Vienna Insurance Group AG Wiener Versicherung Gruppe

OTC:VNRGF

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Vienna Insurance Group Conference Call. [Operator Instructions] Please make sure your phone have the DTMF tones activated in order to register for a question. [Operator Instructions]

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

[Higatzberger-Schwarz Nina, executive]

Thank you, and welcome to VIG's Conference Call. Today, Liane Hirner, CFO; Peter Höfinger, member of the Managing Board; and Werner Matula, our Chief Actuary, are hosting the call.

Liane will start with the presentation of the 2022 preliminary results and Werner will guide you through the Life & Health embedded value development. After the presentation, we are happy to take your questions.

Liane, please go ahead.

[Liane Hirner, executive]

Thank you, Nina, and a warm welcome also from my side to today's conference call for the preliminary financial results of 2022. Please let me add that unfortunately, our Group CEO, Elisabeth Stadler, is not able to join. She had a medical treatment, so she's not able to be here in the headquarters, but I hope that she is able to participate online.

I'm pleased to present an excellent set of results. We were able to achieve a more than solid operation and business performance in 2022 despite the challenging macroeconomic environment. Our business model with local entrepreneurship and broad diversification in products, markets and sales channels has once again proven its resilience and led to convincing results.

Premiums were up by 14.1% to EUR 12.6 billion, supported by growth in all segments and in all lines of business, except life single premium. Our profit before taxes increased by EUR 51 million to EUR 562.4 million. This figure includes impairments taken in relation to our Russian bond exposure and goodwill impairments as well as impairments on other intangible assets.

The business operating result amounts to EUR 630 million, substantially up by 23 percentage compared to 2021. The operating return on equity for 2022 has also increased to 11.9% after 10.9% last year. The combined ratio for 2022 was 94.9%, slightly higher than 2021, but at a level we are comfortable with, given the current macroeconomic environment, and especially the high inflation.

A strong preliminary solvency ratio of 280% is reassuring also in light of our A+ stable outlook rating with Standard & Poor's, which Standard & Poor's confirmed last year. I would also like to mention the excellent new business margin for Life & Health of 3.6% for the group which was up from 2.5% in 2021. Our Chief Actuary, Werner Matula, will present the details in a couple of minutes.

Based on these solid figures and taking into account the still volatile environment, we proposed an increased dividend per share of EUR 1.30 for 2022 in line with VIG's dividend policy of distributing 30% to 50% of group net profit, the payout ratio amounts to 35.7% leading to an attractive dividend yield of 5.8%. In keeping our long-lasting track record of paying dividends each year since our stock listing in 1994, VIG remains the reliable partner also for capital markets.

Let me now guide you through the results in more detail, starting with the income statement on Slide 5. As already mentioned, we saw a very strong premium and profit growth over the year with and without the contribution of the former Aegon companies. Adjusting for the first time consolidation effects, premiums would still grow double digit by 10.1%. Our financial result increased by 28% or roughly EUR 172 million. A positive development mainly coming from Aegon Turkey and Aegon Hungary as well as from the changed interest rate environment. These positive effects overcompensated the impairments already taken in the second quarter on our Russian bond exposure in the amount of around EUR 84 million.

Speaking of impairments, as you can see in the line adjustments in the income statement, we had impairment in the amount of EUR 67.6 million last year. This is split into goodwill impairments of roughly EUR 26 million for Albania including Kosovo and North Macedonia as well as impairments of around EUR 41 million, mainly for insurance portfolio and customer bases.

Despite these one-offs, we were able to increase our pretax profit double-digit by 10%. Subject for the first-time consolidation of the Aegon companies, the increase would have been 14.6%. The results of the Aegon companies are impacted or were impacted by the impairments and the additional tax on insurance premiums in Hungary. Both favorable profit development and tax ratio of 17.4% compared to 24.1% last year led to a net profit after taxes in minorities of EUR 465.9 million, up 24%. The reason for the lower tax ratio is coming from Austria. The other interest rate development and devaluation of available-for-sale assets related to special funds at year-end 2022 caused a reversal of already taxed income in an extraordinary positive one-off in Austria.

