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Edited Transcript of TOP.CO earnings conference call or presentation 18-Jul-19 12:00pm GMT

Q2 2019 Topdanmark A/S Earnings Call

Ballerup Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Topdanmark A/S earnings conference call or presentation Thursday, July 18, 2019 at 12:00:00pm 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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* Jakob Brink

Nordea Markets, Research Division - Senior Analyst & Sector Coordinator

* Jonathan Denham

Morgan Stanley, Research Division - Equity Analyst

* Mads Thinggaard

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Per Grønborg

SEB, Research Division - Research Analyst

* Philip Ross

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst

* Steven Haywood

HSBC, Research Division - Analyst

* Youdish Chicooree

Autonomous Research LLP - Non Designated Member

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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, our CFO; and Steffen Heegaard, the Group Communications and IR Director.

We're holding this conference because earlier today we published our results for the first half year of 2019. So we are now 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) And our first question comes from the line of Youdish Chicooree of Autonomous Research.

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Youdish Chicooree, Autonomous Research LLP - Non Designated Member [2]

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I've just got 3 questions, please. The first one is on your last result. If you can you help us understand why it's so high and whether there are new one-offs we need to be aware of.

And secondly, it's on your guidance for the rest of the year. You're guiding for a range of 200 and 300 for the year, which means that even at the low end of the guidance, you're suggesting a quarterly result of around DKK 14 million. I was wondering are you just being very conservative here or are you anticipating any impacts going forward?

And finally on your underlying claims ratio, I just wanted to know whether you actually adjust for discounting impacts. Or is it stated before those changes for the year?

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

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Sorry, I didn't get the last one.

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Youdish Chicooree, Autonomous Research LLP - Non Designated Member [4]

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So you reported the claims ratio before run-off was in large claims of 69.3 in 2Q and 69 for the half year. Does that adjust for the changes in the discount rate on claims reserves or not?

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

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So I'll answer the last one first. Yes, it does.

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Youdish Chicooree, Autonomous Research LLP - Non Designated Member [6]

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It excludes or it does not exclude? Sorry.

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

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It does. It is made up taking into consideration how the discounting rate changes.

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Youdish Chicooree, Autonomous Research LLP - Non Designated Member [8]

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Okay. So if the discount rate was stable this year, so the improvements you would have soon for the half year would have been more like 2 points instead of 1. Is that right?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [9]

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That's right.

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [10]

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And in the forecast we make for the rest of the year, the impact is actually 1.2 percentage points different from what it would have been 3 months ago. And then investment on life equity, that was your question?

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Youdish Chicooree, Autonomous Research LLP - Non Designated Member [11]

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Yes, yes.

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

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We've had a very good run. There has been some asset class that has performed unusually well. There's no specific one-offs, but we certainly do not expect this to continue this year, the investment stochastics, so to speak.

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Youdish Chicooree, Autonomous Research LLP - Non Designated Member [13]

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So just to follow up on that, in the first quarter, the results are very similar, but in the first quarter did have strong recovery markets. So in the second quarter, a little bit puzzled to see that's the same level. So I was wondering what asset class did perform well.

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

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So the fact that the Danish markets bonds have actually performed well. And since we don't have the liability side, when we -- so the investment income in life, the income hasn't been hurt from the changes in discounting rates. Probably we had some very steep increase in price and indexing bonds. Our CDOs have come back and has performed well in the quarter and so on. We have built a property, which is now finalized and every -- all [properties] are laid out. That means that the [consumer] will have this -- under this thing has been changed.

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

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And then the difference between the change in combined ratio and the forecast. I remind you that when we used intervals, in principle, if the expected combined ratio moves from 86.1% to 85.9%, then we must change the -- so the change in combined ratio of -- from 86% to 87% and to 85% to 86% is not necessarily a full percentage point.

That's the first thing. And the other one is that the -- with the very low interest rates we are having now, we expect the investment income to be somewhat lower than we did 3 months ago.

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Youdish Chicooree, Autonomous Research LLP - Non Designated Member [16]

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Okay. Understood. But my question on the guidance was specifically with respect to the life segment and the fact that you already recognized DKK 220 million in the first half, and you're saying you're going to -- it's going to be in the range of DKK 300 million to DKK 330 million for the full year. So that suggested that the life results will be like in the region of 40 per quarter, which is very low compared to even last year.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [17]

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I admit a slight conservatism in this context.

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Operator [18]

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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 [19]

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Actually, coming back to the same question about life insurance. To what extent the customers get same good return as you got for shareholders' equity in the quarter? And I guess to follow on that, what is the sensitivity for you to be able to book the full year risk allowance when the year is over? I mean how far are you from being able to do that? Or how's that calculated? That's my first question.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [20]

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It depends on which customers. I can't really give you an answer to this. There are customers in our linked environment. They have had very good result in this quarter. While the customers we have in the interest rate groups, they are not very exposed to shares, and that means that they get more or less a hedge of the guarantees that they report. And that means pretty low results.

