DFV Deutsche Familienversicherung AG

XETRA:DFV

Earnings Call Transcript 2020-Q3

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

Good afternoon, ladies and gentlemen. Thank you very much for your interest. Today, I will present the 9-month figures of Deutsche Familienversicherung. And for the beginning, I would like to start with 2 unusual slides and also unusual question. What do you think about a company with these figures? Please have a look on the growth rate, the development of the share price, the profitability and the difference between the number of employees and the revenue. On the next slide, you see the real figures behind this abstract first slide; it shows a growth rate of 100% since 2017. These are real figures from Deutsche Familienversicherung, shows a realistic outlook of profitability, a pretty good development of the share price and again, a spread in respect of the relation of turnover and number of employees. By the way, a really obvious indication of functioning digitalization. I started my presentation with these questions because insurance companies typically build a solid platform for further growth. The premium volume of 2018 was the basis for 2019 and EUR 100 million we realized in 2019 are the basis for our business in 2020 and so on. An insurance company is not only a service organization, it is a collection of money based on long-term contract relations of satisfied customers. Let me give you an overview of actual figures of the results of the first 9 months. The result of more than 67,000 new contracts means that there is nearly no corona impact. We increased the P&C business line by more than 200%, which we promised. However, it's remarkable. The gross written premium grew by more than 27% even in the corona crisis. The new premium volume is more than EUR 22 million. This brings us to a premium volume of more than EUR 120 million. The claims ratio, which is a little bit more than 60%, is stable and in comparison to the market, low. The financial investment aggregated to nearly EUR 140 million. Because of a capital increase, the solvency rate is more than 400%. All these figures are impressive, especially if you keep in mind that the economy faces a major crisis at the moment. But these figures -- these financial figures show not everything we did in the last 9 months. We are also on track in preparing CareFlex, the first nationwide branch solution in the chemical industry. I will tell you more about this later. We are on track with the project of outsourcing the IT infrastructure. It's one of the biggest projects in company history. The employee recruitment campaign called COD, I think you remember we explained this in the first -- after the first quarter, has brought 60 new employees. That means 60 times onboarding processes, 60 times educating, 60 times controlling and evaluating the work results and productivity. No problem under normal circumstances but a real challenge under corona terms. A new structure in financial department was installed, and a successful capital increase was placed. Now I would like to show you a few -- I'll give you information about our peer group. We are the leading insurtech company in Europe. Insurtech is a combination of an insurance company and digital service and process solutions. Insurance company means taking insurance risks with the permission of the national financial authorities, in Germany so-called BaFin. There are 2 other listed companies in the Western world, the meanwhile well-known insurance company Lemonade and Root, both U.S.-based enterprises. If you look on the figures of 2018 and '19, it is obvious that the listed companies are, in respect of size, more or less similar. But in Germany, you can put together all other insurtech companies, they will not have the size of Deutsche Familienversicherung. We are the leading insurtech in Germany, the leading insurtech in Europe. Yesterday, Lemonade presented the figures for the first 9 months of the year, so we can compare by using concrete figures. Lemonade is only 1.3x bigger than Deutsche Familienversicherung but with annual losses 16x bigger. In other words, it is obvious that either Lemonade is too expensive or Deutsche Familienversicherung too cheap. After this overview, I would like to present concrete figures of the first 9 months. In respect of the new business, there is almost no corona impact. EUR 22.3 million new business corresponds to what we have planned for the first 9 months. Gross premium volume increased by more than 27% and the premium volume by nearly 19%. All this is remarkable. This slide shows the growth rate in comparison to September 2019. That means an increase of nearly EUR 25 million or more than 20%. Please compare this with the performance of other insurance companies, even the non-insurtech enterprises. Interesting is that we are able to increase the new business contracts by nearly 15% if you subtract Henkel, a onetime effect in 2019. Due to the fact of the coronal crisis, there is a gap between 9-month plan and the results in respect of the number of contracts. As long as people are not allowed to travel, it is obvious that travel insurance is not the preferred insurance product. We missed there around about 7,500 contract, but this has no impact on the premium volume. There, we are on track. Good news is that pet insurance developed very well. Nearly 10,000 contracts is a pretty good result for a recently introduced insurance product. It could be that this is a positive result of the corona crisis. People, especially singles, become owner of pets and pets become family members and family members need similar medical treatment. This is the reason for pet insurance. Our effective and successful online sales channel was able to increase the performance by more than 13%. This is a strong proof of the advantage of digital sales. We should not ask what corona will change. We should figure out what kind of corona impact will remain after we have overcome the crisis. I strongly believe that customers learn at the moment that there is no necessity to let a broker or intermediary in their house or apartment because it's easier to close an insurance contract by using digital service. At that point, I would like to remember that Deutsche Familienversicherung is the only insurance company where it is enough to enter the individual age in order to get the price for every insurance product presented by Deutsche Familienversicherung. The next figures are partly a repetition of what I have mentioned already, so I will focus on claim ratio, which is still low and stable. Combined ratio is due to the fact that the company is not profitable more than 100%. This is logical. Solvency ratio is now more than 200% because of the capital increase a few months ago. About the number of employees, we spoke already. Because of the growth over there, we spent more money for HR. The next slide is a very important one because it shows the impact of sales investments on profitability. First step is to substract from the gross written premium the payment for claims and the internal costs for claims settlement. The result out of this must be very positive. These are real figures from the first 3 quarters. Then we still substract all other costs except the acquisition cost. At that point, an insurance company should be profitable as well. Otherwise, the CEO should stop all sales activity because the company can't become profitable. After underwriting