ALM. Brand A/S

CSE:ALMB

Earnings Call Transcript 2018-Q3

[Søren Boe Mortensen, CEO & Member of Management Board]

Good afternoon, and welcome to the presentation of result for Q3 2018 for the Alm. Brand Group. If you look at the total result for Q3, the result pretax profit had been DKK 230 million. The Non-life business had a profit of DKK 205 million with a combined ratio 85 level, and a growth in the premiums of 2.7%, this is quite good and better than expected. The Life came out with DKK 31 million, also better than expected with a growth as high as 15% and still a bonus rate of 21%. And the Banking pretax profit get out with a DKK 6 million after the reversal of write-downs with DKK 20 million. On the other hand, growth in the mortgage loans and the full-service numbers of customers.If we look at the Q3 and the result there then, with the DKK 230 million result then we have a return on equity before tax at 19%, and the performance compared with that had been on a satisfactory level. The non-life profit of DKK 205 million had been on the influence of low level of weather-related claims, also the major claims had been a little bit lower than expected. And we had a good, as I mentioned before, good growth in the premiums, especially, in the commercial sector. On the other hand then, we have a few large payouts on the health and personal accident insurance, which have a minor negative impact on the results. For the Life company, we had -- it had outperformed our expectation and risk and expense result had been better than we expected. The growth had also been on a very high level and better than expected.For the Bank, the profit of DKK 6 million could be good, but on the other hand, then we have a reversal of the write-downs in the DKK 20 million, and we had to say that turbulence on the investment markets had a negative impact on the trading activities in the bank and that had negative impact and then we also have a tough competition on the retail market. The Saxo Bank integration is still progressing as planned. Still had to be aware of that the 9-month result is still quite good. DKK 640 million in result, the Non-life came out with 85.8 in combined ratios. And the Life came out with DKK 82 million, and the Bank with DKK 40 million, all in all, a good performance. And a 18% in return on equity for the 9 months.When we are talking about the strategy then, of course, the focus had been on the acquisition of the Saxo Privatbank in this year, and we had, as you know, acquired the Saxo activities in the first quarter and get to that approval in second quarter, and now we are working with a total integration. So we expect that we have all the customers in one data center platform in the end of 2018, and that we have all the branch offices combined in the end of 2018. So we, at the start of 2019, are ready to have the synergies of the merger of the 2 banks. We will expect that the synergies will count at least DKK 75 million in 2019 and onwards.If we look at the Net Promotion Score and the retention rate then the Net Promotion Score, a little bit weaker in Q3 this year compared with the latest quarter, but still on a -- at a high level. Of course, we had to some maintain our focus on this to remain this level or even improve it, we have a target of 60 million -- of 60 in 2022.For the retention rate still maintaining on a high level. For the private lines, it's the highest level that we had seen, but still for both line -- both commercial and private, quite a good retention rate.Going through the Non-life insurance, then the -- as mentioned, the pretax profit DKK 205 million. The technical result DKK 195 million, which is better than we had expected, the weather had been better, the major claims have been better, and we also have some runoff result, which had a positive impact. But it obviously -- and I come back to that later, but it obviously compared with last year Q3, the result is lower.The investment result also positive in this quarter, but compared with last year, lower. And if we look at the 9 months, then it obviously, that we last year really had a good investment result, which was unusually good. And this year, we have minus 1 total in investment result, which are aligned with what you could expect with this environment on the financial market compared with the investment portfolio that we have in the Non-life business.If we look at the combined ratio then the combined ratio for the Q3 is 85.4, and if you exclude the runoff gains then we have a combined ratio of 90.1 is still a decent level, lower than our general expectation for the combined ratio. If you look -- compared it with last year, obviously, that is much higher for the combined ratio. The main reason here is 2 issues, the first is that the runoff gains is much lower this year compared with last year, more than 