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. Welcome to VIG's conference call for the preliminary results 2021. Elisabeth Stadler, our CEO, had to excuse herself on short notice due to a positive COVID test. We are all the more pleased to welcome Mr. Hartwig Loger, our Deputy CEO today. He will start with a general overview and Liane Hirner, our CFRO, will take you through the financials. Werner Matula, our Chief Actuary, will present the life and health embedded value, and hand back to Mr. Loger for closing remarks. Afterwards, we are happy to take your questions. Please, Mr. Loger, go ahead.

Thank you, Nina. Good afternoon, ladies and gentlemen. It's a pleasure and honor to be a member in this conference. So I think, first of all, we all remind that on the 13th day of war in the Ukraine, one of our CEE core markets, as we described it in our strategy, let me state that we are all shocked about this unprecedented situation in Ukraine with cities being bombed and thousands getting killed. And up to now, about 2 million already of innocent people, mainly women and children, were forced to leave their country and homes. So out of this, they had to leave behind their family members that are determined to defend their country. And by doing so, also defending the democratic values on which a free and independent society is built on. The European Union is United and its full support for Ukraine and solidarity is shown not only in words, but also actions and also done by all other companies of our group. Our group companies also took immediate humanitarian actions. And starting in Poland, the group companies in Ukraine's neighboring states individually organized transportation from the borders and provided accommodation for colleagues and employees, families from the very first day on. In addition to this, immediate help that is ongoing and is getting extended, we, at Vienna Insurance Group management have set up also the VIG family fund. The goal of this fund, which is open to individual contributions from our group companies and donations from the employees, is the direct support of affected families of our Ukrainian group companies. The initial donation from VIG Holding is EUR 5 million, representing 1% of our strong group pretax profit for 2021. We hope ways are found to end this war as soon as possible. As long as this may take, Vienna Insurance Group, with all its group companies, will go on providing humanitarian help and support wherever necessary. I want to now go on with Slide 3 in the presentation where our solid results are shown on Slide 3 with premium and business operating results both growing by over 5% and a combined ratio of 94.2%, representing also this excellent technical results in the P&C business, undermine the strength of our business model even in the second year of the ongoing pandemic. Together with our preliminary solvency ratio, which according to first estimates is expected at around 250%, this puts us in a strong position to manage our operational insurance business going forward, and we are confident to be able to continue our positive performance also in 2022. Going on to Slide 4. Our confidence is also represented in our dividend proposal of EUR 1.25 per share. This is an increase higher than the earnings per share growth of 62.3%. In line with our dividend policy of distributing 30% to 50% of group net profit, the payout ratio amounts to 42.6%, leading to an attractive dividend yield of 5%. On the next slide, before I hand over to Liane for the details of our 2021 results, I would like to shortly touch on the announced agreement with Corvinus that we signed on the 21st of February. It took quite some time and intense negotiations of nearly 1 year but we were able to agree on the cooperation and targeted company structure as shown on the right-hand side of the slide. In the end, Vienna Insurance Group will hold the majority stake of 55% in the newly set up Hungarian VIG holding company, and what is most important, keep the operational management of the Hungarian business. Into this central steering units, VIG group company, UNION, will be transferred as well as the 2 Aegon Hungary holdings, still subject to the closing of the Aegon CEE transaction. Corvinus itself will hold a 45% noncontrolling minority stake. And in a separate shareholder agreement, the governance structure was settled. Our intention right after we have learned about the decree from the Hungarian Minister of Interior was to find a common solution that would work for Hungary and us. With the agreed cooperation, we have now achieved clarity and what is most important, avoided extended time and cost-intensive legal proceedings. We are now looking forward to fully focus on the insurance business activities again in Hungary, where we are located since 1996. I'll stop here with my part and hand over to Liane to take you through the financials.

