AK Sigorta AS
IST:AKGRT.E
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AK Sigorta AS
Earnings Call Analysis
Q2-2023 Analysis
AK Sigorta AS
Aksigorta's 2023 first half earnings call painted a picture of a company displaying strong performance despite various one-time financial impacts. The company's officials confidently addressed the investors, underscoring significant year-over-year growth and robust financials.
In a commendable second quarter, Aksigorta saw its gross written premiums double to TRY 5.9 billion, bolstered by a 3.5-fold jump in net income to TRY 454 million. While the net loss ratio improved significantly, the impact of three one-time items, including a favorable increase in discount rates and additional reserving driven by wage hikes and regulatory changes, resulted in a net negative of TRY 240 million. Despite these challenges, the financials adjusted for these items showed resilience with a normalized net loss ratio even better than the previous quarter.
The first six months of 2023 mirrored the second quarter's performance, with premiums doubling again and reaching TRY 11.1 billion and notable improvements in net loss ratios and combined ratios. These numbers were achieved even after considering the one-shot financial impacts. A remarkable rise in financial income to TRY 1.6 billion reflected an impressive management of assets and a fruitful strategy in foreign exchange gains, contributing to an annualized yield growth of 41%.
The Turkish insurance market experienced substantial growth, with written premiums increasing impressively in the second quarter. Aksigorta managed to seize opportunities within this surge, particularly in the health and nonmotor sectors, allowing it to outperform the market's growth and incrementally increase its market share in those areas.
Notwithstanding a negative underwriting result for the first half, Aksigorta substantially narrowed the gap year-over-year, showcasing adept handling of technical discount rates and one-time event impacts. The comprehensive improvement from a combined ratio of 160% to an adjusted 113% is a testament to the firm's improving loss ratios and general profitability strategies.
Aksigorta's asset under management swelled to TRY 9.4 billion, growing by 108% compared to the previous year. Their strategic asset allocation led to diversification across tax-advantaged funds, eurobonds, and FX deposits, with expectations of further growth by year's end. Even within this mixed portfolio, the company managed outsized returns, particularly from its offshore fiduciary and super bond portfolio which yielded returns over 40%.
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Dear investors, welcome to Aksigorta 2023 First Half Earnings Call Presentation. Today, Aksigorta CFO, Zeynep Ertem and Aksigorta new agency sales Assistant General Manager, Osman Akkoca [indiscernible] Aksigorta and myself, all with you. [Operator Instructions] And now I want to give the word to Zeynep make his earnings call presentation.
Please Zeynep, thank you.
Thank you, Ugur bey. So for starting with the second quarter scorecard results. In the second quarter, gross written premiums doubled year-over-year and reached TRY 5.9 billion. Net income is TRY 454 million, which is 3.5x compared to our TRY 121 million net result in the first quarter this year. Total equity reached TRY 2.6 billion and net loss ratio is 102% [ which is ] 31 percentage points improvement year-over-year, still higher than the first quarter loss ratio of 86%. In the second quarter, there are 3 one-shot items impacting our financials. One of them is favorable, which is increasing the discount rate from 22% to 28%, effective from June this year, which led to TRY 331 million positive impact in our discounting figure.
Second one is interim minimum wage hike of 24%, which resulted in a TRY 250 million negative impact, additional reserving in the second quarter. And the third one is the cancellation of MTPL general conditions, which resulted in TRY 600 million growth and around TRY 320 million net negative impact, which means additional reserving in our financials in the second quarter. So these 3 one-shot items in total have negative net of TRY 240 million on our second quarter financials. And when we eliminate those 3 impacts, normalized net loss ratio is currently at the best 90%, which is slightly above the first quarter loss ratio of 86%.
Net combined ratio is reported at 126%, which is normalized as 114%, excluding those one-shot impacts. And as of the end of June, our total market share is 6.4%, which indicated the year-over-year loss of 1.2 percentage points, which is mainly coming through our actions, our position in motor line of businesses. So when you look at the financial income, total financial income reached TRY 1.1 billion. This figure includes both interest and also the FX gain in the second quarter, which corresponds to an annualized average yield of 60% in total when you compare it from the first quarter, it was 24%. So there is a huge increase versus the last quarter in the yield as well.
