AK Sigorta AS

IST:AKGRT.E

Earnings Call Analysis

Strong Growth and High Financial Return

The company reported a significant 90% growth in gross written premiums to SEK 27 billion, with underwriting results increasing by 63% due to better margins across all business lines. Total financial income hit EUR 2.6 billion, resulting in a net profit of PLN 1.2 billion for 2023, although the combined ratio was high at 117%. Net income rose by 70% to 468 million with a strong year over year balance sheet growth of 65%. The assets under management grew by 19%, amounting to EUR 9.1 billion. Looking ahead, the company anticipates a robust top line growth above 80% for the next year, aiming for a combined ratio below 115%. They expect a stellar overall return on financial income at around 40%, potentially reaching EUR 4 billion.

Aksigorta's Remarkable Growth and Optimistic Outlook Amidst Market Challenges

Aksigorta's Q4 earnings call for 2023 highlighted a company on the rise amidst industry headwinds. The tone was set with an impressive 90% growth in total gross written premiums (GWP), tallying EUR 9.5 billion, and a substantial 71% increase in total net income reaching SEK 468 million. Equity growth paralleled net income with a nearly 70% year-over-year increase to BRL 3.3 billion. These numbers, however, were tempered by operational challenges, as the net loss ratio went up by 2 percentage points and the net combined ratio rose by 3 points due to deteriorations in the net loss, ending at 108%.

Strategic Market Positioning with Focus on Profitable Segments

A focus on non-motor and health segments, deemed to have better underwriting results, led Aksigorta to a decrease in motor business market share, a calculated move that translated to increased market share in more profitable segments by about 0.5 percentage points. This strategic shift underscores a willingness to optimize capital construction and adapt to market conditions, whereby the company's overall market share slightly dropped from 9.6% to 9.7%.

Improvement in Underwriting Results Fueling Profitability

A significant turnaround was the improvement from a EUR 1.2 billion loss in 2022 to a PLN 300 million gain in 2023, mainly due to positive results from the non-motor and MOD segments. The underwriting margin improved from a negative double-digit to a single-digit at -1.3%, a noteworthy recovery backed by an 18 percentage point enhancement in the overall net combined ratio, which improved to 117%.

Solid Financial Income and Asset Management Growth

Financial income development was robust, with an annualized yield growth of 9 percentage points leading to a 40% total annual yield and roughly BRL 3 billion in combined FX and interest income. Effective asset management was evident through the growth in corporate bond weight and a tax-advantaged fund established in 2022, providing a substantial tax shield, expected to grow in the coming year.

Future Focus Areas: Digitalization and ESG Goals

Looking ahead, Aksigorta and its executive team outlined the importance of interest rates and currency impact on its business model, alongside emphasis on addressing risks and leveraging digital transformation opportunities. As part of the larger Sabanci group, the company plans to integrate its ESG goals, focusing on investment policies to align with sustainable practices.

Guidance and Expectations for 2024

Expectations for 2024 include a top-line growth above 80%, with an anticipated increase in market growth due to inflation and local currency depreciation. Aksigorta has set an aggressive target for a combined ratio below 115%, recognizing that mandatory segments like MTPL may keep it above 100%. The guidance for ROE is close to 40%, a promising forecast reinforced by the strategy to harness opportunities in non-motor lines and health insurance, areas pinpointed for potential growth and market share gains.

Earnings Call Transcript 2023-Q4

[Operator]

Dear investor community, welcome to Aksigorta Q4 Earnings Call presentation. Our speakers are Mr. Gulen, CEO, and Mrs. Zeynep, CFO. [Operator Instructions] Thanks for your patience. Mr. Ugur, the floor is yours.

[Ugur Gulen, executive]

Dear all, thank you very much for joining the Aksigorta 2023 Quarter 4 Investor Call meeting. We are going to present our earnings call presentation together with Zeynep. As like I mentioned at the beginning, we are going to get only written question at the end of the presentation. So now, floor is Zeynep. Zeynep, please.

[Zeynep Eroktem, executive]

