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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the Aksigorta's Second Quarter 2021 Earnings Call. Thank you very much for your standing by. [Operator Instructions] With that, I will now hand you over to your host, Ugur Gulen, the Aksigorta CEO; and Osman Akkoca, the Aksigorta CFO. The floor is yours.
Okay. Thank you. Welcome to Aksigorta second quarter earnings call presentation. Today, together with Aksigorta CFO, Osman Akkoca, and myself, Aksigorta General Manager Ugur, we'll be in your -- at your service. So I will hand over the presentation for -- presentation to Osman Akkoca. Presentation will take 20 minutes. Then we are going to give some quality time for Q&A session. Okay, Osman, please?
Thank you, Ugur. Welcome, everybody. I hope all is well. So we are here now presenting our second quarter's results. And on the first page, we proudly say that on the last consecutive 4 years, we have beaten our guidance, and this will be -- we hope this will be a sign up for the coming period. And on the next slide, #2, the figure shows the second quarter performance. We have 38% growth in the top line. We have TRY 1.4 billion premiums. But on the other hand, our net income decreased by 45%, basically due to the last year's positive impact from the lockdown was higher than this year's positive impact, much higher then. And this year's net income in the second quarter is TRY 93 million, very close to the market estimate. And our total equity increased by 3%. We have -- basically, the decrease in the net income is coming from the increase in the loss ratio. We have 23% higher loss ratio; compared to prior year, we have 78%. And again, the net combined ratio increased, mainly driven by the net loss ratio. And ROE dropped 33%. Most of you know the company very well and monitor Aksigorta. So we get used to have an ROE above 40%. So it is an unused result for the second quarter also. And in the first quarter, we paid out -- we announced TRY 306 million, and we paid out TRY 202 million, and the remaining TRY 104 million is to be paid in September.
And on the next slide, #3, we have the year-to-date figures, which is the first half results. So we have plus TRY 3 billion premiums, which corresponds to 22% year-over-year growth. And the net income reached to TRY 169 million that -- it corresponds to 35% decrease versus prior years. And again, the decrease in the net income is mainly driven by the increase in the loss ratio. We have 80% loss ratio, again, which affects the combined ratio. There is 17% increase in the combined ratio, and it reached 103%.
And on the other side, we focus on growth. In the last 3 years, our growth is -- we all part of the market. And again, this year, we repeated that performance. We gained 0.8% market share, and we reached to 8.2% market share. And if we repeat the second half performance of the last year, we can easily reach to 9% at the end of this year. And our assets under management total reached to around TRY 3.7 billion with 24% increase. And currently, we have 16% annualized yield, which we forecast to increase the yield in the second half. And the financial income, in the second quarter, we have TRY 141 million, which corresponds to 40% increase. And on the next slide, we have the market figures. And basically, I will go with the right-hand side bar, which shows the second quarter in the market. In the second quarter, we have 6% growth in MTPL, basically due to the players, the companies mainly focused on the high interest rates. So they are trying to increase their cash inflow. So there is that, let's say, price competition in MTPL. So the growth is weak in MTPL. And in MOD, the MOD prices are delivered mainly by the foreign currency rates. So we have 29% growth. We can say there is still real growth. I mean the number of policies and also around 17% growth in the average premium. So it's a common effect of increase in the number of policies and increase in the average premiums. And in Non-Motor side, in the first quarter, it was 32% growth. And in the second quarter, 20% growth because in the prior year, there was a huge big ticket policy, which is the Akkuyu nuclear plant. So there is no renewal of that policy this year. But still, the growth is strong. There's 20% growth, which is slightly higher than the, let's say, annual inflation, 17%. So Non-Motor is growing fast also in the market.
