Anadolu Anonim Turk Sigorta Sti

IST:ANSGR.E

Earnings Call Transcript 2022-Q2

[Baris Safak, executive]

Good afternoon, everybody, at least the attendees from Turkey. We are going to have our second quarter webcast presentation today. Thanks for attending our presentation. As usual, we are going to be presenting our presentation with our CFO, Erdem Esenkaya. After our presentation, we are going to have a Q&A session, as usual. So I think we might start now.

Erdem Bey, the floor is yours.

[Ibrahim Esenkaya, executive]

Thank you, Baris. Welcome to Anadolu Sigorta financial presentation first half of '22. My name is Erdem Esenkaya. Our presentation has 3 different titles: first of all, Company and Market Overview; secondly, Technical Results; and third, the Financial Highlights.

I would present company market overview and technical results, that my colleague, Mr. Safak will present financial highlights. I think it will take 30 or 40 minutes. If there is any question, we will pleasure to answer it.

First of all, I would like to look at the first half of '22. When we look at first off of '22, we can see the easily highly challenging balance of payments dynamics, deteriorating external backdrop, trade deficits, rapidly growing energy bill. Both of them, they affected the Turkish economy.

At the same time, we faced chock-full with worries about inflation, justifiably so securing household budgets at the same time, companies' budgets, too. The cost living keeps soaring. On the other hand, volatility, Turkish economy is going on.

Now first of all, company and market overview and highlights about sectors. When we look at the sector, sector premium production at TRY 77.6 billion, growth above the CPI is a good result for us for sector. Discount rate change from 17 to 22%.

In motor branches, MOD and MTPL. MTPL policy is being sold at cap prices. Surging MOD policy prices and MTPL price cap one-off increased 25%.

Financial -- then we look at the financial measures, especially, negative real interest rate is now a kind of problem for financial income. Inflation in rising trend, CPI reached 78% -- 17.6% is a hike. Volatility in FX markets and [ along person ] year-to-date depreciation against currency basket in '22 first half.

Next slide, please. Now we look at the top 10 nonlife companies in the sector. When we look at the premium production figure, we can see easily that we are below sector total nonlife premium production TRY 77.6 billion first half 2022. Last year, same term, it was TRY 39.4 billion. It shows nearly 97% increasing. Anadolu premium production increased rate is lower than sector premium production increased rate because of [ reinstallation ] and increasing price. We don't use competitive price in this [ term ], especially. I would like to take attention here.

When we look at the pie chart, when we can see distribution of production, the share by companies. Anyway, we maintain our market share, about 12%. When we look at the top 5 companies have 50% and top companies have 70% like before. We can say there is a big penetration top 10 company is going on again.

As you see in this page, Türkiye Sigorta is first, Anadolu Sigorta is second, Allianz Sigorta is third degree of the range as last year. When we look at it first 5, maybe I can take your attention to HDI because last year, it wasn't in 5 [ degree ].

Next slide, please. Let me talk about the highlights Anadolu Sigorta. Premium growth higher than the sector -- sorry, premium growth in main branches ranked in top 3 at 13 nonlife branches, MOD growth 222%. It's a good increasing for us, sector growth 204% in '22 first half. MTPL growth, 82% increasing; sector growth, 127% increasing in the same term again.

Portfolio allocation updates, CPI linked treasury bonds increase in FX loan position. There are important turn for us. Investment portfolio, especially asset under management reached TRY 11.2 billion. And if we compare in the second quarter additional nearly TRY 1 billion -- TRY 0.8 billion increasing end of June. Investment yields reached [ 20.5% ] increase.

Next slide, please. When we look at the branches, for example, MOD average premium increase, we can see the price increasing at '22 first half because car average price increasing, especially new average premium increase rate was 95%, and renewal average premium increase rate was 122%. This means the prices is going on. Inflation is hiked, and we are going [ from the ] increasing oil prices.

Next slide, please. Here, when we look at the health branches. Our company was below sector because we like to get profits. So we choose the risk, especially. In motor branches, we reached the increasing percentage rate less than sector. We have the same idea, but in this section, where we increased the prices for market reality.

