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

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

Thank you, operator. A warm welcome, ladies and gentlemen, to Vienna Insurance Group's Half Year Results Conference Call. Today, our CEO, Elisabeth Stadler, will present the results highlights and our strategy program, VIG 25. Afterwards, Liane Hirner, our CFO, will guide you through the details of the half year results. And I immediately hand over to Elisabeth for the introduction. Please go ahead.

Thank you, Nina. Welcome, everybody, to today's telephone conference, and thank you for your interest in the business development of Vienna Insurance Group. We can present a very satisfying set of results with which we are well on track to reach the announced full year targets for 2021. On Slide 4, you can see premiums were up by 3.5%, amounting to EUR 5.8 billion. Profit before taxes increased by 25% to EUR 251 million. Compared to the same period last year, we did not have any goodwill impairments this year. But given the current weather situation and the ongoing pandemic, our profit before taxes of EUR 251 million includes provisions for weather-related claims as well as COVID-19. Our combined ratio as of 30th of June 2021 is a favorable 95.2% driven overall by an improved claims ratio. The increased cost ratio of 32.2% is impacted by costs for IT and digitization projects that we -- given the sound operational development of VIG directly led via the profit and loss as operating expenditures. Ladies and gentlemen, for those of you regularly following VIG, the conservative approach of our group is nothing new. We are confident to be able to handle the uncertainties of the remaining year on the basis of our prudent reserving policy. At the same time, we are making sure to build on our #1 position in Central and Eastern Europe, including Austria and to make best use of our long-term growth opportunities in a changing environment. Therefore, I would like to take the opportunity today to give an overview of VIG 25, our new strategy program over the page. After the successful finalization of Agenda 2020, we have realized VIG 25 this year. Together with our local group CEOs, we have discussed and defined major future drivers for the period until 2025 that are shown on Slide 6. These 7 trends and developments on the left include well-known elements like the low interest rate environment and the ever-increasing pressure from regulation. Already now, insurance is among the most heavily regulated and supervised economic sectors in the European Union. Thinking about the topic, Sustainable Finance, the EU taxonomy for sustainable investments is only one part of numerous new regulations with business implications for the whole group. Overall, we expect to see rather an evolution of today's setting with new insurer tax and players emerging, pushing towards innovation and helping to improve business models and solutions of the established insurance industry. A task that we have already started under Agenda 2020 with the digital transformation of our group and the constant search for new and supportive technologies to be incorporated in our processes and business. On the right-hand side of this slide, we show our list of main tasks to address the trends. To continue and intensify the work on digital transformation is #1 on our to-do list and for spaces for task #2, achieving operational excellence. We want and need to become more efficient and raise productivity in order to counteract cost pressure and the decreasing income due to the low interest rate environment. But digitalization has changed expectations of consumers as well as their behavior. This leads us to the topics of the essential assets to potential clients and the partial erosion of insurance as a stand-alone product. Two trends that have gained momentum due to the COVID-19 pandemic. On the one hand, we need to prepare for a more hybrid form of distribution, providing physical and digital alternatives for sales agents and customers to act and interact with each other. On the other hand, we need to address the fact of more built-in insurance solutions, especially in the nonlife segment. From the perspective of the client, it's convenient and easy to purchase a travel insurance directly with booking the holiday trip or adding a theft insurance when renting out a bike or skis. At this point, we have to talk about the creation of digital platforms and ecosystems as new important ways to reach our customers. For platforms that are usually organized by a noninsurance product provider who extends the services offered to his existing customer base, we, as insurer act as product or solution provider and are able to reach out to new customer groups. Ecosystems are different. We understand ecosystems as a set of services and solutions around a customer basic need, such as home or health, for example. As an insurance group, we want to attract and retain customers by addressing such basic needs, by orchestrating attractive services and convenient solutions to respond to these needs being also visible with our own brand. We start number 3, preparing and involving in new ways of customer acquisition and retention. We are addressing these 3 trends with the goal to find VIG's suitable solutions. All this requires that people are aware of their insurance needs. Latent demand is the last development specified for our VIG 25 program. Given the characteristics and specifics of insurance, especially for long-term products like life or health insurance, the need for insurance is often not understood by consumers and business alike. This leads to nondetected and hence latent demand. As specialists in risk transfer, it's our duty and listed as part #4 to establish and increase the people's understanding for risk provision. One might call this financial literacy, but for us, it's about the specific situation of individuals and corporates and their individual needs. On insurer side, this also means that we have to have suitable and affordable solutions for all people, businesses and pockets. Last but not least, sustainability remains on our agenda. To strengthen sustainability is an integrated part of our business model with the aim to combine economic objectives with environmental, social and governance factors is not only defined in our CSR strategy, but something the whole group constantly works on. With our new strategy program, VIG 25, we will respond to the identified trends. And for the first time, also includes ESG-related targets. Before I talk about these targets in more detail, let's have a quick look on Slide 7 where we show the 3 strategic fields of action under VIG 25. The initiatives to tackle the identified trends and achieve the tasks described shall, first, optimize; second, enhance; and third, enlarge our business model. On the left side, as mentioned, the digital transformation will be ongoing in order to increase productivity and efficiency. The use and implementation of new tools and solutions achieved for innovative underwriting and pricing as well as the exchange of best practices within our group, were already a topic under Agenda 2020. Further optimization to achieve operational excellence is also a goal for VIG 25. In the middle, the extension of customer access and increasing direct sales within our multichannel approach is our focus for enhancing our business model. The use of platforms to gain new customers or the establishment of own ecosystems are the potential topics here. To the right is the expansion of the value chain beyond insurance, with the intention to enlarge our business model. The ideas are, for example, to offer asset management or pension funds as financial provisioning options or assistant services as part of an own ecosystem in addition to classical insurance solutions. We will update you on the actions and initiatives we plan to implement on a regular basis. With an optimized, enhanced and enlarged business model, we will achieve our VIG 25 group targets, which are presented on Slide 8. Point one, VIG is the #1 insurer in Central and Eastern Europe. For sure, we want to expand our leading position in CEE, aiming at a top 3 position in each of our CEE markets until 2025. The planned acquisition of the Aegon CEE business for which we received competition clearance last week from the European Commission would be a great step in this direction. As you all know, the transaction is currently still blocked by Hungary. The constructive dialogue with the Hungarian Ministry of Finance is ongoing, and we consider the approval under competition law as a positive sign. Point two, the financial targets of VIG 25 are premium volume of EUR 12.3 billion and a combined ratio of below 95% in 2025. The group solvency ratio without transitional shall be within a range of 150% to 200%. Point three, I have mentioned the ESG-related targets that we have summarized at the bottom of the slide. In view of the time, ladies and gentlemen, I will not go through them in detail but would want to mention at least the newly defined goal of making office operations at all group companies climate neutral by 2030 at the latest. With this, I hand over to Liane for the details of our half year results. Liane, please go ahead.

