Earnings Call: Q2 2020

Aug 20, 2020

Welcome to the Elm Brand Interim Report 2020. For the first part of this call, all participants will be in a listen only mode. And afterwards, there will be a question and answer session. Today, I'm pleased to present CEO, Rasmus Werner Nielsen. Please begin. Thank you. Good afternoon, and thank you for taking the time to join me on this call on the AMP Brands results for the 2020. At my side, have Head of Investor Relations, Lars Hall. Three weeks ago, we made an announcement with an upgrade of our guidance for the full year. And at the same time, we provided you with the preliminary half year result. Today, we have shared with you the full set of results and giving you some more detail on how our business is performing. It's been a special quarter with a busy agenda, not just because of the COVID-nineteen, but also because we have a lot of things that we want to develop within our group. Please turn to Slide two. The results in the quarter were very strong with positive development within all our business areas. Like many other companies, we have been challenged with how to navigate in a world affected by COVID-nineteen, and I'm proud to say that our employees have done a great job in servicing our customers during this special situation. In terms of earnings, the second quarter has been very good. You may recall the negative impact we had in the first quarter due to the COVID-nineteen effects on investment returns, the surge in travel insurance claims and the write downs on loans in the bank. In the second quarter, we have regained most of the losses on the financial markets. Insurance claims has been lower partly because of lower activity in the society and we have not seen any need for additional write downs on the loan portfolio in the bank. Adding Q1 and Q2 together, Ambrand is looking into a neutral effect for the COVID-nineteen so far. Underlying performance has been better than expected, and thus we upgraded our guidance back in July 31, and we restated our commitment to deliver on the ambitious financial targets that we have set for 2022. And finally, I just want to highlight that we are entered into a partnership with first Group four Securities and then the car sales company Semler Group, two different setups that we expect would fuel growth in our non Life business and help us achieve our growth ambitions. I will get back to this. Please turn to Slide four. Non Life business made a pretax profit of $3.00 9,000,000 in the second quarter of the year, driven by an extraordinary strong technical result of DKK $237,000,000 and a positive investment result of 72,000,000. The technical results benefited from a good development in underlying business as well as favorable development in both weather related and major claims, but also from fewer claims as a consequence of lower activity during the lockdown due to COVID-nineteen, which have added around CHF30 million to our result. The recovery of both equity and bond markets has helped our investment return. Our investment strategy is a long term strategy with respect to overall portfolio exposure, and we have made only small adjustments actually adding a little extra exposure in the period. Please turn to Slide five. Premium income grew by 1.6%, I. E. Somewhat down compared to the first quarter of the year, most notably within the corporate segment. Our sales force has of course been operating in an environment with fewer customer meetings as insurance coverage has not necessarily been top of mind for a lot of people while COVID-nineteen has been out there. In general, we saw customers being relatively more resistant in signing up for new insurance. And in addition to this, we had a number of corporate customers inquiring for downtime insurance. Please turn to Slide six. In order to further grow our business, we're exploring various way of adding new distribution power to our non life business. We have developed major digital solutions across the value chain in our non large business and we are rapidly accelerating our use of technology. We strongly believe that the digital future offers a lot of opportunities. And in order to use these opportunities, we need to have the ability to create and enter into ecosystems so that we can offer our customers intuitive and sincere solutions that are easy to use and meaningful. During the summer, we have formed a partnership with both Gruphor Security. This is a traditional setup with the aim of referring customers to each other and Semler where we are integrating our digital solution. This is meaningful for both us and for Semler, and I expect this to be the first of more similar partnerships to come. For us, the partnership will be part of the toolbox that we will apply in order to get the 3% growth target by 2022. Please turn to Slide seven. The claims ratio excluding run up gains was 7% points better than in the 2019. Including in this is a positive effect from fewer claims in the quarter of 2.5% points due to the COVID-nineteen situation. The expense rate was 17.5%, down a full percentage point as the effects from the cost savings program has started to kick in. And all in all, this leads to a combined ratio, excluding runoff gains of 85.3%, which is well ahead of our expectations. The runoff result amounted to a gain of DKK30 million, which corresponds to 2.8 percentage points. On this, we have seen positive results from accident, motor and workers' compensation insurance. The combined ratio, including runoff gains amounted to 82.5. Now please turn to Slide eight. Both for major and weather related claims, we've seen a very favorable development in the second quarter. In total, these claims amounted to only 85,000,000 in the quarter against DKK 127,000,000 in the 2019. Compared to previous quarters, this is a very low level, and we would expect a return to a normalized level of around 3% to 4% for weather related and 7% to 8% for major claims going forward. Please turn to Slide nine. The overall improvement in combined ratio figures down on both the private and commercial segment. In light of this, the claims ratio was down 4.3 percentage points in the quarter against 2019. And it should be stressed that both April and May was very good, But as society gradually reopened and returned to normal for many of us, we have seen the claims ratio trending towards normal in the month of June. Run off gains amounted to 2.9 percentage