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

Ladies and gentlemen, thank you for standing by. I am 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 to Vienna Insurance Group's conference call for the preliminary results of 2020. Elisabeth Stadler, our CEO will start with the highlights; and Liane Hirner, as CFO, will take you through the financial developments in more detail. Werner Matula, our Group Chief Actuary will present the life and health embedded value and [then back to Elizabeth for the outlook 2021. Afterwards, all presenters, including Peter Hofinger and Gerhard Lahner, are ready to take your questions. I now hand over our CEO, please, Elisabeth.

Thank you, Nina. Good afternoon, ladies and gentlemen. I'm pleased to present solid preliminary figures of our group for -- in many ways extraordinary financial year 2020. We ensured business continuity in all our 50 group companies in 30 markets and states at our customers' disposal throughout the whole year. This is a great achievement, and many of our employees and sales forces are still working from home. Thank you, Nina. Good afternoon, ladies and gentlemen. I'm pleased to present solid preliminary figures of our group for -- in many ways extraordinary financial year 2020. We ensured business continuity in all our 50 group companies in 30 markets and state at our customers' disposal throughout the whole year. This is a great achievement, and many of our employees and sales forces are still working from home. I assume we all have adopted to the changed circumstances and ups and downs in our countries. VIG's decentralized approach and local entrepreneurships are a key driver for the overall solid operative performance of our group. Despite the COVID-19 challenges, we continue to work successfully on our Agenda 2020 initiatives, further expanding our digital products and services. As the CEO of the company, I'm particularly happy about the share purchase agreement signed for the acquisition of the CEE business of Aegon. VIG is taking an important step towards further expanding this market leadership in Central and Eastern Europe, and we'll make use of the opportunities connected with this transaction. At the same time, our focus on sustainability and the further integration of ESG aspect into our core business remains. Also, our commitment to shareholder participation is unchanged. Thus, VIG is planning to propose a dividend of $0.75 per share at the Annual General Meeting, which will take place in May 2021. At that time, our new strategic program for the next 5 years will be finalized and announced as well. With this, let's move to Slide 4, and give you a quick overview of the results highlights. Despite the pandemic and the negative impact on new business, we were able to achieve premium growth, and we reached a premium volume of EUR 10.4 billion. Profit before taxes of EUR 346 million is at the upper end of the announced range of EUR 300 million to EUR 350 million. The decrease of 34% compared to 2019 is due to a declining financial result, impacted mainly by COVID-19. We have prepared more and detailed information later on. The combined ratio came down to 95%, driven by the improved claims ratio. The first estimation of our preliminary unaudited solvency ratio, including the use of transitional for the Austrian insurance companies is roughly about 235%, underpinning the sound capitalization of our group. I have already mentioned the dividend proposal of EUR 0.75, corresponding to our payout ratio, this is a payout ratio of 41.5%. Finally, one highlight from the life and health embedded value, that Werner Matula, as you have heard, our group Chief Actuary, will explain in more detail in a few minutes. I would like to stress the new business margin of 4.4% for our CEE business. We have summarized our Agenda 2020 accomplishments on slide 5. When taking over the role as CEO in VIG in 2016, I have initiated this strategic work program. The idea was to create a broad range of concrete measures for sustainable success. And I think I can be quite proud to say that we have achieved our planned objectives, not only regarding the optimization of our business model that strongly supported the improvement of our combined ratio, but also with regards to ensuring future viability and growth. Our focus on health insurance in the countries, Bulgaria, Poland, Romania, Hungary and Turkey, paid off and resulted in a more than through put premium volume in these markets. Especially in times like these health has become even more important. Therefore, our group companies have responded appropriately and increased their health services and offers. There was progress made in all areas and particularly the digital transformation of our group proved to be essential in the past year. We have given more details in our news and investor release today and being conscious of time, I want to say a few more words about our mergers and acquisitions during Agenda 2020. Over the page, Slide 6. You can see an overview of our M&A activities in the past years. We have completed 13 mergers and acquired 10 insurance companies. Most of them, the smaller add on transactions for either economies of scale or additional sales power, respectively, distribution. This leads us to Page 7. Our latest and recent acquisition of the CEE business of Aegon. We are quite proud that we were able to reach this agreement with Aegon. We had been actively in to grow in CEE, and this transaction represents a really unique opportunity for us to do so. We are becoming #1 in Hungary and the transection also helps us achieving growth in countries where it would have been difficult organically. We believe and all statistics show that the growth in Eastern Europe will remain higher than in Austria and Western Europe. Therefore, this acquisition represents an investment in sustainable growth. The strategic merits are listed on the slide. And I want to stress that this deal offers an extremely attractive business mix in 4 specific geographies. We are buying complementary business with additional sales channels, we can leverage on. It is strong, stable business from well management -- well-managed insurance companies with good management, including also asset management, service and pension fund entities. Given our vast experience in acquiring, integrating and merging companies, which we have shown through the last year, we are confident in achieving substantial synergies. The transaction is subject to the regulatory and antitrust approval, of course. We will provide more details with the announcement of closing, which we expect in the second half or at the beginning of the second half of 2021. Before I hand over to Liane for the details of the preliminary results, let me give you a brief overview on our CSR accomplishments in 2020, split up in the 5 pillars of our sustainability strategy. There is core business, customers, employees, society and environment. After doubling our green bond investments in 2019, we have increased our total exposure in 2020 to EUR 238 million. Our engagement in affordable housing remains unchanged. For our customers, we strive to develop attractive and affordable as well and ethical and environmentally friendly products. Our diversity efforts are recognized. That is quite fine. In 2020, we have fully focused to support our staff in handling the new challenges. Moreover, the group companies did a lot for their local communities and we continued our sponsoring projects as far as possible despite COVID-19. Our climate change strategy in placed since May 2019 provides for the ongoing gradual withdrawal from the coal sector, and we were able to receive a reduction of the underwriting risks by 60% in 2020. Let me stop here. I hand over to Liane to take you through the financials.

