Topdanmark A/S

CSE:TOP

Earnings Call Analysis

Topdanmark Strong Performance amid Major Strategic Moves

Topdanmark reported significant events and impressive financial results for Q2 2024. They face a one-off cost of DKK 195 million due to their IT separation from Nordea but delivered a solid profit, driven by a 13.6% insurance revenue growth and strong investment returns. The combined ratio improved to 86.0, showing the success of their pricing and efficiency measures. The acquisition of Oona Health also contributed positively. They updated their profit forecast for 2024 to DKK 1.255-1.46 billion and expect 6% organic growth. Additionally, Sampo’s offer to acquire all shares at a 27% premium is set to conclude by September.

Quarterly Financial Performance

In the second quarter of 2024, Topdanmark presented solid financial outcomes despite a significant one-off cost related to its IT separation from Nordea. The company's profit after tax from continuing operations exceeded medium consensus by 6%, primarily driven by a robust investment return. The insurance service result stood at DKK 410 million with a combined ratio of 86.0, and insurance revenue surged by 13.6%. This growth was supported by both organic growth and the acquisition of Oona Health, indicating a strong momentum for Topdanmark.

Key Business Events

Two major events defined the quarter for Topdanmark. Firstly, an agreement was reached with Nordea to renew their partnership for non-life insurance products for an additional five years, although the IT separation process is taking longer than anticipated and includes a DKK 195 million one-off cost. Secondly, on June 17, a combination agreement was announced for Sampo to potentially acquire all shares of Topdanmark, offering 1.25 Sampo shares for every Topdanmark share, representing a 27% premium on Topdanmark's shares. This acquisition could bring about significant changes and synergies to the company.

Investment Results and Solvency

Topdanmark's investment results in Q2 were notably strong, yielding a profit of DKK 86 million, driven by positive contributions from both public and private equity markets as well as running yields. On the liability side, reduced insurance provisions due to lower wage projections from the Danish Economic Councils also contributed positively. The company's solvency cover increased to 215% from 210% at the end of Q1, despite the rise in intangible assets.

Updated Profit Forecast

Topdanmark adjusted its profit forecast for 2024, increasing expected organic growth to around 6%, driven by strong pricing actions, higher retention rates, and a higher net inflow of customers. The combined ratio forecast has been tightened to 83-85, and the expense ratio is expected to fall below 17 due to continued cost control measures. Consequently, the guided profit from continuing operations has been narrowed to DKK 1.255 billion to DKK 1.46 billion. Accounting for the one-off IT separation cost and the expected costs of Sampo's takeover offer (DKK 90 million to DKK 110 million), the net profit forecast is set between DKK 950 million and DKK 1.175 billion.

Pricing and Claims Management

Topdanmark has been proactive about addressing rising claims due to higher costs in wages and spare parts for motor insurance. Price increases have been implemented gradually since the start of 2024 and will continue throughout the year and into 2025. The impact of these price adjustments is expected to fully materialize in the coming years. Additionally, investments in retention initiatives, both in manpower and advanced AI technology, have contributed to lower churn rates and stronger sales.

Strategic Outlook

Looking ahead, Topdanmark is focused on merging seamlessly with Sampo, which could lead to beneficial synergies such as enhanced pricing strategies, digitalization, and procurement efficiencies. While specific changes in underwriting policies due to the merger remain speculative, the combined entity is expected to leverage economies of scale and broader market power. The company remains focused on maintaining and enhancing its market position, particularly within the private, SME, and agricultural sectors in the Nordics.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, and welcome to the Topdanmark 2024 Earnings Call. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand over to the CEO, Peter Hermann. Please go ahead.

[Peter Hermann, executive]

Thank you, operator. Good afternoon, everybody, and good morning to the U.S. Thank you for joining us on this conference call. My name is Peter Hermann, I'm the group CEO of Topdanmark. And with me is our Group CFO, Lars Kufall Beck; and Head of Investor Relations, Robin Løfgren. And we are hosting this conference call because earlier today, we published our interim report for the first half of '24. I'll start by addressing key events in the quarter before handing over to Lars for comments on the results in detail, and I will then revert with the comments to our updated profit forecast afterwards. So can we have Slide 2, please.

Before diving into the results, let me briefly address the 2 large events that occurred since the publication of our interim report for the first quarter of 2024. On May 1, we announced an agreement with Nordea on the completion of the IT separation of our old Life company, while at the same time, renewing their agreement with Nordea on the distribution of nonlife insurance products by up to 5 years. The IT separation will take longer time than previously anticipated, and both we and Nordea have revised our respective obligations and task in that process. The new agreement has been entered in common interest and will ensure the full IT separation from Topdanmark. Financially, the agreement entails nonoperational one-off cost of DKK 195 million after tax, which are provisioned for in the Q2 accounts.

