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

Hello and welcome to the conference call for UNIQA Group results of the first half year 2020. My name is Val, and I will be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Andreas Brandstetter, CEO, to begin today's conference. Thank you.

Good afternoon, ladies and gentlemen, and thank you very much for your interest in our 6 months results. Let me start my summary with Page 4, where we have a snapshot concerning the first half year. As you see, we see a better-than-expected growth in our top line, especially driven by the Health business, which has been growing more than 3%, followed by strong growth in P&C business of around 2%. On the other hand, we see a shrink in the Life business of almost 5% in those first 6 months 2020. Insurance benefits have a drop of 0.9%. Background is that we experienced, on the one hand, a hit by COVID-19 in business interruption. So we have been building provision in the amount of around EUR 90 million in this first half year. But on the other hand, we have 2 positive developments. We have a favorable development of our so-called basic claim development in our markets, and we have less hits coming from natural catastrophes and in the overall average of the last years. So this has been the main reason why we see a very positive development as far as the insurance benefit development is concerned. On the operating expense side, you see an increase on the net base of 2.5% driven by, on the one hand, higher costs for projects and, on the other hand, by upcoming costs for the AXA integration, where we still expect the closing to come in Q4 of this year. What do we mean by higher project costs? Those are costs for our IT system, our new IT core system. Those are costs for the increasing need for digitization, and here we also see burden -- cost burdens driven by regulatory projects such as IFRS 9/17. As far as the net investment income result is concerned, we see a sharp drop of almost 30% mainly due to no gains on sale of real estate, which, if you remember, had an impact of EUR 45 million in our books in the first half year 2019. And the second reason responsible for this decrease in the net investment income is coming from impairments of equities and fixed income of something like EUR 35 million. So those are the main reasons for the sharp decline. As a result of all these factors, we see a decrease of our earnings before tax coming from EUR 135.9 million by almost 60% down to EUR 55.4 million, as mentioned heavily driven by the lower investment result, which puts a strong pressure on our EBT. On the positive side, after a loss of minus EUR 14 million, which we saw in the first 3 months this year, Q2 standalone 2020 has been at a satisfying level of EUR 69 million. This was a short snapshot, a summary of our most important developments. And as far as the details of our P&L are concerned, I may hand over to Kurt Svoboda, our CFO.

