ASR Nederland N.V. (ASRNL) Earnings Call Transcript & Summary

Good day, and welcome to the ASR Nederland Investor Call Interim Results 2021. This call is being recorded. At this time, I would like to turn the conference over to Michel Hülters. Please go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining us today. Welcome to the a.s.r. conference call on our first half 2021 results. On the call with me are Jos Baeten, our CEO; and Annemiek van Melick, our CFO. Jos, as customary, will kick off with some of the highlights of our financial results, and he will also discuss the business performance, of course. Annemiek will then talk about the developments in our capital position and solvency. And after that, we'll open up for Q&A. We've got schedule for a full hour for this call, including the presentation and the Q&A. And as usual, please do view the disclaimer that we have in the back of the presentation slide for any forward-looking statements. So having said that, Jos, the floor is yours.

Thanks, Michel. And also from my side, good morning to everybody, and thanks for joining us on this call. I've understood some of you are calling in from their holiday addresses, so that is -- that has become, in the meantime, the importance of this call for you. I hope you're doing well. I noticed that we are the only insurance company today with results, so I guess this must be a pretty relaxing day for an analyst covering the insurance sector. I'm sure you will understand that we are very pleased to present a strong set of results for the first half of this year. Momentum in our operations has remained strong driven by happy and loyal customers. Our financial performance exceeds last year's record results with a considerable margin. And we continue to operate our business with a very strong balance sheet with a robust solvency. I want to thank our employees who are the driving force behind this performance. I'm proud of the fact that our employees have continued to keep moral high in this challenging period. In a recent survey executed by Effectory, a.s.r. is chosen as the best employer in the Netherlands. Now without further ado, let's turn to Slide 2 and take a closer look at our financial results. I presume you all have seen the data we released this morning, so I only will highlight the most important developments. As this dashboard shows, our performance in the first half of 2021 has been really strong. The substantial increase of 20% in the operating result to EUR 536 million is driven by higher results in all of our segments. Combined ratio stood at 90.2%, well ahead of our target of between 94% and 96%. Excluding COVID, by the way, the combined ratio improved to 94.1% from 94.5% H1 last year, at the lower -- so at the lower end of our target range. Our Solvency II ratio continues to be robust at 197%, still at the standard formula after interim dividend and share buyback and absorbing the impact from the lowering of UFR. Of course, Annemiek will provide further detail on this. The OCC improved by EUR 74 million to EUR 372 million, which means we are well on track of achieving our midterm target of EUR 500 million of OCC by the end of this year. The increase is a result of strong business performance and slightly increased investment returns. Operating return of 17.8% remains high and very well above the target of 12% to 14%. The increase in IFRS net result reflects the higher operating results and the absence of large negative incidentals and one-offs, which we have seen in the first half of 2020. We are happy to offer an interim dividend of EUR 0.82 per share, which is an increase of almost 8% and represents 40% of last year's dividend. Let's now move to our nonfinancial targets on Slide #3. As I'm sure you are aware, we are committed to deliver sustainable value to all of our stakeholders, specifically our customers, investors, employees and the society at large. Our ongoing focus on customer satisfaction has led to a solid Net Promoter Score of 48 and already well above the medium-term target of 44. We are well on track to achieve the objective of measuring the CO2 footprint of 95% of our investment portfolio, and our impact investments are already ahead of this year's objectives -- objective. Due to the lockdown restrictions and social distancing rules, our employees have not been able to do many of the activities we typically do for society. As soon as the social distancing measures are relieved, we will scale up again. As we focus on sustainable long-term value creation for all stakeholders, we are very pleased with the recognition and ESG benchmarks. Sustainalytics assigned a.s.r. 10 points in its ESG Risk Rating, which makes us today the worldwide leader in our industry, in addition to being included in the Dow Jones Sustainability World Index, is a welcoming recognition. Let me now highlight some key developments and achievements in executing our business strategy on Slide #4. Some business developments I would like to highlight. The Non-life business is performing very well, with strong organic growth, positive developments in our reintegration company and a successful conversion to a new IT platform within our Commercial P&C business. In the Life department, we delivered on creating synergies by reducing the number of applications and converting the systems to a Software-as-a-Service platform. In April this year, we have decided on centralizing and modernizing our main pension IT system to Keylane's Software as a Service platform, Plexus, which, by the way, is the same provider as where our Individual life business already is. With this, a.s.r. takes an important step in the preparation for the national pension reforms, which will be fully effective from the 1st of Jan 2026. Furthermore, we achieved good revenue growth in the WerknemersPensioen, which was up 31% in the first half, and