Okay. Thank you, Ugur. So we have published our last quarter 2023 results yesterday, as you all know. As a summary of our main KPIs, the scorecard for the last quarter is as follows. The total gross written premiums growth is almost 90%. We reached EUR 9.5 billion of GWP in only three months in the last quarter. Our total net income reached SEK 468 million, showing a growth of 71%, and total equity reached BRL 3.3 billion, with almost a 70% year-over-year growth. At the same time, in the operational ratio, our net loss ratio deteriorated by 2 percentage points, and net combined ratio mainly coming from this deterioration in the net loss is showing an increase of 3 percentage points, reaching 108%. As you know, we have been trying to minimize our motor kind of business market share for contents of capital construction. And due to this reason, we are at 6.7% of market share at the end of the year, which shows a slight decline versus last year. Regarding the financial income, our total asset under management exceeded SEK 9 billion at the end of this year, which showed annualized yield of 32%, which has increased by 3 percentage points year-over-year. Corresponding to financial income of EUR 743 million. So moving on to the annual scorecard of this year, the total GWP reached SEK 27 billion, almost close to 1 million level. And at the same time, the total net income is at EUR 1.2 billion. Since last year's result was negative, the fluctuation ratio is not really meaningful, but we are improving our net income by almost TRY 1.3 billion in this year. So the overall net combined ratio improved by 18 percentage points, leaving us at a level of 117%. And in the financial term, total annual yield reached 40%, which shows a growth of 9 percentage points versus last year, corresponding to almost BRL 3 billion of both FX and also interest income with 83 percentage of year-over-year growth. So when we mounted the market GWP, as you are also aware in the last quarter, we are seeing a slowdown in the market growth. In the first 3 quarters, that has been announced at around 100 and 3140 levels, now slowed down to 82% at the last quarter of the year. When we look into the details, we see that the main reason for the slowdown is that the MTPL monthly increase in the price cap has been decreased from 4.75 to 2 percentage points. And we have the full quarterly impact in the last quarter, which slows down on the growth of MTPL from 74 percentage in the prior quarter to 58 percentage growth in the last quarter. In addition to that, you look at MOD, MOB growth is 63%, and it has also slowed down versus the first half and also the short part. The main reason in MOD is also coming from the increase in pricing. We see that in the second half of 2023 in the market, the average premium MOD has slowed down and the increase in the prices is not as best as the first 6 months. That's the main reason for the relatively lower growth rates in the motor line of businesses. And also, non-motor is still strong at 121% versus the prior quarters relatively, we have a similar effect in non-motor. That can be mainly explained by the FX Moves since non-motor is mainly priced in corporates which are denominated in FX-based premiums. So health shows track growth of 116%. And when you look at the overall market in this year -- in last year, the total market premium reached almost TRY 400 billion, showing a growth of 111%. Whereas, when you look at the portfolio of shares of the main business lines, we see that motor alliance slightly declined versus the 2022, whereas the non-motor had gained -- each gained 1 percentage point of portfolio share in the total market. So when you look at Aksigorta on a similar basis. We see that we are -- in the third quarter and in the fourth -- in the last quarter of 2023, our premium growth outperformed to market, and we increased our market share in the second half of the year. And in overall, annual terms, our market share dropped from 9.6% to 9.7% at the year-end. So when you look at that in our total portfolio shares, we see that the MTPL portfolio share has been coming from 18% to 15% in the last -- in the second half of the year. Please note that this is mainly because of capital adequacy optimization actions. And we have been focusing on rather non-motor and health, which are relatively better underwriting result producer line of businesses. So the good news is that we succeeded to increase our non-motor market share in 2023, but almost 0.5% -- about 0.5 percentage points in last year and we are at around 7.6% in non-motor. So when you look at the next page, we have the underwriting result and combined ratio development. You see a huge improvement from 2022 to 2023 in the underwriting results. We are moving from EUR 1.2 billion of loss to almost PLN 300 million. So this is mainly supported by the positive underwriting results that we have gained from non-motor and also MOD this year. The non-motor has by SEK 410 million in the deviation, whereas the MOD produced additional BRL 770 million of underwriting results, thanks to better margins in 2022. Whereas the underwriting margin improved to single-digit minus of minus 1.3% coming from 12% last year. When you look at the net combined ratio, -- overall net combined ratio improved by 18 percentage points, moving to 117%. We have -- the main portion is coming from the loss ratio. Loss ratio has moved from 112% to 91%. One of the main reasons that is underlying this improvement is the increase in the technical discount rates this year. We have 2 impacts, 2x increase in the discount rates, one was in June and the other one in December financials. When you make the calculation, the increase in the discount rate has contributed to almost 12 percentage points in the improvement of 21 percentage points in loss ratio. So other than that impact, we have a natural improvement in our result by 9 percentage points in terms of a loss ratio and the combined ratio. So when you look at the financial income development. As you see in the tent --in the pie chart. Throughout the year, we increased our weight in the corporate bond and the tax advantage fund, which we have established in 2022 in terms of benefiting from investing in TI and generating a tax shield by 30 percentage points, the same level with the corporate tax rate. It is classified in the corporate bond lives off the pie chart, and it has reached on of TRY 3.7 billion at the end of last year, which has a rate of 42% in the overall investment portfolio. Thanks for