Thank you, Hartwig, and welcome to all of you from my side. I will start on Slide 7, where we present our new segmentation, which will provide a better overview and focuses on the most relevant markets and regions. Instead of 12 reportable segments, we will now concentrate on 6 reportable segments, which are shown on the right side of the slide. One thing that I would like to mention with regards to the new segmentation is that due to consolidation effects within a segment, individual combined ratios of some markets. In 2020, for example, of Slovakia, changed insignificantly. It's only a topic of where the consolidation takes place, already within a segment or via the separate consolidation column. Thus, the overall combined ratio stays unchanged. Let's now directly move to Slide 8 and our consolidated income statement for the full year 2021. Our result before taxes recorded a strong increase of around EUR 165 million in 2021. Adjusted for impairments of EUR 141 million in 2020, the operating profit in 2021 grew by 5.1% year-on-year to EUR 512 million. This positive development is mainly based on our excellent combined ratio and the strong result from shares in at equity consolidated companies, which was impacted by negative COVID-19-related effects last year. The tax ratio of 24.1% normalized compared to the elevated level of 2020 and is expected to remain at this level. On the next slide, you can see our premium development per segment. We are pleased that all of them contributed to the 5.5% overall premium growth. The development was stronger than we expected in the second year of the pandemic. The main drivers for the increase were the segments, Czech Republic, extended CEE and group functions. In terms of business lines, growth was mostly coming from other property business, MTPL and motor Casco or motor-owned damage insurance, as you can see over the page. In addition to the strong growth rate in motor and other property business, health also recorded good growth and was up by 5.7%. Life regular premium business was more or less stable, whereas life single premium business declined slightly. A detailed premium split by lines of business and country is provided in the back of the presentation on Slides 37 and 38. With this, I would like to move to Slide 11 showing the overview of group profit before taxes by segment. Austria achieved the highest profit of all segments with EUR 235 million, being up 31.3%, driven by an increased financial result. I would also like to highlight the solid profit development of Poland and extended CEE. Not only did they present an increased result before taxes, but also adjusted for impairments in 2020, both segments, Poland and extended CEE, recorded double-digit growth of 84.6%, respectively, 30.6% in their business operating result, mainly based on their favorable combined ratio development. The small decrease recorded in the Czech Republic is due to higher acquisition costs in life and provisions for digitalization initiatives. I now move on to Slide 12 and the presentation of the combined ratio details. Here, I would like to point out that 2021 was one of the most severe years in history with regards to weather-related losses. Our total gross losses for weather-related claims amounted to roughly EUR 620 million. Given our comprehensive reinsurance program, the impact from NatCat was limited to roughly EUR 90 million. Despite this impact, but supported by a favorable claims experience, we were able to achieve [ extremely ] improved group combined ratio of 94.2%, 0.9 percentage points better than last year. Almost all segments registered better combined ratios in 2021. In particular, the positive developments in the Czech Republic, Poland, and extended CEE were supported by an improved claims experience in 2021. The increase in the combined ratio of special markets was based on their higher claims frequency and inflation effects mainly in Turkey. Over the page, we provide on Slide 13 the details for the financial result, which decreased by 2.8% to EUR 607 million. This is mainly due to the fact that in 2020, we had higher income from the disposal of investments, namely from bonds and loans. The EUR 64 million less income from disposals this year were not offset by the also decreased depreciation of investments and led to an overall lower financial result. By contrast, the result from shares in at equity consolidated companies developed very well and turned positive again after a one-off effect due to COVID-19 in 2020. Now let me quickly jump to Slide 14 where we showed a split of our roughly EUR 37 billion investments, including cash. Compared to the previous year, the portfolio mix stayed rather stable and is due to our conservative approach, still dominated by bonds. Details regarding the bond portfolio by rating and issuer are presented on the right side of this slide. Starting with year-end 2021, we are also -- we also provide the rating distribution of our bonds over the page on Slide 15. This slide will be included in the appendix going forward with an update of the numbers at year-end. On Slide 16, we present the details of our exposures in Russia and Ukraine. Here, I would like to point out that we have no operations in Russia. We operate with 3 insurance companies in Ukraine, which generate around EUR 100 million in premiums. The average profit in the last 4 years amounted to EUR 10 million. We have no goodwill for the companies and their net asset value is roughly EUR 55 million, which includes an investment exposure of around EUR 60 million. In Russia, our investment exposure amounts to roughly EUR 210 million. Most of it are bonds. Any short-term valuation losses would affect our equity via OCI, a default of bonds, which is the status of today, currently not the topic, would have a negative impact in the P&L. We will have to wait and see how things develop going forward. Given the terrible situation in the Ukraine and the increased volatility on capital markets, the consequences for the financial results this year are not yet predictable. And in addition, second order effects are not yet foreseeable. VIG is extremely well capitalized and our group solvency ratio of roughly 250% puts us in a strong position to handle the financial implications of our exposure to the VOR region, but let me express my personal hope that we see rationality return and that ways are found to end this war and end the suffering of so many as soon as possible. With this, I would hand over to Werner Matula for presenting the details of the life and health embedded value. Werner, please go ahead.

