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 thanks 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, operator. Ladies and gentlemen, welcome to Vienna Insurance Group's First Quarter Results Call. Liane Hirner, our CFO, is going to take you through the presentation. And afterwards she and Peter Hofinger, Member of the Managing Board, are going to answer your questions. I hand over to Liane. Please go ahead.

Thank you, Nina, and a warm welcome from Vienna on a special day. Today, hotels, restaurants, fitness centers, theaters and opera houses in Austria are finally opening again. After more than 6 months of lockdown now, this is a big thing and hopefully, only the first step towards a more normalization. So we are happy about this very positive development in Austria. And it's my pleasure to also present positive results for VIG for the first 3 months of 2021, with which we are returning to pre-pandemic levels. With me on the call today is my Board member colleague, Peter Hofinger, who will join me for the Q&A after the presentation. Now let's immediately start on Page 3, where we summarized the highlights for the first quarter of 2021. We achieved a stable premium development and strong profit growth in this, despite the ongoing lockdown measures since the beginning of the year throughout the region to fight the COVID-19 pandemic. Gross written premium of EUR 3.1 billion were nearly on the same level as in Q1 last year. A slight decrease of 0.4% is mainly driven by the intentional decrease of the life single premium business. All other lines of business, except for life insurance, recorded growth in the first quarter. Despite the stable top line development, profit before taxes went up by 5% to EUR 128 million based on less expenses for insurance claims and benefits and an improved financial result, bringing our annualized earnings per share to EUR 3.09, a plus of 15.3%. The combined ratio increased year-on-year by 0.1 percentage points, with the claims ratio being up to 62.4% and the cost ratio down to 32.8%. I would particularly like to highlight Slovakia and the remaining CEE segments, which reduced their combined ratios substantially. All this proves the resilience of our business model and reflects the trust of our customers in 30 markets as well as the extraordinary commitment of our more than 25,000 employees. These strong results underpin our ambition to be a stable and reliable partner and built a solid basis for achieving our targets for 2021. With this, let me go straight into the financials at Slide 5, where we present the income statement for the first 3 months of 2021. The main items I would like to highlight here is first the financial result, including shares in its equity consolidated companies which was up by EUR 33 million year-on-year as we had less depreciation of investments compared to the same period last year. Other major changes affect the items, other income and other expenses, largely as a result of foreign exchange effects and the decline in bad debt allowances, mainly in the Czech Republic. Further down the income statement, the result before taxes was up by 5.0% on the back of increased contributions from life and health, leading to a double-digit growth of 15.3% of the net profit at EUR 99 million. Over to page, I would like to take you through the gross written premium trends by segments. The main premium growth drivers being the central functions, Romania and the Czech Republic. Unfortunately, the additional EUR 77 million premiums for these 3 segments could not offset the overall EUR 80 million decline from the life business being also the driver for the premium decreases in Austria and Slovakia. Given that the premium development in first quarter '21 with all 3 months still influenced by pandemic is nearly on the same level as last year, at time where COVID-19 was not a topic before mid of March is a great achievement. The level of premium income is even more assuring due to the fact that adjusted for FX effects, premiums would have been up by 1.6%. I have already touched on the gross written premium development by lines of business shown in more detail on Slide 7 and would directly move to Slide 8 and the group profit before taxes by segment. We are pleased by the increased profit contribution from nearly all segments with strong profit growth in Austria, Slovakia and Romania. In Q1, all the segment's remaining CEE and central functions came in with declines in profit before taxes. The drivers were negative developments in the financial result in the Ukraine and Croatia and a lower technical result compared to quarter 1 2020 in the central functions. Overall, we are very satisfied with the profit developments across our region, and are confident to meet the announced target for 2021. On Slide 9, we show the development of the combined ratio for the 3-month period, with improvements in Austria, the Czech Republic and Slovakia among others. I would like to stress that we are only at the beginning of the year. And that based on our constant cautious approach, we have been very carefully reserving for IBNR. This also in view of less weather-related claims in first quarter 2021 compared to the same period last year. And we all know how quickly this can change. Overall, I would see the 95.2% net combined ratio for Q1 2021 as a good start for the targeted roughly 95% for the full year 2021. Turning to page. We show the composition of our investment portfolio by asset classes on the left with further detail on bond ratings and issuer on the right. In terms of asset classes, there is only one change to highlight, deposits and cash clearly increased from 7.5% at year-end 2020 to 9.6% at first quarter 2021, which has to be seen in light of the planned acquisition of the CEE entity of Aegon. Let me take this opportunity to confirm that despite the denied approval from the Hungarian Ministry of the Interior beginning of April, we are still in constructive talks with the Hungarian Ministry of Finance, as the ministry responsible for the insurance sector to secure the necessary approval for closing of the transaction. We hope that this issue will be resolved positively in the near future. You will understand that due to the ongoing talks, we are currently unable to provide any further details. Therefore, I would like to move to Slide 11 and the financial result. Compared to the first 3 months in 2020, the financial result increased by 29.3% due to less depreciation of investments, down by 62.6% and substantially decreased losses from disposal of investments down by 82.5%. They are the main contributors to the EUR 58 million decrease of total expenses. On the income side, the current income, due to the low interest rate environment, develops as expected, with income from disposal of investments always bringing volatility in the income side, as these disposals are not part of the financial planning of the group, but rather are affected by taking windows of opportunities. Finally, on Slide 12, I would like to confirm our given targets for 2021. With this excellent first quarter, we are not only back to pre-pandemic levels but also well on track to reach the announced premium and profit targets and we'll continue to work on achieving a sustainable combined ratio of roughly 95% for 2021. With this, I have come to the end of my presentation. And Peter and I are happy to take your questions.

