maybe moderate our expectations a bit here? And is like really a part of the long term on brand set up?

That was a lot of questions, Asbjrn. No, we are largely still a part of our business, for sure. It's very profitable and it's good business. And for many of our customers, especially the smaller coverages, they really like this value proposition we have. So that is, for sure, we'll continue with that. And as you see, we -- for some years, we have said that we aim for 7% as top line growth for '22, and that has been a little bit too positive. We have known that for So now we change it to 3% to 4% in '21 and 4% to 5% in '22. I think -- really think that we should be able to achieve that going forward. Looking further than '22, I cannot really say anything about that.

All right. Fair enough. And then a final question from my side on your dividend and capital. First, on the dividends. Have you been in dialogue with the FSA about the 4 and 3 krones? And if you have what have sort of been their arguments? And how they're looking at that? And then secondly, on the solvency, you mentioned the plus 300% solvency here in Q4. I guess, it doesn't say that much given your setup and your own capital targets or at least your former capital targets. So I was just wondering since you have sort of officially at least those financial targets, should we look more at the solvency ratio going forward? Or should we look more at the old capital targets that you had or the way that you look at capital back then? Or how should we really look at the 300% solvency?

Yes. I can comment on that. First, the first question about our dividend. We have issued this about giving 3 and 4 krones for '19 and '20. And I think it's very much in line with what we have communicated and promised before. We have this issue about giving at least 70% of our profit after tax. So I think they should know what to expect. We have not been in any contact with FSA. We did not even do that in -- after our announcement in January. And I think we are very well inside the proposition that we should do this carefully, and we should be very well capitalized afterwards. And I think your second question is actually that we are very well capitalized. So we see no reason for having this discussion with FSA. Then we come to the next question that maybe are we -- not only well, but also over capitalized, we have our own capital targets. And the dividends we provide today, it's simply meeting these targets and nothing more. So having this 313% as a solvency rate is, of course, high. We know that. But it is within our targets, and that's how it is. We know it's conservative. It's been that for years. And not knowing what will happen out in society, we keep that at least for the moment being.

Yes. I mean, I could agree that you're very well capitalized. I think there's a lot of financial companies that are very well capitalized, but still having sold back a bit on the dividends. But my question on that was more that if I look at least what the FSA has said, and I'm aware that you're not a bank, right? But at least they have said that the payout should be below the normal range. And I guess, U.S. would be 70% to 100%. So paying out 100% is not really doing what the FSA is seeing. So I was just wondering whether you would be afraid of basically crossing the line here or whether you're super confident that they would not have any issues at all?

I don't know what they're thinking. So of course, I cannot be super confident. But I think we -- if you take in total, I think we pay out 100% and looking into our capital situation, also compared to others, I think we are very well capitalized, also meeting all kinds of hard scenarios. So I would be surprised if we receive any comments on the FSA.

The next question comes from the line of Per Gronborg from SEB.

I think there might be 1 or 2 questions left from my side. First of all, the risk allowance in Life 2021, any changes to where it was in '20?

No, it has no changes at all.

Why not? Did you question next one.

Well, we have looked at -- yes, we think this is the right level for us to be slow be competitive. Now we are not seeing that many competitors having the same product, as I guess you would reply to that. But we think this is the right level for us to, yes -- to compete.

And then you can say, we have actually increased it both in '19 and '20 a bit, but I think we should be also a little bit concerned about the customers.

And what about the cost for managing your assets now? I assume it's moved to a third-party after you did it in-house beforehand. Is that cheap or more expensive?

Non-life insurance, it's slightly cheaper. So we saved some money, including in our investment results in Non-life by this new contract that we have made in terms of asset management.

In terms of life -- yes, for Life, it's the benefit of the customers.

And even though you don't think you can taking out a higher management fee?

the moment.

For the moment. Okay, let's see what happens. I think the final question is on the extraordinary or the cost over one that will be booked in P&C, but will be paid by Sydbank. Is this a one-off payment Sydbank is doing only for '21? And what are they paying for? Or why shouldn't they continue to make that payment also in '22, 23?

Yes. I can take -- it's good you're asking these questions. Actually, we have our own cost after selling the bank of between DKK 50 million and DKK 75 million. And those we have in our books. But then we have services to Sydbank. We have to make sure systems are running and stuff like that throughout -- until time of conversion, which is due in September. So there, we have made a contract with Sydbank that we'll do business on their behalf. And these 2 amounts more or less adds up in '21. And then, of course, when we end a -- reach end of September, they will not have to pay anything more, maybe a little bit for rent here and there where they use our premises. But moving into '22, I would not guess there will be any big arrangement with sy paying for our services. And hopefully, we will be able to take down this DKK 50 million to DKK 75 million as part of the big cost from the banking activities.

So there should basically be a net positive impact from this in the first half and then that's leveling out towards the -- that will enter into a net negative towards the end of the year. Is that fair to say?

