Earnings Call: Q1 2021

May 6, 2021

Welcome to the Alm. Brand Interim Report first quarter of 2021. For the first part of this call, all participants will be in listen only mode, and after this, there'll be a question and answer session. Today, I'm pleased to present Rasmus Werner Nielsen. Good morning. Thank you for taking the time to join us on this call on the Alm. Brand's result for the first quarter of 2021. I'm here with my CFO, Andreas, and Head of IR, Michael. Let me begin by stating that I'm satisfied with the result we have announced today, both in terms of the earnings that we have made and the progress that we have achieved in the first three months of the year related to further improving the core of our business and building a company fit for the future. Please turn to slide two. As you well know, following the structural changes that we made to our business last year, our focus this year is to make the core of our business more efficient, i.e., streamlining the operational processes and to meet more customers. COVID-19 still influenced our business. We knew this when we announced our full results back in February, so no surprise here. The partial lockdown of society and the general lower level of activity have provided both tailwind and headwind to our business. Claims has been lower on several key insurance products, which has benefited our technical result. The flip side on the coin has been that we have not been able to meet as many customers as we would have liked to, which has temporarily reduced the premiums growth. Also, we have achieved a positive result from our investment portfolio as financial markets has continued to perform well. Aside from this, we have invested a huge amount of time and resources in building and implementing the digital solutions and internal processes to cater for the partnerships with both Sydbank and Volkswagen Semler Finans Danmark. We are making the progress that we have planned for and are reaching the milestones that we have defined in our rollout plans. Both partnerships are now live, and we expect them to contribute meaningfully to our overall premium growth both this year and the years to come. For the next quarters, our focus will be to make sure that we are able to execute and create excellence in our core functions. We will revisit the full value chain and identify what we can do better on claims handling, procurement, and customer servicing. All of this will lead to Alm. Brand delivering on the financial targets in 2022, as communicated to the stock market back in early 2020. Please turn to slide three. The group made a pre-tax profit of DKK 137 million in the first quarter of the year, against DKK 41 million in the first quarter of 2020. The underlying numbers are pretty much in line with our internal forecasts and including herein our cost and investments in our partnerships to get them up and running. These costs are under control. They develop in line with our expectations, they are of course, somewhat front-end loaded, all the benefits will follow in the quarters to come. Further, again, this quarter, the result includes a positive earnings impact from the COVID-19 in line with our expectations. Looking into Q2 and beyond, we foresee that we are now getting back to a more normalized activity level with only marginal effects from the COVID-19 on the claims experience level. Calm weather in the first quarter of the year has kept weather related claims at a very low level. Contrary to this, we have seen a quarter with a high frequency of major claims, and the combined effect of these two claims experiences has been somewhat to the high side. Run-offs has been close to zero. I will get back to that later. Investments results has been good and thus very different from what we saw a year ago. All in all, I think this has been a quarter where we have demonstrated that we are advancing steadily on all the factors that we can influence. There are a few factors that fluctuate regardless of what we do. This is the nature of an insurance company. We have paid out dividends for both financial year 2020 and 2019 this year. The sum of these amounts to DKK 7 per share, which come on top of the extraordinary dividend payment of DKK 8 per share back in January, following the divestment of our bank. Following this, our solvency ratio remains high and is currently 360% in the group. Finally, after the positive development in Q1, we feel comfortable in increasing the full year guidance, which we increased with DKK 50 million. I'll get back to that on the end of my presentation. Please turn to slide five. The non-life business made a pre-tax profit of DKK 138 million in the first quarter of the year, which comprises a satisfactory technical result of DKK 109 million and a positive investment result of DKK 29 million. The technical result benefited from a good development in underlying business as well as a favorable development in weather-related claims. The COVID-19 pandemic and the subsequent lower activity in general had a direct cost impact on earnings of an estimated DKK 30 million, just like we expected. On the negative side, we had a somewhat higher than expected frequency of major claims, and this happens from time to time, and the run-off result was close to zero as two claims related to workers' compensations wiped away an otherwise positive result. The positive observation, of