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

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the VIG IFRS 17/9 follow-up. [Operator Instructions] I would now like to turn the conference over to Liane Hirner. Please go ahead.

Thank you, operator. Dear ladies and gentlemen, dear participants of this TEACH-IN follow-up, good morning, and welcome to all of you. I would like to refer to our TEACH-IN we already had met in December last year, where we gave an overview of the first indications based on the transition and balance sheet under the new accounting regime, from -- starting from 1st of January 2022. The replay and all the documents are available on our relaunched website, group.vig, under the section Investor Relations, subsection Events. Here, we have also uploaded the relevant section of the group annual report 2022. Here, we have 12 pages, which contain all the information with regards to the changes to the new accounting policies starting 1st of January 2023. Now today, we are sharing -- we're happy to share with you the comparative figures to IFRS 17/9 for the full year 2022 results. Please note that these numbers are still preliminary. They are unaudited data, and they may be subject to change. Nevertheless, I'm really happy that together with Roland Goldsteiner, our Head of Finance; and Werner Matula, our Chief Actuary, we are able to present to you the first set of comparative figures ahead of the half year 2022 results, which we will present end of August. And we have announced to do this in the last Q1 results call. Now let's have a look on Slide 4. Having a look at the participants list of today, I think it's not really necessary to present Slide 4 in detail. You are, in the meantime, well aware of the most significant changes with regards to the accounting of insurance contracts and investments. And in the meantime, the overall concept of the new accounting policies as well as the new IFRS 17 terms like contractual service margin, CSM or risk adjustments are common to all of us. Let's move on to Slide 5, with a short reminder of the key accounting decisions we took in implementing IFRS 9 and IFRS 17. In general, we have chosen those options to allow us for the greatest alignment to Solvency II regime and to avoid accounting mismatches as much as possible in order to provide stable earnings development in future by limiting the effects of market volatility to the greatest extent post [indiscernible]. As you can see here on this slide, VIG applies all 3 measurement models which depends always on the underlying business. The split between insurance liabilities shows that the VFA approach dominates with almost 3 quarters. VFA is in VIG typically applied for unit and index link business, but also for long-term Life & Health business, with an underlying item meeting the VFA application criteria. The 73% at VIG are driven by the significant life book in Austria both unit-linked products as well as with product traditional life business and the legally required profit participation and the legally regulated profit participation plus the long-term Austrian Life Health business. Approximately 20% of the technical reserves account for the simplified premium allocation approach, PAA. Typically, we use it for short-term non-life policies. In case of longer durations, here, we test the eligibility of applying PAA by making sure that the expected results do not differ substantially compared to the general measurement model, GMM, which would have [indiscernible] utilized in the other case. Now GMM, interestingly is despite it's -- this model was a default model according to IFRS 17. In VIG, only accounts for approximately 7% of the technical reserve. This includes external reinsurance business of VIG Group in order to be in line with the reinsurance industry. Because the biggest part of this portion, life comes from the business, which is written by our reiterance company, VIG Re in Czech Republic. Now when we look at the discount rate, VIG has chosen an approach very close to the Solvency II regime. We apply a default bottom-up approach, risk-free interest rate plus an illiquidity premium where applicable. Basically, this resembles the IOP, interest rate curve only the volatility adjustment of Solvency II is replaced by the country specific illiquidity premium. Now let's move to the risk adjustment. This considers the uncertainty of future cash flows and the additional amount to be held above the best estimate reserves. Here, 2 VIG has based the methodology of the risk adjustment on the Solvency II regime. Before we come to the figures in more detail, let me quickly recap IFRS 9. And I would like to remind you that we have applied IFRS 9. Also withdraw [ spectively ] as of 1st of January 2022. So it's fully included in the P&L 2022. The IFRS 9 auctions for equities at the value through other comprehensive income, OCI, will be used in order to match the swings in the interest rate environment in the P&L. This together with the extended use of the VFA approach in the -- for the technical reserves. The classification and measurement of financial instruments depends, as you all know, on the business model and the contracted cash flows. In VIG, the companies must specify their business models based on their insurance portfolios. Uniform measurement of risk provisions primarily takes place in our central subledger, SimCorp Dimension, taking into account the parameters set by VIG headquarters. That instruments that certify the conditions of hold-to-collect and hold-to-collect and sell business are measured according to either an amortized cost or fair value through OCI. That instruments that are not satisfied the SPPI tests, solely payment of principal and interest must be measured through profit and loss. Furthermore, at VIG we use VFA, OCI for strategic participations. Here, we are fully aware that any gains from selling participations will not be shown in P&L in the future anymore. Regarding our real estate portfolio here, I'd also like to remind you that we will stay conservative by prolonging the accounting treatment of valuing it and purchase costs less or minus regular depreciation, meaning the amortized cost model is still applied. With this, let's move to Slide 6. I'm happy to share with you the overview of the IFRS 17/9 results. Just a quick run through here by myself, before Roland Goldsteiner and Werner Matula, we go into more details in some minutes. Compared to the EUR 12.6 billion gross written premiums under IFRS 4, the insurance service revenue amounts to EUR 9.7 billion. Our profit before taxes amounts to EUR 546.6 million, which is slightly below the IFRS corresponding number of 562.4% (sic) [ EUR 562.4 million. ] We have shown also similar to IFRS 4 a net combined ratio including attributable expenses, which is at 92.3% according to IFRS 17. This compares to 94.9% under the IFRS 4 accounting regime. Both the earnings per share for financial year 2022 with EUR 3.4 and the operating return on equity, which amounts to 10.7% and the IFRS 17 are slightly below the IFRS 4 comparative figures. Finally, the IFRS 17 new business margin for Life & Health stood at pleasing 5.8% at year-end 2022. The reason for the increase compared to the 3.6% according to the embedded AU calculation will be explained by Werner Matula. And here, I would also like to remind you that we have presented embedded value calculation end of 2022 for the last time. And we are really happy to share this reconciliation with you. But first, let me now hand over to Roland Goldsteiner. Roland, please go ahead.

