DFV Deutsche Familienversicherung AG

XETRA:DFV

Earnings Call Transcript 2021-Q1

[Stefan M. Knoll, Founder, CEO & Chairman of the Management Board]

Ladies and gentlemen, I would like to welcome you to the ninth presentation of the quarterly figures of Deutsche Familienversicherung since the IPO. After a few introductory words, my colleague on the Board of Management and Chief Financial Officer, Dr. Karsten Paetzmann, will present the quarterly figures in detail. And in the third agenda item, I will say something about the outlook of 2021. With the IPO on the 4th of December 2018, we promised that we would grow significantly more than we had done with the available funds up to that point. Since then, we have fulfilled every promise. This also applies to today's presentation of the Q1 results. If you put all the quarterly results since the IPO side by side, today's figure are an impressive presentation that we are continuing solidly and reliably on the path we embarked on the IPO. The exit from CareFlex was a flip, which was annoying, but only affected the core business of Deutsche Familienversicherung in respect of certain goals. We were forced to postpone such as entry into another European country. On this overview, you can see the reliability with which we fulfill the IPO promise since 2019. We did this in 2020 and now in the first quarter '21. If there are some few fluctuations in the number of units at the peak, for example, in 2020, then I qualify these deviations to the level of trivial, because in 2020, they are essentially due to the failure of travel insurance. If a country is in lockdown for a large part of the year or travel bans apply, then travel insurance is not the insurance product that is typically in demand. Conversely, we managed to maintain the so-called 12 MP. MP stands for monthly premium rule. According to this rule, we need 12 months of premium to acquire a new customer, or in other words, for every euro we spend, we get EUR 1 of new business. On the whole, however, our sales have proven to be resistant to pandemic. We have made a good start in '21, even though Germany was in a hard lockdown at the turn of the year. The quarterly results can be summarized as showing that we are above the pro rata time target and thus above expectations in all key indicators. As already said, our distribution, which is majority online based, is a crisis-resistant one. And we even believe that this form of insurance distribution will increase because people in Germany have positive experiences with online shopping every day. To give you an idea of where Deutsche Familienversicherung stands, I would like to tell you that we claim a new business and market share of over 2% for supplementary dental insurance and 9% for pet health insurance, which we only started in 2019. If you compare this with the fact that we are only in a certain year of business and only have 170 employees, then this is quite a respectable result given the existing competition and market situation. When Mr. Paetzmann also presents the balance of the quarterly results right away, this is not meant to be an indication that we will already become profitable in '21, but rather that, we have no doubt that we will fulfill the forecast and promised annual results in '21. I hand now over to Mr. Paetzmann. The floor is yours.

[Karsten Paetzmann, CFO & Member of Management Board]

