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

Hello, and welcome to the UNIQA Group Conference Results of the First Quarter 2021. 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.

Hello, ladies and gentlemen, and thank you for your interest in the Q1 2021 results of UNIQA Insurance Group. As you can see on the page, describing the snapshot, Page 4. I think it's quite fair to say that we had a satisfying and very good start into this new year. In the last 3 months, we managed to decrease our cost ratio, which came down to something like 27.2%. We had a very good underwriting result in P&C business. And as you saw and noticed, our investment result was exceptionally strong. Yes, we know that some of those positive elements are not sustainable and are not recurring. This is clear. But on the other hand, this very good quarterly result also reflects our [ outlook ] on the longer-term strategic goals, which we presented to you in last December when we talked about UNIQA 3.0 feeding the future. So first, what it's good to see that the restructuring in Austria is going on, it's executed as planned. And also second, the integration of our former AXA CEE subsidiaries in Poland, Czech Republic and Slovakia is right on target and is extremely good and right on track. Those 2 factors, Austria plus CE together make us very confident to show to you what we promised last year, achieving an increased return on equity on a sustainable basis in the midterm. This is our very clear promise, and we will manage this. Please note, then we talk now about the figures that all, of course, and then include the acquisition of former AXA companies. So when relevant, we will give you also an idea of how the business developed without this effect of the AXA companies. Just a few comments first on the growth. As stated on those slides, the business in Austria is quite robust despite the very negative environment, on the one hand. On the other hand, in CE markets without AXA, we see a moderate decline, driven by negative FX development. FX-adjusted with those developments without AXA, we would have grown slightly. The motor business and the bancassurance business are most affected by lockdowns in various of our countries in Eastern Europe. But overall, I think as far as growth is concerned, we see a very solid development in the current environment. If it's about net investment result, and Kurt will touch it a little bit later, we see a very strong quarter on the capital markets and we took advantage of this. We reduced our exposure to growth and increased, on the other hand, exposure to value on the equity side. And also on the fixed income side, we had some harvesting compared to a quite weak quarter in the year 2020 when we had impairments due to the COVID-19-related volatility. When it's about combined ratio, you saw a very positive development, 90.9%. A very good underwriting result this quarter. Clearly, we had some backwind from lower frequency, especially in the motor business, which we deem not -- nonrecurring. But even without the lower frequency, we think our disciplined underwriting is showing further results. And also here Kurt will touch it, and he will go into more details a couple of minutes later. Earnings before tax, a very good result. We are very happy about something like EUR 112 million. From all perspectives, quite satisfying. Last comment, allow me to give before I hand over to Kurt on Page 5. It's about the regulatory capital position, the SCR, 195% per Q1. Increasing interest rates, of course, and the improved underwriting were the main driver for this strong increase from the year-end onwards, and we feel very comfortable with the long-term target to stay clearly above the 170%, which we gave to you as our guidance for UNIQA 3.0 seeding the future. Having said so, I may hand over to Kurt, who will start on Page 7, introduce you to the main details of our group results.