Thank you, Liane. Let's start with the development of equity over the business year 2022 on Slide 7. As you may all remember, we started in the transition of an equity of EUR 5.3 billion at the 1st January of 2022. The result of the period, less income tax minorities only slightly changed from the results according to IFRS 4. The same is that for the true for the foreign exchange changes and the dividend payments, of course. As you also may remember, the equity went down in IFRS 4 from EUR 5.6 billion to EUR 4.4 billion for the business year 2022, highly effective, but a while went swing in interest growth during this year, pushing the OCI from investments into the negative [indiscernible]. What you can see here in IFRS 17, on the other hand, is a total different picture due to the fact that the OCI movement from the technical provisions and that CSM newly counterbalances the downswing of the OCI from the unrealized gains and losses to IFRS 9. In total, an equity stays at a stable EUR 5.7 billion, which we samples model as the equity at the beginning of the period, plus the net result of the period. This development assures us that VIG has taken the right accounting and measurement decisions in order to achieve the goal to stabilize the financial development. Starting with Slide 8, about the emphasis again the fact that VIG group in the new accounting world still sees this business according to markets, not according to business lines. This determines the reporting segmentation, which stays the same as in the older accounting world, of course. We will stick to Austria, Czech Republic, Poland, extended CE and special markets and group functions as our reporting segments. Going on to the presentation, we give you a look on the insurance service revenue of the VIG Group in comparison to the IFRS 4 figures of 2022. Overall figure of insurance service revenue went down compared with the presented gross written premium by EUR 2.9 billion to EUR 9.7 billion. This is not due to the elimination of the investment premium in life insurance business from this new turnover [ GI. ] This is also clearly pictured on the right graph here on this slide, where the Life turnover was down by EUR 2.2 billion. This is also the reason why especially the turnover in Austria goes down significantly. However, we run the biggest life portfolio within our group. This effect is also visible to a minor degree in all other business segments here. The decrease in profit and casualty turnover is corporate discounting effects, especially in the third-party reinsurance business, where GMM is applied and accounting treatment of the portfolio entries of the intake reinsurance. This can also be clearly seen and a matching of the decrease in the turnover figure within this segmentation to [indiscernible] the group functions, which includes VIG Holding, VIG Re and Wiener Re with the lower consultation effect pictured on the left graph. Going on with the group result before taxes on Slide 9, we see hardly any impact overall on the group result as the result was goes down by nearly 2.8%. Our business drilling down the overall results to the business segment, it is visible that the change from IFRS 4 to IFRS 17 in nice little detail, of course. Starting with Austria, result was down by EUR 23.6 billion due to the significantly stronger results in Life & Health business, overcompensating a significantly lower result in the P&C business. Life & Health result is supported by the strong new business margin shown before as well as by the release of CSM, especially from the VFA classified business. On the other hand, the P&C business is subdued by the increased liability for incurred claims or otherwise called the LIC, due to the effect of cost inflation during this year. As the difference in the Czech Republic is a little minor, I want to go along the development columns. Here, we can see an increase of the result by only 40%, which can be explained by 2 effects. First, we experienced also in this market a positive impact from the release of CSM in the Life business. And then additionally, we've got a positive impact from the investment result by the realization of SPPI eligible investments, which goes according to IFRS 9 through routine earnings and not through the P&L anymore like IFRS [indiscernible] The most significant change to the IFRS 4 result, of course, appeared in the several CEE segment. Here, several effects pushed the result before tax is down by EUR 64.3 million. First, we see a far lower positive effects from the CSM release compared to Austria, Czech Republic and Poland. And secondly, we have here many markets with a cost inflation led to a further strengthening of the [indiscernible] Moreover, we also experienced a major impact from the different accounting treatment of non-SPPI eligible investments, which under IAS 39 were buffered in the OCI for equity and didn't affect the P&L there. According to IFRS 9, the decline in market value due to the heavy swings in the interest environment now goes through the P&L. Here you can clearly see the difference in the measurement both GMM and also VFA. Of course, we're also in contact [indiscernible] affecting the format reporting segments. But there, the VFA application is far more broadened than in the business -- this business segment here. This underlines once more the balancing effect of the VFA approach. Additionally, we also experienced a negative impact from the staging of investments due to the expected credit loss of some investments. [indiscernible] and taking also the rather minor changes to the segments of the special markets and the group functions into account. The changes described above, some up with all, an overall slight deviation, the group results before taxes of all together just minus 2.8%. Slide 10 just summarizes the effect of already mentioned on Slide 9. You can see here the effect from the cost inflation on the link and the negative effect of IFRS 9 of the result of the P&C business. A positive effect of the strong new business margin and the release of the CSM in our Life & Health business. But the predominant application of the VFA measurement model balances the IFRS 9 effects. Now we concentrate on the next theory KPI, the combined ratio. Regarding the composition of this KPI, we calculate the combined ratio only for the P&C business on a net basis, meaning, including reinsurance. Furthermore, we only include attributable cost basis to the calculation. Using this formula, we come up with a net combined ratio of 92.3 percentage for the P&C business. This is, of course, significantly lower of the IFRS 4 combined ratio of 94.9%. Difference comes nearly from the discounting effect in the claims ratio according to IFRS 17, which we didn't apply in our IFRS 4 regime as we stick to the natural insurance accounting regulation and not as most of our figures have done to our U.S. GAAP. Additionally, the cost basis with this calculation is significantly lower by taking only the attributable costs into consideration. Of course, we are striving to come up with further TEACH-INs on the combined ratio in future presentations. But for this presentation, we had a limited level of detail as we now also heavily engaged in preparing the half result of 2023 as well as the new format of the half report. So please apologize for that. This concludes the section of my presentation, and it's my pleasure to hand over to Werner for the details of the Life & Health. Please.

