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] And I would now like to turn the conference over to Nina. Please go ahead.

Thank you. Welcome to today's conference call of Vienna Insurance Group. Liane Hirner, our CFO, will guide you through our first IFRS 17/9 results for the half year 2023. Today, Roland Goldsteiner and Werner Matula, both well-known from our IFRS 17/9 webcast have joined. And together with Liane, are ready to take questions after the presentation. I now hand over to Liane. Please.

Thank you, Nina, and I wish everybody a good afternoon. It's a great pleasure for me presenting to you the results of the first 6 months of 2023. I'm very delighted to provide the first regular set of IFRS 17/9 figures of Vienna Insurance Group. And please let me also take this opportunity to once again thank all the teams and companies involved through our entire group in this huge transition. And I would like to remind you that compared to our -- or many of our U.S. GAAP [ peers ], the change for VIG is even more substantial as for the first time, we calculate our -- and value our IFRS technical reserves on best estimates and group-wide common principles. We are not yet at the end of the road and like everyone else in the insurance industry, we are learning and better understand the mechanics of IFRS 17 in every little detail with each result that we are preparing. But now let's directly move on to the half year results overview on Page 2. Insurance service revenue as the new IFRS 17 top line figure increased by 13.7% to EUR 5.4 billion. Profit before taxes more than doubled to EUR 462.9 million compared to EUR 212 million in the comparison period. The net combined ratio of VIG was 94%, up from 90.6% end of 6 months last year. The comparative period includes positive one-offs due to the transition of IFRS to IFRS 17, whereas trying to follow our prudent approach also under IFRS 17/9. Considerations of higher claims volatilities and the liability for incurred claims impacted the net combined ratio of the first half of this year. Base annualized net profit after taxes and non-controlling interests annualized earnings per share of EUR 5.25 were achieved. Our operating return on equity as well annualized based on the half year pretax profit increased to 15.8%. The solvency ratio of the VIG Group, including transitional measures, demonstrated a very stable development in the first half of the year and amounts to 282% as of June 2023 or 2 percentage points above the previous year-end figure. The own funds increased by EUR 294 million in the first half of this year. This increase is mainly driven by the positive business development on the one hand, but also on the development of the interest and capital during this time. Altogether, these figures underline the group's strong performance in an ongoing challenging environment. I will give more details on the business development now on the following slides. Let's move to Slide 4 where we present the group's income statement, including the contractual service margin, CSM release of EUR 340.2 million. The increased CSM release in the general measurement model and the variable fee approach together with the growth in gross written premiums in the premium allocation approach, business and short-term life were the drivers for the 13.7% increase in the insurance service revenue. The shift from the minus EUR 149.1 million to plus EUR 233.4 million in net investment result is impacted by mainly 3 effects. First, we had the measure in relation to our Russian government and corporate bond exposure in the first 6 months last year, burdening the half year result 2022 by EUR 126.1 million. Second, the previous year was affected by unrealized net losses from the valuation of bonds due to the sharp rise in the interest rates. And third, the positive effect out of the increased interest rate environment is coming through in the first half of 2023 with higher current income, something that was we expect to be persistent based on the increased new money yield. All these effects, of course, also influenced the result. I already mentioned the result before taxes of EUR 462.9 million and the result after taxes and non-controlling interest. The tax ratio of 23.8%, in line with the corporate rate in Austria of 24% of EUR 343.4 million. Now let's have a closer look at the development of the insurance service revenue, which is shown on Slide 5. All segments contributed with increased insurance service revenues. In Austria and Poland, the growth of 6.4%, respectively, 10.8% was driven by the non-life lines of business. This is similar to the Czech Republic, where the 10.7% increase was dominated by the motor lines of business. In Austria and the Czech Republic, only the life single premium business recorded decreases in the first half of 2023. In the segment extended CEE and special markets, the frame consolidation of the former entities, Aegon Inc. -- entities, Alfa Biztosító in Hungary and Vienna Life [indiscernible] supported the positive development. Overall, sound insurance service revenue growth, which is here shown. In the Appendix on Page 24, we have included a slide on the gross written premiums development which is no longer part of the IFRS 17/9 reporting for your reference. With