Grupo Catalana Occidente, S.A. (GCO) Earnings Call Transcript & Summary

Good afternoon. It's a pleasure to be here with you all. I am Francisco Arregui, General Manager of Grupo Catalana Occidente. And here with me, I have Carlos González, Financial Officer; and Nawal Rim responsible for Investor Relations. And first of all, I would like to thank you for your attention in this online event. And the follow-up that you do of our business and the Catalana Occidente value. Let's talk about how things have been in the year 2019. Precisely, this morning, the Board of Directors has formulated the corresponding accounts. They have been published a while ago. And for starters, as in other occasions, I anticipate that we have had a good 2019 despite the adverse weather conditions, a slowdown of growth, strong competence in the Spanish market and the uncertainties of all kinds that we are experiencing. And we will, with no doubt, talk about them today. I will continue and follow the agenda for the presentation today that you see on screen. So we will start with the economic and social environment. The truth here is that I have some presentations now saying that we continue developing our activity despite our good results. It's a difficult environment, precisely because of the volatility, despite what we are experiencing these days. Volatility from globalization and revolution of mass media in remote, everything that happens throughout the world, affects our business immediately. And there are lots of political uncertainties, protectionism, Brexit, the Catalonia problem in Spain, coronavirus virus, which is now very trendy and the slowdown of growth, generally speaking, in all economies, but at least from the point of view of figures with economic growth in almost all areas -- geographical areas in 2019. And with an estimate to grow, not as much, but to grow in 2020 in an environment that continues to be of low inflation and of interest rates that are relatively low, although it is obvious from the picture that we saw a moment ago that there is a slowdown of growth. This is a fact and it is patent in 2019 throughout Europe. And in Spain, for us, continues to be the most important part. 2/3 of our business are here in Spain, so we have had economic growth for many years. Very positive behavior of all indicators. The closest to this insurance sector, although with a change in trend that you can appreciate in some of them despite this fact, we have seen that our economy grew by 2% in the year 2019, and the estimate is to have a growth of around 1.5%, 1.6% in 2020 this year, above the European average. In this context, the insurance sector in Spain was evolution. These years are the main indicators that you can see on screen had a very good behavior during the economic crisis and has been growing in turnover without interruption since 2015 until this year, 2019, where there is a slight, a very slight drop of 0.4 points because of the minus 6.6% of savings. The reality that is in periodic premiums or recurring premiums, there is a growth in the sector, 3% in life risk and growth around 3.4%, 3.5% in all the non-life pillars. So once again, a year with a good behavior in the insurance sector. And in the economic context, things have gone relatively well for us. And the truth is that you see on the screen, we have significant improvements in almost all magnitudes and very specially in those that are closer to the 3 basic pillars of our general policies. So growth, profitability and solvency. We have grown at almost 5% in turnover, results around 10%. We also closed with an improvement of solvency and it's very good to see the improvement in our own permanent resources, as we'll see later on, and we increased dividend against the results of 2019 on 7.3%. And the month of February, we closed our corporate operation, the Antares acquisition, which I'll talk about later. We start with the income statement figures of the year, an income statement, which is very easy. First line is income and their results. It's enough to see that we're growing at 4.7% of turnover. In business volume and traditional business, we grew slightly less, 2.8%, very much influenced by the less growth of the single life premiums at 0.9%. But at any rate, this is something that doesn't worry at all. It's contributing least value to our business with such low interest rates as the current ones. There is truly no margin for intermediation. As you already know, we are de-incentivating these operations because they have a possible growth in interest rates curve that could damage the solvency and equity. So the truth is that we're growing above 3% in premium -- the current premiums in the traditional business. The general manager -- the CFO will talk about this later, aligned with the sector, slightly less growth in motor. And in credit insurance, we're doing fine, above 7%. This is, frankly, good if we take into account that we have low claims, below 4%. So it is our view that we continue to have downward pressure in prices, both in production and in our portfolio. And the most significant part is that we grew 9.9% consolidated result, 9.6% of attributed results. And once again, this is not due to the extraordinaries, one-offs, which are actually damaging in over EUR 25 million. This is mainly due to an improvement of the operational results of our 2 biggest business, 8.9% (sic) [ 8.4% ] growth of the traditional business results, then we'll talk about the different pillars and give you more details, and 18.6% from the credit insurance business. 18% above last year, which was already a record in our results of insurance -- credit insurance, maintaining very good claims level and also a better improvement of reinsurance, so higher retention in 2 points that we have done in the year 2019. From the standpoint of the grade figures and composition of our business, I see this constantly it is obvious that the weight of credit insurance from the Atradius integration in the group, approximately 60:40. At the closure of the year, you can see it slightly higher, the credit insurance. And from the territorial perspective, from the Atradius incorporation, we are international. Although it is limited to credit insurance, Spanish continues to represent 2/3 of our business and the rest is practically in Europe. We only have 6% around -- out of Europe. Third message is solid capital position and solvency position. We will see the evolution of our own resources and how we're doing in terms of rating. The fourth message is that we maintain a stable and increasing dividend policy, dividend in 2019, with a growth of 7.3% after the approval of the proposal of increasing 10% of the complementary dividend that the Board of Directors has agreed to do or to take to the general shareholders' meeting in April from the share price evolution or the share evolution. You know it better than us. Even we can continue to say that the long term is very good. The evolution, you can see for many years now at the beginning of the century, with an internal rate of return of 13%, much better than the indexes that are closest to us. And in the short term, as you can see, after 2018, there was a drop of the stock exchange and the Catalan market behaved a bit better. We had a worse behavior with a drop of 4 points in 2019. And currently, the accumulated drop in the Catalana Occidente year was 6% yesterday. We are dropping, as you all know, in these days of -- especially difficult days for all stock markets, and of course, the Spanish one, too, from the standpoint of dividends. I have said that we have a stable and growing dividend. The truth is that we were able of increasing slightly in 2008 and 2009 the dividend in a moment of economic crisis and very bad results of credit insurance, which naturally affected the group. And from here on, growth has been constant, very significant dividends from 2013 to 2019. And then 7.3% that I have announced a moment ago after the proposal of increasing the complementary dividend of 10% that we are currently taking to the general shareholders' meeting. And finally, the Antares acquisition. I won't inform you about all the different procedures. We have done this previously. You need to remember that we have bought Antares, which is a subsidiary of Telefónica through which Antares was articulating all the proactive agreements in risk insurance and health, plus [indiscernible] the agreement exclusivity for 10 years, EUR 160 million was the price. And the operation was closed on the 14th of February. So 2019 is the first time that we have included 11 months of the operation in our statements. Without a doubt, we have stressed this on several occasions. The strategic fit this has within the strategic -- with the strategy of the Catalan Occidente Group, it allows us to include health, ninth position on the ranking with a 2% of market share, over EUR 160 million of turnover, and it will produce synergies. First one is to make the most of the advantages of greater volume to be able to negotiate with third parties. And Carlos, you can give us the details of the income statement.

