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

Hello, and welcome to the UNIQA Group UNIQA Capital Report 2020. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I would now like to hand the call over to your host, Kurt Svoboda, CFO, to begin today's conference. Thank you.

Thank you very much. Ladies and gentlemen, welcome to UNIQA's Solvency Capital and Embedded Value Report 2020. I refer with the numbers on the document that is published on the Investor Relations website of UNIQA Group and start with Page #2, talking about solvency capital. We achieved by the year-end a ratio of around 170 percentage points, which was exactly that what we expected and what we announced and in line with the items that we announced over the year. That means the AXA acquisition, the environment of 2020, our one-offs within the group result 2020, strategic and the new strategy and the restructuring reserves and, of course, interest rate environment. Keyword, interest rate environment. Generally, the group and I personally, we believe that it's low for long. And within this, we also anticipate all our projections for the upcoming years. That means that 170 percentage points is a basis, which is for us, okay, but I come to that in a minute. We have a drop of 26 percentage points out of the acquisition of the AXA companies, which is a little bit better than expected. We expected around 30%. So it is better than that what we expected. A Tier 1 capital ratio of 74 percentage points. Leverage ratio will be taken later on. And strategic positioning of Standard and Poor's in the IAS segment with A-. Talking about the embedded value. We created a new business value of EUR 111 million in 2020, which was slightly better than expected, with a good new business margin of 3.6 percentage points and a free surplus generation of close to EUR 130 million, if you consider our dividend payment of around EUR 58 million. So it's more than double that we achieved on the free surplus, which we can use them for economic reasons for the future. I will move on now on Page #4 to present the group capital risk strategy, slightly different than the past. Out of the low-for-long interest rate environment, we set our targets of 170%. Everything above is an ambition target for us and possibilities for different areas. Everything below is with actions and unchanged is the threshold, 135% and of course, 100%. So we changed out of the volatility on the interest rate demand our threshold for the ambition target. Still our strategic initiatives and our strategic plan is to go towards the 200%. This is what is in line with that what we announced during the Capital Markets Day in December. Page #5. What I would like to stress is the features of UNIQA's capital position. So still, we do use no transitionals and no matching adjustments. It's a prudent approach that the company runs with a risk charge on sovereign bonds. And out of that we're using all the partial internal model and the market risk, we also used the dynamic volatility adjustment. Let me state on that page that we are now applying for a full internal model of UNIQA. We expect this to be ready by the end of '23. Page #6. What is new on that page is that within our SCR development per risk model, also the pension fund is included, and this is under other financial sectors included in our SCR. The pension fund is just an add-on. We do not use the SCR calculation out of the standard formula for the solvency ratio. Page #7, the split between, on euro basis, the ex AXA acquisition, close to EUR 300 million, EUR 287 million in detail. The new subordinate debt that we issued brings us around EUR 200 million relief. And we have an operating Solvency II earnings of around EUR 415 million. This has to do with model changes, then variations on the capital basis and also our cost management program is embedded in that respect as we anticipate the achievement of the program. Page #8 is about the financial leverage. I talked about this before. 37% between IFRS equity and the total debt of the company. Strategic target is in the first step in '23 to come in a first step-down and, then by '25, to be below 35 percentage points. This has to do with the duration of our existing Tier 2 instruments that we plan to reduce in the year 2023. On the reconciliation to support that we have, in that case, the foreseeable dividends within this reconciliation, plus the VBI in 2020. This has to do with the AXA integration. So we splitted the goodwill between VBI and the real goodwill. The VBI depreciated over time. So far to the SCR developments and the development details, maybe on Page #11, to highlight that the interest rate shock of 50 basis points plus by 23 percentage points is in comparison to that what we announced the years and the quarters before, 5 percentage points better. This has to do with our strategic asset allocation, closing the duration, mismatch in the Health business and bringing down the volatility to this 23 percentage points, which is more or less in line with what we expected. Personally, we would like to come to close to 20% within the next 12 months. So far, the additional information to the solvency CapEx ratio for 2020. Now moving on with the market consistent embedded value. I'm referring now to Page #13. What jumps into the eye is the development on the changes of the value of in-force in Austria with minus EUR 144 million. This has to do with interest rates. And on the other hand, we could also counterbalance from better tariffs, especially in the Health business and from cost efficiency within our strategic program. So that in total, on a net basis, we come to this minus EUR 144 million. On the CEE level, in the green part, you're going to see minus EUR 38 million. This has to do with the integration of the ex AXA portfolio, the pension funds and the Life business within this caused this deviation on the value of in-force. Generally, these values or the new business margin within these businesses excellently -- is excellent high. Moving now to Page 14. The new business margin that had a drop from 4.7 percentage points to 3.6%. Anyhow, 3.6% on a group basis is a good and solid development, if you take into consideration the interest sensitivity of the long-term business. Let me state on this page something that you can't read here. Within UNIQA, it's important to understand that on the Life business, the duration of 14 years is relevant because this is more or less the liability duration of our average business, and 26 years is the average liability duration on the Health business. Within these 2 segments, the interest rates dropped down by on the 14 years duration by 25 basis points; and on the 26 years duration, 55 basis points. So within these and taking these into consideration, a 3.6% new business margin is a solid development and a solid ratio for this business. You see also on the split on the PVNBP that we included here the pension funds, which makes around 25% of our business. In other words, this helps us to reduce the transitional business and the reduction on the portfolio is now 3% in relation to the year 2019. On the next page, the EUR 111 million new business value, it's more or less 50-50 coming from Austria and from the international business, which is for us important, so that there is also a good shift between Austria and the international business. And we could achieve this within this year by 50 percentage -- in relation to 50-50. Last page, I would like to refer before we have the room for question and discussion is the Page #17, 1-7, talking about the Life, Health and pension fund sensitivities. We show here a risk-free yield growth sensitivities on the 50 basis points, which is strategically, for us, important to have here a net or a more or less same level on ups and downs, minus 14% on a minus 50 basis point shock at a plus 12 percentage points on a 50% -- basis point shock. So in that case, we can argue up and downs are covered more or less on the same level, which is important for the AUM management. So far, the additional information I wanted to share within this conference call on embedded value and on SCR capital management 2020. Thanks for listening, and I would now hand over to the operator for questions and discussions. Thank you.

