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

Good morning, everyone. It's a pleasure to be here, once again, with you to talk about Grupo Catalana Occidente. I'm Francisco Arregui, General Manager of the group. And I have here with me the CFO, Carlos González; and Nawal Rim, responsible for Investor Relations. For starters, I want to thank you for your attendance remotely to this event as well as the follow-up of the business and the Catalana Occidente value. You can ask all the questions that you have remotely, and we will try to ask as many -- answer as many as we can at the end, and the rest will be answered through ordinary means. Before we start, I want to tell you that things this quarter, this very difficult quarter, have gone fairly well. Very good in traditional business. And we'll see how -- well, not as good in credit insurance, not as well, business, which is much more closer to the business cycle with a drop in results, but positive results, overall, and at any rate. So we will follow the order that you see on the screen at the moment. And we're going to start with the environment -- economic environment. Well, in last presentations, I always say that for years, we have developed our activity in a difficult economic environment. Given the volatility due to globalization, anything that happens in the world effects immediately our businesses. But the truth is that till date, there has been a common denominator of growth in all geographical areas in an atmosphere of very low inflation and interest rates that have been at historical minimums. It is true that last year already, we saw a significant slowdown of growth, mainly in Europe and in Spain. But the reality is that all that economic landscape is broken dramatically with the COVID crisis and the financial crisis that has risen from it. So there's a stop in production chains. And the crisis, well, is reaching everywhere, the paralyzation, blocking of the industry and the sector. And at the moment, it's still difficult to do our forecast of growth. It will all depend on the duration of the healthcare crisis. But all the forecasts with wide ranges are dropped. The FMI (sic) [ IMF ], you can see it on screen with 9.4% (sic) [ minus 4.4% ] globally; and drop in the Eurozone, minus 8.3%; and in Spain, almost 13% of drop. And as you can see, this will affect and is affecting our business, very specifically, the credit insurance business, which is more stuck to the cycle, and the traditional business at any rate is much more defensive as a consequence of the synergies of the portfolios. So we have told you on many occasions, we have stressed the wonderful behavior along the difficult financial crisis of 2008, 2009. And since 2015, we've seen continued growth and consistent growth. And at the moment, as you can see on screen, there is a decrease in global terms of the insurance industry in Spain, 10.8%. And it's dragged by the minus 31% of savings; and in non-life savings, 0.7% with a decrease of 2% in automobile, 2.2% in others; and a growth of 2.9% in multi-risk; more significant in the health branch, almost 5% growth. So in that context, as I was saying at the beginning, things are doing relatively well. And well -- frankly, well, at the end of the third quarter in traditional business despite the extraordinary competitive nature of this industry in Spain and the adverse weather conditions we had at the beginning of the year with claims ratio of Gloria, which has been the greatest accident for the group in multi-risk branch, almost EUR 30 million with an impact -- net impact of reinsurance in income statement of almost EUR 9 million. And apart from that, and the crisis of COVID that affects us fully from the month of March and less good, well, we saw this in credit insurance, which is closer to the cycle. But there's still positive results as we will see so. Just to highlight that evolution, this P&L account summarized. So the income and results, we grow in turnover, as you can see, 1.4% in traditional business. We grow 6.3%, which is truly 8.5% in recurring premiums because the growth -- well, we're decreasing, as you can see also in life single premiums, 10.2%. We are not too concerned about this. As you know, these are the ones that contribute the least value to the group. And in this atmosphere of low interest rates, where there's no margin for intermediation of the money or of savings. So as for the rest, we grow in almost all branches, except for others. And we will hear from the CFO later on, but we are doing fine in automobile. We're doing the same matching. And in that growth of 1.4% and 8.5% of recurrent premiums, there is an inorganic component, given the acquisition of Antares, which, as you know, was consolidated in February last year. So last year, we were lacking or missing the month of January, and Antares has a seasonality in the month of January because the premiums of January reached almost EUR 120 million. Without that effect in pro forma terms, we would still grow in traditional business and the 1.3% that you can see on screen. And in credit insurance, well, the turnover decreases 4.10% that you can see there. And it's truly 1.1% of decrease in terms of acquired premiums with a behavior that is worse in Spain. The decrease is 3.8%, and the causes for that negative impact is that on the one hand, we have very little new production, but also negative regularizations in the automization of sales in the -- in our policyholders for the first time in several years. And all this despite the fact that the cancellation rate is still there, but the portfolio are increasing on average at the close of the quarter, 4.5% in accumulated terms. But revaluation rates that are much more significant in recent months, just to give you an example, in the month of September, 11%. And in terms of results, you can see there, the consolidated result decreases 33%, 29.2% in the attributed results, the non-recurrence are still negative. They're not helping that EUR 11.5 million with very negative results of EUR 121 million net in terms of financial results as a consequence of realizations and portfolio impairments as -- and this year, we have a nonrecurring income, which is very significant, EUR 11.2 million gross, given the tax. Because we have one over -- trial, given the deductability, given a goodwill coming from Plus Ultra. So as for operational results, we were bringing it already, excellent result of the traditional business, which has increased on a very good result of last year, 10.1%. And the reality is that all branches are great, but there's 3 great keys in that increase on the one hand. Carlos González will talk about this good result of multi-risk. We practically matched despite the incidence of Gloria in the first quarter in the terms I was talking about a few minutes ago, an excellent automobile result, 45%. Given a claims ratio, that improves 2.7% as compared to the previous year as a consequence of, with no doubt, and to a great extent, given the lockdown and also the portfolio, defense measures and actions that we are adopting, we will also talk about. And thirdly, a very good result of the health branch with an increase of 24%. And as I was saying, well, there is a result which is low in credit insurance with that 76% of drop, but positive at the end of the day with EUR 42.5 million that you can see on screen. And also, it is improved as compared to what we said on the second quarter, the technical results -- net technical results of reinsurance was negative EUR 15 million. And it's been positive -- an almost EUR 15 million in this third quarter. And as for the background reasons for this drop, well, of course, there is the claims ratio. We appreciate from the second quarter, an increase of claims ratio, especially in Spain, and increase in frequency also globally in this third quarter, an increase of claims -- peak claims and a bad reinsurance result, which is being accepted. And the government plans supporting the commerce and trade through reinsurance, it's giving us negative results of EUR 36 million. As a consequence of that, they're still not reaching the claims ratio threshold so as to have a positive result. Fortunately enough, the claims ratio in the other parts of Europe is behaving or still behaving not as bad so as to those agreements providing us negative results. So we are having a profit in our business, and we are providing profit to the reinsurance. And we are being very cautious. As you know, we have a global system that can anticipate the claims ratio, given some parameters that we keep adjusting. And we understand that we are, frankly, well-provisioned, although we do not reject the idea of having to increase provisions given or depending on the evolution of the crisis. And then finally, I need to talk to the huge amount of actions that we have done in the great stakeholders. We have been doing this in this context of the health crisis, and all this are basic and essential to the maintenance of the business, some of which you can see on screen. I am not going to go through them all. But these are actions that started in the protection or from the protection of the employees' health and to guarantee the operational support of the group. We are very satisfied on how we have 100% of our employees working remotely. And lots of actions in terms of customer service, payment flexibilization, et cetera, and supporting society, in general. There's been multiple actions. And particularly, I wanted to stress our contribution of EUR 2 million to the protection fund of health professionals that was promoted throughout the industry through UNESPA. So from the global perspective, in terms of our portfolio, there's not great changes in one quarter. It is obvious. The weight that the credit insurance has in our portfolio, given the inclusion of Atradius in our group, basically 60%, 40%. We are international, although limited to credit insurance in the terms that you are seeing on screen, although a bit over 2/3 of our business continue to be in Spain and the rest is essentially Europe, just 6 -- 6-something percent is abroad, outside of Europe. The third message after income and results is that we have a solid solvency and capital position. I will talk about later. And then finally, a dividend policy that is stable and cautious with a firm commitment to pay out that shareholder. And as for these 2 topics, the evolution of the share price of Grupo Catalana Occidente, you know it perfectly well, we see this in the long term on the graph that you have. On screen, on the long term, they're still -- after the last drop, well, it's been doing frankly well with an internal revaluation test almost 10 percentage. You can see GCO, much better than the indexes that are closer to us and our competitors. And in the short term, well, you can see us not doing as good. Last year, it was a drop of 