course, being that run-offs are generally fine, and the negative impact can be isolated to a special and rare situation. In this case, the two claims on workers' compensation with a total cost in excess of DKK 20 million. Our investment strategy is a long-term strategy with respect to overall portfolio exposure. Consequently, we have profited from the continued positive development on the financial markets. Please turn to slide six. Premium income grew by 0.5% in the quarter, i.e., less than we have seen in the previous quarters. Only a bit lower than our budget for Q1. As expected, COVID-19 reduced our ability to reach out to customers, which affected the development in premium inflow. This has not only been the situation in Q1, but also back in Q4 2020, which has had a spillover effect on the realized numbers in the first quarter of 2021. Further soft sales of new cars and generally fierce competition in the motor insurance space has also affected growth. Especially when we look at the numbers for private customers, the development has been subdued, and this is, of course, something that calls for action. Now we are looking into reopening of the society and return to more meetings with our customers. On top of this, our partnerships with both Sydbank and Volkswagen Semler Group are up and running. I'm confident that this, coupled with various pricing initiatives, will get us back on budget. Just to be clear about this, our main focus is to make sure that we grow in a profitable way. There will be some of the fierce price competition in the market that we will be back away from. The claims ratio, excluding run-off gains, was 74.3% against 74.7% in the first quarter of last year. Included in this is one of positive effect from fewer claims in the quarter due to the COVID-19 situation and a positive effect from fewer weather-related claims. On the other hand, a negative effect from higher costs stemming from major claims. The expense ratio was 17.8. This effect from the cost savings program continue to materialize but are set off by start-up costs related to the partnerships. All in all, this leads to a combined ratio excluding run-off gains of 92.2 compared to 92.3 in the first quarter last year. The run-off result amounted to a gain of DKK 2 million, which corresponds to 0.1 percentage points against a gain of 1.9 percentage points in the first quarter of last year. As mentioned, we had two claims on workers' compensations that were somewhat higher compared to what we normally see, each of them being above DKK 10 million. Aside from those, the run-off result was pretty much in line with what we would expect. The combined ratio, including run-off gains, amounted to 92.1. Now please turn to slide eight. For the weather-related claims, we have seen a very favorable development in the first quarter. Despite cold weather and some snow, these claims amount only to DKK 7 million against DKK 54 million in the first quarter of last year. The major claims, however, more than doubled to DKK 170 million against DKK 51 in the last year's quarter. Adding these two together, total claims amounted to DKK 124 against a more moderate level of DKK 105 in the first quarter of last year. Now please turn to slide nine. For the private segment, the claims ratio was down 1.9 percentage points in the first quarter against first quarter last year. In the quarter, we have seen restrictions and social distancing having a direct impact on general activity and the number of accidents. Like especially in Q2 and Q4 last year, this can be seen in the numbers. Run-off gains amounted to a decent 0.8%, modest compared to the previous year. Lastly, the expense ratio ticked up, but lower than expected as cost in Q1 includes funding the start-up of the new partnerships. Please turn to slide 10. For the commercial customers, the combined ratio increased to 97.6, i.e., significantly higher than in the first quarter of 2020. The key driver here was a sharp increase in the major claims, which tripled to 14.4 percentage points. However, this was partly offset by a lower level of weather-related claims. Through 2020, we have reviewed our portfolio of corporate customers and have found that some are paying too low a premium relative to the expected risk profile. Throughout 2021, we will adjust the price of several of these policies. On a separate note, we now see an increase in cost inflation in relation to insurance claims as prices for both works and building materials are going up. The expense ratio amounted to a satisfactory 16.2%. This is in line with our expectations. Now please turn to the life business on slide 12. Pre-tax profit for the first quarter of 2021 amounted to DKK 21 million against DKK 32 million in the first quarter of last year. The technical result amounted to DKK 27 million and reflects a continued satisfactory expense and risk result, which amounted to DKK 12 million. On the negative side, the investment result came in at a loss of DKK 6 million as interest rates on our bond portfolio increased. The bonus rate increased by 180 basis points to 17%, as higher interest rates had a positive effect on the life insurance provisions that exceeded the losses on the investment portfolio for the policyholders. Please turn to slide 13. Premiums totaled DKK 426 million in the quarter and were made up by DKK 246 million in regular premiums and DKK 180 million in single