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

Hello and welcome to the Alm. Brand Investor Conference Call. [Operator Instructions] And afterwards, there will be a question-and-answer session. Today, I am pleased to present CEO, Rasmus Werner Nielsen; and Senior Investor Relations Officer, Mikael Bo Larsen. Please begin your meeting.

Good morning, and thank you for joining our call today. We also have Andreas Ruben Madsen, our Group CFO here. We have been looking forward to this morning's announcement on our rights issue, which marks an important next step in our efforts to acquire Codan Denmark and build the second largest player in the attractive Danish nonlife insurance market. Our prospectus has been published and is available for you so that you can dive into the details of the rights issue. On this call, I will provide an update on the time line, a summary of the fully underwritten rights issue and a brief recap of the transaction. Please turn to Slide 3. I'm very pleased to say that the acquisition process is very much on track. We are aiming to build a Tier 1 Danish nonlife insurer and to benefit from economies of scale by roughly doubling our size whilst realizing tangible synergies with manageable risk. We see great value creation potential in this acquisition, and we'll work hard to secure a strong economic impact. As you all know, we announced the acquisition back in June and held an extraordinary general meeting in September, which resulted in strong support from our shareholders to go ahead with the rights issue offering. In mid-October, we announced the completion of our first ever public debt issue of DKK 1.3 billion with strong interest from investors. And towards end of October, we posted a solid set of Q3 results. And we were pleased to note the positive development in Codan's Danish business in the period as well. Today, we have announced our rights issue and published our prospectus to secure financing of the contemplated transaction. We expect to successfully complete the rights issue over the next couple of weeks and to obtain the expected antitrust and FSA approvals during Q4 '21. On this background, we expect to close the Codan transaction in the first half of '22. We feel confident about the time line and look forward to realizing our ambition of creating a new and larger Alm. Brand to the benefit of all our stakeholders. Please turn to Slide 4. We will continue our efforts to transform Alm. Brand into a leading pure-play nonlife insurer after the announcement of the planned transaction. In early October, we announced a conditional agreement to divest our pension activities in Alm. Brand Liv og Pension for a consideration of DKK 1.1 billion. This contributes to realizing our strategic ambitions and has freed up around DKK 900 million in capital, which we now use to reduce the size of the rights issue. As briefly mentioned before, we also raised around DKK 1.3 billion at a variable interest rate of 3 months CAGR plus 1.5% in the Tier 2 capital insurance after obtaining an A rating from Fitch. We are really pleased with the investor interest we experienced in this financing round. The separation of Codan Denmark is on track and is expected to be completed in the first half of '22. In late September, the new Danish business unit received its insurance license and everything is on track. On our end, we have established a solid integration program with internal and external professionals with extensive process experience and comprehensive knowledge of Codan Denmark business. To sum up, we experienced significant progress in transforming the group from a financial conglomerate into a leading pure-play nonlife insurers. Let's turn to Slide 6, where we will provide some color on the financing structure for this transaction. The total investment comprises the consideration of DKK 12.6 billion agreed with the seller, plus restructuring and transaction costs of an estimated DKK 1 billion after tax. In total, this amounts to DKK 13.6 billion, which will be financed by the underwritten rights issue, which will be of DKK 10.5 billion, capital freed up by the divestment of our pension activity of DKK 900 million and the previously mentioned bond issuance as well as other financing sources summing up to DKK 2 billion. We are pleased that the association has increased its irrevocable commitment to invest as much as DKK 4.65 billion in new shares. The association will subscribe to its preemptive rights and have excess cash to further invest up to DKK 600 million. In addition, we have received irrevocable commitments from AP Pension, Nykredit and Østifterne for DKK 550 million in total corresponding to around 5% of the offering. The remaining part of the rights issue is fully underwritten by the syndicate banks in this transaction, which are JPMorgan, Nordea, SEB and Danske Bank. Please turn to Slide 7 for just a few comments on the support from the association. The association is owned by around 400,000 members, who are insurance customers in Alm. Brand and currently holds close to 45% of the shares with an ambition to increase its ownership to more than 50%. The association has a long-term interest in ensuring Alm. Brand's position in the Danish market and is very supportive in the transformation of our company. Please turn to Slide 8 for an overview of the rights issue and the execution time table. I'll not comment on the details in this, but simply note that we have decided on a 9:1 subscription ratio. We published the prospectus today and expect to complete the rights issue on December 2, as indicated in the timetable here to the right. Let's turn to Slide 10 for a brief recap of the transaction. Back in June, we signed the agreement to acquire Codan Denmark from Tryg/Intact at a total consideration of DKK 20.6 billion. We have strong financing in place, including commitments for the association and AP Pension, Nykredit and Østifterne to participate in a full underwriting of the remainder of the rights issued by JPMorgan, Nordea, SEB and Danske Bank. We expect to realize significant synergies of DKK 600 million per year by 2025 and deliver a 7% return on the investment. Finally, we still expect closing of the transaction to be in place by first half '22, pending approval from the competition authorities and the FSA. Please turn to Slide 11 and the investment highlights. So why are we doing this? We firmly believe that the acquisition of Codan Denmark represents a unique strategic opportunity for Alm. Brand. It will allow us to reposition our company and transform us to a Tier 1 player in the attractive Danish nonlife insurance market. The combined company will position itself as a #2 in the nonlife insurance market, and there will be a noticeable distance to the #4 and 5 players in