3% lower, the first. And then secondly, then we had recalculated our models, we are doing that every Q3 and we did that in the '15, '16, '17 and also in '18, but the adjustments in '15, '16 and '17 was very high. But in '18, it's only a minor adjustments to the models. And of course, every times you are adjusting your models you are coming closer and closer to the experience that you have. And we must say that in 2018, we are pretty close to the right models and the right factors in our models. So that also have an impact in Q3, and therefore, I will recommend when we are comparing '18 and '17 to look at the 9-months result, too. The 9-months result, it's obviously, also a little bit higher in 2018 compared with '17, but nevertheless, the movements here are a little bit lower. Also here, again, it -- the worse performance in '18 compared with '17, we had adjusted the prices on the motor business for some years ago. They still have some impact. We can see that the travel insurance, I mentioned that after Q2 had a bad performance and we will make adjustments on the prices there. And we can see other segments in our portfolio on the commercial property, for example, where we also will make some adjustments, but this also -- this area also have a negative impact on the total combined ratio.The same picture going through the underlying combined ratio where the underlying combined ratio for this year is 82.4. This level is absolutely much higher than we have seen in Q3, the years before, but still if you are going over and look at the 9 months then the adjustments are less, but nevertheless, still increasing underlying combined ratio. Same factors, the motor business had an impact as mentioned before. We also have the health and personal accident, which have an impact on the result. We had mentioned that in our presentation and you had to be aware, here when we are making adjustments on the underlying combined ratio that a claims of DKK 13 million, for example, will move the underlying combined ratio with 1%. So it's sensitive for a few claims in this measurement of the underlying combined ratio.If you look at the other factors, which have impact on the claims ratio then we have the major claims, and the major claims for this quarter had been quite good, nearly the same level as we saw last year and better than expected. And again, looking at the weather-related claims, also here, we see that the weather-related claims this year had been lower than last year and absolutely much better than the expected levels. So it -- obviously that the major claims and the weather-related claims have a positive impact on the claims ratio and to the total combined ratio. If we look at the premium, then we have totally premium growth of 2.7%, which is quite good. The private line up with 1.5% mainly on the motor business, which have growth, the other lines of the business are nearly steady. On the commercial lines of the business, we have a growth of 4%, and I think all the lines of the business here had been improved and give distributions to the growth.If you are going to look at the private lines than the private lines in total, a combined ratio of 86.8, quite good. And the runoff gains is limited. So still after without runoff gains then still we have a good result on the private lines. As mentioned before, we have the personal health and accidents, which have a negative impact this quarter. We still have the travel insurance, which have a negative impact. So we will try to adjust these components for the future and especially the travel insurance to improve the result. On the other hand, other parts the portfolio had a good quarter, including the major claims and the weather-related claims, which had been strong in this quarter. If we look at the commercial lines of the business, same picture, quite good combined ratio, higher than we have seen the years before, but you also here had to be aware of that the runoff gains are a little bit worse this year than it was -- had been the other years. Still runoff gains mainly on the workers' compensation and the motor insurance, the liability on the motor insurance mainly. Still all in all, the commercial lines still had a good performance. We have areas in the commercial lines where the claims ratio are a little bit too high, as mentioned before. Some part of the commercial property had to be adjusted, and we also have some part of the motor insurance which had to be adjusted in 2019 to improve the underlying combined ratio for the commercial lines. The underlying combined ratio for the commercial lines are a little bit higher up in this quarter. Then I will leave the Non-life insurance and go into the Life insurance. Here the pretax profit of DKK 31 million in profit. Better than last year. The investment result related to the investments allocated to the [ equities