The sensitivities, again, we have 9 -- 10 interest rate groups, and the sensitivities are different from 1 group to the next. You may remember that there was 1 group in the -- at year-end '18 that we didn't manage to -- we couldn't get the return we should have had, all the administration fees that we should have had. If you're concerned about whether the interest rate changes as such should bring the solvency in danger, then the -- in general, we have hedged the interest rate risk in interest rates groups.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [21]

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So with the current interest rate levels, you should be able to book full risk allowance at the end of the year?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [22]

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If it was the end of the year, we would book for risk allowance. It also depends on development of equities, of course.

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Jakob Brink, Nordea Markets, Research Division - Senior Analyst & Sector Coordinator [23]

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Yes. Of course. And then, I guess, secondly, on the termination of the Danske Bank agreement regarding that it's less than 10% of new sales. Of course, it's also around 10% of the back book. And if -- now it's only 2.5 months or 3 months away from you having to give a premium growth guidance for next year, at least if you do this normally. What would you -- if we should maybe take a sort of a small primer on that? What would be the expected impact next year?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [24]

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Now we need to see how things are working out from this 3 months. And we don't really know what kind of initiatives that Tryg and Danske Bank are going to show. So I would rather not give an impression now of what is going on to happen next year. But obviously we've told you that we expect this to be around 0.5% growth this year. And if you double that, it is 1 percentage point. But what I don't like to guess is what is the consequences of the initiatives we may meet.

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Operator [25]

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Our next question comes from the line of Jonathan Denham of Morgan Stanley.

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Jonathan Denham, Morgan Stanley, Research Division - Equity Analyst [26]

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Just 3 questions from me, if I may. Firstly, your SME premiums grew by almost 2% -- sorry, 5% in 2Q. Just quickly what was that excluding the indexation of workers' comp? Secondly, you said the life premiums wouldn't...

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

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Sorry, the line is pretty bad. Could you repeat slowly, please?

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Jonathan Denham, Morgan Stanley, Research Division - Equity Analyst [28]

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All right. The SME premiums grew by almost 5% in 2Q. What is that excluding the 9% indexation of workers' comp?

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

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That is -- we made a couple of agreements that has been a bit large, an anomaly.

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [30]

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Most of the taxation on the 9% that happened at the start of the year, so seen just -- focusing on Q2. Then the indexation of 9% that's actually not had that much of an impact.

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

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That's right.

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Jonathan Denham, Morgan Stanley, Research Division - Equity Analyst [32]

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Secondly, you said the life premiums were negatively impacted by the implementation of the new IT platform. Should we expect ongoing reduction in the inflow of new single premiums? Or is that all in 2Q?

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

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You should not. We still have some problems with the implementation, and this may slow things down to some extent. But we expect to be in full speed within a couple of months.

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Jonathan Denham, Morgan Stanley, Research Division - Equity Analyst [34]

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And just finally, you highlighted that the VA fell to 6 basis points at the end of 2Q. Where is it now? And what have you assumed in your forecast model?

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

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It has increased somewhat. There are different bits on how high it is. And it is made up by the regulator. It is made up by Danske Bank. And it's made up by Nykredit, and they don't agree. But something like, say, between 10 and 15 basis points now. And I think that it will probably increase a little bit more during the quarter and everything else equals.

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Jonathan Denham, Morgan Stanley, Research Division - Equity Analyst [36]

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And is that included in your profit forecast model?

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

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No. It's not.

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Jonathan Denham, Morgan Stanley, Research Division - Equity Analyst [38]

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Okay. Perfect. And just the guidance for DKK 5 million for every 1 percentage point change in the VA still stands?

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

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Yes. 4.5% -- DKK 4.5 million that's after tax.

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Operator [40]

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Our next question comes from the line of Per Grønborg of SEB.

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Per Grønborg, SEB, Research Division - Research Analyst [41]

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Two questions from my side. In Q1, we saw your bonus risk in the -- in your solvency numbers, going off quite a lot. Why is it only moving margins this time taking into account that VA is continuing its downtrend? That's the first question.

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [42]

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Yes. The proportion of that there could run on nonequities, which means that the loss absorption capacity here for our customers has increased.

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Per Grønborg, SEB, Research Division - Research Analyst [43]

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Okay. So it's offset by equity gains primarily?

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

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Yes.

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Per Grønborg, SEB, Research Division - Research Analyst [45]

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Okay. Perfect. My second question, can you put some flavor on the gap between your return on your more payment in advance and the revaluation of your liabilities? The gap is pretty big. I know there's a DKK 60 million from the VA. But beside that, something else must have gone quite wrong this quarter.