Yes. Thank you. This is Kurt Svoboda speaking. And also from my side, welcome to the UNIQA half year result conference call. I'm now on Page #5, key financial indicators. The most important thing that I want to state here is that the solvency ratio of UNIQA as at 30th of June 2020 is exactly in the same level as it was in Q1. So we have 204%, stable in comparison with Q1. What was driving this performance, on the one hand, we had positive driving -- asset prices that compensated the lower interest rates, especially on the long-term bonds, for example, that we lost 20-year bonds in comparison to the year-end around 50 basis points. This 50 basis points have been compensated by rising asset prices. Still, this solvency ratio is good for the transaction of AXA, which is then being represented in the fourth quarter in our numbers. Coming to the development of the premiums, Page #7. Additionally to that what you heard already by our CEO, I wanted to also underline that the business areas that we want to grow are those we are really growing. This is Health in Austria. This is accident in Austria. And this is the -- our P&C lines in the international business. Motor business, we know this is impacted by COVID-19. This is a short-term business, especially in the international business, which is, for us, okay at the moment. But from a strategic point, the growth is the right one in those area that I described. In Austria, we are also planning a reduction in the traditional Life, which we see. The new business is much more lower than the outflow. International-wise, we see a temporary closure of the banks that felt in the second quarter. And therefore, we are, in that case, lacking of new business in the Life business in the international business. This then also reflected in the new business margin, which declined in comparison to Q1 2020 by 70 basis points. Page #8 on the costs, nothing to add what has already been mentioned in that case. So that means extraordinary projects like IFRS, for example, like the integration that was mentioned drive in comparison to last year the increase. The so-called acquisition costs are in line with that -- what has been planned this year and what was also the reason for last year. So in that case, no major deviation. Still, we know that this is a topic that we have on the agenda for our new strategy in the upcoming years. Page #9, P&C and combined ratio. Even that we have a EUR 90 million provision for the business interruption and event cancellation in the insurance business mostly in Austria, we run a very solid combined ratio for this first half year. It was a discussion the last time, and I wanted to state this actively here that we made sure with our actions in the sales force that should there be another lockdown, we are not significantly impacted than in 2020, again because that business interruption that we have, we agreed with more than 80% of our customers that we have here a cancellation of this business interruption case. So this EUR 90 million are a one-off in 2020 and are in a second lockdown, which we do not expect but theoretically not the same amount in that case. The underlying combined ratio without this COVID-19 effect is of around 95 percentage points on a net basis. So to sum it up, a very solid and a very good technical development in the first half year in the P&C business and also in the core Health business. This leads me to Page #11 to the Health business per se. So I told you that the technical business in Health is very profitable again, a very sustainable development on the growth side, a very good development in the inpatient tariffs, outpatient tariffs, on the same level. What impacted the Health result on the EBT basis was the investment results, which I will explain in a minute. Page #12, the Life business. I talked about a decline in the new business in Austria, also a decline of new business in the international area because of the banks. We are very strong in the bank channel in the Life business international-wise. In Russia, for example, in Croatia, out of lockdown and out of the closing of the banks in the second quarter. This didn't come true. And therefore, we are, in that case, lacking of premiums and also, in that case, lacking of profitability. New business margin, I told you, 70 basis points lower than in Q1. Page 13, the net investment income. Besides the numbers you can see here, I also inform you always about the new money yield, which is about 2.1 percentage points in the first 6 months. The new invested volume that UNIQA had in 6 months was EUR 2.1 billion. As a comparison -- this is stable in comparison to the last quarter. Still, we see in the future out of less new business a little bit less of new investment volume to come. We have less realized gains on the investment side and higher impairments, especially from Q1. Just to remind you here that UNIQA, out of the treatment on the IFRS, cannot bring the impairments back over the P&L that we did in the Q1. And therefore, these are lost impairments. They came back via the OCR in the equity. The performance itself on the asset side was, in the second quarter standalone, very good. And therefore, also, the solvency ratio developed very stable in that respect. So far, to some additional details on the operating business of the first 6 months and for the outlook and for the closing remarks, I hand over back to Andreas Brandstetter.

And this leads us to Page #15. Thank you, Kurt. Well, so as far as the overall outlook for the full year is concerned, you find us still on the more cautious side, I would say. As you saw and as Kurt explained, we have been digesting the impact of corona in the insurance business, in the core business, still so far, of course, subject to a hopefully not coming second lockdown. But everything which has been concerning us so far on the premium side and on the insurance technical side, on the cost side, I think we have been digesting in a very strong way. Now while we are still cautious is that on the one hand, we do not know exactly what kind of uncertainties on the public health sector we have to expect in the upcoming 4 months of the year. And the second reason is that mainly, as far as capital markets are concerned, we expect volatilities to go on and to continue. If we walk through the P&L stepwise, then you see that we expect a slight decrease in the reduction of our gross written premium. While, on the one hand, we expect the Health business to remain on a stable growth path, just remember that we had those plus 3% in the first half year. We assume that P&C business still will decrease, maybe not in a strong way but slightly. And the muted demand for the Life business, especially in our home market, Austria, at least those minus 5% in the first half year in mind, we expect to continue. As far as the combined ratio is concerned, we expect it to increase by year-end compared to the full year 2019, which has been at 96.4%. And as far as the net investment result is concerned, I mean, clear a minus of 30% after 6 months will mean that also by year-end, we'll see a quite strong decline there. Having said this, as a summary, due to, on the one hand, those mentioned uncertainties regarding COVID-19 plus due to the development of our strategic program UNIQA 3.0, which we'll be happy to present to you by the year-end, we expect still, possibly, negative earnings before tax for the full year. As far as the AXA integration is concerned, which, as I mentioned previously and we expect it still to take place in Q4 of this year, we assume that this effect will have no significant impact in our overall results for 2020. So thanks once again for your time and interest, and Kurt and me are very happy now to answer your questions.

[Operator Instructions] The first question comes from the line of Oliver Simkovic from RCB.