Next slide, please. Premium production. Our premium production is nearly TRY 9.1 billion and increasing 88% -- 18.5% increasing year-to-date. Our growth rate is lower than sector growth rate in '22 first half.

Next slide, please. Market share and rank, Turkish liras in millions, we mean. Our company, which attaches importance to balance growth in every branch, has succeeded in winning 5 first places, 4 second places, 4 third places in 12 main branches.

As I talked on our last presentation, first quarter '22, we are not only 1 branch insurance company, like MOD, like MTPL or fire. We are in all branches. I think it's very important, and this table shows it very clearly.

Next slide, please. Net profit drivers. When we look at the financial statics and activity results of company are exempt, it is that our assets exceeded TRY 20.9 billion, with an increasing nearly 49.2% compared to previous year. And the premium production reached TRY 9.1 billion, an increase of 88.5% compared to the previous year.

As a result, the premium increase realized or increased its market share and reached the level, 11.7%. Our company realized TRY 376 million as unconsolidated net profit rise, 21% increasing compared to previous year, and net profit value in our consolidated financial statement is TRY 363 million.

Next slide, please. When we look at the distribution channels, we have got 2,650 nearly agency. At the same time, 1,100 Isbank branches, totaling 3,750 agencies and channel, something like that. I can say the [ wide ] split network all country. This is a very important side of the [ our ] sector [ forward ].

There are nearly 300 direct sales staff, we say may sell maximum Sigorta [ is one of these ] we say. They are working in the Isbank branches, and we are trying to increase the -- especially bank insurance in the meantime. When we compare to last year, in this term, the agency production down 2 points. But at the same time, the bank insurance increased 2 points, that's why.

Next slide, please. Yes, when we look at the technical results -- next slide, please. Yes. Accident. We like accident branches because we are getting money here, and combined ratio is low. What I like that, increasing premium production and decreasing clients affected combined ratio positively and idle branches for us.

When looking at the health, health branches is very important for us, especially the last 2 years. We are declaring the health year, and we are growing and improving the health production by the year. We are planning to grow this branch, especially, but on the other hand, health inflation rate higher than the inflation rate. So we are very carefully in this branch.

Next slide, please. When we look at MOD, MOD is another important branch for us, but high FX rate disruption in the supply chain and all the results increased the price of the hiked cars and car fixed cost. So it affect our combined ratio, the 44.5 higher than the last term.

Next slide, please. And we can pass quickly here, general losses on the next slide. Fire is a better branches for us.

And the next slide, please. MTPL, of course, a very important branches for us. In this term next -- last year, we are the first degree here. This year, this is the second degree here. But this affects our financial statement negatively. And when you look at our combined ratio is increased to high because the MTPL pricing and close or not enough for the price, isn't enough for the closes.

Next slide, please. And when we look at the combined ratio, again, as you see, our combined ratio has increased and reached 128.2%. We can say 12.3 points deterioration about it. It depends on increasing [ claim ] exchange rate change and inflation rate change, and inflation is more affectable in this ratio. Deferred claims are important in this ratio, too. As I said at the beginning of our presentation, inflation is very important for us. At the same time, negative real estate is important in this position.

Now I would like to give some things to my colleague, Mr. Safak. Thank you.

[Baris Safak, executive]

Thank you, Erdem Bey. From now on, we are going to continue with our financial figures, financial highlights. Our balance sheet figures and P&L figures, as usual. On this slide, you might see our balance sheet trends. Our assets had an increase around 24% in 6 months' time, and it reached to TRY 21 billion at the end of the half. Our assets under management had a similar increase. We are nowadays managing TRY 11.3 billion with an increase to 21%.

On the liability side, our technical results had a similar increase like our assets, 24% again, and they reached to TRY 13.3 billion this time. Our technical reserves consist of our outstanding claim reserves and unearned premium reserves mainly. But this time, unexpired risk reserves has some weight in our technical reserves due to MOD, especially because we had some reserves from MOD related with unexpired risk reserves. And on the right-hand side, the shareholders' equity, we had a strong growth in first half of the year with 25%, and our shareholders' equity reached to TRY 4 billion.

