AK Sigorta AS

IST:AKGRT.E

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to Aksigorta First Quarter 2020 Earnings Call.

I will now hand over to your host, Ugur Gulen, CEO; and Osman Akkoca, CFO. Please go ahead.

[Osman Akkoca, executive]

Hi. This is Osman Akkoca from Aksigorta. I'm together with Ugur, he will attend in a few minutes. So today, we will share the first quarter of 2020 financial results of Aksigorta.

Welcome all again. And let me start and go through the presentation, then Ugur Gulen will welcome you at the time he enters the meeting room. And I think we shared our financial statements on the disclosure platform. You can also see the result on the disclosure platform. And also, I think we have already uploaded on our website the presentation. And also, I hope you can follow the presentation now.

So on the first page, we have the brief summary of the first quarter. So friends, can we go to the next page, the first page? So I hope you can follow the presentation.

On Page #3, we have -- sorry, #4, we have the market -- sorry, I'm sorry, I get confused. On Page #3, we have the scorecard of the first quarter. You see we have 17% growth at the top line in the first quarter, this is a year-over-year figure. And we have TRY 89 million net income in the first quarter, which is 14% higher than the last year first quarter. And the total equity increase is 24%. So we have good results especially in the insurance performance. We have very good results. We improved the net loss ratio by 7 percentage points and end up with 69% at the quarter end. And our combined ratio, you remember, it was 94% in the last quarter of 2019. So we keep the same level in the first quarter. This means 8 percentage point improvement compared to prior year same quarter. And our ROE increased to 58%, it's incredible. It's 14% higher than prior year. And in the first period -- in the first quarter, we paid out TRY 202 million dividend which corresponds to 55% payout ratio.

In the next slide, yes, Ugur entered the room. Ugur, do you want to welcome the investors also?

[Ugur Gulen, executive]

Oh, okay. Hi, everyone. Welcome to 2020's first quarter results earnings call. I will be here throughout the presentation, and I would be great to answer your questions at the end of the presentation.

[Osman Akkoca, executive]

Thank you, Ugur. So on the next page, #4, we have the market figures. In the first quarter, the market growth rate is in health, 25%, so health business is growing strong. In the non-motor, there's 16% growth, which is very close to the market average. And there is 13% growth in MOD, you see the weakest growth is in MOD. And there is 17% growth in MTPL, very close to the market average. And after the latest -- during the COVID days, let's call it like that, during the COVID days, we are observing that in MTPL, the number of policies is coming down by around 17%.

And the overall premium volume is coming down around 18%. So there is a slowdown in MTPL side. And in MOD, there is -- the number of policies is slowing down by around 13%, and the premium is coming down by around 11% to 12%. So the growth rate changed after the quarter end. During the COVID days, there are negative growth in the number of policies. But as the prices are higher than the prior year, there are some positive growth in MTPL and -- sorry, there is still negative growth in MTPL and MOD. But the strongest growth is still in the health side. Health is growing strong in the market. It's 25% and higher than the market average.

And looking to the distribution channels, agency channel growth is 17%, very close to the market average. Bank channel growth is 19%. But after the COVID days, bank channel growth rate is now negative, and there's a huge slowdown in the bank channel. And the corporate channel growth is 16%, again, very close to the market average.

And I'm passing to the next slide, #5, which shows the Aksigorta results. And I'm waiting on the web to shift to the next page. Yes. In Aksigorta, our growth rate in health is 22%, which is slightly less than the market growth, 25%. But we are going good, especially in the individual health segment. The only -- the only, let's say, subsegment, which is behind market, we can say that's the group health segment, which is the least profitable one.

And in the non-motor side, our growth rate is negative. In real term, we are growing around 20%. That negative growth is mainly due to the -- some policies in the last year in 2019 is not renewable, is unable to renew in this year. So they are either 1.5-year policies or 2-year policies. So it's not the case to renew the health policies this year. One reason is that. And secondly, we had a fronting partnership with XL Catlin. XL Catlin is acquired by AXA in the global level -- at the global level. So they are, starting from this year, they are a partner. They make a partnership with AXA Turkey. So we lost that portfolio. So excluding that part, that portfolio, we are growing in our Motor segment also.

