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Edited Transcript of TOP.CO earnings conference call or presentation 24-Jan-19 2:30pm GMT

Q4 2018 Topdanmark A/S Earnings Call

Ballerup Feb 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Topdanmark A/S earnings conference call or presentation Thursday, January 24, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lars Thykier

Topdanmark A/S - CFO & Member of the Executive Board

* Peter Hermann

Topdanmark A/S - CEO & Member of Executive Board

* Steffen Heegaard

Topdanmark A/S - Group Communications, CSR & IR Director

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Conference Call Participants

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* Asbjørn Nicholas Mørk

Danske Bank Markets Equity Research - Analyst

* Jakob Brink

Nordea Markets, Research Division - Senior Analyst & Sector Coordinator

* Mads Thinggaard

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Per Grønborg

SEB, Research Division - Research Analyst

* Youdish Chicooree

Autonomous Research LLP - Partner of Insurance

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Presentation

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [1]

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Good afternoon, everybody, and good morning to the U.S.A., and thank you for joining us at this conference call. With me is Lars Thykier, the CFO; and Steffen Heegaard, the Group Communications and IR Director.

We are holding this conference because earlier today, we published our report for Q4 2018. But before we open to questions, I would like to give the word to Lars to explain a little about our premium development that has been asked a lot too. So I'll give the word to Lars.

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [2]

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Thank you very much. Sorry to keep you [busy] today, but I would like to give you a few introductory remarks. I do not think that I can teach you Danish accounting rules in this conference, so I'll just give you a flavor of what happens.

If you envisage what I would call a normal insurance, we underwrite an insurance in October month '18, for instance, and this insurance comes into force the 1st of January '19 and it runs the full year. If this insurance has a premium of 100 and we expect that claims and expenses and risk margin will cost 90, then we'll book a 10 profit margin at year-end. And then in '19, as the contract gets shorter and shorter, we'll move this then from the profit margin to the P&L gradually.

If we, on the other hand, envisage onerous insurance where we have a premium of 100 but we expect that claims and expenses and risk margin is 120, then [deducted] sales that the 20 would be minus 20 on the profit margin, but that is not permitted. We have to pay the 20, the expected loss, by a reduction in premiums. That means that if we have an insurance with an expected gain, then we'll have this gain in '19. If we have an insurance with an expected loss, we'll book this loss as a decrease in premiums in '18.

What we see in Q4 in Topdanmark is that we have a substantial increase in the expected combined ratio of some insurances, especially illness and accident in '19 compared to what we had in '18. This means that we will have to deduct premiums from the P&L -- from top line and from the P&L and put this aside as premium reserves to cover expected losses in '19.

So premiums in '18 will be lower, the bottom line in '18 will be lower. In '19, we will take the premiums we have reserved from premium reserves and on to the top line and use this to pay for the losses we have on the reinsurance. So it will be neutral in '19 while we will have the losses in '18. But as I said before, this hits the top line in Q4 and it hits it substantially. That's why the growth in Q4 looks so strange.

I hope this would help your understanding of the Q4 accounts. Thank you. Peter?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [3]

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Yes. So we're now ready to answer your questions. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Youdish Chicooree of Autonomous Research.

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Youdish Chicooree, Autonomous Research LLP - Partner of Insurance [2]

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I've got 2 questions, please. The first one is on your combined ratio guidance. So you are guiding for 89%, 90% for 2019, which is roughly 1 point better than this time last year and also reflects the efficiency improvements you have made over the past year. So I was wondering whether you can tell us about the efficiency gains you're planning for 2019 and given the sense of the amount of cost savings you are hoping to achieve. So that's my first question. Then on -- secondly, could you just comment on the pricing environment in firstly in private lines and then SME lines separately, please?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [3]

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All right, taking a look at when -- the efficiency gains, when? In (inaudible)?

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Youdish Chicooree, Autonomous Research LLP - Partner of Insurance [4]

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Well, could you give us -- I mean, could you give us a sense of what cost savings you're planning to achieve in 2019?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [5]

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No, not really. What we are going to do and what we have done the last few years is that we are investing pretty heavily in efficiency gains, but we are not making an exact road map for when these efficiency gains are achieved and how big they are. What you can see from history is that we -- in '17, we launched this concept that we would spend between 0.5 and a full percentage point on efficiency -- on investment and efficiency gains. And nonetheless we have been able to reduce or keep the expense ratio at the same level. And that's simply because the gains we have got has been as -- at least as big as the investments we have made.

In '19, we expect this to [balance the movement], so the gains we have made are a little bigger than we -- than the investments we are doing. And this means that we have changed our combined ratio from -- expectation from 90 to 91, as it used to be, so it's [90] as it is for '19. I do not have the specific figure for the gains we are going to get at a given point in time.