And then on 17th of June, we announced that we have entered into a combination agreement pursuant to which Sampo will make a recommended public tender offer to potentially acquire all shares in Topdanmark. The consideration offered is 1.25 Sampo shares for every Topdanmark share, reflecting a premium of approximately 27% to the closing price of the Topdanmark share on the last trading day before the announcement. Our Board of Directors and we, as the Executive Board, finds that the consideration represents attractive financial value to our shareholders and has unanimously decided subject to fiduciary duties to recommend our shareholders to accept the offer from Sampo. Sampo has already obtained necessary regulatory approvals and an authorization by its EGM to issue the Sampo shares needed for the consideration. Therefore, the next step are publication of the prospectus and offer document as well as a commencement of the offer period in early August, and Sampo expects the offer to conclude in September. But Lars, will you take us through the Q2 results in detail, please.

[Lars Beck, executive]

Yes, I will. And thank you, Peter. Turning to the financial results for the second quarter of 2024, we delivered a low reported profit due to the mentioned one-off effect from the IT separation. However, looking at the profit after tax from continuing operations, we delivered a solid 6% versus medium consensus. The outperformance was mainly driven by a solid investment return in the quarter. The insurance service result amounted to DKK 410 million, with a combined ratio of 86.0 or 88.2 before runoff. Insurance revenue growth was a full 13.6% in the quarter, continuing the growth momentum from last quarter and underpinning the significant step change for Topdanmark. Naturally, a part of the growth is based on our acquisition of Oona Health, but organic growth was also strong and reached 5.8% in the quarter, up from 4.3% in Q1, underpinning the positive growth momentum.

Growth was supported by indexation and our implemented pricing initiatives. In addition, we continue to see improved churn rates following our investments into retention efforts both related to manpower, but more importantly, also to AI and machine learning to pinpoint the strongest and most profitable leads by significantly raising efficiency and effectiveness of outbound calls. In addition, growth was supported by stronger new sales based on our improved competitive power as witnessed over some quarters now. And finally, the growth momentum in Oona Health in the quarter remained good. Looking at the claims experience in the quarter, both weather-related and large-scale claims were within or around budgeted levels. The quarter was marked by a very dry environment in May which caused more large fires in the private segment.

In fact, we saw 4x as many fires above DKK 5 million per event as we did in the same quarter last year. And please note that these fires are not captured by our large-scale claims definition. In addition, the timing of Easter caused us to underestimate the claims ratio in Q1 causing a correspondingly higher claims ratio in Q2 of approximately 1.1 percentage points. And finally, or further, we saw a continuation of the trends from Q1 in motor insurance. Adjusted for calendar effects, the claims frequency was in line with the level last year, while average claim size continued to rise due to inflation in wages and spare parts. As we have previously communicated, we started raising prices outside of motor insurance already last year, and we have also started raising prices on motor this year, starting with new sales at the beginning of the year, but also existing customers from April onwards. These pricing measures will offset the headwinds we are currently seeing. But as always, it does take 12 to 18 months to earn through.

As we also commented last quarter, the acquisition of Oona Health brings seasonally higher claims in H1 and seasonally lower claims in H2. This adversely impacted the claims ratio in Q2, but please note that it has not -- it has no impact, sorry, on our model profit forecast for the full year. Underlying all these effects, we continue to see good results of our pricing initiatives as well as our ongoing efficiency program. This was also evidenced by our expense ratio, which continued the good momentum and was lower than anticipated following tight cost control in addition to the effects from our efficiency program.

Turning to the investment results. This was a solid profit of DKK 86 million in the quarter, significantly ahead of expectations, supported by positive contributions from both public and private equity markets, running yield and lower provisions attributed to capitalization factors in workers' compensation. The matching portfolio also continued to contribute positively to the result. On the asset side, the continuation of the low volatility regime supported carry assets and we saw a positive impact from running yields and curve roll compared to the discounting curve. And on the liability side, the Danish Economic Councils lowered their wage projections, leading to lower insurance provisions and thus, a positive contribution to the result.