Thank you, Elisabeth. Let's move to Slide 10 and the details of the income statement. I would want to highlight the premium development of plus 3.5%, with growth in all lines of business except for like single premium, where the intentional decrease is still ongoing. The financial result down by 8.9% was driven by less income from disposal of investments compared to the same period last year. As already mentioned, last year's results included goodwill impairments of EUR 118 million being shown under other expenses. The profit before taxes of EUR 251 million for the first 6 months this year contains based on our conservative approach, provisions for weather-related claims and COVID-19. The tax ratio of 24.1% is where we expect it to be also at year-end. We are pleased of the net profit of EUR 186 million leading to earnings per share of EUR 2.91, up by 47.5%. Over the page on Slide 11, we present the main market developments providing a mixed picture country by country. As common patterns are missing, the developments are better explained on the following slides. Therefore, I would suggest to directly move to Slide 12 and the premium overview by segment. We recorded strong premium growth in the Czech Republic and Poland, whereas premiums in Austria and Slovakia decreased due to the reduction of single premium business. I would want to highlight the double-digit growth rate in Romania and Hungary and also the segment Turkey, Georgia is growing double-digit adjusted for FX. On the next slide, premium development by lines of business shows overall similar-like trends like in the first quarter this year with MTPL plus 3.7% and Casco plus 7.3%, growing stronger than in Q1 and Life regular premium business turning positive, growing by 1.9% after a slight decrease in the first quarter. The profit before taxes for all segments is shown on Slide 14. We are pleased with the profit growth achieved in nearly all segments, only the Czech Republic driven by acquisition costs due to increased new business in Life and Poland, due to a lower financial result had a negative development compared to the same period last year. The combined ratio was 95.2% in the first half of 2021 improved by 0.3 percentage points based on a better claims ratio. Combined ratios in Austria, the Czech Republic and Slovakia improved despite increased weather-related claims. Overall, we recorded about EUR 25 million more weather-related claims compared to last half year but better motor claims experienced in the first half of 2021, more than offset this development. Our investment split on Slide 16 shows compared to year-end 2020, a much higher percentage of deposits and cash deriving from the EUR 300 million restricted Tier 1 instrument placed with the main shareholder, which also has a positive impact on our solvency ratio. Apart from that, no major changes in the bond portfolio split by rating an issuer. Therefore, let's move to the financial result on Slide 17. Overall the financial result excluding equity consolidated companies was down by 9.9% to EUR 350.9 million. I have already mentioned the decline in income from disposal of investments stemming from higher realized gains on bonds and loans in the second quarter of last year, partially offset by less impairment of investments and losses from disposals of investments due to the more stable capital markets development in the first half this year. Let me end my part of the presentation with the strong solvency ratio shown on Slide 18 that underpins the strong capitalization of our group. The regulatory group solvency ratio at half year 2021 is 267%, driven by increased own funds due to the issued restricted Tier 1 hybrid capital of EUR 300 million in Q2, and the overall recovery of the financial market as well as from positive developments in the life portfolios of our Austrian companies connected to the increase of the risk-free rate. The solvency ratio, excluding transitionals, currently used by the Austrian group companies amounts to 235%. With this, I hand back to Elisabeth for her final remarks and the outlook 2021.