Yes the payment for Sydbank will only be 3 quarters of the year and then what our costs will be that will be a slight positive impact in the first half and then a slight negative in the second half, but it's minor. Yes. That's the timing.

And we have one more question from the line of Martin Gregers Birk from Carnegie.

A couple of questions from my side. The first one on premium growth, you say above 3% premium growth this year. I guess the numbers should have been 4%. What is making you confident in maintaining the 5% 2022 target, given that you are already behind the curve?

That was a very direct question. No, we are quite confident even in 3%. Of course, we need to be a little bit aware of what is having with that is, of course, an impact that that can cater for a lower amount. But for the moment being, we have a very, very good start with Sydbank. Lots of customers coming in from that point of view with a quick start, much quicker than we anticipated actually in our budget. And then, of course, on the flip side, the corona situation in -- current corona situation. So we need to struggle, I think, to reach a 3% this year, but I'm still confident that we will do it. And then you ask for the 5%, and I have really big expectations for also Sydbank, but especially also for the Semler Group coming in. And then, of course, we should be able to do even better in our core business throughout '20. So that will have a -- '21, so that will have an impact in '22. As you all know, we are working towards core our business and improving all of our core activities and from these improvements, I also expect things on the top line.

Okay. But -- sorry, if we look at the numbers that your peers have provided, it didn't really seem like their premium growth so affected by corona. And now you guys have addressed the situation, I guess, for well over 3/4 now. Why do you think in particular that you are so affected on your premium growth development from the COVID-19 situation? And what are you doing different from peers basically?

I don't know if we are so affected. We aimed for 3% and we ended up at 2%. So it's not a disaster, anything, but it is a fact that the way we are doing business with the salespeople driving out to customers is maybe a little bit different from what the others are doing. Maybe you can even say more old-fashioned, but still is the best so of say we have at the moment. So there are things to look into, which is maybe not totally comparable to others.

Okay. Very clear. If we move on to runoff gains, 2 questions on that. Q4, in your commercial lines, you booked runoff losses for 3Q 4 in a row. Any particular reason?

Yes, it's due to workers' comp result, yes. So that's the main reason for that.

And just to say, it is a thing that is a bit variable. I would say some quarters is a little bit up and some, it's a little bit down. But what we intend to show here is the -- you can get a reality and not just keeping it.

Okay. Okay. And then going forward, I mean, now you don't guide for runoff gains. But if you were share, what number should we pencil in?

I will look very much into the 20 number.

Okay. All right. Very clear. And then maybe on -- before we leave the Non-life, then maybe back to question. Given that you deliver a 90% combined ratio this year. You also expect to deliver 90% combined ratio next year. But expense ratio is said to be 1 to 1.5 percentage point lower. I mean, doesn't it seem -- I mean, you guys are not -- in a normalized world, you're not going to give up 100 to 150 basis points in competition on your claims side. Could you maybe put a bit more color on that?

Yes. But as Rasmus said, this year, it's going to be positive effected by COVID-19 of around 1 percentage point, but the same level as Q4, so DKK 45 million, DKK 50 million. So -- and that's not going to have -- at least that's not our expectation for '22. So that's the main part of your calculation there.

And the normalized interest rate level as well. This is maybe a 1 percentage point.

Yes. And you guys don't factor in any improvements in underlying combined ratio growth?

Well, of course, we aim for that, and that's why we also said that our 2022 targets are below 90%. And that's the case.

All right. Then final question on also back to solvency ratio, 3 17 after the deduction of your total DPS of 15 as far as I understand it. I mean clearly, that's sort of very high side. But sort of going forward, what solvency ratio would be your targeted solvency ratio? Are we looking at 2 25? Or...

I would say it will be an outcome of what we pay out in dividend. And for the moment being, our dividend policy is 70% of the annual profit after tax. So I do not expect any major changes right now. We have to see what is happening throughout 2021 and then we can discuss at end of the year.

Okay. But I mean, I guess, this is the sort of the lowest that you're going to be in 2021 and from here on, you could probably going to build on excess capital from here on and your solvency ratio will increase. But when we think about excess capital, I mean, there must be sort of -- you must have a targeted or management floor that we should look at you?

But where we are at the moment is very, very close to our management floor and that is because we are providing for these 200 years accident, both in Non-life and in Life. And as we have this very, you can say, very stressed scenario when it takes off capital. So that is why we are where we are. So in order to get lower, we would need to decrease the 200-year scenario. And this has been the case for many years and brand. And this is what the Board at the moment wish, and we will, of course, take up these discussions. But I also think that we need to remember that things can change out there. We are an insurance company, and we need to be sure that we can also cater for tomorrow. But that being said, then we know we are conservative.

And as there are no further questions, I'll hand it back to the speakers for closing remarks.

Thank you. Thank you, Martin, and thank you for all the good questions. Thank you for listening in, and I hope you will have a good day. Bye.