Haci Ömer Sabanci Holding A.S. (SAHOL) Earnings Call Transcript & Summary

Hello, everybody. Thank you for joining Sabanci Holding Financial Services Day. Today, we have our Group CFO, Orhun Köstem; and Financial Services Day SBU Head -- SBU President, Haluk Dinçer with us. I also would like to take a few seconds of your time to go over our disclaimer. I now would like to leave the floor to our Group CFO, Orhun Köstem, for opening remarks.

Thank you, Kerem. Good morning, good afternoon, everyone. Welcome to this discussion about the Financial Services business unit in Sabanci Group today. Based on my recollection, it has almost been about a year since we last have this conversation about the Financial Services business unit. So we're more than happy to be able to tell you about what has happened in the meantime. Now if you look at the Financial Services business unit, it makes about 9% of the listed net asset value of Sabanci Holding, which stands at about $4.4 billion. That should be as of closing on Friday this month. If you look at the EBITDA -- or the share of the EBITDA of the Financial Services business unit in the combined EBITDA of Sabanci Group, it's about 3%. And the combined EBITDA nonbank -- of the nonbank businesses within Sabanci Group is TRY 22.5 billion. This is from the 9-month results for 2022 that we have recently disclosed. Now if you look at the numbers, of course, comparably, they may not be as large as some other business units. Having said that, the Financial Services business unit have been a robust return-generating business for the Sabanci Group. And if you take a look at our strategy house, our strategic initiatives, it plays a complementary and critical role in terms of contributing to our vision statement and our transformation of our portfolio to lead the investments in the health care ecosystem and, of course, do that through certain strategic partnerships and other drivers together, obviously, with our joint venture partners, Ageas. Now today, we are hosting Haluk Dinçer, the President for the Financial Services business unit for Sabanci. And we're happy that he's going to share his thoughts and views with us about the strategic road map of the business unit. Haluk Bey, welcome.

