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. Good afternoon, and welcome to our 2022 half year results call of Vienna Insurance Group. Here in Vienna, Hartwig Loger, our Deputy CEO, Liane Hirner, our CFO; and Peter Hofinger, member of the Managing Board in addition to his country responsibilities in charge of corporate business and reinsurance. We will start with an overview and update on VIG 25 given by Hartwig Loger, and Liane Hirner will guide you through the financial results details. I now hand over to Hartwig Loger.

Thank you, Nina. Very warm welcome also from my side. On behalf of VIG, it's a pleasure to welcome you to this presentation of half year 2022 results. Before I give an overview and then actual information about the status of VIG 25. I want to, on Page 2, give you an overview about the results of '22, which will be then in detail presented by Liane Hirner. I think, first of all, it's a strong half year result from VIG Group at all, which underpins also the resilience which we see coming out from our business model, which as you know, is very specific in the management principles. And in the way we are giving flexibility to the local management, the entrepreneurship. It is the possibility also in the times we have now that they are acting local. And this, I think, decentralized approach of VIG is really now also showing a beneficial in that case. What we also want to remark in the summary is that our strong capitalization in the solvency ratio of 285% is also on the 1 side, a safety basis and gives us also the chance for growth, which is part of our VIG 25 strategy. And of course, we all the time are looking for opportunities in which way we can go on in our positioning as #1 in Central Eastern Europe. The positive top line performance, you have already seen is important for us that it is out of all segments. And so in this case, it shows that this resilience is not only coming from some regions, but it is really on a broad basis over the whole group. Strong technical results underline also by a very positive way of the combined ratio we are showing. And what we also announced is that the measures we are taking for the Russian government and corporate bonds. We are also increasing and 3/4 of the overall exposure we have in safe. So it is, at the moment, of course, always the interest from all sides to hear a clear expectation about the outlook for the year-end. In this case, we want to announce that we are really expecting to achieve a positive operative performance at the end of the year, showing the strong result of half year. But please be aware that we are not able due to the ongoing geopolitical and economic uncertainties, mainly coming out of the conflict between Russia and Ukraine and the war there that we are not able to define it in detail now. Now I want to go on as it was announced with maybe a short information about the status of VIG 25. As you know, last year in April, it was confirmed by the Supervisory Board of VIG to start this strategic program, VIG 25. We took the chance in May, this year, to do a first evaluation together jointly with all the CEOs of our group. So it was important because the program also was developed with all CEOs and now with the impact of the situation, as I mentioned, Ukraine, but also inflation and the framework around, we decided after 1 year to check in which form our frame, we discussed for this program, is still remaining and in which form we have maybe also to go on. On chart #5, you see the frame on the basis shown in this kind of flower. These have been the main trends when we discuss the VIG 25 program starting 2 years ago. And in a very short term, you here can see in which discussions with the CEOs evaluated and where we see the impact of the changing environment which is shown maybe -- and I don't go in detail now, but overall, that we have, of course, still the discussion about the interest rates basis. And here, in this case, we, on the one side, see that the real interest rates, especially on the European Union level or euro room is remaining still rather low. On the other side, of course, the nominal interest rate has a different impact also, if we call on the capital side. The pressure out of this, what we see now is that the pressure on technical result is increasing, of course, of inflation increase. This and was also part of our initiatives we started last year already. And what we see now also for this half year results '22, that these trends and also the initiatives and actions we set and started already are really working in the right form and the strong technical result also showing now is also in connection to what we already started. So in this case, we still see it's valid that we are on the right track concerning also these topics. What we see on the other side is that, of course, we also get opportunities out of what we've see now because when we have on the worldwide situation of supply chain issues that there might be also possibilities of investments that foreign direct investments, regional independence is also driving opportunities for near shoring, which also came a little bit underlying and strengthen our positioning in the possibility of the market. Concerning the customer access and the trends, we also said in the VIG 25 with clear initiatives on that way. We, on one side, see that there might be a lack of growth tailwinds because when we see economic slowdown and the impact on the purchasing power, this might a little bit shift the spending patterns. But on the other side, we also develop in a strong form, platforms, digital platforms, we are creating ecosystems where we go beyond insurance. And we see that this already is bringing also positive impact in the way for future growth and also the possibility to be near to the customers. The latent demand concerning also insurance and financial products, we had, as a trend, at the beginning of VIG 25. Here, of course, we have this nominal interest rate hike. And here, we see also positively influencing the demand of life insurance in the direct way, but we see also that these latent demand will even be more persistent out of the development we see now. On the next page, going deeper to the actual discussion about the rise of the inflation. First of all, it's