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Youdish Chicooree, Autonomous Research LLP - Partner of Insurance [6]

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But it is fair to say you have basically harvested the low-hanging fruits and -- possibly as we move into 2019 or maybe beyond, any gains will be more or less offset by the investments you're currently making?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [7]

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No. It just means that -- the reason why I won't be more explicit about this is it is an ongoing process, and we are finding new ways to improve efficiency over time, and we'll have to make these investments to make -- to gain this -- or to improve the efficiency over time. I'm sure that we will be able to improve efficiency very much during the year to come, but I don't have a final figure.

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Operator [8]

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And our next question comes from the line of Jakob Brink of Nordea.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [9]

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So the first question is about the Danske Bank deal. It would be interesting to hear, I think, how you got to the roughly 0.5 percentage point impact on the growth in 2019. That was my first question.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [10]

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I just have to warn you, there are some problems with the phones. So I'm not sure I got all of it. But I think you asked, why we are forecasting a 0.5 percentage point decrease in premiums due to the termination of Danske Bank, is that right?

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [11]

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Yes, that is correct.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [12]

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That is basically that we think that -- that new business we have written through Danske Bank, we don't think what we accounted in that it more or less disappears in '19. That is not supposed to be the case and that is not what we have really agreed with Danske Bank. But that is in our forecast. We have used this amount. This amount should cover the loss of new business and it should cover some of the additional business we have underwritten by the bank. A major part of the additional business that we underwrite with existing customers is not done by the bank but by our sales centers.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [13]

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So does that mean that it's around the -- is this roughly half of your portfolio, let's say, DKK 1 billion that has been growing 5%, and now it won't grow anymore? Is this -- is that how you got to 0.5% or...

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [14]

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No, no, not at all. It doesn't -- as I said, it is -- the portfolio, this [post] of the portfolio will decrease by, say, around 1 percentage point during the year if we don't get any new business from Danske Bank. The 0.5 percentage point, that is 50% of this. We expect to get some business from Danske Bank. If not, they would not be buying with the agreement we have. But the 0.5 percentage is, in my view, a little bit conservative when we're talking new business. It is probably less than 0.5 percentage point [we'll use] in '19. But we have to see how this is being rolled out, how effective we make this with Danske Bank. We have worked with them for 20 years, and I am sure that we will be able to find an agreement on how to cancel the -- or to end this -- or terminate this cooperation in a reasonable way.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [15]

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And then on 2020, how would it then be? Because then the contract will have expired and I guess, the 10% is -- or the 1 percentage point drop you talk about is just a retention of around 90%, which, I guess, will then drop somewhat in 2020 if Danske can start to sell to Tryg instead. So what should we expect then? Is it 1% or is it 2% impact in 2020 or if nothing else happens?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [16]

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Again, we have problems with the phone, and I hope I answer your question. What we have done is to state that we will receive -- or we will reduce the total growth in '19 by around 0.5 percentage point. In 2020, we won't get any new business from Danske Bank. And we'll have the accumulated effect of the premiums we didn't get in '19 as well and there may be some impact on retention. That's true. We don't know how big it's going to be. We know that retention is very high as it is now. But when we are talking '20, we're talking about something we don't know much about yet. We will not just dismiss this distribution channel, disappear into nothing. Of course, we'll reallocate our distribution resources and look for other ways to keep the sales at the same level as we are used to.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [17]

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Okay. And then just a final small question, please. What was the discounting impact on the combined ratio in the fourth quarter? I couldn't find it.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [18]

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Compared to last fourth quarter, it was 0.

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Operator [19]

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Our next question comes from the line of Asbjørn Mørk of Danske Bank.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [20]

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If I can just go back to the Danske Bank agreement. Could you maybe disclose a bit on how will this impact your costs for -- or acquisition costs for 2019? I guess, you also saved quite a lot of costs from the distribution that you don't get. So what's sort of the impact there? And was there any impact in Q4 from the redundancies that you made in December on the back of this loss distribution agreement?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [21]

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The redundancies we have made has, of course, an impact on Q4 but it's very small. The impact on '19 is too early to talk about. Of course, in the first place, we have not discovered -- or we have not disclosed our agreement with Danske Bank. So we have not told how much we'll pay Danske Bank for the cooperation. But you're right that it is not an insignificant amount that we use to pay. This will be saved across when we don't get the references from the bank. And -- but again, as I said before, we are -- everything else is not equal. We are doing -- we are cancellation the cooperation with the bank, but we are doing -- or we are putting other activities in place of this cooperation with the bank. So we cannot sack the team and save the money. We'll use the team for other purposes.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [22]

