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

Good afternoon. We will begin with the presentation of results for the first half year of 2024. You know me, I'm Clara Gomez Bermudez, General Manager for Risk & Finance at GCO. And as on previous occasions, I'm here in this presentation with Carlos Gonzalez, Chief Financial Officer; and Nawal Rim, Director of Investor Relations, who, as you will know, will proceed to put together all of the questions that you posed during the presentation, and we will try to answer them at the end of the presentation. First of all, I would like to thank you for being here with us today, in this presentation that is being presented remotely. And we would also like to thank you for your interest in the evolution of our business and the performance of our shares. Brief regulatory aspect before we start the financial information that we include in this presentation of results is done with our management information under the regulation that we know as IFRS 4. And as we've said on other presentations, we also offer comparative information with the new IFRS 17 and 9 together with the main KPIs. And beginning with the summary of the half year, in the first 6 months of the year 2024, we've had behavior -- you can see on screen, a positive behavior of our 3 strategic pillars; growth, profitability and solvency. The first pillar, total turnover with this plus 1.6% that you can see on the screen. You can also see the breakdown in each of the 3 businesses and a positive growth above that of the Spanish insurance sector, which has suffered a decrease, and this 1.6% may seem moderate. But if we isolate the effect of savings single premiums that, as you will know, we issued mainly in the first half year of last year. We would be talking about a traditional business growth of 6.1%. Regarding the second section, the consolidated result, you can also see it on screen EUR 380 million in 6 months, a growth of 10.6% as compared to the previous year. A brief mention of each of the businesses that we will talk about in detail later. The Credit business again shows a very good result as in 2023. And I would stress the more than favorable performance of the Traditional business with growth in all lines of business, which speak of the excellent recovery of the Traditional business versus the inflation trends that we experienced mainly in 2023 and that are still having some after effects in 2024. You can see it here as main indicator, the combined ratio with 90% in all of the Traditional business and with a drop of 1.8 points as compared to the year before. I will not talk about permanent resources market value, not at length, but it's a positive growth as well as we will see later in detail, and this confirms our financial strength. And, therefore, I think we can now say that our results have not been negatively impacted; on the contrary, they are very satisfactory even despite the current financial situation, a situation that has been impacted by several geopolitical tensions. You are, of course, following up on these tensions, just like we do. And we do see more stability in terms of inflation. In Europe, inflation is around 2.6%, a bit higher in Spain, around 3.4%. Interest rates still high if we compare with the ones we were experiencing before the pandemic. And talking about the global economic growth, as per the data of the MFI of July -- of the IMF of July 2024, certain improvement versus expectations in all areas. This parity of growth in each of the geographical areas you can see it, and it reflects what we said in previous presentations with a better forecast for Spain than our European counterparts. Regarding markets, we always give you an overview of how they have evolved. At the top, you can see the good performance of the stock markets of the IBEX, which is 8.3%. At some point, this has exceeded [indiscernible] points, a bit worse these past few days. And regarding European and American indexes -- regarding these indexes and with a good performance in big techs. And at the bottom, we have fixed income that is very relevant for us, and some volatility of interest rates, impacted by geopolitical tensions and with some rate reduction trends. It is true that we continue with high interest rates, high as compared to the previous period, the last 10 years, where they were almost nadir or even negative interest rates. But the ECB has already started with the first drop of rates of 25 basis points, and the market is expecting another 2 reductions in the second half year. As in previous presentations, we also like to give you some context. We'd like to take a look at the rest of the insurance sector. The insurance sector as a whole has experienced a drop, this 2.2% in volume and very significant as we so very much impacted by the drop in single savings premiums by 18% -- by 17%, as we said in the first half year of 2023, there were significant issues of single premiums savings. Very good performance in terms of general insurance, is 7.8%, specifically with a good performance of Motor with 9.1% and Multi-risk with 8.4% that