Earnings Call: Q1 2021

May 20, 2021

Hello, and welcome to the Unical Group Conference Results of the First Quarter 2021. My name is Lydia, and I will be your coordinator for today's event. Please note, this conference is being recorded. And for the duration of the call, your lines will be on listen only. However, we will have an opportunity for live questions. I will now hand you over to your host, Andreas Baumshade to begin today's conference. Thank you. Hello, ladies and gentlemen, and thank you for your interest in the Q1 2021 results of Unica Insurance Group. As you can see on the Page describing the snapshot, Page 4, I think it's quite fair to say that we had a satisfying and very good start into this New Year. In the last 3 months, we managed to decrease our cost ratio, which came down to something like 27.2%. I've had a very good underwriting result in P and C business. And as you saw and noticed, our investment result was exceptionally strong. Yes, we know that some of those positive elements are not sustainable and are not recurring. This is clear. But on the other hand, this very good quarterly result also reflects our book on the longer term strategic goals, which we presented to you in the last December when we talked about Unica 3.0 Feeding the Future. So first, well, it's good to see that the restructuring in Austria is going on. It's executed as planned. And also second, the integration of our former AXA CE subsidiaries in Poland, Czech Republic and Slovakia is right on target and is extremely good on balance track. Those two factors, Austria Plus C together make us very confident to show to you what we promised last year, achieving an increased return on equity on a sustainable basis in the midterm. This is our very clear promise and we will manage this. Please note then we talk now about the figures that all of course in them include the acquisition of former AXA Companies. So when relevant, we will give you also an idea how the business developed without this effect of the AXA Companies. Just a few comments first on the growth. As stated on those slides, the business in Austria is quite robust despite the very negative environment on the one hand. On the other hand, in CE markets without AXA, we see a moderate decline driven by negative FX developments. FX adjusted and both developments without AXA, we would have grown slightly. The multi business and the bank Assurant business are most affected by lockdowns in the areas of our countries in Eastern Europe. But overall, I think as far as growth is concerned, we see a very solid development in the current environment. If it's about net investment result and Kurt will touch it a little bit later, we see a very strong quarter on the capital markets and we took advantage of this. We reduced our exposure to growth and increased on the other hand exposure to value on the equity side. And also on the fixed income side, we had some harvesting compared to a quite weak quarter in the year 2020, where we had impairments due to the COVID-nineteen related volatility. When it's about combat ratio, you saw a very positive development, 90.9%, a very good underwriting result this quarter. Clearly, we had some backlinks from lower frequency, especially in the multi business, which we deem not nonrecurring. But even without the lower frequency, we think our disciplined underwriting is showing further results. And also here, could we will touch it and we will go into more details a couple of minutes later. Earnings before tax, very good result. We are very happy about something like €112,000,000 From all perspectives, quite satisfying. A last comment allow me to give before I hand over to Kurt on Page 5. It's about the regulatory capital position, the SCR, 195% per Q1, increasing interest rates, of course, and the improved underwriting were the main driver for the strong increase from the year end onwards, and we feel very comfortable with the long term target to stay clearly above the 170%, which we gave to you as our guidance for Oonica 3.0, exceeding the future. Having said so, I may hand over to Kurt, who will start on Page 7, introduce you the main details of our group results. Thank you, Andreas. This is Kurt Fuerla speaking. Additionally, to the policy explanation that Andreas gave to you, for your information. These numbers, including the partial internal model of Uniper, including the AXA Companies, and Toyota Companies does not have any transitionals in its calculation. Jumping on Page 7, just a snapshot on the development on the premiums. A quite good growth in all lines that we have in our business. Quality effects are still negligible. And out of this, the growth even without AXA, a little bit more than 2% is very satisfying. Page number 8, jumping to the cost ratio and the cost development. The cost ratio came down, especially early because of the first implications positive implications of our cost program that we run all over the group. Restructuring effects in Austria from the Peruvian social plan in 2020 are not yet material. We expect them to be visible at least in the quarter Q3 and Q4 within this year. This has to do because we have now around 80% of our people that are affected in the social plans with a contractual basis finished. But when we leave the company and the first effects, we expect in the second half of the year. You will see positive effects in especially in the material costs. And out of this, we are quite happy that this cost program shows the first effect. So we expect them to be in plan for the year 2021. Synergies of AXA, maybe also a word on that. Of course, we have the first synergies within this cost ratio in the cost development that you see here. Still in comparison to that what we have on integration costs, they are not material. Integration costs included in Q1 are of around €11,000,000 The AXA synergies in the Q1 are close to €2,000,000 As well as the combined ratio on Page number 9, a very good combined ratio. I think one of the best combined ratios