And in MOD and MTPL in the motor segment, we are growing faster than the market. Our growth is 32% in MOD, which is much appreciating because you all you know that MOD is one of our main focus areas, and we are making money in that MOD part.

And in MTPL, we are growing by 36%. You all know that in the first half of last year, our market share in MTPL was less than our fair market share which was weak. And starting from the second half 2019, we achieved our fair market share in MTPL. So nowadays, we are above 9% market share in MTPL. So there is a strong growth in MTPL, and we will keep that market share level in the coming period also.

So looking to the distribution channel, we have a strong growth in agency channel. In agency channel, not only the motor segment, but we also over performed the aggregate level in health, in non-motor also. So our agency channel is growing very strong with 35%, and it's evenly distributed, I mean, in all channels, in all products.

And in bank channel, our growth rate is a little bit weak, 4% and compared to both market bancassurance average and also Aksigorta average And all of you know that there was a 15-day suspension in Akbank in insurance transaction, the insurance function. So that is around TRY 12 million of impact from the suspension. And also after those COVID days, the bank channel is -- all you know that banks are allowed to open their branches half of the day. So in the afternoon. So this also has a portion in that small growth rate affected -- this also affected that the small growth rate.

In the corporate side, as I mentioned, we have [ last said ] unrenewable portfolio in the corporate segment. So the corporate channel is growing by negative figures. But in the coming, let's say, remaining quarters, we foresee that the corporate channel will grow with positive figures, and they are in line with their targets also in the first quarter.

I'm passing to the next page, which shows the underwriting results of the segment, and I'm waiting for the web to pass to the next page. Yes. The next page is showing the underwriting results. In the underwriting results, we are going very well. We have TRY 98 million underwriting result in the first quarter. And compared to prior year years, TRY 40 million. It's more than twice the prior year's results. So we can say that we are doing well in terms of insurance profitability. And you all see that we are generating underwriting profit in all products. We have 8% underwriting margin in MTPL, which is not including the financial income also. In MOD, we have 19% underwriting margin, which is very good and very improved underwriting margin compared to the prior year levels. And in non-motor, we have 21%. And in the health side, we have 13% underwriting margin, which are very appreciating.

In Agency channel, we have 13% underwriting margin. In bank channel, which is the most profitable channel, we have 36%. In corporate channel, we have 33%. And in overall company, underwriting margin is 12% -- sorry, 15%. So everything is on track in terms of underwriting margin and underwriting results.

So I'm passing to the next page, which shows the combined ratio results, and I'm waiting for the web to pass to the next page. Yes, the combined ratio, you remember, we reached 94% combined ratio, and we keep that level -- sorry 96%, it was in the last quarter, 96%, and we improved 2%, and we reached 94%. And you all see that the expense ratio and the commission ratio is almost stable. It's around -- the total is around 25%, 26%. So the basic -- the main improvement is in the loss ratio, and you see our loss ratio improved to 96%. It's a very good level.

And I'm passing to the next page, which shows the financial assets and financial income details, the analysis of asset under management. So I'm waiting the web to pass to the next page. Yes, remember that our asset under management was TRY 2.6 billion at the end of 2019. And at the end of first quarter, we are still at TRY 2.6 billion. But in the first quarter, we paid out TRY 202 million dividend. So it means that we recovered the dividend amount in the first quarter. And the breakdown of the investment portfolio is, you see it's 48% in the deposits, while it was 66% at the year-end. So in the first quarter, the deposit interest rates dropped from 12% to almost 9%, 9%, 10%. So there is almost 200, 250 bps decrease in interest rates in the -- for the deposits. So we reduced our portfolio shares in time deposits.