Thank you very much, Liane, and thanks for your words for the current situation. I will move on now with a very short overview of the life and health embedded value, which VIG is always disclosing supplementary to the IFRS 4 results in order to give a little bit more understanding in the -- to the long-term life and health business. It's the economic equity perspective, and it's completely consistent with our Solvency II balance sheet. We are looking at the life and health embedded value in 2 segments. One is the Austria and German book, which is driven by traditional business and savings business; and the CEE region, which is younger, [ live both ] with a lot of risk business and unit-linked business. And I would like to start on Slide 18 with the Austria and Germany development. What you see is how the embedded value developed from 2020 to 2021. We see a very opposite behavior in this region in Austria, Germany compared to the previous year. We have experienced at the beginning of the year a recovery of the interest rates of the market, and that's why the value is completely driven by the economic variance. This is EUR 732.6 million up, which results in an embedded value of almost exactly EUR 2 billion here compared to the other drivers, assumptions or noneconomic experience. This is the only driver. I would like to mention that also the new business contribution in this segment has shown a little bit better result compared to 2020. The contribution is EUR 32.3 million, but the margin is up to 1.75% compared to last year where it was 1%. If we look on Slide 19, that's the CEE region, and it's also very consistent to what we have seen in the previous years. Here, we see always a more significant contribution of the new business in 2021 that was EUR 41 million with a margin of 3.8%. This is slightly down compared to last year, where it was 4.4%. That's a little bit driven or mainly driven actually by the fact that we are shifting more and more to a risk business, right of business, supplementary covers, which need to be evaluated at the 1-year contract boundary according to Solvency II, that's compliant treatment of contract boundaries. We see the prolongation of such covers because obviously, they are long term, in the experience variance, that's why we have quite a significant contribution here of EUR 108 million in 2021, that's the full portfolio roll forward of Solvency II contract boundaries every year. We have seen this very similarly also in 2020. What is also important to mention in CEE is every year we do not have a significant impact of the economic environment. You see here minus EUR 11.4 million. That's nonmaterial simply because the portfolio is not very exposed to interest rate movements. In terms of the total on the next slide on 2020, this is how it all adds up. We have reported last year an embedded value for VIG life and health business of EUR 3.2 billion. After dividends paid by the life and health segment and foreign exchange rate adjustments, we are starting at EUR 2.9 billion as an adjusted embedded value of 2020. And we have a return of 32% or EUR 935 million and end up with EUR 3.85 billion for the year 2021. Obviously, those are the numbers from CEE and Austria summing up. The new business contribution on the group level, I would like to point out here, it's close to EUR 74 million. Also the margin is a little bit up to 2.5% compared to 2.2% last year. And the second good news is that the CEE region contributes to the life and health embedded value with 48%. So almost half of group, which once again is almost every year underlines the fact that we are well diversified with that business across the group and proves that we should keep up selling profitable life and health business across the whole region. So far to a short overview for the life and health embedded value, and I'm happy to hand back to Hartwig for the outlook and the summary.

