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Tryg CEO pledges to hold fire on M&A deals

Tryg A/S CEO Morten Hübbe on Jan. 20 pledged that the insurer will hold its fire on further M&A deals in 2017 after picking up Livförsäkringsbolaget Skandia ömsesidigt's child and adult accident insurance operations in 2016.

"I think if we look at M&A ... it's clear for us that with an ROE target of 21% post-tax and the combined ratio target we have [to be at or below 87%], we don't really have room to make the wrong M&A acquisition and that gives us the discipline we should have," Hübbe told analysts while presenting the Danish insurer's full-year 2016 results. "If you look at the recent acquisitions, there is a link between the financials [and] the group returns, and also to the future of developing our products and our business."

Amid intense competition for risk and ultralow returns on safe investments, many European insurers have looked to M&A deals to increase their relevance to the market. But this has driven up prices for top-quality European insurance assets and raised concerns among analysts about companies overpaying.

Tryg did seal a deal earlier in the week to write insurance policies for members of the FDM, a Danish motoring club, which will move from an insurance partnership with Denmark's LB Forsikring starting in 2018. Hübbe called the move "a very positive opportunity for us to work with the strongest motor association entity in the Danish market" and said the groups "can do a number of positive new solutions in motor and related areas. I think that is long-term very positive."

Tryg also said it would begin to make quarterly dividend payments beginning in the first quarter, with the annual payout spread evenly across the year. It maintained its dividend policy otherwise, aiming to return 60% to 90% of after-tax profit to shareholders.

"The fact that we have a high payout and high transparency on the payout is the most important," Hübbe said. "The mix between the methodology is perhaps less important for us. But what we've seen is that when we changed [in 2015] from annual dividends to semiannual dividends, we saw a lot of our investors being very positive toward that. ... So I think to move ... to quarterly dividends was a natural next progression."

The firm proposed a dividend of 3.60 Danish kroner per share for the second half of 2016, taking the full-year payout to 6.20 kroner per share. It also said it is paying an extraordinary dividend of 1 billion kroner, equivalent to 3.54 kroner per share.

The company booked a fourth-quarter 2016 profit after tax of 560 million kroner, down from 754 million kroner in the year-ago period. Full-year profit was 2.47 billion kroner, up from 1.97 billion kroner in 2015, with after-tax ROE rising to 26.2% from 20.0%.

Including the impact of the dividend payments, the company said its Solvency II ratio was 194% as of year-end 2016, indicating that it has almost twice the regulatory capital needed to withstand a 1-in-200-year loss event. It noted in its presentation that Danish regulators have said a company would be subject to additional scrutiny if its ratio dipped below 125%.

Tryg also said its Solvency II ratio would be virtually unaffected by any change to the Ultimate Forward Rate, a metric set by Europe's insurance regulator and used to set the discounted present value of long-dated liabilities. The regulator is poised to announce a revised framework for the rate in the near future, with speculation that it will cut the figure from its present level of 4.2%.

Because it writes only nonlife insurance and the average duration of its business is less than four years, a change in the UFR to 3.2% from 4.2% would knock just a single percentage point off the Solvency II ratio, Tryg said.

The ratio is most sensitive to changes in interest rates. A change of 100 basis points in spreads on the company's entire fixed-income book, including Danish government and mortgage bonds and Norwegian government bonds, would move the Solvency II ratio by about 14 percentage points, with the ratio rising if spreads fell and falling if they rose.

As of Jan. 19, US$1 was equivalent to 7.00 Danish kroner.