And in Health side, the growth slowed down in the second quarter, basically due to medical inflation. And also in the first quarter, there was 24% drop basically due to the group health policies renewals, and also the comprehensive health products are lastly getting more share in the first half, and then afterwards in the second and third quarters, the comprehensive health product share is decreasing. So the Health growth slowed down in the second quarter. Overall market growth is 17%, and it corresponds to 20% growth in the first half for the market. So we can say there is a weak growth in MTPL by 3% in the first half. There's a strong growth in MOD and Non-Motor, mainly driven by the currency rate. And in Health side, there is 21% growth, mainly driven by medical inflation. On the next slide, we have the Aksigorta top line performance. As I said, we have 8.2% market share at the end of June. And you see in the second quarter, we have a huge growth with 38%. And you see the old platform in MTPL because we are targeting 10% to 11% market share in MTPL, so we are keeping our pace in MTPL. And in MOD, we have 22% growth, which is slightly less than the market growth. But in year-to-date figures, we hold 37% growth in MOD. So we can say that we are a strong competitor in the market in MOD because it's a strategic product from Aksigorta perspective. So we are trying to accelerate in the third quarter in MOD side. And in Non-Motor, it's -- very happy to see a very, very strong growth with 61%, and that growth is main -- mostly driven by all channels, both agencies, bank and also corporate -- mainly corporates. We renewed telecom's 2-year period policy in the second quarter and also by the contribution of almost all channels and is limited to all products, almost all products. And in Health, as I can recall, in the first quarter, there was this Sabanci group health policy renewed in December which we used to renew in January in the past. So it was missing, let's say, part in the first quarter. But then we will renew it in the last quarter of 2021. So we will see the effect at the last quarter. And then we recovered the growth in Health in the second quarter. We have 15% growth, which is again slightly less than the market's growth. So we are trying to accelerate in the Health product as well as in MOD. And year-to-date growth is 33%. So we gained 0.7% -- 0.8% market share. And on the next slide, we have the underwriting performance of Aksigorta. So on the right-hand side, you see in the second quarter, in 2020, we have almost TRY 200 million underwriting results. And you see the majority of the underwriting result is produced by Motor products, TRY 71 million in MTPL and TRY 84 million in MOD. And looking to this year, we have negative TRY 3 million in MTPL and only TRY 15 million in MOD. So it's far higher than this year's Motor underwriting results in the prior year, mainly coming from the lockdown conditions. So the performance in the Motor side was weak in the second quarter. And coming to the Non-Motor side, we have, let's say, acceptably good result. We have TRY 32 million, and the underwriting margin is 6%. And again in Health side, we have TRY 17 million and underwriting margin is 15%. So the critical zone is MTPL and MOD. In MTPL, as we discussed in our previous meeting, we are targeting a breakeven underwriting margin and focusing to have high financial income produced by MTPL cash flows. So it is not, let's say, surprise results. But in MOD side, in the past, we used to have some, let's say, 8% to 10% underwriting margin. So in the second quarter, we have -- and also in the first quarter, we have 4%. In second quarter, we have 5%. So it is not the level we are targeting in terms of underwriting margin, which is mainly driven by the currency rate increases. MOD is priced in Turkish lira terms, but the majority of the cost is driven by foreign currency in spare part costs. So in MOD, 70% of the claim cost is coming from the spare part, which is almost all -- spare part cost is, let's say, foreign currency denominated. And at the end of first half, we have TRY 83 million versus last year's almost TRY 300 million, which is almost 1/3 of the last year's results. And on the next slide, we have the combined ratio, which is again very parallel with the underwriting without an underwriting margin. In the second quarter, there is almost 22% increase in the combined ratio, and you see mainly coming from the loss ratio, claims ratio. So considering the commission and expense ratio, there's a flat track. The commission ratio is almost 15%, 16%. And the expense is almost 8% to 9%. So there is no, let's say, surprises or deterioration in commission and expenses side. And the critical point is the claims ratio. And on the next slide, we have the financial income performance. And as of June, we have TRY 3.7 million -- very close to TRY 3.7 billion assets under management. And 51% of the total fund, the asset under management, is in deposits, time deposits and 32% is in corporate bonds. And in those corporate bonds, we have around 10% -- 10% to 12% in supranational bonds. And those supranational bonds, we can treat those bonds as, let's say, time deposit equivalent investment because its fixed rate is issued by, let's say, foreign banks. So we can easily say that they are very less equivalent to time deposits in the foreign banks. And the remaining part around 20%, 23% in the corporate bonds are the high-rated local corporate. And at the moment, together with our portfolio management company, we do not see any major risk from those issues.