important to mention that there are, of course, very different numbers in the ratios of inflation in the markets we are working on. But overall, we have, of course, the impact, which is on the motor and property side, mainly concentrated in the discussion about claims inflation because the costs there are, of course, increasing. And out of that, it is important that in the possibility to go against, we see the chance of premium increase, but also on the side of product modification, also claims handling processes which we already started also as parts of initiatives in our VIG 25 program. Out of the discussion I mentioned with our CEOs, it is clear that there is a higher dynamic in the way we have to act in this way to bring down the costs on one side and to -- I would say, also develop the technical results and the combined ratio, especially in this way. So there are a lot of activities over the companies of the group. And as I mentioned in the overall results, this is one of our USP that we have a lot of creativity in the regional markets, and there is a big change in between the best practice models we can take there. Especially in Austria, we have, in this case, the indexation for various lines of business. In the CE countries, we have mainly year-by-year contracts where we also see the chance to increase premium in the renewal of the yearly-based contracts. Life & Health, the inflation, of course is also influencing, maybe on one side that there might be lower interest for new business. But on the other way, we also see the possibility on the cost side that they're -- we have partnerships with private clinics. We have the chance also here for premium increase, also in combination with the market. And in Life, we see that the profitability of in-force business will also benefit from better investment margin on the saving products. And so out of this, we have also here the possibility for improvement. The next chart #7 shows an overview about the basis of our initiatives defined in this VIG 25. We have, on the one side, the horizon named optimize the current business model. So here, we are focusing really in simplification of processes and automation. It was already mentioned that this is one important factor in the activities to really have a decrease in costs. And out of that, this is also underlying and influencing positively, the running and also the future results we are showing in that way, also in underwriting and pricing and also in changing the best practices out of that. Enhancing the second horizon, this is to give additional customer value. And in that form, we are in the way of bringing in new services, new products in combination with insurance products. This also is over the last year, a very positive factor in improving premium and income. And the third horizon in the name of expand is all we call beyond insurance. There, we really expand the value chain in the way that we are creating the way of platforms. We are also the ecosystems in a definition that shows that, for example, in health, but also in motor, we have a lot of opportunities to create also new forms in the way of the services for our customers. The next slide, #8, is one of, I think, the main factors also showing that VIG 25 is a clear definition about 1 side, the core markets of Central Eastern Europe. So the 20 core markets described and shown here, segmented on 1 side in top 5 CEE markets. You'll see in the color red shown here, Austria included also in this definition of CEE markets, Czech, Slovakia, Hungary and Poland. So there is a special focus in between these 20 core markets on these 5 top markets. And about the other CEE markets, of course, we are also developing a strong clear target in the positioning. Overall, we are in the VIG 25 strategy program defining that there we are ready, and we are looking forward to become top 3 position in all our Central Eastern markets. And besides that, there are the special markets, 10 special markets where we act in the way of niche players with specific goals and also specifically concentrated on product lines. Now touching maybe also the current situation about the Aegon CEE. We had in the transaction also of the first half of '22. To give this current information, we had the chance already to close Aegon Hungary. It was in the 23rd of March this year. And immediately after that, we also could close the agreement in the partnership with the Hungarian government. And out of that, we are now in Hungary, as we defined it in the strategy in the #1 position of this top 5 market in between our core markets with 19% market share. And we are really expecting a strong win-win partnership between VIG and Corvinus, which is the company aligned with the Hungarian government, and so the first actions already started and give a positive expectation also in the development of this positioning in Hungary. We also, on the 21st of April, closed Aegon Turkey. So also in that way, it is the base is fixed that we can go on in taking the synergies out of the activities together of these 2 companies we are now running. And this transaction also opened the chance for us to start life business in Turkey besides the already running property. Aegon's remaining CEE business to touch in that form, we are still in the way of working that Poland and Romania will also be able to close the transaction until the end of this year. And so in this way, also a positive expectation. At least on the Slide #10, I want to touch in the introduction also the successfully placement of EUR 500 million bonds, which was successful in 2.7x oversubscribed demand. And so this was despite challenging capital markets environment, I think, also a very positive important step. The background was that there was also accompanied by a partial repurchase of a bond issued in 2013 with first call date in 2023. So this was also in the strategy, the background of this successful bonds despite. So altogether, I think that this first half result is fitting well in the activities. We started with VIG 25. It shows that strong resilience is also based on clear definition of strategic expectation. And now I want to hand over to our CFO, Liane Hirner, which will now give you detailed information about the financial results of the first half. Over to you.

