ALM. Brand A/S
CSE:ALMB
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ALM. Brand A/S
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Hello, everyone, and welcome to the Alm. Brand's Interim Report for the Second Quarter of 2022. My name is Daisy, and I'll be coordinating today's call. [Operator Instructions]
I would now like to hand the call over to your host, Rasmus Nielsen, CEO of Alm. Brand, to begin. So Rasmus, please go ahead.
Thank you. Good morning, and thank you for taking the time to join us of our call on the Alm. Brand Group's result for the second quarter of 2022. As usual, I have with me today our CFO, Andreas; and our IR team with Mads and Mikael.
This morning, we have published our first consolidated set of numbers that includes Codan, not for the full quarter, but for the 2 months, May and June. I've been looking forward to this, and I'm excited that we now, for the first time, can provide a detailed picture of what the operational performance looks like for the group. This, of course, means that it's a little more complicated to do like-for-like comparison to previous performance.
In total, I'm proud of what we have achieved so far. And I think we have a very clear road ahead of us in terms of integration and business development for the quarters to come.
And now please turn to Slide 2 with our highlights. Again, this quarter, we have maintained a strong momentum in execution, thus succeeding in both further growing our business and taking important steps in integrating Codan into the Alm. Brand Group. After taking over Codan in early May, we put in place the top level of the organization, and subsequently, the next level of managers was appointed.
Further, in mid-June, the full -- the new full organization was in place, including physical reallocation of more than 1,800 employees. Also, a first round of significant synergies was realized as FTE reductions were made across the various headquarter support functions. At the same time, we managed to keep a strong focus on the day-to-day running of our business and, thus, Alm. Brand successfully maintained a strong growth also in the second quarter.
You should note that growth is in both Private lines and Commercial lines and that both segments have successfully added to an already positive development in the first quarter. Partnerships are an important growth engine, and we are very pleased with the overall contribution that we see from this channel.
For the development in the technical result, the development in the technical result reflects an underlying business that developed satisfactorily, although cost inflation is on the rise. Also, I'm pleased with our first earnings result from Codan. And when adding it all together, we get to a solid outlook for the full year.
Consequently, we increased our full year guidance for the technical result based on both a positive development in Alm. Brand and a good contribution from Codan as well as the estimated effects on synergies.
And now please turn to Slide 3 with our financial highlights. The technical result, including Codan, is up to DKK 337 million compared to DKK 322 million reported in the second quarter of 2021. In general, we are pleased with how our business is performing, but we do note that the combined ratio is up against last year, most notable due to a very low number last year because of the expansion of our internal model as well as tailwind from the COVID-19 on claims.
Investment income was a loss of DKK 272 million. This is a much higher amount compared to what we normally report and reflects both the inclusion of the Codan investment portfolio, which nearly tripled our portfolio, and the fact that financial markets have had a quarter with exceptional price and spread movements.
Our other costs amounted to DKK 27 million with net headquarters cost fairly unchanged and including cost to deposit of the large sum of cash earmarked for the purchase of Codan.
Execution of the first initiatives to integrate Codan and realize synergies has been swift and has put us ahead of our plan in terms of the amount of synergies to flow into the numbers this year. Thus, with special costs of DKK 164 million in the quarter, we are also a little ahead of the amount of researching costs compared to what we had expected. We do, however, see this as a positive.
Customer relationships and brand amount related to Codan will be amortized over 8 to 10 years, respectively, at an annual rate of approximately DKK 360 million. This is, of course, a noncash item, and it will have no effect on our dividend capacity going forward.
And now please turn to Slide 5 for the operational performance. As said, the group made a technical result of DKK 337 million in the second quarter against DKK 322 million last year. The result from Alm. Brand was DKK 247 million. As such, it comes in somewhat lower compared to last year.
However, you should bear in mind that last year, we implemented the extension of our internal model to cater for accident and workers' compensation insurance also, which alone generated a onetime positive result of DKK 64 million. And then we had the positive effect from COVID-19, amounted to an estimated DKK 20 million, i.e., when stripping those 2 effects out, the like-for-like comparison should be DKK 247 million against DKK 238 million.
A breakdown of the number reveals that claims inflation is gradually becoming more visible. Thus, we do see average claims cost climbing upwards, more than they have done in the previous quarters.
