DFV Deutsche Familienversicherung AG

XETRA:DFV

Earnings Call Transcript 2021-Q3

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

Welcome to the presentation of the 9 months results for '21. The CFO of Deutsche Familienversicherung will present and explain selected figures and ratios of the company to you in the proven form. At this point, I will limit myself to a few introductory remarks and later to a brief description of the outlook. On Tuesday, November 9, '21, we already informed you via a tough announcement about the conclusion of the reinsurance agreement with Barmenia and also about the fact that we will fall somewhat short of the new business plan with regard to primary insurance. At this point, I would like to make at least one comment on the reinsurance agreement that has been concluded. We agreed this in the form of an LOI with Barmenia in December 2020 as part of the termination agreement with which we restore from CareFlex contract. If the contract has only been signed now, this is for internal reasons that I do not need to go into detail. Economically, it has no effect because the reinsurance contract comes into force retroactively as of June 1, '21, but is not yet included in the results for the first 9 months of ’21. This will only be seen in the results for the full year '21. The reinsurance contract is an important step for Deutsche Familienversicherung once because the company has been a reinsurer again since ‘21 -- 2012. Second, we are the only insurtech at all that does active reinsurance. And most important, we can participate in this way in the CareFlex deal, the basic idea of which comes from us. When I review the first 9 months of '21, I would like to take the opportunity to point out once again that we launched the new combined insurance product on time on the 1st of July, just as we realized the market entry in Austria on the same base. Despite the reduced target expectations with regard to the new primary insurance business, our sales strength remains unbroken. However, after waging of all the factors, we decided not to achieve the original promised annual target of EUR 30 million in the new business at any price in other words. We felt it drives, particularly against the backdrop of the reinsurance agreement now concluded to avoid buying new business for the final month of '21 at too higher price. Instead, based on the 9 months results we present today, an overall positive result of our business activities. We also managed to complete the IT outsourcing project. As you know, we decided to hand over the hardware -- the hardware to an external IT service provider. This was essentially for reasons of IT security. This major project has been brought to a successful conclusion and brings me to the next point, the implementation of the so-called [ VA IT ] structures. These are supervisory requirements relating to the security requirements for IT structures in an insurance company. We have devoted a great deal of attention on this year, and I can say that we have set up the necessary structures. Finally, I would like to hand over to the CFO without pointing out that we have also succeeded in establishing a finance department in '21 that truly meets our requirements or indeed any requirements at all. The investment result to be presented is a visible expression of these efforts. Let me conclude this forward by pointing out an important element of external perception. In '21, we again succeeded in obtaining important fields, particularly of Stiftung Warentest. These are needed, in particular, in our preferred online sales because they are one of the key arguments for customers to decide in favor of us without additional advice, which we naturally cannot provide in case of Internet contracts. With that, I will hand over to my colleague on the Executive Board and CFO, Dr. Karsten Paetzmann, the floor is yours.

[Karsten Paetzmann, CFO & Member of Management Board]

