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Edited Transcript of ALMB.CO earnings conference call or presentation 20-Aug-19 8:00am GMT

Half Year 2019 ALM. Brand A/S Earnings Call

Copenhagen Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of ALM. Brand A/S earnings conference call or presentation Tuesday, August 20, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Søren Boe Mortensen

Alm. Brand A/S - CEO & Member of Management Board

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Conference Call Participants

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* Asbjørn Nicholas Mørk

Danske Bank Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Welcome to the Alm. Brand interim report for the first half year of 2019. (Operator Instructions) I'll now hand the floor to our host, CEO, Søren Boe Mortensen. Please begin your meeting.

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Søren Boe Mortensen, Alm. Brand A/S - CEO & Member of Management Board [2]

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Good morning and welcome to the presentation of the result for Alm. Brand group for Q2 and for the first half year 2019.

For 2019, we came out with a profit of DKK 145 million. That is a little bit better than expected. The Non-Life business came out with DKK 122 million with a combined ratio, 89.9%. The Life came out with DKK 21 million and the Banking came out with DKK 15 million. All in all, aligned with the expectations when we look at the result.

If you look at the Q2 generally, then we can see that the return on the equity for Q2 had been on level, more than 12%, which is quite decent still. And the impact from the Q2 had give us a review on the full year guidance, up with DKK 50 million.

The Q2 had been under influence of a development in the interest rate level, which had decreased during Q2 and during the first half year. If you look at the interest rate level, compared of 1st of January to end of June, it had come down with 1.1% in both 10-years and 20-years levels when you are looking at the discounting rates that we are using for the reserves, including the VA adjustments. So that's a major move that we have seen in Q1, Q2 on the interest rate levels. That had, of course, impact on the Non-Life business on the result there, on the investment result there, but also on the claims, also on the premium income. I come back to that.

On the Life side, of course, on the bonus reserves, which on the interest impact. And on the Banking side, we can also feel this change in the interest rate levels.

If you look at the group result for the first half year. Then the pre-tax profit, DKK 370 million, a little bit better performance, all in all. We have Non-Life with the DKK 317 million, equal to a combined ratio 87%. And the Life with DKK 50 million and the Banking with DKK 31 million.

So all in all, Q2 and especially the first half year, better than expected, but a little bit lower than we saw in 2018.

If we look at the development on the strategic goals, then we are still working a lot, introducing new digitalized product for our Non-Life business customers. We have a lot of new products introduced for the private lines, and we will expect that have been through all the products or most of the products during the next year.

In the first half year, we had converted a lot of the existing customers to new product, which gives them the ability to have a more digitalized product, but also a more value-added price structure for the product. All in all, that will give an improving of the premium income in the second half year and in 2020.

The return on the equity have been, as I mentioned before, quite a decent level. And if you look at the growth of the new group-wide customers, that had still improving. The situation are now that half of the new customers coming into the bank are coming from the Non-Life business. So we see that the group customers are now improving much better than we have seen for the latest year. Along with that, we can see that the Net Promotion Score from our customers had improved from level of 47 up to 64 now. We have changed the method that we are calculating this, but nevertheless, the 64 level is quite good, and of course, a part of the support for the development of the group in the future.

If we look at Non-Life business result for Q2, with DKK 122 million result. That is a little bit lower than we saw in 2018.

The -- If you look at underlying business, it's quite on the same level. The major claims are lower than we saw last year. But on the other hand, the runoff results are absolutely lower than we have seen for some years. That is aligned with the expectations and our forecast, but nevertheless. And then we have a negative impact from the property business and also for the discounting rate which have a negative impact on the result. And then we have the weather-related claims which had been higher this first half year and second quarter too than we saw last year. The investment result for the Non-Life business, worse than last year with a loss with DKK 13 million for Q2.

If you look at the combined ratio, the combined ratio, all in all, 89.9 compared with 88.4 last year, a little bit worse. But you have to be aware of that the impact from the interest rate level and the decrease in interest rate level have an impact on the combined ratio level of 1%. So that is essential to look at that. And if you are taking the combined ratio excluding the runoff business, then we had last year, 93.2, and this year, 93.3. So nearly the same level. Despite that, we have 1% impact from the interest rate level. So the underlying business, running business are, in fact, a little bit better than it was last year.

The same picture if you look at the underlying combined ratio. The underlying combined ratio, nearly the same level as last year. But if you have -- looking at the interest rate level impact here, then again, you have the same conclusion that the underlying business are better in 2019 compared with 2018.