premiums. The development was flat for the quarter relative to the first quarter of last year, well below our medium-term target, but partly explainable by the special situation around COVID-19. All this is in line with our expectations, and we forecast growth to pick up nicely in the quarters to come. For 2021, we have announced a customer rate of 3% for new customers. The FSA has announced a regulatory change to the minimum technical rate of interest to minus 0.5%, with effect from July 1st, 2021. We will have a setup in place so that we also in the future can cater for customers that prefer our value proposition. Please turn to slide 15 for the outlook for 2021. Based on the development that we have had in the first quarter, that is a very few weather-related claims as well as the positive investment return, we increase our full year guidance by DKK 50 million. This means that we now guide for a full-year pre-tax result in the range of DKK 650 million-DKK 700 million, which is the sum of an expected pre-tax profit in non-life of DKK 625 million, in pension of DKK 100 million, and net group cost of DKK 50 million. As I also stated back in February, our guidance assumes that the direct positive effect from COVID-19 on claims frequency is expected to be lower. We have had tailwind in the first quarter, but looking into the rest of the year, we believe things will normalize. Secondly, for both major claims and weather-related claims, we budget for something close to normal in the rest of the year, i.e., around 3% for weather-related and 7% for major claims. Thirdly, we expect only a modest investment result in the remainder of the year. Lastly, as usual, we do not include bonus results in our guidance. Just to be clear, we still guide for top line growth in non-life of more than 3% and the growth in regular premiums in life of 3%-4%. Both will be challenging, and we will at the same time keep firm focus on profitability. Further, the cost rate in non-life is expected to pick up a little compared to last year, to between 17% and 17.5%. Regardless of this, combined ratio is now expected to be around 89%, thus reflecting the increase in our earnings guidance. We are comfortable about the development and see no changes to the financial targets for 2022, with costs around 16% and combined ratio in a normalized world with no COVID-19 around 90%. In total, our guidance reflects a business with all major parts moving as we would like them to. With this, I conclude my presentation and hand over the word to our moderator. Thank you. Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question is from Per Grönborg of SEB. Please go ahead. Your line is open. Yes, thank you. I will start what might be a bit nitty-gritty area. The VA adjustment of 23 basis points in the quarter, you state that the Danish mortgage bonds have not seen the same spread widening. What's your investment benefit isolated from the 23 basis point? Where have they been lost again this quarter? Hi, Per. This is Andreas speaking. In round numbers, we have, I would say, a net positive from the match portfolio in the level around +DKK 15 million. With the VA adjustment we've seen, that is in line with what we would expect because we have the ambition to basically match the liabilities in a way that the amount of credit and mortgage bonds are a match compared to the underlying risk on the liabilities. That's very much in line with what we would have expected. You are saying that the impact of 23 basis point from the VA, if I understood you correctly, that was DKK 15 million only. Is that correct? Yeah. In that ballpark on the match portfolio. We also have an own risk portfolio which mainly consists of short mortgage bonds. In the quarter we've seen with both a widening of spreads and an increase in interest rates, we obviously have a loss on that part of our portfolio. You could say that those two effects. Let me rephrase the question. Sorry. Those two effects would basically match in levels. Then we have a positive from the equities increase. Yes. That of course can be seen that you are disclosing. Let me rephrase the question again. 23 basis point increase in the discounting curve, everything else being equal, how big would your gain be from that? Forget about the asset side, only the liability side. The liability side would be about DKK 40 million. DKK 40 million only? Yeah. Isn't that a significantly smaller amount than what you have communicated previously? No, I know that's in line what we've communicated previously. We have an interest rate risk on the liabilities in the level of DKK 2 million per basis points. Okay. My second question is on the growth in P&C. You have 0.4% growth in the first quarter. You still guide for more than 3% growth for the full year. This must imply that, I assume Q2, you more or less know the numbers by now as those premiums have been written, and you need to earn them first. Are you seeing a very quick pick-up in the second quarter? Does this imply that we should see second half growth approaching 5%? Rasmus here. When we guided in February, we knew that Q1 would be challenging, and it's actually also in our internal numbers. We are a bit below, as you were saying, also a bit below our own expectations. Now with the opening and that we have our people are out on the roads discussing with customers again, we are positive towards the 3% for the full