AK Sigorta AS
IST:AKGRT.E
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Yes, Ugur, we have 20 attendees in the call. I give the words to you for the welcome speech.
Hi, everyone. Welcome to Aksigorta 2022 First Half Earnings Call event. Today, with myself and our CFO, Osman Akkoca, will be at your service. The presentation will be done by Osman, then we will leave ample time for the Q&A session. And now I'm giving the word to Osman for the first half earnings call presentation. Please, Osman, it’s your turn.
Thank you, Ugur. Welcome, all to our earnings call. So I will quickly go over the presentation and share the figures with you quickly and afterwards give more time to the Q&A session. So let's start with market figures -- sorry, the first half scorecard. We have TL 5.5 billion gross return premiums with a growth of 84%. And on the other hand, we have negative net income with, let's say, a decrease of around 340% compared to the previous year. And the total equity reduced to TL 525 million with a 50% decrease. And we will share the reasons on the following pages. And the decrease in the net result is mainly coming from the net loss ratio. You see there is 57% deterioration in the net loss ratio and reached [ 236% ] and paralleled with the net loss ratio, there is a deterioration in the net combined ratio, and we reached 260% combined ratio in the first half. And on the growth side, we have a 7.5% market share, which is 0.7% less than previous year. And in the asset side, we reached TL 4.5 billion assets under management with a growth of 23%. And our average annualized return yield -- financial return yield is 29%.
As we said, it's increasing quarter by quarter. And in the first half, we have TL 625 million financial income with an increase of 112%. And on the next page, we have the market premium production figures. In the second quarter, market has 129% overall growth whereas the first quarter was 77%. So there is an acceleration in the market growth. And you see mainly -- the main acceleration is in the motor segment, I can say, in the first quarter, MTPL growth was 69% whereas in the second quarter, it jumped to 138%. So we can say there is a slightly increase in the number of policies. On the other hand, the growth is mainly coming from the price increases -- average premium increases. And in MOD side, in the first quarter, there was 95% growth in the market, and it doubled in the second quarter with 200%. So the price realization in MOD product is far better than MTPL product. In non-motor, there is an acceleration again. It was 76% in the first quarter, and it's now 99%. And in the health side, it was 68% in the first quarter, and now it reached to 119%. So we see a huge and fast growth in the market almost in all products.
Health and non-motor growth are close to each other and almost let's say, 100%, and we can say the growth in non-motor and health overperformed the fixed basket increase. But in the other side, in the motor products, especially MOD and TPL, the growth is higher, mainly due to the market is losing money in -- both lost money from the previous year's portfolio. And also market continues to lose money in MTPL. But in MOD, we can say that the market pricing is more accurate compared to MTPL side. And looking to the distribution channel growth, you see there is a fast growth in the agency side, mainly coming from the motor products, which is mostly paralleled with MTPL, and agency channel growth is $138. The bank channel is again parallel with non-motor and health, which is 106%.
Again, in corporate channel, there is 104%, which is mostly paralleled with the growth in non-motor health side. And on the next page, we have Aksigorta figures. I can say overall growth is slightly less than the market growth, which is 114%. And looking to the product breakdown, you see in MTPL, we are almost 100% growth, which is behind the market growth. The market growth was 138%. You see our growth appetite in MTPL is not big. So we are losing some market share in MTPL side, mainly with the profitability and capital adequacy concerns. In MOD side, we are almost parallel slightly behind the market. We have 187% growth whereas the market growth was 200%. So we keep our strong -- we try to keep our strong position in MOD mainly due to, let's say, fair pricing conditions in the market. And in non-motor side, we have 89% growth, which is again slightly less than the market growth. But I can say both the corporate and agency channels are contributing the not growth, whereas there is, let's say, slightly slow growth in the bank channel. And in the health side, we all performed the market growth.
We have 118% growth, whereas the market has 109% growth. So we focus in the health side, especially after launching the complementary health product in the last year, we bought, let's say, the growth -- the contribution on the growth is coming from complementary health and the other had products also. Looking to the channel breakdown, you see agency channel, again, very close to the aggregate of MTPL and MOD growth, which is 128%, and again, parallel with the market growth. But in the bank side, there is a weak growth, which is 2 and which is mostly linked by the credit portfolio of the Akbank channel. And in the corporate side, a [ protagrowth ] in the market. And again, the aggregate on motor and health growth is almost reflected in the corporate channels growth, which is 95%. So we can say we are slightly conservative in MTPL. We try to keep our strong position in MOD, try to maintain our market share in MOD. We are gaining market share in outside, and we are trying to accelerate in the non-motor products especially.