If you look at the major claims, the major claims in 2019, a little bit lower than last year and close to the expected level. If you look at the weather-related claims, it's quite high in the first and second quarter of 2019. All in all, 2.7% of the combined ratio is coming from the weather. That is close to the expectation -- expected level, but it's much higher than last year where it was 1.1%. The weather-related claims are mainly coming from June and mainly from cloudburst around in the country in end of June.

If you're looking at the growth of the premium income, the growth had came out with 1.6% in growth in this quarter. That is below our expectation, absolutely. And we have 2 things to look at: the competitive environment out there is absolutely increasing; and next, the change in the interest rate level accounts for -- are taken out of the growth, around 0.2%. Our retention rate is still on a high level in both segments. It obviously that on the private lines, we also can see that the selling in the first half year are a little bit lower than expected. The main reason for that is that a lot of our customers on the private line, as mentioned before, had been introduced for our new digitalized product, and our service centers -- telephone service centers had used a lot of their time to give some advices to our customers in that connection. So the result of that had been that our telephone center had sold much lower than we have seen the years before. If you look at the private agents, then they had been saying the same level as we have seen before. So our competitive position in the market is still the same, but a little down in the selling in the first half year.

On the commercial side, we have a growth of 2.6% up. Also here, impact on the interest rate level, but also a competitive environment, absolutely. We think that the growth for the full year will reach a level of around 2% for the full year. So the growth in the Q3 and Q4 will be much higher than we have seen in Q1 and Q2.

If we look at the private lines, the private lines came out with the combined ratio of 89.5. That is absolutely better than last year, but in 2018, it was under influence of some big events, major claims, which pushed up the combined ratio. This quarter, the underlying business had been a little bit better than last year. The major claims have been better. The weather claims, as mentioned before, a little bit up, and that had all in all given the fluctuation of the private lines.

If you look at the commercial lines, the commercial line had gone up from 83.7 to 90.4 in combined ratio. The reason for that is mainly 2: The weather-related claims had a huge impact in this quarter with 3.6%; and on the commercial lines, we had 2 claims which solely accounts for 6 million which are equal to 1%. 2 events. And then we have a lot of other weather-related claims which also had an impact. Then we also had the runoff gains which are positive with 3.6%. But if we compare with last year, then it's nearly half of the level that we saw last year on runoff gains. The underlying business, the quality of that is still on the same level as last year or even improved a little.

Then I go to the Life Insurance. The pre-tax profit from the Life Insurance, DKK 21 million, in line with expectations, a little bit lower than last year. The investment ratio, although a little bit negative with DKK 1 million. And all in all, the most of the earning's similar to what we have seen the years before.

The issue for the Life Insurance in this quarter had been the bonus rate, which had gone down to 13.7% as a result of an environment where the interest rate really had moved. I mentioned before that interest rate on the 20-years level, the discounting rate including the VA had gone down with 1.1%. And if you are going further to the 15 of August, then the interest rate had gone down with 1.8% in 7 months -- 7.5 months. That is extreme movements in very short times to a very, very low level. And that, of course, have an impact on portfolio which we have -- where we have a guarantee. We have a guarantee of 0.5 on most of the portfolio. And when we are coming below this level, of course, that ask for strengthening of the provisions for the policy holders, and that have impact on the bonus rate.

Despite this development, then we still have a bonus rate of 15th of August that are about or over the 10% level. So we still are confident about the situation, and the position and the strength of the Life company, but of course, this had been a very challenging development in the interest rate level over the first half year of 2019.

If we look at the premium coming into the Life company, it had gone down, in fact, but the main reason for that is that the regular -- the single payment premium had gone down from DKK 276 million to DKK 220 million. But if you look going back to 2017, it was DKK 164 million. So the 2018 level was extremely high. So we are absolutely happy about the DKK 220 million in single premium. The focus from us is that the regular premium had gone up with 2.8% from '18 to '19, and what we're seeing on the portfolio is that the growth had been up to 6.5% up compared with last year. So we will expect still to make a growth on the regular premium in 2019 on level 7% to 8%. So still growth in this business.

If we look at the insurance provision, it had gone up, as a result of the growth of the business, one, but also, as a result of the decrease in interest rate level and the decreasing discounting rate used for these provisions.

If you look at the split of the profit in the Life Insurance, then it obviously that the expense risk and Group Life result are a little bit lower than we have seen for the Q2 the years before. But all in all, we are seeing fluctuation on the risk result over the quarters. And this is, as we see it, just one adjustment in one quarter, and we will still expect the same level that we have seen for the latest years. The portfolio is still the same. The quality of the portfolio is still the same.