Codan's technical result amounted to DKK 90 million for May and June. This is, on a stand-alone basis, a very positive number and reflects 2 months with good performance. We are pleased with the development, but acknowledge that the Codan business come with more volatility compared to what we have in the Alm. Brand. Thus, we need a number of consecutive quarters to showcase that the profitability is fine.
Our investment strategy is a conservative, long-term strategy with respect to the overall portfolio exposure. I will, however, argue that this has been a quarter with an extraordinary development on both the bond market. And in light of this, we have had significant and not satisfactory losses on both the free portfolio and the hedge portfolio.
For the hedge portfolio, we will expect this to reverse in the long run as claims and bonds exposure net out each other. Positive to note is the development from beginning of July until now, the rebound in the market has more or less taken us back to what we guided back in May, i.e., we are back at a much lower loss level.
And then please turn to Slide 6. Premium income grew organically in Alm. Brand by 5.1% in the quarter, i.e., keeping the high pace from the first quarter with positive contribution from both Private lines and Commercial lines. Again, growth had been very positive in the Commercial lines, and we have seen premiums jump by 6.4% as a result of both continuous influx of new customers and adjustment of prices. Also in the Private lines, momentum has been strong with premiums of 3.7% following the initiatives implemented on pricing, customer retention and value proposition.
Inflation has been on the agenda for some time now. We mentioned this first time more than a year ago, but for some quarters, we have seen only modest inflation. And what we have seen, we have been able to offset by initiatives to further improve claims handling and procurement.
This quarter, we have seen claims inflation kicking up further. And consequently, we have initiated a process to increase premiums for selected customer segments and product categories. And again, our profitability is more important than growth as such.
Please turn to next slide. Weather has generally been nice and mild in the quarter, thus causing only very few weather-related claims. With our new group exposure, we do, however, have an exposure that reaches beyond what we've been used to have. And this quarter, we had an incident caused by a hailstorm that hit a solar park in the U.S.
On the other hand, net large claims stayed at a low level. Adding weather-related and large claims together gives a total of 5 percentage points in Alm. Brand and the number for Codan add up to 8.9 percentage points, thus resulting in a group number of 6.6 percentage points, which is at par with the reported numbers same quarter last year.
And now I turn to Slide 8. Combined ratio increased to 85.9%, which, at first glance, is somewhat higher than last year. We have made a small flow chart on the right side of the slide to show you the moving parts.
In the first quarter last year, combined ratio was reported as 76.1%. This is a very low number, partly due to expansion of our internal model and partly due to subnormal activity in claims due to the COVID-19 lockdown. Here, we have adjusted for the delta risk -- for the delta in risk margin quarter-on-quarter, and we have adjusted for the COVID-19 effect, thus getting to an adjusted combined ratio of 81.3% for Q2 last year. This number has increased to 82.6% this quarter for Alm. Brand, i.e., 130 basis points, primarily because of a higher average claims cost, which has been partly offset by a positive interest rate impact.
The combined ratio in Codan was 90.8%, which puts the group in a good position in respect to how we see the journey going forward. Adding Alm. Brand and Codan together leaves the group at a respectable 85.9% for the quarter.
And now please turn to Slide 9. For Private lines, claims ratio for Alm. Brand was 65.3%, again, against 59.6% same quarter last year, i.e,. somewhat higher as claims frequency has normalized after lapse of COVID-19 effects on claims and average claims cost has increased due to inflation, especially in materials and energy.
The expense rate stayed flat at 19.7%, reflecting increased sales provision and investments in partnerships. The Codan business had a mix with lower claims and high expenses and a notable combined ratio of 84.1%, which led to a group combined ratio for Private of 84.7%.
And then please turn to Slide 10 and the Commercial lines. The combined ratio increased from 73% to 80.4%, fueled by a sharp increase in claims ratio. What we see here is the effect of what I explained on Slide 8, the full effect of the extension of the internal model last year spills into the number of Commercial lines. Thus, we should rather focus on the absolute level of claims, i.e., 66, which is a very satisfactory number, although we note that average cost for small claims tick up as the inflation pushes prices up on building materials and also repairs.
Organic expenses -- organic expense ratio remains flat, reflecting a very tight control on cost development. But as expenses -- but as expected, the inclusion of Codan adds a portfolio with higher claims ratio and higher expense ratio.
And now we will conclude with the synergies and the outlook for the year. Please go ahead, Andreas.
