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

Welcome to the Alm. Brand Interim Report First Half Year of 2021. [Operator Instructions] Today, I'm pleased to present Rasmus Werner Nielsen. Sir, Please go ahead.

Thank you. Good morning, and thank you for taking the time to join us on this call on the Alm. Brand results for the second quarter of '21. With me today I have our CFO, Andreas Ruben Madsen; and Head of Investor Relations, Mikael Bo Larsen. It is a strong set of results that we have announced today that demonstrates that we are successfully executing on the things that we have planned. We have had a very busy agenda in the second quarter of the year, and we have spent a vast amount of both time and resources on the process leading to successful bid for Codan. This is indeed a very big thing for us that will transform our Company and define our road map for years to come. But we have still been able to maintain a strong focus on executing on the day-to-day business, and this is exactly why I'm most satisfied with the results. But let me walk you through our results for the quarter. Please turn to Slide 2. In the second quarter, we have witnessed a very positive development in our business. We have seen a return to a more normal business environment following the reopening of the society, and we welcomed this as it allows us to meet face-to-face with our customers again. Also, our partnerships are making progress and they start to contribute meaningfully to our overall premium growth. The ongoing operational changes that we are making to our business is reflected in our profitability. The initiatives that we have been implementing are making the core of our business more efficient, and eventually, this flows down to the key numbers like the claims ratio. Our focus will remain on both growth and cost initiatives, as we strive for improving profitability further. Please turn to Slide 3. The group made a pretax profit of DKK 244 million in the second quarter of the year against DKK 328 million in the second quarter last year. As you may see from the table on the right side, Non-Life is up quarter-on-quarter, Life is slightly down, and the Other activities are significantly lower. The key takeaways are that the underlying profitability and cost development are very satisfying, that Non-Life profit includes a onetime positive contribution from change in risk margin, but lower than last year, positive contribution from investment results, and that Other activities include a onetime negative contribution for primarily costs associated through the acquisition of Codan, that is both consultancy fees and warranty and indemnity insurance as well as a negative investment result. All in all, this has been another quarter where we have demonstrated that we are advancing steadily on all factors that we can control. This means that the half year pretax results amount to DKK 381 million, which is slightly up compared to last year. Back in June, we increased our full year guidance, reflecting a strong development in our underlying business. We hold on to the overall guidance, but we made some change to how we see the different parts moving in the rest of the year. I will, as always, get back to this at the end of my presentation. And now please turn to Slide 4 for a short comment on the development in Codan. Yesterday, Codan announced their first half results. We are, of course, pleased with this -- positive numbers that indicate that progress is being made on a broad scale. Premiums growth totaled 1.7%, and at the same time, combined ratio improved from 100% to 92%, i.e., a notable improvement of 8 percentage points. The positive development was driven by a huge change in the commercial lines following some of the initiative launched to restore profitability, but also private had a fine development leading to a combined ratio just below 83%. The technical results increased by more than DKK 100 million, and excluding runoffs the technical result increased by close to DKK 200 million. These are numbers pointing in the right direction. And now please turn to Slide 5. We have a process in front of us that we will follow step-by-step in the coming months. On top of this, we have launched a full catalog of actions to prepare ourselves for the acquisition of Codan next year, thus facilitating a swift takeover. The next step we are looking at is the upcoming EGM in early September. We will make the formal decision to allow for the capital increase in Alm. Brand, which will take place within the next month. And on a special note, the association has informed us that they expect to participate with an additional DKK 500 million, thus increasing their stake in the forthcoming capital increase to DKK 4.25 billion. And now back to the Q2 results on Slide 7, the Non-Life business made a very strong pretax profit of DKK 346 million in the second quarter of the year, which is comprised of a very satisfactory technical result of DKK 326 million and a positive investment result of EUR20 million. The technical result benefited from a good development in underlying business as well as a favorable development in weather-related case. Also the COVID-19 pandemic and the subsequent lower activity in general had a direct positive impact on earnings of an estimated DKK 20 million, just like we expected. Last year, we applied to the Danish FSA for an extension of our partial internal model for insurance risks. This has been approved as the model change has a direct onetime positive economic impact on earnings of DKK 64 million. However, after adjusting for this, the technical result came in at DKK 262 million, which corresponds to an increase of DKK 25 million against second quarter last year. The run-off result was a gain of DKK 25 million in the quarter, which corresponds to 1.8%, and thus at par with what we would normally expect. Our investment strategy is a conservative long-term strategy with respect to overall portfolio exposure. And consequently, we have profited from the continued positive development of the financial markets. And now on Slide 8, premium income grew by 1.7% in the quarter, i.e., an improvement relative to what we have seen in previous quarters. Growth has been very positive in the commercial segment where we're seeing premiums climb by more than 4% as a result of both influx of new customers and adjustments of prices within, especially workers' compensation. In the private segment, we witnessed a generally fierce competition in the motor insurance space, which has affected growth. But although we have