this, let's move on to Page 6 and the profit before tax development shown by segment. As already mentioned, the measures taken in relation to the Russian investment exposure especially burdened the Austrian result last year. Out of the EUR 126 million to EUR 109 million impacted only Austria. In the Czech Republic as well as in the extended CEE segment, the net investment result and the effects out of the rise of the interest rates explain the profit being up by million, respectively by EUR 75.8 million. In Poland, the increased net combined ratio is the reason for the slightly decreased result before taxes of EUR 33.5 million. Finally, the Special Markets segment had a positive first-time consolidation impact and has also seen better health business in Georgia. Now over the page, let's have a look at the net combined ratio development. The net combined ratio is calculated as net insurance service expenses divided by the net insurance service revenue. For the first 6 months, this year, the net combined ratio was 94%, up from 90.6% comparative IFRS 17/9 value. The increase is primarily due to the consideration of higher claims volatilities in the liability for incurred claims, which impacted the claims ratio in all reporting segments. In addition to that, in the Czech Republic, a positive one-off in accrued commissions is the reason for the rather low comparative net combined ratio in 6 months 2022. In Poland, the relatively strong deterioration of the net combined ratio is due to insufficient MTPL prices. In Turkiye, increased claims costs driven by inflation is the main reason for the high claims ratio in the special market segment. Looking at the sound insurance service result, the yet elevated net combined ratio driven by the claims ratio is no cause for concern in view of the higher claims volatilities considered. We will, of course, closely monitor the further development. It's currently difficult to assess how the extreme weather events, not only but especially in Austria, are going to impact our net combined ratio going forward. Therefore, we are not yet setting a target in this regard. Now let's move on to the profitability of our Life & Health business, which we show on Page 8. First, the slide shows on the left, that the total net CSM role forward, starting with a CFM of EUR 5.8 billion as of 1st January this year. Now new business with EUR 164 million and more than 80% thereof deriving from Life & Health and the change in variable fee with EUR 175 million put together outweigh the CSM release in the size of EUR 337 million. The total net CSM for the period slightly increased by 1.7% and stood at EUR 5.9 billion. On the right-hand side, the slide shows the key figures for the Life & Health business with a new business CSM out of Life & Health in the size of EUR 136 million leading to an excellent new business margin of 7.2% for the half year 2023. Before we come to the outlook, let me shortly also touch on the investment split. The difference in the total capital investment portfolio of EUR 49.7 billion that we show in today's press or Investor Relations release, is the exclusion of the financial instruments for unit- and index-linked life insurance and investment for third parties. On Slide 9, the presented split for EUR 34.7 billion, refers to the investments held at VIG's own risk and includes investment funds and also consolidated special funds. Very similar to the split shown at year-end 2022, the far biggest part with close to 75% are bonds, followed by property investments in the size of close to 10%. Cash and deposits coming next with 8.4% and the share in equities of 4.5%. The bond portfolio split by rating and issuer both experience only minor changes and that now we move now on to Slide 11 and our outlook. Well, as already announced, VIG expects a group profit before taxes in the range of EUR 700 million to EUR 750 million for the full year 2023. This guidance is given subject to substantial interest rate changes and market volatilities. The development of the financial year 2023 is generally difficult to assess due to a number of uncertainty factors. There are the ongoing war in Ukraine, the weaker macroeconomic environment and the currently persisting weather extremes. Nevertheless, based on our excellent capital position and our successful and resilient business model and in view of the strong half year results that we presented today, we are confident to be able to achieve net profit. The profit before tax range of EUR 700 million to EUR 750 million in 2023. First-time preparation of the half year results and comparative figures 2022, in accordance with the accounting standard IFRS 9 and 17, already showed the expected increased volatility of results in relation to the changes in interest rate environment. The objective for the financial performance indicators and the dividend policy are therefore currently being reviewed. Of course, the participation of shareholders in VIG's success remains a priority for us and we will keep you updated on the developments in this respect. With this, ladies and gentlemen, I have come to the end of my presentation. And together with Roland Goldsteiner, our Head of Finance; and Werner Matula, our Chief Actuary. We are now ready to take your questions.

