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Edited Transcript of TOP.CO earnings conference call or presentation 24-Oct-19 1:30pm GMT

Q3 2019 Topdanmark A/S Earnings Call

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

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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

* Steven Haywood

HSBC, Research Division - Analyst

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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 the CFO, Lars Thykier; and Steffen Heegaard from Group Communications and IR Director. We are holding this conference because earlier today, we published our results for the Q1 to Q3 2019.

So now we are ready to answer your questions. Please ask them one at a time. And operator, may we have the first question, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So our first question is over to the line of Mads Thinggaard at ABG.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [2]

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This is Mads from ABG. The first one is on what you would call the adjusted claims rates, you're up, at least 270 basis points year-over-year. You mentioned a lot of elements here. Water pipes, workers' comp and, of course, also, the discounting rate being the most prominent element. But could you guide us a bit to which of these elements are kind of the worst sinners here? And is there a trend in this development? Or it's more kind of an unlucky quarter we are seeing here?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [3]

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Yes. It is not an unlucky quarter. It is not as lucky as some of the quarters we have seen during the last couple of years. But the quarter is better than we expect the normal quarter 3 to be. The worst sinners compared to last year is this next -- and workman's compensation, and that was due to the sort of steep decrease in interest rates.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [4]

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Okay, okay. And then you have -- you come with, I guess, a flat, a premium growth guidance for 2020. And I -- could you explain a bit more about the split between SME and the private segment you see for next year?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [5]

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As it is now, we have -- which you very well know, we have lost the distribution by Danske Bank. And that means that we have to start again next year, within the end of the year. That -- and that means that the portfolio will increase at good pace in my assumptions, but the premium income during the year will not be as high from the banking side as we used to. And that will have a negative effect on the private part of the business. I have not -- this -- or I'm not going to tell you the split between SME and private lines next year.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [6]

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Okay. Then on life insurance, I noticed the sales and admin, it's up to plus DKK 17 million. I think the highest number for some years. And you do write a bit about future expenses reversed or need for future expenses reversed. Could you just put a bit of light on what is driving this? And does it change something for the life business in the future?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [7]

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Yes. We use different kind of models when we make up the size of reserves in the life company. And we have changed cash flow model we use on our lifelong annuities, so new 74 annuities at a high-interest -- high-yield annuities from -- before 74.

When we did this, we could release some of the year reserves we have made for future expenses, and that is actually impacting this sales and administration item and -- which makes it especially high, so to speak.

And then at the same time, this was like -- as you know, that by an era, this item was placed as investment income in Q2, which was reversed in Q3, meaning that we have a minus DKK 15 million on investment income. And as -- which has been moved to the sales and admin result.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [8]

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Okay, okay. And then just a final question from my end. I was looking for the kind of sales costs you were saving on the Danske portfolio, here from Q3. I couldn't really find it anywhere. Could you put a better light on how much you normally pay Danske for the Danske portfolio?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [9]

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I bet you were, but you know very well that I'm not going to tell you how much we pay Danske.

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Operator [10]

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Right. So we're now over to the line of Asbjørn Mørk of Danske Bank.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [11]

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A couple of questions from my side. First, if we can return to the top line. Now you're saying flat growth for next year versus 2019. But what should we actually expect for this year? I remember Q4 last year, we had this DKK 53 million negative from health and accident. I'm pretty sure you've been quite keen in saying that we shouldn't expect that for Q4 this year.

So you're going to have, I guess, quite a decent growth in Q4. If you look at the year-over-year. So are you basically hinting around 3% growth for next year for the top line? Is that what we should be looking for?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [12]

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If I would tell you this, I would have written it in the accounts. But on the other hand, you are aware of this change in the handling of the illness and accident and the reservation for premiums in illness and accident Q4 '18.

You will not see this reservation in Q4 '19. And that means that the underlying growth in '19 is somewhat higher than the 2.4% that we have had in the first 3 quarters. We have been impacted by the loss of an equity last year. It was worth around 0.2 percentage points. And then we have the unexpired risk on illness and accident, which will bring us slightly above 3% that year in recovery.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [13]

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Okay. So that's a fair level to assume. I mean that is your reference point for next year?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [14]

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Yes.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [15]

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Yes.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [16]

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Okay, okay. Fair enough. On the investment result, I mean, you -- basically, you're writing that it's a DKK 70 million miss versus expectation. You're taking down the EBIT guidance by DKK 80 million. So I guess, basically, what you're saying is that there's a DKK 10 million potential drag into Q4.

