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

Hello, everyone, and welcome to the UNIQA Group Preliminary Figures 2020 Conference Call. My name is Lydia, 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, Andreas Brandstetter, to begin today's conference.

Thank you, and good afternoon or good morning to all of you who are on this call. We hope that this call finds you well and that you and your families are healthy and safe. Let us briefly start with an overview, starting on Page 3 of our presentation, about the main events of 2020, which was due to 2 reasons for us a very special one: first, of course, because of COVID-19 and its impact; and second, because of the acquisition of AXA companies, which we fully consolidated for the first time in Q4 in our books. Overall, we may say that we had a clearly better underlying business development in the previous year than we initially expected in April and when the COVID crisis began in Europe. We did not see in the course of this year any major waves of lapses from our existing clients, neither in the retail nor in the corporate segment. We didn't see [ massive failures ] in the existing business. And the sale of new business, which dropped, as you remember, back in April and May and June, meaning in Q2, had a strong gain because of less uncertainty than originally feared. Of course, we were hit by business disruption claims and event cancellations. We informed you about this in our last 2 calls, and the amount in total is something like EUR 70 million. But that was also compensated to at least good part by lower frequency in the motor and in the Health. So overall, claims development of UNIQA in this year was a quite good one. To sum it up, our core insurance business performed relatively well and proved to be resilient. And this also makes us very positive when it comes later on to the outlook for 2021 and the following years. As we closed this AXA acquisition, which I mentioned before, in the first part of the fourth quarter, the numbers of those entities are included in the fourth quarter. So including AXA, as you might have seen, our gross written premiums have been growing by 3.6%. But even if we exclude them, we have been nearly flat, declining only by 0.4%, driven only by the Life business here in Austria mainly and internationally. The amount in total of the contribution of the AXA book in the premiums is more than EUR 200 million, EUR 212 million. The main reasons for our results being lower than previous years, there are several one-off items, as you would have read. So there are 3 main effects. First, we impaired, as you know and has informed you already in November, goodwill of our subsidiaries in CEE countries in the amount of overall EUR 106 million. We then took a restructuring charge in the amount of something like EUR 100 million mainly because of Austria, and we had costs related to the transformation of Austria and the integration of AXA CEE business in the amount of another EUR 39 million. So the sum of those, EUR 106 million plus EUR 99 million plus EUR 39 million, goes up to EUR 343 million. Despite those negative one-off items, we achieved earnings before tax of EUR 57 million. And this is the reason why we then decided to propose to our general assembly in May paying a dividend of EUR 0.18 per share, same amount as for the business year 2019. And this is in accordance with current regulatory guidelines. The decision is driven by the fact that without the mentioned special charges which I just named, we would not have had a bad business performance. And despite the acquisition of AXA, we feel still strong capitalized. And therefore, we think to pay a reduced dividend is the right decision for all stakeholders involved in this process. If we then move on to Slide #4, the snapshot. We see that underlying growth, especially from the Health business, of more than 3% growth, where we continue to see stable customers' behavior and good new business, which is very important for us being a market leader in Austria, not expected in those days. P&C grew slightly without AXA, 0.6%. And Life continued to be under pressure. Only due to AXA we show a growth rate here. The main driver behind the decline in investment income, and Kurt will highlight it later on, were impairments and the fact that we did not sell any real estate this year yet. We did during the year 2019 in the amount of EUR 45 million, and this amount you do not see in the books of 2020. Insurance technical result declined, yes, but only by something like EUR 20 million despite the restructuring and special charges, and this underpins what I said a couple of minutes before, mainly the improvement of our core insurance business. You can clearly see the enormous increase in costs driven by the mentioned one-off items. This is true. But if we adjust, for example, the combined ratio for the special factors in the P&C segment, and Kurt will turn back to it in a second, we would have achieved an underlying combined ratio of 94.4%, which is clearly above what we show in our results, clearly above the 97.8%. Having said so, I propose that we move on to Slide 7, and I hand over to our CFO, Kurt Svoboda.

