Vienna Insurance Group AG (VIG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thanks for joining the Vienna Insurance Group conference call. [Operator Instructions] I would now like to turn the conference over to Liane Hirner, CFO. Please go ahead.

Thank you, operator, and a very warm welcome to today's conference call. It's my pleasure to present to you the expected solid first quarter results with premium and net profit growth, as already mentioned in our ad hoc release about a month ago. I will start with a short overview based on the distributed presentation, and my Board member colleague, Peter Höfinger, will join me for the Q&A session afterwards. On Slide 4, the headline figures showed sound performance of our operating business with only minor impacts following the COVID-19 pandemic in the first quarter. Gross written premiums increased by 7.2% to EUR 3.1 billion, with premium growth in CEE reaching 9.4%. Profit before taxes decreased by 4.4% to EUR 122 million, but the profit after taxes and noncontrolling interest increased by 2.8% to roughly EUR 86 million, leading to earnings per share of EUR 2.68 in the first quarter, up by 2.8%. The combined ratio improved to 95.1% driven by a favorable claims ratio development. Over the page, on Slide 6, the P&L details are shown. The main item here is the development of the financial result. The 2 reasons for the decrease of roughly EUR 46 million are, on the one hand, the consolidation change of the nonprofit housing societies end of July 2019, which has an impact also on the tax ratio and is also the explanation for the lower noncontrolling interest; and on the other hand, increased impairments of investments due to the financial market turbulences in the course of the COVID-19 pandemic. There is not much to add on the positive premium development shown in more detail on Slides 7 and 8. I would like to go straight to Slide 8. As you can see, all lines of business contributed to the overall growth of 7.2%, and we are pleased about the strong organic growth rate of 5.3%. Gross written premiums from our cooperation with Erste Group in Q1 increased double digits by 12%. Due to the COVID-19 pandemic and all our markets being affected in the one or other way by the lockdown measures of local governments, new business is affected and we will see the impact from Q2 2020 onwards. Let's have a quick look at the profit before taxes on Page 9. As already mentioned, it is the consolidation change of the Austrian housing societies driving the profit decrease in the Central Functions segment. And the impairment of assets due to the capital markets development is the reason for the further decrease in Austria. Despite Austria and Central Functions, all market segments were able to achieve profit growth, nearly all segments, supported by a favorable combined ratio development presented on the next slide. As you can see on Slide 10, it's only the Remaining CEE segment with the combined ratio being up by more than 6 percentage points. This development was driven by a one-off precautionary measure taken in the Ukraine. Weather-related claims were slightly higher compared to the same period last year. But overall, the claims ratio improved mainly due to the favorable premium development in P&C and, at the same time, lower claims frequency in motor business. We do not expect this to be a trend for the upcoming months and are carefully monitoring further developments in this area. Slide 11 shows the overall investment split as well as rating and issuer details of the bond portfolio. There are hardly any changes compared to year-end 2019. I would now directly move on to Slide 12 with more information on the development of the financial result. The decreases in the current income, the depreciation of investments, the interest and other expenses are impacted by the already mentioned consolidation change of the housing societies. Overall, this means EUR 17.8 million less contribution to the financial result compared to the first quarter last year. Impairments of investments increased by EUR 13.6 million due to the capital markets development. Further impairments are subject to the level of financial markets in the upcoming months, the overall economic development and potential rating changes of countries and companies. This directly leads me to Slide 14. And I would like to end my presentation with an update of the current situation and our observations in the course of the COVID-19 pandemic. We are proud that we, VIG Holding, and all its group companies in the 30 markets, were able to quickly shift operations to home office mode, securing safety for staff, customers and business partners while, at the same time, keeping up our services. Right from the beginning, identified communication and extended country reporting provided us with up-to-date information from our group companies and the local developments in the different markets. The good news here is that many of them, similar to Austria, start to ease the substantial containment measures taken at the beginning. Based on different developments market by market and given the overall high uncertainty, especially on capital markets, it is yet far too early for a guidance for the full year. New business is, of course, affected. And as also, direct sales in many of our CEE markets increased and overall, a higher acceptance of online services is recognizable, this cannot compensate for the decline in new production via regular sales channels. As of Q1, we do not observe material changes in cancellation rates but are monitoring the further developments in all our markets. The overall macroeconomic development and the long-term consequences of the COVID-19 containment measures are not yet assessable. Biggest risk and, as such, constantly monitored is the high market volatility and the further development of capital markets going forward. As already mentioned, further impairments of investments and adverse effects on the financial result, thus, cannot be excluded, and rating changes of countries and companies are to be expected. Let's move to the executive summary for the first quarter results, which were not materially affected by COVID-19. Not only our balance sheet but also our numerous successfully implemented measures of our Agenda 2020, increasing efficiency and strengthening profitability contributes to our resilient foundation. All the digitalization efforts proved to be beneficial, and we see that VIG's diversification over countries, business lines and contribution channels in combination with our management principle of local entrepreneurship helps us to cope with the current challenges. Also, for the mentioned reasons, it is not possible to give a more detailed guidance for the full year 2020. I can assure you that VIG is well positioned and ready to act as a reliable and stable partner where we want to be for our stakeholders. On the following slides of presentation, you find the solvency overview of year-end 2019, including the sensitivities. The solvency ratio of 210% at year-end 2019 is, as of Q1 2020, at the lower end of the defined comfort zone of 170 to 230 percentage. With this, I end my presentation, and we are happy to take your questions.