on the moniker in the quarter. Lower frequency, a very good basis claim development. Basis claims, moniker, are defined with a in the range of up to €500,000 especially in the retail business. We have an accurate good development on the weather related losses because in that case, we have not seen significant impacts. COVID loss ratio impact is still visible, but we see also tendency that it goes up to the old normality. But still, of course, we have here a sort of a head a backlink in that case. Of course, we had also some bigger claims, but our reinsurance cover was quite good. And then in that case, we got also a good retrocession premium out of these bigger claims. Of course, we do not see that this is a sustainable ongoing development over the next quarters, but we see also that our portfolio management works quite good. And please also note that this quarter does not reflect any court decisions that we have regarding business interruption cases. So this still has to come. Page 11 is the next page I would like to elaborate. We have on the Health business, besides the goods to help and also on the growth side, also our decisions taken to allocate substantially to the premium substantially to the premium refund. This was one action that we took in Q1. And on the other hand, we experienced Ozan Dollar claims. And in that case, we have been careful and have also potentially reserved for IBLR in terms of upcoming services that they have to pay to our customers. Page 12 on the Life business. There is a positive effect coming from the AXA plus and ex AXA portfolio. And in that case, also the CE Life business was the driver of the good development of the Life business in Oonika. Also, that says bank insurance has a negative impact because COVID and the closing end point of sales, in that case, was against the expected growth. Coming at least then to the investment activities, Page 13. We talked about and we have heard about the our trading efforts that we have. We took a look at Unity, especially in the 1st 3 months that we changed our approach in our internal funds and to change from technical equity positions to more sustainable ones with this because trading effects of more than €50,000,000 This is, of course, something that we do expect ongoing on this amount. Only take into account that Stravax in the first quarter had a negative impact according to their business model. But still, Strava is also in line with their plans, and we do not expect any deviations from that what we had in the previous years. So far, my explanations to the operational development of the Q1 and the outlook, Andreas will give you a flavor of that. Thank you, Kurt. The main elements about the outlook you find on Page 15. So to summarize what you heard from Kurt now, we may say that this was a very good quarter without any doubt. It was a quite satisfying start into the New Year. I would like to mention 5 points. First, the top line, as you saw, is getting the expected boost from our acquisition last year. And as we see, our already existing core business is stable and a quite challenging environment. 2nd, excellent common ratio. We are on the right long term trend. This is for sure, and we are more confident than before to reach confident and, of course, long term goals. 3rd, cost management on track. 4th, AXA integration, as was shown before, is delivering against our targets. And well, last but not least, 5, this altogether gives us confidence to not just reach this year's target, but even more important also to keep what we promised on the Capital Markets Day to you last year. We know that it seems or might seem a little bit conservative not to increase our outlook after the strong Q1. We are aware about this. But please also accept that we need to wait and see how our business is going to develop in Q2 over the next weeks months. To change the outlook already after the Q1, according to our opinion, might be premature and we should wait for this. About our targets, I would like to confirm them. Oonica 3.0 will deliver on top line a CAGR of something like 3%. We'll have a cost ratio on the long term perspective below 25%. We want to have our common ratio net constantly to be at around 93%. We want to deliver to you an ROE of 8% to 10%, and most importantly, you will increase in dividend per share with a peer to ratio of 50% to 60%. So thank you so much for listening to us, and I may hand over back to the operator. We are now very happy to answer your questions. Thank We have our first caller. Our question comes from the line of Michael Haid of Commerzbank. When you're ready, please proceed. Thank you very much. Good afternoon to everyone. Two questions. First, the combined ratio, of course, 90.9 percent, excellent combined ratio. Can you provide a breakdown into the various components of the combined ratio? Obviously, as you mentioned, weather related losses were very low frequency benefits, probably more significant. Also, you mentioned some more cautious reserving due to uncertainty about future loss experience once COVID-nineteen is behind us. So can you shed a little bit more light on what you expect there? And second question, the Solvency II ratio, 195%, up from 170% at year end. It is well above your target. Do you want to be above 170%. How do you look at the Solvency II ratio with respect to capital distribution measures? Yes, these are my questions. Thank you, Michael. Let me start with the second one. The movement in Q1 was driven by 2 elements. First of all, of course, we had around 35 basis points better interest rate curve, which is paid for Solvency. And this is according to our long term business, especially in the health business, where we have, on purpose, these asset allocation helping us in that respect. Secondly, not to forget, these excellent technical results also gives the risk capital and therefore also an impact on that side. Talking about excess capital and talking about, I think, the usage of excess capital, and that's too early. We do not see a sustainable increase of interest rates over the next couple of quarters. So I think when we can argue that this interest rate environment stays like it is, then this is a good opportunity and a good position also from a macroeconomic perspective. But for us, too early to talk about excess capital and how to bring this into working capital. On the other hand, Michael, I think we have all known that excess capital doesn't automatically mean free cash flows. So also on that, we have to take care of what this means for internal and external funding. And I can give you more guidance on that at least in the conference call in August or then in September. Your second question is about combined ratio. 