TOP Financial Group Limited Price & Performance (TOP)

Good afternoon, everybody, and good morning to the U. S. Thank you for joining us on this conference call. My name is Herman. I'm the Group CEO of The Denmark and with me is our Group CFO, Lars Kuvevic and Head of Investor Relations, Robin Lefgren. And we are hosting this conference call because earlier today, we published our interim report for the first half of twenty twenty four. I'll start by addressing key elements key events in the quarter before handing over to Lars for comments on the results in detail. And I will then revert with the comments to our updated product forecast afterwards. So can we have Slide 2, please? Before diving into the results, let me briefly address the 2 large events that occurred since the publication of our interim report for the Q1 [indiscernible] On May 1, we announced an agreement with Adeya on the completion of the IC separation of our old life company while at the same time renewing their agreement with Nordea on the distribution of non life insurance products by up to 5 years. IT separation will take longer time than previously anticipated, and both we and Odea have revised our respective obligations and task in that process.

The new agreement has been interred in common interest and will ensure the full IT separation from Topdanmark. Financially, the agreement entails non operational one off cost of €195,000,000 Danish kroner after tax, which are provisioned for in the Q2 accounts. And then on 17 June, we announced that we have entered into a combination agreement pursuant to which Sample will make recommended public tender offer to potentially acquire all shares into Denmark. Consideration offered is 1.25 sample shares for every Stockton Mac share. Reflecting a premium of approximately 27% to the closing price of the Turkmenmark share on the last trading day before the announcement. Our Board of Directors and we as the Executive Board find that the consideration represents attractive financial value to our shareholders and has unanimously decided to subject to his fiduciary duties to recommend us shareholders to accept the offer from Tempo. Sempoo has already obtained necessary regulatory approvals an authorization by its ETM to issue the Sampo shares needed for the consideration. Therefore, the next steps are publication of the prospectus and offer document as well as a commencement of the offer period in early August. And Semco expects the offer to conclude in September.

But last, will you take us through the Q2 results in detail, please? Yes, I will. And thank you, Peter. Turning to the financial results for the Q2 of 2024.

We delivered a low reported profit due to the mentioned one off effect from the IT However, looking at the profit after tax from continuing operations, We delivered a solid 6% beat versus medium consensus. The outperformance was mainly driven by a solid investment return in the quarter. The insurance service result amounted to DKK 410,000,000 with a combined ratio of 86.0 or 88.2 before runoff. Insurance revenue growth was a full 13.6% in the quarter, continuing the growth momentum from last quarter and underpinning the significant step change for Turkmenmark. Naturally, a part of the growth is based on our acquisition of Oona Health but organic growth was also strong and reached 5.8% in the quarter, up from 4.3% in Q1 underpinning the positive growth momentum. Growth was supported by indexation and our implemented pricing initiatives. In addition, we continue to see improved churn rates following our investments into retention efforts, both related to manpower but more importantly also to AI and machine learning to pinpoint the strongest and most profitable leads by significantly raising efficiency and effectiveness of outbound calls. In addition, growth was supported by stronger new sales based on our improved competitive power as witnessed over some quarters now.

And finally, the growth momentum in Una Health in the quarter remained good. Looking at the claims experience in the quarter, both weather related and large scale claims were within or around budgeted levels. The quarter was marked by a very dry environment in May which caused more large fires in the private segment. In fact, we saw 4 times as many fires above DKK5000000 per event as we did in the same quarter last year. And please note that these fires are not captured by our large In addition, the timing of Easter caused us to underestimate the case ratio in Q1 causing a correspondingly higher claims ratio in Q2 of approximately 1.1 percentage points. And finally or further, we saw a continuation of the trends from Q1 in motor insurance. Adjusted for calendar effects, the claims frequency was in line with the level while average claim size continued to rise due to inflation in wages and spare parts. As we have previously communicated, we started raising prices outside of motor insurance already last year we have also started raising prices on motor this year starting with new sales at the beginning of the year but also existing customers from April onwards.