[Operator Instructions] First question comes from the line of Youdish Chicooree.

I've got 3 questions, please. The first one is on the outlook. I appreciate it's quite difficult to make strong statements at this juncture. So maybe you could comment on which parts of the group are likely to be more resilient in the current environment and which parts are more sensitive to the macro development. And then secondly, on the combined ratio, should you not be more confident in hitting your old target of 95%? Because you had a strong start to the year and, as you say, lower claims frequency during the lockdown and in the near term, economic activity remains, so it should help you. And then my third question is on the solvency. Could you help us here and just be a bit more precise on where it is because lower end of the range is a bit difficult because you've got quite a big range. So that would be very helpful.

Okay. Thank you for your questions. First question regarding outlook, it's really the situation that a strong statement is currently not possible. Of course, we very much look for the current situation and are in close contact with all our companies. But as I already mentioned in my presentation, they're very well diversified over the group, so we have different effects offsetting also each other. But for the time being, no real strong statement is possible. When it comes to the combined ratio, of course, the situation is quite well in the first quarter, but we do not expect this to be a trend for the whole year because there is a shift from claims from the first quarter to the second quarter. Now the lockdown measures are eased and people are starting to travel again and using their own cars, so we expect more claims frequency, on the one hand; on the other hand, we expect also more claims in the areas like household, for example. Regarding solvency ratio, at the end of Q1, our ratio was at the lower end of the target range. What I can say from today and from the development since the end of Q1, we are still at the lower end of the comfort zone. Also, our solvency ratio is, of course, fluctuating regarding the capital markets development -- or in line with the capital markets development, but they are still in the same range.

[Operator Instructions] Next question comes from Thomas Unger, Erste Group.

I'm following up on the previous question, Liane, on the solvency ratio at the low end of the comfort zone. Could you describe the main factors that impacted the solvency ratio now in Q1, going down from 210% to whatever it is now, 170%, 180% in the first quarter? Do you expect or anticipate to stay within your comfort zone throughout 2020? And then also within the solvency ratio, in the own fund, do you -- is there -- for the Q1 figure, is the dividend for 2019 the proposal still included and also the Q1 earnings as well as possible deduction for a possible 2020 dividend? And then lastly, on your observations that you described on Page 14 for Q1 '20, if you could just elaborate on the development of the new business now and the decline in new business, as you described it, and talk a bit more on the claims situation. On premium, should we expect the growth rate to slow in the coming quarters? Or should we anticipate a decline of premium income in Q2, 3 and 4?