the market and an even longer distance to a long tail of smaller companies. Size is important in our business. The new and larger company will enjoy economies of scale, which will benefit customers, partners and investors. We will be able to accelerate the development of our product range, your distribution channels and our partnerships. Part of the economic rationale for this transaction is based on us being able to realize substantial synergies when combining the 2 companies. We have identified several hardcore synergies, and we are confident that we will be able to harvest those through hard work and allocation of time and resources. This transaction will create attractive value as we progress on realizing the synergies. This will lead to higher earnings and an increase in our capacity to pay out dividends. And now please turn to Slide 12. The Danish nonlife insurance market is today characterized by 2 big players, a handful of small, medium-sized players, and long tail of smaller players. Alm. Brand and Codan are currently listed #3 and 4 in this ranking, and the combination of the 2 companies received the new company becoming a clear #2 on the list with a market share of 17.4%. The increased size of the new company is expected to drive significant economies of scale and create value for all stakeholders as we aim to leverage a larger platform to develop our business, solutions and services. The transaction will allow us to leverage further on the data insight. It will give us even better scale on procurement, and will make room for more R&D. All of this is important as it will enable us to strengthen the value proposition to our customers and to ensure a strong underwriting. Our employees will embark -- will be embarking on an exciting journey, and I'm sure this is attractive for talent in both Codan and Alm. Brand as well as newcomers. In conclusion, we consider this transaction an opportunity to establish a future-proof nonlife insurer in an attractive market space and fundamentally change the proposition of our company. Let us move to Slide 13. The key value driver in this transaction is the substantial synergies that can be extracted from the combined business of Codan Denmark and Alm. Brand. The 2 companies about the same size and market reach that overlaps in most customer segments, overlapping geographic footprints, 2 headquarters almost next door and a huge potential from sharing best practices. We expect considerable upside from very tangible cost synergies. We are aiming to realize synergies of DKK 600 million. We have thoroughly analyzed the synergy's potential and find that around 63% of this will come from cost reductions, IT and infrastructure. We will share the best practices, reduce head count, ensure rent savings from combining offices. The synergies will also be realized by integrating IT systems, platforms and applications. And the remaining 37% will come from reduced indemnity spend related to procurement, fraud detection improvements and improved claims processes. While some of the synergies can be realized quite fast, others are more complex in nature and require more work and time. IT synergies are expected to be subject to the longest phasing period. We expect a total amount of DKK 600 million to be fully realized by 2025. DKK 90 million is expected to materialize already in the first year after the transfer of Codan Denmark to Alm. Brand. And the synergies are then expected to be phased in with DKK 240 million by '23 and DKK 450 million by '24, and therefore, reaching DKK 600 million by '25. In addition to the cost synergies, we also expect the combination of the companies to generate revenue synergies from cross-selling in the longer run. Please turn to Slide 14. Based on our insights in the business and integration program, we have established -- we have a very high degree of confidence in our ability to deliver on the synergy expectations. We have defined clear integration priorities and expect legal disturbance. Our business continue due to our deep knowledge of Codan Denmark and our comparable business models. The process plan and program structure for the integration work have been laid down and thoroughly specified, ensuring that we are ready to move when the expected authority approvals are in place. In short, we are doing everything possible to prepare the integration and minimize execution risk. You have mostly met us present on the call today, but it's very important for me to highlight the strength of the Alm. Brand team. We have a very experienced and highly talented colleagues, who are fully capable of executing on this integration strategy. There are onboarded, involved and dedicated to create the second largest nonlife insurer in the Danish market, which you will think is a fantastic mission to be on and something great to be part of. Now please turn to Slide 15, where we have highlighted how this transaction is expected to affect our solvency position, which is currently very strong with a Solvency II ratio well above the required level. With the combination of the rights issue and owned funds, we expect to maintain a robust solvency position with a ratio of around 170% after completing the transaction. The solvency ratio will be positively affected by the ongoing rights issue and the completed bond issue, whereas transaction and restructuring costs as well as increased insurance exposure and the standard CSR model in Codan Denmark will entail a lower solvency ratio. Please see Slide 16, an illustration of the development in dividend payments and share buybacks over the years. The payout ratio has been around 100% in the last couple of years, and the proceeds from the sale of the bank were also fully distributed to the shareholders. We have and will maintain a dividend policy stating that we will target a payout of a minimum 70% of the group's profit after tax. With the new and larger company, we expect to see increase in earnings potential and thereby, dividend capacity. On this note, we will turn to Slide 18 for a swift recap of the key takeaways. We are absolutely confident that this is a great deal for Alm. Brand. We will transform our company into a Tier 1 nonlife insurance company in Denmark and create value for customers, partners, employees and shareholders. We are well prepared and certain that we will be able to unlock value by combining the 2 companies and realizing the identified synergies. Before we turn to the Q&A session, please go to Slide 19, where we have outlined the next key steps in the rights issue. The rights trading period will commence this Thursday and close on November 24, and subscription for new shares can be placed on November 15 until November 26. And on this note, I will hand it over, the word, to our moderator. Thank you.