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

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Yes, you may say so. You can inherit problem when you -- when we -- when you are trying to hedge a leaner liability with a curved asset profile. The things -- the way things work when we're doing this hedge is that if interest rates stay stable, we have an extra income. But of course we have had recent options on the interest rate level. When interest rate changes up or down, we always lose money. In this case, we saw very difficult markets and very strong for all in interest rates. And that means that we are -- every time the interest rate ticks down, then our hedge is too small, we have -- buy more bonds. And the market has been squeezed, so it has been very hard to buy this bond at a reasonable price. So yes, it has been one of the worst quarters concerning hedging for many years.

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Operator [47]

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Our next question comes from the line of Phil Ross of Mediobanca.

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Philip Ross, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [48]

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Two questions for me, please. Just looking at the slides from the roadshow presentation. So Slide 9 shows your trend in average premiums in motor starting to tick up again and I guess more so in Q2 of this year. Can you talk about why that is, if you made some deliberate price increases? Or is the market becoming a little bit easier for you?

And then secondly on, I think it's Slide 23, the breakdown of run-off profits, they are materially higher this year. But you also have a negative DKK 91 million impact, I wonder whether that is a function of discount rate. Or is there sort of an area where you'd have to strengthen some reserves?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [49]

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Yes, the first one about cars is that this is a comprehensive side of cars actually going up and also people buying larger cars. So -- some of the reasons for both, for the average premiums going up on the motor side.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [50]

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We had a change in taxation of cars a few years ago, 2 years ago, and this means that people are buying larger cars now than they did before. We have not increased prices. And on the run-off, we have -- yes, we have negative run-off on house.

We have negative run-off on the contents, including consequential losses, negative run-off on the professional liability. And in total, it is -- and in health actually. Some a little bit unusual run-off losses. And the -- yes, you can see on the other side that we have run-offs on workman's compensation and third-party liability on motor, especially the -- concerning the workman's compensation. We had a long time where the public body that handles workman's compensation of deceased -- or accident is covered by workers' compensation, where they didn't decide anything. So we were in darkness when we tried to make up where the right -- developed things were. There has been some light on this now, so we have better idea about this. We have been able to release some of the research we've made.

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Operator [51]

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(Operator Instructions) And our next question comes from the line of Steven Haywood of HSBC.

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Steven Haywood, HSBC, Research Division - Analyst [52]

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I wanted to ask 2 questions, please. One is on the Coop agreement you have still. I wonder if you can give us any sort of potential update or insight on what this agreement is providing in terms of premiums, how that's developing going forward, the potential really here to offset the sort of Danske Bank termination agreement. And then secondly, now that the Danish government bond yield 10-year is negative, I wonder if there's any implications for your life business here and if there's any convexity issue on your solvency capital requirement here.

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [53]

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Well, I can answer last one. Yes, it is a kind of convexity. It is kind of direction, you could say. But we don't really use things going with bonds for this hedge. We use swaps. And it is not made of specific concern that the government bond yield is very low. On the...

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [54]

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On the Coop side, we have -- actually, this half year actually delivered 5 new products to the core platform. It is to the content, travel insurance, stop and cat and also accident insurance. And this fall, we'll also deliver our house products.

Actually, I don't have a number for you, so I would like -- what we're going to see in terms of premium, but we are saying that we expect around 8,000 to 10,000 policies on the core platform of this year. But it will not be core alone that could actually take off the effect on the Danske Group. So it will not be 0.5 percentage on the premium, on the core for this year.

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Operator [55]

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Our next question comes from the line of Mads Thinggaard of ABG.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [56]

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This is Mads from ABG. The first one is -- I mean on the life income, we're behind here the last 3 quarters. How should one think about life pretax profit in 2020? Would that be like taking '19 and then deducting DKK 100 million? Will that be kind of the standout view here?

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

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You should just look at the forecast we made before '19. And then not move very far away from this.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [58]

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Okay. Okay. Then just to understand correctly, the VA component now, you say it's a bit back here after Q2 to 10 to 15 basis points. But if it went downwards again, could it go below 0 over the start, I presume?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [59]

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Technically, it can go below 0, but we don't need to use it. So if it goes below 0, we will grab it.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [60]

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Okay. And then just a bit of add-on question that is not that much related to Q2 here, but your competitor, Tryg, is talking a lot about fraud detection potential in their business. What kind of potential are you flagging here on fraud detection over the next years?

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [61]

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We don't work exactly as Tryg does, as you know, so we have not stated how much we aim to find or how much we hope to find. But we have, by our machine learnings, developed our own fraud detection model, which seems superior to the models that can be bought in the market. So we expect this will have a reasonable impact, so to speak.

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Operator [62]

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(Operator Instructions) And there are no further questions at this time. Please go ahead, speakers.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [63]

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So thank you for taking the time to attend our conference. And as you know, you're always welcome to call one of us if you have any further questions, and we will be happy to answer them. But otherwise, have a good summer. Bye.