Thank you, Rasmus.
Please turn to Slide 12. To deliver on synergies is an essential part of our investment case, and I can guarantee that we will do our utmost to deliver on this. And to do this, it is paramount that we get off to a good start, and this we have done. We've had a long period of time to prepare this while waiting for the final regulatory approvals to take over Codan. Thus, we have been well prepared, and already in mid-June, we rolled out our new organization.
In connection with this, we reduced the headcount in various headquarter functions, and we successfully [ trimmed ] out costs in claims handling and IT. Some of it has now -- some of it has been low-hanging fruits and some have been a little more complicated. In total, these initiatives will deliver synergies of DKK 110 million this year with a run rate of approximately DKK 200 million in years to come.
We had an ambition of delivering DKK 90 million this year, thus, we are ahead. And we have an ambition of delivering DKK 240 million next year, and we are closing in on this goal already now. This puts us in a very confident position with respect to delivering on the overall target.
Then please turn to Slide 14 for the outlook for 2022. Our new guidance now includes the expected result from Codan from May to December this year. We upgrade the expected technical result to DKK 950 million to DKK 1,050 million as we see a positive development in both Alm. Brand and Codan.
On Alm. Brand, we now guide for a technical result of DKK 750 million to DKK 800 million against previously DKK 650 million to DKK 700 million. And for Codan, we guide for a technical result of DKK 225 million, both including synergies.
Further, investment income is expected to be a loss of DKK 100 million. This is unchanged compared to the guidance we made and a whole lot better than the number we had just reported as markets have rebounded in July and August.
Also, our guidance on group cost remains unchanged at DKK 100 million. Adding in all together leads to an upgrade of group pretax results guidance for continuing activities of DKK 750 million to DKK 850 million against DKK 450 million to DKK 500 million previously.
Our earnings guidance is based on an organic increase in growth to 4% to 5% against previously 4%, partly fueled by both our partnerships and the continuation of the positive trajectory we have seen in the first half of this year.
Adding it all together, we would expect the combined ratio to be at 89, excluding any effect from runoffs for the remaining part of the year; and an expense ratio of 18, reflecting a higher level of costs in Codan.
Further, with the initiatives already implemented, we will harvest synergies of DKK 110 million this year. And we expect to incur special costs related to the integration of Codan and restructuring of around DKK 350 million. On top of this, we will have special costs relating to the carve-out of Alm. Brand Liv and our share of costs related to the bankruptcy of Gefion Insurance, in total DKK 80 million.
Finally, we will write off customer relations and brand over the next 8 to 10 years at a monthly rate of a total of DKK 30 million, thus totaling around DKK 240 million for the full year. And just to make a note, this is as well -- this, as well as restructuring costs mentioned earlier, will have no effect on our dividend capacity for the years to come. In total, our guidance reflects a business rapidly transforming into a strong entity.
And with this, I conclude my presentation and hand over the word to our moderator. Thank you.
[Operator Instructions] Our first question is from Asbjørn Mørk from Danske Bank.
A couple of questions from my side. First, relating to your guidance, basically trying to understand, first, the DKK 100 million lift to the traditional Alm. Brand, is it fair to assume that, that is the DKK 27 million of runoff, it's around DKK 50 million of the DKK 110 million of synergies that relates to Alm. Brand, the discounting impact, let's call it, DKK 10 million and then, of course, [ benign ] large weather? So basically, the underlying, largely unchanged for the traditional Alm. Brand.
And then on your Codan guidance, the DKK 225 million, is it fair to assume that there's around DKK 60 million of synergies in that number and that the DKK 75 million of fire claims that you had in Q3 so far is sort of an addition that hits Codan Denmark in addition to normalized large claims? So the underlying guidance for Codan Denmark would have been something like DKK 240 million. Is it a fair assumption?
Yes. Thank you, Asbjørn. Let's start by Alm. Brand. You're right, we totaled 100 of -- we would total an increase of DKK 100 million. The numbers are maybe slightly from what you're saying, but they're not far off. A lot of it has to do with a sound July, I would say, probably something like DKK 35 million coming in above -- coming from a better July than expected. And then you're also right that in terms of guidance for the rest of the year, we are positively impacted from the still elevated interest rates. So totally, I think you're more or less on target there.
