UNIQA Insurance Group AG (CS) Earnings Call Transcript & Summary

Good afternoon, and welcome to the UNIQA Group acquisition of AXA's businesses in CEE, hosted by Andreas Brandstetter, CEO, of UNIQA; and Kurt Svoboda, CFO, CRO; and Wolfgang Kindl, CEO of UNIQA International. My name is Kevin, I'll be your coordinator for today's conference. [Operator Instructions] I'm now handing over to Andreas Brandstetter, CEO, to begin today's conference. Please go ahead.

Good afternoon, gentlemen, ladies. Thank you very much for joining us on our today's telco. I'm very happy to announce our recent transaction from last week. Some of you have been already accompanying us during the recent years, and know that when we introduced our long-term strategy, UNIQA 2.0 in the year 2011 we always had in mind to increase and to improve our market position in CEE, which for long period of time is the second home market, close to our home market, Austria. The current transaction means that we have a substantial revenue diversification, reducing our dependency on Austria, knowing that it was before this transaction, 30 on an international base versus 70. Austria, you see on Page 3 of our presentation, it will be moving for 40-60 distribution after the closing of the deal. The reason why we decided to deliver a bid for this transaction was quite simple. Poland, Slovakia and Czech Republic are one of the most promising countries in CEE. The UNIQA is present either for 30 or 20 years. So we know the local markets. We're sure that we can achieve a higher profitability in our already existing businesses and the AXA companies represent a perfect fit for our operations. We have a significant increase of our customer base by plus 5 million, adding to 5 more to the existing 10 million. And this, of course, provides us opportunity for additional growth and for cross-selling of our existing products, both in the retail as well as in the corporate business. Before my colleague Wolfgang will take over and lead you through the most important facts of the new companies, let me make sure that I think we can provide a quite effective use of the capital. We will see an earning per share on an accretive level, and we will see an improvement of the return on equity from the year 2020 onwards. So we are very sure that this investment of around EUR 1 billion, which, as you know, will be done in cash. Kurt, our CFO, will talk to you in a few minutes. It's a significant but most of all, really attractive investment, especially for our shareholders. And I would like to hand over the call to Wolfgang, leading us to Page #4 about a short overview about 2 new companies.

Thanks, Andreas. From my side, from the international point of view, I would like to state that this acquisition was a perfect consecutive step with respect to the consolidation of our CEE business, which took place over the recent years. As you know, we improved significantly our profitability throughout the region by improving, for instance, the combined ratio by more than 12 percentage points. So after having consolidated our regional footprint and making it more and more profitable, this platform acquisition was definitely the opportunity to overcome one remaining issue we have to deal with, and this was the lacking of scale in these very profitable markets we are currently in. So you have to be aware by adding now the AXA operations to our Polish, Czech Republic and Slovak operation means that we are adding exactly in those countries who are currently already contributing to a high extent to UNIQA's profitability in CEE. So currently, we are talking about a 40% contribution, top line and bottom line. So now leveraging these opportunities, this is something which was really an outstanding opportunity for us. We will triple our premium in Poland. We will increase our premium volume in Czech Republic and Slovakia by around 50%, which means that in those countries in aggregate throughout Central and Eastern Europe, as Andreas already mentioned, we will reach a top 5 position, which opens us a lot of opportunities in the near future. When turning to the countries, let me briefly touch base what we are talking about. In Poland, what we see really is complementary is that we have here a top-notch digital insurer with capabilities in this digital field. We are acquiring the #1 direct insurer in Poland, which is definitely complementary to our existing setup. In retail, we have seen throughout the management talks we have conducted and throughout the presentations, really advanced pricing capabilities. We have seen a omnichannel concept, this is definitely something we can leverage not only in Poland, but as well in Czech Republic, Slovakia and also throughout our other operations in CEE. We have seen that also the corporate business with its dedicated broker platform currently serving more than 90,000 midsized companies is exactly the strategic fit of the corporate business we have built over the past 7, 8 years throughout Central Eastern Europe. As you know, corporate business currently accounts for almost 25% to 28% of our overall premium income in Central Eastern Europe. So a perfect strategic fit in Poland from all these issues I indicated. We also step in Poland in a well-established bancassurance agreement with mBank which lasts until 2024, with respect to stand-alone products and until 2029 with respect to bundled products. We are definitely aware of the ongoing process at mBank. Nevertheless, we are of the opinion that the existing agreement issue is really a respective growing concern ahead of us. You also have to take note that in Poland, we currently have no strategic preferred bancassurance partner as we have no cooperation with Raiffeisen Poland. So this also was a perfect complementary match to our existing bancassurance footprint throughout the entire region, which currently contributes for more than 20% of our premiums. Now turning to life and pensions. I think here it's important to outline that the life transformation has already been successfully accomplished. Namely, the strategic shift from the protection insurance -- towards protection insurance and putting their legacy portfolio into runoff, namely the unit- and index-linked portfolio. So I think this is also something very important to be aware of that this turnaround has already been accomplished on a local level with the respective measures behind. And we can really now focus and build on these existing life transformation. When it comes to the pension funds, we are also aware regarding the ongoing discussions in Poland regarding Pillar 2, that either you move to the state-run system or you move to Pillar 3, where we have stated also here, the target has already an established Pillar 3 in Poland. So we are perfectly prepared for any move in that respect. Regarding Czech Republic and Slovakia, I mentioned it before, it's a little bit a different game. We increased our existing footprint by 15% from the turnover perspective. What is here outstanding is that AXA is more or less approaching these 2 markets in the same manner as we do now since almost 5 years even though we didn't have put Slovakia into a branch of the Czech Republic, from the governance perspective, we were exactly steering the countries in the same manner. We have a unified Board for both countries, and we have already been very, very successful in both countries with this approach. So the AXA approach is a perfect one-to-one match. Here, we definitely have to state also this center they have established in Brno, where they are servicing both countries out of one competent center, administrative competent center is of a unique opportunity for us as well to build on this and to derive also for us the respective strategic advantages. Regarding the employees, we already stated in some of our comments that we are welcoming more than 2,100 employees. Let me state that in the entire transaction, we consider these employees definitely as an asset for us. We get excess, and I mentioned it before, when I was talking about pricing capabilities when I'm also mentioning really technically savvy bancassurance team where 50% of the bancassurance business in Poland is currently generated via online. So we really have here a perfect match, and we really have an asset with these employees who have been part of a world-leading insurance group and now move to a dedicated regional player. And I think this is a perfect strategic fit for us in the future. And I think this will also be the foundation of all the synergies we would like to leverage. It's also worth to mention that in the inter due diligence process, UNIQA International has been deeply involved in growth countries. So we had all our experts from Czech Republic, from Slovakia, from Poland and from Austria in the process. So we had a very due diligent assessment of the entire target, and we are really confident that we can leverage all the synergies in the upcoming years. I would like to hand over now to you, Kurt, to talk a little bit about the transaction details and the financials.