Thank you, Stefan, and a warm welcome also from my side. Let me now present the financial results for the first 9 months of 2021. Premium growth was at 22% compared to a growth rate of 26% in the financial year 2020. We think this is a great result, given that this is the second year under the COVID-19 pandemic. The loss ratio increased to 71.8% compared to the last financial year, which is an increase, partly due to the so-called hygiene lump sum compensation, [ Higino Shana ], which we have to pay due to COVID-19 and which we consider to be temporary. Another effect having driven the loss ratio are allocations to the actuary reserves in the long-term care business. A very good result in our eyes is an increase of 3% of the expenses from insurance operations OpEx. This 3% compared to the 22% top line growth rate is a wonderful result, and we continue to work on this to drive the profitability of Deutsche Familienversicherung. Overall, the profit before tax for the first 9 months of 2021 is at positive EUR 0.1 million, which compares to negative EUR 6.9 million for the first 9 months of 2020. Provide an overview of the statement of comprehensive income, which is an extract ending at the profit before tax because I would like to highlight the operating result and give you some more details around this. As said on the previous slide, GWP, our growth with premiums, increased significantly by 22%, again, which we feel demonstrates our continued strength of the business model. The income from capital investments, as mentioned by Stefan, minutes ago, has substantially increased from negative EUR 1.2 million to positive EUR 8.5 million, which is a swing of EUR 9.7 million compared to the last year. At the bottom, you see the profit before tax, which is now positive EUR 0.1 million, and we provide a breakdown on the right. So you see how this distributed to the 3 first quarters of 2021. After a quite promising first quarter and a slightly negative second quarter, the third quarter proved to be positive at positive EUR 1.1 million. So this is where we are. And this is the result of a number of drivers. And one most important one is actually the income from capital investments. Again, we find it promising that we have managed to implement and restructure the capital investment management at Deutsche Familienversicherung, and we continue to drive forward our initiatives, both in the so-called security assets, the [ Hongsun ] portfolio and the three assets, highest one portfolio. And I'm delighted to be able to tell you that we will meet the actual interest, the retinal sense of our portfolio also in 2021. That is something I can describe right now given the decisions we have made over the last weeks and months. The duration of the investment portfolio has slightly increased to 8.3 years, which we feel is the right balanced way to have a portfolio based on the liabilities, which we need to cover over the years to come. One issue that has been at the core of our interest in the last month is the share of sustainable investments. We have significantly reallocated investments to a more sustainable portfolio. We have now a 28% share of explicit, sustainable green bonds or sustainable linked bonds, sustainably investing ETFs or sustainable real estate assets. And we think that is a great way, and we will continue to reallocate assets to explicit sustainable investments. Now we are all aware that coherent standards for sustainable finance do not exist yet, but we follow kind of with great interest, what is happening on the more political agenda. And we noticed just as Jorg Asmussen, the CEO of the German Insurance Association noticed that Frankfurt, the home base of Deutsche Familienversicherung has been made also the home base of the ISSP. So Frankfurt will play a role in the sustainability league worldwide. As mentioned before, we have seen again, an increase in GWP we calculate 22% in the first 9 months of 2021. And this number is without or before any ceded premium from the new CareFlex Chemie Reinsurance agreement. So we estimate that by the end of the year, the increase in GWP will be quite higher than 22%. I would estimate right now that it is -- it will be above 30%. A factor, which I have mentioned before is the development of OpEx, which has only increased by 3%. The measures to improve cost discipline have been implemented, and we continue to implement more measures. However, we will concentrate on such effects that do not harm any new business stream or process quality and our digitalization efforts, which continue to be high on the agenda. Let me summarize. We have seen the first 9 months of 2021 to be continued by a stream of new business, which is -- which gives us a promising 22% growth rate year-over-year. We have just started reinsurance business, and there are ideas around making more new business ideas, which I guess, Stefan will let you know in the months to come. We have a substantially improved investment results. With strong progress in the repositioning plan around strategic asset allocation and other measures, which we have implemented. We have measures to improve the loss ratio currently being implemented. The cost management initiative carries on to provide positive momentum to profitability. And we have again seen that COVID-19, while it continues and might even get worse in Germany does not significantly or not at all, even harm the business model of Deutsche Familienversicherung due to our stable market position, our digital processes and due to our strong balance sheet ratios. Overall, we would like and we have already let you know, we would like to adjust our planned profit before tax for 2021 from negative EUR 2 million to around negative EUR 4 million. And therefore, we continue to be quite positive that Deutsche Familienversicherung is on the right track to profitability. And with that, I would like to hand back to Stefan.

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

Karsten, thank you very much. Ladies and gentlemen, you are now familiar with the results of the first 9 months, which I can summarize as follows. We still have strong growth, even if it has slowed down a little. I have already referred to this in my introduction. This contrast with a significant improvement in the overall result compared with 2020, the result that is also well above expectations when measured against the plan. These figures are good basis -- a good basis for the targeted profitability in 2020. With the reinsurance contract, we remain part of the CapEx structure, albeit indirectly and continue to participate in this success, which is attributable to our idea. I look forward to see you again. At least in part at the equity forum in mid-November, we will present the primary 21 figures in February 17, 2020 – ‘22, sorry. And the annual press concerns at the final figures on March 24 in 2022. The letter will be presented by the full Executive Board, similar to the Capital Markets Day on the Twenty 1/2 year figures. Thank you for your attention. We are now available to answer your questions. And I think we can start with first question we got in German. And if it is okay to everybody, I would like to read the German questions. And I would like to answer these German questions in my language, if it is okay for you. Okay. We continue -- there's a couple of questions from Mark Uber, a private investor. And I would like to hand over to Karsten for the first -- first 3 questions from Mark Uber, you read them and answer or should I read you answer whatever.

[Karsten Paetzmann, CFO & Member of Management Board]

Okay. Okay. So in German, [Foreign Language].

[Operator]

[Operator Instructions] We will take our first question from Christian Salis from H&A.

[Hans Christian Salis, Equity Analyst]

I've got four. So the first one would be, what's the number of new contracts in Q3? And what's the total number of contracts at the moment? And then secondly, you mentioned the operating costs, which only increased by 3% despite the strong sales growth. So that's, yes, very reassuring. So -- but what's driving the positive development here? Can you maybe talk a little bit more about the initiatives you have started? And thirdly, on the capital investment and the income from capital investments. So if we try to model this going forward, could you maybe provide an indication of what would be an appropriate proxy to model this? Would it be fair, for example, to use the -- some index like the S&P 500 or something like that, for example, and then final question on international expansion. You already mentioned the market entry in Austria. So could you also maybe talk a little bit more about that? How is this going? And what would be the next step probably or which country?

[Karsten Paetzmann, CFO & Member of Management Board]

I will answer this in English, obviously. The first question referred to the number of contracts at the end of September 2021. The total number of contracts is about 571,000. Yes. That answers your question. The second question referred to the -- if I understood this correctly to the new business stream and what the initiatives are about. Stefan, would you like to answer this? I.e. the business stream and how it -- what it consists of, what kind of initiatives we have on the new business side, is that something you would like to?

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

No. Sorry, I -- can you hear me?