And then on the next page, we have the profit margins in underwriting results and the combined ratio figures. Last year, first half underwriting result was a positive TL 100 million, whereas we have almost TL 1 billion loss in the underwriting line, which is mainly driven by the in-force policies of motor products. We priced those motor products in the last year with an assumption of 20% annual inflation and 20% minimum wage increase in annual terms, whereas we realized 95% increase in the minimum wages in the last months period. And also we have around 80% CPI result at the end of July and almost 145% inflation in PPI figures. And looking to the FX basket, there is a devaluation in Turkish lira around 110%. So the main reason for the negative result in insurance line is the losses from the in-force policies.
And again, there is a rule for unexpired risk reserve calculation, which is [Foreign Language] in Turkish. So the rule says that if an insurance portfolio is making loss at the time of reporting date, it is most probably candidate to realize the losses in the future also as well. So it says that the future expected losses must be booked at the time of reporting date. So again, I can say there's a huge liability coming from that URR, unexpired risk reserve not only in Aksigorta financials, we observed all the competitive -- all the other companies' financials. And looking to the margins, we have a negative 24% underwriting without margin in the first half. And the combined ratio reached 116%, mainly driven by the increase in the loss ratio, you see the loss ratio increased from 79% to 136%. There is almost 57% deterioration in the loss ratio, whereas the expense and the commission ratio is almost stable.
And on the next page, we have the figures from our financial investment portfolio, comparing with the March figures, we increased our, let's say, share in the portfolio in Euro bonds. In the first quarter, there was 24% share in the Eurobonds, and we increased to 35%. So as of today, I can say that it is higher than that share. And until the year-end, I think we will continue -- I can say, we will continue to increase our portfolio share in Eurobonds, and we target to reach some 60% of the total investment portfolio in FX investments, let's say, not only Eurobonds.
I can say there is a small portion of FX equities for sustained ESG concerns. So we can say all FX portfolio, FX position will be around 60% of the total portfolio. So we get long in the FX portfolio. And you see in corporate bond side, we have 29% lower portfolio, whereas it was 23% in the first quarter. So we get short in the corporate bonds, especially in the local corporate bonds, we do not renew, but the majority of that corporate bond portfolio is at the offshore market. So I can say that almost 20%, 21% of that portfolio is supranational and again, you see there is 12% in the time deposits. So those time deposits are not in the local banks. I can say almost all are at the foreign bank accounts as of fiduciary deposits or swaps. So I can say it's around 29% to 30% is in the offshore accounts, either as fiduciaries, swap or as supranational bond. All are Turkish lira denominated.
And looking to the government bond, we have 20% of our portfolio in the government bond slightly increased compared to the first quarter, and there was a regulation which was giving a tax shield for the investment funds. We are moving our -- as of June, there was no, let's say, investment in our fund, which was established and owned by Aksigorta. But starting from July and August, we are transferring those government bonds and all of the [ mustI-linke ], no fixed rate bond. We are transferring those government bonds in the fund in order to benefit 25% tax shield from the investment fund. And we have equities, which is let's say, small share in the total portfolio. So we try to keep our local equity investments up to 5% within the portfolio. And looking to the return yields, as we told in the first quarter's earnings call, we will have higher return yields quarter by quarter.
So it reached to 29%. And we believe that in the coming quarters, it will also increase because all new investments, both in Eurobond side, in supranational bond side, and in the investment fund, including the CPI linkers, our new investments have higher yields whereas we are exiting the less yield instruments. And the quarterly financial income reached to TL 340 million. And our asset under management reached to TL 4.5 billion. We foresee that our assets under management will exceed TL 6 billion at the end of the year. And that we have the contribution of TL 1 billion capital injection, which is estimated to conclude at the end of September.