And we have 6% in the Eurobond side. These are mostly the Turkish treasury Eurobond and local bank Eurobonds. And we have 9% share in the government bond side, and we have 3% in the equity side. So you see from March to June, we reduced the share of the equity. The share of the government bond is same. And again, the share of the Eurobonds are same. So only the share of equity decreased and the share of, let's say, deposits are increased. And at the moment, we have 16% return, and we can easily say that it will increase in the remaining part of the year because we renewed some of our -- we renewed in the second quarter our investments, almost all above 19%, almost all about 19% except the equities at Eurobonds, of course. And so we can easily say that the renewals are around 19% to 20%. And also the -- some corporates reached 24%, 25% rates. These are also high-rated companies. And the quarterly financial income is TRY 141 million. And the average duration in our portfolio is around 11 to 12 months. So we can say that we are slightly increasing our duration from March to June. And on the next slide, Page 8, we have quarterly income statement results. You see it in the second quarter of this year, we have TRY 62 million underwriting results. We get used to have an underwriting result around TRY 90 million -- TRY 80 million, TRY 90 million. So still, this is less than what we targeted. And in the net -- in terms of net profit, we have TRY 93 million, which is almost parallel with our last -- usual quarterly results. And which is, again, an unusual result is the combined ratio because you all know that we used to have a combined ratio less than 100% in the past quarters. And then on the next slide, we have the balance sheet figures. As I said, our assets under management reached TRY 3.7 billion, and our equity is TRY 968 million, very close to TRY 1 billion. And you see the weakest ROE is in the last quarter. We have 33% ROE. And on the next slide, we have the bridge between our SFRS and IFRS results in Turkish financial reporting standard book. We have TRY 169 million first half results. And you all know that May last adjustment line is the discounting of outstanding claims that is TRY 35 million in that line, and IFRS regard is almost TRY 152 million. On the next page, we have the list of risks and opportunities. The risk we can emphasize the downsizing economy insurance growth while we see high, let's say, car sales volumes. On the other hand, there are some, let's say, shrinking market and also insurance market was affected by those shrinking market. And the decrease in underwriting profit margin due to competition, mainly an issue in MTPL. And uncertainty, high volatility in currency, which is, again, an issue in MOD side. That currency uncertainty affects MOD result with very high concentration. And the decrease in interest rates is a risk for us and the increase in interest rates is an opportunity for our financial results.
And natural disasters due to climate change, we experienced a lot of those cases. In this year, we experienced floods. We experienced wildfire. We experienced hail and also the hail season is coming. So that's a very important issue in terms of non-life insurance. And possible churn and sudden increase in mobility or sudden decrease in mobility can have an impact on our business. And there is an increase in new vehicles is an opportunity. And pandemic is also affecting our business. As we said, the lockdowns bring us some profit from the motor business. And accelerating digital transformation is an opportunity also in terms of expenses and increasing efficiency, quality and innovation with remote working. We are benefiting a lot and higher premiums and improved underwriting margin with the introduction of new products. We launched the cyber product in the bank channel and they are all performing the initial business plan. So it's going very good. So in the coming quarters, we will also emphasize the performance of that cyber product also. High focus on industrial and technology and analytics to generate values and other opportunities.
On the next slide, we are -- last slide -- recalling the guidance. So our guidance which we announced at the beginning of the year was 15% to 25% growth in top line and 10% to 20% growth in bottom line. So we keep our guidance.
