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

Hello, and welcome to UNIQA Group's UNIQA Capital Report 2019. My name is Jose, and I will be your coordinator for today's event. Please note that this event is being recorded. [Operator Instructions] I would now hand you over to your host, Kurt Svoboda, to begin today's conference.

Welcome, ladies and gentlemen, to UNIQA Insurance Group's Solvency Capital and Embedded Value Report 2019. I'm referring to the presentation which is published on the website. And starting on Page #2 with the executive summary, which shows on the solvency capital position still strong position of UNIQA of around 216% for the year-end 2019. Let me give you an additional number. As you have maybe read over the last couple of days out of our ad hoc release 2 days ago, the decision of the Supervisory Board to present the general assembly a dividend of 1/3 of the original one. The calculation of the solvency ratio with this 1/3 of dividend would lead to our solvency capital ratio of 221 percentage points for the year-end 2019. We have around -- what you can see, a good Tier 1/Tier 2 mix of around 80/20. And with the coverage of our partial internal model of market risk and non-life, we cover around 78% by internal models. On the other hand, the embedded value of UNIQA is of around minus 14.4% in relation to the year 2018. The drop is mainly driven by economic variances coming from the low yield environment. The new business value of around EUR 92 million is close to the level of 2018. I will come in a minute to the reasons for that. We generated a free surplus on the Life and Health business of around EUR 89 million. Including the non-life profit after tax, we cover a full amount of our dividend of around 170%, so the generation of surplus is covering the full year dividend stream. New business margin ends up at 4.3 percentage points. On Page 4, we present our risk strategy, unchanged to that what we communicated in previous times. So with our existing solvency ratio, and I can also give you guidance that we expect this also for the Q1 on that level, we are still in the opportunity zone, which is above 190 percentage points. Page #5. Nothing to add to that what I have told you before. So please take into consideration 216% is with full dividend loading. With 1/3 dividend, we end up at 221 percentage points by the end of 2019, impacted, of course, in relation to the previous year by the yield curve. So also on Page 7, please take note that the capital flows was EUR 169 million. It's still the old version, with the full year dividend of EUR 57 million as the correct number, ending up to a level of EUR 4.867 billion of own funds by 2019 end year. Page #8. No changes in the financial leverage on a dramatic amount. Our 2 subordinated bonds with nominal value are still included here, and we are fine with this leverage of around 22% in 2018 and 20% in 2019. Last page on the capital requirement. I would like to explain in Page 11 about sensitivities. Also here, nothing new. Maybe to explain to you that we have, starting on the lower level, 36 percentage points with no VA. That means the yield curve without volatility adjustment. You have to know that after application of our internal model for market risk, UNIQA is also applying -- or is also using the dynamic volatility adjuster, which plays a role especially in times like this with high volatility on the interest rate side. The interest rate is still -- the volatility of interest rates is still our highest sensitivity, coming from the Health business with a very long duration and where we run, at the moment, a shorter asset duration than the liabilities side. So far to the economic capital position, market consistent embedded value on Page #12 and following. So I'm talking about a number of EUR 2.8 billion Life and Health MCEV, which is a minus of 14.4% in relation to 2018. The deviation comes to more than 80% from interest rate development and, referring to Page #14, that we have also less present values of new business premiums leading to new business premium of 9 -- new business value of EUR 92 million. So all in all, that we have more present value of new business premiums, we have a little bit of declination of the new business value. This has to do, of course, with the Austrian Life business, where we have, at the moment, 3.8% in total as a new business margin and 8.1%, still a very high new business margin in the international business. This is mainly driven by our Russian entity, followed by a good position in Czech Republic and in Croatia. Page #15. EUR 720 million economic variance coming from the interest rate development. I think this is nothing that is unexpected. Sensitivities on Page #17. No major changes to that what 2018 has been published as sensitivity. You see over here that the risk-free yield curve is, also in the embedded value, the main driver of the sensitivity. This is again to do with the Health business. Unchanged is more or less the situation on the noneconomic factors. So far, my explanations to group economic capital and market consistent embedded value. I'm now happy to take your questions on that topic. And also, if you want to talk about our press release and our ad hoc release 2 days ago, I'm happy to take your questions and ask to open the line.

[Operator Instructions] The first question comes from Thomas Unger.

Thomas Unger from Erste Group. On the investment results and your outlook that you gave 2 days ago, you said that the result in total earnings before tax will be negative in Q1. What exactly were the effects on the investment results and maybe also on the participation in STRABAG? And then also for the full year, what do you anticipate beyond Q1 that makes you expect or see the possibility of earnings before tax loss for the full year? And then also on the dividend and the AGM, I'd like to get some insights on your decision not to postpone the AGM like some of your -- some of other companies in Austria did, just the financials. That would have allowed you to delay the dividend decision. And just wanted to get some insights why you took that step now to reduce the dividend and also cancel dividend for 2019 -- 2020, I'm sorry, at this point in time already.