Thank you, Hartwig. And also a warm welcome from my side. Now let's move to Slide 12. I am happy to present a strong set of key figures for the first half of 2022. VIG once again demonstrates an excellent operating performance and the resilience of its business model in challenging times. Premium growth continued to be strong in the second quarter, which increased in all lines of businesses and segments, leading to gross written premiums of EUR 6.4 billion in the first 6 months of this year. The increase in profit taxes by 10.3% was supported by a very good technical result in P&C. Please note that the result of EUR 277 million includes impairments and precautionary measures related to the Russian bond exposure on which I will come back in more detail in a few minutes. We are pleased that not only our profit increased, but our net result was up by 8.6% leading to earnings per share of EUR 3.05. Our combined ratio improved by 0.9 percentage points and is a favorable 94.3% driven by a better claims and cost ratio. Last year's cost ratio of 32.2% was impacted by costs for IT and digitalization projects. The group solvency ratio came in strong at 285% based on the increase in the risk-free euro yield curve and the issue of the Tier 2 capital, which Hartwig mentioned before, with a nominal value of EUR 500 million, the solvency ratio of VIG improved substantially from 250% at year-end 2021 to 285% as of June 2022. In spite of the repurchase of part of the Tier 2 bond issued in 2013, which already been mentioned before by Hartwig and the stock market declines. Let me add that 1/3 of the increase of the solvency ratio is stemming from own funds increase, 2/3 are coming from reused SCR. Now let's have a quick look on the income statement on the next slide, Page 13. Overall, the strong profit performance of VIG in the first half of 2022 is mainly driven by a better technical result. The decline of around 10% in the financial result is coming from measures in relation to the Russian sovereign and corporate bond exposure, which I already mentioned before. Overall, we have provided for more than 3/4 of the roughly EUR 165 million exposure, which -- with measures taken in the first half of this year. Our tax ratio of 25% is in line with the previous year, and we expect it to be at this level or so at year-end. Over the page on Slide 14, we show the premium development by segment. It has already been mentioned that all our segments recorded strong growth, once again demonstrating the advantages of local entrepreneurship. Our group companies know best about the local insurance needs, which is reflected in the top line growth of 11.6%. Among the main contributors were Czech Republic and Extended CEE with double-digit growth rates in motor and other properties. Group functions recorded a plus of 22.7% in order -- in other property with positive contributions from corporate business as well as internal and external reinsurance. This leads me to Slide 15, where we provide an overview of our premiums by line of business. As you can see, on this slide, not only all segments, but also all business units grew in the first 6 months of 2022. The trends are similar to the first quarter this year with motor, other property and Health showing double-digit growth rates. The extraordinary growth of 20.3% in motor third-party liability business was mainly driven by Romania year after the bankruptcy of City Insurance, more than 3 million clients had to search for a new insurance