are linked in ] negative this year, but still a minor issue. I think the most essential is that despite the development in the investment markets in the first 9 months then we still maintain a bonus rate level, it's -- which is quite high, 21% total. But of course, had been reduced with nearly 2% over 2018 as a result of a low return on the investments generally compared with the bonus rate that we had for the policyholders' savings of 5% in this year.If we look at the development of the premium then we had the underlying, the regular premium that are going up with 8%, aligned with the strategy that we had on this area. Additional to that then we had a lot of single premiums coming in. A huge part of the single premiums is getting connected to pension schemes coming from small SME market where we get the ongoing regular premium for the future and then we get some transfer of existing pension schemes from other players in the market. And then we -- of course, we have some single payment coming in, but here we have some provisions that had to be paid to come in through the portfolio this way.The total provisions for the insured is now up to more than DKK 14 billion, which is quite a remarkable growth seeing from 2015 up to 2018. More growth in the portfolio, more growth in the premium income and a good financial result are -- had been part of this development.If we look at the profit of the life and pension company then in this quarter the expense result, I mean -- and not at least, the risk result had been very good performance. So we had DKK 24 million in earnings in this Q3 on this area, both the expense and the risk had been much better than the year before. The interest result, [ which are the ] 0.2 margin is unchanged, and then we have the result of the portfolios without bonus and the return on the investment allocated to equity around plus/minus DKK 1 million. But still the basic for the earnings in the life and pension company are the insurance part, are the risk part of the portfolio.Then I leave the pension and go into Bank. The Bank came out with a profit in this quarter of DKK 6 million. But the DKK 6 million are after reversal of write-downs of DKK 20 million in Q3. It obviously is that the current environment for banking business are not very positive. The trading income, as I mentioned before, had tough times in 2018. The Q3 had been a little better than the first half year 2018, but still much lower than we have seen the years before.The interest and fee income from the retail part of the business, the margin there are under competitive pressure, which have an impact of lower interest margin on this part of the portfolio. And the additional to that then we can see a lot of our customers, which are coming in. We have quite a good growth in the numbers of customers, full customers in the Bank. [ Not ] more than 9% coming in year-to-year is quite good. High inflow of new loans coming into the bank, but a lot of our existing customers are repaying their loans or are transferred to mortgage loans. So nevertheless, despite that we have a high-growth in numbers of customers then the -- our loan portfolio in the retail business are flat. And that, of course, have a negative impact when we have more bank advisers to serve our customers as result of the increasing growth.If you look at the leasing then the leasing income is nearly at -- on the same level as we saw last year. The leasing area, the private area had gone down with more than 20%, on the other hand, then we had been able to improve and develop the commercial parts of -- it's up with 15%. So a little bit pressure on the leasing part, but nevertheless, it seems to that we can improve and develop the commercial part of this portfolio so that it can still give a decent earning for the Bank.Then we have the last and then the investments portfolio of the Bank, which have a negative result. And here we -- including this figure, we also have the result of the negative interest rate environment in Denmark currently. And for the bank, we have the channels that we have too much excess of cash currently. And with the very carefully low risk profile of our investments in the Bank then we have, in fact, negative interest rate level for all the excess of cash in the Bank. And that, of course, are not improving the figure in the Bank. The business volume in the Bank, I have mentioned some of -- part of it, but the loan portfolio is going up to now DKK 4.2 billion compared with last year, DKK 2.8 billion. But the growth we see here is solely related to the acquisition of the Saxo Privatbank. And at the same time, we also here see that the mortgage loan in [ total credit ] are going up to now DKK 15 billion, which is a high growth compared with last year, DKK 8.2 billion. And here we have, in fact, a growth ex the Saxo Privatbank with