you can see on screen. And comparatively speaking, I would like to stress a better growth of our group in the entire Traditional business, lower impact in our case due to the savings single premiums. We grew positively in general terms because you know that in general terms, we prioritize the recurring business, which we consider to contribute more value for us and for our customers. And a similar growth in Non-life as a whole, 7.7% growth in GCO as compared to -- similarly, we see on screen similar in both lines. In Motor, we grew by 9%, against 9.1%. And in multi-risk, we are growing at 6.4%. But if we break it down because in multi-risk we are also incorporating the large industrial risks, where we have repositioned with the idea of having a profitable portfolio. So if we isolate these effects, if we look at the mass products, owners and -- homeowners and labor communities, we are growing in all. And now you are seeing the 2 summarized pillars that we normally show you with income and results. And in income, I'm not going to talk about so much because I've compared it already with the insurance sector, but I would like to stress the more than EUR 3.2 billion total turnover for 6 months of the year, growing by 1.6%. In Traditional business, especially I would like to stress the positive performance of recurring premium, 6.1% result. And we're optimistic about the behavior of single life premiums. We dropped by 16%. In the first quarter, we had a drop of 29%. And back then, we already said that us, we made issues of our saving's product -- our capital product, the situation would slowly revert, and this is how it's been. In growth, it is true that probably the less positive note of the evolution of our business is the drop you can see in credit Insurance with this minus 2.7%. We already said in the first quarter this trend, and the reasons stay the same. In 2023, this business was very much incentivated by inflation, which has a direct impact on the sales of our customers. And also as a consequence of lower sales activities, they are less insured sales of our customers. What we can say is that we are indeed seeing a tendency towards more commercial activity. So if the macro situation allows, this will have a positive impact in the income of the Credit business during the second half year. And finally, you can see on the screen as well the contribution of the Funeral business with this EUR 135 million. It compares more than positively with last year, but I would like to remind you that last year, we were not incorporating the first few months because the acquisition took place in February 2022 of the Memora Group. And now on to results. As big lines, I would like to stress that there is a very positive growth of the consolidated results of the group, EUR 380 million, we already mentioned it, a growth by 10.6% at this half year and undoubtedly excellent behavior of the Traditional business and very good behavior of the Credit business, which basically gives us again a more than satisfactory result as last year. And now going into digital in the different businesses. In the Traditional business, you see a growth of 13.5%, close to EUR 160 million in one half year and it's improved on the 2 main elements of the P&L., the technical result and the combined ratio of 90% and the financial result, which grows by 9.7% with EUR 69.5 million financial result. From the technical point of view, very good behavior of the 2 main lines of business, Motor and Multi-risk, but especially stressing the behavior of Multi-risk with a combined ratio, which is at around 87.5%. We will hear more about this from Carlos Gonzalez, our CFO. Almost 5 points less than the previous year and 1 point less than in the first quarter of this year. And as a summary, in the end, this is due to all of the measures that we have implemented. I would like to stress all of the cost reduction strategies that we have implemented. They are the key of this first half year. And also, as we already said in previous presentations, we have the incorporation of earned premiums into the books, which are being incorporated with more delay, and we are progressively seeing it in our results, all these due to the tariff measures implemented. And something else that is not so intrinsic of our actions, but an exogenous aspect, which is the lower claims frequency because there have been less weather events during this year as compared to 2023. It's likely that whatever happens in the second half year, this improvement in the weather-related claims ratio -- well, probably the events that have not been so intense during this first half year will probably happen in the second half year. But I think we can say that in the second half year, we will consolidate the results or the improvement in Motor that we are already seeing in this first half year. In Credit, as you can see on screen, we have results which are almost at the same level as the year before, almost EUR 110 million results, as you can see on the screen, and they were another year of very good results the Credit business has had. They have