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

Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome and thank you for joining the Vienna Insurance Group conference call. [Operator Instructions] And I would now like to turn the conference over to Nina. Please go ahead.

Thank you, Haley. Welcome, everybody, to today's conference call for the first to third quarter results of Vienna Insurance Group. Today, Liane Hirner, our CFO, will start with a short presentation and afterwards, Liane and Peter Hofinger will be happy to answer your questions. I now hand over to Liane. Please go ahead.

Thank you, Nina, and a warm welcome also from my side. I'm pleased to be able to present VIG's solid results for the first to the third quarter 2020. Here in Austria, we are in the middle of our second lockdown and most of the time working from home. I assume that many of you are in a similar situation and I hope you are all safe and well. The third quarter itself was characterized by a stable premium development but got substantially impacted by the expected investment impairments which, according to the long-standing impairment rules of the group, came through in the third quarter. This, in combination with the missing contribution from the Austrian housing societies, led to the decrease in the financial result. On Page 4, we are presenting the highlights of the first 9 months results 2020 compared to 2019. Premiums of roughly EUR 8 billion recorded a plus of 1.7%, driven by higher contributions from the segments Central Functions, Austria and Poland. Over the period of 9 months, we have to consider the goodwill impairments done in the second quarter of 2020 in the size of roughly EUR 118 million. Therefore, the profit before taxes decreased by 29.2% to EUR 266.3 million. Adjusted for these impairments in Bulgaria, Croatia and Georgia, profit before taxes would be up by 2.1%. Net profit were down by 22.7% to EUR 175 million due to the investment impairments in Q3. The combined ratio of 96.1% improved by 0.3 percentage points compared to the same period last year. I will provide you with more detail shortly. Before moving to the details on the financials and investments, let me quickly touch the rating report of Standard & Poor's that was published yesterday. We are pleased that our A+ rating with stable outlook got confirmed once again, making VIG the best-rated company in the Austrian Traded Index. The excellent capitalization in 2019 as well as our prudent underwriting standards were recognized in a very strong financial risk profile. The strong business risk profile mentioned, among others, our leading market position in Austria and CEE and the market credentials like our well-known brands or the broad geographic premium diversification. Together with our business model and the group's digital transformation, this solid capital base is one of the cornerstones that enabled us to successfully manage the first wave of the pandemic. And based on this experience, we are also confident to be able to handle the current situation. Also a burdening impact on new business in Q4 will be given due to the current lockdown measures in many of our countries. Let's move to the details of the first to the third quarter results. On Slide 7, the income statement is provided. I have already mentioned the premium development in the separate slides and the financial results will follow. Decrease of 18.2% or EUR 114.2 million in the financial result, including an equity consolidated companies, is composed of about EUR 67 million missing contribution from the consolidation change from the housing societies and roughly EUR 50 million from investment impairments taken in the third quarter 2020. The increase in other expenses is driven by roughly EUR 118 million goodwill impairment and if they are nontax deductible, the tax ratio went up to 31.2%. Over the page on Slide 8, I would like to give you an overview on our main markets. Austrian premium volume, up with all lines of business growing except for life regular premium business. The decreasing financial result of roughly 13% has a direct impact on the profit before taxes, down by 13.5%. This negative profit development of roughly EUR 19 million in Austria is more than out-weighted by a strong increase of about EUR 30 million in Czech Republic, driven by the improved combined ratio in non-life and a better technical result in life. FX-adjusted premiums would have been up by 1.8%. Of course, there is no FX effect in Slovakia. The decrease in life business accounted for the premium decline of 7%, but it was the strongly improved combined ratio that made the profit before taxes rise by 16.2% to EUR 38 million in Slovakia. In Poland, the premium growth of more than 6% is derived mainly from the other property and MTPL business. Profit before taxes and combined ratio recorded a stable development in the current market environment. In the Baltic states, we were able to achieve double-digit profit growth, thanks to the reduced combined ratio and this despite the slight decline in premiums. On Slide 