On the next slide. We have the breakdown of our revenue generation. So we earn money from insurance performance, which is the gray bar -- sorry, the red bar -- which is underwriting results. And we earn money from the financial performance, the gray bar shows the financial results. So this year, you see the gray bar is much bigger than the red bar. So this year is a financial performance basically due to the high interest rate. And on the next slide, we have the long-term ambition. Let me repeat them. 30-plus ROE, $1 billion market cap and combined ratio of 95% and the market share 10%. So we are, let's say, we are -- we achieved the ROE and keeping still above 30%. And we are trying to, let's say, reach $1 billion m-cap. We are again trying to improve our combined ratio 95%, and we are going very fast to 10% market share. And that's all from my side. So now we are ready for your questions. Thank you for listening.
[Operator Instructions] All right, speakers. I believe we don't seem to have any audio questions. If you would like to switch to the written questions, that would be great. Over to you.
Thank you, Rob. So [indiscernible] some comments. There is a disturbing echo. So I think now he rejoined. And if there is still an echo, let us know. And I see no written questions at the moment. And maybe we can give some more minutes if our participants will call. I see a lot of, let's say, investors and researchers which very closely monitor our company. So if they have any questions, they can share with us in the webcast site.
All right. Speakers, if you -- do you have any more written questions? Do you have written questions?
Ugur, maybe -- I can, let's say, field the...
Ask a question. You can ask a question.
Yes, yes. I can ask a question. Thank you for giving me that opportunity. Thank you. I want to ask you, first, there is a negative aspect impact of the currency changes, currency increases in MOD side. So do you still expect some more negative impact in MOD, one. And then second, can we -- so we watch on television and also we hear from the social media that there's a lot of wildfires. So do you have any exposures to -- did you receive any notification -- claim notifications? Can we...
Yes. Okay. Thank you. In our business, when we issue a policy, we are waiting for 12 months at least to be incurred cost of that policy. And in our pricing model, of course, we are trying to estimate next 12 months inflation and FX figures. Unfortunately, we started the year 2021 very well with solid economic management. But suddenly, in the middle of March, the government changed, make everything upside down, and suddenly FX rates increased by almost close to 20%. Of course, that breaks all our game plan. And all the written policies before that date were not confident FX and inflation in that level. So definitely, we are going to write some underwriting losses with the policy written before March 2021. Of course, after FX increases and the new inflation target, we readjusted our prices. Of course, that readjustment made some market share losses in the second quarter on MTPL, although we are -- over performed in the total cumulative first half figures. In the second quarter, we lost some market share. Most probably, if the current speed stays in a stable position throughout the year, and if there is no unexpected interest rate cut, I'm not expecting a further hit on the MOD side. And our MOD underwriting results will improve throughout remaining quarter. Yes, that would be my first comment. But Turkey is a quite unstable country. Everything can happen. So we have to be -- act cautiously. And your second question, definitely, the climate change is an event anymore. It's an event, but currently, as a normal citizen, we have started to feel those -- the impact of the climate change on a, let's say, daily basis. In February, there was a heavy rain on the AGM site and the hurricanes, tornadoes that hit us in just mid of July or towards the end of July. Heavy rains on the Black Sea area of Turkey has brought a lot of claims. And last week, indeed, last Saturday, the wildfires started in Mugla, city of Mugla and in the districts of Bodrum, Marmaris and Köycegiz, 3 important districts of the Mugla city. All these fires started on the rural areas, but with the help of the strong wind and very high temperatures and very dry weather in 1 day, the humidity dropped to 80% level and the temperature increased to 45% -- 45 Centigrade. Those fires spread up to densely populated areas and particularly Bodrum, Marmaris has been adversely affected from those wildfires. And of course, a lot of telecom infrastructure got some damages. And as well as, if you -- coal power -- thermal power station, power plant was affected from those wildfires. We are very closely monitoring the development. Of course, there are some new open fires due to that wildfires. But luckily, the amounts will not be, let's say, measurable disaster this month. Most probably single-digit net claims will hit our financials in August. But this is effect anymore. So definitely, non-life insurance having a -- running -- and run an insurance company would be much more difficult than prior years on the coming period if those events related with climate change continue, Osman.