With regards to Codan, I think it's not way off to say that, at least, I would say, DKK 60 million to DKK 70 million coming from synergies. DKK 60 million is probably a good guess there. And then you say -- you mentioned the large claim we had in July of DKK 75 million, that is, just to be clear, included in this guidance. So we've taken that in. We're not, let's say, fully DKK 75 million below what we would expect in an underwriting result for the total of July. We're closer to maybe around DKK 40 million, DKK 45 million, taking into account the full picture. So -- but you're not far off. But I hope that adds [ clearance ].
Okay. So basically, so you say DKK 40 million to DKK 45 million. So basically, if you haven't -- if hadn't had these synergies and you hadn't had the fire, Codan -- your Codan guidance would have been something like DKK 200 million, DKK 210 million for the full year?
Yes, that's not far off.
Okay. That's very helpful. Then a question on your underlying combined ratio in Private, which deteriorated quite a lot both in Alm. Brand traditional, 450 basis points, but I also see quite a deterioration in Codan Denmark and, of course, on a pro forma level for the group. Just trying to understand, you mentioned motor, you mentioned building, I guess travel has an impact here as well. But what is it really that is sort of going on here on the underlying in Q2?
Yes. Thank you, Asbjørn. I think we have to split it a bit in Codan and Alm. Brand because, I would say, in Codan, the underlying claims is actually varying quite favorably. That is, to a larger extent, coming from -- you can say, the increase is coming, to a large extent, from costs rising. A lot of that having to do with the investments we've had, especially in partnerships around Forsikring. So I'd say that is probably the main driver in the realized numbers for that.
If you go to the Alm. Brand side, what we're seeing this quarter is, let's say, at least the first indications of our average claims picking up a bit in certain lines, especially in property and, to some extent, also auto. So that is, let's say, the main negative driver for the underlying.
I think, as you're fully aware, we had some COVID in the numbers last time. So you can say, if you fill that out, we're a bit up about 2% on the underlying combined quarter-on-quarter. And some of that is coming from this beginning in rising claims. We should probably also keep in mind that Q2 for '21 has a very sound level of 78 in underlying combined, and there will be some fluctuations.
All right. That's helpful. But just mentioning the larger claims and then, of course, the -- and general claims inflation you're seeing and then the repricing that you're pulling through now, could you then quantify what kind of repricing measures you're doing? I guess there's a very limited effect from this in 2022, but maybe you can guide a little bit on what we should expect for '23 from this.
Yes. I think it's a bit early, Asbjørn, to be very specific in terms of where we'll end up in 2023. But maybe to give you sort of a flavor, you could say that -- I mean we will be doing selected increases in certain lines. It's primarily property, and it is, to some extent, also auto. It's across all brands. But let's say, the deficit, so to say, and the need for price increases will vary across brands. And as I know you're aware of, there's also a difference in how we have been indexing in Codan and Alm. Brand.
So the need for price increase will be relatively higher in Codan than it is in the Alm. Brand. It's something we've already started out now, and it will be running out through the next couple of months. I don't think we are ready to sort of give you any firm estimates for the effects for next year yet. But you are right in the conclusion that it will have a limited impact for the current year.
Okay. But is that -- just a final question from my side really to this. Is the reprice in Codan, is that part of your synergies guidance? Or is that a Commercial synergies that you have not included? And if I may add to that, you say you have quicker realization of synergies, obviously, investing more also now. But have you identified new areas or new synergies? Or is it basically just front-loading the synergies that you had already identified a year ago?
Let's start with the synergies and then take the repricing. Synergies is, I would say, we are continuously sort of developing the plan, and we find more synergies as we go along. The plans for what will happen in the coming years are being more detailed every month. The fact that we've been able to realize more synergies than expected right now has mostly to do to the fact that we -- there was simply a larger potential when we got in there, also with the development until, yes, until we took over.
So we had a bit more -- we had -- we simply were able to find more -- a bit more through the organizational changes than we had originally planned for at this point in time. We're not ready to say what that means for the targets in coming years. We'll be getting back to that.
And your question on repricing, Asbjørn, what was that specific? I just lost it.
It's just that you said that you will be repricing more in Codan than in Alm. Brand. And I was just wondering whether that was part of the DKK 600 million of synergies that comes on your guide more -- maybe a little more than DKK 600 million now, but that's maybe me concluding too early. But anyway, just to ask, basically, the question was just whether that was included in your synergies or whether that's the Commercial synergy that is not included.