These pricing measures will offset the headwinds we're currently seeing but as always, it does take 12 to 18 months to earn through. As we also commented last quarter, the acquisition of Una Health brings seasonality higher claims in H1 and seasonally lower claims in H2. This adversely impacted the claims ratio in Q2 but please note that it has no impact, sorry, on our model profit forecast for the full year. [indiscernible] Underlying all these effects, continue to see good results of our pricing initiatives as well as our ongoing efficiency program. This was also evidenced by our expense ratio which continued the good momentum and was lower than anticipated following tight cost control in addition to the effects from our efficiency Turning to the investment results. This was a solid profit of DKK86 1,000,000 in the quarter. Significantly ahead of expectations supported by positive contributions from both public and private equity markets, broadening yields and lower provisions attributed to capitalization factors in workers' compensation. The matching portfolio also continued to contribute positively to the result. The asset side, the continuation of the low volatility regime supported carry carry assets and we saw a positive impact from running yields and curve roll compared to the discounting curve.

And on the liability side, the Danish Economic Councils lowered their wage projections leading to lower insurance provisions and thus a positive contribution to the result.

On discontinued operations, reprovisioned the full DKK 195,000,000 after tax one off cost related to the IT separation agreement with Nordea as Peter mentioned. And let me also quickly comment on Solvency Our Solvency cover rose to 215% from 210 percent at the end of Q1. The positive impact on owned funds from retained earnings [indiscernible] was more than offset by lower profit margin and rising intangible assets as expected. Solvency capital requirements decreased by almost DKK 100,000,000 and that was driven by a gradual reduction in equity exposure over the quarter coupled with a lower symmetrical adjustment to equity exposure in the solvency stress scenario. Peter, will you take us through the updated profit forecast?

Yes. Thanks, Lars. Can we have Slide 3, please? And then finally, let me provide some remarks to the profit forecasts for 'twenty four. On the top line, we have improved our expected organic growth from above 4.5% to now around 6%. This is a result of the strong first half with an increasing growth momentum and driven by pricing actions higher retention rates seen in the light of the ongoing pricing actions and a stronger net inflow of customers as well as stronger across sales of health insurance products. The assumed combined ratio is narrowed to 83% to 85% including runoff We include the effects from the 2nd quarter and update the expected impact from most claims inflation for the remainder of the year. Again, please remember that our ongoing pricing measures will offset the headwinds we are currently seeing, but as always, it takes 12 to 18 months to earn through And then we include the improved run rate for expenses lowering the expected expense ratio to below 17% now. Also taking into account the outperformance on investment mix results in the Q2, we are narrowing the guided profit from continuing operations [indiscernible] $1,255,000,000 to 1.46 $1,000,000,000 including runoff.

And within discontinued operations, we have one off cost of €195,000,000 related to the IT separation agreement with Nordea in Q2. Which was not part of the profit forecast model as at Q1. And further, underlying transaction costs we include the expected one off transaction costs related to samples pending takeover offer totaling between €90,000,000 to €110,000,000 with no assumed tax deductibility. As a result, the net profit forecast is lowered to between €950,000,000 to 1.175 including one off. As we showed you a quarter ago, we have an outstanding contingent liability SPA from the sale of our life operations. These matters may result in us incurring costs that could affect our results, but we have not included such potential costs in our updated profit forecast for 24 There is currently no news in relation to the ongoing dialogue and we still cannot quantify the potential impact yet the minute, we can, we will inform you and hence, we will not be able to comment further at this point in time. And then Slide 4, please, And that this actually concludes our opening remarks. So we are now ready to answer your questions. So please keep your questions to 1 or 2 at a time.

And if you have more questions, feel free to enter the queue again for a second round. So operator, may we have the first question please?

Thank you so much. We are now opening the floor for question and answer session. Our first question comes from Praisonis Sipeskyra from Bloomberg. Your line is now open.

Hi there. It's Tifan from Berenberg here. Thank you for the opportunity. I just have one question mainly on the topic of motor, clearly, you talk about little bit sort of higher claims inflation. So severity of claims being higher think that goes against maybe some of your peers have been talking about [indiscernible] I guess I just want to get a little bit more sort of dig a little bit more into your thoughts of what are the key underlying trends you're seeing? And presumably, last year, you obviously updated your procurement agreements, etcetera. I would expect the severity and obviously the inflation you seem to be coming down and the frequency to coming up given the market is seeing more frequency. And again, maybe help us square that with the fact that you kept sort of pricing flat last year in motor, you went a little bit more competitive and now you sort of seem to be raising prices. So maybe just help us a bit more on what you're doing there in Monterey and what you're seeing? Thank you.

Yes. And last year, I can start by the frequency part and then Peter can maybe take it onwards from there. What we are saying is that if you if you clean out the numbers for the weather impact in Q1, then we actually see frequencies having stabilized and frequencies are broadly the same as we saw last year. Clear that if you look at it face value, we have an increased frequency. But as said, that is stemming from in the first half, sorry, but asset that is stemming from the weather driven events in Kenya and February. If you strip that out, we do see a flat more or less, frequency development in our book.