Okay. Thank you, Werner. So I'm going on with Slide 22. And here, this provides a short summary of the highlights of 2021. I think for sure, the strong operational development of our group with premium volume, as we could see, to exceed the EUR 11 billion threshold is to be mentioned. Based on the favorable combined ratio development and also the strong technical results in P&C and life, our earnings per share of EUR 2.94 were up 62%, leading to the increased dividend proposal of EUR 1.25 per share. So we also, in 2021, set out our new strategy program, VIG 25, which is securing the further dynamic developments of our group, also strengthening the market leadership in Central Eastern Europe. Our entrepreneurial activities until 2025, we'll be focusing on optimizing, enhancing and also expanding our business model to increase efficiency, also to strengthen alternative distribution channels and expand the value chain beyond insurance business. VIG 25 also includes specific sustainability goals that underscore our efforts also to combine economic objectives with social and also environmental factors. This was also our ambition when issuing the first senior sustainability bond in March 2021. Roughly 50% of the EUR 500 million have been already allocated immediately according to the sustainability bond framework for investments in already existing eligible green and social projects. The most recent eligible investment has a volume of EUR 54 million and is 3 office buildings with also the necessary qualifications as green buildings in the city of Warsaw for our VIG fund. Green investments overall in our portfolio increased by more than 80% to EUR 436 million in 2021 compared to the previous year. As a part of our VIG climate change strategy, we intend to decrease investments and underwriting in the coal industry. Since 2019, we already have reduced coal risks in the corporate business by more than 70%. Despite all the uncertainties for the financial year 2022, I can assure you that ESG stays in our focus. In terms of environmental aspects, we will see how the debate is going to develop based on the dramatic situation in the Ukraine and the substantial price increases for oil and gas as we see it now. Finally, on Slide 23. With this, we are back on the topic of Ukraine and as such extremely difficult outlook for '22 and in this form, the financial year 2022, will remain affected by the still geopolitical and economic uncertainties, mainly due to the war in Ukraine, but also as we see in the example of missing today, Elisabeth Stadler, the pandemic is yet not over. So volatility on capital markets is high and the impact on the financial result, unpredictable at the moment. Nevertheless, based on our strong capitalization and the conservative investment and reinsurance approach, we are aiming for positive operating performance for 2022, subject to the aspects mentioned. We're also taking into account the fact that up to today, we have managed the current challenges in our operating insurance business very well, and we plan to do so going forward. In that, so we have come to the end of our presentation, and we are now open and available for any questions you might have out of our presentation.

[Operator Instructions] The first question is from the line of Fossard from HSBC.

I've got a couple of questions. The first one would be related to your acquisition of Aegon CEE operation. Doesn't seem to be the case, but could you specify if you're trying to renegotiate the price given the evolution of the situation in the regions? And I'm probably not talking of willing to walk away given the strategic interest you may have in the operation, but anything on the price would be interesting to us. The second question would be related to your reinsurance structure, very strong projection as you highlighted in 2021. Just wanted to better understand if the kind of EUR 90 million cap on the losses you highlighted for 2021 is a good assumption as well for 2022? And the third question would be related to your combined ratio. In Poland, which was pretty strong in 2021, just wanted to understand what was the current dynamic in the market in Poland, especially in the Polish motor market, if you were seeing, I would say, more competitive pressure or competition starting to ease.

Okay. Thank you for your questions. So I will start with answering your first question regarding our deal with Aegon and the purchase of Aegon Central Eastern Europe. I would start maybe also with the background, I think it's important to understand that in our strategy, we clearly defined Hungary as 1 of the top 5 markets where we are concentrated also to strengthen our position. We have since 26 years, UNION. And out of this, we are, at the moment, #6 on the Hungarian market. And it was clear for us that Hungary is a target market also in expansion, and it was clear that we are ready to invest. And the negotiations with Aegon, end of 2020, set us the chance that we can, with one step, also gets a #1 position on the Hungarian market. Out of this, at that time, the price of EUR 830 million, including also the activities in Poland, where we are also in the focus of increase of our market share and also including Romania and Turkey, it was totally fitting to our regional structure we have over the Central Eastern European markets. And concerning the pricing. So it was clear from the beginning that we are ready also to follow the market prices which have been shown also in acquisitions in CEE markets before. And out of that, it's important to tell that also the minority share, which is now given to the Hungarian state by Corvinus, which is also on the level of this purchase price of EUR 830 million, which shows that it was done in the right form.

And I now take over your second question regarding our reinsurance structure. As you know, we still follow our conservative reinsurance approach. And the net effect of the NatCat events. The net effect amounted to EUR 90 million. As you mentioned, this is a worst-case scenario. It's nothing which we expect to come up in the future. Your third question regarding combined ratio development in Poland. The combined ratio decreased to 93.2%. This is mainly due by lower claims frequency in 2021.

[Operator Instructions] The next question is from the line of Thomas Unger from Erste Group.

Firstly, on Ukraine. If you could describe us the current status of your operations, what do you hear from your companies locally? And in general, what is business like an insurance market? What is happening to policies in a situation like that, in a war? Is there any relief for your customers also? And then secondly, on your outlook, you've mentioned an expectation of a solid operating performance. What exactly do you mean by that? Is that -- are you comparing it to 2021 and you expect an improvement? Or if you could just describe what exactly you mean with that operating performance? And what you expect -- what could the impact be for your region on the premium development still over effect from Russia and Ukraine? But what kind of development is expected for the top line in 2022? And then you introduced the operating ROE and the new key figure. Where do you see it mid term, what level would you like to reach for that indicator? And then maybe lastly, if I could also ask if you're looking to reduce the bond portfolio that is exposed -- the share of your bond portfolio exposed to Russia?