been very good results for almost 3 years despite the slowdown of commercial activities that we mentioned in the first slide with a claims ratio that is coming closer to pre-pandemic levels. Despite that, we still maintain a provisioning level, which is very conservative without any significant key claims. We hope this claims ratio trend will stay, will maintain and this slight improvement of sales activities as well, commercial activity as well. So I think we can expect satisfactory results in the second half year in Credit as well. I will not talk too long about the EUR 12 million of the Funeral business. I've already mentioned the Funeral business, and the CFO, Carlos Gonzalez, will offer more details or the non-ordinary results that are broken down that do not amount to EUR 3 million positive. So they did not have a relevant impact in the consolidated results of the group. A brief comment about financial results. They are not here. We do not see the breakdown. They have a very good performance, EUR 124 million of financial results, 25% above the previous year, which is, of course, due to the good evolution of interest rates that we mentioned before. And that also allows us to offer life savings products with interesting interest rates. So the EUR 380 million of results with a growth of more than 10%. And although, you very well know about the diversification of our business, and we see it here at year-end 2023, so it's nothing new, you've already seen these figures on previous occasions. But I just wanted to remind you that we believe that this diversification is one of the keys of the evolution of our business, the weight of Motor, under 12%; Multi-risk, 14%; and Life, 20%, a diversification of businesses, but also a geographical diversification, and we continue to go for this. You can also see the incorporation of the Funeral business with a 3.9% at year-end, a bit higher in the figures we showed at the beginning of the presentation bearing in mind the turnover in the first half year, which is a bit higher. And for the next 2 slides, I don't want to talk too much about this because these are similar to those of year-end 2023, regarding our position and the ranking. I will not talk for too long about sustainability either. You can see it on screen at the moment. And you know that all of the sustainability information is available in the sustainability report and in the nonfinancial information report of 2023, which has been verified by our auditors, and that are available on our website. I would like to stress the group's commitment with the different principles and international associations in the area of sustainability. We are undersigners -- underwriters of the principles we are committed to the Paris 2050, the carbonization agenda, and also our commitment with the new regulations that are being implemented in all areas. I would like to stress that we are committed with the implementation of the new nonfinancial information regulation, CSRD, which we will determine nonfinancial information for 2025. We continue to work on several initiatives. You can see here a summary of them. And you have them in the sustainability plan, which will guide us in the coming years, 2024, 2026, and this is available on the website of the group. As on previous occasions, we would like to offer you the evolution of the share price in the last few periods, you know this even better than ourselves. We've had an excellent performance in this half-year, clearly better than the previous year with this 23.4% and better than reference indexes. But as we've said on previous occasions, we consider that the share price performance have to be -- has to be measured in the long run, not only in the short run, despite this good performance in the past half year. And in these joint periods that we're showing on screen, more than 20 years, the -- I think we can say that the performance has always been very positive with this 11.5% that we can see on screen and better than reference indexes. As usual, also a few comments about our dividend payout policy. As a policy, it is very stable over time, and it shows an increasing dividend throughout the different periods, which confirms our commitment to the remuneration of our shareholders. In this year, an increase of 7.5% in the July dividend as compared to the same period last year, EUR 28.84 million compared to the EUR 23.1 million that you can see on screen. And as compared to the dividends payout chart through 2023, these increased by 8.67% and EUR 134 million, with a dividend per share of almost 1.12, which we have doubled in the past 10 years. which, of course, confirms the commitment of the group to our shareholders, a commitment that we've been able to maintain even in crisis years -- in financial crisis years. And without further ado, I will pass the floor over to our CFO, Carlos Gonzalez, who you know from previous presentations, who will get into greater detail, both on the evolution of this half year and the main indicators, and he will give us a breakdown, as you can see, any agenda of the different businesses.