Let's move on the positive premium development by segment on Slide 6 proving that local entrepreneurship and the flexibility of our group companies are paying off. Austria contribution with EUR 4.1 billion, the biggest part of premiums grew by 2.2%, driven by non-life and health. Strong premium growth was recorded in the Czech Republic with a plus of EUR 257 million. There are the other property as motor business as well as life insurance with regular premium were the drivers.

Extended CEE and Special Markets, the 2 segments showing the strongest premium growth rates were supported by the first time consolidation of the former Aegon companies in Hungary and Turkey. However, even adjusted for the consolidation effect, Extended CEE and Special Markets would grow double-digit by 14%, respectively, 34%. We are not only very satisfied with the premium development by segment, but also with the development by lines of business, which we show on Slide 7.

The overall increase of EUR 1.6 billion includes roughly EUR 444 million in premiums from former Aegon companies in Hungary and Turkey. Especially the growth in life regular premium business is coming out of these 2 markets, but even adjusted for the first-time consolidation, we could record 3.6% growth in this line of business. In Romania, the bankruptcy of City Insurance had a positive impact on MTPL premiums, strongly contributing to the overall growth of 20.1% in MTPL.

I would also like to mention the premium development in Turkey where favorable market conditions supported extraordinary premium increases, both in MTPL and Casco. The main contributor to the 12.4% growth rate in Health [indiscernible], followed by Georgia and Austria. Over the page, we show the result before taxes by segment. Profit increased by 6.3%, demonstrates the strength of our Austrian business, considering that this includes the measures taken in relation to the Russian investment exposure.

The improved combined ratio of 92.4% in P&C and favorable results also in Life & Health complete the picture of healthy and solid operations in Austria. In Poland, we are currently experiencing a more competitive market environment, especially in motor. In addition, it's a lower financial result compared to the previous year, leading to the EUR 18.2 million weaker pretax profit.

Profit in Extended CEE was impacted by goodwill impairment of EUR 26.2 million for Albania, including Kosovo and North Macedonia, as well as the impairment of other intangible assets. These are mainly impairments of insurance portfolios of around EUR 19 million and impairment of customer basis of around EUR 15 million in connection with Aegon Hungary. Moreover, result before taxes in Extended CEE also includes the additional tax and insurance premiums in Hungary for 2022 in the size of around EUR 26 million. The segment, Special Markets was up by [ 30.5% ] due to an increased financial result driven by the first-time consolidation of Viennalife, which is the former Aegon company in Turkey. I will elaborate on this in more detail in a few minutes.

Before that, let's move on to Slide 9 and the combined ratio development. We aimed for a combined ratio of around 95% despite the challenging market environment and together with our group companies have taken all efforts to achieve this. Combined ratio for 2022 at solid 94.9%, only slightly up compared to last year, demonstrates our expertise and discipline in managing our P&C portfolio in the current market setting. I have already mentioned the highly competitive motor market environment in Poland, which was mainly responsible for the 3 percentage point increase in the combined ratio in this arket. Nevertheless, the combined ratio with 96.1% is well below 100%.

The cost ratio in the segment, Extended CEE is burdened by the additional tax on insurance premiums in Hungary of EUR 26 million, which I already mentioned earlier and by the limited product portfolio in Ukraine due to the ongoing war. And while the development of motor claims burdened the combined ratio in the Czech Republic, this year recorded a favorable claims development in Casco which helped to reduce combined ratio in the Special Markets segment overall.

With this, let's move now on to Page 10 and the financial result. Very strong developments in the current income which increased by roughly EUR 120 million or 13%. This is driven by the first-time consolidation of the Aegon companies. But even adjusted for that, the increase would be 8% showing the positive impact coming from the increased interest rate environment. Another consequence of the first-time consolidation of Viennalife, the former Aegon Turkey, is the positive effect in the exchange rate changes coming from assets denominated in euros and U.S. dollars.

In addition, I would like to point out that the precautionary measure amounting to approximately EUR 43 million, which we have built in the second quarter last year for the Russian bonds exposure has been released in Q4 as no further impairments needs materialized. However, the impairment of roughly EUR 84 million taken in the second quarter last year remains, of course.