9, we show the premium development of all our segments. Growth rates were recorded in Romania, Hungary and Turkey/Georgia. The premium decrease in Bulgaria was mainly driven by health, whereas the decline in other markets derived from less single premium business in Liechtenstein. As also recognized by Standard & Poor's, the broad diversification of our markets and lines of business is a big advantage of VIG and positively contributes to the overall solid insurance business development also in challenging times like these. Over the page, you can see that as well. The declines in the life regular and life single premium business were offset by the increase in other property, motor and health business. The overall premium growth of 1.7% for the first to the third quarter got supported by the excellent start into the year. And as already mentioned, it will be difficult to compensate for the expected negative impact on new business due to current lockdowns. Slide 11 shows the overview of the group profit before taxes by segment. First, I would once again want to mention that the goodwill -- that excluding the goodwill impairments taken in second quarter, the profit before taxes development would be a positive one. I have spoken about the profit development of our main markets. In addition, I would like to point out the favorable development of the Romanian market segment after all the taken restructuring measures in the past. The declines in Bulgaria, Turkey/Georgia and remaining CEE are due to the goodwill impairments. All 3 segments would grow double-digit adjusted for these one-offs. On the next page, Slide 12, you can find more details regarding the combined ratio developments in our segments. Except for Austria and Poland, we recorded improved combined ratios in all market segments. Claims ratio decreased, supported by better claim activities and less weather-related claims. As expected, claims expenditures increased after the lockdown during the summer months. And given the ongoing uncertainty, higher claims reserves were built. This brings me to Slide 13 and our investment split and bond portfolio overview. In terms of asset classes, there are hardly any changes compared to year-end 2019 with a slight decrease in equities, currently at 3.7%. At year-end 2019, we were at 4.5%. This was mainly driven by the market development. In terms of bond issuers, we have slightly increased our exposure to corporate while at the same time reducing the share of financials in governments. Turning the page, we present on Slide 14 the financial result in more detail. The increased income from the disposal of investments by roughly EUR 100 million, recorded mainly in the second quarter when we made use of the market volatility, could not offset the missing contribution from the Austrian housing societies in the size of EUR 67 million for 9 months and the higher impairment of investments in Q3. In accordance with our long-standing impairment rules, these effects came through later compared to our peers. Let me finish my presentation on Slide 15 with our key messages and our outlook for 2020. What to say about 2020 based on the first to the third quarter results? First of all, we are satisfied with the development of the operative insurance business. New business premiums increased again after the lockdown and we see that our business model in this specific environment works well. Digital distribution channels have gained significantly in importance and in acceptance, thus, the efforts and initiatives regarding the digital transformation of the group paid off. We are optimistic that with the experience gained during the year, we are able to handle the recurring challenges. A few additional words regarding our solvency ratio. VIG currently calculated solvency ratio based on partial internal model and we only used the volatility adjustment in some markets. Our solvency ratio is currently stable on the half-year level of 2020 at approximately 183%. With this, we do see ourselves solidly capitalized. In the view of the upcoming Solvency II review, we have decided to group-wide evaluate the application of transitional -- on technical provisions in order to be able to react to any possible deteriorating measures that might come with the review of the long-term guarantees by EIOPA. VIG, like many of its peers, wants to secure the option of using transitionals for the group. At this point, I would like to confirm the released outlook for the full year 2020. We are expecting a profit before taxes in the range of EUR 300 million to EUR 350 million, still subject to unpredictable volatilities, especially on capital markets. Let me also confirm VIG's dividend policy, foreseeing a dividend distribution in the range of 30% to 50% of group net profit also for the financial year 2020. But of course, the dividend per share can only be proposed once the final net results for 2020 have been determined. With this, I have come to the end of my presentation and together with Peter, we are now at your disposal for any questions you might have. Thank you.

