Topdanmark A/S

CSE:TOP

Earnings Call Transcript 2020-Q3

[Steffen Heegaard, Head of IR]

Welcome to the presentation of Topdanmark Results for the First 3 Quarters of 2020. Profit for the first 3 quarters was DKK 553 million compared with DKK 1.115 billion for the first 9 months last year. The combined ratio was 87 compared with 82.1 in the same period last year, mostly caused by higher claims trend on house insurance and by lower runoff profits. Premiums increased by 2.8% in non-life and by 3.6% in life. For the full year 2020, the assumed non-life growth has improved from between 2% and 3% to about 3%. And the combined ratio has improved from about 88 to between 88 and 89, excluding run-off in Q4. The profit forecast for 2020 has been improved from between DKK 550 million and DKK 750 million to between DKK 750 million and DKK 850 million, excluding run-off in Q4. Following the Danish FSA's recommendation, it's still the intention to postpone the payout of the remaining dividend for 2019 until the AGM on the 25th of March 2021. For 2021, we assume a premium growth in non-life of just above 3% and a combined ratio of about 90, excluding run-off. September will upscale investments in order to improve the efficiency. It is expected that the assumed efficiency gains will surpass the increased level of depreciations by a clear margin. These are the main points in my presentation. Pretax earnings decreased by DKK 714 million to DKK 722 million. The typical non-life profit decreased by DKK 315 million to DKK 945 million. The decrease was primarily due to lower runoff of profits, a higher claims strength on house insurance, a higher level of weather-related claims and the impact of lower interest rates. Investment return decreased by DKK 189 million to a loss of DKK 240 million. Investment return was impacted by the turmoil in the Danish mortgage market during Q1, resulting in a substantial spread widening that impacted the portfolio of Danish mortgage bonds, which is used for hedging the provisions. Profit in life insurance decreased by DKK 247 million to DKK 44 million, primarily due to a lower investment return. The claims strength deteriorated by 0.4 percentage points to 70.7. The claims strength was negatively impacted by lower runoff profits of 2.8 percentage points, a deterioration of the claims trend on house insurance of 2.1 percentage point, discounting of 1 percentage point, a higher level of weather-related claims of 0.6 percentage point and a higher level of large-scale claims of 0.5 percentage points. Based on the negative claims trend on house insurance, Topdanmark will make risk-based price increases as well as increased focus on acceptance criteria and claims prevention. The underlying claims trend, which is the claim strength adjusted for run-off profits, weather-related claims, large-scale claims, discounting and COVID-19-related claims was 69.9, 0.3 percentage points above the level in the first 3 quarters of 2019. COVID-19 impacted the claims trend positively by 0.8 percentage points. For 2020, the assumed impact on the combined ratio from COVID-19 has been improved by 1 percentage point. Premiums increased by 2.8% in non-life. The premium growth was split between a 0.7% increase in the private segment and a 5.2% increase in the SME segment. Topdanmark continues to see a net inflow of customers in the Topdanmark brand. The good start to the distribution agreement with Nordea continued into Q3, and the number of customer leads in the private segment has reached 74,000, which is well above the target for 2020. We still expect a negative impact on premium growth in 2020 of approximately 0.5 percentage points due to the switch of distribution partner from Danske Bank to Nordea. In 2021, the premium income from the inflow of customers from Nordea is expected to fully compensate for the terminated distribution agreement with Danske Bank. On October 1, Swedbank terminated the distribution agreement with Topdanmark. As Topdanmark has good momentum in new sales and low churn rates, the terminated distribution agreement with Swedbank does not impact the assumed growth in 2020 and is expected to have only a marginal impact on growth in 2021. We have upgraded the expected premium growth for 2020 from between 2% and 3% to about 3%. And for 2021, we assume growth of just above 3%. As stated, the combined ratio was 87 in the first 3 months of 2020, up from 82.1 in the same period in 2019. Despite the negative impact from house insurance of 0.6 percentage points, the assumed combined ratio for 2020 is improved from around 88 -- from between 88 and 89, excluding runoff in Q4. Among other things, the assumed combined ratio for 2020 is positively affected by improved impact from COVID-19. Profit in life insurance decreased by DKK 247 million to DKK 44 million. The low result was primarily due to a decrease in investment return of DKK 203 million but also due to lower sales and admin result as well as a lower result on insurance risk. For 2020, the assumed profit in life insurance is improved from between DKK 0 and DKK 50 million to between DKK 50 million and 100 million due to the postponement of costs related to solving the teething problems of the new core IT system. Premiums in the life division increased by 3.6%, split between a 4.6% growth in regular premiums and a 3.2% increase in single premiums. In Q3, premiums were impacted by price increases on illness and accident insurance, which is the entry product selling pension schemes to corporate -- to the corporate market. Accordingly, single premiums decreased by 31.1% in Q3. Regular premiums continued to increase in Q3 by 7.1%. We continue to assume growth in regular premiums of about 0% in 2020. Investment return for the Topdanmark Group was a loss of DKK 240 million. This includes the result of Topdanmark's asset management company of DKK 65 million. Investment return was impacted by the turmoil in the Danish mortgage market during Q1, resulting in a substantial spread widening that impacted the portfolio of Danish mortgage bonds, which is used for hedging and provisions. Based on a number of assumptions described in the Q3 report, the assumed post-tax profit for 2020 has been improved from between DKK 550 million and DKK 750 million to between DKK 730 million and DKK 850 million, excluding runoff in Q4, representing earnings per share of DKK 9.2. Following the Danish FSA's recommendation, Topdanmark's Board of Directors decided to postpone paying out the remainder of the dividend for 2019 until the AGM on the 25th of March, 2021. It's still intention to distribute in part or in full the remaining 8.5% of the previously announced dividend of DKK 17 per share. For 2021 we assume a premium growth in nonlife above 3% and a combined ratio of around 90, excluding runoff. The assumed combined ratio of around 90, excluding runoff, is compared with 2020, negatively impacted by increased investments in Topdanmark's efficiency program by 1 percentage point and by 0.3 percentage points due to lower interest rates. Topdanmark will upscale the level of investments in order to improve the efficiency of the company. The main focus areas are automation and digitalization of routine based processes, risk and pricing and procurement. As mentioned, the increased level of investments will impact the combined ratio for 2021 negatively by approximately 1 percentage point. The positive impact of the efficiency improving measures will start to materialize from 2022 with increasing impact to 2025. The basis for unfolding the efficiency gains are a new core IT system in both life and non-life. In the Life division, the new system was implemented in 2019. In non-life, the IT system will start being implemented in 2021. Consequently, Topdanmark will start depreciating the external cost in relation to the new system in 2021. The assumed level of depreciation will increase from approximately DKK 25 million in 2021 to approximately DKK 230 million in 2026. It is expected that the level of efficiency gains will absorb the increase in the level of depreciations with a clear margin in the coming years. The implementation of a new IT system in the life division has had some teething problems. The problems implementing the IT system are yet to be solved, and some of the cost solving the problems are carried over to 2021. Furthermore, the assumptions for the investment return have been lowered. Consequently, the assumed pretax profit for the life division in 2021 is between DKK 50 million and DKK 100 million. Thank you for taking the time to watch this presentation of Topdanmark's Q3 report. If you want to learn more about Topdanmark, you are welcome to contact me. In October and November, we will host a number of online investor meetings. Today, we'll be hosting a conference call at 3:30 CET, and the dial-in information is available on our website. You'll find more information on our roadshow schedule in the events calendar on our website. Thank you, and goodbye.