Yes, thank you. Ladies and gentlemen, it's a pleasure for me to present to you the Q1 2021 quarterly financial results. This is, in fact, the first quarterly conference call since my appointment to CFO of Deutsche Familienversicherung on February 1. I'm more than pleased that the first quarter represents a good start into the 2021 financial year. Premium income increased by 25% in the first quarter compared to the first quarter of 2020. After we explained to you a few weeks ago the premium growth for the full year 2020 of 26%, this is a confident continuation. Please note that the comparative quarter, i.e., Q1 2020, was effectively still without corona influence. The loss ratio amounted to 63.2% in the first quarter of 2021 and thus remained stable, slightly below the loss ratio in the 2020 financial year. For the first time, we explicitly show here the development of OpEx, i.e., operating expenses. OpEx decreased by 4% in the first quarter of 2021 compared to the first quarter of 2020. We consider this to be a positive development, which should also be viewed in light of the strong premium growth in the first quarter. In general, we are placing greater emphasis on cost management and the finance function of Deutsche Familienversicherung has defined and already partially implemented a bundle of initiatives to increase cost efficiency. Consolidated profit before tax for the first quarter 2021 is very close to breaking even at minus EUR 0.1 million. In the first quarter of 2020, Deutsche Familienversicherung generated a consolidated pretax result of minus EUR 5.6 million. On this page, we have compiled the IFRS consolidated statement of comprehensive income for you in detail. Total comprehensive income in Q1 2021 is positive at EUR 0.1 million, with unrealized gains from investments recognized in group equity. Let me comment on the key performance indicators presented below the statement of comprehensive income. Gross premium written per policy increased again in Q1 2021, and is now at an average of EUR 237 per policy. We see this development quite promising as it also reflects the group's efforts and ability to successfully shape relevant value drivers of profitability. On this page, we illustrate how key earnings components changed in the first quarter of 2021 compared to the same period of the previous year. In addition to the influences from the growth in premium volume, which naturally entails a certain increase in insurance benefits, it can be seen that the reduction of expense items had a positive influence on the development of the result. Even more striking, however, is the contribution of investment to the development of results. I will discuss this in more detail below. Deutsche Familienversicherung's underwriting provisions remained virtually unchanged in the first quarter of 2021. This applies to the gross underwriting provisions which at the end of 2020, continue to be recognized at EUR 91 million. It also applies to the share of reinsurance in underwriting provisions, which is under IFRS reported as an asset. The reason for the dampened or even temporarily suspended growth in underwriting provisions in the first quarter is a positive development in the actuarial provisions, which results from premium adjustments in some health tariffs implemented at the beginning of the first quarter. While investments continue to grow in the first quarter in light of the expanding business volume, we defined a comprehensive package of initiatives that reflects the high importance of asset management. We see actually considerable potential here and have already reached out to some rather low-hanging fruits. The bundle of initiatives is comprehensive and is now being implemented. I will be happy to provide you with detail at one of the upcoming conference calls. The group's equity remained stable at EUR 91 million in the first quarter of 2021. The regulatory solvency coverage ratio, SCR, fell slightly to 333% as at March 31, due to deliberate taking of capital market opportunities. In comparison, it had been 379% as at year-end 2020.In summary, I would like to emphasize that I consider the achieved premium growth of 25% in the first quarter of 2021 to be pleasing. Furthermore, I mentioned the continued increase in premiums for policy as well as the stable loss ratio in the first quarter. This applies to both supplementary health and property products. The implementation of the defined bundle of initiatives in the investments is progressing. We also expect contributions to results from the cost management initiative that has been launched. I will be happy to report on this in one of the following telephone conferences. Despite all the challenges of day-to-day business in a company that is still young and growing at 25% per annum looking forward, is done based on the knowledge that Deutsche Familienversicherung has once again shown in the first quarter of 2021 that COVID-19, a true event of the century, is only having a very limited effect. The group's stable market position, its digital business model and the robust financial position are paying off. Overall, we do not see that we will be able to remain very close to breaking even in the remaining 3 quarters of 2021. However, given the current strategic rationale, we hereby confirm our forecast for 2021. We see ourselves on the right path with our continued strong investment-driven growth, and the efficiency-enhancing measures which I have explained in order to create sustainable value for shareholders. Our key earnings drivers are set to create value. Now thank you for your attention, and I hand back to our CEO.

[Stefan M. Knoll, Founder, CEO & Chairman of the Management Board]