So as it's still coming. I will start talking about the traditional business initially, and I will end up with the breakdown of the credit insurance. So in terms of the traditional business, starting with turnover, there's a growing trends of the increase of premiums. The recurring premiums grow by 3.1% until the EUR 2.2 billion. And additionally, this is added to a technical result of 6.7%, which is transferred into the recurring result, which goes up to EUR 212 million, with an 8.4% of increase. The basis of this increase was the -- mainly focusing on an improvement of the general insurance with a reduction of technical cost of 0.9 points with a control of the motor claims and also because of the rains over the last part of the year. We additionally maintain an expense ratio, which is stable, underlined with the previous year. So the combined ratio has been reduced by 9 basis points, around 90%, specifically 90.4%, as you can see, which favorably compares to the combined ratio of this sector. Let's move on to analyzing each one of the branches of the traditional business. We start with multi-risk growing at 2.4%, which is a similar pace as the sector, if we exclude the drop of turnover of Plus Ultra bank, which we still have in our portfolio. The combined ratio is 89.5%, 0.4 points below last year and consolidating on fourth year in a row with ratios below 90%. And finally, the technical result has increased by 6.4% until EUR 69 million, as you can see on screen. As for the motor pillar, we continue to have turnover growth of 0.5% in this case. And this is a consequence that we have done a tariff increase that has not been too aggressive in order to maintain our policy cancellation rate very low because of the loyalty program of our customers, bearing in mind all the tensions in prices in the industry at the moment. So commercially speaking, we continue to grow in number of policyholders, but with average premiums that are lower, the combined ratio is reduced by 1.3%, down to 94%, with a reduction of 1.3% of the technical cost, where we see at -- a stable behavior of claims, which has been historically low reduction of fleet policies too, and all these takes to this high combined ratio and this technical result of almost EUR 40 million, which increases almost 30% -- 28% as compared to the previous year. As for others, we have a growth of turnover of 1.1%. And the technical cost is maintained at levels similar to 2018 and the level of commissions has been reduced. As a consequence of the changes in the portfolio that have taken place this year, the combined ratio improved 6 points, going up to 84.6%. And the technical result is at EUR 48 million. As for the life business, we continue to see growth in recurring premiums and funerals, around 5%. And as you know, these are the products we are getting strategic priority for being the most profitable ones. As for the single and supplementary policies are maintained given the low appeal, commercial appeal in these low interest rate environment. This does not include the turnover of Antares, which recognized the totality of the premiums in January as is common in health companies. And as we include this company, we couldn't consolidate the turnover in terms of acquired premium that eliminates this effect and allows us to include the income from Antares, around EUR 133 million, from February. This Antares inclusion takes the life business to grow almost at 17%. As for results, the technical result grows -- drops down to EUR 58.4 million, although we must say that the group has wanted to provision it entirely, so without using transient periods that are being currently debated. The new biometric tables published at the end of the year by the general insurance authorities have meant an expense of EUR 13.3 million. Without this provision, the technical result will go up to almost EUR 72 million, and the technical result would be very favorable, almost 19% of increase. Thanks mainly to the life risk behavior, good margins in funeral, which, as you can see, is a pillar working with very low ratios, 8%, and also a good result in health with the Antares results with EUR 11 million. So as a summary for the traditional business. The growth of 7% in the acquired premiums or written premiums, a drop of 0.9% at the combined ratio and the good behavior of claims with the contribution of the Antares pillar, allows us to include the technical result, 6.7%, that you can see on screen, up to EUR 215 million and absorbing in a single year all the provisions of biometric tables dropped by the authorities for these pillars -- the life pillars that we have meant and talked about before. The financial results, on the other hand, is affected both by the low interest rate environment that we're seeing these last years and also the higher interest of our customers in some life products. And finally, the recurring result has increased almost by 9% to EUR 212 million. In the credit insurance business, the recurring result also grows very notably by 18.6%, up to almost EUR 240 million, EUR 238.2 million, given the evolution of the technical result after expenses. And in terms of turnover, the evolution has been very favorable with a growth of 6.7% of the earned premiums, up to EUR 1.7 billion, and this is given the good evolution of the sales of our insurance holders or policyholders that have taken part in 2019 and readjustments and estimates that we had done on 2018, and then have seen an increase in turnover this year, too. This has allowed us to offset the effect of repricing of our insurance. As for our exposure to risk, this has matured to 2.9%, maintaining a caution in risk acceptance. As for the growth in geographical areas, you see this on screen. And as you know, the credit insurance business is concentrated in Europe, 85% of the acquired premiums. And in this market is where the growth of turnover is most significant premiums increase in these geographical areas by 5.5%, stressing the growth in the -- in Central and Northern Europe. In the Spanish market, we obtained, for second year in a row, growth in income and turnover 1.4% this year. And in the rest of the world, there's also significant growth, global growth of 15%, essentially highlighting the area of the American Continent. We now move on to talking about profitability. Combined ratio continues to be at minimum levels. In this case, at 73.4%, with a significant reduction of 2.1 points of this ratio. In this case, we must stress the net claims of reinsurance, 43.4%, where there's an improvement of 1.3 points. This is mainly due to an increase of the frequency aligned with the increase of the exposure that we're having and a low effect of the peak claims. And as for summary, finally, to conclude our explanation of credit insurance, there's an 18.6% in recurring result, EUR 238 million, and we go through the different drivers of this growth. On the one hand, we have increases of 6% of income in Europe and positive growth in Spain too. The technical result continues to be highly profitable with sustained ratios throughout time. As you can see on screen, it is obvious that we have an improvement in reinsurance given higher retention and low claims level in the last year that allows us to negotiate conditions with reinsurers that are very beneficial for the group. And here, we would like to remind you that we have a 38%. This year, we have agreed conditions that are very beneficial for this year 2020. So finally, there's good evolution of the technical parameters allows us to offset the only variable that has behaved slightly worse, which has been the drop of financial results, especially as a consequence of a negative impact of the difference of exchange rates, which are the most volatile component of the financial results. And that's all from me.