Thank you, ladies and gentlemen. Referring to Page #5 on the document, transaction details, the acquisition is of the whole platform. So there are no exceptions for the whole deal. The purchase price, as already stated several times, is of around EUR 1 billion, paid fully in cash. That means there is no share deal or other financing. The funding was stated during the signing via a bridge facility, and we have the intention to finance the transaction through a good mix between the senior debt capital market issuance to be decided then during the upcoming months. The mix between senior debt financing and internal financing is also according to our rating accreditation with Standard & Poor's. And also the bond structure, meaning if classical senior also to change our internal cash position with the green bond is something that we're thinking of. Good cost synergies are expected, of course, in our upcoming calculations and in the value and also our capital synergies that we can take out of the deal, meaning that we have also to get AXA companies into our partial internal model, especially for the non-Life business in the upcoming months. Warranties and indemnities are in place, giving us a risk mitigation in a very good collaboration with AXA in Paris. The transaction is expected to be closed in the fourth quarter of 2020. Just for information purpose, the consolidation would be done in a way that either UNIQA has 1/4 of the result in its books 2020 or depending in which part of the fourth quarter the final closing takes place, even it could be that there is just a very small impact on the books of UNIQA in 2020. Page #6, the transaction value is around 12.4 P/E 2019, which is, for us, a good starting basis for upcoming synergies and also for the cash distribution. We see increasing EPS and a good development on the ROE on the upcoming years. I'm talking about 1.5% to 2% impact on the ROE of UNIQA. The efficient funding and the development of the market make it possible that we expect our Solvency II ratio by the end of 2019, pro forma calculated with the AXA companies in the upper 1/3 of our known target range, 155% to 190%, including an estimate on what the partial internal model for these companies could look like, including the interest rate movements that have taken place in the last days and weeks of the year 2019 and the model change that UNIQA took place in -- by the end of 2019. About the integration work and Kindl already stated that it's also very important for us to have the talent on board. In terms of the cash remittance, we expect from Poland, Czech Republic and from Slovakia increasing dividends in the future. And this means for us, a reduced dependency on the Austrian business. Just for information purpose, at the moment, we have a mix between around 30% international dividend contribution and 70% Austria, and we expect that this comes over time on a fiscal basis for UNIQA with our already known slightly increasing dividend policies. So far from my side about the transaction and finance details, and we are now happy to take questions from your side. Thank you very much.

[Operator Instructions] Our first question comes from the line of Michael Haid from Commerzbank.