Thank you, Liane. With this solid set of results for the first 6 months of 2021, we are back at precrisis levels for premiums as well as for profit. The environment due to COVID-19 still remains uncertain and NatCat events, such as the flood in July. And meanwhile, also in August, could impact the second half of 2021. However, based on our prudent reserving policy, we are confident to achieve our already announced targets. On Slide 19, we confirm our premium forecast of around EUR 10.4 billion and the profit before taxes in the range of EUR 450 million to EUR 500 million. The combined ratio, we expect to be at around 95% at year-end. Ladies and gentlemen, we are now happy to take your questions, and Peter Thirring, our Chief Technical Officer, is joining us for the Q&A.

[Operator Instructions] The first question is from the line of Youdish Chicooree with Autonomous Research.

I have 3 questions, please. Just on premium growth. I mean there was a material improvement in the second quarter. And as a result, premiums were up 3.5% for the first half. So I wanted to understand why you're still guiding for flat premiums for 2021. That's my first question. My second question is on the solvency progress of 29 points to reach 267% at the end of June. I was wondering if you could quantify the contribution from operating capital generation and separately, the benefit or the impact from favorable financial market moves, please? And then finally, just on the Aegon business, the acquisition of the Aegon CEE business. Can you give us an idea of the progress that you have made with the Hungarian authorities or government since April when they blocked the transaction?

Thank you. To start with your first question. Given -- I already mentioned it, the ongoing pandemic, we'll stay conservative. Happy to overfulfill our premium target. But for the time being, we confirm the original plan. And on the other side, also the development of life business is a little bit difficult to predict at the moment. If you look at the last years, you can see that the premium income in the second half was always lower than the premium income in the first half. In the last year, the difference was EUR 0.8 million. Then I take the third question before I hand over to Liane for the solvency. Concerning Aegon we are really intensive and in our opinion, good discussions with the Hungarian government, especially with the Finance Minister. He is the one who is leading the discussions for Hungary. Please understand that I can't give you more information at the moment.