On the next slide, our P&L figures can be shown. These are second quarter results compared to previous year's second quarter's P&L figures. Again, on the left side, unconsolidated P&L figures are placed. And on the right-hand side, consolidated figures are placed.

Technical income, we had done 57% technical income increase. This was below the written premium due to unearned premium reserves. You may recall, our earned premiums, our EBIT -- gross EBIT grows a bit slower than our gross written premium. So we may say our technical income growth is going to continue on the second and fourth quarters.

Technical expenses had 78% increase, and they were TRY 2.9 billion in the second quarter. Of course, the claims -- higher claim reserves and paid claims has important effect on our technical expenses, and our financial -- net financial income increase was around 120%. And we were able to gain TRY 900 million technical income in the second quarter.

The consolidated side is a bit different because Anadolu Life dividend effects are reconsolidated site. So it was TRY 935 million financial income. At the bottom of the table, our net profit is placed. We had then net profit around TRY 180 million in the second quarter, which was 23% higher than previous years. Result and on consolidated form, our net profit was TRY 216 million, which was 27% higher than previous year again.

On the next slide, our technical income -- I'm sorry, our half year total income breakdown can be seen. It was TRY 376 million, as you might recall. So on the right-hand side, you see the breakdown of our net profit. Technical earnings was loss-making, but it was a bit higher than previous years, TRY 102 billion.

Net investment income totally was TRY 1.7 billion. Anadolu Hayat, dividend income was TRY 88 million. Amortization was the TRY 70 million, minus, of course. Our bad debt provisions was around TRY 118 million. And after the tax deduction, we had the net income of TRY 376 million.

And this chart shows mainly our return on average -- return on equity, average return on equity, both consolidated and unconsolidated form. As you might see on the right-hand side, these are yearly trailing 12-month results. Our return on equity for consolidated was 24%, and our unconsolidated ROAE was 17%. We were able to catch up our year-end results. That's a good point, although the claims keep on rising, actually.

On the next slide, our investment portfolio distribution can be seen. We had mentioned we are managing something like TRY [ 11.3 ] billion, which is divided into bonds, mainly 66%, both Eurobonds and Turkish [ lira ] bonds. Funds 2%, our stock portfolio has increase EBIT. Of course, each rate has an important rate in our stock portfolio. We had 18% deposits and [ repos ] was 5%.

And on the right-hand side, you might see our portfolio return, it was around 21% with -- and the total income we were able to get from our investment was TRY 1.4 billion, which Anadolu Hayat dividend income is not included.

So this was all of the presentation. As usual, we are going to continue with the Q&A session. [Operator Instructions] Thank you for listening to us.

[Baris Safak, executive]

The question from [ Hyder Bey ].

[Unknown Analyst]

Can you give us a breakdown of your bond portfolio? How much is in Eurobonds? How much is in Turkish lira bonds? And what's the breakdown in terms of private sector company bonds and state bonds?

Secondly, when you say investment yield is 30.5%, that's the return you get for the first half?

[Baris Safak, executive]

Let me begin from your question. That's not return for the 6 months' time. That's the annualized yield, actually. And back to your first question, I may say that our bonds, Eurobond portfolio is around 40%, and our TL bonds is around 17%.

[Unknown Analyst]

17%. What's the reason why you have significantly lower than inflation investment yields, do you think? And how can you improve it?

[Baris Safak, executive]

That's a very tough question. And you're also fund manager, Hyder Bey. Actually -- I don't see, actually, any company that is -- that has highest yield than inflation. So we are going to try to do our best to catch with the inflation, of course, but there's not such an instrument that you can return -- you can have return close to the inflation.

What's the reason, you mentioned? And did you have any other question, I couldn't get?

[Unknown Analyst]

Well, the reason I mentioned is basically why do we have such a low investment in the stock market or funds? I mean return on fixed income is quite low. And for an insurance company look like yourself, in the future, in order to have better returns, you should have more investments in the funds or stock market.