Then interest result, the risk allowance with 20 bps is improving as a result of the increasing provisions up to DKK 7 million. And then we have the result of the portfolios without bonus and the return on equities which is plus/minus 1 and 0 all in all. So a little bit lower level, but aligned with the expectations that we have given to the market before.

Then going to the bank. The bank had for Q2 a result of DKK 15 million, that is as expected, but again, the composition was not as we had expected. The core earnings had gone up a little compared with last year, up to now DKK 15 million in core earnings. On the other hand, we had the depreciation of the customer relationship, which cost DKK 8 million. And then we have the investment portfolio, which cost DKK 12 million. We still have a negative interest environment. And the excess of cash that we have in our book have a cost of around DKK 25 million on yearly basis, so that have an impact on the investment result. Along with that, then we have a very carefully investments policy in the bank and that gives in this environment losses on the bond portfolio, too. The reversal of write-downs gives a DKK 20 million plus, so that helped on the total result. That's for sure.

If you look at the income split, then the net interest fee and net interest and fee income are nearly the same level as last year. The loan book is also at the same level, but it obviously is that the interest margin had gone down on the loan book compared with 12 months ago. And on the other hand, the shift on the mortgage loans in the market had give some fee income.

Look then the trading income, it's much better than it was last year. Last year was low. This year is on the parted level, on the expected level. And additional to that, then we also here have a impact from the shift of mortgage loans to lower interest rate levels which gives some income on the trading side. The leasing interest -- the leasing income, nearly unchanged. And the other incomes, a little bit lower this year, but last year, we have a one-off coming from the merger with the Saxo Privatbank, which have an impact on DKK 24 million last year on others.

If we look at the business volume in the bank and the loan book in the bank, the loan book is nearly unchanged compared with last year. Nevertheless, we had 7% more customers, plus customers, full customers in the book at the end of the first half year compared with the start of the first half year, 7% up. The inflow of new loans is quite high. Still, that is doubled -- nearly doubled level compared with 2018. Despite that, then the loan book is steady. And the main reason for that is repayment of loans and then it's converting, switch over to mortgage loans, which customers really are doing in these times with these interest rate levels. We are seeing that the mortgage loan going through the bank had improved from '18 to '19 with more than DKK 1 billion, DKK 1.4 billion, at the first half year, it also had improved nearly DKK 0.9 billion. So a lot of activity in the bank still, but obviously, we still had to work with both the earnings and the cost to improve the core business earnings, all in all.

Going to the capital model. The capital model, we have excess of capital after Q1 of DKK 161 million. We have the profit for the Q2, which had added on to this. We have changed some method on the tax side which have a positive impact of DKK 44 million. And then we have changed the capital target which have a net impact of DKK 40 million. And the composition of the DKK 40 million is that the bank -- the capital target for the bank had decreased with nearly DKK 100 million as a result of lower market exposure. But as mentioned, after Q1, it was very high at that time so we are back to a more normalized level. On the other hand, the increasing activities in Life side and in the Non-Life side had asked for a little bit more capital. So all in all, improved with DKK 40 million. So that gives an improvement of the excess of capital with more than DKK 220 million, DKK 221 million, all in all, improving. So excess of capital after first half year, DKK 382 million.

So if we look at 2019, the guidance for the full year, we had improved that with DKK 50 million. So now we are talking about DKK 625 million to DKK 775 million, which are a little bit better than our outlook for the business for a year ago. The Non-Life business: DKK 600 million in result; at combined ratio level, 89; and a premium growth on level, 2% for the full year. And for the Life Insurance, DKK 90 million and still the same growth. And for the banking, a pre-tax profit of DKK 50 million to DKK 70 million. So all in all, a minor improvement, and that improvements are coming from the Non-Life business.

So all in all, looking at the Q2 results and the first half year result, then the Non-Life business are performing as it did in 2018, '19, same level. The underlying business have the same quality, price setting, but there are some swift up and down in major claims and in weather-related claims. And the runoff result had been lower this year, and that had an impact. And the interest rate level had an impact. On the Life side, still growth in the premium -- the regular premium. The bonus rate, down, but still on a competitive level, so we still are competitive with our product and the bonus rate that we give to our customers. And the Banking, still a very growth among the number of customers, still very high inflow of new loans coming still. But the problem around the earnings/cost side, we had to work with that. And the very negative interest rate level also have a negative impact. All in all, pre-tax profit improved more than between DKK 625 million and DKK 725 million for the full year, still a decent level compared with the total capital in the group.

