ALM. Brand A/S

CSE:ALMB

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the Alm. Brand Interim Report for the Third Quarter of 2019. [Operator Instructions] Today, I'm pleased to present acting CEO, Rasmus Werner Nielsen. Please go ahead, sir.

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Thank you. Good morning, and thank you for taking the time to join me on this call on Alm. Brand's 9-months result. As you probably know, I replaced our recent CEO, Mr. Søren Boe Mortensen last week. I've been with the company since mid-'17 and had the position as CFO since then. Let me start by stating that overall, the company performs in line with our guidance provided to the market in connection with the announcement of the half year result. Our business is in many respects a very transparent and predictable business, and thus, the result that we present today reflect what we guided 3 months ago. Please turn to Slide 2. Let me briefly summarize the highlights for the third quarter. Overall, development was satisfactory. Alm. Brand generated a pretax profit of DKK 162 million, which is in line with our expectations in order to meet full year guidance. Our Non-life business delivered a pretax profit of DKK 139 million. And key takeaways from the quarter are, first and foremost, a combined ratio of 90.2, including runoff gains. The combined ratio reflects an overall positive development in the underlying business. Growth in premiums is 1.6%, which shows a slightly short -- which is slightly short of our forecast for the period. Life delivered a pretax profit of DKK 21 million, which is pretty much as expected. Regular premiums increased by 7%, and we continue to see a satisfactory development quarter after quarter. The bonus rate is, of course, affected by the change in interest rates and is now at 11%, which is still a very decent level that allows Alm. Brand to offer our customers a competitive rate on their pension savings. The banking activities made a pretax profit of DKK 14 million on back of a quarter with high activity and a growing business volume and continued inflow of new customers. Still, we see a result that is positively impacted by reversal of write-downs and a result that is facing significant headwind from negative interest rates. Please turn to the next slide. For the first 3 quarters of the year, the group profit before tax amounts to DKK 532 million and this is made up by a contribution from the individual business segments, in line with our expectations. However, I must state that the income mix is not as I would prefer, and I will come back to that later. A key trend throughout our business is the low interest rate level that has a direct and significant effect on combined ratio in Non-life, bonus rate in Pension and earnings in Banking. Headwind from this has been strong this year, particularly in Q3, and all parts of our business have been affected. Total income amounted to DKK 6.3 billion, and this reflects a small increase in Non-life and a small reduction in Life and in Banking. We want to improve this, and we have launched initiative on new products, adjustments on prices on specific products and, of course, in line with what we have witnessed from several banks, negative interest rates on deposit accounts. Return on equity is at 15% annualized, and our priority is to maintain a level well above our strategic target of 12.5%. Lastly, our business is generating a lot of cash, and we are handing this cash on to our shareholders. On top of our dividend, we are returning DKK 200 million to shareholders, of which we have completed around 30% this year. Our 2022 strategy goals on Slide 4 have the clear focus on our customer and a distinct objective to assist and help our customers with all their financial needs. We're making continuous progress on these goals, including the following: We're introducing digital products and solution for our customers. We are successfully improving on how we're perceived among our customers, reflected in the Net Promoter Score and growth in number of plus customers in each business area as well as plus customers that do business with us increases in the business areas. Our ambition is that digital products will lead to a more optimal price structure for each subproduct and that this will strengthen growth and result in value added for both the customer and the Alm. Brand. Please turn to the next slide. For Non-life business, the Non-Life business made a pretax profit of DKK 139 million in the third quarter of '19. This is in line with our expectation, but it also reflects that the runoff results, although positives, is shrinking compared to previous years. The technical result amounted to DKK 132 million and several factors influence this. First and foremost, combined ratio was 90.2, and I'll come back to this on next slide, with underlying performance improved and runoff gains adding some tailwind. Major claims and weather-related claims, I will also come back to this, stayed within our normal range, whereas we had a very low level of both of them back in Q3 '18, why the comparisons are not easy to match. I have mentioned the interest rates before, and now I'll do it again. The lower level has a direct impact on the technical provision for claims. And we estimate a total impact on combined ratio of just below 2 percent points in Q3 compared to last year. Premium -- improved -- premium income grew by 1.6%. We will, as previously mentioned, do further initiatives to improve this. Underlying combined ratio improved by 70 basis points to 81.7. Included in this is the headwind from the lower discount rate. The expense ratio was 16.3%, no surprise, and reflecting a high degree of stable costs. Combined ratio after runoff gains of 2.6% amounted to 90.2%, an increase of 5% compared to Q3 '18. A breakdown of the numbers reveals weather-related and major claims to be at 4% and 7%, respectively, which is within expected range. So underlying business performance combined with the level of these 2 should, everything else being unchanged, lead up to the level of the combined ratio that we report today. However, you should note that although runoff gains are less than seen in Q3 '18, we do expect this number to further decline. The provisioning model has been recalibrated again this year in Q3. And everything indicates that the runoff gains will not materialize in the same amount as seen in the past. Please turn to Slide 7. Just an additional comment on major and weather-related claims. Both are near the normal range, and as such, there should not be a specific interest. We experienced some heavy rain and cloudburst in the August, September, but nothing really out of the ordinary. In total, this amounts to claims of DKK 152 million. And again, this is to be expected. The reason I highlight this is that comparisons are tough. Back in Q3 '18, weather was more than favorable to our business and also a very low level of major claims were -- was filled. Consequently, we witnessed a hit on earnings of DKK 44 million compared to last year, and thus, the underlying development might, at first glance, not look as fine as it actually is. Please turn to the next slide. But still, we have a chance with respect to premium income as it grew only by 1.6%, with an adverse impact from negative discount rate of 0.4%. Our split between private and commercial customers are close to 50-50. And for