[Operator Instructions] Our first question comes from Asbjørn Mørk with Danske Bank.

I have a couple of questions. The first one relating to the Danish Competition and Consumer Authority. Last week, they were out saying that they will launch a new analysis and competition in the private insurance market in Denmark. Of course, the timing seems a bit peculiar considering your transaction here. So just wondering if you could give us a bit of an update, maybe not so much on their stance on why they're doing the analysis, but what the -- when will you submit your final application. And when will this 25-day response period begin? And are you still expecting that this will be completed in Phase I and that you will not have to offer any remedies in connection with the deal?

Yes. So, I think the answer is more or less the same as I gave a week or 2 ago. We will send in the final application by -- before end of this month. We expect to do so. And then things hopefully will be settled in the Phase I around Christmas time.

You say hopefully will be settled. You sounded a bit, maybe it's just the wording, but you seemed a bit more certain 2 weeks ago, or is that just...

Oh, no. It's the same. It's exactly the same message. It's more the timing in it. But we do expect it to be finalized before year-end, yes.

Okay. And then in connection with that, I thought that you got the FSA approval for the [ Japan ] insurance company. And I'm just wondering, it seems like the only thing you need to get from the FSA at this stage is basically an ownership approval for the new entity. Is that correctly understood? And is that just a minor detail from here as you see it?

Yes, it's correctly understood, And it's a minor thing, yes.

Okay. Perfect. Then if I may, on your Codan, on the business. If we look at the combined ratio, of course, it has improved the first 3 quarters of this year versus last year. But if you look at the prospectus, it seems like the underlying business has actually deteriorated by 120 basis points, both within commercial and private by actually around 130 basis points. I was just wondering if you have any comments to those numbers. Anything we should be aware of? I fully acknowledge that 2020 saw a significant improvement versus 2019. So just wondering if this is a regular volatility or if you're actually seeing a slight deterioration in the business.