Okay. Thank you for your question. I will take the first question regarding Ukraine situation and the overall situation also from our companies. I start with the information that we are now active with reinsurance companies in the Ukraine to non-life companies and one life company. So the situation out of 2021 was quite stable and very successful. I also today mentioned already in the press conference that we had a growth of 18% in the average of the last 2 years, we had results of about EUR 10 million. But I think it's all in the background today when we look to the 1,400 employees. The situation now is that, of course, all offices are closed, so there are no activities. It is important for all our companies that since the last years, we stopped the activities in the eastern part of the Ukraine already. So we are strongly concentrated on the western part of the Ukraine. But however, of course, now the situation is that we try to keep on the necessary activities as long as possible. But of course, it is tremendous also what is happening on the employee side. We have a lot of families also coming to Poland, Slovakia, Hungary, also sometimes Austria. We are well prepared also to support them in a humanitarian base. But the background for the business is that I think it's important to know that claims out of VOR actions, excluded in all activities, this is not only in P&C, but also in life. So there will be no dramatic situation out of that to what will happen on the claims basis. On the other side, we have, of course, some exposures coming out from investments, but this is all together also in the volume, which is all over in that form, I think, not so dramatic in relation to our investment portfolio in total. So from today's side, we also are well prepared for the IT security. This is also a main focus we have in the business activities, and we are ready also to fulfill the needs, which has to be done for the clients. But of course, it's, yes, an unusual and abnormally situation we handle as good as possible.

I'm happy to take your second question regarding the outlook. As you might understand, it's not possible to give any outlook for 2022. The capital market volatilities, we can see in the capital markets are not predictable. And we see already on some second order effects very much depending on how long this crisis in Ukraine will take place. So it's not possible to give any outlook and any impact on premium development or any other KPI of our group for the current -- for the moment. And what I would like to point out is our strong solvency ratio of 250% at year-end 2020. So we have a solid capital position, which allows us to manage also this situation hopefully in a good way as we proved also in the past 2 years coming out of 2 years now, COVID-19 situation with this good and high group solvency ratio proved that we were, up to now, really able to handle this challenging situation very well. We have introduced -- coming to your third question, the operating ROE in our profit and loss statement, beginning with this year. This operating ROE excludes noncash impairments unlike goodwill impairments, which we had in the past, we started to work or to show this operating ROE. This KPI, we will use also in the future. It will be impacted by the new reporting standard, IFRS 17 and IFRS 9, which we will introduce or have to introduce in 2023. So no concrete guidance for the time being, but this will, for sure, become a more important KPI going forward. When -- regarding your question, how -- if we intend to reduce our bond portfolio exposed to Russia, I mean currently, this is simply not possible. And no decisions are taken for the moment in this direction.

Okay. Could I just come back to the -- you mentioned the solvency ratio when you talked about the outlook. Does the solvency ratio, I understand that it was around, I think, 267% in I think in the second quarter. There was no specific number given in -- for Q3, but I believe that you've said that it developed -- it was stable in Q3, and now it's 250%. What is that -- how did the solvency ratio decline in Q4? And what was responsible for that development?

Yes. Coming to that, in last year, our in group solvency ratio amounted to 238% with transitionals, and 195% without transitionals. So this is good increase until year-end 2021. In the second half of 2021, the equities performed very well. So the volume and the symmetric matching adjustment in the equity shock increased. And we also had increased interest rate curves, especially in Czech Republic, but also in Poland, Romania and Hungary. So the exchange currency risk increased. And also due to the good asset performance, our exposure towards U.S. dollar increased. So these are the effects why the group solvency ratio is now expected to be around 250%. I still do not have the final calculations. They will be published at least, with at the latest, with the first quarter 2022. So then you will have all the details on that.

[Operator Instructions] There are no more questions at this time. I hand back to Nina for closing comments.

Thank you, ladies and gentlemen, for your interest. The next results call is scheduled for the first quarter 2022 on the 17th of May. Best regards from Vienna and goodbye.

Goodbye.

Goodbye.

Goodbye.

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