adjusted our pricing somewhat and increased the amount of campaigning, then our main focus continues to be on profitability. After the reopening of the society and return to more meetings with our customers, we now see our business momentum improve. On top of this, our partnerships with both Sydbank and Volkswagen Semler group are up and running, and I'm confident that this coupled with various price initiatives will further accelerate growth. The claims ratio, excluding runoff gains, was 65.7% against 67.9% in the second quarter last year. Included in this is an improvement in the underlying business as well as a positive, although lower than last year, effect from fewer claims due to the COVID-19 situation. The expense rate was 17.1% and in line with our expectations through the cost savings program we launched last year. As mentioned, the extension of our internal partial model has a onetime positive effect on our results. In terms of the combined ratio, the effect is 4.7 percentage points. All in all, this leads to a combined ratio, excluding runoff gains and change in risk margin, of 82.8% compared to 85.4% in the second quarter last year, i.e., a very strong number driven by recurring underlying improvement. The combined ratio, including runoff gains, amounted to 76.3%. This is an exceptionally low number that reflects the continuing work with the underlying business as well as the tailwind we had in the quarter. Now please turn to Slide 10. For the weather related claims, we have also in the second quarter seen a very favorable development. Weather has been mild. We know especially when events and claims amounted to only DKK 14 million. Likewise, the major claims has developed within the normally expected range and amounted to DKK 74 million. Adding the 2 together, total claims amounted to DKK 88 million, almost flat against EUR85 million in the quarter -- second quarter last year. And now please turn to Slide 11. For the Private segment, the claims ratio was down 4.9 percentage points in the quarter against second quarter last year. Again, this is the combined result of -- on the one side [ in this ] we're doing to increase profit on the underlying business and on the other side, the positive impact from the extension of the partial internal model. One-off gains amounted to a decent 1% but modest compared to the previous years. And lastly, the expense ratio ticked up as expected as we continued to invest in the rollout and implementation of the new partnerships. For the commercial customers, the combined ratio improved to same degree, i.e., significantly lower than in the second quarter last year. Included herein is also a onetime positive impact from the extension of the partial internal model. But aside from this, underlying performance has been good on the back of the various initiatives implemented, including both price adjustments on several policies where we have found that some customers have been paying too low a premium relative to the expected risk profile and then also a tight control on the cost development. Thus, the expense ratio amounted to a satisfactory level of 14.7%, sharply down against the same quarter last year. And now please turn to the Life business on Slide 14. Pretax profit for the first quarter of '21 amounted to DKK 23 million against DKK 30 million in the second quarter last year. The technical result amounted to DKK 27 million and reflects a continued satisfactory expense and risk result, which amounted to DKK 30 million. On the negative side, the investment result came in at a loss of DKK 4 million as prices on bonds eased down. The bonus rate increased to 17.5% compared to 15.2% at the end of last year, as higher interest rates had a positive effect on the life insurance provisions that exceeded the losses on the investment portfolio for the policyholders. Premiums totaled DKK 360 million in the quarter and were made up by DKK 174 million in regular premiums and DKK 142 million in single premium. This development in regular premiums was flat in the quarter relative to second quarter last year although this is partly explainable by the special situation around COVID-19.Iit will take some extra effort to succeed in reaching a respectable growth this year. For 2021, we still have a deposit rate of 3% for new customers. Some months ago, the FSA announced a regulatory change to the minimum technical rate of interest to minus 0.5% with affect from July 1 of this year. We have applied for and been granted a postponement of implementing this until end of this year, and we will then have a setup in place so that we also, in the future, can cater for customers that require our value proposition. And just to be clear about the future of the Life business, before summer, we announced that we are investigating various strategic alternatives for Life, and we are progressing on this as planned. And then please turn to Slide 17 for the outlook for 2021. Based on the development that we have had in the second quarter, that is the strong development in the underlying business as well as few weather related claims and a continued positive investment result, we increased our full year guidance back in June. Following this, we have had 2 additional items that will influence the results this year. Firstly, the extension of our partial internal model is adding DKK 64 million to our profit in Non-Life. This means that the new guidance for Non-Life is a pretax profit of DKK 800 million, i.e., up DKK 75 million compared to the guidance provided back in June. Secondly, other activities include the vast amount of expenses related to the acquisition of Codan, that is both consultancy fees and royalty and indemnity insurance as well as losses on non-listed equities and redemption of subordinated capital. Bottom line is that we changed guidance for other activities to a loss of DKK 175 million, i.e., down DKK 75 million compared to the guidance provided back in June. No changes to guidance for Life. Consequently, our guidance for the group pretax profit stands at DKK 700 million to DKK 750 million, excluding any runoff results for the remainder of the year. And just to be clear, the cost rate in Non-Life is expected to pick up a little compared to last year to between 17% and 17.5%. And regardless of this, the combined ratio is now expected to be around 87%, thus reflecting the increase in our earnings guidance. In total, our guidance reflects a business with all major parts moving as we would like them to. With this, I conclude my presentation and hand over the word to our moderator. Thank you.