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Okay, that's very clear. Is there a sizable difference in the combined ratio of the Danske portfolio and the rest of -- I think you discussed or you mentioned that at some earlier stage. Is that enough to just have an impact on your combined ratio for the next couple of years?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [23]

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Not really. The -- we have stated that the combined ratio of the private lines in Danske's second portfolio is a little higher than the combined ratio of the private lines in the rest of Denmark, but the business mix is much different. We have a lot of [illness in that] and a lot of working compensation in the rest of the business that we don't have at comparable size in the Danske (inaudible). So I think the best advice I could give to analysts like yourself is to assume that it's the same as the rest of Denmark.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [24]

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Okay, fair enough. On your growth, if we look at sort of your private lines growth, if you adjust for the one-offs, you say 3.4% growth to premiums. I believe you said something like 1.8% on the corporate side. How much is the market growing? Where are you taking market shares?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [25]

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I think we are talking private lines? We are taking market share especially on that front. I think we are taking market share on (inaudible). We are not taking market share on long-term. Any additions, Steffen?

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Steffen Heegaard, Topdanmark A/S - Group Communications, CSR & IR Director [26]

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I would say that in Q4, the market share is almost flat which is the first quarter for a long time that we kept our market share...

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [27]

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On [long term], yes. But we are increasing our market share, not very fast, but a little bit in '18 and '19, [it's post].

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [28]

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Okay, fair enough. And weather claims, you still guide for 170 on normalized weather claims. It's -- I mean, if I look at the last couple of years, and I know that this has a tendency to be quite volatile from year to year. But still, it seems like 170 is much too high given the circumstance. So is it just because that's how you've been doing in the past? Or should we really put 170 as a weather claim on a normalized basis going forward?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [29]

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The 170 is not from our internal model. We have to make probability distribution about how storms will be, how many storms and how big they will be, and the same goes for rainstorms. It is -- you can really use this as a prediction for 2019. It is very volatile. And I remind you that it is 20 years ago we had a very, very big storm (inaudible), and it was in '11, we had the big rainstorms. So 170, that's our best guess on -- the [diagnosis] we can make on the risk premium we have on cat.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [30]

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Okay. Then just to redefine the question from my side on the runoff gains, quite high in Q4. And if I add back the other provisions, it's almost record high. Is there anything specific? Is this sort of -- should we expect a higher level of runoff gains going forward? Or is it -- I guess, you would say no, but is it correlated with investment returns -- negatively correlated with investment returns?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [31]

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I'm sorry to hear you (inaudible) significantly correlated with the investment returns. I think that effect has disappeared with the last [results]. So this is (inaudible). What we have done is that we have looked at the -- now what is called this, resources for the -- that is a way the Danish government has introduced to a process that should make more people -- well, some have suffered some strong -- some kind of accident or illness, so get back to work. And we have increased our expectation on how many will go back to work and how fast they go back to work. This has a small impact on the combined ratio this year, but it has a substantial impact on the research we have made on illness and accident. And that is why the accident runoff is so high as it is.

On top of this, we have added developments that the risk on the personal lines seems to be lower than we have expected it to be. And that goes for single accident and it goes for workers' compensation and accident as well. So that's the reason why it is pretty high this year. We had a very [opaque] situation for a couple of years because this public body that is assessing workers' compensation claims has been more or less down for a couple years. So we haven't really seen any decisions since '13, '14. In '18, again, we saw a lot of cases going through. And it seems as if risk has come down.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [32]

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All right, so no correlation. That's very helpful.

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Operator [33]

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Our next question comes from Mads Thinggaard of ABG.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [34]

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This is Mads from ABG. The first one regards to -- or relates to claims before one-off weather, large-scale claims, et cetera. We have this uptick of 170 basis points. I don't know if you could kind of elaborate a bit on -- if that is simply underlying claims coming, I mean, down to too low levels and that we should expect that to reverse a bit? Or if you see any trends here?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [35]

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The [only one trend] we have seen is downwards. But I think we spend a lot of it in '17 to convince everybody that '17 was an unusual [market] year. And on our internal model, the basic nonlife technical result was among the 3% best results that we could expect in a given year. So '17 was far too low. Coming above '17 is just what you would expect. And I would say that the 7.5 we have in '18, that is [a little normal].