Hello, good afternoon. As Clara Gomez very well said, I will now go into greater detail on the financial information, both of the Traditional business and Credit business and Funeral business as well. And I would like to stress that on some occasions, I would like to stress that the main ideas that have already been mentioned by Ms. Clara Gomez. We will start with the Traditional business. Customer retention in a market environment of higher turnover has allowed us to maintain a significant growth in income. Also, recurring premiums, which are the ones that are more stable and stay in the company with 6.1% up to EUR 1.6 billion. We should stress there the increase of 8.9% in Motor and an 8.3% in miscellaneous in Multi-risk. And there's an increase in the technical result of 22.3%, where on one side, in the General Insurance business, the combined ratio is at 90%, with especially relevant improvement in Multi-risk, we will talk about later. And on the other side, we continue to see the favorable evolution of the technical financial result for Life, with a growth of 10.4%. And by lines, Multi-risk, EUR 472 million in premiums, strong growth, 6.4% growth. And what is important to stress here is the increase in the premiums of mass lines. With a growth above 9%, we are at figures that are now closer to the growth of the sector in this line of business. This is as a consequence of good customer retention and a good evolution of the average premium that has had an impact on the -- that has transferred the costs of claims. We are in a crossroads of different FX increase of claims costs due to inflation, which is starting to ease up and improved productivity. We see it in this drop of 1.2% in the cost ratio. And in fact, they have not been very relevant, weather events, as compared to 2023. So in the end, thanks to cost contention, increase in turnover and better weather conditions. There has been an increase in results with 68%, almost a EUR 58 million result of profit for this line. Motor maintains relevant decreases in turnover and more than EUR 400 million, 8.9%, similar to the average growth of the sector in a competitive environment, which maintains high prices. And in our case, it comes together with a good customer retention. The combined ratio is at 95.2%, slightly lower than that in 2023, stressing the improvement in efficiency ratios with a drop of 2.6 points as compared to the previous year. But there are still increases in claims ratios due to inflation effects that we are dragging along that have an impact on the technical cost. The result of this line goes back to being higher than previous years with an increase of 7.1% that you can see on screen, as compared to 2023 and a profit of EUR 16.7 million. Regarding Multi-risk -- or Other, an increase of 8.3%. In terms of results, we maintained the excellent levels of combined ratio, which over time have stayed at around 85% based on specifically 85.9%, which generates stable and high levels of technical results, which continue to increase to EUR 28.2 million. Now on to Life, continued growth in periodic premiums of around 2%, 3%, whereas single premiums in comparison to the strong activity of the first half year of last year, have now dropped by 16%. Clara Gomez already mentioned that the behavior in this second quarter has been a bit better than in the first quarter of this year. And about results, the technical financial result improved, so a 10.4%, going up to almost EUR 97 million, both because of an improvement in the technical result in and of itself as well as an improvement in the financial margin due to the current capacity to reinvest at higher rates. As a summary for the Traditional business, the increase in turnover, but especially earned premiums, which are growing by 7%, improved productivity with a reduction of more than 8% of costs and an improvement of 1.3 points in combined ratio. And improved financial result, related to the new environment of interest rates, allows us to improve the combined ratio and the profitability of the business as a whole. So in the end, the ordinary result is at EUR 156.1 million with an increase of 15.5%. The total result is at EUR 163.4 million and an increase of 21%, with a contribution of EUR 7.3 million of non-ordinary results coming mainly from realized investments. Now on to the Credit business, acquired earned premiums are EUR 1.14 billion almost with a drop of 2.6% because we can see some stagnation of the economy. And together with the inflation effects, reduces the good evolution of the performance of our customers. On the other hand, there is still downward pressure in renewal prices in a favorable environment of claims. This price pressure is easing up as compared to last year. As to the Technical result, it is at EUR 312 million with some reduction as compared to last year as a consequence of the normalization process of the claims ratio, where the inflow of claims is still below pre-pandemic levels. Regarding geographical distribution, the reduction of income mentioned before is quite homogeneous. We don't need to stress the performance of any specific areas. And as to profitability, the combined -- gross combined ratio continues on a good trend, 74.7% ratio, and the claims ratio is still below pre-COVID era, as you can see in the first bar of the combined ratio on the chart. And this is basically a consequence of the fact that despite the number of claims going up, they have not yet reached, they're close, but they have not yet reached pre-pandemic levels. We would like to stress this. We continue with our conservative provisioning criteria that we already saw at the end of 2021 and 2022. And in terms of risk exposure, an increase of 3.6%. We are maintaining our strict selection criteria, and we are maintaining the excellent quality of the portfolio. As a summary, I will let you go through the drivers of the half year. On the one side, there is a slowdown of income because of the reduction of invoicing of our policyholders, but this is moderating at the moment. The technical result before reinsurance normalizes with a moderate increase of the inflow of claims and maintaining our cautious provisioning policy. As to reinsurance, better result as a consequence of the 2-point increase our retention of business. And on the other hand, the financial result improved substantially by almost EUR 23 million as a consequence, among others, of reinvestments in the short term, fixed income or liquidity at the new rates offered by the market. So with all of that, finally, the ordinary result is at EUR 209.2 million, along the lines of the results obtained in 2023. Total result is less impacted by nonrecurrent losses, as compared to last year. In previous years, this was due to the old software being replaced. Finally, the Funeral business. We informed you about the -- we informed you about the evolution of this business on a stand-alone because after the incorporation of Memora, we expect for it to continue providing a stable increase of our turnover and with stable margins. The technical result is EUR 23.7 million, a margin over EBITDA of almost 26%, similar to that of the previous year. And a bit higher than the 25% of the historic average despite the inflation effect on the cost structure of the Funeral business. Finally, I would just like to remind you, as we already mentioned, Memora started providing results starting February 2023. So in 2024, we are incorporating one more month with all the business and its results. And that would be all from me. Clara?

