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] Please make sure your phones have the DTMF tones, activated in order to register for questions. [Operator Instructions] I would now like to turn the conference over to Nina. Please go ahead.

Thank you. Welcome also from my side to today's 3-month '23 update. Liane Hirner, our CFO, will guide you through the presentation. And afterwards, Liane and Peter Hofinger, are ready to take your questions. I now hand over to Liane. Please go ahead.

Thank you, Nina, and welcome to our short update call for the first 3 months of 2023. As already stated in our previous calls, VIG is going to start its IFRS 17, 9 disclosures with the release of the half year results 2023 end of August. We are happy to share today the Q1 top line developments and the solvency ratio of the group at year-end 2022 as well as at Q1 2023. Before we turn to the premium development, let me quickly show you on Slide 2, the most recent market data for our markets based on year-end 2022. We were able to keep our excellent market position with strong market share throughout the region, being #1 as insurance group in Austria, the Czech Republic, Slovakia, Romania, Hungary, Bulgaria, [ Croatia ], Latvia, Lithuania and North Macedonia. In the meantime, we also received full year data of Serbia and I'm pleased to announce that VIG reached top 3 position with year-end 2022. In Poland, PZU with more than 35% market share is the dominant player. Our VIG ranks fourth after PZU, Talanx and the ERGO group. On Slide 3, the GDP forecast and the expected development of the consumer price index indicate part of the challenges we face in our markets. Especially 2023, with limited GDP growth and still elevated CPI will not be an easy year. Nevertheless, from 2024 onwards, the developments are more promising with real rated GDP growth rates recovering and always ahead of the EU27 average. For 2024 and 2025, the spring forecast report of the Vienna Institute of International Economic Studies anticipates an overall acceleration of economic growth across Central, East and Southeast Europe, primarily on the back of the recovery in private consumption. Over the page on Slide 4, you see from the spring forecast GDP growth rates for the individual VIG markets with positive developments, especially in our major markets. In VIG, as long-term focused insurance group, we always see the business opportunities in CEE with regards to the insurance density, the long-term growth potential is in place. Spending on insurance per person per year is small money even within the CEE markets and the need for insurance protection apart from mandatory motor insurance is given, especially in volatile and insecure times. I'm thinking of pure risk protection or different sorts of health insurance that don't have to be expensive to provide support and protection in the worst of cases. Our local group companies close to their customers in their market, know how to address these topics and have the flexibility to create proper insurance solutions. Therefore, we are, despite the fact that Hungary will not be able to avoid a recession in this year pleased with the closing of the Aegon transaction in Hungary and Turkiye last year last year. In the meantime, the Romanian authority also has given its approval for requiring the missing parts of Poland and Romania, and we are now working towards closing. The completion of the full transaction, therefore, is only a question of days. We have lifted the key effects for the outstanding entities. Life insurance and service companies as well as pension funds in Poland and Romania on Slide 5. Let's now move to the development in Q1 2023 on Slide 6. Gross written premiums were up 12.1% to EUR 3.9 billion. Adjusting for the first-time consolidation of Aegon Hungary and Turkiye, premiums would have increased by 7.1%. The solvency ratio for the first quarter 2023, including transitionals, stood at strong 284%, and I will go into more details in a moment. Dividend proposal of EUR 1.3 million was approved in our AGM last Friday and the dividend payment, they will be tomorrow 1st of June 2023. Now let's have a closer look on the premium development, which is shown on Slide 7. Solid single-digit premium growth was recorded in Austria and the Czech Republic. In both markets, the positive development was driven by growth in nonlife and health business, where a single -- life single premium business declined in the first 3 months. Poland showed with premiums of EUR 386 million and a growth of 14.6%, a strong development mainly coming from casco, other property and the life single premium business. The growth rate for Extended CEE includes the additional premium volume from Aegon Hungary of EUR 120.3 million. But even adjusted