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

Hello, and welcome to the UNIQA Group results of the first quarter of 2022. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Andreas Brandstetter to begin today's call. Thank you.

Thank you. Hello, ladies and gentlemen. Welcome to our call on the first quarter results 2022. The strategic program, UNIQA 3.0, which we launched last year proves resilient even in challenging and quite uncertain times. The positive trend, the positive insurance technical trend, which we saw in the full year 2021, continues as we see an ongoing robust and satisfying development of our insurance core business in both our markets, Austria and CEE. Inviting you to join me on Slide 5 of our presentation. We see first and growth in the amount of 4.3%, which is driven by both our markets, a little bit less than 4% in Austria and more than 5% in CEE. You might be surprised that this growth in CEE is not stronger, while the fact is that we kept a very strong focus on our profitability in the motor business, especially in Poland, and this is the reason why this growth did not turn out to be even stronger. Second, you see a development of our operating expenses, which are below our growth on the top line. We see an increase in net commissions in various countries. They are offset by lower admin costs. And this as you know, is one of the key pillars and one of the key elements of our strategy program, UNIQA 3.0. Point number three, as a consequence out of this, we see a combined ratio, which increased slightly compared to the Q1 2021, which was an extremely good one, but which is with 92.8%, still on a very good level. Please have in mind that we aim to be clearly below 95%, around 93% on the long-term perspective on a continuous way at the end of our strategy program, UNIQA 3.0, in 2025. So overall, about the insurance technical result thing, we are quite fine. Having a look on the net investment income, EUR 170 million is a clear growth of roughly 13%, driven on the one hand by higher current income and on the other hand, as you might have seen by positive FX valuation. Well, in a nutshell, as a consequence out of this, our earnings before tax remained stable, around EUR 112 million, EUR 113 million, again, reflecting a very solid core business in both our core markets and the above run rate investment result. Topic number one, of course, on Slide 7, our current situation, our overall exposure in Ukraine and Russia. Well, on the left part of the slide, information, which you also are aware about. Both countries do not have really, I would say, extremely important role in our book. Yes, we are #2 on the market in Ukraine. So you see a market share of 7%, which shows and demonstrates how fragmented this market still is. We have many market participants, so consolidation will go on. The market remains for us very attractive. We think the market has potential even or especially after the war. And this is why we have a very strong and clear commitment staying in the Ukraine itself. Q1 of Ukraine, by the way, very positive. We saw a top line more or less in the level as on 2021. I think roughly EUR 28 million, and we see a profit before tax at around EUR 5 million. So we are up and running there. We are servicing our customers. We're even collecting premiums and our colleagues there deliver a astonish dedication and quality of work to a more than 1 million customers. It's about Ukraine. Russia even smaller. The full year figures of 2021 show a company which contributes to our top line at around 1.2%. So you see EUR 74 million. Market share very slow, of course and very, very small because we are only active, as you know, in the life business and only selling our products to customers of Raiffeisen Bank International, whose local Russian daughter company is a 25% shareholder of this insurance entity. So this means we are in the JV there with a daughter company of Raiffeisen Bank International. We are currently carefully evaluating all our possibilities, how we further proceed on the market, and this evaluation includes also the option of stepping out from the market and leaving completely Russia, please be so kind to accept that at the current point of time, we are not in the position to provide you any further details on this, but one option is also a completely withdrawal of the market. Of special interest to you, of course, is our bond exposure, which you're aware about also since our last call, which we had, I think in February. Overall, we see an exposure on the level of amortized costs in the amount of EUR 529 million for both countries, whereas we have the higher, by far higher exposure of course in Russia with EUR 386 million. One dimension which you might add to all this information, which you have in this slide, is that the Russian bonds on group level, which are in non-ruble currency. So this means mainly in U.S. dollars plus in euro, plus the equity of our Russian operation in Moscow altogether amount to roughly EUR 180 million. This is an additional information. Exposure in Russian bonds on group level in non-ruble currencies out of this amount to roughly EUR 140 million. So just to give you a guidance about the exposure as far as this is concerned. Having said so, let me please stop here and hand over to all the details of the first quarter 2 results to our CFO, Kurt Svoboda.