Thank you, Andreas. This is Kurt Svoboda speaking. Additionally, to the solvency explanation that Andreas gave to you. For your information, these numbers, including the [ partial ] income model of UNIQA, including the AXA companies. And still, the companies does not have any transitionals in its calculation. Jumping on Page #7, just a snapshot on the development on the premiums. A quite good growth in all lines that we have in our business. COVID effects are still negligible. And out of this, the growth, even without AXA, a little bit more than 2% is very satisfying. Page #8, jumping to the cost ratio and the cost development. The cost ratio came down, especially, a, because of the first implications -- positive implications of our cost program that we run over the group. Restructuring effects in Austria from the provision social plan in 2020 are not yet material. We expect them to be visible at least in quarter Q3 and Q4 within this year. This has to do because we have now around 80% of our people that are affected in the social plans with a contractual basis finished, but when you leave the company and the first effect we'll expect in the second half of the year. Here we see positive effects in -- especially in the material costs. And out of this, we are quite happy that this cost program shows the first effect, and we expect them to be in plan for the year 2021. Synergies of AXA, maybe also a word on that. Of course, we have the first synergies within these cost ratio and the cost development that you see here. Still in comparison to that, what we have on integration costs, they are not material. Integration costs included in Q1 are of around EUR 11 million. The AXA synergies in the first quarter are close to EUR 2 million. As regard to the combined ratio on Page #9, a very good combined ratio. I think one of the best combined ratios on the UNIQA in a quarter. Lower frequency, a very good basis claim -- development basis claims in UNIQA are defined with -- in the range of up to EUR 500,000, especially in the retail business. We have an extra good development on the weather-related losses because in that case, we have not seen significant impacts. COVID loss ratio impact is still visible, but we see also a tendency that it goes up to the old normality. But still, of course, we have here a -- sort of a backwind in that case. Of course, we had also some bigger claims, but our reinsurance cover works quite good. And in that case, we got also a good [ intersession ] premium out of these bigger claims. Of course, we do not see that this is a sustainable ongoing development over the next quarters, but we see also that our portfolio management works quite good. And please also note that this quarter does not reflect any court decisions that we have regarding business interruption cases. So this still has to come. Page #11. The next page, I would like to elaborate. We have on the Health business, besides the good development also on the growth side, also our decisions taken to allocate substantially to the premium refund. This was one action that we took in Q1. And on the other hand, we experienced also lower claims. And in that case, we have been careful and have also potentially reserved for IBNR in terms of upcoming services that we have to pay to our customers. Page #12 on the Life business, positive effects coming from the AXA -- positive ex AXA portfolio, and in that case, also the CE Life business was the driver of the good development of the Life business in UNIQA. Also that this bancassurance has a negative impact because still COVID and the closing on point of sales, in that case was against the expected growth. Coming, at least, then to the investment activity, Page #13. We talked about with -- you heard about our trading efforts that we have. We took the opportunity, especially in the first 3 months that we changed our approach in our internal funds and to change from technical equity positions to more sustainable ones with this, because trading effects of more than EUR 50 million. This is, of course, something that we don't expect ongoing on this amount. Also take into account that STRABAG in the first quarter had a negative impact according to their business model, but still STRABAG is also in line with their plans, and we do not expect any deviations from that, what we had in the previous years. That's all my information to the operational development of the first quarter. And for outlook, Andreas will give you a flavor on that.

Thank you, Kurt. The main elements about the outlook you'll find on Page 15. So to summarize what you heard from Kurt now, we may say that this was a very good quarter without any doubt and was a quite satisfying start into the new year. I would like to mention 5 points. First, the top line, as you saw, is getting the expected boost from our acquisition last year. And as we see our already existing core business is stable in a quite challenging environment. Second, excellent combined ratio, we are on the right long-term trend. This is for sure, and we are more confident than before to reach our mid and, of course, long-term goals. Third, cost management contract for AXA integration, as was shown before, is delivering against our targets. And well, last but not least, 5, this altogether gives us confidence to not just reach this year's target, but even more important also to keep what we promised on the Capital Markets Day to you last year. We know that it seems -- or it might seem a little bit conservative not to increase our outlook after the strong first quarter. We are aware about this. But please also accept that we need to wait and see how our business is going to develop in Q2 over the next weeks and months. To change the outlook already after the first quarter, according to our opinion, might be premature and we should wait for this. About our targets, I would like to confirm them. UNIQA 3.0 will deliver on top line CAGR of something like 3%. We'll have a cost ratio on the long-term perspective below 25%. We want to have our combined ratio net constantly to be at around 93%. We want to deliver to you an ROE of 8% to 10%. And most important to you, an increasing dividend per share ratio of 50% to 60%. So thank you so much for listening to us, and I may hand now back to the operator, and we are now very happy to answer your questions.

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

Two questions. First, the combined ratio, of course, 90.9%, excellent combined ratio. Can you provide a breakdown into the various components of the combined ratio, obviously, as you mentioned, weather-related losses were very low. Frequency benefits, probably more significant. Also, you mentioned some more cautious reserving due to uncertainty about future loss experience once COVID-19 is behind us. So can you shed a little bit more light on what you expect there? Second question, the Solvency II ratio, 195%, up from 170% at year-end. It is well above your target. You want to be above 170%. How do you look at the Solvency II ratio with respect to capital distribution measures? Yes, these are my questions.