This is not included in the synergies. It comes on top and it's because of the -- also due to the fact that we are seeing a different, to be fair, a different claims pricing than we have been. So that's coming on top of synergies.
And then just to add, Asbjørn, I mean we don't factor any top line synergies at all at this point still.
Exactly. That was why I asked. Okay, but that's great.
[Operator Instructions] Our next question is from Jakob Brink from Nordea.
And I hope I didn't -- I came in a little late. But the very strong growth in corporate Codan, could you maybe put a few more words on that, please? Also, what has helped? And then it seems like a very steep acceleration during Q2.
And then also on premiums, the guidance for the full year of DKK 9.3 billion to DKK 9.4 billion, if I look at sort of the premiums through the year of last year for Codan and assume roughly the same sort of split per quarter and putting in your 4% to 5% growth for Alm. Brand stand-alone, I get closer to DKK 9.5 billion than DKK 9.35 billion. So could you -- is there anything unusual in the Q2 numbers? Or is there any reason to expect lower growth or lower premiums even in the second half of the year? Or is it just you being cautious?
I'll try to answer that as well. Let's start with your question on the strong growth in Codan. There's a couple of factors in there. I would mention 2 main ones, I would say, that partnerships and Forsikring in the Private lines of Codan is a, let's say, the major contributor to the quarterly growth, and I mentioned it's really picking up now. So the increases in written premium, that has been building and now to be seen for real and also in the earnings premiums.
On top of that, we have also Commercial increasing significantly. A lot of that is driven by the rate increases we have mentioned earlier, specifically in technical lines. So they have -- it's a very hard market. And they have, for certain larger customers, been able to reprice that quite significantly.
And a final point on that, premium growth in Alm. Brand Group will, from the pipeline from Codan, be a bit more volatile going forward quarter-on-quarter. And that has to do also with the way that premiums are earned and timed in, especially the technical lines area where you can see projects stepping in and going out, let's say, either begin and completion or they go out of -- completely out of our books and expire. And so we will also be looking into a bit more volatility on single quarters than we've seen before.
To your last question, I can see what you're getting at. It's hard to maybe specifically comment on what exactly the DKK 150 million in change to account book. But I will say that I think you're right in assuming that the 4% to 5% is probably something that we feel quite comfortable with at this point in time.
So basically, what you're saying is that the one reason for not being at DKK 9.5 billion is the volatility you just spoke about on the corporate lines in Codan, but you could have Q3 or Q4 that is somewhat lower?
I know what...
The one -- I didn't catch the last thing. Jakob, sorry, could you repeat that?
No, I was just saying, so basically, again, if you take sort of starting point with Codan Q2 numbers, you have had it for 2 months, and then take another 6 months of roughly that level and taking 4.5% growth in Alm. Brand stand-alone, I get to DKK 9.5 billion premiums, not DKK 9.3 billion to DKK 9.4 billion. So my question is just, is that due to the fact what you just spoke about that we should expect higher volatility in premiums from Codan corporate business that you could basically see a drop in Q3 and Q4?
That would be one of the explanations, yes.
Okay. And how clear is that pattern? I guess you must know what projects are maturing in the second half of the year. So have you taken that into [ account ]?
It's not something that comes from one day to the other. We have -- if we're looking for the next 6 months, we have a quite good picture of what we expect earned premiums levels will be. So we are able to forecast this quite precisely at least in the near term.
[Operator Instructions] We have a follow-up from Asbjørn.
And just a follow-up from my side. Basically, just looking at your -- at the Codan Denmark, the tech line business, now you have a large claim in Q2 in the U.S. from solar panels. In Q1, it was wind turbines, offshore wind turbines. I guess the fire claim in Copenhagen in Q3 is more of a natural thing for a company like yours. But basically just wondering what kind of thoughts you have around the more exotic parts of the Codan Denmark exposures and whether you think that fits into the future Alm. Brand Group?
Yes, it's Rasmus here. It's a question we have heard before. And I think our answer is actually still the same, that we will remain with the business that has come in from Codan, both tech lines, marine and large industry. We are reviewing it, of course. We are putting pressure -- further pressure on our organization to make it even more profitable rather than growth. So that is what we are aiming for at the moment.
Thank you. We have no further questions. I'll hand back over to the management team for any closing remarks.
Well, I just want to say thank you for listening in, and have a nice day.