90.9% is a quite excellent development. So what I can state to you is the composition of this combined ratio is of a 14% acquisition and admin costs, around 16% is about commission ratio and about 60% is the loss ratio. The loss ratio is going to divide into an impact of 7% that we had out of peak claims, which is in relation to other quarters, a little bit higher. And another impact is that we had only 0.7% from the nut cut, which means the remaining part is coming according to, we call them attritional claims or basic claims. Reserving level, you know from my previous information that the company always targets between 2% and 2.5% to have in the so called best estimate level available. And this is what we have with this combined ratio again, meaning we are quite well reserved. And even with this 90.9% was possible to achieve. Thank you very much. Is it fair to assume that frequency benefits are around 1%, maybe 2 percentage points in the combined ratio? It's fair to say 2%, correct. And the other point, I could also say that the COVID impact is still between 2% also. Thank you very much. Fantastic. Thank you. We have our next question from Thomas Ombre of RBC Group. When you're ready, please go ahead. Yes. Hello. Good afternoon. Thank you also for taking my questions. I have a few, if that's okay. First, I would like to ask them on the investment results. Obviously, it recorded some substantial realized and unrealized gains in the quarter. Around what level do you see the financial result currently sustainable? Is it around $100,000,000 to $110,000,000 per quarter also for the coming quarters then? And on the solvency ratio, you've mentioned the interest rate curve changes as the main contributor to the 25 basis points 25 percentage points increase quarter on quarter. How much exactly or can you give the breakdown? How much exactly would it relate to the interest rate curve and how much to the technical results in Q2 Q1 and the changes quarter on quarter? And then lastly, the line amortization of goodwill in the P and L was minus 12.6 $1,000,000 for the quarter. Is there a one off in that line as well? Or is that the run rate that we can use to project the coming quarters? And then lastly, on the operating expenses, the level with a one off now seems to be around €400,000,000 to €420,000,000 for the net operating expenses that appeared that way in Q4 and now also in Q1. Do you expect an improvement from this level already in 2021, so in the coming quarters towards the end of the year? Or is that the level that we can project for the coming quarters in 2021? Okay, Thomas. Thank you. So I'll take the first one, investment result. Of course, what we're going to state is that in the Q1, we have no impairments. That means the was really a favorable quarter for the financial industry and also for our portfolio. But given your guidance, I would at the moment state that everything between around €130,000,000 is a sustainable quarterly investment result that you can take into consideration. Of course, not knowing if there are capital impact on I don't know from the U. S. American development or from the topics in Israel or Turkey. But with normal development, this I will give you as a guidance. Your second question about Solvency II ratio and the composition of the improvement. So the improvement was exactly 25 basis points. When we divide this into what effect comes from the internal shift, what comes from the technical result, it's about exactly 18% comes from the internal shift, 1.8% and the rest, 7% comes from the technical result. The goodwill topic is something that is relating to our integration of AXA and the composition of the purchase price allocation. So we decided to divide our purchase price allocation into a so called fixed goodwill, which is the classical goodwill as intangible visible. And the other thing is that we created a so called value of business in force, especially for the life and for the pension business in Poland, Czech Republic and Croatia. And this is depreciated over the lifetime of the contract, which is, on average, around 11.5 years. And this is the impact of a yearly depreciation of this VPI, and this is shown under goodwill. It is something that we planned and that we knew and was in former days, just to give you the technical information in the AXA World accounted as deferred acquisition costs. So the last question, then, if I got it right, is about when do we expect the first impacts on the cost side. So significantly, we expect them, as I stated, in Q3 and in Q4 in Austria and in CE. This has to do with laying off of people in Austria and the social plan. And anyhow, we have some many people that are leading the company still by mid of the year, others at the end of the year. But the most significant things we will see in Q3 and in Q4 and the run rate is then visible in 2022. Very good. Thank you very much. Thank you. Before I return the call to your presenters, we'll ask for one more call for questions. We have no further questions coming through. I'll turn them over to your speakers for any closing remarks. Ladies and gentlemen, thank you very much for your interest in our Q1 figures. Figures, stay healthy. Have a good afternoon and goodbye. Thank you for joining today's conference. You may now disconnect your lines.