And then we have the income statement figures on the next page. You see the main variance is in the underwriting results line and which is mainly driven by the claim increases due to the claim inflation. And at the expenses line, there is 52% growth, which is less than the annual inflation. We are increasing our financial income. So in the second half also, the main contribution on the net profit will come from the financial income line. And on the next page, we have the balance sheet figures. You see our total assets increased by 22% from 2021 year-end to June 2022. In a half year, there is 22% growth in the total assets, mainly due to negative real interest rate because you see there is a weak growth in assets under management. We started with TL 4 billion, and we reached to TL 4.5 billion at the end of first half. But on the other hand, you see the total liabilities increasing by 34%. If we double it, it comes almost the inflation level. So the reserves are increasing by 36%. So our claim cost is increasing.
Almost with the inflation, but we cannot inflate our total assets at the inflation level. So accordingly, our equity is coming down. You see we started with almost TL 1.5 billion, and now we have TL 525 [ million ], mainly due to the net profit with a negative result. And on the next page, we have the risks and opportunities. We have a negative underwriting margin due to the claim cost inflation. But I can say in health side, we have fixed margin in MOD and non-motor side, we can update the new business or adjust the new businesses, prices according to the both realized inflation and the expected inflation. But in MTP side, there is a clarification by the regulator, which is a price gap. So we believe that and we see that the price gap is not sufficient to have a positive margin in MTPL. So we are continuously asking to the regulators to increase the price gap even to, let's say, to link the price gap with the inflation, at least. And the negative real interest rate is the main problem on our balance sheet.
Uncertainty, high volatility again, is the main risk riding on both balance sheet on pricing, pricing in the new business, et cetera. So the future prospects, future assumptions are not clear. So I think we have to say that the most conservative side in the second half. We are suffering from the bad weather incidents. We received flood claims in the first quarter, and they continued in the second quarter and no major [ hail claims ] at the moment, but the third quarter is the hail season, but we received a lot float claims in the first and second quarter. And then in the opportunity side, maybe we did not include the opportunity. We are increasing our FX position. So the FX increases will be the, I think, greatest opportunity according to our high FX position. And we are very effective in the expenses side. We are using the technology.
And we are launching new products like Cyber, et cetera. So we -- there are -- there is a material contribution from Cyber product. I can say, in the first half, almost reached TL 20 million gross written premiums and approximately TL 8 million underwriting result from the Cyber products. So the new large products are contributing on the writing results. And of course, increasing interest rates is at any time, the greatest opportunity for Aksigorta. And then on the next page, you see we have the income last year.
There was $100 million underwriting result and TL 295 million financial income with a sum of almost TL 400 million. But this year, we have almost TL 1 billion loss from the insurance result and financial income, which is not -- which could not compensate that loss with an amount of TL 625 million. But we included that if the real interest rates were 0 in the first half, which means as far as you remember, it was 76% CPI, annual CPI in the first half. If the rates were around the inflation, the CPI inflation, our financial income would be around TL 1.1 billion more than what we reported. So the real negative interest rate is the main problem in considering the profitability and our balance sheet. And that's all from our side. We will welcome your questions. Thank you for listening.
[Operator Instructions].
Yes. If you have any questions, you can either right on the Q&A part or you can raise your hand or admin [ Zena ] will allow you to share your question. I don't see any written questions. Yes, I think [ John ] has a question. [ Zena ].
Yes, I gave permission. [ Please ].
I want to ask 2 questions. Do you have any time on expectations for the right -- for the decision of capital like for about your right issue application? Recently, we see that the decision time. This decision time takes more time than usual. And also, can you give some information about the financial situation or financial health of the company after the right issue.
Thank you, [ Kian ]. Ugur, I can start, and you can continue if you prefer. We have the insights of the experts, the capital markets experts in the Sabanci team and they share that the process could take 1 or 1.5 months. So I can say that we can start the exercise of using the printer rights in the middle of September, and we can complete the process at the end of September. That's our expectation at the moment.
And then I also want to mention that we are releasing some management commentary with the results. And in the management commentary, we explained the reasons for TL 1 billion capital injection. You know the reasons, but we shared clearly and in detail that, as I said, the inflation is far higher than expected one reason. And second, negative real interest rates. These are the reasons. And our desires or our ambition is to keep the sustainability of the company and then also to, let's say, recover the profitability of the company. So these are the main drivers and the reasons of the capital injection.