provider. Now let's move on Page 16, where we show the profit before taxes by segment. Let me start with the most obvious development, which is in Austria. The decrease in this segment is mainly caused by the measures taken in relation to the Russian investment exposure. There is a small impact due to these measures also in the Extended CEE segment, but this was offset by the good results, especially from Bulgaria, Romania and Albania. The result development in the Czech Republic was driven by the increased combined ratio due to higher claims frequency and weather-related claims. In Poland, the decrease of EUR 5.2 million resulted from a declined financial result mainly due to less income from disposals of investments. Over the page, Slide 17, let's have a look at the combined ratio in the P&C business, which shows a rather mixed picture in the first half year. Overall, the group's combined ratio improved to 94.3% based on positive developments in Austria, Poland and Extended CEE. Increases in the combined ratios in the Czech Republic in special markets are among others, due to higher claims frequency. Claims frequency is also the driver for the increase in claims ratio in Turkey and Georgia, bringing the combined ratio despite the decrease in cost ratio to 94.4%. With this, I move to the financial results, which shown on Page 18. In the first 6 months this year, we had higher income from the disposal of investments compared to last year, driven by the sale of investment funds and bonds. However, overall, the financial result decreased by 10% due to the sanction driven trading suspension of Russian sovereign and corporate bonds, impairments in the amount of around EUR 83 million have become necessary. In addition, we have also included a further precautionary measure booked in other expenses. With these measures, we have provided for more than 3/4 of the Russian, sovereign and corporate bond exposure of, in total, around EUR 165 million. Now let's move on Slide 19. The split of the EUR 34.4 billion investment portfolio is stable compared to year-end with a solid bond rating structure and no substantial changes in the bond issuance split. The share in deposits and cash of 11.1% compared to 9.3% at year-end 2021, derived from the newly issued EUR 500 million subordinated Tier 2 instrument and the partially repurchased bond in the amount of EUR 215.6 million. Before we move to the Q&A, I would like to once again highlight the good operating performance our group in a challenging market environment. And I would like to point out that we will stick to our successful business model. The upcoming and long expected accounting changes under IFRS 17 and 9 will have no impact on our business model. We have made further progress in the implementation of IFRS 17 and 9 and decided on relevant accounting options. Moreover, we have decided on the valuation approaches for the defined IFRS 17 portfolios, Property & Casualty, Life and Health Insurance. The detailed description is given in our half year financial report 2022, which is available on our website as of today. At this stage, the impact on the balance sheet of the first-time adoption of the new accounting standards cannot be reliably quantified, but we expect to be able to announce the effects on equity and the contractual service margin, CSM, at the date of first time adoption on January 1, 2022 in the course of the first month 2023. With this, I end my presentation, and we are ready to take your questions.