this -- thanks to this fund, we have generated a tax field of EUR 228 million this year, which we expect to increase to a EUR 400 million level in the coming year. So in terms of the maturity of the overall portfolio, we can say that 70% of total asset under management is a bit less than 1 year period of maturity. So we are trying to keep it go as short as possible in order to benefit for the potential increase in the interest rates. There is no major change in our portfolio breakdown. I mean, when we move from the September to December pie chart, it is almost similar. The main action or the main thing we did in the last quarter was that we have -- as you may recall from earlier information, we have invested in CPI linkers in August. And after the surprising policy rate hike in August council meeting, we had some MTM losses in CPI linkers. So in November, we have the chance to take them out of our Tatex Advantage Fund as we classify them as hope to maturity at a yield of CPI plus 0 percentage points, which means that we will be mimicking the inflation in the coming terms -- in the coming period with the CPI in portfolio no longer creating any risk. Other than that, a few comments on the FX portion, we are sharing at 28% of our total asset under management ethics, which we plan to lower in the 2024 period. And we will be looking -- watching the market and all the news and everything very closely in order to make the right timing and right amounting in FX position. Anyhow, we are not planning to go at a level below 20% since our costs are, especially in motor line of businesses, mainly denominated in ethics as well. In the last quarter, we have generated SEK 743 million of total financial income, which corresponds to the overall yield of 32%. Please note that this is the overall return, including both ethics and TI financial assets. So this is for the financial income. And when we move to the income statement. We have a growth of 90% in gross written premiums. We are at SEK 9.5 billion in the last quarter, which takes us to SEK 27 billion in the total year. Top line figure, which doubled last year's top line. The good news is the underwriting results. In the last quarter, we have increased the underwrite writing result by 63%. And also in the annual terms, we have increased our -- at least improved our loss by EUR 1 billion, thanks to MOD and non-motor, with a better margin in all lines of businesses. So when you look at the financial income, it has reached EUR 2.6 billion after putting off for the financial expenses, it's a net figure, which takes us to total overall net profit of PLN 1.2 billion in 2023. We are at a combined ratio level of 117%, with an improvement of 18 percentage points. And when you look at the last quarter only in a solar perspective, the net income is 468 million year-over-year improvement of 70%. And also the combined ratio stays 108% level. So this is it for the P&L. When you move to the balance sheet, we had a total balance sheet size graft of 65%, which is similar to our year-end inflation level. The receivables have grown by 140% where the payables show a similar growth, very close growth at 138% increase. In terms of asset under management, the year-over-year growth is limited at only 19%, which rises to EUR 9.1 billion. There are a few reasons explaining the limited growth in team management. There are three, and the first one is that we have took the decision to slow down in motor line of businesses. And we have also focused our MTPL market share in pool part, which is a better selection in terms of the capital risk requirements. But on the other hand, since this is only a collection and then transferring product, since we transfer all of them to the pool without any holding period in our own funds, we cannot generate any financial income and asset under management out of this premium. This is one of two reasons. And others are that, as you know, we have made some refinancing in the earthquake claims in order to support the claim insured families and companies. So we had collected those from the reinsurers after we have already paid it. It was a challenging period for the 2023. But as you know, this impacted our short-term financial performance, but also, we have highlighted the strength of our business model. And also, we have a very responsible insurance company. So the last item is that in the 2022, we were making arbitrage income by collecting our credit card receivables earlier and then using the funds, the proceedings and investing in higher returns and making a profit in between. Whereas, with the start of the increase in the political interest rates in August, we stopped doing that in 2023 August since there was no room for any profit-making with the elevated interest rates. The reason I'm telling this is that the 2022 figure of EUR 7.7 billion includes this early collected credit card receivables of almost SEK 1.6 billion, whereas in the 2023, we do not have such inflated figure. So if we have net like-for-like compare, the actual growth will be among a 60% level in the similar base terms. So the increase in the total assets is 65%, and we have also succeeded to move our total equity to around BRL 1.9 billion last year to SEK 3.3 billion at the end of December with an ROE of 45%. So we are still working on the capital adequacy calculation to report to the regulator. But the good news is that we are at a level above 100% according to our draft calculation. So I can't tell. So these are our classic recurring slides in risks and opportunities. As you all know, the real interest rates is one of the main drivers of our revenue in insurance companies. So we are very dependent on the interest rate level. And also, ethics is one of the main impacts parameters in our business. And other than that, I would like to highlight that also the natural disasters and also the talent retention and acquisitions are amongst the challenges and risks where we have a lot of opportunities. On the other side, we have those increase in both ethics rates and interest rates, and also the switch to the free clarification in MTPL hopefully after the elections. And also, we have a lot of opportunities in using digital transformation and also IT in our company. Other than that, I will focus on, as you know, we are also a part of Sabanci and we have some ESG goals. We will be focusing on our ESG in the coming years. I can tell, mainly based on our investment policies. So I think this is it. Thank you, and we are happy to receive your questions.