transferred to the pension scheme of our own employees from a DB to a DC scheme. Our fee-based businesses are also doing very well. Third-party assets under management have increased by EUR 1.5 billion to EUR 25.8 billion mainly driven by growth in the mortgage fund and the pension DC funds. Our mortgage origination amounted to EUR 2.6 billion in the first half of 2021, on track to exceed last year's production of EUR 4.6 billion. And lastly, we now have fully finished the divestments we set out at our CMD of 2018 and, therefore, have no current divestments. Now let's move to Slide 5 to elaborate a little bit on our Non-life results. A record first half in Non-life with our operating result increasing to EUR 179 million, driven by an improvement of claims in Disability and strong organic growth in all product lines. In Disability, we have seen considerable improvement also in sickness leave despite some reserve strengthening driven by the adverse trend in absenteeism from stress and burnouts. We have started a new campaign to make people more aware of these risks. Also, we have invested in our reintegration service, which aims to help both in prevention and reintegration. And as you can see in the numbers, that worked out quite well over the first half. P&C saw a favorable claims experience, partially offset by a one-off reserve strengthening related to motor vehicle liability including a lowering of the actuarial interest rates related to a recent court ruling. Weather-related calamities were on a low level in the first 6 months of this year. We currently estimate the impact from the floods in the beginning of Q3 in Limburg somewhere between EUR 20 million and EUR 30 million, and this will be included in the results for the second half of this year. Combined ratio improved by 2.6 points to 90.2% for P&C and Disability combined, beating the target of 94% to 96%. Excluding COVID-19 related effects, the combined ratio, as said, is 94.1% compared to the 94.5% in H1 last year and, therefore, at the lower end of our target range. Organic growth in GWP in Disability and P&C amounted to 5.2%, above our target of 3% to 5% per annum. And finally, the increase in Health gross written premium of 43% reflects the commercial success of the benefit in current insurance product, which we launched at the end of 2019, and a nonrecurring premium that was received from the Health Insurance Act. So let's talk about our Life business at Slide #6. Some highlights to mention on our Life segment here, operating results of the Life segment increased by EUR 18 million to EUR 379 million with a less negative impact of COVID-19, amounting to a negative of EUR 13 million compared to a negative of EUR 25 million last year. The increase in operating result is mostly driven by a higher investment margin, reflecting the recovery of the financial markets with higher dividend income re-risking benefits on a lower required interest due to the runoff of higher guarantees in the Life book. Gross written premium of our Life business fell by 8% to EUR 928 million. This is due to different impacts within our pension scheme, a nonrecurring single premium paid in the first half of 2020 as well as timing differences in premium income related to the transition from DB to DC, which will show a catch-up in the second half of the year. At the same time, we achieved good growth in our Pension DC product, which show an increase in premiums of 31% to EUR 342 million over the first half. Furthermore, our cost efficiency improved to 42 bps, a share of the basic nominal provision, which is below our target range for 2021. This is driven by lower costs through efficiency from earlier conversions and lower operating expenses in addition to a higher nominal provision due to the strong inflow in DC. Let's now turn to Slide 7 for the other segments. The operating result on the 2 fee-generating segments, Asset Management and Distribution and Services combined, amounts EUR 34 million, up from EUR 28 million in the first half of last year. So a growth of 21%. This confirms that we are running comfortably ahead of the medium-term target for 2021 of 5% growth per annum. Asset Management results improved by EUR 3 million, which was driven by continued growth in the mortgage fund and, to a lesser extent, to the growth in the DC pension product. Operating result of the Distribution and Services segment increased EUR 3 million mainly driven by small acquisitions and organic growth due to the expansion of services provided. Operating results of the Holding amounted to a minus EUR 56 million, as already announced at full year 2020. This is mainly due to the fact that as of the beginning of this year, our pension plan for a.s.r. employees moved to a DC product, resulting in lower costs. So now let's turn to Slide #8, about our capital management. I'm always keen to show this slide as it displays our strong discipline and track record in offering attractive returns to our shareholders. This half year, we announced an interim dividend per share of EUR 0.82, an increase of almost 8% compared to the interim dividend of EUR 0.76 at the half year 2020, and equals 40% of the regular dividend over 2020 in line with our dividend policy. Since our IPO in 2016, we have been committed to offering shareholders attractive returns in dividends and supplemented by share buybacks. During this period, a.s.r. showed growth in the EPS of over 12% per year and returned around EUR 1.7 billion of capital to our shareholders. This roughly equals 38% of our market cap at June 30. We continue to allocate our capital in a rational manner, as we have shown in the past, with a strong balance sheet and robust solvency position. Having said that, I will wrap up after, and Annemiek has -- talk you through all the solvency numbers and the OCC numbers. So I'm happy to hand over to you, Annemiek.