So I think that we can leave the income statement to one -- to a side, and we will give you a couple of ideas in terms of capital parameters and solvency. So what we see here on screen is the evolution of permanent resources on market value, over EUR 4.5 billion, increase of 17.3% as compared to the previous year. And you see to the right the table that we normally use to visualize and see the very significant increase of permanent resources throughout this period from EUR 300-and-something million in 1999 to the EUR 4.585 billion. So it has multiplied by 13, more than that, and we have done this without doing capital increases. With asking third parties as a -- we have retained a significant part of profit, applying a very cautious policy for dividends that has allowed us to finance this entire period for the expansion. This is what we see also in the year to the left of the box, minus dividends -- consolidated results minus dividends and the variation of adjustments. Change of valuation adjustment reflects the greatest value of financial investments because of an increase in stock exchange and the fixed income given low interest rates. Also, this is net, as you know, of accounting asymmetries, participation of our insurance holders, the capital gains and also taxes. So this has allowed us to have this very significant increase of 17.3%. From the standpoint of solvency ratio, without a doubt, this is a very essential magnitude in the entire group. You see here best estimate for the closure of 2019, the final figure with all the details we -- or we will publish it when we publish the report on the financial situation and solvency in the month of May. At a consolidated level, our estimate is that our solvency will be of around 213% at the closure of the year, a significant improvement of 6 points. We will give all the details in the report on the financial situation or solvency situation. But in actual, I can say that the main drivers of the ratio improvement are, on the one hand, the retained reserve that we have just mentioned of EUR 254 million, and at the same time, the generation of greater value on investments and capital gains and the terms that we've already seen, too. On the other hand, there's also been a growth of SCR as a consequence of a part of the integration of Antares and the increase of market risk, which comes from greater value of investment and a greater requirement or a greater load or burden of capital. At any rate, the increase of SCR has allowed us, at the end of the year or closure of the year, to apply transient measures for provisions that we could not apply at the end of 2018. And I can tell you that the ratio without transient application or provisions would be around EUR 203 million. At any rate, we are very satisfied with the evolution of our solvency ratio. At any rate, it is better than our European competitors. They are all above 170%. They are around 170%. And there's some adverse scenarios. And at any rate, the funds are of a high quality. 90% of them -- 93.6% of them are Tier 1. And this is what credit rating agencies appreciate of Catalana Occidente. They see how sound our balance is, balance sheet and our business model. And the truth is that we are being -- AM Best is giving an A, and Moody's is giving a rating of A2 to the operating entities of the credit insurance business. On screen, you now see the classical graph of distribution of investments that represent EUR 14.377 billion with an increase of almost 17%, 16.7%, at the end of 2018. I don't want to tie you with all the details -- comprehensive details of the investments. They -- well, you have details in the appendix of the presentation and also the memoirs of the yearly accounts. I just want to remind you that we understand that we have a cautious investment policy, a diversified portfolio in these terms, and we have assets that are fitting our liabilities and/or the different terms for the management, joint management of assets and liabilities. And finally, sustainable business. I must talk about sustainability for our group. Corporate responsibility is the voluntary commitment to integrate into this strategy a responsible management of economic, social and environmental aspects. Also, encourage ethical behavior with our stakeholders and to rigorously apply the principles of good governance and to contribute to the well-being of society through the creation of sustainable social value. Grupo Catalana Occidente subscribes to the principles of the United Nations Global Compact and also to the Principles for Sustainability in Insurance, PSI, and the principles -- recently, the Principles for Responsible Investment, PRI. So through our current activity and social action, we support the Sustainable Development Goals defined by the UN by promoting aspects such as economic growth and progress, equal opportunities, quality learning, energy efficiency and health and welfare care. And nothing more. With this, I conclude. I'm sure you have been asking questions remotely as you normally do. And I expect that we have been classified by a group. We will try to answer all the questions that we can at the moment. And at any rate, be in no doubt that the ones that we can't answer today will be answered on the regular channels.