result II, we subtract all the acquisition costs. Due to the fact that these costs are more than the positive underwriting results II, the company makes losses. Or in other words, as long as we spend more money for sales that we can finance with the money we earned with the original insurance business, the company can't be profitable. The graph on the right-hand side shows the relation between the premium volume and the acquisition cost investments. As long as the relation is more than 5:1, an insurance company can't earn margin. It is a question of physics of market. This principle is essential for every insurance company, and this is the reason why we expect profitability next year, because, next year, there is a relation of 5:1, relation between premium volume and money we spent for sales. I would like to use the possibility of this presentation to say a few words about financial investments. There are nearly EUR 140 million under management, but this is not only money that belongs to the company. Around about 60% is part of so-called guarantee assets. These guarantee assets are loaded by premium reserves from insurance product that are calculated as a life insurance.Because there is a correlation between age and risk, it would be necessary to ask every year a higher price for an increasing risk, but this is not practical. So we asked in the first half of contract lifetime more money than we need in order to finance the gap in the second half of the contract lifetime. You see it on the graph on the right-hand side above. Because of the transition of money, we have to calculate with a specific interest rate. Our calculated interest rate is, at the moment, in average 1.85%. This interest rate has to be realized by investing the guarantee assets. We are free what kind of assets we decide for, but under the regime of solvency II, we have to provide a specific sum of money, so-called SCR or solvency capital required. How much money this has to be depends on the selected asset class. You see it on the graph on the -- in the middle of the right-hand side. And the best investment from a solvency perspective is government bonds, but you can't earn any money in the government bond. The worst investment type are non-rated corporate bonds, but it is a very stressful investment because the solvency stress is more than 30%. So there is a correlation between the risk, the money we collect, the interest rate and at the end, the premium we ask from the customer. On the next slide, you see what we have done in the financial department. You remember that I took over in January the position of the CFO. I was not happy about this because, as a lawyer, I'm better in other things. But lawyers are good for restructuring of departments, and I did this with the financial department. I installed a new IRCF, independent risk control function. I installed a new financial investment guy, a new financial technology guy, a new department leader with the responsibility for accounting and financial planning is -- well, I have signed the contract just a few minutes ago, but I cannot announce the name at the moment. And I will announce the name of a new CFO in the next days, so I have solved nearly every problem over there. And so I can hand over this financial department, and I am happy to do this, hopefully, at the beginning of next year. I spoke about the capital increase. Well, it is well known to everybody, I would like to focus only on the increase of the free float, which is now more than 25%. And last month, there were several researches from remarkable companies. The newest is the research from Berenberg. If anybody is interested to purchase this, let me know, you will get them immediately. A few words about the outlook. We want to make or create the basis for entering a new dimension. And I would like to show you 3 elements out of this: one is CareFlex, one is risk carriers and another one is Europe. CareFlex is worth to be explained in detail. Because of time reasons, I will give only a brief introduction. I think it would be good if we show more in detail maybe next year when we have more time after the results -- after presenting the results of 2020. We expect at the 1st of July around about 500,000 new customers. You remember that CareFlex is the first nationwide branch solution for chemical industries. Around about 500,000 employees out of this branch will get an employer-financed long-term care solution. The employers are 1,900 companies with around about 5,000 legal entities. And we have to organize -- as co-leader of a syndicate with R+V and Barmenia, we have to organize -- or we are responsible for the product and all the process. We get from the employer EUR 33.65 a month per insured person. That means we get around about EUR 200 million, and the part of Deutsche Familienversicherung is 35%. So we expect next year a new business volume of EUR 70 million. And we get an additional fee for managing everything behind the big project. At the moment, we spent time in founding new risk carriers, which is not an easy project. At the moment, we wait for an answer from the Frankfurt financial authorities because there is a tax issue when we bring customers from the listed Deutsche Familienversicherung to new risk carriers. We have already an oral answer, but I need the written answer. And then we can ask the German financial authorities, and not the tax but the financial authorities, I can ask these financial authorities, BaFin for the permission to found the new risk areas. We start with sales, then P&C. And next year, we want to add a life insurance company. Besides this, we expect the all-in financial solution or global product next year. It is a combination of insurance and saving component. We think that this is a real breakthrough product. And well, I'm really happy when I can present you more details. At the moment, we write on the terms and conditions, so I know exactly where we are at the moment. Internationalization is another issue. We planned this earlier than we will do it, because -- but the reason is very simple. CareFlex is -- besides the outsourcing of the IT infrastructure, these are the major projects of 2020. And you should keep in mind that my company employs only 166 people, and for 166 people, these figures and all the other projects we are able to realize is really remarkable. I would like to finalize my short presentation with an overview of what will happen next year. We expect next year more than 1 million customers. We expect a premium volume of more than EUR 200 million. And as long as we keep the money we spend for acquisition stable, we expect a profitable company next year. The summary is very simple. Important is that we confirm all major targets of 2020. I am on the -- I'm of the opinion that this is really remarkable if you keep in mind that there is one of the largest economic crisis in history. With CareFlex, founding new risk carriers and the preparations for entering European markets, we are on track as well. So I think we are -- we do a good job. I'm happy to be the CEO of this wonderful company, and I look forward when I am able to present you the annual figures in January next year. I think it's worth to look -- to have a look on this company. And again, it's a pity that U.S. companies are much more worth than German companies. Maybe they have a better look at what is possible in a market. Thank you very much for your interest. And now your questions, please.

