Anadolu Anonim Turk Sigorta Sti

IST:ANSGR.E

Earnings Call Transcript 2020-Q4

[Fatih Gören, executive]

Baris. I'm going to start.

[Baris Safak, executive]

Yes, Mr. Gören. We can start I guess, everyone is here.

[Fatih Gören, executive]

Okay. Good afternoon, everybody. Welcome to Anadolu Sigorta Conference Call about Fourth Quarter of 2020. Today, we are going to make our presentation with Mr. Baris Safak, as usual, our IR manager. There are 3 main parts of our presentation. In the first part, I will talk about company and market overview, the highlights of sector and Anadolu Sigorta. And then we will look at the technical results of Anadolu Sigorta. And I will show you the some ratios and results, technical results, of Anadolu Sigorta, especially combined ratio and profitability figures.

And finally, we have a financial highlights part. In the third part of this presentation, I will hand over Mr. Baris Safak, and he will give you the information about our financials. He will talk about our income statements, balance sheet and other indicative trends and portfolio. And finally, as usual, we have a Q&A session, as you know.

Now let's start with the highlights of the sector in the next slide, you can see here. Well, when we look at the last quarter -- the fourth quarter of the sector, we see that the strong performance of the sector is continuing, and fourth quarter growth is 19% despite COVID-19. And premium production reached TRY 68 billion with a yearly increase of 18%.

I would like to underline motor branch, especially motor own damage and motor third-party liability branch. We are seeing decrease in claims frequency. On the other hand, we are experiencing higher claims expenses. Of course, weekend lockdowns and cost increase due to Turkish lira devaluation affecting our results. And on the other hand, minimum wage increase affected, especially motor third-party liability reserves.

Health branch is another important branch for the last quarter and also for the COVID period. As you know, we are experiencing a decreasing frequency. People are afraid of going to hospital, and they are delaying some of their claims and even sometimes give up their claims. And during that time, we are experiencing that there is an increase, especially in top of insurance policies. The number of policyholders are increasing by the time.

And during that time, as you know, we have seen a sharp policy rate hike to 17% by Central Bank. Treasury yields hit year peaks 15.5%. And Central Bank is likely to sustain tight monetary policy for a while. This is also story -- this will also affect this year's story also for 2021.

Now let's look at the next slide, and we will look at the effect of the main branches, especially for the sector increase. You see that the total increase is 18%. Health branch increase is 21% for the last quarter of last year. Motor branch, 11% and other branches increased 25% as you can see here.

And on the next slide, we will look at the top 10 companies, top 10 non-life companies of the sector. Could you press the next slide, please? Yes, here. As you remember, we used to talk about that we are estimating that there will be 3 insurance companies, which is producing more than TRY 8 billion. And our estimation, you can see here is realized and we are seeing at the top 3 companies with -- producing between 8% -- TRY 8 billion to TRY 9 billion range.

Anadolu Sigorta increase during that time is 21%, which is relatively higher than the sector. The sector increase is around 18%, as you can see here. The gap is still big between the -- those 3 big insurance companies and newcomers. As you see here that Aksigorta, Türkiye Sigorta, 13% market share; Allianz, 12%; Anadolu, 12%; and Aksigorta, 8%; Axa, 7% market share. There is a big gap still between Anadolu and Aksigorta nearly 4-point gap between the 4 insurance companies and Anadolu Sigorta. And when we look at the top 5 companies increase, it is 90 -- it is nearly 20% and top 10 companies increase is nearly 16%, as you can see here.

Now let's look at the next slide. And let's look at the highlights of the fourth quarter about Anadolu Sigorta. And you will see that we are keeping a balanced business profile for hardening market conditions. As we finished this year, we are ranked as the market leader in most of major non-life insurance branches. I will show you in the coming slides.

