Vienna Insurance Group AG (VIG) Earnings Call Transcript

Ladies and gentlemen, welcome to the preliminary results for the financial year 2023 Conference Call and Live Webcast. I'm Mauritz, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Hartwig Loger, CEO of VIG. Please go ahead, sir.

Warm welcome also from my side, Hartwig Loger, speaking, CEO from VIG. And I also welcome on my side, my colleagues, Liane Hirner, our CFRO; and Peter Hofinger, our Deputy CEO, and also participating today, are Nina Higatzberger-Schwarz, Head of Investor Relations; Roland Goldsteiner, Head of Group Finance; and Werner Matula, our Head of Actuarial Services; and altogether, we will take your questions after the presentation done by me, Liane and Peter Hofinger. So I want to start with Slide #3 in our presentation, Here, I just want to shortly mention the key figures as they are shown on the slide to stress the positive development of VIG in 2023, starting with the increase by 12.2% of insurance service revenue. And out of that also followed by a significant increase of profit before tax up to EUR 773 million and also including a positive move from the net combined ratio, which is improved by 0.2 basis points, down to 92.6% and earnings per share also in very positive development from last year's EUR 3.63 to EUR 4.31 this year. And operating return on equity, which also increased from 11.6% in '22, up to EUR 15.1% in '23. And what I want to mention, especially the solvency ratio, which is quite strong at the level of 269%, which is including transitional measures. And to the excluding transitionals, it is at a level of 243% compared to the solvency ratio of last year of 280%, the main drivers were decreasing own funds and also interest rate movements. On Slide #4, there is the dividend proposal, which will be given by the Board to a level of EUR 1.40. This is, on 1 side, based on the strong performance I mentioned just before, and also in line with our new dividend policy, which, as you know, is aiming for continuously increasing the dividends year-by-year. And so out of that, we are, I think, quite in line also in the increase of EUR 0.10 up to EUR 1.40 in our proposal. On the next slide, #5. Again, some topics about the achievements in 2023, which is out of our running VIG '25 group strategy. And the slide shows some activities highlighting 2023. On 1 side, it is activities, especially, I want to mention the sustainability program where we are designing 6 spheres of impact in the areas of asset management, underwriting and operations, which are [indiscernible] the ecological form. And on the social side, we have [indiscernible] of employees, customers and society. And there is also, I think, important to mention that we established also an own group sustainability office, which is coordinating all the activities which is defined in the topic of the sustainability program, which is 1 important key factor out of our VIG '25 strategy. Besides that, it's important also to mention that we launched also new forms in the digital transition regarding also telematic apps, which started in Czech, and also we'll hand it over to Poland, and we're expecting for '24 and the next years that this system will also improve our activities and be a positive factor also on the growth side for our activities in the countries. And merger and acquisition, just to mention, there was, in '23, the acquisition of the Slovakian pension fund company, named 365.live. This acquisition was done by Kooperativa [indiscernible]. And this is also underlining our activities in the VIG '25 strategy program where we clearly define also our expansion in the pension fund business in our countries. Closing of acquisition was done of the Polish and Romanian entities of the former Aegon CEE business. And what was also important in '23, the increase of the stake in the Hungarian business, where we now have 90% of the shares of the holding, which was built up and 10% left with Corvinus from Hungarian state-owned company. And in Poland, also the group companies are on the way to strengthen the market position where we are planning a merger during the year '24. Going on to Slide #6. I think there will be also, not only for the success of '23, I mentioned to the strong strategic partnership with Erste Group, we see here on this slide that there was also, in '23, a strong growth on the non-life business up to 10% even in life where the background with single premium was quite difficult, but it was possible on the regular premium side also to increase overall premium by 4.8%. And what is, I think, also for the future, very important factor we see here down on the right side that the increase of sales development on the platform of George, not only in Austria, but also in the banks in Central Eastern Europe of Erste Group. There was an increase of more than double of the amount of the last year. So this strong long-term partnership, which is defined now till 2033 is also over the next few years, a good basis for growth. And there is also a strong target agreements inside the Erste Group, which will also provide us in the movement. On Slide #7, CO3, I think might be a little bit surprising you from the definition. When we discussed about sustainability, there, we are focusing to minimize CO2. The positive factor for us is CO3, which means communication, collaboration and cooperation. In this form of CO3, we define the focus where we are clearly fostering and underlying also our activities of the initiatives of VIG '25 strategy program. Especially, I want to work out the cooperation, which is focusing on the identifying of synergies between the VIG companies being active in the same country. Here in this chart, you can see that we structured the definition along the value chain. And in each country, we now are working up the potential of synergies in aligning the activities and the cooperation as we define it. And out of that, the local management, guided by the VIG Holding team, will work out the potential of synergies, which will be, yes, get into action in between the next months and years. For example, I just want to mention, as we discussed also in Poland, there is the topic that we will consolidate the activities in between the companies as far as possible. What does not mean that we are in line with mergers in all the countries, no, but we want to strength also on cost side and the potential of synergies in between the companies also to strengthen their independency in between the group. So this was a brief overview on the main topics of 2023. And now I hand over to Liane for deepening the financials.