Thanks, Orhun Bey. Thank you. Okay. So this is our first slide. You may remember this from last year. We have a successful and strengthened partnership with Ageas since mid-last year, and we are fully aligned in our strategic approach. As you may recall, we have 2 companies, Agesa and Aksigorta, both 40% joint venture for Agesa, and 36%, in Aksigorta, 2 joint ventures. And as we promised, we also have the third insurance company as of today, the Sabanci Ageas Health Insurance company that is fully owned subsidiary of Aksigorta [ by now ]. According to the present legislation, we cannot merge the 2 companies, but we can make them work as 1 company, especially in leveraging all our distribution channels for unified customer-centric approach. And we have joint working models to transfer experience between the companies and create efficiency in departments such as human resources, internal control, risk compliance, internal audit and so on. So this is our portfolio -- our strong portfolio. Agesa is active in life and pension. We are #1 -- we've been #1 since 2015 in private pension assets under management. And since the beginning of this year, we are also #1 in the first 3 quarters of this year in life and personal accident gross written premium figures with 12% market share. We have over 3 million customers, and we have multiline distribution channels. We have a direct sales force. We have bancassurance. We have our agents, and plus, we have our corporate channel. Now Aksigorta is active -- is in nonlife. We are -- this is a crowded market. There are 45 players. We are #5 player. Last year, we were 4. So intentionally, we lowered our market share in motor third-party liability branch, and we lowered our market share overall to 7%. We, again, have multiline product offerings here, motor, nonmotor and health branches. And we have 3,600 agencies, and we have exclusive partnership with Akbank, with Aksigorta is the same as Agesa. In health business, as I said earlier, we have established Sabanci Ageas Health Insurance company in August of this year, 4 months ago. And this will be acting as a health competence center serving both of our group companies, all our customers. And we would like to expand our insurance business towards the holistic health care ecosystem. Now these are the trends that we observe and that shape our business. The 4 main trends that we observe are digitalization and technology and value chain being reshaped. And aging and healthy living is the second one. Third one is changing needs in sustainability with new business dynamics and new emerging needs and, of course, new products and services being offered. And macroeconomic dynamics is the last one, macro uncertainties we are living through and emerging needs for effective capital and risk management. All these 4 trends are quite relevant for our business. Now SBU key moves to win is to strengthen and grow the core as a multiline insurer, become a health care player and, lastly, pursue new opportunities in digital platforms and ecosystems at both local and international level. So this is our strategy house for the next 5 years. Our aim is to become the leading new-generation financial services provider, and we divide our strategy house into 3. In protect and grow the core, we act as a multiline insurer with Aksigorta and Agesa. Together, we develop our already strong distribution, we further develop. We achieve commercial excellence by diversifying our product portfolio and improving customer acquisition, cross-sell and retention. We keep our efficiency and improve our services, and we grow in health market in all companies. Now regarding growing into adjacencies, we've already mentioned that last year, we have a greenfield health insurance company investment established now. It's not operating yet, and we would like this to become a health care player in the coming years. Regarding transformation of our portfolio, we would like to pursue new opportunities with strategic partnerships in multiple ecosystems. Regarding the distribution network, we would like to grow our core by utilizing our strong distribution network in agencies. We have 4,000 agencies in total, and we've recorded 50% increase in the last 5 years in this, and we have nearly 20% penetration into total number of nonlife agencies in Turkey. Direct sales forces are unique feature. We have 600 financial advisers serving mainly our life and pension market, and we would like this figure to go up to 950 in the next 2, 3 years. And we've recorded 60% growth in the last 3 years. Regarding brokers, brokers are active in nonlife market. We have 70% penetration in this network, and we are working with 115 brokers in total. Regarding bancassurance, both of our companies, Aksigorta and Agesa, they are working with Akbank on an exclusive basis. Akbank has 711 branches and 3,300 relationship managers that are doing business with our insurance companies. And then we -- in order to protect and grow our core business, we are entering new markets with new products, and a good example of it is our new life savings product that we launched this year in September, and the initial results are quite strong. Turkey has been a strong pension market because it's well incentivized by the government. So the market for life savings is very much underpenetrated, and we think it poses a great potential to grow. And this product is much more flexible than a classical pension product, and that's why we see the potential. Again, in order to grow the core, we have the sector's leading capabilities. We've identified 4 here. The first one is customer centricity. We closely monitor our customers at all their touch points. We serve 6 million customers. We innovate products according to their needs. We measure our NPS scores and monitor constantly. Regarding data and analytics, all our decisions are based on data and analytics, especially in customer segmentation, in pricing algorithms and so on. We invest in -- heavily invest in digital enablement in all our companies. And we have best-in-class mobile apps, both at Agesa and Aksigorta. And in Agesa, we also have FonPro that is the advisory -- automated advisory services for fund management of our customers. And then we invest in smart processes as well, such as digital twin, image recognition, digital assistant and robotic process automation, all these to make our company more efficient. Investing in people is our strategic top priority. We have agile organizations, agile teams for resilience and flexibility. Future of work has been at the top of our agenda for the past 3 years now. We're always looking for new ways of working. We invest in new skills. We make strategic workforce planning, and we focus on talent, and we have a strong employee brand to attract and retain talent. Now we will want to grow into adjacencies and our health care business. There are several trends shaping our health care industry here in Turkey mainly. The first is rising needs due to aging and chronicle diseases. Although the median age in Turkey is about 33, the 25% of population have chronicle diseases, unfortunately, and 80% of all our health care spendings are being financed by the government, which we don't see as sustainable. The next major trend is preventive care that is becoming more and more important. This is about health checkups. This is about counseling our patients regarding healthy living, well-being and also vaccines, of course. And personalizing and virtual care is, of course, enabled by technology. We mean by telehealth and all these -- and telehealth and IoT uses of health care. And lastly, new digital players and ecosystem business models. Just like in many other sectors, we have some new digital players in this area as well. Now our key objective in health care is to develop a new health care business focused on health insurance and in the broader health ecosystem to complement our health insurers. And our game plan is as follows: reseller, we are presently reselling model. We would like to move it -- our new company. We would like to become a health specialized health insurer with differentiated products and services. And as the next step, we would like to become a health care ecosystem player, then open an accessible 360-degree health and well-being system. Our strategic priorities are to design a customer-centric, future-proof business model, insurance and this complementing ecosystem; build and run technology-based operating model; achieve distribution partnerships to catch growth wave, mainly initially with our group companies, Aksigorta and Agesa; and be frontrunner in sustainability. While we search for opportunities in ecosystem initiatives to create value in the long run, we have listed some of those items for 360 degrees approach on health and well-being. We have identified below listed products and services: telehealth, symptom checker, disease management, wearables and so on. And we've also identified potential market entry strategies. We may do acquisitions. These are not large acquisitions, by the way. These are light acquisitions, and we will not be acquiring hospitals. These are asset-light products and services. We may build strategic partnerships. We may leverage Sabanci Corporate Venture Capital investments, and there's already one company in there that may fit our strategy. We may also leverage the incubation center, the new incubation center of Sabanci. Sabanci Almost Ready to Fly, ARF. And lastly, we may leverage our partner, Ageas' global know-how. IT is, of course, very critical for our business. Our efforts continue to build our IT infrastructure as private cloud in Sabanci DX, our technology company, digital company and Bulutistan our Sabanci CVC investment in cloud. And then we invest in strategic partnerships and ecosystem initiatives to transform our business. The very first one is digital bancassurance. This is with Akbank obviously. We have simple and segmented products, integrated bundles with banking products and personalized and analytics-driven targeted offers. Regarding Sabanci synergies, we have plans for improving our collaboration with Teknosa, Enerjisa and Carrefoursa. And lastly, ecosystem and partnerships, this is beyond Sabanci, embedded insurance ideas with different ecosystems such as mobility, again, health care, housing and so on. This is our last slide. This is the wrap-up slide for Financial Services SBU's future vision. Our vision is smart and sustainable growth in financial services. Where we are is on the left-hand side, competitive market position, strong omnichannel distribution network and solid operational and financial performance. Regarding the future, we have a long list of items. First of all, we would like to maintain our leading position in pension, life savings and life protection. For our nonlife business, we would like to have profitable growth with balanced portfolio and strengthened balance sheet. We aim best-in-class customer and stakeholder experience. We invest in new digital engines via platforms and strategic partnerships that I just described. Operational and technical excellence with technology and analytics, future of work, end of -- end-to-end IT and cultural transformation at the top of our agenda, sustainability at the heart of our business to build a better future. This is, again, Sabanci's vision: health insurance synergies and providing new solutions for aging population, long-term care. This is something that we would like to say more next time we meet. This is my presentation. Thank you for your patience.