But we increased in the corporate bond side, you see the corporate bonds reached 25% of the total investment portfolio. We invested some new issues by some banks by some high-rated corporates. And also, we invested in supranational bonds of foreign banks with above 13% return yield. So our corporate bond share is increasing.

And in the Eurobond side, we have still 7% of the total portfolio in Eurobonds. These are all either government Eurobonds, Turkish government Eurobonds or Turkish high rated, I mean, market maker banks' Eurobond. And then you see we increased government bonds, it was 6% at the year-end. And at the quarter end, we have 14% of total portfolio in government bonds. And this is just before the announcement of the asset ratio applied to the banks. So we acquired or we bought those government plans with high rates. And now after the announcement of the asset ratio for the bank, we observed that the bank mostly, let's say, appreciated or acquired -- or very active in the government bond market. So now we are still enjoying the increase of the prices of the government banks.

And in the equity side, it's almost at the same level, 6% of the total portfolio is invested in the equity. These are mostly available -- accounted as available for sale, but we all know that at the end of March, there is a huge decrease or depreciation in the stock exchange, the asset prices. So there is a, let's say, negative difference of [ mark to market ] value and higher value of those bought bonds and also the equities, the stocks I mean. So there is a negative result in the comprehensive income. But we all know and see that, that negative comprehensive income will recover throughout April and the coming months. Still, there is almost 15% recovery in the equity side till that day.

And coming to the average yield. Remember, it was a very fantastic last year in terms of financial income. So in the first quarter, our average yield was almost 20%. But now in the first quarter of this year, our return yield is 13%, still good. But we see that, that will come down in the coming quarters. We are trying to leverage by the supra bonds, by swap options, by government bonds, et cetera. And our quarterly financial income is TRY 87 million, which is almost half of the prior year's TRY 120 million. So that's the picture of the financial investment.

I'm passing to the next page. And I'm waiting for the web presentation to pass to the next page, which shows the net income and the profit loss statement. In the first quarter, we have TRY 1.2 billion premiums with 17% growth. Underwriting is TRY 98 million with 142% growth -- year-over-year growth. And the financial income, TRY 81 million. And net profit is TRY 89 million with 94% combined ratio. And the increase is -- or the -- let's say, the increase in performance is the insurance income side. You see the overall underwriting margin is 15%, which is 7 percentage points better than the prior year.

And then the next page shows the balance sheet item. I'm waiting the web presentation to pass to the next page. Yes, and asset under management, as I said -- sorry, TRY 2.580 billion. And total assets, almost TRY 4.6 billion. And our ROE reached to 58%, it's incredible ROE level.

And then the next page, #11, shows the bridge between IFRS results and SFRS (sic) [ TFRS ] results. I'm waiting the web presentation to pass to Page 11. Yes, the local results, we have TRY 89 million. And the bridge shows the IFRS results adjustment. We -- you see there is a discounting of outstanding claims, which is applied in local financials but not applicable in IFRS. So in IFRS, after tax, we have TRY 71 million net profit in the first quarter which is almost equal to last year's results.

And then I'm passing to Page #13, which shows the risks and opportunities for the coming periods. And I'm waiting for the web presentation. Yes, in the risk side, we have risks related with COVID-19. We have business continuity risk every time. We are going good at the moment, and we are working at home. It's been 40 days. And in that 40 days, we faced no issue nor risk in terms of business continuity. Everything is going on as it is in the offices. So we -- thanks to our investments in the past years that we have good IT infrastructure, we have good business continuity plan, we have all our systems web based, so we can connect to our systems anywhere on the world, only electricity and Internet is needed. So everything is going good.