[Operator Instructions] And the first question comes from Asbjorn Mork at Danske Bank.

Congratulations on the good numbers. I have a couple of questions on the operations side to begin and then a little bit on the rights issue. If I may start on the action Non-Life performance, the DKK 64 million of one-offs and then DKK 25 million of runoffs in Q2, I guess, weather ended up being a little bit better at the end of June versus your guidance. So that basically gives me around 2 percentage points of improvement to your combined ratio, which is also what you're lowering your combined ratio target for, for this year. So the question really being, how should we interpret this versus the June guidance upgrade? I guess it means first that the summer has been largely as expected. And secondly, it doesn't really seem to indicate any major changes to the outlook versus what you saw a couple of months back. Is that sort of correctly interpreted?

This is Andreas here. Yes, Asbjorn, I'd say that is correctly interpreted, to put it shortly.

Then on the growth in the Non-Life, I mean, premiums in private down again in Q2 and the same kind of happened in Q1. I understand your comments on the reopening and the sales process going into second half. But if I compare with the target that you have for growth next year, it seems very much like corporate is delivering as we could have hoped or expected, but premiums in the private side, of course, much, much less. So how should we look at the growth target for next year? Will that be completely dominated by the corporate or should we expect the Sydbank and the other agreements to sort of mean that private will contribute their share of the growth?

Yes, Asbjorn, I think growth in commercial, we are very happy with that, very satisfied, and it's almost at par with what we expect for this year. And it will also be somehow at that level expected next year. Growth in private, of course, we've discussed that for some quarters, is not satisfying. But we need to see that the overall profitability also in private is very, very good. And we have worked with that for some quarters to find exactly the balance between profitable growth and long-term proper relationship with the customers. And that is what we are working on. Coming into next year, private will also take their part of our growth. And it is exactly the partnerships with Sydbank, which has come in very, very good. We have received more than 11,000 leads in first half. It's on target. And that will continue into second half and also the speed of [ similar group ] coming in. Please also have in mind that now the initiative we have launched in the partnership area with customers in Sydbank now are able to view their -- will be very soon able to view their insurance policies in their bank app, so to say. It will definitely be indicated for a change in the sales environment and the same goes for the Semler partnerships. So we are very confident that also with the reopening of the society, growth next year will come both from private and corporate.

All right. That's very clear. A couple of questions on the transaction. I hope that's okay. First, you mentioned, Rasmus, the Codan first half figures, which look pretty solid. First, do you have any more insights than just the announcement that came from them or is it basically just you commenting on the press release yesterday? And how does that compare to sort of the base case in your business model when you made the offer earlier this year? Just a little bit of a comment on that, please.