So when we look at the next slide, this slide shows to first 6 months, KPI scorecard. There is a similar growth in the top line. So in the first half, gross written premium doubled and reached TRY 11.1 billion. Net income reached TRY 585 million. Net loss ratio is 94%, with 42% improvement year-over-year. And then we adjust for those 3 one-shot items in the second quarter. Net loss ratio is calculated at 88%. Net combined ratio is 120%, which shows a year-over-year improvement of 40 percentage points, which is mainly coming from the increase -- improvement in the loss ratio. When we normalize it for those 3 items, this 120% becomes 113%. At the end of June, our total assets under management size reached TRY 9.4 billion, EBITDA growth of 108% year-over-year. And financial income for the first half reached TRY 1.6 billion, which annualized [ return in growth ] of 41%.
And also, we should note that the Turkish lira assets return exceeded 30% in the first 6 months. Out of that, TRY 1.6 billion FX gain is TRY 617 million. Thanks to our loan position in USD amounting to slightly over USD 100 million, which is a stable level when you compare it with the March balance sheet. And also, as you all know, we have been investing in the Turkish lira tax advantage bond starting from last year, August. And in this year, total tax generated from those TL investment funds reached TRY 95 million as rough.
So when you look at the next page, we have market gross written premium development slide here. And we have divided the market development into quarters for showing year-over-year growth trends. In the second quarter this year, market gross written premiums increased by 133% and reached TRY 86.6 billion. We see an increase in MTPL portfolio share from 25% to 28%, whereas other line of business portfolio shares dropped in the second quarter. MTPL share increases due to both increase in the price cap and also a number of policies. Average premium increases 150% year-over-year, and number of policies increased by [indiscernible] in MTPL.
In MOD, market growth is 122% written in green box in green font. And when you compare it with the first quarter growth rate, we see that it has slowed down from 177% to 122%, which is mainly attributable to higher average premium base effect in the second quarter last year. All in all, in the first half, market gross written premium growth is 139%, and total production, total premiums reached TRY 168 billion.
So moving to the Aksigorta gross written premiums development. In the second quarter, Aksigorta premiums increased by 97% and reached TRY 5.7 billion. Aksigorta growth is lower than the market growth of 133%. This is mainly due to the MTPL and MOD line of businesses. In Motor & Health, we are growing faster than the market. In nonmotor, market growth is 122%, whereas we are growing at 125%. And also in health, the market is growing by 142%, whereas Aksigorta growth is 146%. So we are gaining market share in health and nonmotor.
So when you look at the next slide, this shows the underwriting results and also the combined ratio components. In this quarter, our underwriting result is in the first 6 months, negative TRY 242 million, which showing a rough improvement of TRY 750 million year-over-year. The increase in the technical discount rate, partially compensated for the interim minimum wage increase and also the cancellation of MTPL general conditions impact. In total with TRY 240 million negative net impact occurred from those 3 on-shot events. And we have uploaded the full impact of cancellation of MTPL general conditions in our first 6 months financials, which is around [ TRY 323 million ] in net terms.
And our net combined ratio improved from 160% to 120%, which is mainly coming from the improvement in the loss ratio. If we eliminate those 3 impacts as one-shot events in the first 6 months, our TRY 242 million of underwriting loss would become slightly negative at almost a breakeven point at like minus TRY 3 million. And also the combined ratio would be 113% rather than 120%. So this shows the general profitability. And when you look at the next slide, we have demonstrated financial income components and also the allocation of our asset under management. In the first 6 months, as of June, our total asset under management reached TRY 9.4 billion, which shows a growth of 108% year-over-year. We expect to higher -- to have a higher growth in the year-end assets under management with collection of the earthquake claim payments from the reinsurers.
And when you look at the second quarter portfolio asset allocation in the right pie chart, the main difference when you compare it with the first quarter is the increase in the Eurobond share from 13% to 18%, which is led by switching from the FX time deposits into Eurobond. Currently, our asset under management portfolio is divided into 3 main pieces both having almost equal shares like one chart for each. The first one is the tax advantage fund. We have invested over TRY 3 million in tax advantage fund. As I have already mentioned, we led to TRY 95 million of tax shield.
In this fund, we are having a return of 35% in the second quarter, excluding tax shield. And in the other component or piece of asset under management is our FX portfolio, which is compared of eurobonds and also the FX deposits. Currently, we are sharing a Eurobond portfolio of USD 69 million. And we have FX deposits amounting to TRY 1.2 billion. And our total eurobond maturities 3 years, and we have yields which are increasing from 7% to 9.4% [indiscernible] time.