Yes. Asbjørn, Andreas here. Happy to answer that. I see it this way. I mean, one thing which is pushing the underlying combined is the increase in costs, driven especially by the personal lines segment and the significant investment they've had in strategic partnerships. If you look at commercial segment, you are right that the story isn't the same there. But what I would say it is a marginal increase in the commercial, probably also driven by claims. But I think the thing to remember is that the issue with Codan's profitability in commercial lines has not and is not the underlying claims. It has been the major claims, and that's where we are happy to see a significant improvement. So I think overall, that's the story.

Okay. Fair enough. On the synergies part, if I understood correctly from the presentation, it sounds like you said that the IT synergies would have sort of a longer duration for delivery going forward. I was just wondering, with the same IT systems in place in both Codan brand and Alm. Brand, why is it taken -- or why will it take so long to realize IT synergies? Are there anything you've been aware of the last couple of months that has changed sort of the timing here?

No, there is nothing changed, Asbjørn. It's more -- it's not only the tier platform, it's actually in general, still 2 big companies putting together. And also, as you know, from the bank world, too, bank data platforms getting together is not just a walk in the park. So everything is exactly the same timing as we said originally. So nothing has changed.

Okay. And then final question from my side on the specialty line business, the technical lines, more specifically, the renewables business. Anything you can share with us today on what you feel what your strategy will be for this specific line of business going forward? I see you touched upon the retention risk you also touched upon the growth, but could you give us any insight into where do you see this going forward in the future Alm. Brand set up?

Again, I don't think we have any new to add on this. As you said, we are expecting this business to merge into Alm. Brand as it is today. And of course, most likely in even better shape. And then we'll look in to see what is profitable and what is less profitable as with all other business. So it's the same statement.

Our next question comes from Martin Gregers Birk with Carnegie.

Just a number of questions from my side. First of all, on the DKK 600 million debt, the association can also choose, too, by rights were -- wasn't that number DKK 700 million originally? That's my first question. Then my second question that goes on -- I'm wondering why you are not intending to include your underlying net profit for 2021 in the rights issue and thereby reducing it by another 6-ish percent?

So I can start with the first question being the participation by the association. The short answer is nothing has changed. They still have ultimately the same facilities and drawing rights in place. I mean in period, they would be able to go even further since they're not too regulated. So actually, the DKK 600 million, you should see as an approximate level. It might be a bit higher. It might be a bit lower. So that's the answer there.

Yes. And in terms of the profit of the year and the dividend, we have chosen to simply include that and be a little bit to the conservative side in that matter.

Okay. So just a clarification. So you're not going to -- so you're still going to -- you still aim to pay the dividend by year-end? I mean, this is basically what it means?

Yes, exactly. We feel that, that is what we've said all along. We were -- we've been out saying that we were funding, in total, the need for this transaction. So in our capital planning, we have also planned for there being a capacity to pay out dividends next year in accordance with our policy on dividends.

Okay. And then maybe a final question on your own funds. I mean, if you strip out life and you look at sort of the underlying own funds for the P&C companies, so it looks like that is fairly well capitalized. Isn't there -- couldn't there also been a chance that you could have used or committed additional funds in the transaction and thereby, again, reducing the size of the rights issue?

Well, no, I don't think so. I think we are -- the way we are presenting this is consistent with what we've said until now. We are aiming for, after completing the transaction and after also realizing the synergies, to have a long-term level of 170% in the nonlife part, and we are now basically only an nonlife company. So that's consistent with what we've said. And the internal capital surpluses we've had, we have brought into place, so to say, in terms of arriving on the financing need and the rights issue size now. So that is consistent with our overall planning of a nonlife ratio of 170%.

Our next question comes from Jakob Brink with Nordea.

Thanks for the additional information on Codan. However, I just had a few more details on that part. First of all, regarding the increase in the underlying combined grade. So It seems, from the prospectus, as if this is not adjusted for COVID. Can you just confirm? And isn't that then part of the reason why it's going up?

Yes. Jakob, you're completely right. This is the underlying combined ratio. In the raw underlying, so to say, we have not included in the prospectus, estimates for COVID-19.

And then just a follow-up. If I look at your Page 25 in the presentation, I guess, 9 months '20, commercial underlying combined ratio must have been 77.3, right? It says 78.6 now, and it's up 1.3 to 77.3, but it also says that it was 80 for the full year '20, which means, sort of back of the envelope, at least, that it was around 88 in Q4 last year. So I'm just wondering why is the underlying combined rates so volatile in Codan Denmark? Have you got any idea of that?