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

I just have actually 2. The first one related to the EIOPA Solvency II review recommendation that was published in December. Could you elaborate on what impact you would expect if it gets implemented the way it was recommended? And the second one is, are you considering a use of transitionals going forward?

Thank you, Oliver. So first of all, I'll start with your second question. So we don't go for any traditional in the future. So this is for us called the Last Exit to Brooklyn meaning so really tough times to have this as a buffer and as an option. So no transitionals planned and even no transitionals within these models. First question on EIOPA. So I'll start and ask Paul then to add some more detailed information. We did some best calculations on the Solvency II review proposals that are on the table. For us, most problematic and what we are loving within the whole industry within UNIQA in Austria via the Insurance Association and also together with our positioning also in the [indiscernible] is about the risk margin and is about also the interest rate curves, especially on the UFR. So these are the most important topics that they avoided. Because around -- on the long-term business, this has the biggest impact on our ratio. And therefore, in that case, we are lobbying against this. Any other topics, Paul, maybe that you add to Mr. Simkovic in terms of what our positioning looks like?

Yes. Paul Buchner speaking. I can, of course, add 2 sentences to this topic. I think especially to the suggestion by EIOPA in December, this was mostly unchanged to what the proposals and discussions were in the consultation period. So our estimate on the impact would stay at the same level as we have already published during the Capital Markets Day, and this was back then 15% to 20% implications. So this would still uphold, and we upgrade our estimate currently.

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

I have just a quick question, a numbers question. If I understood correctly, then you mentioned the duration of the Life and the duration of the Health liabilities 14 years and 16 years -- sorry, 26 years. Can you confirm that? And why is the duration of the Health business so long? And what is the duration mismatch in both Life and Health? And I assume that's only Austria, right?

Michael, to start with the question, yes, I can confirm, 14, 1-4 and 26, 2-6. Why is the duration on the Health side that long? This has to do with, when do people go for a Health business, it's more or less in young age, and this is important, because, A, from a customer's perspective, the younger you start, the more cheaper the product is. If you start with 50 years or more than 50 years, the product is -- the product will become very, very expensive. The mismatch on the Life side is around 1.5 years. The mismatch on the Health side, Michael, is much more longer. I think we are here more than 10 years because you have to do with our longest contracts more than 90-year duration, and we don't have enough assets to cover this, if you just take into consideration. People who started very, very early with a product within 5 years, when you have been 5 years old and now the people are 16 years old, so in that case, with the Life expectation of these people, we have here a very long duration of some contracts. And therefore, we don't go for an ALM matching in the Health book. What we did in 2020 is we reduced the open ALM duration by this around 5 percentage points I explained, talking about the sensitivities.

And in Health, you can always adjust the prices, if necessary? That's probably...

In the Health, we can adjust the price for those products where the customer agreed that an indexation is for him, okay. But this the majority of the portfolio. Around 95% of our customers agreed on this indexation, yes.

[Operator Instructions] The next question comes from the line of Jakub Lichwa from Goldman Sachs.

Just a very brief one. In terms of the flexibility, what levers you can pull with respect to increasing your solvency capital ratio? I mean your leverage, as you said, you were, if anything, aiming to reduce that. You're on the edge of the, if I can put it that way, of your ambition. So could you actually maybe list in, in terms of, I don't know, priorities or flexibility, what you can do to get that higher?

Yes. Okay. So the options that we see when it comes very tough is -- I'll start with the ranking. We can work on our reinsurance model. UNIQA has so far no quota share within its portfolios. So we run always excess reinsurance with the external market. Secondly, we can go for Tier 1 restricted. So in that case, we have enough headroom. And the third one is, as I mentioned, where we can use also transitionals, which can be applied via the Austrian Supervisory Authority. What can all take place? So when I explained around our risk strategy falling below 170% on a sustainable basis or on a foreseeable basis. It's about derisking, especially when it comes on the market risk and the portfolio, talking about equity, talking about also maybe on the real estate. So the derisking topic is also something that we can have in mind.

[Operator Instructions] We have no further questions coming through on the phone lines. So I'd like to hand the call back for any closing remarks. Thank you.

Thank you very much. Ladies and gentlemen, thank you for taking part in this conference call. Wish you all the best and close the meeting. Thank you.

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