Thanks, Jos. Let's turn to Slide 10 then for stock solvency. As you can see, our solvency ratio remained very robust at 197%, which, as you all know, is based on a standard model. This figure includes the interim dividend of EUR 111 million as well as the buyback we executed earlier this year. It also absorbs a further UFR decline of 4 percentage points. Unrestricted Tier 1 capital represents 74% of our own funds, and hence, we continue to have ample headroom available within the Solvency II framework. We have around EUR 1 billion of restricted Tier 1 and over EUR 500 million in Tier 2 and 3 headroom, as you can see. SCR decreased by around EUR 28 million primarily driven by the decrease in insurance risk for Life and Health due to higher interest rates. Let's turn to flow on Page 11. Obviously, we started the year at 199% and lost around 1 percentage point from the impact of acquisitions, mainly related to the Brand New Day IORP acquisition. OCC came in very strong with EUR 372 million, or 9 percent point in solvency driven by strong business capital generation in all segments and Non-life, specifically. And I'll talk about OCC in more detail on the next slide later on. The minus 5% for market and operational development includes the impact of the lowering of the UFR with around 4 percent points, and the other market and operational developments are roughly offsetting each other, with some positive impact from interest rates and spread movements as well as real estate valuations being offset by negative impacts from the lower VA and some adjustments and the impact of rising equity markets due to the equity dampener. Before capital distribution, our solvency stood at 202%. And after deducting the interim dividend and share buyback we executed in H1, we get to 197%. Now on to Slide 12 for some detail on the OCC. As said, the OCC came in at EUR 372 million, which is an increase of 25% or EUR 74 million compared to the first half of last year, which is mainly driven by a strong increase in business capital generation, which added EUR 58 million versus H1 last year. The increase in business capital generation was primarily driven by improved performance in the Non-life segment and higher excess returns. Within Non-life, we saw a larger positive contribution from COVID than last year. However, this was largely offset by additional reserve strengthening Jos has already mentioned. Underlying, we really saw a better performance at both P&C and Disability. For Disability specifically and sickness, better operating performance as well as the impact of repricing in Disability. The higher excess returns were driven by re-risking, mainly by increased exposure in mortgages and partly in other illiquid credits, and an increase in equity in real estate valuations. The increase in capital release was mainly driven by SCR release due to interest rate movements. Now please bear in mind that in the second half of the year, we always absorb an additional new business strain from renewals in our Disability business and, to a lesser extent, in our Health business. H2 last year, this led to hardly any capital release, for instance. Interest rates in the first half of the year went up, which almost fully absorbed the negative UFR echo from last year, hence, a flat technical movement, as you can see on the slide. Given the results in H1, we're obviously very comfortable in achieving our target of EUR 500 million OCC at the end of this year. As mentioned before, you can't just take H1 OCC and multiply that by 2 for the full year given the new business strain seasonality we typically have in H2 and given the strong Non-life result in H1. It would probably be more appropriate to take H2 of 2020 as a base and the EUR 200 million we had in the second half of last year and adjust that for current circumstances like lower rates and the impact from the July flooding. And then obviously, it depends a bit on what will happen with COVID for the remainder of the year, et cetera, and obviously where interest rates would go. All in all, very strong OCC, improved underlying performance in Non-life, higher investment returns as well as a benefit from COVID and us being quite comfortable, obviously, on the full year guidance for OCC. Now let's go to Slide 13 for a few words on the balance sheet. Balance sheet remains very strong. As I said, we have ample financial flexibility. Financial leverage decreased by 2 percent points to 26.3% due to an increase in equity. Interest coverage increased as well mostly due to the improved IFRS results. And our S&P rating was confirmed in June. On liquidity, on Slide 14, Holding liquidity ended at EUR 456 million, which is in line with our policy of maintaining capital at the operating companies and upstream cash to cover dividends, coupons and holding expenses for the current year. Last year, due to the COVID uncertainties, we didn't remit from the Non-life entity. And this year, we've remitted EUR 73 million from the Non-life entity and EUR 251 million from Life, with the remaining EUR 32 million coming from other segments. Our debt maturity profile, as you can see, is very robust with the next maturity date in 2024. Solvency Group, we already discussed, robust at 197%. Ratios for Non-life and Life entities are 166% and 188%, respectively, after remittance. And both are well above our target of 150% and 160%, respectively. And with that, I'd like to hand it back to Jos.