And then after the capital injection, there will be TL 1 billion injection in, let's say, at the end of third quarter at latest according to our expectation. So we have good investment opportunities in front of us. One is getting loan in FX position in Eurobond side, we can receive, let's say, time to time, it changed about 11% to 12% returns in dollar terms in the government Eurobonds. So this is much attractive. One is that. And the second, in the offshore market, we can find 50% to 55% return yielding in TL, supernational bonds, et cetera. So these are good. And in the local market in investment fund, in the CPI linker side, we can say we can find less 40% return yield with a 25% tax yield. It comes to -- it's reached to 50%. So it will contribute to the company's profitability. This is very clear.
And on the other hand, there is capital adequacy issue. And we reported that at the end of 2021, our capital adequacy result is less than the legal threshold, which is 100%. And then at the end of the first half, our capital adequacy result is far below the legal threshold. So that TL 1 billion capital injection will improve our capital adequacy result and our aim is. But even we increased our capital with TL 1 billion. It will not, let's say, immediately reach to 100%, the legal threshold. So until the year-end, we have -- take some actions to improve the capital adequacy result. We are, let's say, strongly focusing on that issue. So our year-end target is to, let's say, to maintain or to reach 100% capital adequacy results with at least a positive net profit result. So I can quickly summarize the financial, let's say, picture of the company just after the capital injection. Ugur, do you have anything to add on...
Thank you. First of all, capital injection. The company, the Aksigorta has the strongest liquidity position in the market. But on the other hand, our capital base is less than our competitors. The major reason of it in the last 5 or 6 years, Aksigorta one-off, let's say, highest dividend payer in the market. We were always wondering around minimum threshold level in the past. But it [ rises ] happened in this starting from November 2021. Of course, together with the whole industry, Aksigorta lost some of its capital. So the capital increase is mainly to improve capital adequacy ratio since the company doesn't have any liquidity issue. This injection will provide additional financial income for the company. So we will improve the profitability of the company. But on the coming days, of course, as Osman mentioned, the capital adequacy would be an issue not only for Aksigorta, for the oil industry.
Now, we are closely contracting with the regulator in order to improve the capital base of the industry. As you know, I'm also the Vice Chairman of the Turkish Insurance Association. So I know all the company's financials. This negative interest margins, very adversely influenced, impacted the home insurance industry balance sheet. As you know, there is a change in the regulator, the chairman of the regulator has changed in the 18th of July with the new chairman, we have much more close relationships. And the new chairman understand the issue [ wherever ]. And we are also explaining the situation in the non-life industry to the new chairman, most broadly, regulators and the association will provide an actual risk order to non-life insurance companies to more year-end, I would say, Osman. Any other questions?
Yes I’d like to make as... I think…
Yes, I gave, but it takes time to come…
Got it. Following question on a [ command ] question. I missed that. You said that the capital adequacy ratio or the solvency may not be reaching 100% level following the price issue? Did I -- okay. I understand. And the second one is that you expect second-half earnings to be offsetting the first-half losses and you may be in the positive zone for the full year of 2020.
Yes. So let me explain that. But as I said during the presentation, there is an unexpired risk reserve standard. This is a regulated provision. And it says that if your insurance portfolio is making loss, the insurance company has unearned premium reserves. So the remaining -- in the remaining life of the portfolio, you will also make loss, the regulations, let's say, explanation is like that. So it's clear, it's reasonable. But in MTPL side, we have a PPL portfolio, which is not only underwritten in the last 12 months, which is issued in the last 10 years.
So we have an outstanding claims portfolio coming from 10-year period, in the last 10 years period. So with the increase in the minimum wages, there will be additional cost on our claims and our loss ratio is increasing. Then the rule says that, the financial loss ratio is to be calculated and our financial loss ratio in MTPL, let's say, it's around 160%. And it says that the exceeding part over 95% loss ratio, 95% exceeding 65%, it comes to 160%.
And it says that you have to book URR unexpired risk reserve in Turkish the [ Ramadan ] with [ car case ] that, you have to book URR in order to, let's say, be at the conservative side for the future losses. That's clear. But from the rational of that provisioning, I can say that it is the financial loss ratio represents the total 10 years portfolios, let's say, results. But in the new business, I can say, in the last 12 months, there was a 25% one-time increase in the price cap in February. There was, again, 20% price cap increase in June, and we expect a new price gap within a few months, let's say.