Currently, the total return in the eurobonds reached 8% in yield to maturity charge. And for the FX deposits, we are investing it, on average, 5.5% yield. As the last piece of the total asset under management, we have the offshore fiduciary and super bond portfolio, which is another -- which accounts for another TRY 3 billion, on which we are gaining a return of over 40%. So these are the main breakdowns of our asset portfolio. And we are trading -- as you see, we are showing 0% in equity pie chart, whereas we should note that we are trading equities tactically as of end of our balance sheet date, our holding is limited. That's why you see that [ grow ].
In normal terms, we have limit of 5% in overall assets under management to be invested in equities as well. And one thing we should also note that our current portfolio is liquid, 30% of our total asset under management will be available for the investment in the last quarter of this year. So if there is an increase in the interest rates, we will be -- we would have available funds to invest and use that -- catch that opportunity. So that's the summary for the financial income. And when you look at the financials, starting from the income statement, in the first 6 months, underwriting result is TRY 242 million negative with expenses of almost TRY 500 million.
And we have the net financial income. In net, we mean that when we deduct the financial expenses, which are composed of mainly the early collection of our credit card receivables, we pay a fee interest in order to receive our credit card receivable earlier and pay our claims and other operational needs. So that's the net figure you see there as the TRY 1.4 billion. And all in all, the net profit is calculated at TRY 585 million. And the combined ratio is showing a 40% improvement compared to the last year this quarter -- this first 6 months.
And when we go to the balance sheet. In the balance sheet,
As of June our total asset size reached TRY 15 million. And this shows a growth of 19% versus December year-end. Our total equity is TRY 2.6 billion, and our return on equity or ROE is cooperated on a trailing 12 month basis is 40% as of June. So these are the main highlights.
We have the risks and opportunities as a recurring page. In the risks, the negative real interest rates still our -- is one of the risks in our business and also the uncertainty, high volatility on currencies, another one. The systematic risk of bankruptcy in industry is one of the risk. The increase in reinsurance cost is also another risk which has already increased after the earthquake and also the natural disasters due to climate change and churn in individual segments due to savings and also hyperinflation can be one of the risk. And also, we have that increase in the FX rates, which makes stress on our MOD claim cost as one of our risk items.
On the opportunities. On the other hand, we have increase in interest rates as an opportunity since we are carrying assets under management on our balance sheet. And also FX rate is both a risk and an opportunity since we are long in FX as well. We see that one of the main opportunities could be the switch to the free tariffication in MTPL, which will improve the overall industry MTPL profit, which will be the best case. And also, we have the accelerating digital transformation with the pandemic as one of the opportunities. The increase in efficiency and quality and innovation with remote working. And we have higher premiums and improved underwriting margin with the introduction of new products as well as one of our recurring items. We have the high focus -- the intense focus of industry on technology and analytics to generate value and almost 100% of our CapEx is made on IT in that respect as well.
So that's the end of my presentation, and we can start the Q&A session, if it's okay for you as well. [Operator Instructions] I think that [indiscernible] is raising hand. [indiscernible]. Maybe we should give him access.
I have two questions. Why is the combined ratio so high, 120% because in the old days, you were one of the more efficient insurance companies. In other words, your combined ratio wouldn't be more than 100%. That's number one. And number two, you said you limit equity exposure to 5%, which I find very interesting because ironically, that's the same risk limit I have imposed on my son when he was sort of experiencing with investment in crypto currencies, I wanted him to learn crypto currency investment, but I didn't want him to risk too much money. So I said no more than 5%. So my point is, do you find equity so risky as to limit the exposure to 5%? I would be very interested to hear your views on why limiting equity to 5% in such a big portfolio, which should be managed in a more optimal manner.
Okay. Thank you [indiscernible]. For the first one, for the combined ratio, we are having struggles in both MTPL and also in nonmotor. In nonmotor, other than the effect of the earthquake, which is coming from the restatement impact of the reinsurance costs. We are having [ legal ] large loss of large claims in nonmotor. This is one of the main reasons for the increase in the loss ratio, which triggers the combined ratio. This is one of the main explanations, together with MTPL and also the deterioration in our nonmotor claims, we are having high combined ratio.