Thank you very much, Roland. Let me go on with Life & Health. And as we learned already today, Life & Health business is mainly value -- are going to be Variable Fee Approach, VFA and a little bit of GMM. Almost 2 or 3 [indiscernible] of the book regarding to our -- at the beginning is VFA and this is also visible if you look here on Slide 12 for the development of the CSM or the year. We are starting at the transition balance sheet with EUR 5.1 billion opening CSM, the CSM here is presented as net CSM. This means direct business, reinsurance issue and reinsurance health are together consolidated. And then there are certain developments over the year. The first and probably the most interesting one is the new business contribution of EUR 240 million, which I will go in details on the next slide. The GMM model contributes only loan material with EUR 9 million of interest accretion and EUR 24 million changes in estimates besides the fact that this is a smaller proportion also this is due to the situation that changes in the economic environment are not adjusting the CSM in the general measurement model. This is very different other than VFA. You see here a big block of plus EUR 800 million coming from the change in variable fee. And this clearly follows the strong increase of interest rates in 2022, particularly in the Austrian life and long-term health book. After a small FX effect of EUR 6 million, we also see a block here labored with other effects of EUR 200 million additional to the CSM. This one represents in particular or mainly the 2 new Aegon entities which have not been yet part of the opening balance sheet and went into the consolidation during the year. Last but not least, we see the CSM lease of EUR 543 million in 2022. And this also adds up to a little bit more than EUR 5.8 million CSM at the end of 2022. Let me also note that the CSM development is very much in line with what we have shown at the beginning of the year in our embedded value of disclosures supporting the IFRS 4 financial statements, Liane already mentioned, this was the last time that we did this, and we are happy that the developments are comparable. Wherever we go in business, where we've been, I would like to use the opportunity to explain a new business value of EUR 230 million more detail and how this reconciles our MCVU business value. Comparative number has been EUR 91 million new business value under the embedded value of metrics, with a new business margin of 3.6%. Just to remind you, the new business margin is always the new business value in relation to the present value of new business premiums. Now there are 3 effects, which I would like to explain and which reconciles then to IFRS 7. The first 1 is tax and minorities. Embedded value is similar to Solvency II market exactly as far as [indiscernible] own funds position and therefore shown net of tax. Also, the embedded value is presented after minorities. Now grossing this up means EUR 29 million additional value. Second block -- the second block relates to the methodology changes. IFRS 17 allows for different country boundaries, normally longer country boundaries. IFRS 17 also only considers the attributable expenses, both effects increase, of course, the new business value or increased the presentation of profitability. And then IFRS 17 initial recognition requires us to use assumptions at the beginning of the period at point of sale. That's different to embedded value and also there is no consideration of any experience variance in the [indiscernible]. Last but not least, the scope, which is actually the biggest block here of EUR 77 million means all entities which have not been in the consolidation scope of embedded value are now included here. Again, this is close to 2 bigger entities in Hungary and Turkey. And then we are reaching EUR 240 million of new business, CSM, where additional recognition CSM with a margin of 5.8% for the year 2022. Let me conclude with the statement that the results again show that our long-term business, Life & Health is important and profitable, and we are very happy that we are having a good strategy in building that business overall. With this, thank you very much. Handing back to Liane for a summary.