Let's turn to Slide 11, where we show the breakdown of our roughly EUR 34 billion investments. The portfolio mix has remained relatively stable with some minor changes due to the consolidation of the Aegon companies. But overall, our conservative investment approach denominated by fixed income assets remains with no substantial changes in the investment strategy planned for the time being. Details regarding the bond portfolio by rating and by issuer are presented on the right side of this slide and over the page on Slide 12. We're also providing the rating distribution of our bond portfolio.

With this, I now hand over to Werner Matula for presenting the details on the Life & Health embedded value. Werner, please go ahead.

[Werner Matula, executive]

Many thanks, Liane. In fact, this is the final embedded value disclosure of Vienna Insurance Group. For many, many years, the market consistent embedded value, or MCV, has been the supplementary information to the IFRS 4 financials to illustrate the performance of our long-term Life & Health business. As the industry is now changing the reporting standard for insurance contracts to IFRS 17, the relevant information KPIs will be part of our IFRS financials for now, and a separate disclosure of the embedded value will not be necessary anymore. VIG completely harmonized the embedded value and the requirements and methodology to Solvency II. The embedded value can, therefore, be seen as own funds of the Life & Health business in scope.

In this respect, I think it's worth mentioning that they are different in methodology between Solvency II and IFRS 17. One of the important conceptual differences is that the value-in-force component of the embedded value is not part of the equity under IFRS 17, but an insurance liability disclosed as contraction service margin. I will explain the development of the embedded value using the earnings analysis separately for Austria, Germany and CEE as I did years before. If you look on Slide 14, we observed a very strong increase of the embedded value in Austria, Germany from EUR 2 billion to EUR 2.86 billion. This was obviously driven by a strong increase of interest rates and resulting in a positive economic variance of more than EUR 900 million.

Compared to this, the update of assumptions and experience variances are relatively small. The contribution of the new business sort was EUR 33.7 million with a margin of 2.6% compared to 1% last year, again, mainly driven by higher interest rates. Please note that here the long-term health business of Austria is included.

Moving to Slide 15. We see a development of the CEE embedded value, which is very much in line with previous years. CEE is not as sensitive to interest environment due to the risk and unit-linked life business in the books. As a consequence, the economic variance has only a small impact. Typically, we observe a positive experience variance in CEE. This is capturing the renewal of short contract boundaries in line with the Solvency II regulation.

And that's also one of the other important differences to IFRS 17. Solvency II has a risk perspective, while IFRS 17 looks at contracts. A short contract boundary will not be applied, the additional covers under IFRS 17 in the future. The new business value in CEE was EUR 56.9 million, with an excellent margin of 4.8%, also 1% up compared to last year. The increase is only partially driven by interest rates, but mainly by the higher proportion of the profitable business sold in 2022. Overall, the embedded value in CEE increased from EUR 1.75 billion to EUR 1.92 billion, which corresponds to a return of EUR 170.3 million or 9.7%.

Summing all this up, we see the results for VIG on Slide 16. Last year, we reported an embedded value of EUR 3.85 billion. After adjusting for the dividends paid from the Life & Health businesses and the foreign exchange rate effects, the adjusted embedded value of last year is EUR 3.75 billion. The value creation is then reflected in a return of slightly more than EUR 1 billion or 27.5%, resulting in an embedded value of EUR 4.78 billion for 2022. Almost 9% of this return is the new business contribution of EUR 90.6 million with a margin of 3.66% compared to 2.5% last year, as Liane already mentioned in the introduction.

Given under favorable interest rate development in Austria and Germany, the CEE region contributed significantly with 40% to the broker embedded value. So far, the brief overview of our final embedded value results, which marks the end of 2 years traditional supplementary reporting to IFRS 4. We are very much looking forward with the derivation of the respective KPIs from our future IFRS 17 financial statements.

With this, I'm handing back to Liane for the summary and the outlook.

[Liane Hirner, executive]

Thank you, Werner. We just presented profitable new business in life and especially in Austria, a big portfolio of traditional life business for which the rising interest rate development is, of course, favorable in combination with our underwriting discipline on the non-life side led to the excellent results achieved by VIG Group in 2022. The broad diversification of the group and our overall prudent and conservative business approach, together with the strong capitalization form the basis for the resilience of VIG even in challenging times.