4.5% practically when the stock exchange was growing in the last quarter. And with that loss at the closure of the 9 months of this year, around 30%. But at any rate, quite similar to the indexes that are closer to us and to some of our closest competitors. As for profitability by dividend that I was talking about before, I want to repeat that we have a cautious principle for dividends, bad growing dividend in absolute terms after very significant growth before 2008. The truth is that the crisis, financial crisis in 2008, 2009, that affected very significantly the credit insurance results. We were capable of maintaining and even increasing, as you can see, increasing slightly the dividend. From 2010 on, we have had consistent increases of dividend. And this last year of 2019, you know perfectly well that we suggested or proposed to the general shareholders' meeting, a complementary dividend of 10%, placing the global one 17.5%. Although before the AGM and as recommendation of the European Authority of Insurance, we are forced to reconsider our position and to withdraw the distribution of the results on the day of the shareholders' meeting, given the cautionary recommendations in terms of shareholders' compensation. And we had to do -- on the 29th of October, we had to do another general shareholders' meeting to approve the distribution of results. The truth is that in the month of April, and so as not to break our tradition and to keep our commitment in terms of shareholder compensation, we agreed a quarter of dividend -- interim dividend of exactly at half of the complementary dividend. So the total dividend with charging these results in 2019 goes up to the EUR 81 million -- EUR 81.5 million as you can see on the screen. So this is a decrease as compared to what we paid out against result in 2018 of around 17%. The general shareholders' meeting approved last week the proposal for results that finally was done consolidating all the interim dividends that have been paid out without having new complementary dividend. And as for shareholder remuneration, we must say that in this year, in the Boards of June and September, we agreed on the payout of some interim dividends of the same amount that the interim dividends paid out in same dates last year, that EUR 19.1 million in each one of the terms. And despite this, still the cautionary regulations in terms of shareholders' compensation, the perception of the market and the supervisor is of great solvency for the group. So Carlos, maybe you can continue with the income statements?

Well, as is common in these presentations, I will break down the performance of the traditional business and the credit insurance performance. So we'll start with the traditional business on the first-line of the P&L account. And here, our diversification of product and the high retention of our customers has allowed us to maintain that increasing in turnover to the EUR 1 billion that you can see on the screen, 1.3% of premiums once we exclude the Antares Incorporation. And the result continues to have a positive increase of technical result of almost 16%, which has translated into an improvement of the recurring results, which is EUR 194 million, with the increase of 10.1% previously mentioned, too. And the basis of the increase of technical results, it has a positive evolution of the results of general insurance, multi-risk, and also automobile and also in the health branch. Automobile and health have been affected positively given the reduction of mobility, given the lockdown for COVID. So the combined ratio in this environment has improved by 1.2 basis points and going up to 88.3%. And we managed to have a positive differential as compared to the sector or the industry. We now analyze each one of the branches. We start with multi-risk, it's growing at 3.9%, a higher pace than the industry, 2.9%. Given essentially to the high retention of our customers, the combined ratio is at 88.3%, 8.4 points above last year, affected mainly by climate, weather events, Gloria, which has meant these EUR 9 million net euros of claims ratio. That's -- well, there's been a certain decrease in the number of accidents given COVID. This has meant that we have not been able to increase the technical results as compared to the previous year, but it is true that both effects have been balanced. And the result is around EUR 59 million -- almost EUR 59 million. In automobile, we have EUR 485 million with a net increase of the insured or policyholders. Despite the COVID, the combined ratio is -- drops 2.9 points up to 90.6% with a reduction of 2.7% in the technical cost, where we see a decrease in the number of claims in the lockdown period. And currently, in these few months, it's been becoming more normal, and figures similar to the same months last year. This improvement of the claims ratio has allowed us to increase the technical result of 45%, up to EUR 46 million that you can see on screen. As for others, the turnover here has been affected by minus 0.8% basically. And in the branches more linked to the economic activity, accidents, industrial risks related to the turnover of companies, and there's combined ratio improvement, 83.4%. And the technical results, it goes up to EUR 38.2 million. In life, we continue growing in periodic premiums. And funerals and single premiums, as we have seen continue dropping given the very little appraisal that has, well, for policyholders and for