Thank you, Hartwig. I am pleased to present our preliminary full year results based on the new accounting standards IFRS 17 and 9, together with restated figures for the comparative period 2022 in more detail. On Slide 9, we show our group income statement. As already mentioned, the double-digit insurance service revenue growth of 12.2% is driven by strong development in the P&C business. Overall, P&C accounted for 80% of the EUR 10.9 billion insurance service revenues, with Health and Life contributing 20%. When we speak about Life and Health, we have a separate slide for the development of the CSM release because roughly 90% of this relates to Life and Health. I will touch up on the net investment result in detail on the next slide. It is together with the increased insurance service results, the driver for our significant profit growth of 31.9%. The ability to adjust tariff to inflationary cost increases, a higher volume of profitable business and the positive impact of higher interest rates on investments contributed to an excellent result before taxes of EUR 773 million, more than offsetting the adjustments that we have made in line with our overall conservative approach. Adjustments of EUR 103.3 million includes the entire goodwill impairment for the Baltics in the size of EUR 75.5 million and impairment of purchased customer bases in Hungary and Türkiye in the size of EUR 20.8 million. The remainder are smaller software impairment in Romania and Poland. With this, let's move to Slide 10, and the details of our net investment results development. We achieved a net investment result of plus EUR 284.3 million compared to the loss EUR 12.2 million in 2022. The comparative figure for last year was significantly influenced by the interest rate development, which is reflected in the large positive swing of the nonrealized gains and losses. The countermovement from the technical reserves can be seen in the insurance finance result of minus EUR 1.7 billion in 2023. I would like to highlight that interest revenue increased by 25.3% to EUR 895.8 million due to a higher average new investment yield of 5.5% in 2023 compared to 4.2% in 2022. In total, these positive developments support the overall increase of the net investment result as VIG achieved a higher investment performance. Now for completeness, last year's impairment in the size of roughly EUR 80 million of the Russian investment exposure is mentioned. As we were able to sell some of the Russian bonds, we achieved a positive impact out of that for 2023 in the amount of approximately EUR 21 million. One comment with Cigna, in the view of the current situation, we have impaired our exposure of around EUR 50 million. Over this page, we have the investment split and bond portfolio overview. The split refers to the investments held at VIG's own risk, meaning that the investments for unit- and index-linked life insurance of EUR 7.8 billion are not included. Compared to last year's IAS 39 split bonds and the IFRS 9 increased slightly to 75.3%, whereas the share of loans decreased to 2.1%. Real estate, including owner-occupied property and equities remained stable at 9.6% and 3.3%, respectively. Please keep in mind that VIG continues to value real estate at amortized cost. Biggest shift worth mentioning took place in the bond portfolio by issuer bonds issued by insurers are now shown on the financials. Last year, they were part of the corporate exposure. As a result, the share of financials increased to 20.7%, whereas the share of corporate decreased to 17.8%. Slide 12 provides a detailed overview of the bond ratings by issuer. The rating split of the covered bonds improved, but otherwise, there were no significant changes. With this, I would like to move on to Slide 13 and the roll forward of the Life and Health Net CSM. The net CSM in Life & Health remained broadly stable at around EUR 5.8 billion. The CSM release in life and health of EUR 534 million represents close to 90% of the total CSM release of EUR 660 million. New business Life, Health contributed EUR 326 million and led to an excellent new business margin of 8.9%, a substantial improvement compared to the 5.8% new business margin at year-end 2022, reflecting the higher volumes of profitable business written. Let me finish my part of the presentation with Slide 14 with the results before taxes development. Austria was a strong contribution of EUR 113 million to our overall profit growth of 31.9%. I already mentioned last year's impairment on the Russian investment exposure, which impacted in the net investment result last year. Profit before tax decreases in the Czech Republic and Poland were more than outweighed by strong growth in extended CEE and Special Markets segment Czech Republic, the transition to IFRS 17/9 resulted in a special one-off in the Life business. In Poland, the development is fully in line with expectations given the market development and our merger activities that we presented in detail in our Q3 update call. The strong profit increase in extended CEE was mainly driven by Hungary, where lower amortization of intangible assets related to purchased customer bases together with an improved combined ratio supported the positive development. Profit before taxes also increased in Slovakia and Bulgaria, mainly due to higher net investment results. Profit growth in these 3 markets more than offset the full goodwill impairment in the Baltics and the conservative expected credit loss allowance taken for Ukraine. Overall, the excellent pretax profit of EUR 772.7 million achieved in 2023, together with our strong capital position demonstrates the strength of our well-diversified group, and once again underpins our successful business model. With this, I now hand over to Peter Hofinger for further details on our business development in 2023.