both segments, we obtained income increases, slightly short of our expectations, partly explained by a very competitive environment. But, of course, we also need to evaluate on an ongoing basis, what we can do to attract new customers and to drive price and product mix improvement in order to stimulate growth. I made a comment on our ambitions on digitalized product a couple of slides back, and the efforts and the work that we are putting into this, including modular-based insurance coverage and pricing is, of course, expected to be reflected in the numbers once this is fully implemented. The overall combined ratio was 90.2%. And when we look into how this is split between private customers segment and the commercial customer segment, we actually see 2 very different pictures. First, combined ratio for the private customers was at a satisfactory 85.2. That's a strong number and a low part of the result originates from runoff gains. We also had a quarter with a favorable claims experience on a number of key insurance products. For the commercial customers, we had a combined ratio at a high 95.3%, with everything being on our favor in the private customer segment. Then not everything -- but some issues worked against us in the commercial customer segment. The claims ratio went up to 81%. That's an increase of more than 11 percent points, partly driven by increases in claim expenses on building insurance and part of this being claims on concealed pipework. The expense ratio was -- stay at around 14%, an unchanged level for many years. Bottom line, the technical result took a hit compared to Q3 '18. But overall, total of private and commercial is on track to meet our expectation for '19, as previously stated. Then I move on with our next business segment on Slide 11, Life Insurance. Pretax profit for Q3 amounted to DKK 21 million, which is both satisfactory and in line with our expectations. I'm happy to notice that the business volume of this business continues to grow, and we now hold investment assets on behalf of our policyholders of more than DKK 17 billion, reflecting both inflow of new customers and solid investment returns of 11% for the first 9 months of the year. The total bonus rate has been further reduced to a new level of 11% compared to 14% just 3 months ago and a very strong 19% back at year start. This reflects the general decline in interest rates. Although the drop in the level may seem steep, then I will still argue that the current level is strong and will allow us to offer competitive interest rates to our customers. Please turn to next slide. The total amount of pension contribution into Alm. Brand Group is divided between inflow to Life Insurance and inflow to pension schemes within the bank. Life saw pension contributions of DKK 413 million, which was made up by a regular premiums of DKK 173 million and single premiums of DKK 240 million. I'm especially pleased that we have achieved growth close to 7% in the regular premiums. And again, this is fueled by a very positive trend in the corporate segment. Single premiums are down 12%. But we should bear in mind that this is from an extraordinary high level in '18, and that is -- and that -- if we benchmark against '17, the level for single premiums growth is around 70%. Contribution into pension schemes within the bank total DKK 187 million, which is a nice growth of more than 20%. All in all, pension contributions into the group amounted to DKK 600 million in the quarter, which is slightly ahead of last year's comparisons. And then turn to the bank on Slide 13. Pretax profit for Q3 amounted to DKK 14 million. As such, this is in line with our expectations. However, the mix and quality of earnings is not where we want it to be. A breakdown of the profit shows that core earnings have, in fact, improved to DKK 21 million compared to just DKK 3 million in '18, which is good. Behind this development is a high level of activity from customers remortgaging as well as a jump in trading income for financial markets. These are nice sources of income, but not necessarily 100% recurring income streams. Reversal of write-downs amounted to DKK 18 million. It's at par compared to last year. This is good news for Alm. Brand as well as the customers that this concerns. Investment portfolio earnings are negative DKK 17 million, almost double of what it was in '18. The bank has a very substantial surplus of deposits around DKK 5 billion. And with short-term negative interest rates, this is generating a loss. We have announced a number of new account fees and changing of -- and charging of negative interest rates on deposits above DKK 750,000 made by private customers, which will be effective from January '20 and this will, of course, improve the profitability of the bank. Customers flow into the bank. This quarter, we have been busy servicing our existing customers with the relaunching, and consequently, we have temporarily slowed down on-boarding of new customers. Year-to-date, new customers have added up to 8% to the total number of the customers in the bank. For third quarter, this number was only 1%. Business volume has increased by DKK 1.6 billion compared to a year ago and is now at DKK 22.5 billion. The better part of this increase in mortgage is the mortgage lending in [ trajectory ]. This number is up DKK 1.5 billion and reflects both new customers coming into the bank and remortgaging by existing customers, which unfortunately is sometimes combined with repayment of bank loans. We see small changes to retail lending and leasing. Retail lending is up despite the accelerated repayments, and leasing is slightly down, but still representing a very stable portfolio with some 8,000 cars.Turning to Page 15. I will walk you through our capital model. Going into the quarter, Alm. Brand has a distributable total capital of DKK 5.3 billion and an internal capital target of DKK 4.9 billion. Our target is based on the business volume in each of the group's business areas and is affected by changes in the interest rates. Our pretax profit of DKK 162 million translate into a profit after tax of DKK 125 million. This increased our amount of excess capital. At the end of the quarter, the calculated internal target has increased by DKK 100 million, thus, reducing the excess capital with a similar amount. All in all, the excess capital at the end of the quarter amount to DKK 411 million. And now we're turning to the outlook for the year. In short, nothing has changed. We maintained our guidance for the full year to be a consolidated pretax profit of DKK 625 million to DKK 725 million, excluding runoff results for the rest of the year. We have 2 months to go, and visibility for our business is fine. So we believe we are on track to meet guidance. But potential surprises are unforeseen weather-related claims, all major claims require that we operate within our core margin. Finally, as this presentation shows, we have a solid business. With a change in the CEO position, the Board has sent a signal of more growth and better results. I will now, together with the management team, look into growth in the Non-life business, the structure and result in the retail bank as well as the total cost pool of the Alm. Brand Group. I expect to come back with an update at latest when we announce the full result for the year. That was all for today. And with this, I'm ready to take your questions.