Our premium production reached TRY 8 billion with an increase of 21%, which is relatively stronger than the sector. Our fourth quarter increase is 19% despite COVID. And we have strong fire and health growth, especially in fourth quarter of last year. During that time, of course, our growth in asset under management is growing. Our portfolio is growing. We are proactively managing our cash flows. Our assets under-managed reached to TRY 7.3 billion, which means an additional TRY 440 million nearly for the fourth quarter as of the end of this year. We have a robust balance sheet with a solvency ratio, which is around 130%. Our 12 months equity growth is nearly 30%.

On the investment yield side, our investment yields are rising. And we have a flexible multi-asset portfolio structure.

Let's look at the next slide and the figures of Anadolu, especially in hot motor and other branches. As you see that, for the last quarter of this year 15% increase in health, 22% increase in motor and 22% increase for other branches. And our total premium increase is 21%, at the total.

Let's look at the business lines, and you will see that slide, the branches and results of Anadolu, and you can compare it with the non-life sector growing rates. As you see that here, motor truck part liability premium production of Anadolu has reached nearly TRY 2.3 billion with a growth of nearly 28%, as you can see here, while non-life sector increase is nearly 10%. Motor own damage branch, our premium production reached TRY 1.5 billion, with an increase of 15%, which is sector increase is nearly 14%, and it is also higher than sector. On fire and natural disasters branch, we have reached TRY 1.4 billion, as you can see here, as the biggest third branch, while sector increase is 25%.

Again, 15% increase and the figure of TRY 950 million nearly in health branch and other branch, we have reached TRY 1.8 billion, with an increase of 22%. As you can see here, at the total numbers shows a 21% increase, which is nearly 4% higher than the sector average.

Let's look at the next slide, please. And you'll see the ranks of Anadolu Sigorta. As I mentioned to you in the earlier slides, we are keeping our market leadership for most of the business lines.

We have a very well-diversified portfolio. You can see here for motor third party liability, motor own damage, general liability, watercraft, aircraft, bond insurance branches. We are a sector leader for 5 branches, marine transportation and aircraft liability. We have the second rank. In health branch and general losses branch, we have third rank. In total, as you can see here, our rank is third, as you can see here, with a market share of 9.7% around, you can see here.

Now let's look at the next slide, please. And in that slide, I would like to show you the net profit trend of Anadolu Sigorta. As you know, the previous year, we started with the TRY 403 million net profit. When we look at during that time, our underwriting side, nearly TRY 134 million additional -- create an additional income on the writing side. On investment side, when we compare to previous years, it is because of decreasing interest rates, TRY 73 million lower results and other lines is TRY 4 million minus.

So our net profit has reached TRY 461 million at the end of year, which means 14% increase in net profit. And when we look at our consolidated results, we are consolidating with Anadolu Life, as you know, our net profit has reached TRY 510 million, which means we get higher results, and we are -- we have more than TRY 0.5 billion net profit when we look at consolidated side.

Let's look at the next slide, and you'll see the distribution channels, and you can compare it the sector's percentage. You see that when we look at the distribution channels, agencies are still producing the biggest part of our premium income. It is 63% for Anadolu, 58% for the sector. And banking channel constitutes -- also, we have more than TRY 1 billion premium income. It is 13% of Anadolu Sigorta portfolio, it constitutes while on the sector, it is -- 14% of the premium comes from banking channel. And the broker side, we have 11% share -- market share, while in the sector, 14% comes from broker channels and other channel produced 13% in Anadolu Sigorta while 14% for the sector.

Let's see next slide, and let's look at the technical results of our branches. I will give you some information about our gross premium written, our net claims and combined ratio, you can see here the figures.

For accident price, as you can see here, our combined ratio dropped down to 53.3% during that time, while our -- for the last quarter, our gross premium written is -- reached TRY 48 million. And the next slide, you will see -- can we press the next slide, please? Yes, you will see the health branch. With the help of COVID period, as you see here, the combined ratio is decreasing in health branch. It dropped to 91%. While total premium has increased 20%, and it has reached TRY 254 million.