Maybe I'm reading a bit too much into your guidance, but my question is more the impact that you've seen in Q3, the prepayments, considering the high refinancing activity we're still seeing in the Danish market, why is it that you don't believe you will see the same impact in Q4 on your investment result?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [17]

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That's because we have had a lot of negative impact already. We have seen the OAS come substantially up. We have seen that the spreads between swaps and fixed loan has decreased a lot, and we have had a lot of -- actually, we had a quarter 3 -- of prepayments in Q3. And we are seeing the interest rates climbing slowly up during this quarter. So I don't expect it to be as bad as it were last time. And I think we had the major adjustment in Q3.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [18]

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Okay. Fair enough. Now talking to the -- on the interest rate hike that you also mentioned, I mean, the 25, 30 basis points, at least if I look at the 2- to 5-year rates. And I guess the VA is up quite nicely as well in the quarter. So in your guidance for 2020, it doesn't seem as if -- I mean, like always, I guess, you've included the 30th of September rate levels. But isn't it so that there will be a decent, you can say, tailwind, all things equal, as it looks today, 2030, something-like-that basis points?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [19]

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There will be some tailwind at least from the increase in the volatility adjustment. It was only 6 basis points when we made our forecast, and now it is probably 17 or something like that.

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

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Yes. All right. Fair enough. On your next year's guidance on the cost ratio, the 16%, is there any -- I mean when -- should we expect at some point your cost ratio to come down once you sort of completed your investments in digitalization? Or is this just a new run rate we should expect for the next many years?

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

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I think we should probably expect it to be in that level. The problem is that we are finding new interesting investments so fast. So every time we save something, we invest it again. And when I say invest, I'm talking about investments that are taking over the P&L as expenses.

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

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Okay. Fair enough. In life Insurance, just really one question. Considering the rate hikes we've seen in Q4, how do you see the outlook for next year? The probability to book full income in all interest rate groups? How should we look at that for 2020?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [23]

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I think the risk is pretty high that there will be a miss in one of the interest rate groups, but we are not worse off now than we were after Q2.

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

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But still here -- okay, okay. That's fair enough. Okay. Fair enough.

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Operator [25]

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Okay. So we now go to the line of Jakob Brink at Nordea.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [26]

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So just coming back to the previous question on life insurance. Could you give us an update on the bonus potential in the different rate groups? Not what you have explicitly, but are you in positive territory in all 9 groups? Or is some of them at 0 still? That was the first question.

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [27]

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Yes. Well, no. Interest rate groups (inaudible), and there are none now.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [28]

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How close are we to 0? And what does it take of equity market, if you keep everything else changed -- unchanged, what does it then require of equity market movements to bring some of them at 0?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [29]

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Now you are demanding I think the...

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [30]

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Fair enough. But just to get some sort of sensitivity, too. I mean we see pretty big swings in financial markets. So just getting a sense of are we close or are we far away?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [31]

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Yes. But the problem with answering to this when I don't have the calculations in front of me is that there is a different equity exposure in the different interest rate groups. For instance, in the industry group 2, the bonus potential is pretty low, but the equity exposure is very low as well. And we have -- I can tell you, we have decreased the equity exposure in the interest rate group 1 as well. That's the way we handle it when it comes too close to putting the equity into danger.

So when something is going to happen -- I mean if it happens overnight, it's very different from if we foresee it happening.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [32]

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Okay. And then just on the -- on premium growth, is it fair to say that basically, implicitly, you're assuming the same sort of nonindex growth in 2020 as in '19, either as if you should take out the SEB bank, Nykredit then adjust for Danske Bank, which is going to be the same roughly, the workers' comp and so forth. Then the sort of the nonindex-driven growth in '20, you assume to be at the same level as in '19?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [33]

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Yes.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [34]

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And why is that? I mean if you look at some of your peers structure, especially, they're growing a lot more. Why are you not seeing any of the same?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [35]

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I'll say that some of the competitors have probably, and this is getting to my part, put in some price increases that we have not put in, not yet at least.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [36]

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Not yet at least, so does that means...