Thank you, Werner. Also, thank you, Roland. I guess it's a little bit the same for all of us. It takes a little bit time or we take a little bit time to fully understand all the new information and the new -- and the changes of the new accounting regime to get used also to the newer type presentation according to IFRS 9 and 17. Here on Slide 5, I would like to show you a quick executive summary in which I once again would really like to highlight that the new accounting standards do not have or neither have an impact on our overall strategy or risk appetite and nor have an impact on our dividend payment capacity. The latter is especially true because all the bigger VIG entities, including, for example, Austria, Czech Republic, Germany, Poland stay with national GAAP which is, in general, more prudent in IFRS 17, and this remains unchanged and will save the basis also in future for the dividend payments. Now you have seen in our first step of comparative figures, and I would like to highlight that the insurance revenue amounts to EUR 9.7 million, difference compared to IFRS 4 gross written premium is mainly the removal of the investment component mainly Life, but also in the other lines of business. Our IFRS 17/9 combined ratio in P&C amounts to 92.3%. This is calculated on a net basis and considers the attributable expenses. The disclosure of the CSM and the new business CSM going forward, replaced the embedded value calculations and Werner has shown you different transition to that. VIG will [indiscernible] profitable new business under IFRS 17 with a P&C margin of 5.8%. I'm quite confident that the disclosure will further develop over time. And also here, we welcome your feedback, which is highly appreciated. Our first half year results in the regular reporting cycles, we will present end of August on 30th of August 2023. There, we will provide you the comparative figures, half year figures for 2022. And for this reason, we will not collect the consensus for the upcoming period. Yes. As you all know, the process of reviewing KPIs and targets based on the IFRS 17 and 9, regime is still ongoing. There is no clear market standard at the moment according to the new regime. And we also look forward here for your feedback in this respect as well. With this, I have come to the end of my presentation or we have come to the end of our presentation, and we are now ready to take your questions.

[Operator Instructions] And the first question comes from Youdish Chicooree from Autonomous Research.