Thank you for your questions. Regarding the follow-up question concerning the solvency ratio, of course, the financial market impacts the first quarter ratio reduction of own funds due to the capital markets development we experienced. I cannot give you an outlook for 2020 now. The 2019 dividend is -- or the dividends are included in this calculation. So we see quite a stable development up to now in comparison with the first quarter 2020.

Okay. Was it maybe -- I'm sorry, was it mainly the spread development at the end of the quarter? Or what were the main factors there?

Yes, it's -- the decline in the revaluation reserve, it's mainly due to the spread development.

Okay. And I mean, you see it, of course, we saw it also in the IFRS equity and in the AFS losses. But have you recovered some of those AFS losses in the equity and also in the regular capital in the first 6 weeks of Q2 now as the spreads tightened again?

I think the situation is relatively stable since then. And I think what I can say is there is no big further retraction or big further increase. So it's a quite stable development since the end of Q1, up to date. Yes. Now regarding premium development, from -- in March, April, we see new business going down. The situation is quite different from country to country. In this respect, high diversification of our group is a big advantage. We see different developments, especially in Austria, we had a dramatic lockdown situation starting in March which, of course, led to a decrease of the business. We expect for Austria that we have seen the bottom line because shops are opening again this week, also schools started to open, sports will be allowed. We hope to see some positive impacts coming. Regarding Czech Republic, it's quite similar to Austria, but the lockdown measures were not as restrictive as in Austria. In Poland, for example, only now -- until now, we see very little decreases. In Germany, for example, only 50% lockdown was implemented. And there, we see no effect or only minor effects on the business up to now. So this diversification helps very much. But we, of course, expect the new business to go down also in the next quarters. Company bankruptcy is to be expected, like big clients like airports, hotels, restaurants will be affected, and so we do not expect premium increases in the next months. When it comes to the claims situation, I think this was also one of your questions, there's not so much impact. We have no event cancellation product. Business interruption is bundled. It's not too much affected and normally not, in the insurance coverage, included. Yes, we have less car insurance but less accidents in motor business. But claims -- individual claims are bigger and more claims in households, but it's something that we recognize. It's more a shift, but no really big impact. But in total, we don't expect to have -- this to be a big influence. But for the year-end, I cannot give you any concrete outlook. The most critical for us is the development of the capital markets and interest rate environment. So this -- but also in this area, I would like to state that our portion in equities is with 3.7%, rather low, and we have a good rating structure in our bond portfolio. But we expect to be affected in the next quarters also by further impairments. But it very much depends on the further development of the financial market.

Okay. And the impairments that you just mentioned also on the effect on the P&L now, what securities were affected there? And do you expect that to worsen in the coming quarters? Or is that just a major uncertainty that you flag now?

In the first quarter, we had some equities impaired and -- versus in the bond portfolio. But only -- not really big, big impact, but it very much depends on the next quarters how the situation will develop. But we rather expect more impairments in the next quarter.

So more than in Q1?

Yes, yes.

[Operator Instructions] The next question comes from the line of Michael Haid with Commerzbank.

One question only, actually. The combined ratio in P&C, you showed a good improvement in the combined ratio across all your major countries, basically. And I would like to understand to what extent this impact -- this lower combined ratio was impacted by lower frequency losses in motor and to what extent you expect these lower losses to be passed on to clients by means of premium rebates. Have you factored any of this in your figures for the Q1 already?

So experienced lower claims frequency mainly in the motor business, this is the main driver for the development in P&C. And could you please repeat the last part of your question? I didn't really catch it.

Yes, no problem. There is some political pressure maybe and also maybe from competition that you have to pass on this lower claims back to the policyholder by means of giving them more rebates. I heard that in some countries, insurance companies give 1 month premiums back. Or in Germany, for instance, there are policies out where the ultimate premium depends on the mileage driven. So when there is less mileage driven, then the premium goes down. So the simple question is, how much of this lower frequency do you think you have to pass back to the -- to your customers?

Okay. Thank you for repeating the question. Oh, Peter, do you want to answer the question?