[Operator]

And it does look like we have our first question.

[Hans Christian Salis, Equity Analyst]

Can you hear me?

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

Yes, yes.

[Hans Christian Salis, Equity Analyst]

Sorry. Okay. It's Christian Salis from Hauck & Aufhäuser. I have a couple of questions. So first of all, on the profitability side, the profitability was obviously a little bit better than expected in Q3. Have there been any positive or negative one-offs included in the EBIT figure in Q3? Second question would be around the progress. Could you update us on the progress you are making regarding the preparation for CareFlex Chemie? Any update would be very helpful. And the third question, could you update us on the customer acquisition costs? And have there been any changes regarding the customer acquisition cost this year compared to 2019 due to COVID? And finally, on Slide 12, regarding the new business and the online sales, the 13.7% increase, is this a year-over-year increase? Or is it like, okay, it increased 13.7 percentage points compared to last year?

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

It is -- thank you very much. I would like to start with the last question. It is 13.7% in respect of the last year, so it is done this year, first question. Second...

[Hans Christian Salis, Equity Analyst]

For the last year, I think there was basically 73% or something in terms of online sales in percent of the total sales.

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

Yes. Well, I'm a lawyer, so I am not so fast in calculating, but I think yes.

[Hans Christian Salis, Equity Analyst]

No. So the share of online sales in percent of total sales has increased by 13.7 percentage points. That correct? Okay.

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

Yes, that's correct. Okay. So next question. In CareFlex, everything is on track while it's an enormous project. Projects like this are -- we want to start with the first pilot companies on the 1st of July -- or the 1st of January next year. And at the moment, we think we can realize this. I have to be a little bit careful because there is a big meeting next week with all partners, even with the trade union and the association of the employers. So please accept if -- when I say we are on track, no negative impact. So the next question is the money we spent for sales. It is a little bit higher than 12x monthly premium. We will spend at the end of the year around about EUR 31 million, EUR 31.5 million for new business, and we receive EUR 30 million. It's a little bit higher, but it's more or less what we planned. We planned with 12 to 13x monthly premium. So the negative result of Q3 is the next question, I think. The next quarter will be a little bit more negative. This is because of the impact of long-term care insurance products. This is normal. So the little bit better result of Q3 will be compensated in the next quarter. So we are -- with all results, we will be -- it is exactly what we have planned.