[Baris Safak, executive]

Definitely. We don't actually -- we don't have, in my opinion, of course, or compared to the other companies in insurance companies. Of course, our stocks and fund portfolio is not lower compared to the market as well. But on the other hand, we have another problem in the sector. You might also know that liquid -- I'm sorry, capital [ adequacy ] is the problem.

According to our capital adequacy calculation, stocks and funds have higher weight on the capital adequacy calculation. So unfortunately, we cannot invest in stocks and funds as much as we can invest in deposits and bonds. And also, we have an internal limits which are given to us by our Board, of course. But the -- on the other hand, regulatory rates and calculations makes us invest less in stock market.

[Unknown Analyst]

Does that include share buybacks, if you buy back your own shares? And would you consider buying back your own shares because the company's valuation is very cheap? And as you know, one of your competitors, Türkiye Sigorta announced a massive share buyback program.

[Baris Safak, executive]

Actually, it does also include our stock buyback, but that's another point other than our portfolio management, of course. It's another decision. Maybe Erdem Bey might have something to say about it. But we are not going to be giving any color about stock buyback, unfortunately.

[Unknown Analyst]

Okay. Last question. When do you think combined ratio would recover?

[Baris Safak, executive]

Yes.

[Ibrahim Esenkaya, executive]

You can go.

[Baris Safak, executive]

Okay. combined issuer recovery, of course, it's related with the inflation rates and FX, the TL depreciation, I might say. We are increasing our prices, as you might have seen in our slides in our presentation. But insurance is such a business that you don't know what you are going to pay at the beginning of the contract. You are going to -- you see the profit or loss at the end of the contract.

And last year was very tough for insurance companies because like every other investor or every other person in Turkey, we were also shocked with the inflation surging in the third and fourth quarter. We were not expecting such an increase. That's why our prices was stayed very low compared to the claims we had paid during the year.

We were able to recover our premiums during the renewable policy. We were not able to increase -- we are not able to increase our prices during the policy period. So nowadays, as you might see, we had [ 224% ] increase in the second quarter in MOD price, even though we don't grow a lot in the number of policies. So it's going to have an important effect throughout the year.

Hopefully, in the 2023, we are going to have a better combined ratio. I'm not sure -- still, I'm not sure if you are going to have 100 combined ratio. But for sure, it's going to be better if we don't see another hike in inflation or another TL depreciation like we had experienced in the fourth quarter of last year.

[Ibrahim Esenkaya, executive]

I can say one more addition, Mr. Safak. Buyback is, why not, I can say, but this is a very strategic decision for our company. But in this term, we don't need to buy back now. But in the future, why not, I can say. Maybe in the future, we can use this too, for to get by.

Anyway, I would like to say one more thing, but I forgot. I look at my notes, just a moment, please. One more answer could be, why is the stock level of our portfolio is low? They agree. Of course, there is some regulation about it and the capital adequacy is very important, but it's more important than that is the [ trust for us ] is very important issues, companies and for us.

I mean, it is important to come back to cash quickly and minimum loss or any loss at stock exchange and stock, especially stock portfolio could [ become ] big risk for us. So we have got [ 5 ] here. Anyway, we are a little bit conservative in the stock portfolio.

[Baris Safak, executive]

We have some written questions from Sadrettin Bey. I'm going to read the questions. So first question is -- [ we consult ] the presentation. How much effect do you see 5% increase in IBNR discount rate increase? You mean...

[Ibrahim Esenkaya, executive]

About this country, I think so is this question.

[Baris Safak, executive]

What was the effect of 5% discount rate, as far as I understand, Erdem Bey.

[Ibrahim Esenkaya, executive]

For our financial statements, nearly TRY 300 million.

[Baris Safak, executive]

Another question again from Sadrettin Bey. Do you expect further increases in IBNR discount rate going forward?

[Ibrahim Esenkaya, executive]

It depends on the especially inflation, but at the same time, it depends on the minimum wage increase, is very affectable for this decision. I mean, in this term, end of the June, minimum wage increased 30 -- sorry, 30 percentage increasing, as you know. And it was necessary to -- it's partially due -- something changed about [ arranged ] the financial statement because it affects all financial statements too much, especially the MTPL and liability branches.