points, which is satisfactory, and the expense ratio improved with 1.8 percentage points to 18.4% due to headcount reduction and tight control with overheads. Please turn to Slide seven. For the commercial customers, the combined ratios dropped to 81.6%, I. E, significantly lower than we're used to. The key driver here was the reduction of 8.8 percentage points in the claims ratio driven by lower weather related and major claims, but also claims on contents and real estate. Also here, the latter effects are partly due to the situation around COVID-nineteen. Run off gains amounted to a satisfactory 2.7 percentage points and the expense ratio remained at a fine 16.5. And now please turn to the Life business on Slide 12. Pretax profit for the second quarter amounted to a satisfactory result of DKK30 million. The result reflects a continued satisfactory development in expense and risk result which amounted to DKK10 million as well as an improvement an improved interest rate interest result of DKK12 million against DKK7 million in the 2019. The technical result then amounted to DKK26 million. The result on investment allocated to equity made small plus thus regaining the loss from the first quarter. The return on the policyholders' investment assets was 4.1%, thereby turning half year result into a positive 1.7%. The bonus rate is at 13%, which in the current economic environment is still in at a satisfactory level. Please turn to Slide 13. Premiums totaled $361,000,000 in the quarter and is made up by DKK 175,000,000 in regular premiums and DKK 186,000,000 in single premiums. The growth in regular premiums was a modest 1.7%, well below our medium term target, but partly is variable by the special situation around COVID-nineteen and to some extent also by customers having a preference for market return products, which we do in the bank. And now I'll turn into our last segment, banking, on Slide 15. Core earnings in the bank amounted to 43,000,000 in the second quarter of the year compared to SEK 50,000,000 in the 2019. This is a satisfactory development that reflects both the income generating and cost reducing initiatives that we have put in place. Further, in the numbers also included a satisfactory development in trading income following the recovery of the financial markets. We have made no further write downs on our loan portfolio. And although a little early to conclude anything, we have seen no signs among our customers that they are hurt because of COVID-nineteen. Instead, we have again made a reversal of write downs as some of our customers have had an improvement in the economic situation, primarily within the agricultural sector. And as stated also a quarter ago, we are confident that the total amount of write downs on our loan book reflects a prudent estimate on the credit quality, and we are pleased that most of our customers are private households. Investment portfolio earnings was a loss of 7,000,000. Included in this, the negative interest rates on the cash surplus in the bank as well as funding costs. In total, the quarter generated a pretax profit of 43,000,000, and this we are very pleased with. Please turn to Slide 16. Business volume is pretty unchanged as you see. Repayment of retail loans continues at the same pace as seen in previous quarters, and thus the new loans that we add to our total retail lending portfolio can only offset this. Especially coming to the leasing business, the special situation due to COVID-nineteen has had an effect both on demand for new cars and in some cases on the manufacturers' supply of specific cars. This has reduced the amount of new business coming in. And based on this, we would expect earnings to slow down until the market has been fully resourced. Please turn to Slide 17. The result in the bank translated into a pretax return on equity in the quarter of 9% annualized based on both recurring and non recurring income. A positive result was still a job to be done. In the graph, we have done the math on a rolling twelve month basis and adjusted for amounts related to customer relations and then we got to a return of equity on 5.9% pretax. The solvency remains at a robust level of just below 22%. And then please turn to Slide 19 for the outlook of the year. Back on the July 31, we announced that we upgraded our guidance for 2020 following a very satisfactory second quarter. The new guidance is that we expect a consolidated ordinary pretax profit of $750,000,000 to $850,000,000, excluding any run off results for the rest of the year against the previous guidance of DKK $550,000,000 to 700,000,000. The new guidance is based on both a better than expected development throughout our business and the recovery in the financial markets, which means that we have now fully recovered the loss from investments that we suffered in the first quarter. We see a healthy development in all our businesses, but in terms of the change of guidance, then the Non Life is the most important. As usual, we provide a guidance on each business areas. For Non Life, we now expect a pretax profit of DKK700 million against the guidance given back in March of DKK500 million. This is based on the most stable development in the financial markets and continued strong development in the technical result. And our base assumption is now that we will achieve a combined ratio of approximately 87% to 88% for the full year. For Life, we expect pretax profit of CHF 100,000,000. No changes to what we have guided before, but of course, with the earnings achieved so far, we have become even more confident that we'll deliver on this. For Banking, we expect a pretax profit of DKK 90,000,000 against our previous guidance of 80,000,000. Improvement in the underlying business continues to add us some comfort. But in all fairness, we should remember that the reversal of write downs has added a little more tailwind than expected. And other, I. E, primarily headquarter costs, will be at around CHF 60,000,000 reflecting low extraordinary items expected here. So in total, our guidance reflects a business with all major parts moving as we would like it to. And for us, the following months are all about execution. With this, I conclude my presentation and hand over the word to our moderator. Thank you. It appears that there are no questions today. So I will hand the word back to the speakers for any closing remarks. Okay. Thank you for listening in, and see you next quarter. Bye.