So all these price cap increases, and there is still 2.25% monthly increase at the price gap. So all these price cap increases are improving the loss ratio in MTPL. So the loss ratio of the portfolio, which is issued in the last 12 months is not that much high. So the losses in the future over that 100 premium reserve, I can say, the remaining life of our portfolio will be not that much. So the competition rule of URR is not appropriate from our point of view, and we are discussing with the regulator.
So there is no change at the end of first half, but we know that all the companies are suffering from that URR, let's say, computation. So we hope and we insist to make a real change in that URR. So you see at the end of first half, it was almost TL 590 million URR on our financials. So if there is a growth change in that our provisioning, it will contribute, one reason is that. And secondly, we are increasing our return yield. And third, we have, let's say, positive margins of the new business in MOD in non-motor...
Even breakeven in MTPL?
Yes, maybe after a new price increase, we can reach breakeven way.
Yes. On price increases coming. There's another question from [ kin ] in the recent Q&A session of [ ano ]. You mentioned that there are good investment proportion. Do we have an M&A plan? There's an M&A plan on the coming periods. First of all, we have to see the futures clearly currently at least through election this economical program if continues. Of course, the uncertainty will stay there. So there will not be any M&A plan.
On the other hand, there would be some players may exit us, we can see some exit [ back ] to Aksigorta doesn't have any M&A plan. In the investment opportunities, as you may follow Aksigorta established a new company under Aksigorta Affiliation is the health company. Now, [ some time ] you are holding an ADS decided to enter the health market, health insurance market and health care markets, not only insurance, even [ erodes ] is a health care company next to the life pension and life operation. So this is a new and good news from Aksigorta perspective. Now the company is established under Aksigorta, but on the coming days, the company may be independent on similar to Aksigorta and I guess -- [ Sahid ] has a question, please [ Sahid ] could you...
Can you hear me?
Yes. We can hear you.
I guess my question is on the unearned risk reserve as Osman explained the details on this topic. But what I'm trying to understand is the adjustment that [ contract ] you made in the second quarter was basically belongs to the policies that was issued historically, like last 10 years, you are saying, is that right? So it seems like -- I mean, whatever was supposed to happen was happened in the second quarter. And going forward, there won't be much of an adjustment. So my question is, obviously, as these policies mature and the new policies are issued at higher prices, will there be a reversal as well on those unearned risk reserve or whatever has been done will be done?
Thank you, [ Sahid ]. You're right as explained the, let's say logic of the URR. So we started to provision that you are at the end of 2021 before that, it was a negligible level at, let's say, immaterial level. So until the year-end, it will continue. But at the year-end that could be a release, one, let's say, result could be if the price increases continue and the improvement in our MTPL portfolio continues, that will -- there could be a release, one option is that.
The second option, if there could be a rule change or URR competition, again, there could be a release. But from a MOD deep perspective, as far as remember, we have TL 160 million URR provision in MOD products. From now, I can say there will be no URR in MOD because we already reduced our new business loss ratio to 75%. So far better than 95% the threshold, URR competition threshold. And also you know that MOD is not a long-tail business. This is a short-tail business, 1.5 years business. So there is no URR liability. There will be no URR liability at the year-end. I can say the TL 160 million URR in MOD will most probably release at the year-end. But in MTPL side, that's a long-tail business.
So the minimum wage increases will continue, and there is a general election in the next year. So all we can make an estimation on how much the minimum wage increase will be at the year-end but it can be from, let's say, 30% to 100% with a wide range. So that's a risk on MTPL product. So the price cap increases is vital, is necessary for MTPL product. [ Fabio ], do you have a following of your question, the remaining part or it is completed? Because we quickly answer your question if there is the remaining part, please give your question.
You can hear me now, I guess?
Yes, we hear you.
I thank you for the detailed answer. Actually, you also answer with [ Sahid's ] question on the minimum wage side, because as you said, we will be having elections and the minimum wage increase maybe at anywhere. And so what happens, for instance -- let me put it this way. If the minimum wage increase by the end of this year, over 40%, what may we see for the year-end financials? Because as far as I know, you reflect minimum wage increase immediately your full year earnings at the end of the year. If we assume that it is over 40% to 50%, what may happen?