for this effect, the segment would have increased its premium volume by 3%, supported by motor and Health business in the Baltics. The positive development in the Special Markets segment is almost exclusively coming from Turkiye based on the first-time consolidation, but also due to strong premium growth driven by motor in Ray Sigorta. Adjusted for Aegon Turkiye, the premium in the Special Market segment would have been up by close to 52%. on Slide 8, we only combined the premium development is the economic environment for the segment, Austria, the Czech Republic and Poland. As I have already touched most of the facts, I would directly move to Slide 9 with an update on our Russian government and corporate bond exposure. Apart from the well-known impairment in the size of EUR 84 million, which we have already taken in Q2 last year, we were able to sell some of the bonds since the beginning of this year. This happened closely reviewed by VIG Group compliance, ensuring that no sanctions were violated, decreasing the exposure to roughly EUR 50 million impaired value as of 26 of May 2023, which is the day our AGM. As bank exposure became a topic in the beginning of the year, let me quickly confirm that VIG has no U.S. regional bank exposure and was not affected by -- at all by the issues around the Silicon Valley Bank. With regards to Credit Suisse, the exposure of VIG amounts to 0.1% of the overall EUR 34.4 billion investment of the group. More or less all being financial senior or financial lower Tier 2. This brings me to the already mentioned solvency ratio development, which we show on Slides 10, 11 and the sensitivities on Slide 12. The solvency ratio slightly increased to 284%, including transitionals measures in Q1 2023 after 280% at year-end 2022. The decrease in the own funds is mainly driven by the reduction of the transitional effects. Over the page on Slide 11, we present the composition of the full year solvency ratio of 280%, including transitional with the details on the SCR and the eligible own funds. Main drivers of this development are the observed market and interest rate developments in 2022. The increased interest rates together with decreased stock markets led to less exposure towards market risks. On the other hand, with the increased yields, the classical life insurance business becomes more profitable, thus leading to higher loss absorbing capacities of technical provisions and an increase in lapse risks as part of the life risk. Here, it is worth mentioning that until now, we have not experienced lapses to an extraordinary expense. Apart from this, the first-time consolidation of Aegon business in Hungary, together with the overall business growth led to an increase in non-life risk. On Slide 12, the sensitivity analysis of year-end 2022 is shown. Compared to the sensitivities the year before, we have changed the interest rate curve shift from 50 basis points to 100-basis points. Taking into account changed interest rate environment, the 100 point -- 100 basis point shift is simply more appropriate and also represents an alignment of the upcoming reporting requirements, for example, regarding EIOPA. In 2021, our interest rate sensitivity for a plus 50 basis point shift was plus 12.5 percentage points. In 2022, the effect for a plus 100 basis point shift is still plus 13 percentage points. Given now the higher level of interest rates compared to last year, also the downward sensitivity with respect to interest rates was reduced significantly, leading to an effect on the solvency ratio of minus 18.9 percentage points or in other words, VIG's solvency ratio year-end 2022 would still be at 261% in case of a 100 basis point downward shock. The equity risk sensitivity as of the end of 2022 decreased to 3.7 percentage points from 12.8 percentage points in 2021 due to decreased absolute volume of equity exposure in 2022 and the lower symmetric adjustment factor. No substantial changes with regards to the sensitivity on spread development on corporate or government bonds. I would like to end my presentation with a short summary on the confirmation of the unchanged outlook. We see our operating performance developing according to plan, and we were able to successfully grow our premiums. With regard to the NatCat Event in Turkiye, the most recent figure regarding the expected gross impact including active reinsurance from [indiscernible] that we have also communicated in our AGM amounts to EUR 170 million. For 2023, we are cautiously optimistic and aim for further positive operating performance. With the half year results of 2023, this performance will be shown then according to the new accounting standards IFRS 17 and 9. Thank you for your attention. And now Peter and I are ready to take your questions.