[Operator]

It would appear there are no further questions on the line -- I apologize, we just had a question come in.

[René Locher, Research Analyst]

Can you hear me?

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

Yes, yes.

[René Locher, Research Analyst]

Okay. This is Locher, René from Zurich.

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

Yes. Well, I expected you a few hours ago, and I thought that the audience -- that René Locher must be among the listeners, but there was no René Locher. Welcome, René.

[René Locher, Research Analyst]

That was for the press, and I know that's fine. So can we go to Slide 15.

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

15?

[René Locher, Research Analyst]

A very interesting slide. But what I miss here in -- yes, in this table, is reinsurance. This is always...

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

Yes. You're totally right, this is -- well, it was because I wanted to simplify that this is only without reinsurance. But the principal result is the same. So I can send you -- if you're interested, I can send you this sort of P&L with reinsurance, no problem. It has the same results at the end because reinsurance pays part of the acquisition cost. So It is, at the end, the same but on a lower level.

[René Locher, Research Analyst]

No, that's wonderful. And on Slide 18, 1-8, I mean, I am not so familiar with these life insurance -- well, I got a feeling of but my question is you're allocating the interest rate on a yearly basis to the product, right? So what's going to happen, let's say, after 5 or 10 years if the policyholder is terminating the contract? What's happening to the reserve side on the life insurance?

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

I hope that there is no journalist in line because my answer sounds a little bit ridiculous. This is a perfect decision, by the way, if a customer terminates the contract because then, the customer -- yes, we will lose the customer. That's bad news. Good news is that we can keep all the money. And this stabilizes the whole community of these contracts. So termination is a part of the calculation, by the way, and we expect a specific percentage. Don't ask me how -- about figures now. We calculate a specific percentage of people who terminate their contract in -- and this is important for products that are calculated as a life insurance product.

[René Locher, Research Analyst]

Yes, that's fine. And then on Slide 25, outlook. So what I did is, in 2021, I divide the premium volume of EUR 200 million by the number of contracts. So this calculates roughly EUR 182 per policy. If I go to the midterm targets, which, that's my guess, is a lot like 2025, here, I have the EUR 500 million divided by 2 million. This would imply a EUR 250 per policy. And I think this is exactly the way you should go once you have a policyholder on your balance sheet. You should try and start cross-selling, upselling now with your new carriers, you have new products. So yes, perhaps you could just explain a little bit where the increase of the premium per policy is coming from. And if I may, very quickly, then on Slide 23, so that's a follow-up question. I guess you are not allowed to cross-sell products to your CareFlex product -- CareFlex clients despite they're on the funnel.

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

Unfortunately not. Yes, you're right. CareFlex has an ongoing impact. While we can't use these customers for cross-selling -- by the way, cross-selling is not something which is able to convince a person who is familiar with the sales activity. Cross-selling is really difficult, not -- well, cross-selling is totally -- is difficult. We do not know exactly what will happen next year because we have to plan 2021 exactly in December when we start the planning conference with all Board members. We have to invest more into P&C products. This will have an impact on almost everything. And we expect more than EUR 200 million, but this EUR 200 million is more due to the fact that we want to underpromise and overdeliver at the end.

[René Locher, Research Analyst]

Yes, yes. No, no, that's fine. That's fine. No, no, but I think -- I guess you have seen -- this was also kind of a big story at Lemonade yesterday. They are now also focusing on premiums per policy. And I think when you are spending like EUR 30 million acquisition cost to get the policyholder on the DFV balance sheet and then you can sell in an additional product at 0 acquisition cost, this is where you have a huge leverage. And I think with the investments you have in place now -- yes, go ahead.

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

Yes, yes. So first of all, we want to start with this, we call it global product or all-in financial solutions. This is product with a lifelong flat rate for insurance, and this is a sort of a bundled product. So we expect more insurance products for a customer than we have at the moment. And again, our answer is not cross-selling. Our answer is this new product. And at the moment, I write on the terms and conditions, so I'm pretty sure that we can start with this product early next year.