And that was my comments for Q1, and that of Q2 and the first half year. And then for the questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Okay. We have got our first question coming right now. That's from the line of Asbjørn Mørk of Danske Bank.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [2]

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A couple of questions. So Søren, you said that competition is increasing. Maybe you could elaborate a bit on this. And then if I look at the guidance for Non-Life for the full year, and especially considering that you raised the guidance with DKK 50 million on DKK 45 million of runoff gain, is this so that you expect that the headwind from lower rates will more or less be offset by underlying improvements in the second half of the year?

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Søren Boe Mortensen, Alm. Brand A/S - CEO & Member of Management Board [3]

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Yes. When I mentioned that the improved competition in the market, we see that the major players in the market had been more focused on regaining the market share that we have seen for some years. And that can we see on the market, of course. That's new over the latest 6 months or something like that. So that's our impact. That's one. We still think that we have some issues that I mention, so that can improve our position, and we think that we can improve our selling position over the second half year, so we think we will come back with a better performance on the inflow than we have seen in the first half year. Additional to that, then I mentioned that we are now converting a lot of our customers on the private line mainly, currently, from the old product over to new digitalized products with more differentiated price setting. But additional to that, all in all, the average premium income for most of these price adjustments and product adjustment will give improved premium income. So we are improve the price levels for the portfolio and we are improving the selling power in the group for the second half year. And that, of course, will improve the underlying business in the second half year.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [4]

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So basically, if we assume, I don't know, 70, 80 basis points headwinds from lower rates, you will be able to offset that with the underlying improvements in the second half of the year.

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Søren Boe Mortensen, Alm. Brand A/S - CEO & Member of Management Board [5]

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We think that, yes. Of course, the interest rates have a further push on headwinds in the second half year, but we still think that we will be able to balance that with the improvement of the portfolio on the premium level and with the more inflow in the portfolio.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [6]

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Okay. In the competition, is that [Perk and Top] that have basically swapped banks? Or is there other larger players that are becoming more aggressive now?

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Søren Boe Mortensen, Alm. Brand A/S - CEO & Member of Management Board [7]

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I think that the 2 biggest players which had been I think -- always, the question is the bank or what is it? But it obviously that they have more focus on the growth that they have for some many years I think. So that we can feel that in the market, and of course, we will react and we are reacting on that.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [8]

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Okay. Fair enough. On your Life Insurance, the bonus rate at 10% now. Of course, you -- I mean your guidance for this year is unchanged. I guess some of the bonus rate gives you some tailwind short term. But if we look at 2020, is it -- will you be able to maintain the same kind of income from Life Insurance given the -- today's interest rate levels?

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Søren Boe Mortensen, Alm. Brand A/S - CEO & Member of Management Board [9]

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Yes. We think -- I think, still with a bonus rate on 10% or bonus reserves on 10%, we will be able to have the same income. We still have reserve to manage the business. And I think, of course, if you look at the bonus rate for the policy holders in the coming years, that will depend on the development over the next 5 or 6 months. We had to look at that. But as we see it, the quality of the portfolio, the components of the earnings of the portfolio is still the same. And then they will, as we see it, be unchanged despite of the bonus reserves are on level 10 or it was on level 20. So of course, we had to look at the risk profile of the portfolio and so on, but that is more a discussion of how we are making the investment components for the policyholders more than for the income for the shareholders.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [10]

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Okay. And then your bank guidance for 2019, you reiterate that. Do you expect quite material loan loss reversals for the second half of the year? Because I mean it seems like your pre-provisioned profits are still suffering quite a bit.

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Søren Boe Mortensen, Alm. Brand A/S - CEO & Member of Management Board [11]

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Obviously, when we are looking at this outlook for the bank, then we still think that we will have some reversal on the write-downs to help on the result. Obviously, if you look at the core business, the core business had improved a little compared with last year, but still too low. And we have a lot of activities running to improve both the income and the cost side, but the impact of that in Q3 and Q4 will be limited. And therefore, we had also to calculate with some runoff gains, some reversal of the write-downs including in the figures.

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Operator [12]

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(Operator Instructions) Okay. As there are no further questions coming through, I'll hand back to Søren for the closing comments.

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Søren Boe Mortensen, Alm. Brand A/S - CEO & Member of Management Board [13]

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Thank you for your questions. Thank you for your time. Have a good day.