ourselves. And the health branch with this leap is also affected, mainly given the incorporation of the Antares turnover at 100% this year and last year. As we have also said, almost everything went to January 2019, so out of the consolidation scope. As for technical results, it improved 24% up to EUR 66.1 million, given the claims ratio in life risk and health. Given Antares, in health, we have 83.1% in the health combined ratio. It's been positively affected in the COVID crisis, given the reduction of nonserious medical activities and another one of the affected branches. The funeral one has been maintaining the 81.9% of combined ratio, and the claims ratio has been compensated with less commercial expenses. So as a summary, for the traditional business, the growth of the turnover that we have said before, a reduction of 1.2% of combined ratio given this less frequency and the good behavior of claims reach of life and the contribution of Antares to the health branch has given us the possibility of increasing almost 16% to EUR 209 million, showing the resilience of the business in front of the COVID crisis. The financial result is affected, on the other hand, given the low interest rate environment, but also given the less amount of collected and the drop of performance given rentals. So finally, the recurrent results increased in 10.1% to the EUR 194 million that have been mentioned previously. So we go to the credit insurance business now. Premiums acquired in this credit insurance reached EUR 1.301 billion with a decrease of 1% given the COVID crisis. And this effect has, too, negative impact. One is the drop of transactions, commercial transactions. So the potential for growth of our policyholders, which is the food we also feed from in our turnover and also given a lower risk appetite by us. You can see there at the bottom part on the follow-up graph of risk exposure. You can see that this last year, we have decreased by 10.2% in terms of risk appetite. These 2 negative effects have not been able to be balanced given the increase of rates. And as we have mentioned before and for some risks, they are double-digit growth. And as was expected at the level of results, this crisis has affected the profitability of the business with a drop of results up to EUR 57.1 million. In technical results, that is also translated into the recurrent result as couldn't be -- or as was obvious. Here on this slide, you have information on how the turnover has been with the acquired premiums by country, the drop of income is generalized, with decreases in the most affected areas by the pandemic such as Spain, which is decreasing by 3.7%. Although it's true that in some other European countries, there's also a decrease of around 3%. So we are now going to talk about result profitability. The combined ratio is becoming stable in this last quarter at 93.4%, an increase of 14.6% of the technical cost as a consequence of diverse factors or several factors. On the one hand, there's a series of factors that are not directly related to COVID. And we saw them in the first months of the year. They are just peak accidents previous to the lockdown that took place more than other years or than the previous year. And on the other hand -- and the COVID affected the claims ratio, the frequency has affected in Spain, but also it can be observed in other countries. But this claims ratio increase has happened with less frequency than expected given external and internal factors. External factors, well, the success in the fast application of tax policies supporting the economy that has been done by central banks and governments and internally, given the risk management policies of the company, this has allowed us to reduce 2.2 points the claims ratio as compared to the ratio with which we closed the first half year of 2020. I want to say at this point, and as being said by our General Manager, we continue to have our cautionary principles in the provisioning of the loans provisions. And as a summary, we'll go through the drivers of the quarter. As we've said, income has been slowed down in Europe as a consequence of the actions of the portfolio management that has been done. The technical results before reinsurance has also been affected by the increase of frequency of accidents, given the COVID crisis, although the level of claims ratio has been reduced as compared to the 6 months, as we've said previously. And this must be related to risk selection actions that have been done in the last few months. We must also mention that we continue to have reinsurance coverage, which is very relevant. In our contracts, standard contracts is 37%. And this allows to drop this claim ratio. And -- also -- and especially, we have at least for half of the portfolio, government agreements that cover additional increases of claims ratios and extreme claims that could have taken place this year. But it is true, as has been mentioned, the current levels of claims are damaging our profitability and our P&L around those EUR 37 million that we have also mentioned. On the other hand, the financial results is reduced basically given the impact of the differences of exchange rates and also given the drop of the results in associated companies. So in a nutshell and as we said before, the recurring result is suffering from this drop of results, but there's still positive growth in these EUR 42.5 million. So that's all from me. So maybe you want to continue?