Next slide, please. For the land vehicles, as you can see here, for the last quarter, our premium has reached TRY 486 million with an increase of 11%. Our combined ratio has reached 103%, as you can see here.

And the next slide, we will look at general losses. The increase is 11% for the premium, and it has reached 152%, while combined ratio has dropped to 117%, as you can see here.

Next slide, please. For the fire branch, our premium has increased 27%, and the figure -- the total premium income for the last quarter of 2020, it has reached TRY 432 million, while combined ratio dropped to 81.6%, as you can see here.

Next slide, please, motor third party liability. It is -- when we look at the last quarter, it has increased 17%, while it is relatively still better results on combined ratio and combined ratio is 123% for the last quarter.

Let's look at the next slide. And the general -- in the slide, you can see the combined ratio in overall figures and the trend of -- by coming years, for the last 4 years, you can see the general trend of our combined ratio.

In the total, we have reached 106% combined ratio, which means nearly 5 points low than the previous year's results. For the coming year, for this year, we are expecting that it will be a couple of points below than that percentage. And it will be around 105, our expectation as total.

Now let's look at the next slide. And we came to financial highlights part. Now I will hand over to Mr. Baris Safak giving you the information about our financials. Baris, the floor is yours.

[Baris Safak, executive]

Thank you, Mr. Gören. As Mr. Gören mentioned, I'm going to continue with our balance sheet and P&L figures to start with on Page 21. You might see our figures from our balance sheet on the left-hand side of our page, you might see the trend in our assets. We have reached TRY 12 billion with an increase around 25 -- 24%. Our total assets had and important significant growth.

Compound average growth since the beginning -- since the end of 2016, when we calculate the compound average growth. We might see -- it's around 20%. Our assets under management has a growth rate similarly. Last year's growth was 24%. We were able to reach our assets under management to TRY 7.3 billion. Again, when we calculate our compound annual growth for that figure, it's going to be 21%. Similarly, on the liability side, our technical reserves had an increase around 25% and our shareholders' equity -- equities growth was around 40% -- 30% with the help of our net profit and also Anadolu Life market value growth. It was around -- the difference between 2019 and 2020 was around TRY 655 million.

On the next page, I'm going to give you some color about our income statement. Mr. Gören also mentioned about the figures, income statement. When we look at the detail of those figures, you might see we were able to generate technical income around more than TRY 5 billion, which is 20% higher than previous year. In this figure, I should mention that financial income, which is transferred to the technical side, is excluded from that TRY 5 billion.

On the technical expenses side, the growth rate was 5% below technical income figure, and it reached up to TRY 5.4 billion. And our net financial income was around TRY 1900 million. So after deduction of tax and deferred tax combined, we were able to generate TRY 461 million net profit for unconsolidated part.

And consolidated, when we look at our consolidated figures, the only difference you might also see is on the net financial income part, it reached TRY 943 million this year's net financial income. And at the end of the day, our net profit for the consolidated balance sheet -- consolidated P&L reached TRY 510 million with this similar increase rate, which is 14%.

On the next page, the breakdown of our income statement, again, you might see. We mentioned we were able to increase our income with 14% to TRY 461 million. When we look at the breakdown of our P&L, our technical earnings was minus TRY 319 million. So after that, our investment income is included when we sum up with our investment income, it is almost TRY 1 billion.

FX gains is included in that figure. We had dividend income from Anadolu Hayat, which is TRY 56 million. And the following figures are amortization and depreciation, TRY 81 million, provisions for doubtful accounts, it's around TRY 90 million, and the smaller one is rediscounts. And when we deduct, again, tax, which is around TRY 115 million, we reached our net income, which is TRY 461 million. This is the detail of our income statement.

On the next page, we have prepared a chart, which shows our the return on equity -- return on average equity, both in solo -- both on consolidated and unconsolidated basis. As you see at the end of '22 (sic) ['20] we generated 24% consolidated ROE, return on average equity and our unconsolidated ROE stood at almost 19%. So we were able to generate both high teens and about 20% ROEs in solo and consolidated basis. And you may see the trend of our net profit also on that chart. And if we continue with our latest -- last page, again, similarly usually, as usual, we display our investment portfolio breakdown.