[Operator]

[Operator Instructions] Our first question is from the line of Per Grønborg at SEB.

[Per Grønborg, Research Analyst]

A couple of questions from my side. First, on the banking side, remortgaging, how much has that impacted the NII and commission line? I guess there's also been some impact on the trading line.

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Yes. Per, I can state that it's around DKK 10 million.

[Per Grønborg, Research Analyst]

DKK 10 million on the NII line?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Yes.

[Per Grønborg, Research Analyst]

For the quarter?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Yes.

[Per Grønborg, Research Analyst]

Okay. What are the -- any -- then I guess, there have been a couple of millions also on trading, is that fair to assume?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Yes, there have been some trading activities as well. You're right.

[Per Grønborg, Research Analyst]

I mean, is that a fair guess?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

I would say it's a little bit below that.

[Per Grønborg, Research Analyst]

Okay. Perfect. Negative rates, how big amounts do you have on deposits above DKK 750,000?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

I cannot exactly answer that. We have a quite a number of customers, which have funds over DKK 750,000 both in the banking group and in the pension group.

[Per Grønborg, Research Analyst]

What financial impacts should we expect from this when it starts running in '20 -- I mean, January, next year?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

I think that is within our forecast for 2020, and we will come back to that later.

[Per Grønborg, Research Analyst]

Okay. When we turn to the Non-life business, you have a line in your investment income called -- one moment, called on Page 11, return on insurance liabilities, plus 23%. Is that the new run rate based on the current negative interest rate environment?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Yes, you can say that. It should be seen in the total. So you have the total investment outcome. So you're right, that is part of it, yes.

[Per Grønborg, Research Analyst]

So basically, what we should expect going forward, logically, would be that you will get still a negative return on your bonds, but then you will get a positive return down here at the bottom?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Yes, it should match. In the perfect world, these things should match.

[Per Grønborg, Research Analyst]

This looks to match, but -- okay, perfect. I just wanted to be sure that this was the new run rate. One -- back to the bank's agriculture. Gross loss DKK 484 million, net loans DKK 97 million. Clearly, agriculture is improving quite sharply at the moment. How [ bad ] are these farmers? And what is the likelihood that you actually could potentially buy the significant part of this servicer bank? Is that way too early to speculate about that?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

It's a little bit about what we wish here and what we hope for. I agree with you. We see prices on pigs are increasing. So we can hope that things will move our way. But in general, I think it's a little bit early to comment on that. We need to see it in the figures. It is different from farmer to farmer, how to say, how -- which conditions they're in.