Good afternoon, ladies and gentlemen. I continue on Page #9 with the growth of the Group, 4.3%, as had been already mentioned, with a very satisfying development on the P&C side and on the health side and in the life business in the international segment. Talking about P&C. So all the growth reflects on the one hand, the operational growth, which we see with new customers with the increase of existing portfolios plus also indexation that we took especially in Austria and those countries where qualities are based on index prices. So with this, we took the first step also to give on the premium side, the existing inflation development to our premiums. In the health business, driven by Austria, a good growth about in both business lines, on the one hand, inpatient and outpatient, we see, as already stated in the last conference call, it's a good development in the health side, a great demand on services in that respect. So in that case, this is one of the positive outcomes of the COVID pandemic that customers and people generally take more care on the health business. Life, no changes in our strategy. So our focus unit linked and index linked products, whereby Austria, of course, a market that is starting now, but is not a booming market, differently in other markets like, for example, Czech Republic, on the pension fund, which allocated to large business, contribute to growth in that respect, so far to growth and to the topics behind. If you have a look on our cost ratio, which is shown on the next page, the UNIQA 3.0 strategy in relation to the profitability is visible also on the cost side. So we have ongoing good developments on that basis. So the UNIQA 3.0 target to reduce the cost ratio is in line with our targets and our plans. No major deviations in that respect to be mentioned. The combined ratio on a quite good level of 92.8 percentage points. We are, on the one hand seeing that COVID impact or COVID backwinds that we had in the last quarters, not any more debt visible like they have been. So commuting takes more place, mobility of people is visible, especially also the bigger cities, as you can see, for example, in Vienna. And this means also that the claims development are slightly increasing, but not in a manner that we have deviations to the plan. We see this as a good development. We have no major NatCat events to be reported in the first quarter and a very positive and good development. The basic claim is defined between EUR 0 and EUR 500,000. Major claims above are covered and also our reinsurance program shows the efficiency in that respect. The rest of the business lines on the next pages are in accordance to that what Andreas already stated and what we have also announced. Besides the good and solid growth, a technical performance that is in line with what we expected, a good cost management. And on the investment side, on the one hand, with the increase in interest rates, also slightly increase in income visible also in the first 3 months, around EUR 7 million better than in the last year, in the last several years, quarter 1, 2021. We have around EUR 40 million on realizations. This has to do with the portfolio shift into more ESG conformed assets based on our alliances that we have. And with this also reduced the opportunities on the market. FX driven by, of course, the currencies that we are in. But be aware that the FX gains that are shown in the investment results are not 1:1 visible in EPD because mitigations on the liability side take place, especially and as we are currency-wise also match between assets and liabilities and do not have a huge open current position. As the last comment, solvency ratio of income on the level of roughly 210 percentage points driven by on the one hand, the increase of the interest rates, on the other hand, also the negative impact on the own funds and as the portfolios of Russia and Ukraine on existing market levels are considered in the own funds. And this is what is already reflected in the economic market value. And also in the equity position, as you may have seen, so around EUR 370 million decrease on the equity position driven by increase of interest rates and spreads and minor amounts from the economic valuation on OCI for Russian and Ukrainian bonds. So far additional information to the operative business of UNIQA in the first 3 months and handing back to Andreas for last comments.

Thank you, Kurt. You know Kurt and me, we are serving on this project already for quite a time. And I think we didn't have so many moments where it's also difficult to give a clear guidance on the remaining 7 months, which we have. Just because we see 2 developments, 2 major trends, the one thing, and this is really a good one. Our underlying insurance technical result keeps us confident and makes us really very optimistic if you look to the future. I mean the AXA acquisition turned out to be really of an extreme high value for us. We've seen increased, constant increasing profitability in Eastern Europe. And we see also a remarkable robustness in both the growth and also the technical development of our Austrian home business. So top line is signed, seems to be resilient combined ratio and cost ratio we expect to be at the same level as in the last year. This is the one part of the story. The other part of the story is that due to the war in the East, it's really difficult for us to make any kind of comments on development of the capital markets. You have noticed, of course, that no impairment losses have been recognized on investments from Russia or Ukrainian issuer in Q1. And we will repeat and repeat it, we will reevaluate the situation according to the development in the upcoming weeks by the half year report of this year. So please understand that we are currently a little bit careful with giving a very clear guidance. But the really good thing is that, that's what we can influence and what we can drive ourselves, this is developing also in the second year of our new strategy program, UNIQA 3.0, precisely according to our plan. Having said so, let me stop here. We thank you for your attention, and we are very happy to take on your questions now.

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

Three questions from my side. The first one regarding a EUR 770 million decline in revaluation reserves. You mentioned that a part of this is also coming from Russia and Ukrainian bonds. Could you quantify on how much this is exactly. The second question is somewhat related to this regarding Page 7. Can we interpret the EUR 226 million difference between market and amortized cost values that you on the list on this page as an impairment risk that you see from today's perspective or is any of this already recognized in OCI? Also, on what conditions need to be met for you to impair this exposure aside from the obvious default of Russia? And then my last question is on P&C. How does the rising frequency and inflation impacts contract at premium rates and also the claims? So in other words, do you believe that you can compensate both the frequency increases and inflation through price increases, maintaining the combined ratio or do you see a threat that's the combined ratio might deteriorate in the coming quarters or maybe years?