[Operator Instructions] And we have our first question from Bhavin Rathod from HSBC.

I have 3 on my side. The first one would be on the P&C pricing dynamics on your core markets, it would be helpful if you could provide some more additional colors on what kind of pricing dynamics you are seeing in your core markets like Czech, Poland, et cetera, vis-a-vis the claim inflation. The second one would be on the Turkish earthquake exposure. I appreciate the EUR 170 million is the gross number, it would be helpful if you could provide how should this number look on a net basis? And the third and the last one would be on your guidance, which is obviously unchanged and you're still aiming for a positive operating performance. If you could provide some more color on how should we read this statement, especially in the context where you are transitioning to IFRS 17. So when you see a positive operating performance, should we read this positive improvement of IFRS 17 figures or IFRS 4 figures. I mean on what KPI should we look this positive operating performance. Those are the 3 questions that I have. .

Peter Hofinger. Thank you for your questions. The first question and the second question, I will answer and then Liane makes the third question. I start with the Turkish earthquake. We are announcing the gross figures as this is a mixture between active reinsurance, local company and also sometimes corporate business reinsured facultative, so it's a mixture. From the today perspective, the net effect will be a low double-digit million figure. Coming to the first question, P&C dynamics. I would start generally, and I think we have mentioned this in our region, Central and Eastern Europe in the last 20 years country by country, there have been already times of higher inflation. So we have management people in their jobs, which are already in their professional career. We are dealing with the topic of price inflation and claims inflation, maybe differently to some Western European countries, which didn't have this kind of inflation in the last 40, 50 years. Therefore, there is a certain management ability and capability to deal with these changes. In CEE, we do have mainly 1-year contract. This means we are able to adopt according to our calculation, the rates. We are not locked in differently in Austria, but in Austria, where we have more long-term contracts, we have indexation clauses on it. And it's not just a CPI inflation clause as inflation clause is relevant to the business line. So for example, construction price index for property or repair cost index, car repair cost index for Casco, which is ensuring proper pricing automatically with the index. If we go to the countries, maybe I start with the most challenging one, which is still Poland. We are still here the whole market under pressure in the motor pricing. We do believe that there is now the bottom line reached and the first signs that motor pricing in motor TPL is increasing. We also believe that because we see this tendency in the neighboring Baltic states and quite a number of insurance companies operating in Poland are also operating in the Baltics. So therefore, we believe that also this trend will come over. In the property side, and this is again true for whole CEE. Also to our local competitors, they were experiencing the significant rate increases of reinsurance in the last renewal, which is also putting pressure on them on the primary market. So we see, in general, in property business in CEE and rate increase on the property business. There was a certain delay. You know that in Western Europe, these rate increases in the property started already 2, 3 years ago. We saw it in CEE last year, but this year, even a bit accelerated. The same is true in Czech Republic, but with, I think, also a decent performance in motor TPL and also in Austria. In Austria, where some rate increases are flattening, but this has been already over the last years, certain risk adequate increases done. We are growing quite strongly in the Casco line of business, all over the place, on one hand side, due to rising number of new car sales combined with rate increase, combined with value increases as also car prices have significantly increased in the last 12 to 24 months, which is standard function of the absolute premium. So this is a little bit an short overview about the environment.

I'm happy to take the last question on the guidance and what you mean with the positive operating performance. I would like to remind you that the macroeconomic environment is still challenging and still we are experiencing volatile capital markets. So when we talk about the positive operating performance, we mean the insurance technical result. And we see still, of course, some pressure in this year regarding the high inflation rate. But this year and especially in 2024, we expect that the effects of adjusted insurance tariffs, we will see in our insurance result. So this is what we mean by the positive operating performance. I hope this answers your question.

The next question is from the line of Thomas Unger from Erste Group.

Yes, so thank you for the presentation today. My first question would be on -- you talked about the pricing dynamics in the region. Across all your product groups, have the -- is the indexation or the adjustments, the upward price adjustments done or mostly done for this year? And how has the lapse rate in connection with that developed? That's the first question. Second question would be on the changed interest rate environment. What is the new money yield in -- or what was it in Q1 2023? And then lastly, you mentioned that you'll be presenting the half year results on the new reporting standards of IFRS 17 and 9. Do you provide any historical data ahead of these results for the quarters in 2022 that would be highly appreciated and helpful?

So I take the first question. Thank you. We are making rate adjustments at the renewal dates throughout the whole year. So it's not done all on the 1st of January, but when the contract is to be renewed. So this is throughout the year. We do currently not observe significant changes in behavior towards cancellation or lapse rate. What we see, and this is more towards corporate business that certain coverages get changed. So self-retention gets increased certain extra coverages maybe get reduced. So it's not a cancellation of a whole insurance coverage, but it's an adaptation of certain coverages in relation then to the total premium to be paid.

Regarding your question to the -- regarding the new money yield for the first quarter, the new money yield of total VIG in the first 3 months amounts to 4.8%. And the last question regarding the half year results into the new accounting regime, IFRS 17 and 9, we are happy to share with you the year-end 2022 results in advance. So we will reach out to you.