I have 2 questions. The first one is regarding your outlook slide and the UNIQA 3.0 strategy program that you mentioned and the related cost. Could you maybe give an indication on what kind of cost you expect here and what amount they could come in at? And my second question is regarding the provisions regarding the pandemic. Assuming that there won't be an additional lockdown, do you think that there might be some additional provisions necessary? And also for event cancellations, if those will stretch into possibly fiscal year '21, do you see any risk there from more charges also in the coming year from the pandemic?

Yes. Andreas here and thank you for your question. First, to take up your question about UNIQA 3.0, we can't give you a clear outlook as far as the cost burden is concerned. We feel ourselves heavily supported by all the developments and the learnings which you take away from our current COVID-19 crisis. This means a strong push, a strong investment into everything around digitization and renewal of the IT core system. It's clear that the massive and the strong lowering and bringing down of our cost ratio is one of the key cornerstones of UNIQA 3.0. But in which dimension and what of this might affect our P&L this year, sorry to say it's too early to tell you right now. It will be part of our information on the capital market by year-end. But please be assured that cost management is a key cornerstone of UNIQA 3.0 because this is our weak part. Second point about everything corona burden on the P&C and the reserve side. So as you repeated, we have been digesting about EUR 90 million. We do not expect this year any kind of major additional burden. We have been adjusting as far as we can see everything around business interruption. What you mentioned is something where exactly one reason for our uncertainty is now concerned, things like event cancellation. We are very strongly involved in this business, everything around events, sports event, cultural events, stuff like this. We do not know exactly how the upcoming 4 months of this year are concerned. But if we are affected on this side, we'll see it in the result in the combined ratio of this year, not in 2021, right? So still, everything assuming that we will not experience a second lockdown. If there could be a second lockdown, of course we will be, as many of our competitors, heavily affected. But as far as we can see: first, a, we've been digesting everything; b, if something would come up around event cancellation, stuff like this, okay, this is something which is more or less part of the normal business, but is the reason why we cannot give you a clear guidance for the rest of the year; and point three, we do not expect any kind of additional burden on the technical insurance side out from COVID-19 as far as we can see now in the year '21. I hope that this answered your question.

The next question comes from the line of Michael Haid from Commerzbank.

Regarding the outlook, you said that you cannot exclude a pretax loss for the full year 2020. My understanding is that there are 3 possible reasons for this. One is COVID-19, but you just mentioned that the EUR 90 million is -- probably should be it. Then maybe some possible goodwill impairment. Can you elaborate a little bit on this? And presumably, restructuring expenses for UNIQA 3.0. Maybe it's too early, but can you tell us a little bit about what potentially we could see there? Second question. If I understood correctly, the new business margin in the second quarter came down 70 basis points in life insurance. Can you give me the absolute figure for the new business margin? And do you plan any actions to bring the new business margin up again, for instance new product design, whatever, here? These are my questions.

Yes. Thank you, Michael. Andreas here before Kurt takes over about the new business margin and gives indication on the side of the impairments. I will address your first question and confirm what you said. You mentioned 3 reasons, 3 potential reasons why result could be negative. You mentioned COVID-19, you mentioned possible impairments and you mentioned potential restructuring costs for UNIQA 3.0. You're absolutely right. But please understand that in the current situation, we cannot give you more guidance on this. Just one thing and repetition. Once again, we think our core business, what we see currently without AXA yet, our insurance core business in Austria plus in CE is healthy. The 3-years growth, which is for us, given the current situation, again satisfying because, as mentioned, it's already, as the new business is concerned, on the level of almost everywhere before crisis, this is a good thing. We think that we have finessed our underwriting discipline, so we do not see any kind of major concerns there. And as far as the cost situation is concerned, as it was addressed from Kurt and me -- by Kurt and me, then again this is a clear cornerstone of UNIQA 3.0. So this is about COVID and this is about the costs. In which way and if there is any kind of provision for restructuring this year, please understand, and I ask for your kind patience. We will need something like 3 more months before we can give you a clear guidance on this. As far as your third topic is concerned or is there a potential mentioned reason why the result could be negative, impairments, Kurt, can you please be so kind to take this question?