Thank you, Elizabeth, and welcome to all listeners also from my side. Let me start with Slide 10 and our consolidated income statement for the full year 2020. The decline in financial result by more than EUR 400 million is striking. Please keep in mind that 2019 still includes the contribution of the nonprofit housing societies as well as a positive one-off from the sale of the S IMMO stake. In 2020 was impacted COVID-19-related impairments on equities, equity funds and participation as well as a specific one-off items in the Austrian segment. Other expenses in 2020, include the goodwill impairments from Q2 for the countries -- segments, Bulgaria, Croatia and Georgia in the size of EUR 118 million. In 2019, we took a goodwill impairment of EUR 109 million for Romania. The pretax profit of EUR 345.9 million was declining by 33.7% due to the described decreased financial result. Tax expenses remained rather stable, but due to the decreased profit, tax ratio increased to 98 -- 29.8%. On Slide 11, follow up of our main market overview. Considering the time, I will comment on the developments on the following slides. Let's start over the page, which shows the detail of premium growth. Given the pandemic and its impact on new business, we are satisfied with the recorded premium development. We see Austria and Poland, with solid increases, both driven by other property business. The slight premium decreases for the Czech Republic and Hungary are only due to negative currency effects. FX adjusted, both segments are growing, Czech by 2.2% and Hungary by 7.1%. The decreases in Slovakia and in other markets are driven by less life single premium business. The premium development by line of business on Slide 13 shows that other properties based on the positive performance of the corporate business and health grew. Motor business remained rather stable. The interest in the life insurance business was subdued due to COVID-19, both life regular and the life single premium business decreased. Over the page, we provide on Slide 14, an overview of group profit before taxes by segment, with the impact of the already mentioned goodwill impairments being visible in 2019 for Romania as well as in 2020 for Bulgaria, Turkey, Georgia and remaining CEE. One-offs in Austria and Poland are the main driver for the profit decrease is there. Overall profit before taxes of EUR 345.6 million was mostly impacted from the declining financial result, which is shown on Slide 17 in more detail. I move on to slide 15 and the presentation of the combined ratio details. Here all segments, apart from Poland, registered decreasing combined ratios, and all segments had combined ratios below 100%, which is especially pleasing for segment Romania. During the Agenda 2020, we were able to bring the overall combined ratio down from 97.3% to 95.0% in 2020. The reduction in claims expenses during the lockdown period in 2020 also contributed to the improvement. One comment on the combined ratio development in Poland, here the entire impairment of activated insurance portfolio increased the cost ratio. But the Polish combined ratio is 96.7%, still being on an attractive level. The split of our roughly EUR 37 billion investments, including cash, is, as always, dominated by bonds. The details regarding the bonds investment presented on the right side of Slide 16, show a slight shift between Single A and BBB from 2019 to 2020. The slight increase in BBB was driven by purchases and rating changes. Before I hand over to Werner Matula for his remarks on the group embedded value development, let's have a look at the already mentioned financial results development on Slide 17. The financial result 2019 included a contribution from the nonprofit housing societies, approximately EUR 72 million as well as the positive one-off from the sale of s Immo stake. The COVID-19-related impairments, exchange rate changes and increased other expenses burdened the financial results 2020. Leading to the 36.7% decrease, including at equity consolidated companies. Including the negative result from its equity consolidated companies, the decrease is 41%. 2020 was for sure, an exceptional year in terms of market development, having the biggest impact on group performance. Given that the operative business performance of VIG, despite COVID-19 was solid, it's the market behavior carrying the highest uncertainty and capital markets development as market risk are closely monitored. With this, I hand over to Werner Matula for presenting the details on the life and health embedded value. Werner, please go ahead.