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Steffen Heegaard, Topdanmark A/S - Group Communications, CSR & IR Director [36]

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Let me add to that, that the reason why the underlying fee trend was better in Q4 was because of fires in Q4 and some -- a bit more of -- [was high]. And as I say, you might recollect that we have almost no fire in Q4 over last year.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [37]

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Okay, okay. And then the next question on -- I mean, you have a guidance in the presentation for the life result in 2019 of DKK 200 million and DKK 230 million. I mean, I guess, the averaged ticked down from 2018 due to IT costs, investments, et cetera. Could you perhaps talk a bit about what you expect on that line in 2020 and 2021?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [38]

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I think it's fair to say that we are spending a lot of time, and also that means costs on a new system and that's also affecting the prognosis for '19. Now we're taking a new system in force, and that means that we are also going to do depreciations on the system going forward. So you could also expect that the result will be -- go up in the same line as we had seen in '19, going forward some years. And then we hope that we could see some efficiency gains from the system that -- so we also can see some, the cost result going another way than it is right now because it's been negative for some years and it will be also the next couple of years.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [39]

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Okay. So it is quite distant then that we will get an uptick here?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [40]

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You will have to wait a couple of years before we dare to forecast an uptick. We think that it has been a very major investment we have made in the new life system. And we, of course, hope and expect that the launch will be smooth. But I don't think that it has ever happened that we introduced a system that size, (inaudible) as this year. So we hope it will add some extra cost in '19 and '20.

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Operator [41]

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And our next question comes from the line of Stefan Borg of SEB.

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Per Grønborg, SEB, Research Division - Research Analyst [42]

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Per Grønborg from SEB. Two questions from my side. The first, your solvency rate has come under a lot of pressure by coming down this quarter. For background, I guess, it's the life business, is that correct?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [43]

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I will say that the solvency ratio is the same as it was a year ago, and that's because the small differences that are due to CapEx. What's happened this time is that the -- we have had this, what is called, anti-cyclical buffer on the equities has gone down a little which has been passed to Q4 for [this year]. On the other hand, the losses we have had on equities especially has meant that the loss absorption capacity of life has decreased. So the increase in this year has been a little bigger than the increase in own funds. But it is, in my opinion, very much the same as [start time] just marginal changes.

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Per Grønborg, SEB, Research Division - Research Analyst [44]

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Okay. When I look at the numbers, the solvency ratio last quarter, [235], now you're down to [210] before paying this dividend that you still earn money in the quarter.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [45]

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Okay. I compared to Q4 '17.

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Per Grønborg, SEB, Research Division - Research Analyst [46]

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I am comparing a significantly shorter term.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [47]

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Yes, that's fine. But then you have to be aware that there are -- this difference from quarter-to-quarter. And since we have a lot of insurances that comes into force on the 1st of January, these insurances is more onerous in the Q1 than they are in Q4. And that means for this reason alone, we'll see a change in the solvency ratio.

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Per Grønborg, SEB, Research Division - Research Analyst [48]

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So no major impact from lower buffers in the life portfolios, is that correctly understood?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [49]

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That's right.

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Per Grønborg, SEB, Research Division - Research Analyst [50]

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Okay, perfect. My second question relates to the issue on the loss-making sickness and accident, which I understood earlier today from the statement that, that was very much related to the nonlife business you sell in connection with your life business, is that correct?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [51]

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That -- yes, that is correct, but it's not the full explanation. We have this -- we have [fictitious] lines that hurts us on -- in this context. Illness and accident is the biggest, it accounts for around 50% of this. But we do put premiums aside on workers' compensation as well on -- of ownership on motor third-party liability and a couple of other places. But the big change we have here, that is you have some accident and (inaudible).

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Per Grønborg, SEB, Research Division - Research Analyst [52]

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Okay. What I primarily would like to refer to is your normalized return on life insurance. This time you had the slide on Page 50 where you went through the profit from nonlife-related products. If we revisited that math, that line would be 0 or even negative at the moment. Is that correctly understood?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [53]

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If we look at the last many years, we have stated that it will become negative in the -- in our forecast. But after runoff it has been positive, we have used 100%, I think, in this normal (inaudible). That was a small part. I don't expect this to be positive in '19 to be perfectly clear, I expect it to be negative, and visibly so.

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Per Grønborg, SEB, Research Division - Research Analyst [54]

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Any -- are there movements in the market for hiking prices? Or is this just part of the life selling, life insurance [code]?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [55]

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That is part -- this is happening in the -- this is how to do business at the moment in the life. We are -- that is -- it's not giving a surplus selling these personal accident products in there within life. But we see it as a total where we sell a pension scheme, looking at both what we can earn on the investment side, and that is both within the life company but also in Topdanmark's own investment company. So we see that on the whole it would have been the business. But that's right, it will be, in itself, negative and then looking at the -- these excellent [illness] products, but the rest of it will be as a positive.

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Operator [56]

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(Operator Instructions) There are no further questions coming through at this time, so I'll hand back to our speakers for the closing comments.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [57]

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Yes. But thank you for taking the time to attend the conference. As you know, you're always welcome to call on one of us if you have any further questions, and then we'll be happy to try to answer them. So have a good evening or good morning, wherever you are. Bye.