IBNR and some client reserves for that. If there is any changing about the minimum wage increasing, it could be necessary to change the discount rate again.

[Baris Safak, executive]

Another question. Is there any plan of regulator to issue insurance sector specific inflation indexed instruments, in parenthesis, bond life deposits?

[Ibrahim Esenkaya, executive]

Sector is talking about it, but this is very difficult to say something about it because we will like -- we need it. Anadolu Sigorta need it -- sector need it, but we are talking about it again. But is there any specific increasing now? We are waiting.

[Baris Safak, executive]

Hope there's going to be, but we are not sure about it. The next question, based on your '21 year-end financials, solvency ratio is 108 based on -- in parenthesis again, based on my own calculation.

Yes, you're right, 108.

What's the required level? And if it is lower than required, what are your plans to catch-up? Erdem Bey, shall I repeat?

[Ibrahim Esenkaya, executive]

Yes.

[Baris Safak, executive]

Sadrettin Bey says, your year-end solvency ratio of 108, what's the required level?

Actually, 100 is the required level for solvency ratio, Sadrettin Bey. But our regulatory body used to imply a buffer, they asked for 115. If you go below 115, if you are between 100 and 115, you have to make a plan to make it back to 115 and send it to our regulatory body. So 115, we might call is the required level.

We have some plans, and we had sent them to our regulators in terms of both our asset side and liability side. We are trying to [ apply ] them throughout the year and at the end of the year, we do aim to reach the required the level.

Where do you see second half '22 ROAE and combined ratio? Year-end ROAE and combined ratio, Erdem Bey. Your microphone is off. Where do you year-end ROAE and combined ratio?

[Ibrahim Esenkaya, executive]

Yes. This is very difficult to say something, but ROAE, we are thinking that 20% -- 18%, 20%, something like that, we'll likely get it. But combined ratio, we are trying to decrease. It could be [ 120 ], is something like that.

[Baris Safak, executive]

And last question from Sadrettin Bey. Is there any possibility that we might see loss in the bottom line in net profit due to provision expense for higher minimum wage?

I mean, I understand if there is another minimum wage increase throughout the year, Sadrettin ey? We don't expect another minimum wage increase until the end of the year. But regularly, there is another minimum -- there's going to be another minimum wage increase at the end of the year.

So if there is not going to be another minimum wage increase, we don't expect any recalculation of our provisions. So we do not expect any loss in the bottom line, actually.

So -- and we have another question, from this time Sahil Kumar. What's your current capital adequacy ratio?

[Ibrahim Esenkaya, executive]

I can say, 1 -- there is [ a salt ] here. 100 and 115, while the regulatory says it. And now we are the limited here, the 115 [ degree ], something like that, nearly. So there is no problem for us.

[Baris Safak, executive]

There is no junior announcement. I got your question, Sadrettin Bey. We -- it was a one-off increase. We had implied all of the minimum effect to our P&L. So our results actually, which was made in June, so we are not going to be seeing any other negative one-off effects in our provisions due to minimum wage increase that was [ applied ] in June. So we don't expect any loss-making arrangements.

These are all the written questions I read or I've gone through. Do we have any other question?

[Unknown Analyst]

Hello. Can you hear me.

[Baris Safak, executive]

Yes, we can hear you, [ Sahil ]. Is that you?

[Unknown Analyst]

This is [ Sahil ]. One question from my side is on the discount rate, 5% discount rate increase. Have you booked all the impact in the second quarter? Or is there anything left to be booked in the coming quarters?

[Baris Safak, executive]

No, it was all booked, both minimum wage effect and discount rate effect was all booked in the second quarter.

[Unknown Analyst]

Okay. And the second question is that I think you already mentioned that the 5% impact was -- I mean, the positive impact of the 5% increase was TRY 300 million, right, in the quarter?

[Baris Safak, executive]

TRY 300 million Yes.

[Unknown Analyst]

3-0-0-, right, TRY 300 million?

[Baris Safak, executive]

Yes.

[Unknown Analyst]

Yes. Okay. So what is the negative impact? What was the negative impact of the minimum wage increase during the quarter?