Thank you, Thomas. Starting with your first question out of the 4, is about Q1 investment results. We have impairments on the investment result, especially coming from equity positions. Of course, UNIQA does not have a big equity portfolio, but under our accounting standard IFRS, we have also to take into account the funds that we are running with equity because the look-through approach is the valid one under IFRS. And therefore, with our equity positions in self-managed UNIQA funds called UNIQA World Selection, then the fund with Invesco, we have depreciations of more than EUR 30 million, which goes directly through the P&L, and this is the major impact in Q1 leading to a negative result. STRABAG, you asked. STRABAG is, as you know maybe, accounted at equity position at the moment. And at equity means that we take, on the one hand, once a year, a calculation on the inner value of STRABAG with an independent consultancy and compare this with the stock price. For the time being, we have no information and we see no -- we see no trends that STRABAG is not keeping its business lines. So we keep the level of 2019 end year and have, in that case, on the P&L side, no impact in the first quarter from STRABAG on a negative basis. The next question that you asked, Thomas, was about full year and what leads us out of investment results and maybe other topics to a maybe negative year-end result. On the investment result, we expect that this is not the end of the line that the equity positions go down. Secondly, we have also to take into account that bonds and the low yield environment and the development also in the economy will lead to depreciations and impairments on the bond side. And by that, we expect a major hit in the investment results, especially in Q2, when announcement of other industries on their outlook will be given. Secondly is that we have certain scenarios, and this is the basis of our calculation. We calculated in different scenarios, and all these scenarios were important. All these scenarios are based that there is no sustainable solution for a vaccine in the next 12 to 18 months. If there is a solution for a vaccine, meaning that, in 2 weeks, globally or European-wide or in Austria, vaccine is available for the whole population, then, of course, our scenarios will change dramatically. But this is not the thesis that we are underlying in our scenarios, and therefore, we expect a decline in our new business. We have also to calculate a certain amount on payments in business interruption. And by that, we also see that we will get the hit then, of course, in covering our fixed costs. Last but not least, we have, in that case, lower volumes. With lower volumes, it also -- and this is specialty, but this is our treatment at UNIQA, deferred acquisition costs cannot be covered, and this can also lead to depreciation of higher deferred acquisition costs than originally planned. All in all, Thomas, this could lead to a significant impact on the P&L side and the very high deviation from our original plan and also to a possible negative outlook result in 2019. Third question that you raised is about AGM. Why did UNIQA did not use the possibility to postpone? This has to do that we are, at the moment, very certain that Q1 is negative and that we have also the situation of a planned deviation by the year-end. We took the decision because, at the moment, it is for insurance companies possible, even that authorities like EIOPA, FME, see that in a very prudent way. And we said, okay, as we have 2 -- on the one hand, that we know where we end up at Q1, how our year-end result looks like, that we want to give a part of that what we earned in 2019 to our retail and to our institutional clients. It could be that later on, European-wide there's a dividend payment, which we do not want to take the risk on that. About the dividend of 2020, look, this is, Thomas, coming out of the negative scenarios. We see also the possibility of a negative result in 2019. And by that, paying dividend would not be prudent, especially looking on solvency and on capital performance. And this was the reason that we took the decision for 2020 not to take into account a dividend payment. So far, the answers to your 4 questions.

[Operator Instructions] The next question comes from Oliver Simkovic.

Actually, it's 3 questions, and they all relate to ad hoc statement from Tuesday. First, as I understand it from what you said, you have some exposure to business interruption insurance covering pandemics. Could you maybe approximately quantify what impact on claims you expect here from this crisis? And what's your base-case scenario that you use here? Then the second question is regarding impairments. Do you see a risk for impairment outside of the investment portfolio? Any goodwill impairments or -- and also, if this is included in the scenarios that you mentioned before? And lastly, regarding the AXA acquisition. Will the current environment and the impact on solvency affect your financing considerations of the acquisition? And can this change due to those circumstances? That's all.

Thank you, Oliver. Starting with your first question, business interruption exposure of UNIQA. It's an Austrian specialty, so we don't have business interruption in the international business. So this is the first statement. In Austria, we run business interruption, on the one hand, and there is another line of business, which is business interruption for non-employed people, so business [Foreign Language] in Deutsch. The worst-case scenario is that what Andreas Brandstetter communicated, it's an exposure of EUR 150 million, 1-5-0. This is the case when we pay each policy to the maximum amount. As at the moment, it's not clear in Austria if the closing down of hotels and small/medium enterprises that are covered on that is done out of the so-called pandemic law in Austria or if it is done by the COVID law that was set up by the Austrian government. It's also not clear which amount and which policies are covered and which policies are not covered. So that means that we have different scenarios calculated and the base-case scenario is of about EUR 40 million to EUR 60 million payment that we can get out of this. You have to note that this is something that there are many single risks. It's not one big risk. So single risks with a maximum coverage of between EUR 70,000 and EUR 90,000 per risk. Second question, Oliver, was about impairment out of the investment result. Two categories we calculate, and we expect no impairments on so-called intangible assets. What can come to an impairment, if, economy-wise, CE region drops down more than we expect and that, on a sustainable basis, we cannot deliver business plans, especially in Bulgaria, Romania and countries like that, it could lead in the end to an impairment, especially in our risk countries with impairment which is Romania and Bulgaria. And this could come up to a significant amount, which is partly -- and which is estimated in our scenarios, so far, not. AXA is the third topic. No changes in our plans with AXA. Full speed for closing the deal and full speed to take over the companies.