Starting with question #1. So correct, EUR 770 million of decrease in the equity on IFRS basis. Within this EUR 770 million, roughly EUR 116 million are of the market valuation on Russian and Ukrainian bonds. This is in connection with question #2 because you see on Page #7, the EUR 226 million, as you mentioned. If you deduct from the EUR 226 million so-called taxes and profit participation under IFRS, you end up by EUR 160 million on a net basis. So this is the bridge from the EUR 226 million down to the EUR 160 million that are then in the equity or in [ UCI ] as they're called. Are these EUR 226 million the impairment risk that UNIQA runs at the moment? No, because this is the full amount on bonds denominated in all currencies that they are available. That means the rubles in U.S. dollars, in British pounds and in Swiss francs, whatever. And at the moment, we believe we are also incurrence with different auditors in the market, see that you have distinguish between bonds are denominated in rubles and bonds that are not denominated in rubles have also to distinguish between those who are in the home country and those who are not in the home countries. This has to do with IFRS levels. So the main message always is that the impairment risk in the existing situation of Ukraine and Russian or we see much more lower than the EUR 226 million. If you ask me on our guidance, I'm not in a position to do so because this has to do with development of markets, cash flows and also by maybe sanctions based on the European clearing foundation. Your third question goes in the direction of P&C and frequency and inflation, very valid point although, we have already they're possible. And according to the life cycle of the, the due date of the policies increased our policies with the customers with the indexes that are based. So in Austria, for example, for household insurance is the so-called power cost index which is at the moment, 13%. So this was already done in the first quarter, of course, only for those premiums that are allocated for the first quarter. And with this, we can also then counterbalance frequencies or claims increases coming from either higher spare parts or higher prices on the household sector. Is inflation generally had a topic that can hit us in the future quarters. Yes, of course. I think all insurance companies doing business, especially in a long-lasting business with, for example, GTPL as a general third-party liability. So the provisions, liabilities by longer than 2 years, we have to think and at least in Q3, what the outlook for inflation looks like and then maybe adapt the existing reserves to also cover price index for the future. This as an answer to your first question.

The next question comes from the line of Thomas Unger from Erste Group.

I would like to follow-up on the P&C inflation topic. And just if you could explain or give us a number how much of the P&C growth in Austria, the plus 6%. How much was that -- how much of that was indexation related? That's the first question. And then, of course, the equity position declined materially due to sharp rising yields in the quarter. But is that of any concern to you right now, the IFRS equity, I mean, the solvency ratio has benefited the investment yield is going up or likely going up, but clearly looking at the IFRS equity, is that of any concern to you going forward? And then the third question on yields. I would like to be in -- I'm interested in where do you see the effect? And how much do you anticipate the portfolio yield for this year and in the future to increase? What could the impact on the investment income in the P&L be. What uplift do you see for this year from the current change in the interest rate then your environment?

Thomas, let's start with the first question. How much from the inflation or on indexation is already part of the, as Andrea stated, around 4% growth in Austria. As I said before, Thomas, it is to be distinguished between contracts that started in the first quarter and has an impact on the premium development in the first quarter on those contracts that may be started on mid of March and therefore have the biggest impact in the rest of the year. We have different indexations like [indiscernible] index, which is 13%. You have other indexes in the accident or in the motor business, which are much more. So a real number to say, okay, or 1 percentage point of this comes from indexation is at the moment, hard to say because the time spent for one quarter in comparison to other is for us to show up. As a rough guidance, I can tell you, same question as yesterday in another call that we see that less than 0.5% is coming from indexation at the moment. And impact is bigger than the rest of the year, but this has nothing to do with the premium collection in Western Europe business. Second question, the increase of the yields. Yes, you're correct. So we are benefiting in that perspective. Also over counterbalancing negative impact from economic valuation on bonds like Russia or Ukraine because we are according to especially our health business on the liability side longer than on the asset side. And in this case, it plays in more positive. If you ask me if we are concerned about the IFRS equity, I would say no because, a, it's remaining 2 quarters that we are looking on this IFRS equity as it is. And by beginning of 2023, we are going to define a new equity position, which is then coming from IFRS 17 has to do with contractual service margins and OCI management differently than now. And out of that, I would say, no concern on the equity position per se. And the third topic is yields are increasing P&L impact in 2022. But they aren't going way, increasing yields are always good, but on the longer term. So in the first year, it's I would say, neglectable, but we'll talk about a low double-digit number. Importantly, if it stays like that, then in the third, fourth and this year. Here, the situation gets more better because we have a better turnover that the new money yields and then we talked about on the long-term target of impacts of a mid-double-digit number. But shortly, I would say, nice to get it, but it doesn't move the needle at all with record like that.

There are currently no questions in the queue. [Operator Instructions] We have no further questions in the queue. So I'll hand the call back to your host for some closing remarks.

Thank you very much for your time. Stay healthy and safe, and have a good afternoon. Bye-bye. Thank you for joining today's call. You may now disconnect your lines.