I'm not -- I didn't follow all the bridges there, Jakob. But, I mean, if you look at the 3 months, at least, of '21 compared to 2020, also in commercial, it is -- I'd say it's slightly up. That's right. It's about a percentage point. I don't recognize that it's very volatile. You say that you're reading into this that the Q4 is -- there was a...

It's just if you read to the right, we can take it afterwards. Maybe that's...

Maybe, maybe, yes.

Yes. Then just for me to understand on the capital side, you're right that it will be what we said on the presentation, Slide 15. You're right that the SCR will be DKK 3 billion and 70% will be a standard model. Can you just elaborate on -- so in the prospectus, it says that Codan Forsikring was on an internal RSA model, but the Privatsikring was on a standard model. So just the details on that and your plans regarding future capital optimization.

Yes. Happy to do that. I mean the company we are taking over is -- only has a standard model. The internal model, which RSA had, it hasn't, so to say, survive the demerger process. So we have -- we are taking over a business on a standard model. And that will, as you also see from the numbers, will actually be 70% of our total SCR will come from Codan and the standard model there. Going forward, we see a potential to optimize this. We have good experience with developing a model on the product lines we have, at least in Alm. Brand. And so I would say that obviously, we would, in, let's say, medium term, I would say, be able to either get to expand the model we have covering lines such as much of the risk in Privatsikring and also significant parts of both personal lines and some parts of commercial lines. And then we would have to look into how to handle the rest. But as you know, this is not something you do from one month to the other. It's a big process. There's also regulatory approval needed. But we have good experience of that recently, having just expanded our own model. So that would be -- we see some potential upside going forward there.

Okay. And then just continuing on that and also the segmental split of Codan in the prospectus. I see that, for example, I don't know, is the renewable business, maybe that's my first question. Is that part of the offshore or marine segment in the prospectus? Or where is that booked?

I think it is -- sorry, Jakob. We'll just double check that for you and come back later.

I'm just wondering because that segment has been quite volatile historically and also quite loss-making together with the commercial property segment. I guess they have been the 2 most sort of loss-making sectors over the past 2, 3 years. And then also looking at the capital we just discussed in Alm. Brand, it's 70% of the capital consumption in the group. And at least there are some of the segments which are quite loss-making. So I guess my question on capital optimization is a bit further than just going to an internal model, but are you also considering that some segments should maybe not be there longer term?

I think -- if I could start from another end, so to say, I mean, I think you're right. I think also, a significant capital -- yes, if we need to realize the potential from -- well, you also need, so to say, a profitable business to do it on. So I think -- I mean -- and that comes from the business plan we're putting out, also including our expectations for commercial and here under renewables going forward. I think it's worth noticing that also, renewables have, already in the pre quarters we just had, a much better run than it had last year, and that's a big part of driving down the overall large claims ratio by about 5 percentage points. So I think -- and then maybe Rasmus can supplement on this. But as we've said before, we're taking over the business as it stands. We feel comfortable that Codan has done, so to say, the right things in pruning and improving those lines of businesses also. And obviously, we'll be looking into this when we take it over, but that would be the starting point.

And just to say, maybe just to add, we are simply not allowed to get into real details yet. So it will be wrong to take decisions around that yet.

[Operator Instructions] Our next question comes from Per Grønborg with SEB.

First question, on the risk part Section 1-3, the group has now right to terminate the acquisition. We have discussed this before. whether there were the dealers depending on approvals. Here, it looks like it's -- there's actually -- you cannot terminate the deal if the competition authorities doesn't approve it. You commented about -- a bit about what is this -- how you look at it and how we should read the prospectus?

The facts are there, and I hope that comes from the prospectus. It's that there is one thing, basically, in terms of the approvals is on the competition for it that may -- that will entail that the deal doesn't close. And that is if they say no, full stop, so to say, this is not going to happen. If -- and we feel that is an extremely unlikely, a very theoretical situation of possibility. In the event, which is still, as we see it very unlikely that they asked us to do certain remedies, then a mini bond has -- the deal closes and a mini bond has to [ liquid ] those remedies. So I hope that makes sense.