Our investment portfolio at the end of the year stood at TRY 7.3 billion, and when we look at the -- the increase was actually significant of our assets under management. At the beginning of the year, our AUM was TRY 5.9 billion. So it increased around 24% in the end of 2020. In the last quarter, the increase was processing fee, it was around 6.4%. Now the breakdown of TRY 7.3 billion is shown on the left side of the page. It's invested in bonds.

Almost half of our portfolio is invested in bonds. Both Eurobonds and the Turkish government bonds. We have funds, 9%. Our stock portfolio grew a little bit compared to previous quarters. Deposits also has an important part in our portfolio, it's 34%. And a very small portion of repo as you see. And when we look at our yield, our return from our portfolio, we were able to generate TRY 913 million investment income, which makes the return around 15%. And also, I should mention, we had dividend from Anadolu Hayat with TRY 56 million. So this is our last page of our presentation 2020.

Thank you for attending our meeting. Thank you for attending our presentation. I think we are going to continue with Q&A session. [Operator Instructions]

[Karim Sawabini, analyst]

This is Karim from Moon Capital. Congratulations on the results. I hope you're all well. My quick question was, I noticed you took additional provisions in the fourth quarter. As we think about 2021, do you come into the year with a proper level of provisioning and set aside claims? Or do you feel that you will need additional amounts in 2021 beyond what's normal?

[Fatih Gören, executive]

Karim, thank you very much for the question. Actually, we are -- finished this year with a proper, as you can guess, properly. And as I mentioned to you before, 2 factors was very important for the last year. The first one was about minimum wage increase. It was a little bit higher than our expectation, 21.5%, it was higher than the inflation rate, as you know, and it affects our reserves.

And the second thing was about the constitutional court decision about traffic role, which is affecting motor TPL claims and for both of those things, we carefully put our resources properly. So we are not expecting any surprise for this year. But of course, if they bring new regulations. And if they can make some regulations with law, it will help us to manage the profitability of that business line, especially motor third-party liability because the calculations of motor TPL is regulated in general conditions of the policies.

So the constitutional court says that you cannot regulate it with your general conditions. You have to put it in the law on traffic law detail -- in detail. And we are expecting a new regulation at the low level, which is regulating all those calculations. So it will help us for this year, if they come to power, these regulations, for 2021.

Any questions?

[Baris Safak, executive]

Any further questions [Operator Instructions].

[Karim Sawabini, analyst]

I'll ask another question. I'm sorry, I jumped into the call a little bit late, so I apologize if you already addressed this. But obviously, it sounds like we have orthodox central bank at this time. And so rates should remain higher for at least the first half and potentially some parts of the second half. What is the yield that you are assuming that you'll be able to earn on your investable assets for 2021?

[Fatih Gören, executive]

Baris?

[Baris Safak, executive]

Karim, yes, we expect the rates to stay a little bit at these levels for a while, at least till the end of second quarter. We make our projections around mid-teens, I may say. We expect a return around mid-teens for our portfolio at the end of 2021.

[Karim Sawabini, analyst]

Okay. So in 2020, your average yield was roughly 15%. Is that correct?

[Baris Safak, executive]

Correct. Yes.

[Karim Sawabini, analyst]

All right. Yes. And so you're assuming -- I'm assuming something slightly higher in 2021?

[Baris Safak, executive]

Yes. And slightly higher, I may say, we expect slightly higher return for 2021.

[Karim Sawabini, analyst]

Okay. And then if we think about the combined ratio, obviously, in a higher rate environment, more -- you could see more competition on pricing. How do you see the combined ratio being affected in 2021?