Thank you very much, Liane, and good afternoon from my side. On the next 3 side -- slides, let's do a deep dive into the performance of the life and health business during 2020. VIG discloses for this purpose, the embedded value consistently calculated with our Solvency II resides. Looking first on the business in Austria and Germany on Slide 19. It's immediately visible that the economic environment was a significant reason for the negative return in 2020, more than EUR 700 million decrease due to lower interest rates. This effect is consistent with the sensitivities we have disclosed also for the last year results. The development also includes the profitable long-term health business written in Austria, which developed much better than projected. Also, the new business contribution was positive with a new business value of EUR 20 million and a margin of 1%. Compared to Austria and Germany, the new business contribution in CEE, shown on Slide 20 is more significant, almost EUR 50 million new business value with a margin of 4.4% is an excellent result. Given a year of a challenging environment for distribution, especially for profitable risk business volumes. Experience variance reflects also the prolongation of riders, which are considered with a short contract boundary according to the Solvency II regulations. The life book in CEE continues to be less sensitive to interest rate developments, thus, only EUR 10 million negative economic variance. Overall, CEE contributes with EUR 196.5 million or a 10.7% return to the embedded value. On Slide 21, you can see the development of the total embedded value from EUR 3.6 billion reported last year to EUR 3.2 billion this year. The total new business contribution was EUR 68.8 million with a margin of 2.2%. Finally, it's worth mentioning that the CEE region currently contributes with 63% to the total VIG life and health embedded value. With this brief overview, I'm handing back to Elizabeth for the dividends and outlook.

Thank you, Werner. Ladies and gentlemen, let's come to the outlook. On Slide 23, you can see we have put together the pieces contributing to our success. VIG, and I think you know this the meanwhile quite well, is the leading insurance group in Central and Eastern Europe and with our M&A activities, especially with the acquisition of Aegon CEE, we are fostering our position as top player in this region. Our solid capitalization is confirmed by our A plus stable outlook rating from Standard & Poor's. Based on our long-term capital planning and ongoing capital optimization efforts, we have announced the issuance of a senior sustainability bond depending on market conditions with a volume of EUR 500 million in the first half of 2021, allowing for a combination of green and social efforts. On Slide 24, as already mentioned, the dividend proposal per share will be EUR 0.75, taking into consideration VIG's prudent capital planning and being in line with our dividend policy. This means a 41.5% payout ratio based on share price at year-end 2020. This means a dividend yield of 3.6%. Given that there is still no foreseeable end to the pandemic, estimate of business development in the current financial year are still highly uncertain, and we want as we do it always to be cautious. This is reflected in our outlook for 2021. Not yet taking into account the acquired Aegon CEE business due to the outstanding closing, you see on Slide 25, we do expect premium volume to remain stable at the level of 2020 and profit before taxes to be in the range of EUR 450 million to EUR 500 million for 2021. The combined ratio should remain at a sustainable level of around 95%. All this is subject to the further macroeconomic development and unpredictable volatilities due to the pandemic, for example, on the capital markets. Ladies and gentlemen with that, we have come to the end of our presentation. And we are at your disposal and are happy to answer.

[Operator Instructions] And the first question is from Youdish Chicooree.

I've got 2 questions, please. The first 1 is on the CEE business of Aegon. You've said you are targeting synergies of EUR 100 million. I'm just wondering, can you tell us which functions and areas are likely to generate them? And when are they likely to materialize? Is that something we should expect within the next 3 years or a bit longer? So that's my first question. And then secondly on the -- on non-life, can you elaborate on the increase in the Polish combined ratio? And also on Slovakia, what caused the improvement in the combined ratio? And is it sustainable, please?

Thank you. Youdish. To answer your first question, given the size of the transaction and our existing presence in those markets, this means that we know the market quite well. This means we are, for sure, seeing cost synergies out of the combination and the cooperation of the different entities. And of course, we will combine and streamline the processes. We have done first estimations rather cautious, as we always do our estimates. We came to a calculation that we expect a net present value of a little bit more than EUR 100 million in synergies. Please understand that there are no more details at the moment, which we can give. We will have to wait for the closing, but immediately, when we are allowed to give you the information, we will, for sure, present them. Of course, this is not only for 3 years, this is for a longer period of 5 to 10 years now. And your second question, looking at the non-Life, the combined ratio in Poland, which increased. This is mainly because cautious reserving for maybe a little bit unexpected claims, which will occur in the future. I hand over to Liane.