Perfect. Thank you, Carlos. I already mentioned at the beginning of this presentation that we would also give you information in this half year about the evolution of the group's results, not only under the current accounting standards, but also international standards, the regulation that we know as IFRS 17 and 9. A brief reminder, conceptual reminder of this new regulation, what it aims at is homogenizing accounting treatment of insurance and investments in the different countries and it impacts mainly Life Savings and Credit Insurance. The aim or the principles underlying these regulation or the standards are similar to the ones used in the past and that we've been historically using in the framework of embedded value, and they're similar to solvency. It is true that the operational impact of this new standard has meant a significant effort, a lot of involvement from all of the teams, financial, technological, actuarial. But for now, what we can say is that it barely has an impact on the management of our business. It does not change our way of underwriting our risk appetite. It does not change the way we manage ourselves, and it does not change our dividend policy. It has no tax impact. And moving on to summarize P&L under the new international standard, you can see on screen a comparison of international accounting, the new one and the current one. You can see IFRS 17 versus IFRS 4. And in the end, the summary is that the ordinary result is a bit better in the new international accounting with the EUR 391 million that you can see as compared to the EUR 377 million, a slight increase of EUR 14 million result. And in the end, what it gives us is the peace of mind that the fundamentals of the business performed satisfactorily regardless of the accounting standard being applied. Better technical result, as you can see on screen, to be placed in financial. The technical result in the end is due to a better result of the Life Savings business because as we already mentioned on previous occasions, the new accounting standard in the end is advancing certain results of the Life business in time. We have them ahead in time, but the final result will be the same. And in the end, we also -- at the end, we also incorporate the follow-up of the main KPI. We have the combined ratio. As you can see, with very small differences between both businesses. In the Traditional business, there is difference you can see at 0.5 points. And in the Credit Insurance business, this is 0.9 points positive change in the 2 standards. So in the end, what we're saying here is that these are not substantial changes. And in the end, they confirm the positive evolution of the business and very favorable under all accounting standards. I would like to remind you that the provisioning level in both environments is not identical. The provisioning level in the new international accounting is more based on best estimates. So it requires lower prudency margins, so at the time the new international standard comes into force -- came into force, part of the provisions that we had consolidated in the net equity under the new international accounting of the company. You can also see on screen the vision of own resources and market value incorporating all of the capital gains of the properties. Not included in the balance sheet is this EUR 571 million is -- grows by 7.8% as compared to year-end and in the end grows for 2 main reasons. The good performance of the consolidated results of the group, the EUR 380 million that I already mentioned, plus the variation of valuation adjustments with the EUR 67.7 million -- EUR 77.7 million due to the capital gains caused by the good evolution of the markets. As you know, Permanent resources at market value that we show on the right-hand side can only be considered extraordinary in the evolution. And in the end, they've been the reason for the expansion of the group via corporate acquisitions. In solvency, you can see it on screen. These are figures at the end of 2023, 232% solvency ratio. So I will not give any more explanations because we already gave them at year-end 2023, and you have the entire breakdown in the financial situation and solvency report published on our website. And it also confirms the high quality of our own funds. This is also confirmed by our rating agencies. You can see here, A.M. Best and Moody's. Moody's for operating entities of the Credit Insurance business, they give us this A1. In the case of Moody's, as we already said for the operating entities of the Credit business, in what they're acknowledging is the most important thing, the model of the group, which, in the end, translates into good results, the adequate capitalization of the group and the high return on capital with a very satisfactory return equity, ROE. Finally, you can see on the screen our investments. Managed funds are above EUR 16 billion, EUR 16.189 billion, as you can see on the screen, with an increase by 5.4% as compared to year-end 2023. You can also see the distribution of our investments. I will not get into each of them because you know them and it continues and stable and conservative management. We continue to have fixed income as our main asset with 53% of our portfolio and a good addition and increase as well in equity, not so much because we've made more investments, but because of the good performance of the market. And a slight increase, as you can see, in real estate, this 7.3%, which is not due to real estate investments being made, but because you know this as well, we have recently acquired a property in Madrid, which will house the different teams of the group in Madrid in Mendez Alvaro. It is a reference building, a benchmark modern for internal, adapted to the new sustainability trends. And as you know, we have a strong treasury position that you can see on screen as well. And with this, we come to the end of the presentation of results of this first half year 2024. And as on previous occasions, we will now try and answer all of the questions that you've sent to us during the presentation. We would like to thank you again for your interest in our presentation. We would also like to thank you for the questions if posed. I know that Nawal Rim has tried to group them together as much as possible. We will try to answer all of them knowing that if any of them remain unanswered, you can after the presentation talk to Investor Relations, and we will answer these questions via the usual channels.