Mr. Paetzmann, thank you very much for your presentation. I do not want to repeat or comment on anything, so I will limit myself to asking you to look at the overall result. This consists of an unchecked continuation of our high sales level, the expansion of our position in the market and the simultaneous significant reduction of expected losses. There is, of course, much more behind the figures presented by Mr. Paetzmann than what can be expressed in a P&L. Part of this work is the perception of Deutsche Familienversicherung by such institutions, which have made in their goal to rate insurance companies and/or insurance products. The positive ratings are now so numerous that we have stopped buying all the seals. We only buy and use seals that bring us visible added value in the acquisition of new customers. Nevertheless, I do not want to [ resold ] them from you because all seals are also an expression of our performance. However, it is remarkable that Deutsche Familienversicherung received 14 seals just in '21. The positive reception is still going on, and by the way, I'm happy to highlight the fact that we became test winner now for the sixth time in a row in dental. I would like to remind you once again that we have the best closing process and service line in the German insurance market. To all those who dismiss this as a promotional element of the CEO, I ask you to go to our website, enter your age and to see individually at a glance all the prices of the insurance we offer. If you dismiss this as a matter of course, then I recommend that you do something comparable with our competitors. No other insurance company knows this form of transparency and thus consumer friendliness. And that is precisely where the qualification as an insurtech begins. Our app is rated with 4.9 stars and is ahead of TikTok, ahead of Allianz and ahead of Lemonade in its rating. This is no trivia either, but the basis for ensuring that the customer can continue to communicate with us in a simple, fast and consumer-friendly manner after concluding an insurance contract, 71,000 downloads since we launched the app and over 130,000 invoices submitted via it speaks an impressive language. The fact that we have also closed almost 3,000 deals via this app is worth mentioning because this is not offset by any sales expenses, of which almost 800 will be in 2021. In order to intensify this customer service once again, we have decided to set up a new sales call center that only deals with cross-selling and upselling. There too we'll be below the above-mentioned 12 MP rule. Due to this fact, we will be able to refinance these expenses 100% by new business. Pet health insurance is proving to be a successful product. We already claimed almost 10% market share in this area in new business. We have now underlined our exceptional position through an exclusive cooperation with a market-leading online service for diagnosing animal diseases. With FirstVet, our customers have been able to have a free digital video consulting -- consultation since 1st of April '21. We expect this additional service, which fits in with our overall story as an insurtech, to provide additional sales and advertising impetus. I have always said that digitalization is primarily a product issue. I'm sticking to that because customers don't care why an insurance company settles a claim or a benefit case in their interest and why it happens quickly. In this respect, digitalization has a limited external effect. Digitalization on internal processes is important, however, because it can have an influence on costs and if it is associated with an increase in the speed of claim settlement, also on the customers' satisfaction rate. When we founded the company in 2007, there was little talk of digitalization. At most, there was a slate of app at once. But otherwise, convenience through digitalization had not been covered in the insurance market nor in the market in general. Since 2015, we have constantly dedicated ourselves to the digitalization of the company. With the launch of the customer portal and the mobile version in the customer app, we are succeeding in reducing the volume of paper and analog communication elements as far as possible, at least in new business. That is why our personnel costs are growing very little, and then preferably because the requirements of an insurance company in other respects. Two days ago, a presentation of all so-called insurtechs in Germany was published. Contrary to our definition of what an insurtech is, we are unfortunately not quoted there because it is believed that we are just an insurance company. The latter is indeed true, we are an insurance company and have been extremely successful since 2007. But we are also a fully digitalized insurance company. And in the combination with an insurtech -- and in combination, we are an insurtech and can certainly be compared with the other insurtechs in the German market. The comparison shows that we occupy an exceptional position among the insurtechs in many respects. On the one hand, we are the largest company of this among the insurance companies mentioned here. On the other hand, we are fully digitalized, and the only one listed on the stock exchange. On this slide, you will see -- you can see the financial situation of the insurtechs as far as they are obliged to publish it. The promise associated with the IPO to almost double the sales expenses of 2018 had a massive impact on the profitability of the company, which by the way, was already given in 2012, 2013, 2015, '16 and '17. Without this above-average growth, we would already be profitable today. In this respect, we managed the balancing act between pushing through far above-average growth in a distributed market and a well-founded prospect that money can actually be earned for Deutsche Familienversicherung. We want to expand in Europe because we believe that our sales model also works in other European countries. We want to gain initial market experience in Austria because German is the official language in Austria. There is a close approximation to German insurance contract law, and we want to gain experience first before we venture into a European country. We will be able to realize our market entry punctually at the end of the second quarter of '21 and report at the Capital Markets Day on the 3rd of June '21, on our successful entry into the Austrian market, which distribution channel we use there, and above all, which products we offer. In addition, we have also promised a new combination of combined product at the end of the second quarter. We are on schedule with this as well. The underlying individual insurance policies have already been completely rebuilt. Now it is a matter of still fully combining them. Let yourself be surprised by what we will present on the 1st of July '21. On the basis of the LOI signed with Barmenia to conclude a reinsurance contract for part of the CareFlex volume attributable to Barmenia, contract negotiations have commenced. As mentioned in 2020 annual financial statements, BaFin has requested us to have our life insurance type insurance products examined by an independent expert. We commissioned this investigation without delay. In the meantime, we and BaFin have received an initial expert report. This relates to the largest part of the portfolio in terms of premium. The expert who was commissioned with the approval of BaFin confirms the approach with regard to the actual interest rate and the correctness of calculation. We are in a constant and constructive dialogue with BaFin, and assume that we will be able to successfully conclude this process at the end of quarter '21. For a year now, we have been dealing with the outsourcing of our IT infrastructure. The need of this has become even more topical due to the increase of cyber attacks. Today, I can tell you we have completed the outsourcing in-house with the exception of some straggling and dismantling work. With that, I summarize the above as follows: first, we have had a strong first quarter; second, sales are on target; third, all annual targets will be achieved. And in addition to these hard key figures, we have enough to offer to give Deutsche Familienversicherung the time to see that comes with being an insurtech in a distributed market. We are and we will remain the only functioning insurtech in the European market. Thank you very much for your attention.