And in addition, as mentioned on Slide 15, there was an entire impairment of the activated insurance portfolio in 2020.

What is that, sorry, this portfolio?

The activated insurance portfolio was entirely impaired in 2020. so this is an extraordinary one-off in 2020, which led to an increased cost ratio in Poland.

Then you had the question concerning Slovakia. You're right. We have an excellent combined ratio in Slovakia this is, of course, due to less claims in the motor business in this year. I hope that -- or of course, will we do everything to manage, to keep this excellent combined ratio, but probably this will not stay at such a low level for the future. But looking at the overall combined ratio, I'm quite confident that we can keep the combined ratio at around 95% over all our countries.

The next question is from Thomas Unger of Erste Group.

The first -- with my first question, I would like to follow-up on the answers that you gave on the combined ratio question. The combined ratio was excellent in Slovakia, but also in Austria and the Czech Republic in Q4, especially but -- and then Austria dropped to 86%. Was that sort of the same reason that you explained in Slovakia, so in motor business and the lower claims there. Then secondly, on the Q4 results, the financial result. You've touched upon that in your presentation, but could you explain within the financial results, the increase in other expenses, they doubled quarter-on-quarter to about EUR 121 million in Q4, is my calculation is correct? And then also the results from at equity consolidated companies was minus EUR 23 million in Q4 alone. And 2 more questions, if I may. One on the dividend. The payout ratio now was set at around 41% or 41.5%. What held you back? Is there any specific reason for not increasing the payout ratio moving it up to -- towards the upper end of the policy range around 50%? Is that because of concerns regarding the regulatory environment or was it capital? And then lastly, I would ask you for some more details on the outlook. And if you could give us some color of what the Aegon assets might add in 2021? And if you're looking at your pretax profit assumption, are you being very cautious here that the increase is equal about the goodwill impairment that you had in Q2. And so, do you anticipate any worsening of the operating environment or any other negative developments in 2021?

Thank you. Maybe I'll start with the combined ratio, and then I hand over to Liane for the financial questions, and then I take over again. I think we can be really very, very happy with our combined ratio in the year 2020. Of course, this is a mix of the measures we have set and supported by Agenda 2020. We have run these activities since a lot of years, we have been really very, very consequently in supporting our companies but also in asking our companies for delivering the decrease in the combined ratio. So on the one side, this is the outcome of our initiatives in a lot of countries for the last years. And on the other side, of course, we have told you that we had less mobility during the COVID-19 crisis. And of course, this has slightly decreased our claims ratio. We are quite happy that we were able to steer the combined ratio less than 100%, and we can show a combined ratio of less than 100% in all of our countries, even in Romania, where we have had a combined ratio of more than 100% over the last years. Also here, we have set very, very concrete and stringent measures that we were able to show this good combined ratio. Although the average market combined ratio for the year 2020, which is not finally reported, but for sure, it will be more than 100% in Romania.

Thank you for your question regarding the financial results. First part of the question was why the other expenses increased. There are mainly 2 reasons for that. There are one-off in the segment Austria regarding the early cancellation of the life reinsurance contract for a specific state subsidized pension products. And the market risk was released. So this is shown in other expenses in Austria. And in the Central function, there was a one-off regarding the shortening of the depreciation per period of software, which led to higher regular depreciation of IT. I'm sorry, I did not catch the second part of your question. Maybe you could repeat it. Thomas?

The second part of the question is relating to -- yes, I'm sorry. The second part is the question relating to the financial result was regarding the at equity consolidated companies, and that performance in Q4, it was negative EUR 23 million.

This is mainly relating to the impairment of the participation in the tourism and hospitality sector.