Andreas here. I mean, we're not able to bring more specific numbers of splits at this point than what you have seen from Codan. But I will say as much as I think, the overall story here is that the numbers we're seeing are showing exactly the narrative that we talked into when we came out, which is that Codan has historically struggled, especially with elevated large claims and profitability in the commercial lines. And there has been some, let's say, delay in when we would expect to see the full effect of the initiatives they already have in place. So what we see in H1 is basically the traction we were expecting, and we are happy to see that. And to comment on the last part, I would say, to put it roughly, actually it is a bit better than we have been planning for, what we see in H1.

That's very helpful. If I look at your Slide 5 in today's presentation, I note that, first of all, that you moved your Q3 reporting date 1 week forward. I guess that's because you want to get the transaction done as soon as possible. But then I see that you will have to wait for anti-trust approval before you will actually do the rights issue. So just wondering why do you want to move that 1 week forward? And secondly, could you comment a bit on what are sort of the -- what the deal is subject to, because I think I seem to be getting a little bit different communication from you and the seller in terms of what sort of clauses you have in terms of this agreement, whether you are still legally bound to actually acquire the asset even if the antitrust turned down the deal? So a little bit of comment on that too, please?

Yes, I can say we moved it forward 1 week simply to be more flexible in terms of the timing for the rest of the year. So that is basically it. On your question is that we -- in terms of legally binding, we simply wait for the antitrust and the Danish FSA to come up with their -- you can say their approval of the deal. And when it's done, then we can move on.

Sorry, just to supplement here, we're not waiting for these approvals in terms of when we can go out with the right issue.

Just one because what theoretically -- I agree that there shouldn't be any major issues with the antitrust, but theoretically, assuming that they turn down, so basically you won't be able to merge the 2 companies, would you still legally be required to actually buy the asset or will you be out of that deal, so to speak?

I mean to put it roughly, I would say, we bear the risk on the antitrust approval and we will have to make the mitigating actions that they require to make this deal come through.

That was very clear. And then my final question, basically, Rasmus, you said something about Life investigating the strategic options, I guess, you referred to the June announcement, but you didn't give us much more than that. Could you just give us a little bit more flavor on what has happened since June on that part?

Actually, I cannot give too much, saying -- we are just investigating possibilities either for a sale or for keeping the assets and continue to -- continue the good development here. So I think that is what we can give at the moment.

Congratulations on the good numbers.

And our next question comes from Martin Gregers Birk at Carnegie.

Just digging into some of the questions that we have already addressed, first of all, on premium growth, 1.7%, still struggling in the private area, I guess this is with you being born with 2% premium growth to start with, and this is also you coming from easy comps giving that you have Semler and Sydbank somewhat up and running. So there must be some kind of drift here. I mean, where is that coming from? Does that still come back to your distribution model, or how should we think about this?

Yes. I can tell you, you are touching, I would say, the soft part in our accounts this time. Please have in mind our distribution model which we have. It's a challenge, of course, under COVID-19. And we have seen that. We had hoped for earlier reopening what we have seen. So we have struggled with that, and that's why we are so happy to see that now the society is opening. I think that is one thing. The cooperation with the Semler group is not really into our accounts yet, and it's not expected to be in our account yet. So that we cannot really take anything from. And then you can say with Sydbank, it's very well underway. We are very happy. It's on track. But of course, it takes some time to get the premiums into our books. So there's a certain delay there of maybe around 3 months or so. So all in all, I think we are pretty much on track. We have challenges in the distribution area, which we have discussed for some quarters now. But we are launching initiatives, especially on price, in certain geographical areas as well in order to make things more profitable, but also in order to increase sales.

I mean, just sort of to get an underlying view of how your premiums are developing, so if we are subtracting the Sydbank deal from this, what would the 1.7% be?

Now I don't have the figure here, but it would be a little bit low.

How much is a little bit lower? Is it 50 basis points?

What is difficult, of course, is to see what is -- it is like warm and the cold water. What is definitely in the Sydbank would not come through if we have used the efforts on other things. So I think it's difficult to say. What I can say is that we have received more than 11,000 leads. And more than 50% of these, we have harvested as new customers. So we are pretty well off in that area.

And in terms of your distribution model, I guess, Rasmus, we have been discussing this now for quite some time. I mean, what if clients, they prefer to sit home and have teams meetings opposed to having meetings in physical presence? Is that going to be a continued challenge on your distribution model?