Now we would like to move to Q&A. [Operator Instructions] Thank you. [Break]

All right. Thank you. We have a couple of questions. Let me read them through. Why did Aksigorta need to undertake a rights issue when its other listed competitors didn't do so? And the follow-up question, Haluk Bey, and what measures have been taken to ensure sustainable profitability and capital management?

Okay. Well, we thank [ Mehmet Bey ] for these questions. Why did Aksigorta need to undertake a rights issue? Because our capital adequacy ratio was well below the minimum 100%. And when it's other listed competitors didn't do so, I guess, their solvency, their adequacy ratio was much higher. But the way we run our business, we were targeting -- we've always targeted to have 115%. That's our policy, 115% capital adequacy ratio, whereas some of our competitors had much higher adequacy ratio targets, policies. Now of course, in a shock like that, like what happened with the jump in inflation, of course, we were -- we dropped down much lower than the minimum 100%. So we were running our company in an efficient way with -- of course, with a buffer of 15% but with an efficient way. And when others were not as much capital-efficient in a way, of course, you may -- they may argue that they were more prudent, but we've done quite well in the past 10 years, and this has happened for the very first time, and it wasn't a big deal. This is at the end. We've given so much. We were -- and our policy was always to distribute as much dividend as we can as long as we maintain this 115%. And this rights issue, the capital increase that was needed was well covered by our earlier dividends. Now what measures have been taken to ensure sustainable profitability and capital management? But the main problem was arising -- of course, inflation, this jump in inflation from 15%, 20% to 85% is a major issue for a business that works with commitments for 12 months. But the main problem was arising from motor third-party liability products that are mandatory products, and they are -- and the regulator has a pricing -- price cap on that. So it's not easy to manage the risks, and you have to underwrite it, and the prices are driven by the regulator. So what we did, we lowered our market share in MTPL since last year to -- for a more balanced portfolio, and we think we've reached quite a good level in the second half. It's around 4%, 5%. In the first half, it was about 6%, 7%. But last year, it was 9%. So overall, we will end up probably -- end up by 5% or so. And I think this is where we can have a sustainable profitability and capital management for the coming years. That's why we've become #5 player. As I explained earlier, we were #4. We'll become #5, but that's not a big issue.

Thank you. We have 2 follow-up questions from [ Mehmet Bey ]. In terms of capital management, how do you address low-tier deposits and bond yields? And another question, have you increased stock [indiscernible] allocation?

Kerem Bey, I'm seeing some other questions. Why do I see some other questions?

After that, I'll be reading that as well.

It might be a specific question. I would to ask about the effects of minimum wage.

Yes. Let me read that as well. It might be specific questions, but I would like to ask about the effects of minimum wage increase on insurance profitability in 2023?

Well, the minimum wage increase, as long as it's in line with the inflation, is not a big issue because it's already foreseen. And when you look at the last 20 years average, I've done it personally. I've done all the average, and standard deviation figures, I looked at. It's around 6%. So the deviation in average is only 6% than inflation. But of course, this year -- last year, there was a minimum wage increase of 50% at the end of last year, 2021 and mid this year, another 30%. And now, of course, there may be a higher figure again than the inflation. So it affects our profitability, not just -- not Sabanci companies but overall or nonlife, especially those nonlife companies. And this is -- our reserves are based on normal increases on -- I mean, inflation-based minimum wage increases for the coming years when we put our reserves in our balance sheet, and when the minimum wage increase is much higher, of course, that requires new reserves, additional reserves. That's all, Kerem Bey.

Thank you. [Operator Instructions] I see one more question here in terms of capital management, the forward question?