We currently have no further questions. [Operator Instructions] We have a following question from Thomas Unger.

And that will be on the SCR, the capital ratio and the development in the first quarter. You said that it would be at the upper end of the 155 to 190 million -- percentage range. What development -- or what exactly were the main factors that led to the drop in the SCR from 215% to this 185%, 180% in Q1? Was it especially the interest rate movements, spreads, et cetera? And then also, the AXA acquisition would shave off another 20 to 25 basis points (sic) [ percentage points ]. Is that correct? And as you mentioned in the presentation already, from the change in the dividend proposal, you would add -- that will add 5 basis points sic [ percentage points ]. Is that correct?

Thomas, starting with the last 2 questions. Yes, both are correct. So add 5 percentage points to 216%, then you end up with the correct one with the dividend of 1/3. And AXA, at the moment, we expect between around 25%. That's correct. Your first question, what was the reason of the drop from the 216%/221% to that 190%, whatever, 4 reasons, Thomas. The first one is that we have seen increasing spreads. Secondly is that we have a drop in our equity positions. And on the other hand, market values did not correlate 100% with less capital charging. Of course, biggest impact coming from the interest rates. And then we have fourth topic, which is a technical one. But just to be transparent, it's about that with some losses that we realized, we had also lost the possibility of setting up these losses and therefore, have less so-called taxes that we can counterbalance with this. So these are the 4 main reasons of the drop. And by the way, because I mentioned in the beginning of my speech about capital management and capital position, as we're using a dynamic volatility adjuster, the spreads increase could not be counterbalanced 100% by the dynamic volatility adjuster, and therefore, we had this drop of (sic) [ to ] around 190%.

Okay. And for the remainder of 2020, do you anticipate a further deterioration of the ratio?

From the economic variances, not that much. Could lead, of course, from further drops in the equity position, yes. And from -- also, what can hit us is STRABAG. Of course, because STRABAG has, in our solvency ratio so-called performance, we lost EUR 150 million on performance; RBI, around EUR 50 million; and World Selection by around EUR 18 million. So if these equity positions lose again market value, then we can also expect a hit on our solvency ratio, but not in -- at the moment, not in a situation where it gets dangerous.

We have no further questions. [Operator Instructions] The next question comes from [ Fabian Murman ].

This is [ Fabian Murman from Arioso Investments ]. I'm a generalist, I'm a portfolio manager. So not into the very details, but as there was still time, if you may allow this question on the claims from the business continuity insurance. I mean in other comments, I read that this is basically included. So to what extent is this really an Austrian specialty? And is it common in Austria? Or is it just in your policies? And secondly, as you quantified it kindly, with your baseline of EUR 40 million to EUR 60 million, this EUR 40 million to EUR 60 million, would that be sufficient to get into negative territory as you mentioned in your guidance? Or will that need the full exposure of EUR 150 million?

Thank you, [ Fabian ]. This business interruption policy is not a policy on its own. It's part of a policy that is sold. It is a common risk in Austria, so it's not a specialty of UNIQA. Many insurance companies in Austria are selling such line of business, but included in a product. So it's not that you can buy this policy on its own. It's included in a full package policy. And therefore, it's a single risk in one policy. This is the answer to your point. A little bit of a history maybe in 2 sentences. This business interruption was originally, in Austria, sold in a way of not covering a pandemic risk. It was sold in the idea of, for example, if you are in a hotel and your people get sick, your employees, out of a virus or whatever, of a flu and this special hotel or this special SME has to close and also companies or hotels around have to close. This was the reason. But this was not the case that a pandemic all over Europe or a global pandemic is covered by that, and therefore, it's not clear what is really covered and what is not covered. This is just as an additional information. Second point is the mentioned amount does not need -- does not lead automatically to the possible negative outlook. It's just a part of our scenario. And even the EUR 150 million would not lead on a stand-alone basis to a negative outlook in 2020. Also here, it is a part of a scenario out of several parameters like new business, like payments, like impairments on asset side and also accounting topics that lead to a possible negative outlook. These were your 2 questions, [ Fabian ] .

We currently have no further questions. [Operator Instructions] There are no further questions. So I will hand you back to your host to conclude today's conference.

Thank you very much. Ladies and gentlemen, thank you for participating. And in times like this, stay healthy, and all the best for the rest of today. Thank you, and goodbye.

Thank you for joining today's call. You may now disconnect. Hosts, please stay on the line and wait for further instructions.