[Operator]

[Operator Instructions] We have a first question. It's from Gerhard Orgonas.

[Gerhard Orgonas, Analyst]

It's Gerhard Orgonas from Berenberg. I just have a question. Can you confirm that you still expect around EUR 40 million of reinsurance volume from Barmenia for the CareFlex reinsurance business starting in July?

[Stefan M. Knoll, Founder, CEO & Chairman of the Management Board]

Yes.

[Operator]

[Operator Instructions] We received the next question. It's from René Locher, Stifel.

[René Locher, Director]

So I have a couple of questions. And yes, I guess it's more for Dr. Paetzmann, so let's start. When I saw the combined ratio this morning, so this 86.6%, and I saw the strong improvement in the income from investment, I was expecting a very strong operating income. And now your operating income is more or less flattish. And I'm just wondering, where do I make a mistake in my thinking? Because you see, again, coming from that, you have an underwriting margin of 13.3% on your EUR 17 million net earned premiums, plus you have EUR 0.5 million in investment income. And yes, I end up with an operating income of EUR 0.1 million negative. Where do I make mistake in my thinking?

[Karsten Paetzmann, CFO & Member of Management Board]

Yes, thank you for your question. This is Karsten Paetzmann speaking. I'm not sure whether I understand you correctly. You are correct to state that the income from investment has significantly improved, plus 1 point -- plus EUR 0.5 million in the first quarter. And that previously contributes to an operating income, which is almost breaking even. So that is different to the situation in the previous year.

[René Locher, Director]

Or let's put it that way, in your group key financials, you are reporting an underwriting result positive of EUR 1.6 million. And I guess, from my understanding, the underwriting result, that's what comes out of the insurance business.

[Karsten Paetzmann, CFO & Member of Management Board]

That's correct.

[René Locher, Director]

Right? So I have this EUR 1.6 million out of the insurance business, plus I have EUR 0.5 million from the investments. And then what I miss is, what is then the gap to the operating loss of EUR 0.1 million? I mean I don't want to go too much into details. I mean we can also take this offline. More than happy to do so because perhaps it is a little bit complicated. But again, from an insurance point of view, and it does not add up, in my understanding. But I must be wrong somehow. But perhaps I can discuss that with you offline, it's okay. So my second question is what is very interesting to see is that gross written premiums per policy increased to EUR 237. This is something I've discussed with so many times. I guess that's what you should achieve. Now have you been in a position to increase the premiums in your existing business? So like in the back book because when I'm just looking at the premium volume for the new business, it's down year-over-year. But nevertheless, the gross written premiums, the policy increased more than 10%. So I was wondering how have you managed this, to achieve this higher gross written premiums per policy?

[Karsten Paetzmann, CFO & Member of Management Board]

Okay. Let me try to provide an answer. I think it's twofold. Number one is, yes, we have been able to increase the prices for some of our products. And I think as you are aware, on some of our products we have from time to time, the opportunity or we're even legally obliged to adjust the prices, which we have done actually at the beginning of the first quarter. And then there's a certain adjustment to the product mix that also contributes to an increase of GWP per policy. So this is twofold, actually. But you are fully right to say that we have been able to increase the prices.

[René Locher, Director]

Okay. So it's a shift in product, plus you have been able during the renewal of the products to ask for higher prices.

[Karsten Paetzmann, CFO & Member of Management Board]

Correct.

[René Locher, Director]

Okay. Wonderful. Now this is really very good news. But then another number comes to question, sorry. But then the Solvency II ratio is down,and well, interestingly, shareholders' equity is more or less stable. It's good news. So I assume that the reason why Solvency II ratio is down, is that you have shifted your asset allocation, but I guess a little bit more into, how can I call it, higher risk asset classes, like, for example, equities. And yes, I was just wondering because I do know that in the guaranteed assets, you had like 20% exposure to equity. And I was wondering if you have also increased the equity exposure in the 3 assets.