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

I've got 3 questions, please. The first one is on claims inflation in your P&C business. Could you tell us in which markets and lines of business are you seeing the greatest inflationary pressures, and how confident are you that you'll be able to take the necessary actions to maintain your combined ratio at the current 94%, 95% level? That's my first question. My second question is on the premium growth in P&C. I mean you told us what happened in Romania and why we are seeing very strong growth. But I was wondering if you could give us some color as well on the growth we are seeing in the Austrian and the Czech Republic as well, please? And finally, it's more a clarification on what you said on IFRS 17. So just to be clear, I mean, so we will not see basically like a pro forma financial statement before January 2023. Is that correctly understood? Those are my 3 questions.

Thank you for the questions. I'll take the question for claims inflation. Again, it's a very mixed picture all over the place, how claims inflation is developing. But there are various factors. On one hand side, we see overall in the group in the first half year, an increase, specifically also in motor business of the average premium to counterbalance issues of an increased average claim. As mentioned in the introduction, Principal and CEE, we have 1-year contract. So therefore, we also have the possibility to have a quite quick reaction time on the claims situation. In Austria, we have indexations and we have very specific indexation. So for example, for the CASCO business in Austria, there is a car repair cost index, which is not just the consumer price index, but specifically on the repair costs. In motor business, you also have to be aware that the average age of the cars we are insuring in Central Eastern Europe is around 14 years, quite different maybe to Western Europe or to markets like in Germany where we talk about 4 or 5 years, which also means that certain topics of spare parts and supply chain topics and microchips problems. We do not have here in Central Eastern Europe. As spare parts are not a new technology, you [ have ] them from aftermarket topics. Another topic, even though it has been mentioned that there is a certain increase of our frequency. Nevertheless, our frequency level in motor business is still below the market pre-COVID crisis. This is also driven, I assume, by one topic in Central Eastern Europe. There is a much stronger correlation between gas prices and mileage driven as the disposable income of our customers in CEE is significantly lower in Western Europe. Gas prices are on a similar level. Therefore, if gas prices are close to doubling, automatically, people have a lesser mileage driven. I think this is to the topic of how we see certain instruments in tackling the issue of claims inflation. If I also come to the premium growth in P&C, looking at Austria. On one hand side, you see a quite stable growth in Motor TPL. You see an increased growth in CASCO, which is on 1 hand side, driven by higher prices of new cars, is the deduction of new cars is not any more than in the past, which is the denominator for the premium level and the indexes, which I was mentioning. Other property, it's similar. On one hand side, it is certain indexes and new clients in the retail business. On the corporate side, we have been able in the renewal last year for [ January 1, '22 ] to push for rate increases successfully, which can be seen in the premium growth. Quite similar. The top is in Czech Republic and additionally here also a certain exchange rate effect, which is very much a pushing up the premium growth on the euro level.

Thank you for your question regarding IFRS 17 and 9. Let me say that, in general, the project is progressing according to plan, and we are currently intensively working on the opening balance sheet as of January 2022. But we will not show a performance financial statements for 2022 before beginning of 2023. So this is.

The next question comes from the line of Thomas Unger from Erste.

Yes. I would start with the Aegon acquisition. And I was wondering what is causing the delay right now to complete the overall transactions for the remaining parts of the transaction? And then relating to the acquisition, what was the impact of Hungary and Turkey -- of the Hungary and Turkey purchases on the Q2 results and also the solvency ratio. And staying with the solvency ratio, next question would be your -- would you consider -- I mean, excluding the transitionals, you're at 256% now. That's way above your 150% to 200% range that you would target. Do you consider this as excess capital ready? Are you looking at some larger M&A transactions or anything on the horizon right now or any other use of capital if you're in such, if you would describe it as excess capital territory. And then another one on OMV's share at refinery. Are you involved in this. Do the shutdowns have any impact on you, the shutdowns now in Q2 of the refinery. Is that any impact on your financials? And then lastly, on your outlook, 2022, I'm just wondering why you like ready to give any more specific targets for the end of the year? Maybe if you could talk about what you're targeting in terms of premium growth for the end of the year. I would really appreciate that.

So thank you for your question. I will start in the answer for the Aegon transaction. As I also, in my introduction, mentioned, we could close in Hungary and Turkey, and we are still working in Poland and Romania. The special topic there is that the Romanian company is branch of the Polish company. So we are here in -- working in the combination of the institutions in Poland and Romania in parallel. There are some communication links we have to fulfill. And this is why there is a little delay in the way of closing that. So there is no, I would say, situation that we cannot expect in closing over the autumn of the next month. And out of that, we are in line to fulfill all demands, which are given there. So out of that, we are really looking forward that end of this year, we will have the final closing overall. Maybe I hand over to Liane for your question about the financial impacts.

Okay. Thank you. Regarding the financial impact, the first time consolidation of Aegon Hungary and Aegon Turkey has not taken place so far. We are introducing the -- including the 2 companies in our systems currently. So it's the first time consolidation is planned in the third quarter retrospectively April 1, 2022 for Aegon Hungary and May 1, 2022 for Turkey. So no effect on premiums or results in the half year financial statements. We only have booked the investments. Regarding solvency, the same situation, only the investments are included in the assets. If Aegon will be closed, after the closing, the solvency -- group solvency ratio, impacted negatively by approximately 15 percentage points less group solvency ratio.