Well, with the explanation, the statements are clear. What we said at the beginning of the presentation in terms that we're having a very good year in traditional business. And while the credit insurance is closer to the economic cycle, and it's suffering a drop in results, but positive results at the end of the day that we can still see reflected on that amount. So we will leave the P&L account. So let's talk about capital investment and solvency. You have the table here that we traditionally show you to talk about the evolution of permanent resources at market value with, no doubt, as we always say, the right-hand side is an evolution that has been, frankly, very good in the long term. It has multiplied by 13-something to the EUR 4.528 billion that you can see here at the moment. And as we always say, this has been possible without having capital extensions, without asking money to shareholders or third parties. And we have profit obtained in each period as a consequence of cautionary principles for the dividend payout, and this has allowed us to be here. This is what's happening this year with consolidated results. You see here EUR 225 million to the left and the dividend that we have spoken about a few minutes ago of EUR 81 million -- EUR 81.5 million. However, in this period, you can see that there is a variation of adjustments given assessment of around EUR 200 million and slightly less of what we've seen this year as a consequence of the slight recovery of markets -- financial markets. So EUR 200 million, that's at the end of the day, there's the variation of net capital gains and capital losses and accounting differences in the so. Solvency, well, essential figure throughout the group -- the insurance group. You can see the solvency ratio at the closure of 2019, it was 213%. And you have at your disposal, a report on -- the consolidated report of 2019 with all the details included there with all the different scenarios and adverse scenarios that we have explained at other times, just to point out that we believe that this is quite good. This is a ratio that is better than most of our peers. Our all companies are over 170%. Adverse scenarios are around 180%. Equity is of a high-quality, 95% Tier 1. As for the current ratio or the estimates for the closure of 2020, you know that we do not give estimates for P&L account or solvency ratio, but the presentation of results of the first quarter, we already analyzed with you and explained the impact that meant a drop of the financial markets in the ratio, which was quite significant back then. However, the second quarter's markets recovered and the agreements with governments have been increased due supporting commerce through the reinsurance policies, and it has a very significant incidence in the solvency ratio. The only thing I can anticipate is that it's difficult to know how things will be in the date, the situation of the markets. We will continue to have a ratio, which will not too different from last year, so it will be above 200% at any rate. The reality is that, well, the rating agencies appreciate the firmness and soundness -- financial soundness of our balance sheet and our business model. In the year 2018, the rating was increased. As you all know, we are being maintained the A rating, given all the operations of the group. And A2, which is basically similar to the A of AM Best. And this A2 is by Moody's to the credit insurance operations that maintain us despite the crisis. Although Moody's, as other companies, well, has given us a negative perspective. And here, you can see on screen, our investments that go up to the EUR 14.520 billion, with an increase of 1% versus what we had also in December 2019, which is very good in the current economic context and market context. I don't want to tire you out with classifications or details of our investments, which you can see in the appendix and very detailed in the -- all the memoirs of last year, all the reports. But I want to stress as in other occasions that we have an investment policy that is very cautionary and stable, diversified investment, as you can see on screen. And all the details come in the appendixes and assets that are appropriate for our liabilities in terms of liquidity, profitability, duration and/or the proper management of assets and liabilities. And finally, I want to stress that despite the fact that with no doubt in the current economic context, which is frankly difficult, we're very focused in the ordinary management of our business. We are not losing sight on the strategic aspect our future depends on. And without a doubt, the main is innovation. The main one is innovation. It's something very important for the future. But I want to specifically talk about or at least mention in this presentation, I want to mention sustainability, and sustainability for Grupo Catalana Occidente is the voluntary commitment of integrating in the strategy a responsible management of economic, social and environmental aspects to promote ethical behavior with the interest groups to apply rigorously all the good governance principles and to contribute to the wellbeing of the company and the society through the creation of sustainable social value. We included this in other presentations, and this year, we have done a new materiality analysis with the results that you're seeing currently on the screen. We will give you new details in other meetings, but there is a repreparation or restructuring of a new master plan for sustainability in the group, and nothing more. I think that with this, we have given you a detail of how things are doing at the closure of the third quarter. And from now on, we are here at your disposal to answer the questions that you have been asking.

Thank you very much, Francisco, Carlos, for your presentation. And as Francisco said, we'll start with the Q&A session that we have been receiving through the presentation. They have been classified by topic. So firstly, we are asked about the automobile branch. The combined ratio for automobiles improves up to 90.6%. So can you say that it will be maintained at the end of the year? There is a lot of competition in this branch, and the industry is being very aggressive with important price drops. So what commercial measures is the group going to take?

