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Edited Transcript of TOP.CO earnings conference call or presentation 22-Oct-18 3:00pm GMT

Q3 2018 Topdanmark A/S Earnings Call

Ballerup Oct 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Topdanmark A/S earnings conference call or presentation Monday, October 22, 2018 at 3:00:00pm 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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* Asbjørn Nicholas Mørk

Danske Bank Markets Equity Research - Analyst

* Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst

* Mads Thinggaard

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Steven Haywood

HSBC, Research Division - Analyst

* Vinit Malhotra

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

* Wajahat Rizvi

Deutsche Bank AG, Research Division - Research Analyst

* Youdish Chicooree

Autonomous Research LLP - Research 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 USA. Thank you for joining us in this conference call. I'm Peter Hermann, and with me is Lars Thykier, CFO; and Steffen Heegaard, Group Communications and HR Director.

We are holding this conference because earlier today we published our interim report for the quarter 1 to quarter 3, 2018. And we are now ready to answer your questions, so please ask them one at a time.

And operator, may we have the first question?

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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 Mads Thinggaard from 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 I have is on the, I guess, what you call the underlying claims trend. It seems to be much better here in Q3 then were the case Q2. I don't know if you could put a bit of flavor on, I mean, the moving parts? Why the kind of underlying claims are so much better here in Q3?

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

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We have a couple of different -- what? Okay. We have a couple of different reasons. One is that personnel cost or cost for personal consultation has performed a little better than expected. And we have seen a better development on theft as well. And then on top of this, we have the change in risk margin.

On the other hand, we have seen piping being more expensive than expected in the prognosis.

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

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Okay. And what about fires? In this kind of the underlying -- not the last claim part, but this part, is there any change here?

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

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No, the fire level, which are not big claims, is more or less in line with what was expected.

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

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Okay. Then my second question is on the downgrade -- the make of your life insurance income on Page 10 in the report. I could see -- I mean, when you came with the improved guidance, it was very much related to better profits from sales and admin. I can see you did actually make a DKK 5 million profit from that area in Q3. Could you kind of help with, I mean, why did you downgrade the guidance to the DKK 220 million to DKK 250 million for '18 now? And what should we expect, kind of in a normal year, normalized life income pretax profit?

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

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Actually, there's a couple of reasons for the downgrade. One is -- one of the things -- actually, a couple of things is that when we do have trends from customers leaving Topdanmark, we get normally a transfer fee. And the way that (inaudible) here is that we have a lower transfers out of Topdanmark, meaning that we get lower fees, but that will also -- on the first year, they will have a negative impact on the cost results. But that would, of course, be a better thing going forward. That's one aspect. The other aspect is that we are in the process of developing and implementing a whole new operational system for our life company. And we can see that we need more resources to be able to do that with existing and so on to be able to introduce it at the rate -- right time next year. So in quarter 4, we will have more expenses on people side that will deteriorate the sales and the sales results, the sales and administrative results.

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [8]

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And we will see these extra expenses continuing through 2019 where we expect to spend more money on launching the system. But in '20 or '21, that is where we'll receive the administrative easing come through as lower expenses.

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Mads Thinggaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [9]

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Okay, so in '20 we cannot expect the numbers to go up again from this level. Okay.

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Operator [10]

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Our next question comes from the line of Jonny Urwin from UBS.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [11]

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Just one actually. So could you please update us on pricing and claims inflation trends across key lines? And where are you pricing vs claims inflation at the moment?

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

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We haven't made any changes in our price, so it's very much as it was before. We can see that fiscal claims -- or fiscal damage in motor is going the wrong way so to speak. And we can see that the savings we have made on handling claims on houses do not result in the savings we would have expected, and that is probably due to this claims inflation. But it is not a matter that we are very concerned about, and we do not intend to increase prices due to the pretty small changes we are seeing.

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Lars Thykier, Topdanmark A/S - CFO & Member of the Executive Board [13]

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I -- we could add to that the -- that the automatic indexation, which covers up for the claims inflation, goes up from 1.6% this year to 2.0% next year.

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

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And this will hit around 70% of the portfolio.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [15]

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Okay. So pricing roughly in line with claims inflation then, is that a fair representation?

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

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Yes.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [17]

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Yes. In that -- I mean, in that instance, we've obviously seen quite strong improvement in the underlying come through, which is obviously driven by self-help, improvement in the claims handling, et cetera. Do you -- would you expect that to continue going forwards?

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

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Yes.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [19]

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So continued improvement here from self-help measures.

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

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That was the idea. We launched a project in 2016 where we wanted to rationalize our operations. And we are still working on it, and we are still spending on it. But sooner or later, we'll be through, then we'll do something else. But this project, at least, will end in substantial benefits.

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Operator [21]

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Our next question comes from the line of Youdish Chicooree from Autonomous Research.

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Youdish Chicooree, Autonomous Research LLP - Research Analyst [22]

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I've got two questions, please. The first one is on claims inflation. You mentioned that the automatic premium indexing for next year will cover claims inflation, broadly speaking. Could you split out the level of inflation you are seeing in motor and property, please? And then my second question is just a clarification on your combined ratio guidance for next year. I mean, am I right I saying that you're assuming a 1 percentage point improvement in the underlying gross ratio for next year?