[Fatih Gören, executive]

Actually, the companies are -- we're going to try to balance the investment income and technical profitability from my point of view, Karim. And there -- the answer of your question also is closely related with the lockdown period and the claims frequency. As I mentioned, in our earlier slides, the claims frequency is relatively lower, it's still lower with the help of these lockdowns.

But the cost is increased. So the companies are trying to balance between the frequency and the cost of the claims. For the beginning of this year, they will balance it with the higher interest rates. For the second half of the year, the economic trends will determine also the technical profitability from my point of view. Because if the interest rates goes below then they have to sell much more lower combined ratios. Otherwise, they cannot reach their targets. So -- but if the second half of the year, the interest rates, it stays still higher level, then that means they will be relatively much more aggressive on pricing side from my point of view actually.

[Karim Sawabini, analyst]

Understood. That makes sense. And then finally, last question is, the Turkish lira has been strengthening since the more Orthodox policies. If we continue to see the currency staying relatively stable, what does that have in terms of implications for your business, given that a lot of your -- some of your costs are obviously related to auto parts. How would that affect your business? And is it overall a large positive? Or is it offset by the losses you may take on some of your investments that are dollarized or FX oriented?

[Fatih Gören, executive]

Well, it is -- it has different effects of that situation actually. First of all, if Turkish lira is getting much more valuable then that means people are -- people -- people's decisions about buying houses, buying cars or the economic activity of the society is very important from my point of view. Because if they are much more investing their money instead of buying or selling something. That means our business scale will be shrinked. So it is very important to see the -- economically the moving trends.

I mean, if the economy is much more opening than it's directly affecting our results positively. On the other hand, if the interest rates stay at higher level, that means we earn much more money from investment side, but our policy holder numbers will do not increase. That means -- so that means our balance sheet will be much more standing on investment incomes. Baris, I don't know whether you have different kind of views about this?

[Baris Safak, executive]

On the other hand, I think our expenses -- claim expenses are not going to increase as much as much as it did in 2020. We experienced FX trend -- upward trend affected negatively our claims expenses. So if the Turkish lira stays strong, it's going to be positive for Anadolu Sigorta in terms of claims ratio, I may say, actually.

[Fatih Gören, executive]

Especially minimum wage effect is very important. The inflation is directly affecting the minimum wage of the salaries, and it affects, again, directly to motor TPL claims, especially on the parts. On motor side, the spare parts costs are very important. If the FX rates are -- stay stable, that means we can manage our claims side -- claims costs.

[Baris Safak, executive]

We have further questions from our participants. [Operator Instructions] I think [Ozgur] has a question.

[Unknown Analyst]

Yes, this is [Ozgur]. Thank you for the presentation and congratulations for the results. Do you expect any changes in the pricing by the regulation? There was a cap in the previous year, and the cap was increased this year, I think. Is there any change that you expect this year?

[Fatih Gören, executive]

Well, actually, I'm not expecting [Ozgur], for this year because there is still huge competition on motor TPL side. You are mentioning motor TPL side for the highest discounting levels for seventh grade, 6 grade. Steel sector is selling nearly 30%, 40% under the cap. So I think when we -- looking at the trends also, I'm not expecting an increase in the cap. If the cap is increasing 1%, as you know, per month. So I'm not expecting any change in that side.

[Baris Safak, executive]

So, you mean one-off increase, right?

[Unknown Analyst]

Yes.

[Baris Safak, executive]

It increases monthly as Mr. Gören talked. Just to remind, I just wanted to know.

[Unknown Analyst]

Yes, I understand. Another question is how did you start this year? Is there a change compared to the last year because there was a credit impulse in the economy last year. And now the number of cars selling is decreasing in the previous months. And also number of houses are also decreasing. Do you expect any similar credit impulse this year as well?

[Fatih Gören, executive]

Well, we started the year very strongly, but I'm expecting profitability side and on our business volume, I'm expecting between 15% to 20% increase for the sector in Anadolu for this year, and we are very parallel to sector. On the investment side, we are composing our portfolio very flexible, and it is very well designed to address every kind of change, especially in interest rates.