Thank you, Annemiek. And to conclude, a.s.r. remains in a very strong position and has delivered a very strong performance in the first half of 2021, which we're generally proud of. Looking ahead, we are positive about the commercial and operational outlook for a.s.r. in the second half of 2021 and delivering on our 2021 targets. Now I guess you'll be looking how to arrive at a sensible full year estimate. In doing so, I should caution you to not multiply the outstanding performance of the first half by 2. I guess a reasonable starting point for our -- for your analysis would be to look at the operating result of the second half of last year being 40. I also, having said this, kindly invite you to our investor update, which is scheduled for the 7th of December, where we will elaborate on our new medium-term strategy including an update on our financial and nonfinancial targets. Ladies and gentlemen, this concludes the presentation of Annemiek and myself, and we are very happy to take your questions now.

[Operator Instructions] We'll now take our first question from Cor Kluis.

Congratulations with the results, obviously. But a couple of questions. First of all, on Disability insurance, where you had a better combined ratio of -- than expected of 92.1% in H1. Could you help us a little bit, to give an idea of the trend how that went through the first half of the year, probably somewhat higher combined ratios and then gradually it probably came down, improved to a lower level? How is that trend? And is that continuing in July and August after the COVID period? So that's on Disability combined ratio improvement. Second question is also about Non-life. We see that health premiums went up, I think, by 44%. Quite strong. I think in the past, you always mentioned cross-selling is important. Combined ratios are now great actually in this business line. How do you feel about the profitability going forward? And which product lines are you growing because that deviates a little bit from the growth trend that we have seen in the past? And then a question about the OCC, especially the UFR drag going forward. I did some back of the envelope calculations, but maybe you can help us a little bit through it. But I think in H1, the UFR drag was minus [indiscernible] EUR 2 million, I would say. For H2, including the [ adjustment ] for H1, I think it's minus EUR 120 million. And for next year, I would say if rates would not change, minus EUR 220 million. But maybe you can help us through that a little bit. And the last question is about M&A. Of course, you cannot comment too much about it during COVID, plus it would be more difficult probably to enter in such kind of talks. Any comments on that would be appreciated. Because since the IPO, a.s.r. always have been quite good in doing acquisitions. But is it easier now? This kind of questions. That's my -- they are my questions.