[Karsten Paetzmann, CFO & Member of Management Board]

Yes, again, you are right to summarize. I mean the SCR ratio is made up -- is equivalent to dividing the existing capital by the solvency capital requirement. The capital -- the equity has not changed. So we effectively experienced an increase in the requirement, and that is the result of a slight shift in the asset allocation, fully correct, you mentioned this. And that relates to our willingness to exploit opportunities on the capital market. I should also explain that at year-end 2020, and that is the point of time when you compare it to. At that point of time, we had kind of a lot of liquidity not invested into anything that earns profit to Deutsche Familienversicherung, and we have definitely changed that. So it's a shift to assets that earn money, and it's also a slight adjustment to the asset allocation.

[René Locher, Director]

Which makes sense. This is very helpful, yes.

[Karsten Paetzmann, CFO & Member of Management Board]

Sorry, if I may add...

[René Locher, Director]

Yes. Go ahead.

[Karsten Paetzmann, CFO & Member of Management Board]

Still we have the perception, and no, it's more than a feeling that -- I mean we know that we have enough capital with the SCR ratio of 333% to adjust the asset allocation just a little bit. And we can effectively turn it back quickly because most of this is -- has been adjusted to the so-called free assets, not to the guaranteed or secured. So we can shift it back if needed. But right now, as you can see from our balance sheet, we have enough liquidity to finance further growth. So yes, that's the idea about it. Thank you.

[René Locher, Director]

That makes sense. Yes, that's fine. And perhaps just a remark, and I was in talks with a few clients this morning. And then the pushback I get is on the new business. So the premium volume is down by roughly 9% year-over-year. And yes, a lot of my clients told me as a fintech company or an insurtech like DFV, you should show a little bit more new business and not only gross written premium growth. And here again, a lot of discussion at all [indiscernible], but I do believe that this is really as a start or another start but as an insurtech company, you should be in a position really to go into the market and to gain as much new business as possible. I do know this can be at the expense of higher acquisition costs, but this is a little bit of pushbacks I get -- I got this morning. It's really the premium volume down in the new business. And I don't know, is there a simple reason? I do travel, it's definitely the health insurance, I guess, is also one reason why new business is down. Can you comment on, for example, it's down to?

[Stefan M. Knoll, Founder, CEO & Chairman of the Management Board]

In respect of pieces, one reason is that we have to compensate travel insurance, first of all, which is roughly 15,000 pieces a year. This is one reason. In -- this is one reason.

[Karsten Paetzmann, CFO & Member of Management Board]

Well, I mean, again, as I try to point out, 25% growth in premiums in the first quarter compared to the previous year, you are correct to say that new business volume has been a bit slower. But it's for our Chief Sales Officer, it's always a -- he needs to find a balance on where he can win new business at what cost. And we don't feel -- and the number -- that's not what the numbers suggest that we will problem at that end, not at all.

[René Locher, Director]

No, no, it's okay. Again, what I really like is these gross written premiums per contract, I like the gross written premiums. It's just the client feedback I got, because we would like to see a little bit more growth in the new business at DFV. But this is fine.

[Karsten Paetzmann, CFO & Member of Management Board]

Please, if I may add, don't forget that the quarter against which we compare this was prior to COVID-19, we had, I think, 10,000 pieces of travel insurance in the first quarter of 2020, which are now -- which have disappeared entirely. No one is traveling right now, so we think this is a success, actually.

[René Locher, Director]

Yes. It's a very fair point, I guess. And again, if perhaps Lutz could give me a call afterwards just to discuss again the numbers.

[Karsten Paetzmann, CFO & Member of Management Board]

Thank you.

[Operator]

[Operator Instructions] There are no further questions, so I hand back.

[Stefan M. Knoll, Founder, CEO & Chairman of the Management Board]

Well, thank you very much. I would like to say thank you to everybody who listened this short conference. And I would like to finalize with a different advice. First, please try our corporate page and compare this with other insurance companies. And second, please have a look at the share price. I think we are under our -- I think the share price is not in line with our possibilities for the near future. Thank you very much.