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

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Sorry, I didn't get the last one.

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Youdish Chicooree, Autonomous Research LLP - Research Analyst [24]

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Your combined ratio guidance for next year, does that -- what kind of underlying improvement do you assume in that forecast?

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

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That is a combination of lower claims handlings cost, a little lower expense ratio, but I remind you that we are still guiding around 16% for 2019 and a slight improvement in risk. And I'm afraid that I can't give you any precise estimates of the -- how the claims inflation is in different business lines. Of course, we can see that comprehensive is clearly above inflation, while on the other hand, the personal injury is falling.

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Operator [26]

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Our next question comes from the line of Steven Haywood from HSBC.

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Steven Haywood, HSBC, Research Division - Analyst [27]

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Can I just confirm a couple of things you've already said? The 2% indexation you said -- you say -- will that actually offset the increase you are seeing from motor damage claims?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [28]

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Yes. Actually, I should mention that we have another index in workers' compensation. And this will, as a starting point, increase workers' compensation premiums to the tune of 9%.

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Steven Haywood, HSBC, Research Division - Analyst [29]

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9.0%, yes?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [30]

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Yes.

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Steven Haywood, HSBC, Research Division - Analyst [31]

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And your 2019 combined ratio guidance of 89% to 90%, excluding runoff, that's improved from the 90% to 91% averaging forecast for 2018. I wonder if you can say how much of this is driven by the claims initiatives and actions you've done, and how much is driven by interest rates going up slightly.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [32]

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I think the impact from the changing interest rates is pretty small, actually.

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Steven Haywood, HSBC, Research Division - Analyst [33]

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Okay, that's good to know. Do you provide -- or can you provide any guidance on runoffs for 2019?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [34]

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Unfortunately, not. We are not supposed to know anything about runoffs in '19.

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Steven Haywood, HSBC, Research Division - Analyst [35]

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Okay. And then last question. EIOPA published a technical document for the Danish risk-free rate and volatility adjustment on the 14th of August. You haven't put any change through your earnings this quarter. What is Topdanmark waiting for? Or what is the regulator waiting for to include the new volatility adjustment?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [36]

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I think they probably have done or made some mistakes in the first place and then have tried to correct these mistakes, and we are waiting for final (inaudible) to be completely sure about what they should ask us for. And if they -- what I think is likely end up with the volatility adjustment of, say, 10 or 15 basis points, we will probably have this hit spread over a couple of years.

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Steven Haywood, HSBC, Research Division - Analyst [37]

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Okay. And sorry, you said 10 to 15 basis points down or just to 10, 15 basis points?

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

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That is my guess. I don't know. We have not received any information yet.

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Operator [39]

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(Operator Instructions) And our next question comes from the line of Asbjørn Mørk from Danske Bank.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [40]

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A couple of small questions from my side. First of all, on the life expectancy changes from the Danish Embassy, you mentioned in the report that the workers' compensation impact that it has -- it sounds like it's rather small. But could you just quantify this? And then while we are talking life expectancy, maybe a bit of comments on how this impacts your life insurance operations?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [41]

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It doesn't impact our life insurance operations. It was just a question of us using G82 in the workers' compensation. We -- and actually, it has a very small impact because we just move one buffer to another place, so to speak. We have -- we had a buffer for longevity, it was just not specific. Now we do specified on the cash flows. So really, it is -- it doesn't cost anything. It hits combined ratio a little low.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [42]

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But very small, I guess?

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

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It will be around -- impact on combined ratio? It's hard to do calculations, this calculation on top of my head. A couple of points, actually.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [44]

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A couple of points? I mean...

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

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On combined ratio.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [46]

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A couple of percentage points or a couple of basis points?

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

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Percentage points.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [48]

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Okay, wow. Fair enough. Then on weather claims. So basically, no weather claims in the first 3 quarters. If I remember correct, I think you said at Q2 that we should expect some weather claims because some of these fire risks you would also probably classify as weather claims. Could maybe you just tell me how you actually classify weather claims?

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

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We haven't had any weather claims in Q3.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [50]

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No, exactly. Yes. But you -- I remember, you said in Q2 that you could have -- some of the fire claims could be booked as weather claims, or maybe I misunderstood in Q2?

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

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Yes, maybe you did. There are -- sometimes, the fire claims will be driven by weather. If we have a small fire and a storm, then this will be a big fire. And in that case, we'll still regard it as a fire claim.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [52]

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Okay, fair enough. Then on your presentation Slide 9, the retention ratio sort of impacts at 101.6. Maybe you could just tell me what is the retention actually in percentage?

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

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I don't think we provide that information, but it's well known that this is above 90% in the guidelines.

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

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Well above 90%.