[Per Grønborg, Research Analyst]

But still -- these farmers are still alive. This must imply that they are not -- you have not given up totally on them.

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

No.

[Per Grønborg, Research Analyst]

So there must be a significant improvement with the output prices that the pig farmers are seeing at the moment.

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

There are -- in some areas, like the pigs prices, there are improvements. Some other areas, there are less improvements. But what we see is that we're quite happy that the net amount now is below DKK 100 million for the first time in a long time.

[Per Grønborg, Research Analyst]

Okay. 2020 guidance, we normally got that in connection with Q3, I guess that's related to the business plan you will come with, at the latest, with the Q4 numbers?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Yes, you're right about that, Per.

[Operator]

[Operator Instructions] Okay. We have another question, and that's from the line of Michael Birk at Carnegie -- Martin Birk, sorry.

[Martin Gregers Birk, Research Analyst]

I guess coming back to your comment on pipe insurance bursting, one of your peers also referred to that. You guys also talked about it at your Q2. Are there anything short term that could be done to mitigate some of these effects? Or is this maybe sort of a long-term structural thing that we will see?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Can you just -- Martin, can you just rephrase the first part, I didn't get it? Was it Non-life?

[Martin Gregers Birk, Research Analyst]

Yes, Non-life pipe insurance you referred to seeing a drag in your commercial segment from bursts of pipes in the quarter. One of your peers also referred to same thing. You also talked about it during your Q2 presentation. Are there anything that could be done short term to mitigate some of these effects? Or is this a long structural trend that we should get used to?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

I think at the moment, it's a structural trend. What we see is that many of the things, many of the buildings we have are now reaching an age where this is actually happening with the pipes going and the broke -- they break. What we do, and I think others are also doing, that is that we try to increase prices so they reflect the risk we are facing in the coming years. I think to hope that this will change -- be changed in the houses, I think it's a little bit too much to wish at the moment. But we are increasing prices to meet the risk.

[Martin Gregers Birk, Research Analyst]

Okay, okay. And then I know this is a -- I know this is still very early days, but that there is a lot of speculation in your share price at the moment, especially surrounding the bank. So would you say that you want to address profitability in the bank? On the top of your head, is this only going to be a cost exercise? Or will there also be further income initiatives to drive profitability?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

As we mentioned, there will be -- we will look into the structure of the bank. And we will, of course, also look into the cost of the bank. So both is a mix of the services we are providing as well as the costs that are driving these services.

[Martin Gregers Birk, Research Analyst]

Okay. So coming back to your strategy and how that fits in with your strategy, could that be a starting point?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

What I just mentioned is a starting point now for how we will work with the profitability of the bank, if that is what you're asking for.

[Operator]

Okay. So now back to the line of Per Grønborg at SEB.

[Per Grønborg, Research Analyst]

I have a few additional questions. The 2019 guidance, the DKK 30 million for the exiting CEO, in which line are we seeing that? Or is this in your guidance?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Yes, it's not reflected in the accounts yet. As you know, it was activity after we close the account. So it will be accounted for in Q3 -- in Q4, sorry. And that's also why we have not increased our guidance for the full year.

[Per Grønborg, Research Analyst]

But it will not come in the parent company, it will be [ debt put on ] the sales segments.

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

That is [ obviously ] I would say...

[Per Grønborg, Research Analyst]

Is that a little bit too -- or is that a bit too specific?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

It's a little bit too specific there at the moment.

[Per Grønborg, Research Analyst]

I would bet it will come in the parent company as a lump sum, but that's too early to say.

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Yes, let me...

[Per Grønborg, Research Analyst]

Okay. I just wondered about it. One final question, lending growth bank in the third quarter had been pretty sluggish in the first half, then suddenly, you are growing 5% this quarter. Any flavor? I guess it's not a new strong growth trend we are seeing?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

No, it's not. It's a -- yes. No, you're right. It's not a strong growth trend we're seeing. It is more the split between how many customers are coming in and how much repaid in the customer funds.

[Per Grønborg, Research Analyst]

So this is -- this is just a pretty high number you have this quarter. We should not -- basically not expect this to be the new level?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

No. Unfortunately, no.

[Operator]

Okay. That seems to be the final question for this quarter's call. So can I please pass it back to you for any closing comments at this stage?

[Rasmus Werner Nielsen, Executive VP of Insurance Non]

Okay. Thank you very much for listening in. Bye.

[Operator]

This now concludes the call. Thank you all very much for attending. You may now disconnect your lines.