Kerem Bey, I see one more question here, in terms of capital management, the follow-up question.

Yes.

Do you want to answer that? Have you read that? I may have missed it.

I read that, but let me read it again. In terms of capital management, how do you address low-tier deposits and bond yields? And the follow-up question, heavy increased stock allocation.

Okay. Well, now insurance companies, profits are based on 2 different pools. One is the underwriting margin, and the other one is financial income. Now they balance out. And when you add them up, of course, after subtracting general expenses, you reach the profit. Now when the TL deposit levels and bond yields are low, of course, you have to make up for the losses in underwriting margin. And that's why the prices today in both motor own damage, CASCO, or motor third-party liability, they are much higher than last year. In the first 10 months of this year, they're about twice as high. When you look at the -- when you compare the figures between September of this year with last year's September figures, that's even higher -- 3, 4x higher. So we make up for the losses in financial income at the underwriting margin by increasing the prices, not just us but the whole sector. Have we increased the stock allocation? Yes, we did, but we -- up to a certain extent. It's part of our policy. It's a Board decision. Yes, we've increased our stock allocation but not much.

Thank you. [Operator Instructions] So we have another question. When do you expect Aksigorta to achieve past 5-year average net earnings?

Well, in an environment like this, it's very difficult to predict what will happen in the next 5 years. Our past 5 years have been quite successful as Orhun Bey mentioned in the introduction. Yes, we were always twice as high as our cost of equity and return on equity in -- when we had like 15%, 20% inflation, our -- if I remember correctly, our return on equity was in 40s. So yes, we've done quite well. We were always in 1, 2, 3 -- top 1, 2, 3 companies of Sabanci portfolio. And we've been -- yes, but for the next 5 years, of course, we don't know. We don't know about the macroeconomic situation. But the market is adjusting. I'm telling you, like the prices in nonlife market have been adjusting. We've been rising quite rapidly in order to make up for the losses in the financial income side, and this is true for all our competitors as well, for this is true for the market. And I'm hoping to achieve last 5 years of net earnings profitability because it's the same company at the end. Nothing has changed. Of course, the market has changed a bit. It's not just for us, for everybody and for all sectors, in fact. There is a bit of uncertainty. It's very difficult to make a prediction now for the next 5 years in terms of exact net earnings. But I would say the company is -- Aksigorta has always been very competitive and will continue to be so.

Thank you, Haluk Bey. We have another question. Considering the rights issue, is this the correct expectation that Aksigorta will not distribute dividends from 2022 earnings?

Well, this will be a Board -- I cannot talk on behalf of our Board. This should -- this will be a Board decision. This is something that we'll decide when our financials are out. Of course, it depends on the regulators' new capital adequacy rules. We hear -- we keep that -- we hear that there are some works on that of the new methodology. So it all depends on the regulators' moves and our -- the outcome of our financials in the last quarter and then the Board decision in March.

Thank you, Haluk Bey. [Operator Instructions] We have another question from [ Mehmet Bey ]. How is the growth and profit out to [ Agesa ] and the private pension sector for 2023?

Well, Agesa has been doing quite well in terms of both top line growth and profit for the past few years. This year's official figures in the first 3 quarters are more than 100% -- 105%, if I remember correctly, a profit growth in the first 9 months of this year. And we expect this to continue. It's a very competitive company, again. And the private pension sector for 2023, well, there are 2 drivers of this. The first -- the private pension sector is, of course, growing with interest rates in the market and the performance of the stock exchange and the exchange rates and so on. It's so complicated. The fund grows in line with all these factors. So normally, I would expect private pension sector to continue on growing. We have reached 7 -- we have over 7 billion (sic) [ 7 million ] contributors there, customers there. And there are another 7 million coming from the auto enrollment. So 14 million total, although some of those people are the same. But we are very optimistic about the outlook of the private pension sector and for the coming years.

Thank you. We have another question. What would be the minimum solvency ratio you would like to maintain going ahead?

Well, for -- we have 2 companies that we have -- now we have the third one, but it's not operational. So there is no solvency ratio at the moment. Our -- initially, we had targeted, I guess, 150% solvency ratio, and it's still the case. But in Aksigorta, our target was 115%, and we've raised that -- our target to 125%. But last year, the regulator declared that they would not allow any dividend distribution on this. We have 135% solvency ratio, which was valid for last year. We don't know if there will be a minimum this year. So today, it's 125% Aksigorta -- at Aksigorta. And 150% at Agesa.

Thank you, Haluk Bey. [Operator Instructions] It seems like we don't have any further questions. I would like to thank you for participating in our Financial Services Day. I would like to leave the floor to Orhun Bey and Haluk Bey for closing remarks.

Well, thank you all very much for attending and for your questions. I hope it was satisfactory. See you next time.

Thank you. Bye for now. Stay healthy.