Yes, of course. We had the impairments done by the half year, which gave us no deviation with that what we had in Q1 and by the year-end. So in that case, no changes and no need for impairment. As we're talking about our new strategy, as we're talking about also in investments in digital areas, also in the international business, the message that we want to drop is we cannot exclude that for the risky countries that we have, which is Romania, which is Bulgaria, Serbia, to have here a potential of an impairment of a goodwill amount. If I would know it now, I would have booked it in the half year. So in that case, please understand that we cannot give even a range in that respect. Your third question is about the new business margin. Yes, there are 2 options. The first option is -- the 2 options that we have in hand. The first one is more volume, which is, at the moment, rather difficult, especially under COVID-19. I've told you that, especially our very positive and our very profitable bank channel has always -- had also defied this COVID-19. So we do not expect this new business coming back in the second half year. So what stays is to work closely here on the cost side. And you asked for the amount or for the ratio. The ratio is 3.5% after 4.2% in Q1 '20. And I can also give you the number of -- by end of year 2019 was 4.3%. So to cut the long story short, it's about working on the costs also improves our new business margin on the long run in the Life business.

[Operator Instructions] And the next question comes from the line of Thomas Unger from Erste Group.

I'd be interested in -- you've been talking about the outlook. I'd be interested in the operating performance that you expect for Q3 and Q4. Can we expect it to be similar to the strong performance that you had in Q2 on the combined ratio and also the operating expenses? And then the second question would be on the contribution that you expect from the AXA integration maybe starting from 2021. Was there -- has the current crisis now changed anything in your assumptions? Or can we still expect a contribution, once fully integrated, of around EUR 80 million to net profit from 2021 or 2022?

Let me please take on, Andreas here, your second question, Mr. Unger, first, and Kurt takes over question #1. As far as AXA is concerned, currently we see no any kind of major negative impact on our assumptions. So what we told you during one of our recent calls about our mid-term profit expectation as far as contribution from AXA is concerned remains unchanged, and this means a profit before tax contribution of somewhere currently around EUR 70 million, EUR 80 million starting with 2021 onwards. So no change on this side. As far as your first question is concerned, Kurt, you take over.

Yes, of course. The operating performance, Mr. Unger, in Q3 and Q4 is -- from our perspective cannot be the same as it was in Q2. There are 3 reasons: a, first, each premium that we take in now is out to the allocation of the -- on the quarters just with half of this in the balance sheet, which means we are losing a quarter by quarter for each premium that we get in. On the other hand, second thing is we believe that we see in Q3 and Q4, especially in the European economy, a trend where companies have to close down and lay off people again. And this is, for us, another drop in the -- especially in the investment performance. And thirdly is that we know that with our strategy program, and this is what Andreas Brandstetter told you now, that we have to prepare also for the future, and this will also have some burdens on the cost side. So in that case, I would say, on a combined ratio perspective, I expect at the moment a 50 basis point drop, and this is then reflected in the P&C business. A stable development on the Life side. And in the Health business, the big question mark is the investment result. The operative Health business, we believe and we see as stable. So this is an answer to your first question.

We currently have no further questions in the queue. [Operator Instructions] And we do have a follow-up question coming from the line of Michael Haid from Commerzbank.

Just one follow-up question on P&C. You mentioned you cannot exclude a decrease of gross premiums written for 2020. Gross premiums written in the first half increased by 2%. So from what lines of business you expect this decrease in gross premiums written in the second half? Maybe you answered that already in the last comment, but I'm not sure.

Yes. There are 2 things, Mr. Haid. The first one is maybe I wasn't clear enough on that side. I talked about earned premium, not -- as I said, because gross premium, I would say, can -- keeping on the level that we have. But on earned premium, each euro that I get in at the moment is then by 6 months or then in, I don't know, in September, by 3 months only in the P&L, and this is what I was talking about. On the -- yes. And on the line of businesses, as I mentioned in the statement on the operative business, we are satisfied with the development in those areas they want to grow. Again, this is excellent business in Austria, Health business in Austria and our non-motor business in the international business.

That was our last question for today, so I'll hand the call back to our speakers to conclude today's conference. Thank you.

Ladies and gentlemen, thank you very much for your interest in our 6-month figures, and we wish you a good day and a successful remaining week. Thank you so much. Bye-bye.

Thank you for joining today's call. You may now disconnect. Hosts, please stay connected and wait further instruction.