Yes. And on the contrary, you can say we can see that we have seen higher average claims on motor. And that's mainly due to, of course, inflation on spare parts but also inflation on salaries in the motor industry. So that we have seen and that of course we are trying to fight off with procurement deals of course. [indiscernible] But also that we also take pricing initiatives that we actually have enforcing on the portfolio I think actually we already mentioned this with on when we had the results for 'twenty three. We start already there increasing prices for new business on motor. We did that and we have also increased it once more here before summertime actually more than 15% of price increases on motor insurance personal costs in new business. We're also taking on price increases to the back book of the existing customers that we started with in April. That is going on as we speak. And for the remainder of the year and also taking part next year, Remember, we have a lot of customers have renewal dates around the 1st January. So you can say the effect on earned premiums will be bigger next year.

But still, we are doing it and we also, you can say, at least people change cars often more often than they change house. We also have some possibilities to look at the price when people are changing cars. So yes, we're working on procurements, making sure that we use our procurement deals guiding the right cars to the right vendors and auto repair shops and so on And but we are still also enforcing price increases And as you mentioned, we were a little reluctant earlier on putting price increase on motor because it's more competitive it's more sensitive. But as we said, we need to do it because we have done price increase some of the other products. But if we don't want it to be too what's called too much, you can say price increase on some products to cover for the next product, So yes, we have done price increases on motor and sorry, home and house and accident and so on, but we are now doing price increases and we started on doing this in the beginning of the year and continuing on those as well. So that will, you can say, fight off the headwinds we see now from motor.

But it will take some time As we said last time, it will take [indiscernible] [indiscernible] Okay, that's great. Can you just clarify on Slide 5, you show the graphs there. Is that on a written basis or on a known basis in terms of the premiums? And the price?

That's on an earned basis. And hence, as Peter said, the price increases we started early on the year was on new business only. And then starting price increases on the existing book in April. But since it's on an earned basis, you do not see the run rate impact from the pricing increases that we have implemented yet fully in the numbers. That will also take some time. Just like it will take time, as Peter said, to fully earn through the impact.

But the Enerstrain will go up going forward.

Brilliant. Thank you.

Our next question comes from Magyef Jakouri from Autonomous Research. Your line is now open.

Hello. Good afternoon, everyone.

If I may please, if I could go back on the topic of inflation. I think you mentioned that on the front book, you put in 15% increases. I was wondering what level of increases are you putting through in on your back book? And how does that compare actually to the actual level of severity inflation that you're seeing? That's my first question. And then secondly, just on the top line momentum improving quite a bit in the quarter. Would it just be fair to assume that's all price driven or is there something else that's happening there in terms of you're getting volumes in other lines of business.

Just mention it's more than 15% we have put on price increases on new business You can say in terms of the existing book, the existing customers, it's It's based also on, you can say, the full customer view So there, it could be the same or it could be less, but it could also be more. Depends a little, you can say on the you can say our estimated risk going forward when we predict the combined ratio for the customers going forward. So that will be a little more individually based on the customers' different products. But we are also there, as I said, putting on price increases on motor So but I think we don't have even say a number to say that because it will be different from customer to customer.

When it comes to revenue and revenue growth, the vast, vast majority of the growth comes from indexation and from price increases. Net new customer inflow does contribute positively to the growth, but but with a small part compared to the the impact from indexation and from price increases.

All right. Thank you very much.

Our next question comes from Jan Erik Jerland from ABG. Your line is now open.

Thank you for taking my question as well.

The first one is back to the motor side.

Which you show on Page 5 in the presentation.

Why didn't you think about hiking prices when you saw this kind of frequency increase last year in motor? Seems like you're a little bit back end loaded when it comes to repricing from of April of your existing book, which will take another year since most of your new renewables 1st January, if I understood it correctly. So it takes some time before you actually see that in earned premiums, if that is correct? So will you lag behind for too long on the motor side and then actually have a lower profitability on that product standalone. That is my first question.

Yes, I mean, I can answer that. I believe it's It's, of course, always easy to speculate particular on past events But what we have done is actually delivering exactly what we say we would do.