So I take over the question concerning the dividend and the payout ratio. Thomas, you know, we are always very cautious in our calculations and expectations and of course, we do this year. The proposal is clearly in line with our dividend policy. It's a little bit more than in the middle of our dividend policy 30% to 50%. I think you clearly remember that last year, we sticked to our originally planned EUR 1.15 per share, and we had to discuss this, of course, very intensively with our financial market authority. So I think we were maybe a little cautious, a little bit more cautious here also into this direction. The pandemic is unfortunately not over yet and for 2020, also the regulatory recommendations from the AOPA are still in place. So I only can tell you that we are cautious in this point. Our proposal is set after really careful review of all relevant parameters. And of course, we consider the macroeconomic and financial situation. And so I think this is potential impact on solid solvency and financial position of the group on the other side. Our proposal, in my opinion, takes into account all the interest, the interest of the policyholders, beneficiaries and the shareholders, and we try to achieve a fair balance of interest for all our stakeholders. If I come to the outlook for 2021, this is, of course, not including Aegon, of course, also, this is quite a cautious outlook maybe because there are a lot of volatilities and uncertainties for 2021. I -- we do not expect that the insurance business will be influenced so dramatically by the COVID-19 situation. But there are a lot of macroeconomic developments. There is -- of course, we are dependent on the our solution -- on the unemployment -- sorry, on the unemployment situation, maybe on some bankruptcies, which for sure will happen. So this is the reason why we were cautious on this side, too. We did not include Aegon, and I really would like to ask you to wait until we have had the final closing because then we will do a recalculation and come up with new figures.

Okay. Could you just give me your assumptions for the financial results. Is it reasonable to base new projections for 2021 on the 2020 figure, I believe it was EUR 600 million. Or is that -- would that be a very conservative assumption for 2021?

Regarding the financial results projections. 2020 was impacted by negative one-offs. So I would rather see it as a conservative assumption to remain at this level. On the other hand, I would like to mention that there is pressure on current income due to lower new money yields. And also, as mentioned already before, regulators imposing restrictions on dividend distribution. This is also something we can see on the asset side. And of course, there is still increased volatility in the capital markets.

[Operator Instructions] And our next question is from Michael Haid of Commerzbank.

I have 3 questions, please. First, on the outlook, you expect gross premiums in 2021, around about flat year-over-year at EUR 10.4 billion. Of course, there are many moving parts in this assumption. Can you provide a breakdown of your expectations into P&C, life and health? I'm particularly interested in your expectation or your expectation for P&C? Second question on Life Austria. I noticed you can see the reinsurance contract in life for your Austrian state-subsidized life insurance book, I would like to get a better understanding of this reinsurance contract, how was this reinsurance protection structured? And what does it change going forward since you don't have it anymore? And last question on motor insurance. Obviously, your -- most insurance companies benefited from lower frequency in many, many markets. To what extent do you observe now increased competition and pricing pressure in your motor markets? These are my questions.

Michael, thank you. Look, coming to your question about the outlook the premium is at. This is really, I would say, quite a big uncertainty because we don't know how the premium development will be. We were very conservative in the development of the last year, not only we, but the whole insurance sector and the final development was better than expected. So I think if we go with a flat assumption, I think we are on the secure side. I would expect life to go down, of course, because we still run the strategy to decrease single premium payment. So this, of course, will run into that direction. I would expect the health to increase because we still have measures and activities in a lot of the CEE countries. And we also have seen that in Austria, health insurance was more acquired than before and was more interesting than before. And I would expect this also for this year. And for property and casualty, I would expect that we see a development, which we have seen also in this year that especially other non-Life insurances will go up in a quite significant amount. And for motor, I would expect to be it quite stable also in this year. Maybe Liane takes the question next one.

Yes, regarding the reinsurance that got canceled in life in the Austrian segment, let me explain you. In Austria, there is a specific state-subsidized pension products, its called premium [indiscernible], which has a capital guarantee. This product was already launched in 2003 and has very high equity ratio there to classical life products. For this market risk, a reinsurance solution was setup, but now got canceled in 2020. Why was it canceled? The product-specific changed, there is a lower maximum equity share. The track record and the history for this product build up over time and shows that the risk-bearing capacity within the group is sufficient. This is the explanation.

Thanks, Liane. Concerning your question, for motor business, of course, we have seen lower frequency in this year. But on the other side, we have seen a quite higher sums which we had to pay out because when accidents happened, they happened in a really very, very heavy way and followed with a high claim payment. We see pressure for pricing that is different from country to country, depending on the different local situations. In many of the CEE countries, I would say, we see a situation which is really unaffected by COVID-19. So this depends really from country to country. We are trying to avoid this, decreasing of premiums, and we try to balance out, and we will see what will be the development of this year because I would say, most of -- mostly in the insurance business, we expect that the development will go into a normal direction from mid of this year.

And there are no more questions at this time. I hand back to Nina for closing comments.

Thank you, ladies and gentlemen, for listening in and your interest. The next scheduled results call is going to take place for the first quarter results 2020 on the 19th of May. Stay safe and healthy, and goodbye from Vienna.

Bye-bye. Have a nice day. And stay healthy, all of you.

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