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

I have 3 questions from my side. The first one would be on your report combined ratio of 94.0% at first half of 2023. I would appreciate if you could provide any more granularity. And then how should we look at this combined ratio on a normalized basis, i.e., adjusting for the higher discounting impact at 1H '23, which I presume would have been more meaningful at this semester versus the previous semester. So just trying to make a comparison between 1H '23 versus 1H '22. How should we think of this increase on a normalized basis. The second one would be on Poland. Can you talk about what are your strategies to contain this higher combined that we are seeing in particular in the MTPL market? And how are you looking at this business in particular? And the third and the last one would be on the CSM release. which is coming at EUR 337 million at the first half. Now looking at the release ratio, this comes out to be somewhere around more than 5% and looks stronger than what you had on a run rate basis versus full year 2022. So can you tell us how should we think of this release ratio going forward, should we take the 5% kind of a normalized release going forward, i.e., 10% on an annualized basis going forward as the normalized kind of release from the stock of your CSM?

Thank you for your questions. I will start with your first question regarding the combined ratio. Well, as I already explained, the net combined ratio is impacted by the consideration of higher claims volatilities in the liability for incurred claims. And I would give you an example, for example, segment -- reporting segment Austria, this is the main reason, in Czech Republic, for example, 50% is related to this consideration of higher claims volatilities. The other 50% are related to commission accruals, which positively affected last year's results. So this is more or less the explanation, I don't know if Roland want something to explain this. And I will -- maybe also like to add that last year, our focus was on IFRS 4 numbers. So -- and this is just the comparative period under the new regime for foreseeing purposes and so on -- the focus was on different numbers. Now I would like to hand over to Roland. He will explain a little bit in detail the elevated combined ratio in Poland and impacts.

For Poland, we experienced, especially in the first half year of '23, very soft car market here regarding the tariffs, which means that because of or not, let's say, leading market positions up there, we were not able to pass on all these effects which we have experienced in the cost increases here in Poland, especially from the inflation environment there. This means not only the cost ratio, but more or less also in the claims ratio due to spare parts and other repair index costs here. This is something we experienced in this year. We are working here heavily here to better the situation up there. But we will -- we will see or expect also such a development until the end of the year this year maybe with not such a big extent, but I would say that the tendency is this year not really good in the car market in Poland.

Now for the third question regarding CSM release, I would like to remind you that we have in our half year report our initial report on Page 45, also further details on the CSM development, but I would like to hand over to Roland -- to Werner Matula, Chief Actuary and he will explain the developments also with preference to this table or information on Page 45 of our half year report.

Yes, of course. So if I understood your question right, you were asking whether the CSM release. Currently, we are showing EUR 337 million. How would this look in the future? And what would be a normalized ratio come to the level of the CSM. So in terms of the mechanics, one needs to consider that the CSM is not released linearly, but it's flattening. So the table that Liane was referring to will show you that roughly EUR 40 million to EUR 50 million last CSM release in the next 4 to 5 years will happen on the portfolio [indiscernible]. Obviously, the releases then are depending on the new business written in the future years and potential adjustments to the CSM, be it changes in estimates or movements in -- or changes in the variable fee, depending, for example, on interest rates. But it is important that the CSM release is from portfolio perspective rather slowing down. I hope this explains the mechanics and the table in the financial statement should help you to understand this better.

[Operator Instructions] and we have a next question from Thomas Unger with the Erste Group.

You touched upon the extreme weather events in your presentation, is there any level of expected claims that you could give us for the summary events now July and August, especially in Austria. And clearly, you outlined it also in the outlook, what sort of impact do you assume for profitability in Q3 or the second half in general. Then also you mentioned that you will be updating your dividend policy. Is there anything you can say about how you expect the dividends to be calibrated in the future? Do you anticipate a growth of the absolute dividend not or per share alongside the earnings growth? Or you'll be looking at a certain payout ratio? And maybe 2 more questions regarding your P&L and how you presented now the investment results obviously, there is quite a fluctuation this year versus last. Is there any normalized level that you anticipate going forward? And also, I would like some more explanation on the other income and expenses line. Which was -- which more than doubled year-on-year in the first half of '23. It was up to a negative EUR 269 million. If you could just explain what's behind those numbers.