No. But it's of course -- I think it's the new way that customers react, and we, of course, need to follow that. We have very strong outbound teams that are only working with meetings face to face via medias. And also some of our distribution people that are meeting people physically are now also able to take these meetings if their clients wanted -- a customer wanted to do it also via [ IPAS ] and all that. So we are shifting, you can say, the very traditional model to a little bit more model as well. And then we're looking into -- you can see the new and greater brand with Codan coming in. And there, I will say that then we will see a whole other distribution power, a more broad distribution power, than what we have in, you can say, old M brand today.

When we talk about -- sorry to stick around this premium growth area, but is there an element of you being squeezed in sort of the top [ Turk ] Nordea, Danske Bank client swap?

I think there's an element, at the moment, what we are facing, and I've said that for some quarters. In certain areas, there is a very fierce price competition. And you can say that is an element of changing, you can say, provider. In our case, [ top ] was the former provider for Sydbank. And of course, they're not just letting customers go. So we see a very, very fierce price competition in that area. And that is just one case, among others.

So if you look 1 year forward, that number was supposed to be -- well, the number next year was supposed to be 5%, now it's 4% to 5% premium growth. Why is that not going to be 2.5% with 3%? What are sort of the building blocks from the 1.5% to 2% up to the 4% to 5%? I sit back with an impression that you need a great deal of tailwind to make this happen.

I think if you look at our business it's 50-50 commercial and private. And with what we see in the commercial side, we have 4% to 5%. And with all the initiatives we have in our book, the turnaround that we have made, we were very far down last year in the commercial side. It's picked up. We are doing all the right things. We're meeting customers. We're expanding a bit on the size of the customers we are meeting. We are getting an inflow from Sydbank, which is a very strong commercial bank and all that. So the commercial side, I'm very happy about and it may be that they can do more than 5%. So that is like half. And the other half is then the private part. And I think we talked a bit about it already. But all the price initiatives, we have Sydbank coming in, Semler coming up. I'm quite confident that we will be in the upper range of this.

I would like to continue with a couple of questions on Life. I guess the announcement that you made on I guess it was the 13th of June regarding the strategic initiatives, usually when an announcement like this comes out, a sale seems to be imminent. But we haven't really seen anything yet. I mean, is there no way that you can give any kind of insight into this? I assume that you want to have a sale in place before the rights issue commences. Is that fair to assume?

I cannot give any comment on that, Martin.

But so from a buyer's perspective of your Life Insurance business, what's the value proposition here? I mean, you have a business that is struggling on premium growth. You have in health and accident business that is profit making, which probably also could you suggest that prices are too high. And then finally, you have a very old legacy IT system, which could also signal whether large implementation costs from a buyer. I mean, I'm sort of struggling to get my head around this. Is there any way that you can help me here?

I don't share your views on all your statements. I think we have good growth in the Life company. It is, of course, a little bit demanding at the moment with COVID-19 and with the kind of customers we have in Life being smaller customers which have -- struggling a bit with the liquidity, and therefore, they can stop the premiums at the moment. But otherwise, I think we have a fair amount of growth there. And then I'm also saying we're driving a very profitable life company, the most profitable, at least I know. And there are things we can do in order to improve profitability if we really wanted it. Now we are driving this as a growing concern and we will continue to do that. So over the many years it's been driven very cost effective. Then you're right, we have the legacy system. It's old, but it's running and it's very easy to change. So you can say, is that good or bad; at the moment, I think it's actually quite good with all the demanding actions coming from FSA. We can incorporate that in the systems because we can do that fairly easy because it's well known. So of course, you can put a negative or a positive, but I think we have a very good asset and a very attractive asset as well. So yes.

So let's assume that you're going to stick with your Life company because you can't get the multiple that you want. What kind of imminent levers would there be to push our profits in your Life company?

I think I will not get back into that right now. What we see now is a very good bottom line, so to say, in Life, which we are happy with. And that can maybe increase a bit. But for now, it's steady business, it's good business, and it's a profitable business.

Well, selling the Life company, isn't that a vital tool in order to complete this Coda transaction? Of course, you can live without it, but it would be easier with money in the bank to put it...

No, I don't -- it has nothing to do with charge. You can say, what we are aiming for, if something is to have a more streamlined group, that's also why we sold off the bank last year, only to focus on Non-Life. And we couldn't come in with -- we get prices peaking in Non-Life. So Life will be even smaller percentage of the total group. I think that is the most important thing.