But are you confident of a satisfactory resolution on that front?

We are still confident that we will find a common solution together with the Hungarian government and that we can solve the blocking, which we see at the moment.

Okay. Regarding the group solvency ratio development, the group solvency ratio increased by 29 percentage points from year-end 2020 to first half year 2021. Approximately 8 percentage points out of this increase related to the EUR 300 million restricted Tier 1 instrument and the rest mainly derived from the increased interest rate, the increased risk-free interest rate. If we look at year-end 2020, the interest rate turned positive after 20 years compared to the first half year 2021, where the interest rate turned positive already after 9 years. So there is a positive impact mainly from the interest rate, which has an impact mainly on the Austrian life insurance, guaranteed life insurance book business.

And operating capital generation, how much did that help during the quarter -- during the first half, sorry?

The overall business development is satisfying. So there is also, of course, a positive impact from that side on the group solvency ratio. But as I explained, the main impacts are the restricted Tier 1 capital issuance and positive trend in the risk-free interest rates.

The next question is from the line of Michael Haid with Commerzbank.

I have 3 questions. First, P&C Insurance, you showed remarkable strong growth in all lines of business. i.e., motor own damage, motor TPL and also other lines of business. I would like to get a better understanding of what drove this growth. Are you -- are there any special initiatives or any special new products which you introduced? And if possible, can you provide a breakdown of this growth by volume and price increases? Second question. Also in P&C insurance, you mentioned the NatCat events seen in the third quarter. In light of these, could you provide an update of your reinsurance protection you have in place? And the last question on the solvency. Now you are at a highly comfortable level of 267% or 235%, if one excludes the transitional, this stands in contrast to your VIG 25 target of 150% to 200%. How do you look at your current capital position? To what extent you feel it is still necessary to operate with a cushion on this target?

Let me start with the Solvency II question. The ratio is high, and we are very satisfied with it, but it has not to be forgotten that the Aegon transaction is still open. So this will have a negative effect on the group solvency ratio. And our main focus still remains on further M&A. Our M&A department is still quite busy. So this is the main focus. And of course, we have also not to forget that we have further uncertainties related to COVID-19. And so it's -- we feel very comfortable with this ratio, and we hope it will remain stable throughout the rest of the year, but due to the uncertainties and the M&A activities, there is for sure a trend that the ratio might go down by year-end.

Thank you, Michael. Concerning your question, P&C, of course, this growth is not coming by chance. Of course, we have set a lot of initiatives following our strategy, a lot of special initiatives, of course, we have very attractive products in our different countries. And I would say the main reason is, for sure, our good sales network, especially our own agents, also the good connections to brokers. And for sure, the initiative, the newly launched initiative with Erste Bank, where we want to increase the nonlife business also over the banking channel is quite successful at the moment. I hand over to Peter.

Yes. So I will take over then for the question as far as the natural catastrophes are concerned. I can give you details on this. So we had 2 major natural catastrophes so far in this year. The first one was within the first half in June this year. This was this hailstorm, which mainly affected Austria and also the Czech Republic. The other details are that we have a gross figure here of EUR 144 million, and the net figure of EUR 42.3 million. So you can see that our reinsurance is working very well in this connection. What is the -- is mainly a nonproportional reinsurance. So we have an excess of loss for the group and NatCat, for the group. And the second event, but this does not affect the first half year. This affects the second half year. This is the famous flood Bernd, which mainly hit Germany. So this is a little effect or lesser effect. On our areas, there we have, at the moment, a gross effect of around EUR 85 million. This might increase due to EUR 95 million. But net, is less than EUR 30 million, and this will not change anymore. So this effect -- this flood took place in July this year. And out of this, we have a net effect. But of course, this is second half year of a little bit less than EUR 30 million, and this EUR 30 million will not increase anymore. Everything which is increased will go into the reinsurance.

Yes. Could you hear us and understand everything? Hello?

I think the participant already disconnected, but we have 2 more questioners. The next question is Oliver Simkovic from RBI.