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Asbjørn Nicholas Mørk, Danske Bank Markets Equity Research - Analyst [55]

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Okay, excellent. And then the final question from my side on the Slide 11, on the motor insurance, the risk premium where it seems as if your risk premium is actually below that of your peers. Maybe I'm not reading it correctly, but I would assume, considering that you have very limited leasing activities that you would actually have high-risk premium.

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

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You are reading it correctly that is -- that we have avoided parts of the market, and this is a part of the market where leverage premium is too high compared to the actual premium.

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Operator [57]

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Our next question comes from the line of Vinit Malhotra from Mediobanca.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [58]

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So my question was actually, I mean, have been addressed a little bit, but I'll just follow up. So if I were to look at Slide 11 of the webcast presentation today or maybe even the roadshow presentation actually, there's extended risk on motor. Which one of these lines is the one which is causing this positive effect in 3Q, please, if you could comment? Because I think these starts are only running up at the beginning of '18 from what it looks like. So just comment on where this thing is coming from, the positivity in 3Q, please?

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

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I think -- sorry, but I'll have to ask you to repeat, please.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [60]

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Repeat the question? Apologies. So I was on Slide 11 in the roadshow presentation, and my question was, so which -- obviously, there's been a pretty reasonably good trend in motor that you talked about.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [61]

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No, no. I think I got your point now. It is not recently. It has been developing since 2013, which -- we changed our tariffs in 2013, and since then, we have seen this development.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [62]

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But in 3Q, there was an offsetting positive motor effect, wasn't there?

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

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There was -- okay, that's what you're talking about. But that's a pretty small amount. And if you are looking at Q1 to Q3, it is actually negative.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [64]

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Oh, okay, okay. And could you please comment on theft, please? So there's also a mention that theft claims, are these usually random? Or is there some phenomenon there that we should be noting?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [65]

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We have seen a very systematic decrease in the claims, 6 claims since 2010. Every year has been better than the year before during these 10 years or 9 years. Sooner or later, this will end, and we will see claims rise again. That's usually the pattern that we see this long waves of increasing theft and decreasing theft. But now we have had these 9 very good years, and we see no signs that '19 should be worse than '18.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [66]

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So you have a flat assumption for theft next year, generally speaking.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [67]

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That is what is enforcing to our prognosis.

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Operator [68]

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Our next question comes from the line of Wajahat Rizvi from Deutsche Bank.

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Wajahat Rizvi, Deutsche Bank AG, Research Division - Research Analyst [69]

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Just a couple of questions quickly. One is in terms of your underlying loss ratio improvement, you have talked somewhere about reduced risk margin contributing to lower claim strength. Can you just please explain what you mean by reduced fixed margin? Is this some change in your booking assumptions? Or is there something else? And secondly, just to follow up on Steven's question on EIOPA's change in VA. Can you quantify based on these new numbers what the impact on solvency will be? And from what time do you expect this impact to come through? I think you said there'll be 2 years transitional period through that. So just a bit more certainty on timing and quantum would be helpful?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [70]

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If I may ask -- or may answer your last question first, I'd like to stress very much that I know nothing. I'm guessing. I don't know when we'll hear anything, I don't know how long the transition period will be, and I don't know the size of the change we'll see. But if the volatility adjustment is changed, it'll cost around DKK 4.5 million after tax per basis point. But on the other hand, this is a one-off. It will be easier for us to cover the return under [liabilities] in future with a very volatile situation.

And then you asked about the risk margin. The risk margin, that is an amount that we have put aside which must be sufficient to cover the price of owned funds in all time until our reserves have run completely off, if somebody should buy their reserves from us. And the size of the risk margin depends on the SCR we have. And we have recalculated some of the -- of our previous lines and our workers' compensation and the confidence in internal model, and this has led to lower SCR. Since SCR is lower, the risk margin is lowered as well. When the risk margin is lowered, some of it goes into the claims that was -- that is, the risk margin is covered by both premium reserves and the claims reserves. So when it is reduced, these changes is split between the premium reserves and the claims reserves. So this is a part of the reduction in the risk margin that comes out in the claims reserves that you -- that isn't part of the expenditure for the detailed claims trend.

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Wajahat Rizvi, Deutsche Bank AG, Research Division - Research Analyst [71]

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Okay. So your change in Solvency II assumption is also changing your IFRS claims trend?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [72]

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Sorry?

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Wajahat Rizvi, Deutsche Bank AG, Research Division - Research Analyst [73]

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So the change in SCR assumptions and risk margin in Solvency II is also changing your claims trend in IFRS reserves?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [74]

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Yes.

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Wajahat Rizvi, Deutsche Bank AG, Research Division - Research Analyst [75]

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And how much is the impact from that change in the current claims trend improvement, just in Q3?

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [76]

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In Q3, it was DKK 28 million.

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Operator [77]

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(Operator Instructions) And as there are no further questions at this time, I hand back to our speakers for any closing comments.

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Peter Hermann, Topdanmark A/S - CEO & Member of Executive Board [78]

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Yes. Thank you for taking the time to attend the conference. (inaudible), you're always welcome to call one of us if you have any further questions, so we'll be happy to answer them. So thank you.

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Operator [79]

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