From today, I can say we are pricing with an expectation of 50% additional at year-end. So exceeding 50% will be, let's say, will have a negative impact on our expectations...
Maybe for the new business, we are pricing with an expectation of a yearly 80% minimum wage. But for the new business, the in-force business, of course, the in force will effected by minimum wage increases. In order not to face to those kind of thing, we are now accelerating our bodily injury fire closing grade, almost quadruples in the last 4 months. So we are trying to pay all the bodily = injuries before a new minimum wage announcement has been down, is done. On the other hand, minimum wage may adversely impact but next year, there will be URR competition change at the end of the year, which may compensate that minimum wage impact additional minimal wage impact would be and that discount rate change by regulators. So that would be good and bad news towards the year-end, but what we expect good news would be, let's say, more than bad news, and we are slowly leaving the worst page, I would say.
Regarding these discount rates upgrading from 17% to 22%. So should we expect another, let's say, 5 percentage points? Or what may be your expectation?
The most proper solution will be linking the discount rate to the rate curve because we will move -- we will shift to IFRS 17 reporting in the next year. And in IFRS 17 reporting from today dry-run, we are using the rate curve. The rate curve is the best solution. So we do not expect more discount rate for the second half. And also in IFRS 17, there is no URR provisioning. So that's another question. So if we -- let's consider we have TL 559 million URR at the end of first half, and we keep that amount at the end of the year. So 1st of January, there will be no URR. So that's another question from the regulator perspective. We are [ less ] discussing that issue also.
From transition from SFRS to IFRS 17 would be an interesting one [ in on like ] the industry is in that, let's say, environment.
What about the inflation accounting under IFRS 17, is it possible? Of course, it is possible. But what I mean is what may be the impact on overall financials? I think book value will be inflated, I guess.
Yes. The reporting office, the tax authority announced that the inflation adjustment will be implied in the next year. And the reporting authority is not clear when the inflation adjustment will be applied. So that's a question mark at the moment. But from insurance reporting perspective, it is not the main issue at the moment. But the, let's say, the critical issue is -- there is unclarity of reporting IFRS 17 under the high inflationary conditions. So IAS 29 and IFRS 17 is not, let's say aligned. So it's another question mark at the moment.
So from an insurance market perspective, we can say that inflation adjustment is not a material issue at the moment. IFRS 17 is more critical compared to inflation because IFRS 17 also is, let's say, taking into consideration of the cash flows of the insurance business, the cash flow, not the accrual basis reporting. It is the cash flow basis reporting. So it already contains some inflation effects in their rules in IFRS 17. So IFRS 17 reporting is more critical. And the insurance regulators did not, let's say, explain or announced any exit from IFRS 17 reporting. So everything goes as we will report our financials compliant with IFRS 17 in the next year.
I think second half will be much better compared to the first half regarding key portfolio repricing, actually, i.e., let's say, bought a new policy, reviewed my policy yesterday, both MOD and the MTPL and…
We think you [ like ] crisis [ hole's ] say, MODs and DPN is doubled at least and all the premiums are double triples if interest rates are collected, those prices will become very overshooted on the next year because currently the insurance industry tried to compensate the impact of the negative interest margin by, let's say...
Decreasing the prices...
Decreasing business prices. So really, business prices in security, even I have been taking a lot of complaint letters from customers, agencies all day, particularly in somehow health insurance policies, premium when I see really it is insane. The increases are incredible. On the other hand, I'm sometimes [ afraid ] regarding penetration, I mean, as you said, you wish you hadn't [ mark up ], but some of the customers may not buy policies, insurance policies, so that they decrease the penetration of the product. So there's 2 sites to metal price are increasing but penetration may develop. So -- but after election or towards the election, I think the market will be corrected and we will, let's say, balance the financials and the business.
Thank you very much, Ugur. I took much of your time. Thank you for the presentation and see you as soon as possible, I guess.
Yes, of course. We hope to welcome you with more, let's say, appreciating and better results in the coming earnings calls. So I see no raised hands and no written questions. So maybe we can complete the call. Thank you for all participating, and we hope to welcome you in the coming calls. I give the words to Ugur.
Thank you very much for your contribution, and thank you, Osman, for your presentation and for your questions. We are looking forward to seeing you in the third quarter earning costs in October. Have a good evening. Bye-bye.