Well, yes, the claims ratio for automobiles improved 2.7% as compared to the same date September last year, and that is mainly due to the fact that the number of claims has been reduced given the mobility restrictions in the current circumstances, as you know. So in the last presentation, I indicated that we're expecting a certain normalization of the ratio. In the closure of the year, given the levels of circulation and traffic, were being recovered. But the truth is that in this third quarter, the road show claims ratio has been very good. So if everything continues to be the same, we can understand that we will end the year with very good technical result of this automobile branch. As for possible potential or premium drops, there's no doubt that the insurance industry in Spain, and I always say this, especially in auto, it is extraordinarily competitive. So -- and well, we're seeing this -- these days, personally have no doubt that the claims ratio in the industry will be transferred or translated to the consumer, no doubt. So we have applied many measures to defend our portfolio. And this is an added value, given the proximity to the customer. And this is all in relation to the offer of additional services so that the customer satisfaction is kept and making sure that we have retention. We have done this for many years. The customer is at the center of our strategy. So there is satisfaction with the services essential for us.

The next questions refer to the credit insurance. And logically, this is the one generating greatest doubt. So the combined ratio of credit insurance has been maintained below 100%. Do you believe that the combined ratio of the business can be impaired to the levels of 2008? Or could it be maintained at the closure of the year? Could we expect a worse impairment in 2021?

Well, I think that the response to this question is not going to be substantially different to what we said when we spoke about the results of this half year. But we have a new element for justification, as we could see in the presentation, there's no doubt that in a situation, which is as delicate as the current one, in this crisis context, we must act decisively along 2 lines. The first one is the way we've done supporting our customers, either increasing the period for accident notification and increasing the level of solvency of the customers. And the second one, is the management of risks protecting the profitability of our portfolio. So risk management, that is depending on the industry in each country, the buyer, the impairment of insolvencies and the protection of reinsurance. So all these factors will condition our level of tolerance to risk. And as we explained also in several occasions, the agreements -- reinsurance agreements with governments require, in general terms, the maintenance of exposure. Although it is true that we can reduce or cut off the credit in some specific areas. The result of all this is that risk exposure has reduced as compared to the closure of last year and 10.2%. As Carlos González explained, although the movement and reductions are very different, depending on the country, the sector or the buyers, specifically, Spain, without a doubt, is where the risk exposure has been produced the most, 18%. And at the moment, there is no reinsurance coverage by the government. There is no doubt that our pricing system is also -- feeds from the default probability of each buyer depending on the country and the industry where the risk is coming from. So that's why the premiums are quickly adjusted to the risk that we're taking on and the renewal premiums have increased in September, 4.5% in accumulated terms. And the increase, as we said a few minutes ago, it's very significant, and it has been significantly higher in the last few months. With these measures, we go from a technical results that is negative EUR 15 million in the second quarter to a positive result of EUR 15 million in the third quarter. So credit insurance arrived in June. We've seen a combined ratio above 94%, 94.3%. And in September, it has improved in accumulated terms, and it's now 1 point less, 93.4%. So the -- that ratio, as we can see, has a level of provision that is very cautious, and we feel comfortable enough with all the risks that we have taken on. And the response is based on what I said now, but the possibility of reaching levels that are similar to the crisis of 2008, 2009, well, in our opinion, this is not possible. This year will be, without a doubt, a bad year in results and credit insurance, but positive results at any rate in the turns that we have mentioned. And we will not go back to the 2008 ratios because we have a better selected portfolio, proper conditions; and secondly, because we have reacted much sooner in the previous crisis. In the month of March, we were already adopting crisis management measures and reducing the acceptance ratio, reducing risk exposure, which has been reduced over 10%, now as you've been seeing and establishing proper conditions at any rate. So additionally, we've had government plan supporting trade through reinsurance -- credit reinsurance. And this third quarter, as we explained, they represent a loss of around EUR 36 million because the claims ratio does not reach the necessary threshold. But without a doubt, this would protect us in case of an increase in the claims ratio.

There's been several questions related to the government agreements of credit insurance. Can you please explain again how they operate? You have said that there's EUR 36 million loss. So is any type of condition to give back the losses to government? Well, is Spain not going to sign the agreement? Is there a possibility of extending these agreements to 2021?