[Ugur Gulen, executive]

Thank you, Zeynep. Okay. There is one question from America. I will read the question first, and we can answer together. At which level do you expect ROE in 2024 and year-end? Do we expect combined ratio below 100 in at the end of 2024? And third question, is it possible to see normalization in first quarter '24 profits as discount rate change is applied in fourth quarter 2023? In which segments are you going to see growth in 2024? Thank you. Maybe you can answer -- maybe I can answer the last part of the question. Okay.

[Zeynep Eroktem, executive]

Okay. So we will be most probably expecting an ROI level of close to 40% next year. Our total assets under management is expected to turn around EUR 14 million to PLN 15 billion. Regarding the combined ratio, I don't think it will be a realistic assumption to expect something below 100% level. Rather than 100%, we could -- we could be landing at 115% to 120% since, as you know, MTPL is a mandatory part of our portfolio, which is creating huge losses, which is creating the combined ratio to go above 100% level. So as you know, the discount rate change is applied at the end of December last year. And as of the first quarter of 2024, we will not be seeing any favorable impact coming from any discount rate changes, since it has also reached 38%. In terms of growth in segments, Ugur, I will generally touch on the non-motor and hard focus, with also a more selective approach towards motor line of businesses.

[Ugur Gulen, executive]

Particularly in MTPL. On the MOD, we would like to keep our fair market share, which is around 8% to 9% market share. But on the non-motor, in all customer segments from retail to corporate, we want to grow. And as you know from the market, there's a huge increase in the reinsurance costs, and also earthquake tariff. So any policies who include earthquake coverage, the premium of those policies will increase tremendously in 2024. So the growth of the non-motors would be much more higher than expected at the end of 2024, and Aksigorta insurance structure and the insurance capacity is very well placed at the end of last year. So we would like to utilize our huge treaty capacities to gain market share on the non-motor products regard to soft customer segments, I would say, Zeynep. And of course, our new health company will be operating -- start operation 1st April 2020. So health will be one of the, let's say, focus area for Aksigorta on the coming period. Maybe that focus -- that growth would not be too much trend because it will be a transition period. But starting from next year, health will be the major focus area for Aksigorta in terms of growth. There are 2 questions from [ Sareb Timbaji ]. Could you please give some guidance for 2024? Zeynep, you have done some, but maybe you can a little bit elaborate. And we applied 35% discount rate already at the end of last year. The answer indeed is simple. Yes, we have applied 35% discount rate in our financials -- year-end financials. So maybe you can answer the first part.

[Zeynep Eroktem, executive]

Okay. Our first expectations for next year is the top line growth above 80%. We expect the market still to grow in a high percentage since the inflation will still continue and also the TI will continue to depreciate in our expectations. So we can expect something above 80% deal in terms of the GWP growth. In terms of the total combined ratio, our target would be to land at a level below 115%, which will be an aggressive target for us. But in the worst case, we can be going up the level of 120% as well. These will bring us -- and in terms of the financial income, we will be generating the overall return of almost 40% level in our total portfolio, which will bring us at a level of both including the ethics income at a level of EUR 4 billion in a rough calculation. So overall, we will be landing at an ROE of 40% level subject max. In terms of 35%, yes, we have already applied a favorable impact coming from the increase in the discount rate which has contribute to our net profit by almost SEK 260 million in the last quarter.

[Ugur Gulen, executive]

Okay. Thank you. There is no other written questions, Zeynep. I think these are the -- all the question has already been asked. Of course, we are always ready to answer your question. Offline Investment Community, it's always welcome to Aksigorta Investor Relations team. Okay. Are you using equity allocation enough to diversify and enhance your returns, in terms of financial--?

[Zeynep Eroktem, executive]

Financial portfolio. So we are losing people. It's not at a very large expense. We are using it. It's rated around a maximum of 10% in our overall portfolio since we would like to focus on safer, less riskier assets. We are sticking to investment policy approved by our Board, and we have -- we are not too risk takers on that manner.

[Ugur Gulen, executive]

Okay. There's another question, I think. So you are not -- okay. It answers this question. So I think we can close the meeting. So thank you very much for joining Aksigorta 2023 year-end earnings call presentation. And we wish you a happy weekend. And looking forward to see you in the first quarter 2024 earnings call presentation. But of course, we are always -- you are always welcome to any question. If you have, our investment relationship team will be ready with in your service. Okay. Thank you very much. Maybe Zeynep can also.

[Zeynep Eroktem, executive]

Okay. We wish to see you in the first quarter call with hopefully, better results. I can tell. Thank you all for your contribution.

[Ugur Gulen, executive]

Okay. Bye-bye.

[Zeynep Eroktem, executive]

Bye-bye.