And maybe Zeynep, one adding on the nonmotor side next to the -- in addition to earthquake, there are lots of other climate-related claims as well, floods particularly all over the Turkey in the Black Sea region and the Southeast Anatolia, has also brought some mid- to big size claims. In the first half, nonmotor was really what as we predicted. MTPL, it's all shorten, but on the MOD and the health side combined ratios are getting better. And in the second half of this year, the nonmotor performance is getting better, I would say.
And also maybe I can add something on top of this. The combined ratio is the financial combined ratio. But in terms of underwriting year, the combined ratio is not that much high because the runoff impact is too much, mainly driven by the MTPL claims portfolio. The MTPL claims average duration is almost 3 years. So it extends up to almost 10 years, some claim files. So till we finally close those files, they will inflate by minimum wage increases, the regulation change, the cost change, et cetera, et cetera. So there is a big portion of runoff impact on the MTPL side. Excluding that part, the current underwriting year combined ratio is not that much high.
Yes. For the next question after equity sat, we should say that we had the first go to increase the portion of equities in our total portfolio to 5%. And now we would move up to 7.5% until the remainder of the year. So we don't have 5% as a maximum limit. But currently, we are planning to invest less than -- we should say, less than 10% in equities since we have the risk and return appetite of our Board as well limits the risk investments. And also since because of the higher risk coefficiency assigned to equities for the calculation of capital adequacy ratio. We have to find an optimum level for the portion of equities. That's the reason [indiscernible] and other than that, we should note that in the last 3 or 4 months, we have been gaining 20 million plus for each month in equity trading. That's one thing we should also note. So we are seeing opportunities in equities, as we have already mentioned as well.
But of course, it's a conservative company and to local shareholder and the global shareholder, quite a risk averse and most of the companies may invest more on the stock exchange markets, but we have some limits on that. There are 2 written questions, Zeynep, [indiscernible] asked them. Could you please elaborate about switch to free tariff in MTPL? Maybe I would give some brief information regarding that. I'm the Head of the Non-Life Committee in the association and MTPL is a tariff product, all process has been determined by the regulator. Unfortunately, due to continuous minimum wage increases or cancellation of general condition kinds of things. This tariff has to be adjusted in a frequent manner. And each time, it takes a lot of time to negotiate with the regulator to make a price adjustment on MTPL.
So as an industry, we are forcing the regulator to instead of tariff MTPL, make free tariff MTPL. When we say free tariff, of course, there will be some floor and ceilings on the pricing, but the price will be determined by the insurance companies and prices would be determined by supply and demand. But -- and the regulator has announced the road map for the MTPL and they want to go to the free tariff in 2025. But currently, due to those frequent negotiation period as the industry, we are forcing the regulator to implement that free tariff before 2024, maybe at the end of this year. There will be -- you know [indiscernible] CEO of [indiscernible] has resigned a couple of days ago. So he used to be President of the association. So there will be a new election or President election, mid of September. I will be the one of the candidate for the President position. And if I be selected as a President, one of my first job is due to switch to free tariff before the date announced in the road map.
Have you have any guidance for ROE for 2023? Zeynep, are we giving...
Yes, we do not have any guidance for the year-end, but we can say that we expect to stay at similar level as June by the year-end, as an ambition. For the other question, what is your outlook for the second half this year? Will you be able to provide earnings guidance?
We do -- unfortunately, we do not provide earnings guidance. We used to do that, but we stopped doing it in the -- for the last 2 years, I think, because of the cyclical macroeconomic condition and also unexpected regulatory changes, we stopped issuing guidance. And similar to the prior questions, we can say that the overall ambition, we have a target to stick to 40% of ROE by the year-end.
There is no other written question. Is there any verbal one?
Is there another question?
I think all the questions has been answered, Zeynep.
Yes, Ugur Bey. We don't have any other funding questions.
Okay. So in this case, I would like to close the meeting, Zeynep. Thank you for the participants, and we would like to see in the third quarter earnings call, I'm sure, starting from this quarter, both with the support of the higher financial yields and higher underwriting performance. You will see, let's say, an Aksigorta, which will -- we used to see in the past. So most probably every quarter would be better than the prior one of the coming periods. Thank you very much for your participation, and thank you for Zeynep for presentation, and thank you for the Osman.
Thank you all. See you...
Thank you all. Thank you. Bye-bye.