Ladies and gentlemen, welcome. Good afternoon. Talking about the segments. Before I start, I would like to come back on Page #5 and talk about the regulatory capital position. 100% -- 170 percentage points combined ratio or above is the existing information in these days. Compared to the previous ones, of course, a decline, but this was, for us, planned due to: A, the acquisition of AXA. We had always communicated a 30% drop in the regulatory capital position. What was then furthermore to be considered in the [ prior year ] was a decline on the interest rate, especially in the 10- and 20-year euro spot curve, which, according to our business model with Life and Health, give us a hit of around 9 percentage points, including the dynamic volatility adjustment, which was more than half reduced in the fourth quarter. We propose and we expect that the solvency ratio increases in the upcoming quarters according to our profitability, the cost program that we initiated and the profitability on this business. Just as an additional information, this capital position includes the proposed dividend of EUR 0.18 already. Now back on Page 7. This is about growth. Here, to be mentioned, Austrian P&C business stable and with a good development, especially in the retail side. Austrian Health business, on the one hand, we have a very good effort, about 30,000 new contracts in 2020, which is slightly above 2019. But we see a highly increasing trend in new business, especially in the last month of 2020 plus now ongoing in the first weeks of '21. Life business, currently, the traditional one in Austria is declining, higher payback to the customers, less new business. And international-wise due to the fact that our bank partner, Raiffeisen, had also to close several points of sales in the international countries, in fact, due to COVID, we have also here less new business. Another point that it does have some FX rate, especially in Ukraine and in Russia. The cost ratio, nothing to be added on what Andreas Brandstetter already mentioned. For those of you about -- that want to see how the one-offs are contributing to the cost ratio in the different segments, just information, the provision that we created for restructuring, the EUR 99 million, is split between Austria and UNIQA Insurance Group company. It's also split, of course, between the segments Life, Health and P&C. And we see also this part of the restructuring provision in different cost groups like administration costs, claims costs and investment costs. This is due to the cost allocation that a composite insurance like UNIQA has to do. Be informed that we also have a restructuring provision in Czech Republic and Poland due to the merger of the companies UNIQA and AXA, although this is included in this cost ratio as a one-off. We talk about here EUR 8 million. Combined ratio, so in that case, all we've said so far, a very good year about the basic claims ratio of UNIQA with each claim lower than EUR 500,000, was about 50.2 percentage points, which was slightly below the year 2019. P&C business on Page #10. In total, we have already talked about the most important things. What jumps to the eye is that the investment result in the fourth quarter was very low according to the previous ones. This has to do with the merger of Austrian insurance with Austria and the international business and then the treatment of the international business unit. So in that case, we had, first of all, depreciated the impairments on the Austrian insurance business. And then on the group consolidation, the positive effect was shown so that in the end, the impairment was shown on a goodwill position with EUR 106 million. Page #11, the Health business. The medical treatment that have been -- and we talked about this in the recent conference calls, they declined during the year 2020. So this trend was also ongoing in the year -- in the end of the year 2020, but we see it also in the first weeks of the year '21. We created a provision because we believe that the customers will come back with this treatment. So in that case, we have foreseen this with a provision. On the other hand, generally, we see on the cost-benefit ratio purely on the benefits that this is in line with 82% with a very low level and the resilience of this business. On the other hand, these one-off costs also impacted then the earnings before tax in the first quarter. As I said, the provision for restructuring and also some part of the impairments of the goodwills have been allocated to Health. The Life business on Page #12. I talked about the banking business in CEE which has an impact on the traditional business in Austria. The rest is ongoing. New product is well placed. On the other hand, we cannot compensate the runoffs of the old portfolio. Goodwill allocated also to the Life business, this is coming from Serbia as in the beginning of our purchase of Serbia, we have the Life business there. And this is the allocation purpose of this goodwill to the Life segment. Page #13, investment activities. I think we talked about the most important things on the last conference calls. Nothing to be added on that. So no further impairments that have to be taken on the portfolio -- on the investment portfolio in the first -- in the fourth quarter. I will also explain on this slide that the new investment volume was on the same level like 2019, EUR 3.1 billion. But the new money yield is about 2.1 percentage points in total, euro and non-euro currency, and the average investment yield that we achieved in 2020 is about 2.3 percentage points, which is more or less the same level that we had in 2019 with 2.4%. So far, the most important things according to the business groups. And I hand back for the outlook to Andreas.