On discontinued operations, we provisioned the full DKK 195 million after tax one-off costs related to the IT separation agreement with Nordea, as Peter mentioned. And let me also quickly comment on solvency. Our solvency cover rose to 215% from 210% at the end of Q1. The positive impact on own funds from retained earnings in the quarter was more than offset by lower profit margin and rising intangible assets as expected. The solvency capital requirement decreased by almost DKK 100 million, and that was driven by a gradual reduction in equity exposure over the quarter coupled with a lower symmetrical adjustment to equity exposure in the solvency stress scenario. Peter, will you take us through the updated profit forecast?

[Peter Hermann, executive]

Yes. Thanks, Lars. Can we have Slide 3, please. And then finally, let me provide some remarks to the profit forecast for '24. On the top line, we have improved our expected organic growth from above 4.5% to now around 6%. This is a result of the strong first half with an increasing growth momentum and driven by pricing actions, higher retention rates seen in the light of the ongoing pricing actions and the stronger net inflow of customers as well as stronger cross sales of health insurance products. The assumed combined ratio is narrowed to 83 to 85, including one-off. We include the effects from the second quarter and update the expected impact from motor claims inflation for the remainder of the year. Again, please remember that our ongoing pricing measures will offset the headwinds we are currently seeing. But as always, it takes 12 to 18 months to earn through. And then we include the improved run rate for expenses, lowering the expected expense ratio to below 17 now.

Also taking into account the outperformance on investment results in the second quarter, we are narrowing the guided profit from continuing operations to DKK 1.255 billion to DKK 1.46 billion, including runoff. And within discontinued operations, we have provisioned the full nonoperational one-off of -- one-off cost of DKK 195 million related to the IT separation agreement with Nordea in Q2, where it was not part of the profit forecast model as of Q1. And further, on the line transaction costs, we include the expected one-off transaction costs related to Sampo's pending takeover offer totaling between DKK 90 million to DKK 110 million with no assumed tax deductibility. As a result, the net profit forecast is lowered to between DKK 950 million to DKK 1.175 billion including one-off.

And as we told you a quarter ago, we have an outstanding contingent liability regarding Nordea's reserve rights to raise certain claims against us for potential losses under the SPA from the sale of our Life operations. These matters may result in us incurring costs that could affect our results, but we have not included such potential costs in our updated profit forecast for '24. There's currently no news in relation to the ongoing dialogue, and we still cannot quantify the potential impact yet. But the minute we can, we will inform you. And hence, we will not be able to comment further at this point in time. And then Slide 4, please. And that this actually concludes our opening remarks. So we are now ready to answer your questions. So please keep your questions to 1 or 2 at a time. And if you have more questions, feel free to enter the queue again for a second round. So operator, may we have the first question, please?

[Operator]

[Operator Instructions] Our first question comes from Tryfonas Spyrou from Bloomberg ( sic ) [ Berenberg ].

[Tryfonas Spyrou, analyst]

It's Tryfonas from Berenberg here. I just have 1 question, mainly on the topic of Motor. Clearly, you talk about a little bit sort of higher claims inflation so severity of claims being higher. I think that goes against maybe some of your peers have been sort of talking about the frequency of claims in motor being higher. And I guess I just want to get a little bit more, sort of dig a little bit more into your thoughts on what are the key underlying trends you're seeing. And presumably, last year, you obviously updated your procurement agreements, et cetera. So I would expect the severity and obviously the inflation, it seem to be coming down and the frequency to be coming up, given the market is seeing more frequency. And I guess, maybe help us square that with the fact that you kept sort of pricing flat last year in motor, you went a little bit more competitive and now you sort of seem to be raising prices. So maybe just help us a little bit more on what you're doing there in motor and what you're seeing?

[Lars Beck, executive]

Yes. Lars here, I can start by the frequency part, and then Peter can maybe take it onwards from there. What we are saying is that if you clean out the numbers for the weather impact in Q1, then we actually see frequencies having stabilized and frequencies are broadly the same as we saw last year. It's clear that if you look at its face value, we have an increased frequency, but as said, that is stemming from -- in the first half, sorry, but as said, that is stemming from the weather-driven invests in January and February. And if you strip that out, we do see a flat more or less frequency development in our book.

[Peter Hermann, executive]

Yes. And on the contrary, you can say we can see that we have seen higher average claims on motor. And that's mainly due to, of course, inflation on spare parts, but also inflation on salaries in the motor industry. So that we have seen and that, of course, we are trying to fight off with procurement deals, of course. But also that we also take pricing initiatives that we actually have been enforcing on the portfolio I think actually, we already mentioned this with -- when we had the yearly result for '23, we started already there, increasing prices for new business on motor. We did that, and we have also actually increased it once more here before summertime. So now we are actually more than 15% of price increases on motor insurance, personal cars and yes, in new business. We're also taking on price increases to the back book of the existing customers that we started with in April that is going on as we speak and for the remainder of the year and also taking part next year.