I've got 3 questions, please. The first 1 is on Slide 12 on your Life & Health CSM. I was wondering, so you show a CSM release of EUR 543 million. Is that like the run rate going forward? Or could you guide us probably to how that stock of CSM is released going forward? That's my first question. Then the second question on the same slide. Could you -- would you -- I mean, I know you've explained briefly explained the benefit of EUR 800 million you recognized. Could you elaborate on that, please, considering it's such a large figure and how that unwinds going forward? So those are my 2 questions on this slide. And then a couple of more questions on the P&C side. So overall, on transitioning to IFRS 17, your claims ratio falls by just 50 basis points. So I'm just wondering, could you tell us what is the benefit of discounting that you recognize in that 61.1%? And I suppose there is probably another negative which is offsetting that benefit. So if you could quantify that, that would be very helpful.

Thank you. I think Werner will take the first question for the Life business and Roland will then go into more detail on P&C. Werner, please go ahead.

So let me answer to the Life questions. First the CSM release of EUR 540 million or EUR 543 million, whether this release is to be planned also for the future. To a certain extent, yes, we do not extend, no, when it relates also to your second question. So the CSM release follows the coverage units of the underlying business. So there is a regularity, which is expected in the CSM release. However, the CSM release actually then depends on the adjustments of the CSM and 1 of the significant adjustments in 2022 was an additional EUR 800 million of variable fee which after all is well released. So if that was not there, obviously, the scale releasing to be smaller. So we cannot 100% predict. There is an expectation. But if there is an adjustment it's in the CSM like a change in variable fee last year and also the new business, then this number could look very different. The EUR 800 million was your second question. So this is a [indiscernible] I explained that one by the higher interest rates and if we think in our [indiscernible] terminologies so to say is new. The significant increase of the value in force, the business and the higher interest rates in Austria in the Life book is much more profitable. And since this is valued under the VFA, the CSM is adjusted, meaning it has increased and consequently, also released for a particular period. For P&C combined ratio, I think Roland.

Yes. Youdish, you're absolutely right. Maybe compared to other peers, the decrease in the claims ratio just 50 basis points compared to IFRS 4, it's rather minor. But I can give you at the moment the exact number of the discounting effect. But nonetheless, we -- when we said before implementing the result of some P&C business in some reporting segments, I mentioned that we -- price in the cost inflation, here -- movement here. And this be aware that the cost inflation, not only affects the cost rate itself, we in the higher wages whatever for the admin basis, but also the cost inflation effects, repair costs and claims handling cost and so on. And then this also can't effect a little to a certain degree, also the savings due to the discounting effect.

So the only new -- so it sounds like you're saying you basically strengthen your reserves, right? Or did I misunderstand?

We weren't putting it like strengthening reserves. But as new IFRS 17 goes also very much also expected, we see one-off of the business. So we included in our calculation, especially of the LIC also the cost inflation is related as we've been more maybe on a [indiscernible] basis.

All right. So it's more prudent assumption that you had previously under IFRS 4. Is that right?

That's because, if I may answer, that's because the inflation development simply is almost stronger in 2022. It started in 2021 already. Plus the expectation of future inflation looks different in our opinion. So it's still the best estimate, but the best estimate or best estimate cash flows needed to be increased because of the future expectation.

If you may add also in IFRS 4, we have advantage of say, the run of releases out of hidden reserves out of the claims reserves which we don't have according to IFRS 17, because we started a new [indiscernible] balance sheet.

Okay. Got it. But I guess, going forward, you will tell us what the benefit of discounting is, right, on the P&C side? Or once you start reporting and IFRS 17.

We will do our most to, I would say, rise up our level of details for our presentation here in the future.

But we took your point. So we'll make sure that we calculate the effect as soon as possible.

And the next question comes from Bhavin Rathod from HSBC.

I have 2 questions on my side. The first one would be on Slide #10, where you showed the decline on the P&C by EUR 181.4 million. And I guess it's impacted by 2 factors. 1 is of [indiscernible] cost inflation that you have referred and this other element of migration from IAS 39 to IFRS 9. It would be helpful if you could just provide any further granularity and how much of this is impacted by the inflationary impact and how much of this is impacted by transitioning to IFRS 9? And the second one would be on Slide #11 when you showed the combined ratio of 92.3% under IFRS 17 versus 94.9% under IFRS 4. Now I understand under your previous guidance, your normalized expectation for the combined ratio was close to 95%. How should we think about the normalized expectation under IFRS 17? Not sure would you say the 92% would be a more like-for-like to a combined ratio under IFRS 17 under the new regime. I guess, it still doesn't make a question I have currently.