Thank you, Kurt. So summary on Slide 15. And before we can talk now about our business outlook for the upcoming 10 months, we should talk for a couple of minutes about the broader picture in which we are in. This means our current macro environment. So all of us do not know exactly how fast the COVID-19 situation will end. But we are very confident, and I think first indications especially from countries such as Israel, confirm this view that vaccination is helping tremendously to bring this disease under control. How fast and to what extent? Well, we cannot predict confidently. We miss currently the confidence to give very concrete specific forecast for different KPIs, but we still would like to give you our current idea of the result in 2021. So overall, this is repeating the message from Kurt and me. We say and we find our business being very strong, very robust, resilient. We have been gaining customers not only because of AXA. But even if we exclude 5 million new customers coming in via acquisition, our customer base has been growing in this very special transformation year, not strongly but customer base has been growing. Second, we did not lose bigger parts of our current business, very important. The new business production was reduced, of course, as I mentioned, mainly because of Q2. But from a top line perspective, we came through this year much better than initially expected from us in the last April. Furthermore in 2021, we will be consolidating the AXA CEE business, which, as you may have seen in our presentation, proved to be really profitable and very, very promising. From the claims side, we are sure that we will not be hit again by the same amount of business interruption payments. I refer to the EUR 70 million I mentioned before or any other claims directly related to COVID-19 as in 2020. So we do not expect any kind of similar impact. The underlying underwriting, as I mentioned, is satisfying, of course, despite some first signs of competitive pressure in some markets in the CEE region, namely Romania, namely Bulgaria. But this is, frankly spoken, not a new development for us. To a certain extent, we are used to it. But this is within our control, and we will continue to selectively write the business which we want. And this means less motor business and more other profitable P&C business and mostly profit on terms which we can accept. In total, this means for us that it's quite reasonable for you to think of earnings before tax roughly around the same level as we showed in 2018, and this means somewhere around EUR 280 million, EUR 290 million, somewhere in this range. The last slide, and then we are happy to take your questions, is Page 16 because I'm adding to what Kurt said just as a brief reminder of our midterm goal in 2025. First, this is a company showing more than EUR 7 billion of premium in the next couple of years. Second, as Kurt said, cost ratio being somewhere around 25%, and it is a clear mission that we have to bring down our cost ratio significantly by this -- improving the combined ratio down to somewhere at 93% in 2025 and very important for you, at the constant regulatory ratio -- solvency II ratio of at least 170%, at least, it is the minimum, showing a return on equity of something north of 9% and having a dividend payout ratio of somewhere between 50% to 60%. So this is, in a nutshell, again, just as a reminder to you what we have in mind as a kind of backbone for the most relevant KPIs at UNIQA 3.0. Thank you for your time. Thank you for listening to us. And Kurt and me are very happy to answer your questions.

[Operator Instructions] Our first question comes from Thomas Unger of Erste Group.

Just on the outlook for 2021, I understand that you can't be more specific here, but maybe you can give us a sense of where you see premiums going in 2021. Obviously, you'll have the AXA effect. But without AXA effect, it will be very interesting for me what you assume in terms of underlying trend here. Then also the assumption for the investment income, what can we assume for 2021, just basic EUR 500 million plus? Or do you expect any extraordinary effects here, positive or negative? And then also, on the combined ratio, the loss ratio side here came down 1 full percentage point. And you talked about that in 2020, and that's despite the 20 -- EUR 70 million in COVID-related charges that you had. What are you assuming for in your midterm planning? Is there a step up now in 2021 and then a gradual decline midterm? Or do you envision that going down even in the current year?