Remember, we have a lot of customers have renewal dates around the 1st of January. So you can say the effect on earned premiums will be bigger next year. But still, we are doing it. And we are also -- you can say at least people change cars often, more often than they change house. So we also have some possibilities to look at the price when people are changing cars. So yes, we're working with procurement, making sure that we use our procurement deals and guiding the right cars to the right vendors and auto repair shops and so on. And -- but we are still also enforcing price increases. And as you mentioned, we were a little reluctant earlier on putting price increase on motor because it's more competitive, it's more sensitive.

But as we said, we need to do it because we have done price increases on some of the other products, but we don't want it to be too -- what's called too much, you can say, price increase on some products to cover for the next product. So yes, we have done price increases on motor and -- sorry home and house and accident and so on, but we are now doing price increases, and we have started on doing this in the beginning of the year and continuing on motor as well. So that will, you can say, fight off the headwinds we see now from motor. But it will take some time. As we said, Lars mentioned, it will take -- yes, the next year or so that's so you can say take full effect on your end payments.

[Tryfonas Spyrou, analyst]

Okay. That's great. And can you just clarify on Slide 5, each of the graph there. Is that on a weekly basis or on an earned basis in terms of the premiums and the price?

[Lars Beck, executive]

That's on an earned basis. And hence, as Peter said, the price increases we started earlier on the year was our new business only and then starting price increases on the existing book in April. But since it's on an earned basis, you do not see the run rate impact from the pricing increases that we have implemented yet fully in the numbers. That will also take some time just like it will take time, as Peter said, to fully earn through the impact.

[Peter Hermann, executive]

But the average premium will go up going forward.

[Operator]

Our next question comes from Youdish Chicooree from Autonomous Research.

[Youdish Chicooree, analyst]

If I may please, if I could go back on the topic of inflation. I think you mentioned that on the front book, you put in 15% increases. I was wondering what level of increases are you putting in on your back book? And how does that compare actually to the actual level of severity inflation that you're seeing? That's my first question. And then secondly, just on the top line momentum improving quite a bit in the quarter. Would it just be fair to assume that's all price driven? Or is there something else that's happening there in terms of maybe you're getting volumes in other lines of business?

[Peter Hermann, executive]

As mentioned, it was -- it's more than 15% we have put on price increases on new business. You can say in terms of the existing book -- the existing customers, it's based also on, you can say, the full customer view. So there, it could be the same or it could be less, but it could also be more. It depends a little, you can say on the -- you can say our estimated risk going forward when we predict the combined ratio for the customers going forward. So there it will be a little more individually based on the customers' different products. But we are also there, as I said, putting on price increases on motor. So -- but we don't have you can say a number to say that because it will be different from customer to customer.

[Lars Beck, executive]

And when it comes to revenue and revenue growth, the vast, vast majority of the growth comes from indexation and from price increases. Net new customer inflow does contribute positively to the growth, but with a small part compared to the impact from indexation and from price increases.

[Operator]

Our next question comes from Jan Erik Gjerland from ABG.

[Jan Gjerland, analyst]

The first 1 is back to the motor side, which you have shown on Page 5 in the presentation. Why didn't you think about hiking prices when you saw this kind of frequency increase last year in motor. Seems like you're a little bit back-end loaded when it comes to repricing from 1st of April of your existing book, which will take them another year since most of your new renewables is 1st of January, if I understood it correctly. So it takes some time before you actually see that in the earned premiums, if that is correct. So will you lag behind for too long on the motor side and then actually have a lower profitability on that product stand-alone? That is my first question.

[Lars Beck, executive]

Yes. I mean, I can answer that. I believe it's, of course, always easy to speculate, in particular, on past events. But what we have done is actually delivering exactly what we say we would do. So late, sorry, but in 2023, when we did see the claims frequency increase in motor we were vocal also on the analyst call that we were not yet instilling price increases in motor because it was and is a very price-sensitive product. Later on in the year, in combination with our annual results, we did say that -- we did also say that with the development we were looking into, we were now also starting to do price increases on motor because we could not offset the impact on motor with the other products without screwing our portfolio too much.