[Operator Instructions] And the first question is from the line of Michael Haid of Commerzbank.

I have 2 questions for both about the combined ratio and P&C insurance. First, I would like to get a better understanding of the combined ratio of 96.1%. And what are the moving parts here? To my understanding, you incurred some -- must have incurred some frequency benefits in motor across all regions, basically. On the other hand, I understand you decided to reserve more prudently in this year. Second, when I look at the combined ratios by regions, one country stands out. This is Poland, where the combined ratio increased marginally. Why is this the case? I assume that there must be also some frequency benefits from motor in Poland. Why did the combined ratio in Poland not improve more?

Okay. Peter speaking here. You were mentioning the topic of frequency and the more prudent reserving. This has also to do with a situation which we haven't had before in Q2 lockdowns. We also assumed that there are certain delays in one hindsight in reporting claims, but also in respect, if you look on court decisions or of people going to court. So therefore, what maybe one can see today as the real frequency will be not a real frequency later on because it's a different environment than we are expecting the years before, therefore, we are prudently also reserving in this respect. I also have to say, it's a very mixed picture country by country. Coming to Poland, I think what I've said is very much also true for Poland. And we had also, in Poland, a bit higher number of medium-sized claims in property.

The next question is from Thomas Unger of Erste Group.

Yes. Maybe right away to follow-up on the combined ratio question. Could you talk about the combined ratio in Q3 only? In Austria, it was clearly higher. In the Czech Republic, clearly better. Romania, Hungary, Poland, higher. What was the reason there? In the presentation, you've mentioned that there was higher reserving. Was that -- did that affect Q3? And then for -- staying in the Q3 results, the financial results, can you elaborate on the investment impairments that you had? You said EUR 50 million, I believe, in Q3 only. And then turning to the outlook. For -- we've only one of -- one quarter left, one month for 2020 and the EBT guidance is quite wide, considering that. Is that because you're very cautious regarding the financial results and the volatility on the capital markets? Or do you reckon with any one-offs potentially affecting the last quarter? Or is it -- does the operating performance in the last quarter have any question marks in your view? And also for Q3, I see that the operating expenses were quite high. You were actually increased quarter-on-quarter by EUR 51 million. What was the reason for that development in the OpEx?

Thank you for your questions. I will answer the -- or start with the question on the financial result. We had some impairments in Q3, as I mentioned, approximately EUR 50 million. This is due to our impairment rules. Approximately half of these impairments relate to listed entities, so they are not reversible. And the rest relates to participations, especially in the tourism sector. What -- when we come to the outlook, the range is quite wide because there are still a lot of -- some uncertainties not only on the capital markets but on the whole situation around lockdown scenarios. So the wider range also reflects these uncertainties. From a current standpoint, the operating performance of our company is solid and we also expect this to bear fruit first -- fourth quarter. With regard to the financial result in the last quarter, we expect financial result as around the first quarter and the third quarter of this year. So that means a range between EUR 140 million and EUR 125 million is what I can say to the outlook.

Coming to your question of the combined ratio in Austria for the third quarter, yes, this went up. This is due to large claims in our industrial book, which we were experiencing in Austria.

Okay. And the other countries in Q3, any specific factors for the combined ratio in Poland to be very high and also Romania, Hungary above 100% in Q3?

I mentioned, I think, when answering Mr. Haid, that we also had a higher activity in medium-sized claims in property in Poland.

[Operator Instructions] And the next question is from Thomas Fossard of HSBC.

I've got a couple of questions. Two questions, first on the group solvency. The first one is, could you shed some light on the potential benefits for application of the transitional measures you would like to secure just in order of magnitude, of what -- of how much it could be? The second point is taking the opportunity, you mentioned the S&P rating. Maybe you could tell us what is the capital surplus you're currently having on in the S&P model over your single A rating? And the third question would be, in terms of outlook for 2020, how do you expect the competitive environment on your main markets to evolve into next year? It seems to be that the loss environment has been positive roughly overall for you due to lower claims frequency, motor and things like that. So do you see some willingness of some of your competitors to potentially reinvest since frequency benefits into volume ambition and growth expectation next year? Or do you -- I mean are you feeling that underwriting discipline remains strong across the board?

Thank you for the question. I'll start answering your last question. What we see -- and this is now specifically seen in Austria, to a lesser extent in Central Eastern Europe -- there is a quite significant hardening of the market in property business and specifically here in the commercial lines. This has to do, on one hand side, having a soft market for many, many years. But on the other hand side, that the international competition of the commercial line insurers is -- they are less -- they are much more disciplined in underwriting, which also has effect here in Austria, in our commercial book. So here, we are realizing rate increases in the property lines. It's a very mixed picture when we come to motor business. It's currently also the renewal season in motor business. And what maybe we see, and I say we are currently in it, is that we have a higher retention rate of our existing customers. So people are less willing to change the risk carrier in motor TPL due to the effect of less activity of brokers and agents due to lockdowns and different measures out of COVID-19. So in some markets, we see a certain pressure on the premium level but in some others, to the contrary. I think it's too early to have here a clear prediction what this means for the year '21.

And Peter, if I may. Specifically touching upon the Polish market. Do you see any, I would say, cost inflation issue due to imported parts? Is that something that we should have in mind for later in the year and 2021 in terms of combined ratio for the motor book?