It does and we agree that the competition authorities can suggest remedies. You are the only one that can offer remedies to the authorities. So if you don't like their suggestion, you can just decide not to offer them to the competition authorities and then you will get a no.

We will have to offer those remedies. That's the way it works.

Yes. And if you decide not to offer them, then ultimately, the competition authorities will say no. And then we agree there is still no deal in that case. The key risk, of course, being if they should decide that you cannot be the owner of Privatsikring.

I don't see it playing out in that way, Per.

But we are in the insurance industry. You guys have any -- should be aware of tailwinds, and this is -- this must be a tail risk you consider. And I'm just a bit confused because the prospectus is -- at least in the risk part, is saying something different compared to what you have said up until now.

Yes. I'm saying -- what I'm trying to say is that we bear the tail risk, so to say, in delivering the remedies needed for the deal to close.

Okay. So the agreement is that you have to deliver whatever remedies the competition has obviously suggest Okay. Perfect. That was new, at least to me. Back to the numbers. Might as well we get some historical data on weather claims, large claims, et cetera. What's your perception? What -- you have -- on your own company, you have guided run rate for, especially large claims, where the table doesn't seem to have any large impact on product. What should we expect a normalized run rate to be on large claims for Codan Denmark?

Yes, I think it's still a bit early to sort of guide on that. What I would say, as we've also said before, that we are actually a bit, let's say, the plan we were -- what we were planning for and expecting at this point -- I think, actually, Codan is delivering a bit better, also on the large claims realized in the first 3 quarters. As it also -- as mentioned in the prospectus, there has been one large claim in October following completion of September. It's a fire in a Danish factory, which has entailed that they had to pay their deductible of DKK 100 million in the -- via the reinsurance program, which is their single risk deductible as it stands now. So that shows there is some volatility still. And as we also said before, it's been 3 very good quarters on that account. And I think it's fair to say, we weren't expecting it to be quite at that level yet. The overall trend is there, but probably, we would expect to see a bit higher losses than we've seen in the first 3 quarters on a normalized basis right now.

Are we talking 12, 13 points? If you have DKK 100 million in the fourth quarter, then I assume we would be fastly approaching the same level of large claims this year as you have had in the last 2 years.

No, I don't see how that math works, Per. I'm saying that we have an improvement of 5 percentage points this year compared to last year, the first 3 quarters in large claims. I'm saying we're not probably -- that's not probably a normalized level.

Okay. Good. We must see what we will get at some states. Back to the reinsurance program, you outlined, quite nicely, in the prospectus. Any comments on what would be an acceptable single risk level for the new Alm. Brand?

Yes. And maybe it's a relevant comment also in relation to the large claim I just talked into before. They have a deductible, right now, on single risk of DKK 100 million on the fire program. And mainly, brand would be expecting in the larger group, including Codan maybe to have something around DKK 50 million. That's what we're aiming for at this point. But that program, as you know, is something we still have to put into place. But that -- that's a rough target we're planning for.

What should we expect of that to incur in net increased reinsurance costs?

I don't have that number for you, Per.

Okay. Fair enough. Fair enough. My final question, your international business, your international industrial business, how big a part of Codan Denmark is that, if you decide to not do nondomestic business in London? We can see also that you have own risk on natural day or on the big side of as much as GBP 25 million. I assume this also somehow relates to the international business, where you will not have the same muscles to write large single risks on your own books and the question, I guess, is whether it will be possible if you will have to rely to a much higher extent on reinsurance, then the reinsurance tends to take the last share of the cake.

Yes. Per, now we talk about the future and also the insight we get into the business, hopefully very, very soon. I think in terms of foreign business, we believe it's around 10% to 15%. And that, of course, goes for the discussion you just mentioned. What we would take on, how we do reinsurance, how we manage risk, are there any part of this business that we don't want to enter into the future or anything, maybe smaller parts we want to expand. We have to see that later on.

There are no further questions. I hand back over to our speakers.

Yes. Thank you for the questions, all 4 of you. Yes, we'll keep in touch. If you need anything, then just call. Thank you.