Thank you very much, Francisco and Carlos, for your presentation. Now we will start with the questions that we have received during the presentation. As normally, they have been grouped by topics. So firstly, and related to the financial result, what is the reason for the drop of financial results in the traditional business? Is it associated to the interest applied to the life pillar or life insurance?

Yes, this is specified in the management's reports for the year. But at any rate, it is true that the financial burden associated to the recognition of interest in life insurance increases over EUR 26 million and reaches EUR 157.6 million, out of which EUR 15 million, EUR 14.8 million exactly, to be precise, corresponds to the need to calculate our obligations with the policyholders using a rate curve that is risk-free, regardless of the fact that we obtain rates that are higher with our current asset portfolio. This is a mandatory and cautious element from the accounting perspective, and it will allow us to have better financial results in the future as year after year, we can confirm the profitability that we get from our portfolio.

The second question is also related with the financial results, but this time in the credit insurance business, what is the reason of the drop in financial statements in the credit insurance business?

Well, this is basically determined by the nonrecurring results. They mainly stem from the impairment of assets, the impairment of 2 investees' grade on by EUR 10 million and the subsidiary South African company, Credit Guarantee Insurance Corporation of Africa, EUR 6 million. The reality, what I can tell you is that by applying an extreme cautionary period or practice, we have been very demanding in the impairment test.

And also motor, second question. So improves the retail. So do you see this ratio sustainable in this very competing market?

Well, it's true that our ratio has traditionally been better than the sector, and this is mainly due to the rigorous selection of risks and a good tariff system or pricing system this year. The financials explain the technical cost has been reduced because there has been hardly no serious claims, and they have been controlled very well. This sector has also received a good ratio -- combined ratio, 94.8%. And this sector, Spanish sector, and especially in the motor industry is very competitive. It is something that we expect the ratio may be worse throughout the year because there -- but there's margin for this. And as a group, we continue to be firm in the application of our 3 strategic pillars: growth, profitability and solvency. And we will look for profitable growth at all rates.