[Operator]

And we'll take our next question. I believe it's [ Catarina ] with Berenberg.

[Unknown Analyst]

I was wondering on the growth drivers in Q3. I think you gave an overview over the 9 months. I just wondered whether -- how the split was between dental and insurance in the third quarter. And then maybe a second question. You just mentioned more investments in P&C products next year. Could you maybe also give a bit of color on that? That will be great.

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

Okay. I'll start with the second question. Well, Deutsche Familienversicherung started as a P&C insurer so we are familiar with this type of product. And P&C insurance products are essential in order to stabilize an insurance company. There is -- there could be a political impact on health insurance. And because of this, focusing on health insurance is, on the long run, not a good form of company policy. Because of this, we want to acquire more P&C insurance, and we started this already with pet insurance. This is P&C insurance. We did this with good success with liability insurance. We started to present a new type of liability insurance this year. So we are pretty successful in increasing the number of P&C customers. The first question was about, again, dental and...

[Unknown Analyst]

Yes, I believe it was more on the -- sorry, it was more on the kind of Q3 view of what was -- how -- for example, I believe that dental was the highest growing product, and how strong that group in Q3 because I think in the presentation you mentioned 9 months.

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

Yes. First of all, dental is a very important insurance product. First of all, because it's a product you can sell very good by using direct response TV and so on. And by the way, we became 5x in a row test -- winner of Stiftung Warentest. This is a very well-known German testing foundation. So dental is really important. And by the way, dental is a product calculated as a P&C insurance, so it is not so -- not as complex as long-term care or similar product, first. Second, dental is, at the moment, a product which is a little bit more difficult to acquire because during the corona crisis, people do not -- well, nobody loves to go to the dentist. At the moment, there is less interest in visiting a dentist. We can see it if we have a look on claims settlement. What is really interesting, and that compensates a lot, is pet insurance because of -- well, people buy dogs and cats. And these are, as I pointed out, family members, and family members need the same medical treatment.

[Operator]

And we'll take our next question. I believe it's Gerhard with Berenberg.

[Gerhard Orgonas, Analyst]

It's Gerhard Orgonas from Berenberg. I just have one question on your solvency ratio, which is extremely high now after the capital increase and some reallocation of investments. How do you think about this going forward in your internal planning, the trending down back to kind of your target level? And what are the main drivers that will drive this apart from the growth?

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

Yes. I'll give you a very honest answer. We decided to invest in real estate. This investment in real estate costs us 42% points in solvency. So this is one example how difficult a projection of solvency ratio is. Solvency ratio goes down if we do more business -- new more business, and service -- and there is a correlation between solvency ratio and the type of investment. If we invest more in bonds -- in federal bonds, there is almost no impact because this type of investment is very safe, nothing can happen. But the downside is you can't realize any interest, and we need interest. I pointed out this already. So if we spend more for nonrated company bonds, we get sometimes -- not enormous but high interest. But the downside is that we have to spend a lot of money for solvency, and this has an impact on the solvency ratio. So solvency ratio is, for this company, more or less up and down. And again, it depends how much money we invest in what kind of asset class. But our plan is to keep the solvency ratio between 180% and 220%. And so we are far away from the 220%, but we expect a decrease of solvency ratio at the end of the next quarter. I expect around about 300% or something like that.

[Gerhard Orgonas, Analyst]

Okay. So the real estate you bought in Q4, that's -- perhaps this decrease of 42% comes from also this investment in real estate?

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

Exactly, exactly, exactly.

[Gerhard Orgonas, Analyst]

Okay. Can you tell us a little bit what type of real estate you've bought?

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

It is an office building close to Berlin airport at -- I mean the new Berlin airport with a value of around about EUR 27 million.

[Gerhard Orgonas, Analyst]

Is it fully let yet? Or is it mid-built?

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

Again?

[Gerhard Orgonas, Analyst]

Is it let fully? Is there a tenant in there?

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

Yes, yes, yes.

[Operator]

And there are no more questions on the line.

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

No more questions?

[Operator]

Yes, there are no more questions.

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

Okay. If there are no more questions, again, I'll say thank you very much for organizing everything, for the questions, for the interest. And I hope I can hear or see everybody in 3 months healthy and still interested in this beautiful company. Thank you very much. Bye-bye.