A couple of questions. First of all, can you talk a little bit more about the synergies that you expect? I assume most of the synergies are cost synergies. How much of the aggregate cost base do you see as synergies and what would be a timetable for that? Also, the second question, can you tell us a little bit more about what restructuring expenses you expect? I assume these are going to be booked in this year. And then my last question is on the dividend policy. Obviously, this transaction is earnings accretive, maybe you want to talk a little bit more about the dividend policy at your UNIQA Investor Day later this year, but maybe you can say a little bit about how this acquisition may change or change not the dividend policy of UNIQA?

Yes. I'll start with -- Kurt Svoboda speaking. I'm talking about the dividend policy that you questioned. We have, on the one hand, the clear commitment and guidance given on the Capital Markets Day about UNIQA 3.0. But so far, what I can state is that, of course, this transaction gives us also a boost and a headwind -- a backwind, sorry, for getting more dividends also out of the international business as the companies are profitable, as this is a cashable profit that we are increasing here. And that is for us also important for the financing structure that we are thinking of. And as I stated in my speech, our strategic level is to come to an equalization of the dividend between Austria and the international business on the long run.

Okay. From the cost synergies, your question, how long it will last until we will reach the full synergy potential. In our business plans, we assume that the starting point where we leverage already, the first synergies will be from 2021 onwards and basically throughout both countries. We will reach everything in the range between 2022 and 2023. The expected cost synergies are around the 15% of the overall cost base we assume in both countries. This is a prudent approach where we already incorporated also certain investments for this transition.

And restructuring expenses?

Are already embedded in. That's what I said.

Our next question comes from the line of Rahul Parekh from JPMorgan. We will move to our next question. Our next question is from the line of Oliver Simkovic from RCB.

I have 2 questions. The first one is about the profitability of the AXA business. So when I look at data from local insurance associations in Poland and the Czech Republic that AXA business was significantly less profitable in 2017 and 2018 compared to their implied net profit of EUR 80 million for 2019. Could you maybe give some indication on what the driver of the improvement in 2019 was? And what your expectations are about the future? Then a second question is regarding the guided increase in ROE. So since the acquisition will be mostly financed by debt, how much of the ROE improvement is actually driven by operating profitability? And how much is driven by leverage?

Yes. Kurt Svoboda speaking again, starting with the second question. We expect the ROE improvement by more than 80% coming from the operative improvement and then minor parts coming from the leverage. This has to do, A, with the synergies; and B, with the composition of all existing UNIQA business and the AXA business and what we can take out as an additional profit for that one.

Okay. Regarding the profits and the EPD, Kurt already provided you with an indication regarding the 2019 figures with price earning. We see a constantly improving profit in the upcoming years regarding your question of the previous years, and this applies as well for Poland as well as for Czech Republic and Slovakia. There was a lot of restructuring costs embedded already in these results. And also, for instance, the turnaround in the life business, as I mentioned before, taking respective provisions in that respect. All this has been embedded in that. In Poland, you also have to take into account that in 2015, 2016, we started with the merger of all the recent accomplished transactions at that point of time. So these are the reasons for the result as you have seen over the previous years, and this is also what I mentioned before with respect to the synergies, with respect to the turnaround in the Life business, with respect to certain pricing capabilities in the P&C business, where we see really an upside and that we confirm this profitability outlook for the upcoming years and even we improve it year-over-year.

We will try once again to connect to Rahul Parekh from JPMorgan.

Sorry, my line -- there was some issue with my line. And I just have a couple of questions from my side. One is, I just wanted to understand what is the normalized earnings of this AXA unit overall in terms of operating earnings? If you could give us some figures or range that you think is the normalized earnings of that business. And my second question is that on the capital synergies, if you could elaborate if you have some indication on what will be the capital synergies in terms of the uplift to the solvency ratio? And what do you expect there? And my last question is on your funding is that what would you expect your pro forma debt leverage to be post your funding transaction?

Yes. Thanks for the question. Kurt, speaking again. I'll start with your last question. We tend to keep our debt leverage ratio around the level that Standard & Poor's has, which means around 40%. This is what we do not want to overcome. Second, about capital synergies. We see 2 main streams on the capital synergies. So the first one is that we would like to integrate the 3 companies into our partial internal non-life model. And in that respect, we expect around 4% to 5% capital relief. The second thing is that we expect with these countries better diversification. You talked about EUR 800 million on premium, which, with our internal reinsurance model with Zurich gives us a better diversification, which I personally expect around 2 to 3 percentage points according to an increasing profitability. So all in all, I would guess around 7 to 8 percentage points. Normalized earnings, a little bit too early to state this because it's also necessary to have also done a deep dive on the strategy of the companies. But according to the PE that we valued and distributed via this document, I see this level as a normalized result for the future.

Okay. Just one follow-up, if I may. When you mentioned in your PPT that the solvency ratio is expected to be in the upper third of your target range of 155% to 190%, does that include the capital synergies or does it not?

It does include the capital synergies to a great extent, yes.