Thank you very much, Clara Gomez, Carlos Gonzalez, for the detailed presentation. We will start as Clara Gomez is set. We've grouped the questions by topic. We will start with Motor. We've received several questions about Motor. And the turnover is at high levels. Can these be maintained for the next few months? Are you maintaining retention levels? And they also add that the combined ratio is 95.2%, which is still better than the sector. Do you think that this is sustainable?

Well, regarding turnover income, we still see a pressure in the cost of claims. I had already mentioned this. And in the end, these should have an impact on our targets. Selective pricing takes us to this increases in turnover, mentioned in the question. We place special care in pricing. We always do to maintain good customer retention levels that we have historically maintained in the group. And the result has proven positive with the net increase of policyholders. For us, for the group, it is very important to promote long-term relationships with our customers. We've had historically high levels of retention, which support our strategy in this matter. Regarding the second part of the question, combined ratio profitability, I think the combined ratio of the sector in 2023 at around 102%, then went down to 100%, some contention at the beginning of 2024. In our case, we've been working during 2024 with these ratios at around 95%. But as you just said, we continue to manage inflation. And we hope that our actions in this regard, both in pricing and risk selection, will continue to bear fruit throughout the year and also especially throughout next year. And I'm saying this because of the time lapse that there will probably be between the premium increases and when they have an impact in the P&L with earned premiums. At the moment, they are growing at around 5.6%.

Regarding Multi-risk, we've also received several questions, which we will summarize. You stressed that the ratio has improved to 87.5%, a ratio that continues to be low. What is happening that makes you have these very low levels? And they also asked, do you expect a similar ratio for 2024?

Clara, maybe I shall answer this one?

Yes. Thank you, Carlos.

Yes, our ratio is favorable, below 90%, clearly favorable. You said, yes, 87.5%. We've gone even lower 2 points as compared to the same quarter last year. I think in the end this is a consequence of several factors. Some of them are the context, but some others are more related to our management. So I think it is worthwhile starting with these factors of our own management. On the one side, the increase in earned premiums that were around -- it was around 6.7% due to the tariff increases during 2023. These increases -- these tariff increases are already showing an impact on the P&L. And at any rate, maybe we could think of modulating them during the second half year. On the other hand, we've been making a better selection of risks in large industrial products leading to lower claims ratio now and in the future. And there is an additional improvement of cost efficiency due to the restructuring and merger of the different insurance entities. The important thing is that all of these are permanent factors. And additionally, there are other elements that I already mentioned that are rather in the context, for example, weather events, which was favorable, as compared to the first half year of last year. As of now, we have not yet had any very relevant weather events. But as Clara Gomez said at the beginning, it may be that they will happen in the second half year. At any rate, the ratio could go up as a consequence of this potential situation, but we should take into account that we will continue to receive many earned premiums due to the repricing of products coming from the previous year.

We have several similar questions about the Credit Insurance business. Credit continues with drops that are a bit lower than the quarter. But what is the forecast for the coming months? Will there be a pressure on the top line? There are also questions about the claims ratio and the prospects for year-end.