Thank you. Good afternoon from my side. Our insurance service revenues were growing up by 12.2%, which was mainly driven by extended CEE and within extended CEE, the drivers where the Baltics, Bulgaria, Slovakia, Hungary and Romania. We also were experiencing a significant growth in special markets. This has also to do with the first time consolidation of Aegon Life now called Vienna Life. On the next slide, we are showing by lines of business. You see that we are growing 16% in Casco business. This is also very much supported by the higher values, which we are ensuring, so higher car prices. We're also growing by 14% in other property and motor TPL by 10.8%. If we look to the Life business, this is now insurance service revenues, so therefore, figures are smaller as saving part is now excluded. Over here, we have a stable development in different areas. What is very positive, we are very much supporting our Health portfolio and Health business is, although growing still small, but growing all over the place in Central Eastern Europe and also in Austria. When we come to the net combined ratio, we have a net combined ratio of 92.6%. In most of our segments, it has developed quite stable. We kept this combined ratio of 92.6% despite the weather-related claims of EUR 571 million gross, which is EUR 347 million net, which is approximately 30% higher than compared with the year 2022. I give back to Hartwig.

Thank you, Peter. At least I will come to the outlook. And on Slide #19, I just want to mention, if you look on the right side to the map, which is showing our core market CEE in the definition of VIG, and you can see also the special markets beside. I think important is for the outlook of 2024 that we realize that almost all countries are showing positive GDP growth in the expectation for this year. And this is notably stronger than it is, and it shows also the table down on the left side that besides the Eurozone and European Union '27 that there is a clear higher expectation in the forecast, which here is split it up to our 3 regions in between our core market center with 1.3% on the lower level, including Austria, as we know, which is quite on a low level in the expectation of this year, but beside these all other countries and especially in the northern and southern area of our markets, the expectation is up to 2.7%, which is significantly higher than the expectation in the Eurozone. So out of that, we think that the definition of our core markets gives a good basis also for a positive expectation and outlook. And on Slide #20, here, you see that we, as VIG, over the last years, have clearly shown that we are ready to also manage this challenging geopolitical and economic conditions. And out of that, we are still focusing that the continuity, stability and diversity in our market situation will give the basis that there is a clear aim of the management to achieve profit before taxes within the range of EUR 825 million to EUR 875 million in the year 2024. So this is a clear ambition and also a clear target we will focus on. And so thank you also for your interest. And now we come to the end, and we are ready to take your questions. Thank you.