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

Two questions, both relating the combined ratio of 95.2%. This, as you mentioned, includes lower weather-related losses. Basically, to my understanding, 0 net cat losses, it must also include some frequency benefits from lower claims in motor. And then you mentioned somewhat more conservative reserving. Can you shed some more light on this and put down some figures here, that would be very interesting? And then in central functions, there was a pretax loss of minus EUR 42 million. And to my understanding, this includes also some additional reserving. Is it more cautious reserving or is it reserve strengthening? I think you mentioned IBNR reserves, in what lines of business did you put in additional reserving? These are my questions.

Peter Hofinger speaking. Thank you for your question. Yes, we had lower weather-related claims. Unfortunately, it's not 0. We are in the EUR 20 million. We have been in the comparable quarter into EUR 30 million. Specifically, there have been frequency events of freezing rain in the Baltic states, which has quite insignificant impact on the frequency in the Baltics. If you talk about the general frequency in motor business. One has to be aware that specifically in Central Eastern Europe due to less state subsidies for COVID-19, lockdowns are not anymore in our countries in the first quarter. Shops in most of the countries have been open or even restaurants. So the activity of people locally has been on a comparable basis to last year. Where there is an effect, clearly, is cross-border traveling or international traveling due to restrictions in entering and guaranteeing requirements when traveling. Very frankly speaking, and here, we have been also cautious in reserving. This is a situation where we do not have experience from the past. So depending on the efforts of the vaccination and then again, behavior of the population and the clients, there could build one scenario that during summertime, international travel will significantly increase due to the effect that people are eager to go on holidays. But they will significantly less use airplanes for holidays, but we'll maybe more use the car. Therefore, not knowing how the frequency topic and the international travel going forward, the next month is to come, I think there is a reason for having a certain conservativeness.

Taking your question regarding central functions where we have a decline in the results before taxes. It is mainly due to higher claims reserving due to our conservative accounting approach. It's more cautious and mainly relating to MTPL business in the amount of a high single-digit million euro amount.

[Operator Instructions] And the next question comes from the line of Thomas Unger of Erste Group.

First of all, I'd like to follow-up on the combined ratio, maybe the claims ratio side. And how do you -- when you say, okay, 95% of last year should be sustainable now, do you expect the claims ratio to go up a bit this year? And that compensated by the cost ratio for the full year 2021? That would be my first question. The second one would relate to the financial result. And what can we expect going forward now as a quarterly rate? Is the EUR 175 million recorded now in Q1, is that sustainable? So that would make around EUR 700 million for 2021. And I'm talking about the financial markets remain relatively stable. And then also, I would like to hear about your interest rate and yield environment expectation for this year and maybe also the coming years. And how do you plan to position or adjust your investment portfolio to benefit from those -- from a potentially changing yield environment?

Thank you for your questions. Regarding the combined ratio, we expect the combined ratio to be at a stable -- to be stable at around 95%. Of course, it depends on the development of the claims ratio. We didn't have high net natural catastrophes up to now. So this can always distort the ratio. But when I look for 2021, I would rather expect a stable development on the claims ratio side and the cost ratio side from today's perspective. Regarding the financial result for the whole year, I expect something between 2019 and 2020 more stable development also in the next quarters. There are no really signs that -- or there are financial turbulences on the horizon. So rather stable outlook from that perspective. And when we come to the interest rate expectation, we expect the low for long scenario is at least for the midterm for the next years. So some -- quite a pressure on the yield and on the new money yield and then the current income. But I would give you -- like to give you some numbers. The overall average yield on fixed income in Austria amounted to 2.67% in the first 3 months 2021. The new money yield in Austria in the first quarter amounted to approximately 1.7%. So still on a relatively stable level compared to the previous quarters and last year. I hope it answers?

Okay. So -- yes. So on the claims and cost ratios, you do expect that you can sustain the level that you've -- maintained the level that you had in 2020 and also on the claims ratio side where you had some benefits from the lockdown and the COVID-19 crisis?

Yes. We expect a sustainable development. As I said before, always worth not knowing weather-related claims and natural catastrophes, which we cannot, of course, plan or foresee.

And the next question is from the line of Fossard of HSBC.