year. Also with Semler coming in now, we have Sydbank working very good. We are still in a positive sentiment around the growth for the full year. We should not expect Q2 to be that far from the full year growth when we look at Q2? Or will you also be clearly behind in Q2, as you seem to believe that you'll be after Q1? The growth will pick up in Q2, but it will not outline the expected growth on 3% that we did not have for Q1. That will come later. Is it realistic that you will be anywhere close to 3% for Q2? You will be significantly behind going into the second half? Yes, it is realistic. It's realistic. Okay, interesting. Maybe a bit of an nitty-gritty question. If I look at the movements in the interest groups in Life, can you explain what has happened? The high interest group is down quite materially. The 0.5%-1.5% interest group is down quite materially this quarter. Looks like you have had a quite significant outflow of high guaranteed business. Yeah, my immediate answer to that would be that we haven't seen a large outflow. I would say it would be explained by. Is it the asset under management you're referring to or? That's the only number you gave us, so that's what we need to refer to. I would say it's the interest rate increase and the adverse impact it has had on the asset side. You see that it doesn't represent an outflow from the underlying customers. The group three is down from DKK 1.9 billion to DKK 1.4 billion. That's solely driven by losses on the bond portfolio. Mainly, yes. Okay, interesting. Thank you. Thank you. Our next question is from Asbjørn Mørk of Danske Bank. Please go ahead. Yes, hi. Thanks for taking my questions. One question relating to your guidance for the full year and the DKK 50 million upgrade. If I understood you correctly, Rasmus, you said you had DKK 30 million of COVID-19 benefits, which were largely as expected. I also think you recalled at the Q4 numbers, I believe you said you hadn't included COVID-19 in your guidance. Just a bit of clarity on whether the DKK 50 million upgrade, is that impacted by the DKK 30 million of COVID-19, or is that not included in that guidance upgrade? It is not included in that guidance upgrade. The guidance upgrade is primarily due to the weather-related claims and the financial markets. Okay. When you say DKK 30 million as expected, that was not referring to the guidance, but just what you had in your internal model. That was included in our guidance for the full year, yes, at that time. Sorry, I missed. Can you rephrase the question? I missed it. Yeah, sure. The initial guidance of DKK 575 for non-life for this year, does that include DKK 30 million of COVID-19 benefits for Q1, or is that something that was not included at that time in the guidance? It was included at that time. Okay. All right. Okay. I think you said something differently at Q4, but anyway, okay, so it was included in the DKK 575 guidance. Yeah. Is it possible, because when I look at the 3% impact, or the DKK 30 million impact, sorry, is it possible to split that between private and corporate? We could say that most of it is in private. We don't have the exact split today. Most is in private. Okay, fair enough. The final question from my side, a little bit back to Pia's question on the growth, which I guess needs to be quite intense in Q2 and Q3, Q4. You also said, Rasmus, that you would back away from areas where competition is tough, which I guess is in some of the private areas, if I understood you correctly also on the presentation. What are the areas where you think competition is less intense and where you expect to outgrow more than in those more competitive, intense areas? Yeah. I think the intense areas is definitely in the auto insurance part. We see very high price or low price competition at the moment. Of course, we need to have profitable growth, so some of the things we will simply back off from. We have in the accident part, I think we have a possibility to increase prices. We have very good business there, and it's still coming in. It's a good product we have. There are ups and downs, and there are different segments to work with, also in the private side. Isn't auto exactly one of those areas where you expect to grow with the new distribution agreements? Yeah, you are right, the auto industry is there and with these new partnerships we have, we have good prices. Here the product is something more than just the price, it's also the service. It's combined into this ecosystem of servicing. I would say price is one thing, but it's maybe a second priority or even a third priority for the customers, because there are so many other benefits of having the insurance product combined with the services that Semler Group is providing. We don't expect. Of course, there will be some competition on that product as well. There are many other things we can play on providing that product. When we have these new customers into our house, we are allowed to contact them with all the other products we have. It is really a partnership we expect a lot from. On life, on your growth, which of course is quite low in Q1, but you write in the report that you expect that to pick up in Q2 with the deals that you've already made here in Q1. I was just wondering, how certain are you about the growth potential here given the guaranteed products and as you also alluded to, the FSA's new maximum guaranteed