Okay. Thank you, Cor. I think the question on Disability and Non-life I will take, like M&A and OCC will be covered by Annemiek. On Disability, where does the increase in results come from and what is the trend, well, a couple of things. First of all, we significantly increased premiums in sickness leave from the 1st of January recently. And also, we've seen a premium increase in individual disability for new customers. So that was helpful. Secondly, in the first half last year, we weren't able to do the things necessary to help people to return to work. And already in the second half, that we were able to pick up again. And that continued in the first half even despite the lockdowns we had to deal with. Without already projecting the full year result, but the positive vibe in the Disability business which we have seen in the first half seems to continue. So the negative result on sickness leave, which we had last year, probably will not be the case in the full year this year as far as we can judge today. So the positive trend started in the last half of last year seems to continue going forward. On Non-life, on Health, the growth in Health, we are happy with that. We're steering this business on very strict targets in terms of combined ratio. And as far as we are able to judge now, this business line will be able to deliver on those on the combined ratio targets. And Health is for us has become more important because of the connection with Disability. And as you may have noticed, we've seen significant growth in Disability over the first half but also last year, and that's partially related to the fact that we offer combined products between Health and Disability. And part of your question was where do you see the growth going forward. I think we aim at continuing the growth as we have seen in the first half. So in Pension DC, P&C and Disability, so the main growth drivers should come from those business lines. And maybe, Annemiek, you can elaborate a little bit on OCC, and I will come back on M&A.

Yes. Cor, the calculation that you made on high-level UFR drag, that seems about right to us. And probably to give some to give a bit of a sensitivity figure, I think we also provided that last year, if interest rates -- compared to the June 30 figures that we presented, if interest rates would go down by around 50 bps, we would lose around EUR 55 million in OCC, which is basically driven by a plus 70 in UFR and partly mitigated by a bit higher capital release. Now with interest rates not having gone down 50 but around 30 bps, your UFR drag estimate is about right.

And Cor, on M&A, you rightfully said that we've done lots of M&A transactions, actually 15 over the last couple of years. It is still part of our strategy. 2020 ended up being difficult to start conversations with potential targets. And as we all know, there is a bit more -- there are more possibilities to meet people again. So it remains an important part of our strategy, and we are aiming at possibilities, but it's always difficult to give any comment whether we are having conversations right now or we are looking forward to have a conversation. But you can be assured it is an important part of our strategy also going forward.

Andrew Baker, please go ahead.

Great. So 3 from me, please. First one is just on the Non-life business. Obviously, there was a net COVID benefit in the first half about EUR 60 million. Just curious how you are thinking about that developing in the second half. And then just secondly, again, back to M&A. I guess how rational are you seeing the pricing of deals right now, especially as we recently saw one of your peers, I guess, accept a lower return on a distribution business, which presumably was the business that you're obviously looking at? And then finally, if I just -- in terms of sort of capital deployment, obviously, your solvency is in excess of your threshold for additional capital distribution. Your capital generation has been strong. So just curious how you're thinking right now about your, I guess, preference and likelihood of M&A versus buyback in the near term for that excess capital.

Well, on your Non-life question, it's -- to be honest, it's difficult to predict. It is our feeling that -- and if we look at, for example, traffic in the Netherlands, I think it has roughly returned to quite normal. So one could argue that the benefit from a lower traffic level will disappear in the second half. On the other hand, more people keep on working from home. For example, a.s.r. now has decided that our employees have to come to the office at least 2 days per week. So that would mean that they are allowed to work from home for the other 2 or 3 days. So it's -- there is also an argument that traffic will remain a bit lower than it has been in the past. We don't know yet whether we can put a number on that, but I think there are arguments to expect that the pressure on Dutch traffic will be lower going forward. And whether that will result in significant numbers in the results, because on the other hand we do see more pressure on bodily injury claims and whether that will level out or at the end of the day will be a positive, it's to be seen. But we're following on that, of course. It's also important for the 7th of December, where we have to set new targets on our combined ratio, for example. And those kind of questions are taken into account in all the discussions we are having on the new targets going forward. On your question how rational we remain in terms of M&A especially in the distribution area, of course, we have seen the decision of one of our beloved competitors. You can imagine that we have looked at the same opportunity. And from our perspective, it was difficult to meet our hurdles, and that is probably the reason that we then didn't end up being the buyer. On the other hand, we can imagine the decision of the management of our competitor. We already started a couple of years ago to build a strong distribution franchise. They, however, hadn't any significant distribution franchise, so probably they looked at our strategy and are happy to copy this part of our strategy, and then you have to make a significant investment to pick up. So from a rational point, from an investment point of view, I think it's a tough decision. But from a competitive point of view, I can imagine.