up to 17%. So that's a part of the history, which I mentioned before, about the earnings in the bank, development in loan portfolio that the mortgage -- part of the mortgage loans for our customers have really increasing currently and now up to DKK 15 billion.The winding-up portfolio, the exposure there had been reduced now to DKK 505 million. We still have agriculture in this portfolio, but only a little more than DKK 100 million net booked. And the situation here is that our reservation of this loan or this portfolio is good enough also to maintain the pressure, economic pressure from the summer, the dry summer and the economic environment for the agriculture business currently, which is very tough, but it will not have impact on our figures. If we look at -- on the group level, on the excess of capital, which are the capital which are not needed accordingly to our internal capital model, then the excess of capital at the end of Q2 was DKK 461 million, and it's now improved to level DKK 715 million. A little bit help by a low asset size of the bank at the end of Q3, but nevertheless, the most of the improvement had been through the profit in Q3.If I look for the rest of 2018, then we had adjusted our outlook to now DKK 700 million to DKK 750 million instead of DKK 600 million to DKK 700 million. The main improvement are the Non-life business, which had a good Q3, better than expected, especially on the runoff gains, which of course, have a positive impact. But also the general move in Q3 in the Non-life business are a little better than we saw after Q2. So all in all, we think that the Non-life business came out -- will came out with DKK 660 million with a combined ratio 87, 88 and the growth 2% to 3%.Life up with DKK 10 million after a very good Q3, and a growth on the regular premium unchanged on level 8% to 9%. And then we have the Banking, which we think that pretax profit will end up with DKK 35 million, which also are DKK 10 million up compared with the latest outlook. And again the growth in the lending portfolio will be 40% to 45%, but that is solely the Saxo Privatbank portfolio, which have given the growth, nearly solely the growth. And other activities are unchanged at DKK 60 million level.We also have -- make a first draft for the outlook for 2019. And we had -- we'll expect that we will came out in 2019 with DKK 500 million to DKK 600 million. The components here is that the Non-life came out with -- will came out with -- come out with DKK 475 million, a growth still on 2% to 3% level. Combined ratio 91, 92, and had to remember that, that is excluding runoff gains on -- that is essential still. Despite that you also had to be aware of that the runoff gains had been lower and lower the latest years. But we still will expect that we have runoff gains, positive runoff gains also in 2019. The Life we have a expectation of DKK 80 million and still a growth 7% to 9% in the regular premium. And for the Bank, we will expect that the pretax profit will be around the DKK 70 million in level after we had mega depreciation (sic) [ amortization ] on the customer relationships of DKK 30 million. And the improvement here are really strongly connected to the synergies of the merger of the 2 banks. I mentioned before that the mergers of the 2 banks will give us synergies of more than DKK 70 million, DKK 75 million, more than DKK 75 million, and that of course, have a positive impact here. Then of course, we have the amortization or the depreciation of the customer relationship, but still DKK 75 million up for the merger between the 2 banks.And then -- additional to that, then we will expect that the financial market are getting more normalized in 2019 than we have seen in 2018. And we also expect that we will be able to have a little more growth in the retail business than we have seen in 2018. We have even more bank advisers on the chairs in 2019, we will expect that. And we will see that the trend in acquisition of new customers coming in and loan portfolio coming in is improving in the second half year, and we will think that we can maintain that trend into the 2019.So that was the total overview of the Q3 and the forecast for '18 and '19. So all in all, the Non-life business still performing quite well with a good and decent result level. The Life company had really improved the premium level and still maintaining even better earnings. And the banking business, which had not been on a decent level in -- before write-downs in 2018, but the reversal of write-downs had really improved the bottom line with more than DKK 60 million. And then we have the outlooks as just going through with -- for this year, DKK 700 million to DKK 750 million, and 2019, DKK 500 million to DKK 600 million. So now I'm ready for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Asbjørn Mørk of Danske Bank.