This is why we are satisfied with the solvency ratio of 280%, including transitionals. The ratio is clearly above our target range at the moment, but we see this for the time being as valuable support especially in a volatile market environment. Moreover, this strong capital position makes sure that we can pursue our resilient business model, and after a successful year like 2022, are able to suggest an attractive dividend per share of EUR 1.30 at our Annual General Meeting. Based on the strong results of 2022, we are confident to be able to achieve further positive operating performance also in 2023.

In view of the still uncertain geopolitical situation, elevated levels of inflation, rising interest rates and volatility on capital markets, especially we can see it also in these days, the predictability of business developments is limited. Therefore, in view of the change to the new accounting standards, a more concrete outlook for 2023 basis of IFRS 17 and 9, will only be possible in the course of the year.

Thank you for your attention, and we are ready now to take your questions.

[Operator]

[Operator Instructions]

The first question is coming from Bhavin Rathod from HSBC.

[Bhavin Rathod, analyst]

So I have 3. The first one would be on the cost ratio in Poland, which was remarkably high in the fourth quarter of 2022. So could you just provide any additional color as on what was the driver of this higher cost ratio in Poland? I'll appreciate there's some competition going on, but any indication as in what drove this higher ratio higher acquisition cost or claim handling, any color would be really helpful?

The second one would be on Turkey, if you could provide any early indication on your exposure to the Turkish to create any early figures, that would be really helpful?

And lastly, on the claims inflation outlook for 2023, I'll appreciate the fact that you are providing inflation expected to decrease. But vis-à-vis how do you see the P&C prices to evolve in 2023?

And also with respect -- I appreciate that you have short-tail nature of book in the CEE market and you're able to reprice it quite quickly. But are you seeing any pushback from the customers in terms of churn or moving around or doing some bargain hunting? Or are they able to take on the higher prices that you are putting through? So any color around the pricing part in the CEE market would be really helpful?

[Peter Höfinger, executive]

Good afternoon. Peter Höfinger. Thank you for your questions. They're all on me. I start maybe with the last topic. Pricing on P&C. I think if you look on our claims ratio which we have presented for last year, you see that our claims ratio stayed stable. So we could prove our ability to deal with rising inflation and keeping claims ratio at the same level even though the environment is challenging out of inflation.

On one hand side, this is driven by certain rate increases. It's also very much driven in talking with our clients to recheck, there are some insureds and increasing some insureds and respectively having higher premiums. Certainly, also on the topic of claims handling, being in an environment in Central Eastern Europe where inflation has been there also in the past some years ago, we have management resources which are quite well experienced in dealing with this issue, may be different to some countries in the Western world where management resources never had in their professional career the challenge of inflation as we have seen it last year.

Looking to this year, and I'm talking on one hand side, as you also mentioned, we do have the opportunity for fast repricing in Central Eastern Europe as in all business lines, it's basically one year contract. In Austria, where this is a bit different, we do have various indexes also in our retail products. Indexes, which are very much reflected on the business line. So you also have in the private property, you have a construction price index and not just consumer price index.

You have in the Casco insurance, a car repair index and not just the consumer price index, so really reflecting also the underlying inflation for our claims which is balancing the increased average claims. Seeing what happened in the renewal of reinsurance, and I'm sure you're well aware about the overall significant hardening of reinsurance which was experienced by the primary insurance, we also see here in our markets and specifically with some of the more local competitors that they are pushed by these higher prices. And therefore, I do not have the feeling that prices go down in the current environment with one exception, which I come then, this is a bit to question the one you are posing me. I hope I could give you some indication how we see this. Cost ratio...

[Bhavin Rathod, analyst]

Okay. No, I guess that's super helpful.

[Peter Höfinger, executive]

Okay. Cost ratio in Poland, it is a little bit back described in our material with increased competition. Yes, this means that in the end, distribution and marketing costs have increased in relation to premiums generated. We still feel this pricing competition, but I do have somehow an indication that, hopefully, we are on the bottom line as there is certain increased pricing on the fleet business and fleet business is normally the first indication that maybe the market is more going back to a risk-adequate pricing.

Coming to Turkey, there are various estimation by modeling companies. Looking on the models of what will be the modeled insured loss in the region where the earthquake has happened in Turkey, this is somewhere between EUR 3.5 billion to EUR 5 billion as an estimate, taking around our market share in non-life which is approximately 2.5%. Looking on the first claims notification which we have received and extrapolating it, it seems that we will be around EUR 100 million gross.