So late sorry, but in 2023, when we did see claims frequency increase in motor, we were vocal also on the analyst call that we were not yet instilling price increases in motor, because it was and is a very price sensitive later on in the year, in combination with our annual results, we did say that we did also say that with the development we were looking into, we were now also starting to do price increases on motor. Because we could not offset the impact on motor with the other products without screwing our portfolio too much. Clearly, our decision last could have been different decision, you are absolutely right. But at that point in time, we were also looking into probably a little bit of a different competitive environment than what we are now. What we can see and hear, and I guess you can also both hear and see that. Is that all competitors are also raising prices now on motor. And hence the competitive situation is a little bit different from what it was when we made the decision that we made last year. Okay. That's very clear.

Secondly, on your cost, it was quite strong this quarter versus a little bit weak last quarter. So first half is probably a good level to look at. But what kind of back end loaded the synergy should we expect for 2024 when it comes to your cost savings? And outlook for 2025. Is this still going according to these plans? Or how should we think about your efforts into 2025 now at your about to merge with Sample.

So far, we are running this company as it was as we ran it yesterday or rather as we ran it before the announced made by Sample, So our plans when it comes to cost and cost reductions remains exactly the same. As we've committed to, we will over time through 2026 and into 2027, we will make sure that our cost ratio returns to the level it was when we before we sold off the Life and Pension business, I. E. At a level of around 16.5 We did have a very strong performance in Q3 as you say, and what we're also now saying in [indiscernible] The tailwind we have on cost is not only a phasing, we have also made, you could say, real cost reductions in the year that will also benefit us this year And that is what has led us to lower our outlook on expense ratio to below 17. Okay. A lot for the answers.

Next question comes from Vinit Malhotra from Needham Bank. Your line is now open.

Sure. Good afternoon. [indiscernible] I'm curious about Nordea contingent liability [indiscernible] Good The nature of these discussions, could it change With the change of ownership with TANFOL, do you think there's any possibility there? Do you think and this could just maybe you can comment just in future, but is the nature of of these discussions went to [indiscernible] maybe better outcome new structure in the company by 8 or 9 questions.

I believe it would be highly speculative to foresee or forecast anything on that side. As Peter alluded to in the introduction comments, we have had no updates since last and hence since last quarter. And hence, if you take the wording in our note on accounts, They are word for word the same as we presented last time. Of course, now the IT project being taken out But I believe it would be highly speculative of us to start to considering any alternatives scenario going forward. As said, for now, we run the business as we did yesterday.

And sorry, just one more just related not exactly not there, but just on this change of ownership maybe. Do you have any sense that Sample has plans on some different underwriting styles or any changes that they intend to make from where the book is because obviously there's a lot of volatility in the underlying even relative to peers. So is there anything that you understand that is part of this clients to change or some point looking at anything let you know. Thank you.

Yes. Thank you. It's a good question. Of course, we cannot answer yet what the plans will be because first we need the deal to go through. We expect that and also recommends is for the shareholders I think it's a good thing that being together in Denmark with IS having around 6%, so Denmark having 15% of market share, then we'd be an even bigger player in the market having you can say, economies of scale advantages We also have a lot of you can say good people hired in both companies with a lot of good skills. Of course, looking at the risk understanding, pricing and so on, user partnerships, procurement efforts, digitalization, think there's a lot of things that could be done even better than we're doing today jointly instead of competing with the channel, we can do it jointly. I don't know. I'm just because I think it's important to say that we are quite strong on private on SMEs, agriculture, if as well in the Nordics as well. In Denmark, they are particularly strong also in industrial. Meaning that we do a more full service for our joint customers So let's see what will happen, but we'll definitely take advantage of all the things we can do to it even better for the customers and also, of course, for earnings going forward.

So but we cannot answer specifically on that question yet. I hope that they gave you a little flavor to what we're looking into.

And on the comment you made that we need about volatility in the underlying I assume that there is sort of swings and roundabouts principle also in non life insurance here. So clearly, [indiscernible] all else equal, you would see less volatility in the underlying result So I'm not sure it's it's the nature of our portfolio, but more probably a nature of the geographical spread of our portfolio.

Exactly. Thank you. So I was looking for the flavor anyways. Thank you very much for your help.

As of right now, we don't have any raised hands left. I'd now like to hand back over to the management for the final remarks.

Yes.

Thank you, operator, and thank you all of you for taking time to attend our conference here.

As you know, you're always welcome to reach out to Robin if you have any further questions.

I wish you all a pleasant rest of the day and have a good summer.

Bye.

Thank you for everyone for attending today's call. Have a wonderful day. You may now disconnect.