A couple of questions on my side. The first one would be on the P&C side. Could you comment a bit more about the competitive environment? And how does you see the competitive environment evolving maybe in your 3 top markets Austria, Czech Republic and Poland? And if you could focus a bit more as well on Poland and what you're expecting in terms of combined ratio development here? It's been relatively stable so far into the year, but it looks like competition is a bit increasing, I would say. Second question would be related to your Solvency II ratio. I think that if I'm right, the targets you said in the past, was 170% to 230%, but that was based on before applying transitional in Austria. Now that you move to that -- now the ratio include transitional in Austria, I just wanted to check with you if this had any implication on your solvency target?

Okay. Thank you for your question. Motor pricing in Austria is relatively stable. So we do not see here a change in the environment. More or less, the same is true for Czech Republic. As you already indicated, it's a bit different in Poland, where competition has become more fierce. We also see a certain reduction of our average premium in Poland, but this is also driven by a quite sophisticated segmentation strategy, which we are running there. We have developed the right dynamic pricing model, which also led that we are now focusing more on either lower costs -- lower cost cars or lower horsepower cars, which automatically is also reducing the average premium. Therefore, we are optimistic even though that the competitive environment is becoming more force, having this segmentation strategy with a dynamic pricing should enable us to keep a reasonable level of profitability. One market, maybe, which is also important for us, which was not mentioned by you, is the Baltics. There, we have seen in the fourth quarter, but also in the first quarter this year, a very fierce competition. This also has to do with certain specialties of market dynamics in the Baltics and the digitalization there. But recently, there is indication that rates are bouncing back. Okay?

Taking your question regarding our solvency group -- solvency ratio, which amounted to 238% as of year-end, including transitionals on technical provisions, which were applied for the first time year-end 2020 by some good companies. The solvency ratio without transitional amounts to 195.1% at year-end. The solvency -- the solvency target range is currently under review together with the new strategy. But what I can reemphasize again that the steering of the group and the companies will remain on the solvency ratio without technical -- transitionals on technical provisions.

[Operator Instructions] And we have a follow-up question from Thomas Unger of Erste Group.

Just one more question on the health segment. And the performance in Q1 is very good. And that was based on rising premiums but also low claims and benefits in the quarter. Is it fair to assume that the profitability will come down in the coming quarters with some more further pressure or increased pressure from the claims benefit side as we move out of the lockdowns and into a more normal market environment?

Yes, we have been still a bit benefiting that people went less frequent to hospitals. On the other hand side, if you had some kind of a good treatment needed, you were going to the hospital. Or if you were not going to the hospital, you are not now going because you have in February, you are now going in June. So there will be a sustainable positive effect in health business. What we see on the sales side, and this is a bit more Central Eastern Europe, new business is picking up more dynamic as COVID-19 being a health crisis has also increased the sensitivity towards this topic. And people are more willing and able to talk with us about it and conclude health insurance.

The next question is from the line of Youdish Chicooree of Autonomous Research.

I've got 3 questions, please. Firstly, I think you mentioned competition have got more fierce in Poland. Could you give us a sense of the level of price decreases you're seeing in motor and whether competition is also strong in property? That's my first question. My second question is on the solvency ratio and whether you had an update for us as on the end of the first quarter? And then finally, just a clarification. I think earlier, you talked about -- did you mention that the amount by which you increased it was high single digit, is that correct?

Yes. Responding to your last question. Yes, this is correct.

Okay. Going maybe to the first question. I cannot give you a very clear answer to the motor TPL topic. As I mentioned, we are running there now a segmentation strategy. Therefore, we are looking on different segments, which will not give you then the picture on the overall market in the right way. When it comes to property, you see that we have quite a significant growth in this line in Austria on the central functions. This is more the multinational accounts, which we are having. And there, we were able due to also the market dynamics to profit from hardening of the market. This kind of hardening can be seen in most -- in the region, but with different dynamics. So Austria and the larger accounts, significantly more dynamic than maybe than in Central Eastern Europe, where corporate business is maybe better described as SME business. And there is less connects to the global insurance world as we have benefited here in Austria also about physical absence of some of our international corporate or commercial insurance carriers due to lockdown and travel restrictions, which gives a benefit for us as a regional player in Central Eastern Europe.

And then on solvency?

Thank you for your question regarding Solvency II. We will give the next update with the half year figures on the solvency ratio. But as you also, for sure, will have realized the interest rate curve went up, and this, of course, has a positive impact on our group solvency ratio. So for the first quarter 2021, solvency ratio is above what we have seen at year-end 2020.

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

Thank you, everyone, for joining us in today's call and for your interest. On Friday, we are going to do our virtual Annual General Meeting. And if you're interested, you are invited to follow the presentation of our CEO, Elisabeth Stadler. The link is available on our web page, www.vig.com/annualgeneralmeeting. Thank you. Have a good day. Bye-bye from Austria.

Bye-bye. Have a nice afternoon.

Bye.

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