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [37]

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I don't promise that we're going to increase prices during 2020. Actually, we are moving prices all the time. So we have this individual pricing for a lot of customers, and this may lead to higher premium increase than what I ever showed until now. But that's not the decision seen.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [38]

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Okay. And then last question from my side. On the investment income in nonlife, could you just update us on what is the sort of DKK number that we should be looking forward in 2020, given the current level of interest rates? I know you usually say 200 basis points plus the 3-month forward rate, as far as recall, sans the premium reserve, that is actually all the same?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [39]

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Yes. And that means that we are actually talking about a little less than 1.5% on the premium reserve. And so on the combination of claimed reserves and assets matching claimed reserves.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [40]

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So that would be around DKK 100 million?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [41]

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It definitely does, yes.

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Operator [42]

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With that, we now go to HSBC Global Research, Steven Haywood.

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Steven Haywood, HSBC, Research Division - Analyst [43]

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First question, on your comment about burst water pipes in the presentation. Can you say what's driving this because I thought this was more of a winter impact?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [44]

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No. That is a thing that happens all the time. In winter, we do see freezing pipes as a problem. But in general, we have pipes that are hitting into the walls or in roofs or the concrete in the cellar, that a lot of them were installed in late '60s and then '70s. And now they are so old, so they break and they break all time of the year.

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Steven Haywood, HSBC, Research Division - Analyst [45]

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Okay, that's nice -- that's not nice, but it's just helpful. The -- on the motor (own damage), I see so that was negative this quarter as well. Is that a new trend that's coming through? Is there a need to raise prices to offset this? Or is it more one-off related in the quarter, do you think?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [46]

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This is a part of people getting bigger cars, actually, you can say, and that also, we have launched new products like parking coverage. So we can see that the claims are higher now than we saw before. And also, that actually, cars because they are more expensive, they are more expensive to fix as well. So this is probably part of both people getting bigger cars and also that we have new claims and new coverages. So we expect that the claims ratio will be less than has been. It will build and it will go above a little because due to the personal coverages we put on. But the average claims will probably go a little down in that sense.

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Steven Haywood, HSBC, Research Division - Analyst [47]

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Okay. A final question on your Solvency II ratio of 185%, if you take into consideration that you don't accrue the dividend through the year, and if you assume that you pay out what consensus is going for DKK 1.55 billion, currently, your Solvency II ratio would fall to below 150%. I know there's another fourth quarter of profit to generate, but how comfortable are you with Solvency going to that level?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [48]

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I have not made the calculation you just talked about here. But I made my own, and I expect the VA to be around [3 20] basis points at the year-end. And assuming this and assuming the Q4 results that we -- are into our prognosis, we will probably have around DKK 166 million, DKK 168 million if we have a 100% payout ratio. And do I feel comfortable with the DKK 166 million and DKK 168 million? Yes, I do.

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Steven Haywood, HSBC, Research Division - Analyst [49]

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Okay. That's very helpful. And so the VA is going to improve the ratio slightly in the fourth quarter?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [50]

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Yes.

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

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Yes.

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Operator [52]

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(Operator Instructions) Okay. We go for a final question as -- then we are back to a follow-up question from Asbjørn Mørk at Danske Bank.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [53]

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Just one question. Back to the capital side, I fully agreed with your calculation on how you're going to land at year-end, and there's no risk on the dividend there. But with the growth mix that you're seeing, very skewed towards the corporate side, are you going to drain more capital looking ahead? I mean should we expect that all things equal, you will have to lower your payout for the next couple of years if this mix continues? Or are you still growing in very low-risk areas or low-capital consumption areas?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [54]

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The capital consumption from nonlife business is very, very low. What drives the capital consumption is the market risk, the operational risk and life. So even if we double the size of our nonlife business, at this level of profitability, it will still be small compared to the other items.

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Operator [55]

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Okay. That was the final question on today's session. May I please pass it back to you for any closing comments at this stage.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [56]

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Just thank you for taking the time to attend the conference. As you know, you're welcome to call one of us if you have any further questions, and we'll be happy to answer them. So goodbye.

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [57]

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Bye-bye.

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Operator [58]

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This now concludes this conference call. Thank you all very much for attending. You may now disconnect your lines.