Thank you, Michael. Let me start with the second one. The movement in Q1 was driven by 2 elements. First of all, of course, we have around 35 basis points better interest rate curve, which is paid for Solvency II and increases according to our long-term business, especially in the Health business where we have on purpose these asset allocation helping out in that respect. Secondly, not to forget, these excellent technical result also [ decrease ] the risk capital, and therefore, also an impact on that side. Talking about excess capital and talking about, I think, the usage of excess capital, I think that is too early. We do not see any sustainable increase of interest rates over the next couple of quarters. So I think when we can argue that these interest rate environment stays like it is, then it will be good for opportunity and a good position also from a macroeconomic perspective. But for us, too early to talk about excess capital and how we bring this into working capital. And on the other hand, Michael, I think we have all known that excess capital doesn't automatically mean free cash flows. So also on that, we have to take care of what it means for internal and external funding. And I can give you more guidance on that, at least, in the conference call in August or then in September. Your second question is about combined ratio. 90.9% is a quite excellent development. So what I can state to you is the composition of this combined ratio is of a 14% acquisition and admin cost, around 16% is about commission ratio and about 60% is the loss ratio. The loss ratio, you can divide into an impact of 7% that we had out of big claims, which is in relation to other quarters is a little bit higher. And another impact is that we had only 0.7% from a NatCat, which means the remaining part is something according to -- we call them attritional claims or basic claims. Reserving level, you know from my previous information that the company always targets between 2% and 2.5% to have in the so-called best estimate level available. And this is what we have with this combined ratio again, meaning we are quite well reserved. And even with this 99 -- 90.9% was possible to achieve.

Is it fair to assume that the frequency benefits are around 1, maybe 2 percentage points in the combined ratio?

It's fair to say 2%. Correct. And the other point, Michael, it's also fair to say that the COVID impact is still between 2% also.

[Operator Instructions] We have our next question from Thomas Unger of Erste Group.

I have a few, if that's okay. First, I would like to ask on the investment results. Obviously, you had recorded some substantial realized gains in the quarter. Around what level do you see the financial results currently sustainable? Is it around EUR 100 million to EUR 110 million per quarter, also for the coming quarters then? And on the solvency ratio, you've mentioned the interest rate, curve change as the main contributor to the 25 basis points -- 25 percentage point increase quarter-on-quarter. How much exactly -- or can you give the breakdown, how much exactly it relates to the interest rate curve and how much to the technical results in Q2 and -- Q1 and the changes quarter-on-quarter? And then lastly, the line amortization of goodwill in the P&L was minus EUR 12.6 million for the quarter. Is there a one-off in that line as well or is that the run rate that we can use to project through the coming quarters? And then lastly, on the operating expenses, the level with the one-off now seems to be around EUR 400 million to EUR 420 million for the net operating expenses, is -- it appeared that way in Q4 and now also in Q1. Do you expect an improvement from this level already in 2021, so in the coming quarters towards the end of the year? Or is that the level that we can project for the coming quarters in 2021?

Okay. Thomas, thank you. So I take the first one, investment result. Of course, what we want to state is that in the first quarter, we have no impairments. That means the -- it was really a favorable quarter for the financial industry and also for our portfolio. But giving you a guidance, I would -- at the moment, state that everything between around EUR 130 million is a sustainable quarterly investment results that you can take into consideration. Of course, not knowing if there is a COVID impact on -- I don't know from the U.S. American development or from the topics in Israel or Turkey. But with a normal development, I would give you the guidance. Your second question about Solvency II ratio and the composition of the improvement. So the improvement was exactly 25 basis points. When we divide this into what effect comes from the interest rate shift and what comes from the technical result, it's about exactly 18% comes from interest rate shift, 1-8, and the rest, 7% comes from the technical result. The goodwill topic is something that is relating to our integration of AXA and the composition of the purchase price allocation. So we decided to divide our purchase price allocation into a so-called fixed goodwill, which is the classical goodwill as intangible, visible. And the other thing is that we created a so-called value of business in force, especially for the Life and for the Pension business in Poland, Czech Republic and Slovakia. And this is depreciated over the lifetime of the contract, which is on average around 11.5 years. And this is the impact of the yearly depreciation of this VBI, and this is shown on the goodwill. It is something that we planned and that we knew. And was in former days, just to you the technical information, in the AXA world accounted as deferred acquisition costs. So the last question, if I got it wrong -- if I got it right, is about when do we expect the first impact on the cost side. So significantly, we expect them, as I stated in Q3 and in Q4 in Austria and in CE. This has to do with laying off of people in Austria and the social plan. And anyhow, we have some many people that are leaving the company still by mid of the year or at the end of the year, but the most significant things we will see in Q3 and in Q4. And the run rate is then visible in 2022.

Before I return the call to your presenters, we'll ask for one more call for questions. [Operator Instructions] We have no further questions coming through. I'll turn then over to your speakers for any closing remarks.

Ladies and gentlemen, thank you very much for your interest in our Q1 figures. Stay healthy, have a good afternoon, and goodbye.

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