Yes. And then your question on excess capital, let me kind of break it down and first focus on this year. As you know, we have a dividend policy that also includes a payout ratio of, at the minimum, 45%. Well, as you can judge by our stories today, we're quite bullish on the full year operating results. And hence, I wouldn't rule out a very healthy dividend to come out of that based on that 45% payout ratio. In addition, we also said that provided that solvency ratio will be above 180%, we'll also continue with the buyback program, which is still scheduled for 1 year ahead. And now on that solvency, obviously, rates have come down since June, since we reported 197%. VA has come down a bit as well. So there will be some pressure just from market movements on solvency. We'll obviously dividend out quite a healthy chunk. But all in all, we remain comfortable that we can also perform the buyback, as said. So for this year, I think we're looking at a healthy capital return from our perspective. Now going forward and on what level we'll base the capital return and how to deal with the quality of the underlying earnings, this year, we obviously have the COVID benefit in there, et cetera, what will happen with the buyback program, that's all the topic that's scheduled to be discussed on the 7th of December. But for this year, I think we're quite confident with the capital returns.

Michael Huttner, please go ahead.

Can you hear me? Yes?

Yes.

Fantastic. Congratulations on fantastic numbers. I had 3 questions. The first one is you mentioned some reserving on merchant liability, and I just wondered if you could maybe explain a little bit if there's any concerns or what the trends are here. I know you mentioned it a little bit. The second is you focused a lot on the capital strength and the -- so I think it's normal, but -- because I saw it at other companies, I get confused. But you seem to have EUR 1.5 billion of headroom if you wish to do a deal. And here, my question is, with EUR 1.5 billion of headroom, how much business does it -- can that buy? How big a portfolio can you buy? I don't know if you can answer that in any way because it's, I suppose, the question is a bit vague. And then your mark of 10 on ESG sounds like an amazing gold medal kind of Olympics score. What does it actually mean in terms of the -- I mean it's wonderful to be green then I think. But what does it mean in terms of benefit to you, in terms of how investors perceive you or your customers or your employees? Is it a real topic of conversation? Does it bring stuff? Or is it kind of just a nice thing to have which people just take?

Thanks for all your questions. Let me start with the additional reserving that we did on the P&C side. It's really driven -- it's really related to the motor and vehicle liability. That was a ruling where basically the actuarial interest rate is set to also possibly become negative. So in our reserving, we have to take care of that negative actuarial interest rate, which led to some additions. And also in terms of bodily injury, we see lots of people jumping into that market, and the claims tend to drag along a bit longer and is an area that the Dutch industry, for the last couple of years, really had to take some additional reserve strengthening to deal with that part. I think we're fully there now on the old years, et cetera. And quite frankly, this year also provided a very good reputation and opportunity to definitely look at that reserve strengthening. In terms of headroom, the EUR 1.5 billion, it's not cumulative. If you do one tiering, you add a bit, then you have less room on the other tiering. So it's not necessarily cumulative. And what you can buy for it obviously depends on the price. Multiples on the distribution side of business tends to be a bit higher than obviously multiples on, for instance, a Life book. On the other hand, Life book requires a lot more capital. So it really depends on the opportunity that you're looking at. I think in general, it's fair to say that if we see a very attractive opportunity, we would have ample room to transact on it either by our current solvency or by actually using a bit of the headroom that we have there. And in addition to that, there are some other ways that we could create some more headroom in our capital structure, for instance, by longevity transactions, et cetera. So it's -- we're in a comfortable position to have that headroom to support either inorganic or organic growth.

And on your last question on -- sorry, go ahead, Michael.

No, no, no. You're so kind. Sorry, I'm interrupting. But is it big enough that you can buy out the Aegon business?

It depends on the price Lard is going to ask for it.

If we could buy it out with this headroom, we would definitely like to have a conversation with Lard. And I think our shareholders will welcome that as well.