Just a final question for bookkeeping. The negative DKK 125 million, what's the split here on the different components?

I think I can try to help you out there. The main components are, as we've already touched upon, cost related to Codan and how...

How much is that?

Yes, but I would say it's about DKK 90 million as we also put in the H 1 statement. That covers, just to be clear, the total amount of cost we expect from these types of transaction costs for 2021. And then we have had some adverse developments. We have a single unlisted equity called the Bella Hospitality Group, which you can go in -- and if you follow that story, the existing investors basically were written down to 0, following their capital raise recently. And that explains most of the difference up to the total number.

And our next question comes from Per Gronborg at SEB.

First of all, the big picture, it looks like Q2 underlying is just as good as Q1 underlying was bad, at least on the numbers we can see. Is this a pure [ lock/unlock ]? Are there other drivers we should be aware of?

This is not luck. It is, as you say, the under hanging business we're talking into here. And if you adjust for COVID, we're almost 4 percentage points better in terms of underlying combined. And I would say that is the effect from the profitability initiatives we've had in place, both in terms of securing the right premium versus risk levels, but also, I would say, the continued improvements we see in the claims handling area with increasing ambitions also for this year. We start to see the effects there. And then we are -- as we've touched upon earlier, we're also able to deliver costs in order with our expectations. So I think it's definitely something that reflects the underlying improvements.

So what you're telling me is that Q1 was -- if Q2 was not luck, then Q1 was not bad luck either. So Q1 was just very bad management and now all you need to do is start working in second quarter. That sounds..

No, but I'm just saying that -- no, but I can follow you that way. We have to obviously be careful over-interpreting one single quarters. I think that's the general statement.

That was exactly what you did, and that was what I asked about. Is it fair to say that there was a portion of unluck in the first quarter and also a portion of luck in the second quarter?

That's fair enough.

Just on the approval process, I assume you still are in Phase I process. Is that correct?

Yes, that is correct.

When do you expect to have delivered the final tables for the authority to finalize the -- or for them to have their 25 days to make their Phase I decision?

I think we're not quite ready to commit to a specific date there here, Per. So as we state here also, it would be in Q4.

But does this imply that if it goes to Phase II, then everything -- then the [ CAC ] might be postponed to 2022?

There's a lot -- this is not -- we're not -- this is not the rights issue, if that's what you're asking about.

But if you haven't finalized Phase I yet, then they have 25 days working days. If they push it into Phase II then it sounds like it will be hard tray to get the approval before at the earliest, very late in Q4, if we go into Phase II. Of course, we don't know whether they will need a Phase II, but taking into account they need their Phase II for truck, so it probably can be ruled out they also need a Phase II for this deal?

I agree on that, Per.

Then to Codan's numbers, you stated that you had limited insight. Last time we talked about Codan Denmark, the story was that there were a lot of large claims in 2020. That seem to have been a key driver of the impressive improvement they seem to have delivered. What's your perception? Is the large claims level in the first half now at a normal level or are we still above or have we ended up below a normalized level? Do you have any insight to that?

I would say it's a bit hard to comment on exactly, also given that we're not able to provide the absolute levels at this point in time. But I would say it's slightly elevated to what I would consider a normal level, but not far from it with respect to the business they run at present.

But still a bit above what you would perceive to be a normal level in the first half?

Slightly, yes.

Last time, we also talked about Codan, to solve the large [ AMC ] so they need to do some pruning. Therefore, it's a bit surprising to see that they actually grew their premiums quite nicely. What happened to the pruning story of Codan? Has that been canceled or yet to come?

Again, I'm a bit limited by what numbers I can give you at this point, Per. But I would say, again, this is earned premiums and obviously to get a clearer picture of where we are at this point in time, we'll probably go to look at written premiums. And to put it softly, I would say that would probably closer reflect the story of still some pruning being made.

We should still expect some pruning to happen on the portfolio?

Yes.

Very final, the model proves an outcome through in Non-Life, there is nothing pending in the Life. Is that correct?

Yes.

[Operator Instructions] We haven't received further questions at this point. I will hand back to the speakers.

Thank you very much for joining us and thank you for the very good questions. Talk to you later. Thank you for today.