Clearly, our decision last year could have been a different decision, you're absolutely right. But at that point in time, we were also looking into probably a little bit of a different competitive environment than what we are now. What we can see and hear, and I guess you can also both hear and see that, is that all competitors are also raising prices now on motor and hence, the competitive situation is a little bit different from what it was when we made the decision that we made last year.

[Jan Gjerland, analyst]

Okay. That's very clear. Secondly, on your cost, it was quite strong this quarter versus a little bit weak last quarter. So first half is probably a good level to look at. But what kind of back-end loaded synergies should we expect for 2024 when it comes to your cost savings and outlook for 2025? Is it still going according to these plans? Or how should we think about your efforts into '25 now that you're about to merge with Sampo?

[Lars Beck, executive]

So far, we are running this company as it was -- as we ran it yesterday or rather as we ran it before the announcement made by Sampo, so our plans when it comes to cost and cost reductions remains exactly the same. And as we've committed to, we will, over time, through 2026 and into 2027, we will make sure that our cost ratio returns to the level it was when we -- before we sold off the Life and Pension business, i.e., at a level of around 16.5. We did have a very strong performance in Q2, as you see. And what we're also now saying implicitly in our forecast is that the tailwind we have on cost is not only a phasing, we have also made, you could say, real cost reductions in the year that will also benefit us this year. And that is what has led us to lower our outlook on expense ratio to below 17.

[Operator]

Next question comes from Vinit Malhotra from Mediobanca.

[Vinit Malhotra, analyst]

So my [indiscernible] one question, I would say. I'm curious about the Nordea contingent liability discussions you mentioned. This could -- the nature of these discussions, could it change with the change of ownership with Sampo? Do you think there's any possibilities there, do you think in the future? Maybe you can't comment on future, but is the nature of these discussions lead to maybe better outcome for this new structure of the company? That's my main question.

[Lars Beck, executive]

Thanks, Vinit. I believe it would be highly speculative to foresee or forecast anything on that side. As Peter alluded to in the introductory comments, we have had no updates since last and hence -- since last quarter. And hence, if you take the wording in our note on contingent liabilities in the accounts, they are word for word the same as we stated last time, of course, now the IT project being taken out. But I believe it would be highly speculative of us to start to considering any alternative scenario going forward. As said, for now, we run the business as we did year-to-date.

[Vinit Malhotra, analyst]

And sorry, just 1 more, just related -- not exactly Nordea, but just on this change of ownership maybe. Do you have any sense that Sampo has plans on some different underwriting styles or any changes that they intend to make from where the book is because, there's a lot of volatility in the underlying even relative to peers. So is there anything that you understand that is part of this plans to change or Sampo is looking at anything that you know?

[Peter Hermann, executive]

Yes. Thank you. It's a good question. Of course, we cannot answer yet, what the plans will be because, first, we need the deal to go through. We expect that and also recommends just for the shareholders. I think it's a good thing that being together in Topdanmark with it having around 6%, Topdanmark having around 15% of market share they would be an even bigger player in the market having you can say, economies of scale advantages. We also have a lot of, you can say, good people hired in both companies with a lot of good skills. Of course, looking at the risk, understanding pricing and so on, use of partnerships, procurement efforts, digitalization, I think there's a lot of things that could be done even better than we're doing today.

Jointly, instead of competing towards each other, we can do it jointly. Whether that changes to the underwriting policies, I don't know. I'm just -- I think it's important to say that we are quite strong on private, on SMEs, agriculture if the well in the Nordics as well in Denmark, they are particularly strong also in industrial, meaning that we do a more full service for our joint customers. So let's see what will happen, but we will definitely take advantage of all the things we can do to make it even better for the customers and also, of course, for earnings going forward. So -- but we cannot answer specifically on that question yet, but I hope that I gave you a little flavor to what we are looking into.

[Lars Beck, executive]

And on the comment you made, Vinit, about volatility in the underlying. I assume that there is a sort of swings and roundabout principal also in non-life insurance here. So clearly, we are in [ 44 ] markets compared to 1. All else equal, you would see less volatility in the underlying result. So I'm not sure it's the nature of our portfolio, but more probably a nature of the geographical strength of our portfolio.

[Operator]

As of right now, we don't have any raised hands left. I'd now like to hand back over to the management for the final remarks.

[Peter Hermann, executive]

Yes. Thank you, operator, and thank you all of you for taking the time to attend our conference here. As you know, you're always welcome to reach out to Robin, if you have any further questions. I wish you all a pleasant rest of the day. And have a good summer. Bye.

[Operator]

Thank you everyone for attending today's call. Have a wonderful day. You may now disconnect.