Thank you, Thomas, for your question. First question was regarding extreme weather events or events which are taking place currently. As you all know, in the last days, we had ongoing extreme weather events. And currently, we are not in the position to give you any numbers. So we have to wait for that and sorry for not being able to provide you with concrete numbers on that. It's just too early. Then regarding the dividend policy. The dividend policy is under review currently. And as I explained already during my presentation, we saw quite volatile -- quite volatility, which derives from the changes or has derived from the changes in the interest rate environment, especially in the last 1.5 years. So we are reviewing all the mechanics, and we will come back on that as soon as possible. But let me emphasize again that the participation of our shareholders. Our success is really a high priority for us. And I would also like to remind you that since 1994, we paid dividends in each of the year. So this is for the moment, all what I can say. Regarding the P&L investment result, yes, that's quite a different presentation today have seen in previous years. And also the net investment result is highly impacted by the interest rate changes and capital market volatilities. So it's really not possible currently to evaluate a normalized result in this respect. We hope -- we really hope that the interest rate environment will remain stable in the next period --in the upcoming period. So then I think we will have more experience on that. Maybe Roland wants to add something and also to the other income, I hand over to Roland.

Okay. Thank you. Regarding the, I would say, the normalized financial results contribution of the total profit before tax. Is it become more and more difficult according to IFRS 9 compared to IFRS 39 due to the fact that we have much more investments classified as fair value through P&L compared to the other accounting regime. This is I think this is an effect which is normally counterbalanced by the technical results here, which is mostly true for the VFA modeling, but not so much of the GMM modeling. So we have, due to the changes in the interest environment more volatility, especially in the financial result and what contributed at the end of the day to the profit before tax here.

Regarding your question, the development of the other income expense line of the P&L. Here, you can see mostly 2 effects. One is, I would say, a very common effect. We have used some foreign changes here, like in the old times also to here. And the other and big effect, of course, here is that we have much bigger consolidation differences. Where we're doing the consolidation from all the group insurance contracts and so on. And here is we see the net position out of this. But just to give you the indication, what does it mean for the total PBD, Actually, nothing because all these changes I'm talking about are counterbalanced by the changes in other lines of the P&L. So -- this is not an effect which you can see is isolated.

I hope this answers your question.

The next question is from the line of Rok Stibric with Raiffeisen Bank International.

So, much as we already said, therefore, I have only one. So it's related to the investment portfolio performance. Is there any chance that you could share with us your current running yield and reinvestment yield? Thank you.

Thank you for your question. I can share that, of course, with you. The new investment yield for -- until June 2023, average new investment yield was 5.5%. This compares to 4.2% year-end 2022 for the group for the whole group. Does this answer your question?

Yes. Thank you very much.

We have a follow-up question from Bhavin Rathod with HSBC.

Sorry, I just have one quick follow-up on your combined ratio again. Now under the previous accounting IFRS 4, the normalized kind of expected combined ratio for the group, I guess, was somewhere around below 95% or 94%. Now when I look at your first half '22 reported combined ratio under IFRS 17, reported at close to 90.6% vis-a-vis 94% that was reported under IFRS 4. So the question really is now under the new accounting, should we think as close to 90% at a normalized level of combined ratio that the group would be aiming at going forward? I guess that's in the question that I have.

So we do not give a target on the combined ratio on the 95% was the target or below 95% was the target of the IFRS 4 steering. This is now finished, and we do not have new targets for the combined ratio already for the new accounting regime. So this is under review. Roland, you want to add something? Maybe a...

The effects we are talking about, like, for example, in Czech Republic, the one-off effect, which derives on the transition. Actually, this is only effect which we had experienced in IFRS 17, but not in the old regime, for example. So the difference of the 4 percentage points you're talking about can't be totally translated to a new guidance here.

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

Thank you. Ladies and gentlemen, thanks for your participation and your interest in Vienna Insurance Group. The next update on the business development it's just an update and not the full results presentation as we did today, is scheduled for the 30th of November. In case you have questions, please don't hesitate to contact the Investor Relations department. I'm wishing you a good afternoon, and goodbye.

Ladies and gentlemen, the conference is now concluded, and you may disconnect. Thank you very much for joining, and have a pleasant day. Goodbye.