[Ibrahim Esenkaya, executive]

I couldn't understand that.

[Unknown Analyst]

I'm saying like you got the positive benefit of this 5% discount, right? But do you have the minimum wage increase as well during the quarter? So what was a negative impact of minimum wage increase in the second quarter?

[Ibrahim Esenkaya, executive]

If there is no changing in discount rate, our financial statement will be the breakeven point. I would say, not profit, not loss. Something like that, it was.

[Unknown Analyst]

Okay. But you're saying that you made TRY 300 million and your net profit in second quarter was TRY 170 million. So obviously, without the 5% increase, there will be losses, right?

[Ibrahim Esenkaya, executive]

Yes.

[Unknown Analyst]

Okay. But -- okay. Okay. And on the minimum wage, if you -- I mean, I'm just trying to understand if both these adjustment wasn't there in the financial, what was your core net profit or loss in the second quarter, if you exclude both the minimum wage and the 5% discount rate impact?

[Ibrahim Esenkaya, executive]

If there was no changing, it could be nearly TRY 300 million, something like that, it would be. But after minimum wage changing, our financial statement profit went down, I can say. And after that, this country changing, it's a kind of compensated and we [ declarated ] these profits.

Actually, normally, if there is no change in minimum wage or in this [ count ] account, we will be in our budget target, I would say, in this term.

[Unknown Analyst]

Okay. So if you can remind me like what is -- what was your budget target.

[Ibrahim Esenkaya, executive]

In the first half, we were thinking that the TRY 300 million something like that, we were thinking that. And if there was no changing, I would do it.

Maybe the profit is better than it, but again, I would say there's something changed very quickly.

[Baris Safak, executive]

[ Sahil ], thank you for your question. You have another?

[Unknown Analyst]

No, I'm good.

[Baris Safak, executive]

We have additional questions from Sadrettin Bey. Regarding 2023, if inflation comes down, is there a possibility that discount rate to come down? If it is reduced, will you allocate provision for that?

That's a good point actually, Sadrettin Bey, because we are going to be applying of IFRS 17 in our financial tables in 2023, IFRS 17 lets the companies decide deal on discount rates, which is an important point. So if another regulation -- if regulation doesn't change, we will be applying our own calculated discount rates, which is going to be close to markets, I may say. Of course, we are going to see what's going to happen throughout the year.

But otherwise, if inflation comes in single digits, of course, the discount rates would be lower, they would bring it down, I guess. But as I've said, we will be -- the regulation is going to be changed in 2023.

[Ibrahim Esenkaya, executive]

I -- this is a really good question, but it's a difficult question because we don't know the answer the question, I'll say. Because end of the year, it is very difficult to see end of the year and what will happen, what will change both these hikes. So good question, but it is very difficult to answer it. But we are trying the best result.

[Baris Safak, executive]

We have another question, but Sadrettin Bey says, I promise this is the last question. Would you please provide some details on tax income in second quarter '22? How should we expect for the rest of the year for tax expense?

[Ibrahim Esenkaya, executive]

I am telling about it -- I talked about it. No, I talked about it. As I said before, I talked about it. Good question, but it is very difficult to see end of the year because the tax income, it's very difficult because it's changing. Now some FX provides -- FX provide accounts something like that. After this, what will happen? We aren't sure.

[Baris Safak, executive]

We don't have any further written questions as far as I see and no hands in the air also. I think we might end this session, Erdem Bey. Thank you for the closer.

[Ibrahim Esenkaya, executive]

Okay. Thank you very much for joining and asking questions. I can say we are the old and at the same time, the young company Anadolu Sigorta. The term return for economically and sectoral, but we are trying to get best results for us. We are getting to our expenses decreased, and we are trying to increase our income. We are getting to -- purchasing money on time. We are very carefully what is going on. We are really following improvements very closely and carefully. And we are getting some decisions and actions for them, I can say.

And I hope in the third quarter and end of the year, we'll announce good results for our investors. Thank you very much for joining and asking questions. I can see that.

[Baris Safak, executive]

Thank you. You may close.