Thank you, Ugur. Maybe we can continue with the written questions. The first question come from [indiscernible] He asked, can you repeat the reasons behind declining earnings? So maybe I can answer that question. There is around TRY 20 million negative impact coming from MTPL pool. The pool is managed by Turkish traffic office and Motor growth. And they are asking PWC to assess the outward loss ratio of the pool. And this year, they increased outward loss ratio of 2020 by around 20%. So there is around TRY 20 million runoff coming from the pool losses, one is that. And secondly, in the first quarter, there was the inner flood. We received around TRY 15 million in MOD from the floods in the region. And in the second quarter, we see that the negative impact of the FX increases also combined with the positive impact of the lockdown, the net impact is negative TRY 20 million. So the absolute value of the currency rate increase in MOD is higher than the positive impact of the lockdown. So there is -- it's a very important issue in MOD, the FX rate. And in the other side, we announced in the first quarter results, we have a big claim in the first quarter, which was a cotton store, which was around TRY 15 million to TRY 20 million. And also, we observed increase in frequency of medium-sized claims during the first half. So those were the reasons in the declining revenues in the first half. On the other hand, we replaced that decline by the increase in the financial side. But the main change from last -- from '20 to '21 is the last year lockdown impact. There was a huge lockdown positive impact in the last year. And I hope that's enough response for your question. How can -- and again, second question from [indiscernible]. How can you maintain 2021 guidance when first half net income is down 35%? That's a very good question. So we maintain -- still maintain our guidance because our financial income is increasing. First one is that. And the second important thing is our top line is increasing. So it will bring a higher underwriting result in the second half and also higher cash flow in the second half. So that will also -- we will also benefit from the high growth in terms of net income. And there is still discussion on the claim provisioning regulation. So there is a draft, which is announced by the regulation and investigation office of insurance. I can -- we can shortly say the regulators, they announced a draft regulation on provisioning of the claim. So we see that there is -- they are considering a positive change in medical malpractice provisioning. So in medical malpractice, there is a material claim, which we can say the renewal of the operational, repeating the operation, let's say, wrong operation, something like that. The material claims the repeat of that operation. And it amounts to almost, let's say, up to TRY 50,000. But in the other side, there is a moral damage of suffer and pain. And that moral damage reached TRY 800,000. It's very far bigger than the material damage. And we all know that those moral damage, moral claim amounts are exaggerated. And we have few resolutions. We have few settlements in those medical malpractice claim, fires. And even in those fires, the moral damage payment is not that much high. But we have to provision according to the current regulation. So the regulator is considering to change or to limit or they will give some opportunity to the company. First, the companies could use their statistics to adjust moral damage amount or to use -- second option to use market statistics to assess or to provision for the moral damage. And the third option, the companies could ask for -- to an expert or to a consultant who knows both the medical expertise, the legal expertise and the exterior expertise. And they can assess the claim amount and the amount to be provisioned. So it will -- we think that it will be very beneficial for the total market. In the market, we have 25% market share. So it will be also very beneficially change for Aksigorta side. We can also give that news from the regulation side. I can't highlight these items. Ugur, do you want to say something else?
No, Osman, you highlighted very well. We -- of course, there are many opportunities and risks in front of us. It would be a challenging second half for Aksigorta in order to reach the guidance given at the beginning of the year. But thanks to the investment yield and thanks to the possible reserve changes. The accounting changes may help us to reach our guidance. I think there is a question from Karim, Osman, regarding technology. Asking our competitive position against the competitors and fintech companies' impact to the insurance industry. And the second question is regarding price discipline. Will there be any change on the price discipline in the market due to the events occurred in the first half?