[Operator Instructions] And the first question comes from Bhavin Rathod from HSBC.

Congratulations on excellent results. So I have 3 on my side. The first 1 would be on your PBT guidance for 2024. It would be very helpful if you could provide more granularity as to which region or geographies you expect to provide this incremental growth in 2024? The second 1 would be on the combined ratio of 92.6% that you reported in 2023. Just trying to better understand how should we now think about the normalized level of combined ratio for VIG given the fact that we have seen this 92.5% level of combined ratio for the last 2 years. So should we expect an improvement going forward from here on? And the last 1 would be on Poland. Poland appeared to be 1 of the challenging market in terms of the MTPL rates. It would be helpful if you could provide more colors as in what kind of dynamics you are seeing here on? Are you seeing any improvement in the MTPL rating cycle? Yes, I guess those are the questions that I have.

Okay. Thank you for your question. I will take question #1 and 3 from my side, and I will ask then Peter Hofinger to answer the question to the combined ratio. Maybe to go a little bit deeper in the expectation of the aim and ambition for 2024, I think on 1 side, I would split it up in also targeted growth for this year 2024, which is based, as I mentioned, on the expectation also of GDP growth on a higher level in our core markets. But especially there, I also touched the topic of our strategic partnership with Erste. Overall, the Erste Group herself decided to give a clear target of increase over the next 2, 3 years, the income out of insurance commission up to a level of plus 50%. And this is a common agreement. We also have on the basis that there, especially non-life will be a strong potential also in growth besides the -- I would say, important and successful life activities. Going on to that, we see that in most of our countries, we have a clear target also to take the potential of non-life also in the new form of digital insurance and platform activities. So there is also a growth path we clearly defined over the next time and also in '24. And it was also mentioned before by Peter Hofinger in the results of '23. There is still potential also especially in the health business, where we also see the chance over the markets, including Austria, also to strengthen our position there. Also important on the side of efficiency and cost, there is also a clear target. For example, I mentioned from my side also under the topic of cooperation that we, for example, are now in Poland merging 3 non-life companies, and we will merge Vienna and Compensa non-life, and out of that, there is also the situation that out of 3 life companies, we will merge to 1. So there will stay 2 non-life companies beside InterRisk and then Compensa non-life and also one life company. And here, we see that there are also effects we will take in the results of our group. And I also mentioned in the strategic initiatives of VIG '25, there are clear activities also to strengthen the efficiency and increase efficiency in the optimization. For example, in claims handling, there are a lot of activities in the group companies also to work on that. And I also take now the question #3 to Poland. Yes, you are right. There in Poland, we have the situation that there is a soft market. It is not easy at the moment, especially in motor TPL to increase on a high level the premium. Besides that, we are clear that there will be also the need of more, I would say, technical approach in segmenting on the market side to the premium, their activities now including and also guiding the merger activities, but there are also initiatives which will work up a positive impact we see in '23, strong growth in non-life beside motor TPL. And so this is also showing us that there is potential also in a positive form for Poland. All over, as you see, the merger, which is, I think, on a technical basis, fixed in '24 in the second half, this will bring up our basis results coming from Poland, and we are fostering our activities there. As I marked it before on the map, we can see that there is a clear target also to take the potential we have on Poland markets for the next years. And I will hand over to Peter to answer the question to combined ratio.