In health [ claims ], there is a risk. We announced that we will pay our customers COVID-19 medical claims, medical expenditures. But in the other side, the -- our customers' number of hospital visits decreased in that period. So we see that the decrease in the hospital visits will bring some savings, which could be enough compensated by the cost of the COVID-19 claims. So we see that there will be no risk by compensating the savings and the COVID-19 expenses or claims. There should be an increase in the medical malpractice claims because the government announced that all the doctors are as seen as COVID-19 doctors, the branch doesn't matter. So that could raise a risk in the coming period. And there could be a price war in motor segments, especially in order to keep the cash inflow high, especially in MTPL. And all the markets, the sectors face a slowdown in economic activity. So this is the major risk as all.

There's a volatility in FX rates. The fixed rates appreciated almost 20% from the beginning of the first COVID case. And this is a risk, both in the pricing side and also in the cost side of MOD product, all you know that the spare parts are exposed to foreign currency. So 70% of the MOD claims cost is exposed to foreign currency. So we have that risk. But we have a hedging system in the balance sheet. We have some $30 million Eurobonds in order to hedge that cost increase in MOD.

Decrease in interest rates is a risk for insurance companies. So that's one of the major risk nowadays because all you know that both deposit rates in the bank side and the announced Central Bank announced interest rate is coming down even less than 9%. Increase in fraud is a risk we are managing good. We invest a lot in fraud detection side, but it's still a risk.

Cash problems, collection issues a risk. Still, we faced no major cash problem. The cash inflow is going at the same duration, but we foresee some expansion, especially in the corporate and commercial segment. And the opportunities, the biggest opportunity is in the COVID conditions, the mobility of the people is down, is stopped, almost stopped at least within the cities, between the cities, it is forbidden. So the mobility come down. So the claim frequencies come down. So our underwriting margin is improving, especially in MOD, we observed in the last 15 days of March. And we are observing it's very low, it's almost 60% less than the prior year's frequency in April.

And also, we are benefiting in the -- or we are making savings in the expenses, G&A expenses, admin expenses, that's another opportunity. The interest rates are coming down, but it's a question mark. It is -- it's a temporary trend or it could be -- it could go up in the future. But today, the Central Bank announced the year-end inflation and they adjusted or they updated their previous expectation with a better or less inflation rate. So it's a question mark if the interest rates will go up or not. And the efficient cost management is another opportunity in our side.

So these are the kind of opportunities, where I said in the next page, #14, the impact of COVID-19. The cash flow, we are very good in the cash flow side, 62% of our sales is collected by credit cards. So it's a safe zone. We have collaterals from the agencies, that's a positive issue in our side. And in the worst case, we always have the opportunity to cancel the policy -- policies if there's a collection issue. Asset devaluation, yes, there's an asset devaluation. We realized at the end of March. But in April, the market is going good. So we can appreciate in the coming months.

Business continuity, there is no risk at the moment. In the health side, I told we will cover the medical costs of our customers, but we see no risk. At the end of the day, it will be compensated by the decrease in number of visits in hospitals. Economic slowdown, yes, this is a macro risk for all markets, declining claims vacancies and opportunity to us.

And last is the guidance. It's on Page 16. I'm waiting for the web presentation. Yes. On Page 16, you see our guidance, which was announced at the beginning of the year. It was 15% to 25% growth in GDP. Looking to the first quarter results, it's okay. And up to 10% growth in net profit, again, looking to first quarter results, it's okay. But for the remaining part of the year, again, the net profit guidance, we foresee that's okay. But in terms of GDP, it can be less than 15% for Aksigorta side. It's a big question at the moment because it's been only 40 days from the first COVID case announced in Turkey, and we all don't know that when will the end of that COVID issue and when the market will turn back to normal conditions. So it's still a big question mark for the market growth and the Aksigorta Group. But in the first quarter, everything was on track.

So -- and we will be happy to hear your questions. Thank you.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no questions. I will now give back the floor to our speakers. Thank you.

[Osman Akkoca, executive]

Dear friends, dear investment committee, thank you for participating in our conference call and presentation for the 2020 first quarter results. We hope that we make you happy with our first quarter results, and we believe that we will also make you happy with the second quarter results. Thank you very much for your participation. That's all.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.