Definitely, the technology -- the use of technology, I think, will be the key success factor for a non-life insurance company in the coming place. So any companies, who are -- will not invest -- requires investments -- who do not require investment will disappear as well that marketplace. One of the KPIs of Aksigorta is regarding those technology and the usage of digitalization and analytics. And from Board level, this has been monitored closely. And Aksigorta does a continuous benchmarking and compare ourself with the rest of the competition. And the very recent benchmarking [ shop ] said Aksigorta is a leading company in that aspect. So this will create the difference, both in the processes, both the customer transaction as well as many operational excellence within the company. And from efficiency point of view, Aksigorta has 3% better G&A ratio than the top competitors in the top 10. So that also shows the usage of technology in Aksigorta comparing the market. Of course, there are also fintech companies, insurtech companies that want to enter that insurance market. Probably, we are going to see more from those companies because insurance is a traditional business and not -- the incumbent companies are not able to change quickly. But new entrants, particularly from noninsurance business see a lot of opportunities on the non-life insurance business. If you're interested, please watch the CEO of the Lemonade, one of the picks in the YouTube. The gentlemen very rightly mentioned about it. So insurance industry has been, let's say, dominated as one of the industries, which can be disrupted by new entrants and new technology companies really. In the future, there would be a risk. But in Aksigorta, we are trying to overcome this. We are turning Aksigorta to -- from a non-life insurance company to a technology company, who are operating in a non-life industry. So this is our motto indeed. The technology will be the key issue for Aksigorta as well as sustainable planet will be the second key issue on the coming period. Because both climate change -- events coming due to those climate change definitely will hit the balance sheet and the P&L of the non-life insurance companies. Any price discipline changes, better price discipline, we will see, indeed. There are some positive improvement. For example, on the MTPL side, there's slight price increases. On the MOD side, there is a slight price increases. But frankly speaking, companies in the -- most probably in the second half when they see their financials, the companies will act in a more price -- disciplined price way, I would say, in a nutshell. How do you see pricing pressure in the second half? Pricing is always an issue in non-life, but -- due to high inflation and higher FX rate. But on the other hand, high TL interest rates, balance sheet, even price pressures will always be there. I don't see different price pressure than the other quarters, I would say. Osman, those are the questions from Mr. [ Sawabini ]. And do you have any budget guidance division? There is a question from [ Osamra ]. And as well as, Osman, yield realized at 16% is below the deposit rate. What is the main reason for this 2-point under performance? And what is your year-end guidance for investment income from [indiscernible] Could you answer [ Osam's ] and [indiscernible] questions, please?
Of course, as I mentioned, we have recent opportunities. And in the opportunity side as I mentioned, the return yield will be higher than the first half in the second half, and one is that. And secondly, as you previously mentioned, we can expect some rationalization in the pricing of MOD, mostly because all the companies will realize, let's say, declining underwriting margin in MOD. So that can be an opportunity also. And another opportunity is, we are growing very fast. So that will increase -- that is already increasing the inflow -- cash inflow and also the underwriting results because we are growing more than expected. So that's another opportunity. And the last one, there is a discussion and also there is a draft coming on the provisioning of claims. That can be an opportunity for the second half also. And the yield realized, yes, we were expecting some higher than that level than 16%. The main reason we increased the duration, one is that. So we realized some capital losses, especially in government bonds and the Eurobond side, one is that. And secondly, we were holding some 8% investment in the equity side, and we reduced 8% to 3%. So again, we realized some capital loss in the equity side. So this is the second reason. And so starting from the second quarter, we increased share of deposit swaps, supranational bonds and corporate bonds. All of them are higher than or above 19% yields. So that will contribute a lot on our return yield in the second half. And the reason of low, let's say, return yield in the second half, will be the contributors in -- the reason in the second quarter will be the reason of the contributor in the second half. So in the second half, we forecast much higher return yield in the investment income side. I think that's all from the written question side. Ugur, do want to emphasize anything else?
Osman, I think we've gone over important issues. Of course, we are always welcome to any in-person investors or analysts after this earnings call. Anytime they want, they can reach us. Thank you.
Okay. Thank you all for participating. See you on the next phase and also after summer. And we hope to welcome you more pretty good results in the third quarter. Thank you for participating.
Thank you, speakers, and thank you so much. And I believe that concludes today's webcast call. Thank you so much for your participation. You may now disconnect.