Maybe I can take over here. I think you have to differentiate the situation in Germany to Central Eastern Europe. In many -- in some of our countries, we do have also already tariffs which are depending on the usage of the cars. So there, you have an automatic calculation there. In all our other tariffs which we have, it is much too early to assess if there will be the lower frequency result in any kind of political discussion of rebates or payback of premiums. We have not factored it in, in the first quarter results, and I would not expect it to be in the major places where we are in this year.

The next question comes from the line of Thomas Fossard with HSBC.

I've got several questions. The first one would be on the dividend. Could you remind us how we should think about your DPS '19. For the time being, it's been put on hold. And if I'm not mistaken, you have not planned yet a new AGM date. So maybe you could help us to better understand how we should think about the DPS. Is that now completely canceled? Is it just postponed? And also, what is the position of the Australian -- Austrian financial regulator? The second question will be related to your Solvency II range. So the 170% to 220% -- or 230%, sorry, what would be the group decision if in case you were to cross the 170% in the coming months for whatever reasons, maybe interest rates or something like that, if you were to cross down the 170%, what would be the impact? What could be the decision that actually will be implemented by the group in order to maintain a reasonable level of solvency? And the third and last question will be related to -- in different countries, actually, in light of the macroeconomic environment, there are a lot of discussions regarding insurance companies supporting or contributing to relaunch the economic funds or, I mean, the relief funds at your big players in Austria. Are you a part or are you aware of any discussion by which you may contribute to some relief funds in the coming quarters?

Maybe I start with the last question. If I understand it right, you are asking about compensation in the overall economic situation for claims, which are not covered. Hello?

He has exited the line.

Okay. Because I didn't get 100% the question from him. Okay. Liane, I hand over.

Mr. Fossard is connected. I will open his line, sir.

So maybe I will start with answering question 1 and 2. Regarding the dividend, the AGM date is still not fixed, but we expect it to take place somewhat after summer. Our dividend proposal is still valid, and the final decision will be taken by the AGM. No changes on this side. Regarding the solvency, the range between 170% and 230% is our self-defined comfort zone. Also, if the group solvency ratio would decline under the 170%, we still feel could capitalize. But as I said before or already explained, currently, we are at the lower end of the comfort zone. And we feel very -- we still feel comfortable with that ratio.

Excuse me, for the third question, could you shortly repeat it?

Yes. I think that -- sorry, sorry for coming back. Actually, in several countries, there are some pressure from the political -- from the government for the insurance industry to contribute financially to some relief fund or, I mean, helping, yes, the economy to restart.

Okay, I got it. There has been, in Austria, a little bit similar like in Bavaria by the insurance association that has been decided that for self-employed and for some touristic hotels and restaurants to -- where it's not clear if this is covered, the pandemic -- if the pandemic is included, it has been decided that the insurance industry, the total insurance industry will contribute 15% of the sum insured to these topics, which amounts in total for the Austrian insurance industry in Austria around EUR 100 million. In no other countries we do have a topic like this.

Okay. And that's -- and for the Vienna Insurance Group share, it's not yet on the Q1 results, is it?

It is not yet in the Q1 results. But for the overall group, it will not have a too big impact here.

We have a follow-up question from Michael Haid, Commerzbank.

I have to come back to the solvency ratio. Did you take any management actions in the first quarter to limit the decline of the Solvency II ratio? And if not, do you plan to take any measures, i.e., additional reinsurance or lengthening of the duration of your fixed income portfolio or whatever?

Thank you for your question. We did not take any active actions to increase -- or decrease or increase the solvency ratio, and there are no concrete plans currently do so. But we will follow up and closely monitor, of course, the situation.

[Operator Instructions] And there are no further questions at this time. I hand back to Liane for closing comments.

So thank you, everybody, ladies and gentlemen, for your interest and your questions. If anything comes up, the Investor Relations team, though still in home office, are ready to help and reachable. The next scheduled call is going to be on the 26th of August when VIG is releasing its half year results 2020. So thank you once again. Have a nice day. Stay healthy, and goodbye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thanks for joining, and have a pleasant day. Goodbye.