rate or whatever you want to call it, in these negative rate environments? Is there a risk that you might be too optimistic about the growth opportunities even up to Q2 mid-term? I would say we actually had quite a good growth in Q1. We also had that last year in Q1. We are satisfied. We have a very good beginning, and we see the 3% in the deposit interest rate is very attractive to a lot of customers. Funds are moving in our direction. I expect us to be able to deliver on 3%-4% by the end of the year. Yes. All right. Thanks a lot. Thank you. Our next question is from Martin Gregers Birk of Carnegie. Please go ahead. Your line is open. Thank you so much. Just coming back to where Asbjørn Mørk left. If I go to your Q4 transcript, I guess the COVID-19 effect in Q1 was not supposed to be 30, it was supposed to be somewhere around DKK 15 million. What happened to that and what kind of COVID-19 effects have you included in your guidance for the three remaining quarters? On your guidance, I guess if you do the other calculation, it signals that the coming three quarters are going to be fairly strong. How should we think about that, and what are building blocks to reach your P&C guidance from here? I hope you're right that the coming quarters will be very strong. We guided around DKK 50 million in COVID-19 effect for 2021. 30 of them is due to Q1 and it's actually also what we've seen in the figures. 10 to 20 is in Q2. Of course, there's left to see what will happen. At least I can say from what we have seen in draft version for April, of course, there are still some COVID-19 effects floating into the numbers. We hope that the opening of the society will normalize these levels. I think that is. Wasn't the DKK 50 million was only supposed to be for Q1? Then I guess there was some saying, I don't know if I talked to you or where I heard it, there was some saying around that COVID-19 ends at Easter, and that's why we only guide for COVID-19 effect in Q1 of DKK 50 million. I think we guided, at least I hope it was said that it was DKK 30 million for Q1 and the rest for Q2. I must say I cannot remember how specific we were, but at least it was DKK 50 in total for the year. Okay. All right. Onto the remaining three quarters. Yeah. We expect we also see a more normalized level in the claims frequencies. Things are starting to be more normalized. As we saw last year when moving from September into October, very quickly we picked up into a normalized level on claims frequency. That I actually also expect here, maybe end of May, moving into June when the society is reopening. We still have I think what we have guided, this 10-20 will not be far from reality in Q2. It's difficult of course to say, but I would expect things to be more normalized rest of the year. Okay. All right. That was all from my side. Thank you, Mads. Thank you. Just as a reminder, if you wish to ask a question, please press zero one on your telephone keypad. There'll be a brief pause while we register any further questions. We have another question from Per Grönborg of SEB. Please go ahead. Yes, just a follow-up. You address yourself inflation and construction costs. When talking to people who work within the construction sector, seems like material costs are skyrocketing, if they even are able to get materials at the moment. What have you put into your guidance regarding claims inflation in the remaining part of this year? You're right, Per. We are looking into, at least see the first signs of costs on the claims to increase. It could be both on the hourly rates, or it could be for building materials. I think it's too early to say what the effect will be, and we have actually not put anything into our guidance yet. It's just to raise a flag that there are some things we need to follow very closely. Also with what you're saying, that it's difficult to get building materials and things like that. For the moment being, we have not put anything into our guidance. Okay. Thank you. Thank you. We have another question from Martin Gregers Birk of Carnegie. Please go ahead. Thank you. Just coming back, I guess this was actually also a follow-up to Per's question. On the deterioration that you see in your underlying combined ratio this quarter, I guess some of it can be linked to namely a pickup in materials, wage inflations within construction, et cetera. I guess also a part of it is going to be linked to the investments that you guys make in your partnerships. Is that something that we should expect that would go away from the next quarter, or how should we sort of think about this deterioration in your underlying combined ratio? I think the cost side will normalize in Q2. We have had this small effect, exactly as expected in Q1. Now we are live with both Sydbank and Semler. These startup costs will not come back in Q2. In terms of the building materials and all that, we still need to see what is happening. There can be still a pickup in Q2 and even Q3, maybe even Q4, if the whole building market in Denmark heats further up. It is a little bit. We are looking into this very carefully to see how things will affect us. On the cost side, we are fully in control. Okay. Thank you. Thank you. There are no further questions at this time, so I'll hand back over to our speakers. Yeah. Thank you very much for listening and taking your time to our results. Yeah, we talk with you later. Thank you. Bye.