[Operator]

The next question is coming from Thomas Unger from Erste Group.

[Thomas Unger, analyst]

I would like to follow up on -- you did talk about claims and...

[Operator]

Can you please talk louder?

[Thomas Unger, analyst]

Can you hear me now? Is it better now?

[Operator]

Yes, now we can hear you.

[Thomas Unger, analyst]

Okay. Sorry about that. If I can follow up on one of the questions that you answered. On premiums and especially in Austria, the last 2.5 months now into 2023, how did clients react to premium increases, probably quite sizable on the premium increases now coming through? Have you seen any changes in patterns from your customers? That's the first question.

And then secondly, you must talk about Aegon and when do you expect them to close the remaining part of the Aegon acquisition? And if you could repeat the profit contribution that you had in 2022 from the new Aegon CEE assets?

And then lastly, I would like to ask on the dividend. What made you decide for the dividend at EUR 1.3 per share, and why did you not opt for a higher payout in light of your strong balance sheet, strong capital ratios and also quite strong results in 2022?

[Peter Höfinger, executive]

Okay. Thank you for your question. Looking then specifically to Austria and to customer behavior due to inflation. There is no significant increases of [indiscernible] cancellation in the life business, which could be one of the effects, but this is nothing which seems to be here of any significance or any correlation to it. The same is true for retail non-life. I am -- we didn't see anything that there is something like mass [indiscernible] in private property, household insurance due to limited budgets of people.

If we come to corporate clients, this is different. What we see is -- also we are much more asked in the area of risk management and risk advice and also the advisers, the intermediaries are much more asked on this topic. And corporate clients are more evaluating more detail what is the risk they are willing and think about increasing self-retentions, limiting certain coverages for ensuring that premium rises are not so significant.

On the corporate side, there is an intensive discussion how to protect the risk sensitivity and risk awareness, not only because of inflation but also due to geopolitical situation and also due to the COVID topics in the last years as our interaction with clients very much increased which is on one hand side, also a very positive thing, talking very intensively about how to protect the risks and not just to discuss purely premium levels.

[Liane Hirner, executive]

I'm happy to take the second question regarding Aegon transaction. We closed Turkey or Hungary, and I explained the effect on the income statement in 2022. What is still open is Poland and Romania, the closing has not taken place so far, but from the impact, Poland and Romania are by far the biggest parts from the Polish and Romanian entities, we expect around EUR 100 million additional premium volume to Aegon.

Last question on the dividend. As I also explained, we are little bit cautious when it comes to the outlook due to the macroeconomic environment, which is still challenging. You see a small U.S. bank is going bankrupt and the capital markets are in an international way quite heavily affected. So there's still a lot of, let me say, uncertainty and also some disruptive elements that could take place in the next year. So taking all this into account, we do not give a concrete outlook for 2023. When it comes to the dividend, our dividend yield is very attractive with 5.08% and also the dividend is higher than last year and taking all these aspects into account our dividend -- proposed dividend, we think it is very attractive.

[Thomas Unger, analyst]

Okay. Again for the profit -- pretax profit contribution by the Aegon [indiscernible] in 2022 and this type of form in the presentation?

[Liane Hirner, executive]

From Aegon Hungary and Turkey, we have impact in the Extended CEE segment with premiums increase of more than EUR 300 million, so EUR 310 million. The profit contribution for Hungary is minus 29%. This is taking into account the additional tax on the insurance premium and also the depreciation and impairments of insurance portfolios and customer base already mentioned. In Special Markets, we have additional premiums of EUR 130 million. The profit contribution of Aegon Turkey insurance companies is around EUR 6.3 million. These are the main effects last year.

[Operator]

[Operator Instructions]

There are no further questions at this time. I hand now back to Nina for closing comments.

[Higatzberger-Schwarz Nina, executive]

Thank you for listening in and for your questions. Our next scheduled events are the AGM on the 26th of May followed by the first quarter update on the 31st of May, 2023. In case of further questions, the Investor Relations team is there for you. Please reach out. And once again, thank you. Have a nice day, and goodbye.

[Peter Höfinger, executive]

Bye-bye.

[Liane Hirner, executive]

Bye-bye.

[Werner Matula, executive]

Bye.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.