[Asbjørn Nicholas Mørk, Analyst]

A couple of questions from my side. First on the Non-life business. Basically on your private division, 2 questions there. The Net Promoter Score, it's down 2 quarters in a row. I acknowledge it's from a -- you can say, high level, but it seems to be sort of a trend shift the last 4, 5 quarters. So just wondering if we should put anything into that. And then on the other part of the private, the health and accident claims in the quarter, maybe I didn't catch you Søren, but could you, sort of, tell us a little bit about the actual impact that, that had -- the elevated level that, that had in the quarter?

[Søren Boe Mortensen, CEO & Member of Management Board]

The Net Promotion Score, yes, it's going down. And of course, we have the ambition to not move that direction. But nevertheless, we are still on a high level and are -- of course, that's a pattern of many measurement we are measuring the Net Promotion Score, the whole business. So the Net Promotion Score is also in the commercial lines, also in the -- so it's all our activities, but of course, we will work to improve that. I do not think that we have some -- the special areas where we have any problems, but of course we had to monitor in this. If we look at the sick -- the health and accidents part with -- on the private lines, we have some claims coming in and some of these can be quite big, and quite big is not huge, huge but the point is that also relatively small amount if they are for all the time, or for the next 20 or 30 years then it's rounding up to a decent amount. That's the first. So one customer which had been sick or had an accident or so, can with a normal amount easily run up to DKK 4 million, DKK 5 million, DKK 6 million in claims on the book value. The point also you had to be aware of that the sensitivity of the underlying combined ratio is high. DKK 13 million or DKK 14 million then you have 1% of the underlying combined ratio. That's a reason for we are mentioning this. And the impact of this part are below 1%, but close to, in this quarter. And that of course, can change the picture as what is going up and down because the truth is that the rest of the private portfolio in this quarter has been quite good compared with the latest quarters. But nevertheless, as I mentioned, the motor business are still on a higher level, and so I'm -- so I'm not trying to say that the combined -- underlying combined ratio is going down, but it's only the explanation perhaps for some of the increase in this quarter compared with Q1 for example, Q2 was a little bit higher on -- of other reasons. So that's the level and the impact for this area.

[Asbjørn Nicholas Mørk, Analyst]

Okay. Then on the corporate side. So basically, you're saying that you need to reprice within, if I understood you correct, the motor part and the buildings insurance. Now you are also talking about 2% to 3% premium growth for next year. Is that how you see the market growing or do you expect to take market shares? And I mean the question really being are you able to reprice in the current market?

[Søren Boe Mortensen, CEO & Member of Management Board]

Yes, I think first when we are talking about the growth next year then I think the private lines, I will expect that I will be pretty close to the index to maintain my market share in the private line. So I will expect to have the growth in the commercial lines. And it's obviously that the growth will be more limited when I am increasing the prices because what I will expect in 2019 when I reprice part of the portfolios that I will loss -- have a loss of part of these portfolios. When I'm repricing or increasing the prices for some segments, I will expect that I will lose a part of this portfolio. And we have included that in the expectation of growth of 2% to 3%. And I will still expect that, in total, I will still have gained market share in the commercial lines despite that I -- missing some of the customers in the repricing of part of the property book and part of the motor book. So it is a higher growth in commercial but losing some part of the market. But on the other hand, the segments I am looking at, the claims ratio are very high up in the 90s. So if the customers do not want to pay more then I think it's best for both of us that they are leaving. So that's a part of the play.

[Asbjørn Nicholas Mørk, Analyst]

Okay, fair enough. Then on the Bank, a couple of questions. But basically, I mean, you also said it yourself when you went through the presentation, DKK 5 million in loss in the quarter before loan loss reversals. You also had a pretty bad Q2 if we, sort of, strip out the one-off income in the quarter. But just -- maybe you -- if you can help me in your guidance for next year, what kind of income level do you expect for the Bank in able to -- in order to deliver on the DKK 70 million pretax?

[Søren Boe Mortensen, CEO & Member of Management Board]

The DKK 70 million in pretax. Of course, if you look at the impact here, it's obviously that -- first of all, you have improvement as a result of the synergies of the merger of the 2 banks. I mentioned that the growth synergies is -- the DKK 75 million in growth in net after the DKK 30 million then it's around the DKK 50 million plus, perhaps even better. And that's the first part that the synergies had this impact and we think that additional to that then we are looking at the cost rates level, ratio level in the Bank. So we think we'll improve even better than the synergies then we -- additional to the things that we can take some more cost out of the bank. Additional to that then I mentioned that the trading part of the bank had not been very good either this year. Better in Q3, but still weak compared what we have seen before. And when we make the outlook for the coming years then we think of our most normal level of the trading income, not up to the high level that we have seen historically, but more normalized. And then we also have the face-off that we will be able to even have more growth in the incoming business that we have seen in 2018. 2018, we had the Saxo, which had -- have some disturbance on the business. We had a new distribution model with advisers for new customers and for old customers, which have give some disturbance in the business where we have some flowing of new people and some of them had not been good enough so they leave again. So we think that we have more people on the chairs in 2019 [ than ] we have seen in 2018. And the -- our experience now is that the factor, our challenge is not the numbers of new customers, we have easily access to new customers. Our challenge is to have people not enough on the chairs to serve the customers. And with solving the number of hands then we also think that we can improve the numbers of new customers coming in. So we are not expecting that we can stop up the repayment of the loans or the transfer to the mortgage loans, but we think that we can improve the inflow of new customers, and we can improve through that, improve also the loan portfolio in 2019. So a lot of factors, synergies, additional cost savings, more new customers coming in, will more loan portfolio and more interest margin to the earnings and the trading part, which are more normalized. That is a component coming from a negative earnings, as you mentioned before, up to the DKK 70 million.