Yes. Thank you for your question. While Kurt is going to answer the question about asset management and capital earnings, let me start with your first question about premium development rate. Overall, as you know, we are expecting a CAGR of 3% within UNIQA 3.0. Why we are so cautious with 2021 is due to 2 reasons. First, our strategy, especially in corporate business, to focus on profitable growth turned out to be really the right decision. And as I mentioned before, we will not accept each price. We want to continue our strategy that we will take business at those terms which we can accept. And frankly spoken, even if we do not see today, and we are now by the mid of February, any kind of negative impact as far as bankruptcy is concerned within our SME book or in our corporate book, so even if you do not see it now, we are quite cautious what the next couple of months are bringing. So we are not so cautious about the retail business because, as I mentioned, this turned out really to be stable. We've been gaining attractive new customers. Yes, we see here and there, as mentioned, pressure on prices, especially, as I mentioned, Romania and Bulgaria. That's it. But where we are not so sure, where we are more cautious is the corporate business, okay? So this is the reason why we are a little bit shy about this year. But overall, the 3% on the organic level, I think, is reasonable. Your other question is a very interesting one, about the composition of the combined ratio. And yes, thank you for your comment. There is a 1 percentage decline on the claims ratio. And this means, frankly spoken, that we saw some very positive effects, as Kurt highlighted, coming from COVID-19, both on the P&C side, mainly in the motor book, but also, and it's quite interesting for us, on the Health side here in Austria. So can we expect that this is going to get repeated the same way this year? For sure not because if an operation did not take place in 2020 because of COVID-19 and this was not a really critical operation, yes, but a kind of smaller one, well, most probably, our clients will catch up and will do it then in 2021 as soon as there is a vaccine or as soon as circumstances will allow it. So on the other hand, our -- this is the tendency from the last years. Our so-called basic claim, meaning the mass business, the claims and the frequency in the mass business improved constantly over the last years. So this gives us hope that not everything that we saw as a kind of improvement out of COVID-19, not all the positive effects which lowered our claims ratio will disappear. We are confident that we'll keep a certain extent. How much? Well, it's too early to say. So if -- my last comment on this, and then I'd like to hand over to Kurt to come back to the asset management. If you ask me how the combined ratio -- and I talked about 93% as a target for 2025, right? How it will develop, I would think the cost ratio is the most important thing which we're going to focus on. Our claims ratio, frankly spoken, even without COVID, is already on a quite satisfying level, okay? So sorry that's a little bit longer, but this is how I would see the situation. Kurt is going to come back to the asset management.

Yes, Thomas. About asset management, I think we have to consider that this ongoing low yield environment also impacts the earnings in total amount. On the one hand, we see a tendency that, especially in 2021, markets are affected negatively. B, we see an ongoing trend that new business, especially in the Life business, is shrinking and cannot compensate the outflows of the business that is expiring. So in that case, it means we have also less volume that can be newly invested. And having said this, we expect also around EUR 50 million, EUR 60 million less on investment income, a lower amount. From this, [ profitability ] in the technical business is improving. This is as you said, Andreas. But we cannot, in that case, compensate, on the one hand, the yields. And then additionally, we come to new business [ profitability . So this is one of the burdens we have to cover in 2021. Anyhow, as we talked about outlook and we see this on a level of at least 2018, this gives us a good position also for the next level then, 2022, and coming back to, in the end, dividend payment increase in numbers, having in mind that, of course, EIOPA or the Austrian FMA gives no restrictions.

Okay. If you allow, could I add just one more question?

Sure.

The restructuring targets that you took in -- now at the end -- in Q4, do you expect any positive effects from that efficiency improvement in 2021 already or visible only from '22 and maybe '23?

I think Thomas, that we have to consider that. On the one hand, it takes time to talk to the people and to the employees and to set them free. We started this process some weeks ago. Anyhow, we have to consider the Austrian social law and the situation so people are then leaving the company after at least 6 months in a, I would call it, worst case, it may be the wrong word, but in an extended case. So we see, of course, a first impact in 2021, but they will be minor. It is -- I wouldn't call it a hockey effect, but the most effect, we'll see in the year 2022. And this has to do with laying off people and the social schemes in Austria.

Moving on to our next caller, we have Oliver Simkovic of RBI (sic) [ RCB ].