And on premium side, actually, we are willing to grow, especially in health branch, especially top-up insurance because the numbers are increasing. Last year, we add 15,000 new customers in, for example, top-up health insurance. This trend will be going on.

On motor side, it's relatively weak. The increases are weak. And people are actually waiting the Turkish lira trend. Actually, they are -- they want to wait and see what will happen on the economy. If they believe the Turkish economy is the new orthodox policies, I'm sure that they will spend their money, especially for the second half of the year, and it will increase our policy numbers.

[Karim Sawabini, analyst]

Sorry, this is Karim. Just one last thing from my end. I mean, it seems like the setup is very, very good for you for this year. When you think about the ability to grow profits meaningfully above 2020. Is there anything in particular beyond the macro shock that could spoil that?

[Fatih Gören, executive]

Baris?

[Baris Safak, executive]

We do not expect anything other than macro shock you have mentioned actually. The environment for insurance, the environment is very good for insurance, higher yields, high rates. On the other hand, we expect GDP growth around 4%. So with the basis effect also, of course. Both in the financial side and technical side growth in terms of premium -- written premium side, we expect high teens actually. So at the end of the day, as you have also mentioned, we are going to get a nice profit for 2021, we might say.

[Operator Instructions]

[Unknown Analyst]

Another question is about provisions that you mentioned. There was a constitutional change you told that. And you are expecting a change in the calculation of the provisions. What will be the size of the FX, positive or negatively? Can you make a guess?

[Fatih Gören, executive]

Actually, [Ozgur] as we have properly put our reserve for the last year. For this year, the new regulations are very important. Actually, we didn't change our calculation method because it was given by treasury department, and we need something to calculate, actually, as you know. So they have to put it in the right place, these regulations. It is the...

[Unknown Analyst]

Hello, can you hear me now? Okay, I am sorry, I think the pass code is fourth quarter earnings?

[Fatih Gören, executive]

Sorry, can you repeat it?

Okay, [Ozgur], I'm continuing. I am -- just couldn't hear. I will take this question. Well, actually, when we look at this side, I'm not expecting big differences from our provisions. If they put it in low level instead of general conditions, of course, it will help us to manage the rest of the year.

[Baris Safak, executive]

Okay. Thank you. Any questions? I haven't heard actually. I think we don't have any further questions, Mr. Goran, right? I don't see any questions in the chat box or I don't see anyone unmuting himself or herself?

[Unknown Analyst]

Okay. Hello, everyone. This is [Sahel]. Can you hear me?

[Baris Safak, executive]

Yes. Yes, I can hear you.

[Unknown Analyst]

Just a quick question from my side is, how much of your combined ratio improvement we saw in 2020 is because of the COVID-19 lockdown? And because we saw, in 2020, the -- there is an improvement in combined ratio versus 2019. How big is this -- came from COVID-19 versus normal business scenarios?

[Fatih Gören, executive]

Thank you, [Sahel]. Actually, in the total, we are expecting a couple of points below combined ratio when we compare it with previous years for this year. And we are expecting that the positive results in health branch will be continuing through the whole of the year.

On the other hand, if they control the interest rate with those orthodox policies for the second half of the year that our expectations, the inflation rate will be -- reach to peak for April, and then it will go down. And it will get under the control. That means the resource will be much more manageable, especially on motor TPL side. So we are actually optimistic about combined ratio, and it is relatively better. It will be relatively better when we compare it to the previous year. We are expecting around 105 or something like that for the combined ratio for this year, actually.

[Baris Safak, executive]

I think it's time -- we don't have any further questions.

[Fatih Gören, executive]

Okay. I would like to thank you for attending our conference call. Hope to meet you for the next presentation. And till that time, stay safe and healthy. Thank you very much. Baris?

[Baris Safak, executive]

Thank you, everyone, attending our presentation. Hope to see you in first quarter of 2021. Stay safe.

[Fatih Gören, executive]

Bye-bye. Thank you.