[Asbjørn Nicholas Mørk, Analyst]

Okay, fair enough. Then just final question from my side on your capital model. Basically, 2 questions in 1. But you said that the risk exposure amount to the Bank is down in Q3. And then, of course, with the Saxo Bank acquisition this year, my point is just are able to look at the excess capital in the same way that we've done in the past couple of years? So basically expecting you to pay out all excess capital or will you be a little bit more cautious this year, also maybe considering the macro uncertainty, et cetera?

[Søren Boe Mortensen, CEO & Member of Management Board]

It's always difficult to predict because nobody knows if something coming up which will change the picture. But I think the economic environment or the capital demands and so on, I think that is covered by the existing capital model. So the only thing that could change the picture of still looking at the excess of capital and then after the year, paying that out to the shareholders, that will be really movement in the environment, which are much higher -- because then we have seen in 2018. Or something coming up which demands for new acquisitions or something that -- if that does coming up, these 2 events, then I will expect that the excess of capital will be in -- mainly be for the shareholders at the end of -- or in the spring of 2019.

[Operator]

And our next question Per Grønborg of SEB.

[Per Grønborg, Research Analyst]

I think I'm down to only 2 questions by now. First of all, again, back to Bank. I don't think we really got an answer on the revenue. I think it's also basically also more interesting, the cost side. You're promising DKK 75 million in synergies, I assume some of that is harvested as we speak. What will the absolute cost level be in the Bank next year? [ Slightly this is ] up DKK 600 million, is that a reasonable assumption?

[Søren Boe Mortensen, CEO & Member of Management Board]

Oh, Per, you catch me there. I can't remember the figure in my head, for the cost level of the Bank. The point is that it's only a minor part of the synergies which we had impact on the book now. So the impact will be and come through the books in Q4, and therefore, at the end of Q4, so the impact will be from 1st of January. So there a move of this DKK 75 million, 1st of January. A lot of the integration had been reserved from the start point and that have an impact on the current cost level. So the exact figure I have to come back to you with -- to you with what are the cost of the bank for 2019.

[Per Grønborg, Research Analyst]

My second question is basically an update on a question we normally ask you: construction costs, how do you see that impacting your claims? Getting worse? Or is it still moving reasonably slowly? I remember the last quarter or the quarter before was the first time we started to express a little concern about the cost inflation in the construction segment.

[Søren Boe Mortensen, CEO & Member of Management Board]

Excuse me, once again. I couldn't hear.

[Per Grønborg, Research Analyst]

Construction costs, construction cost inflation. What are you seeing? Are you -- is it growing in line with your reservations? Or are you starting to see some concern that construction costs is potentially 5:1 ahead of the reserves you've set aside?

[Søren Boe Mortensen, CEO & Member of Management Board]

Yes, the construction cost. We mentioned a little last quarter was.[Audio Gap]We had to be aware of. And after Q3 still the picture is that the average claim on the property portfolio is still unchanged. So we are not seeing a real move here still. So surprising perhaps, but still our view is that this is not moving the average claim. So when I'm mentioning the challenge of the property portfolio and the earnings in the part of the property portfolio, then it's small segments where we can see that the numbers of claims are too high and where the customers are misusing the insurance and where we are trying to improve the premium levels. So this is not a result of inflation on the claim side.

[Operator]

[Operator Instructions] And as there are no further questions coming through, I'll hand back to our speaker for the closing comments.

[Søren Boe Mortensen, CEO & Member of Management Board]

I would like to say thank you for your time and have a good evening.