[Karsten Paetzmann, CFO & Member of Management Board]

Yes.

[Hans Christian Salis, Equity Analyst]

Yes.

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

This was related to the operating cost because the OpEx only increased by 3%. So very strong operating leverage. And I just wanted to yes, to get more flavor on what's really -- what has been driving the decline in expenses in insurance operations in Q3.

[Karsten Paetzmann, CFO & Member of Management Board]

So. Okay. Okay. Then I misunderstood you. Okay. On operational costs, the initiatives are around actually overhead costs, which we have managed to not increase with the increase of business volume. Maybe that's the most important measure, which we have taken, while, again, while the business volume has increased by 22%. We have just managed to be very sensitive and apply a lot of discipline on overhead costs. That would be my answer on this one. The third one referred to income from capital investments, and I understand that you are interested to get a bit more -- a better feeling how to model this forward. Do I understand you correctly this way?

[Hans Christian Salis, Equity Analyst]

Yes. Exactly.

[Karsten Paetzmann, CFO & Member of Management Board]

[ S&P 500 ] but what exactly are you referring to if you say, [S&P 500]

[Hans Christian Salis, Equity Analyst]

No. It was just an example, what would be a proxy for the amount of capital investments or income from capital investments? Because I mean, you can correct me, but I would assume that these EUR 8.5 million we've seen now in the first 9 months are also related to, an acceleration in terms of -- on equity markets.

[Karsten Paetzmann, CFO & Member of Management Board]

Well, typically, as an insurance company, we typically mostly hold bonds. We have a large bond portfolio, which is the majority of our assets actually. We also have equities, which, in our case, are entirely embedded in ETF. So we have kind of a very high degree of diversification in our equity portfolio. The share of equities today is around 16%, 17%. So if you would like to model, you should actually -- and that is also part of our strategic asset allocation. You should make reference to an equity share of 17%. And most likely because we have -- we are very balanced, very diversified, you could take an index like [ S&P 500 ], you are correct to do so. But for the rest of the portfolio, we also are invested into real estate, about 10% of the overall assets. But the rest of it are bonds. And I leave it up to you how you model this, but [ S&P 500 ] to take as a proxy for bond portfolio is most likely not a good estimate. I take it to you and I'll leave it to you, obviously. Does that answer your question.

[Hans Christian Salis, Equity Analyst]

Yes.

[Karsten Paetzmann, CFO & Member of Management Board]

All right. And the last one was on international expansion. You referred to Austria. You're correct to say that we entered the Austrian market midyear, end of June. We feel that this is kind of successful because we are able to apply our given digital business model to a new geography without opening up any office or driving the overhead costs or anything. And obviously, we take this as an example, how to further drive growth. And as we have said during the Capital Market Day, midyear, we will reassess, we will assess the Austrian experiment, if I may say so. And make our decision based on experiences made, whether we drive this forward or not. And we will let you know once we have made a decision to enter into a new European geography. I hope this answers your 4 questions.

[Hans Christian Salis, Equity Analyst]

Yes.

[Operator]

[Operator Instructions] We will take our next question from Jochen Schmitt from Metzler.

[Jochen Schmitt, Research Analyst]

I have 2 questions, please. Firstly, on the claims ratio. In the press release, you said something about your longer-term target range with a maximum of 70% just to clarify, does this mean 70% would be the upper end of your target range for the claims ratio, but the midpoint of your range and your actual target would be below 70%? That's my first question. And secondly, could you give an indication how the reinsurance contract will affect the Solvency II ratio in Q4.

[Karsten Paetzmann, CFO & Member of Management Board]

Okay. Thank you. I take this, Karsten Paetzmann. Number one is on the claims ratio. Yes, we have kind of a target ratio for our portfolio, which most likely refers to products which are typically being measured by claims ratio, which our long-term care product is not. And for those products that are usually measured by a claims ratio, we feel that 70% is a correct one, and I can confirm that we are still in an area where we feel comfortable. Nevertheless, we have taken decisions to improve the loss ratio. And I think I referred to the temporary increase of the loss ratio due to COVID-19 and the so-called hygiene lump sum compensation or [ Edina Po Charle ]. On the reinsurance contract, you are correct to assume that the reassurance agreements, which we entered in this week has an impact on the Solvency, but this impact is very limited. We have obviously taken robust calculation, as you would expect it from a regulated insurance company, and this is very limited. To give you an indication, it has an impact of something between 10% and 20%. And that's it, actually. And you are aware of our robust SCR ratio, and therefore, it does not have a great impact. I hope this answers your questions.

[Jochen Schmitt, Research Analyst]

Thank you.

[Operator]

[Operator Instructions] We will take our next question from Rene Locher from Stifel.

[René Locher, Director]

Can you hear me?

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

Yes, we can hear you. The questions that we can understand you.

[René Locher, Director]

Yes, we will give it a try. [ Erik from switz ]. First of all, of course, I'm also trying to model in line with my colleagues, the investment income. My guess, the half year results on Page 25, we get a little bit of a feel what the current revenue from capital investment could be. So as for the half year, you reported EUR 1.1 million as current revenue and then EUR 4.6 million as gains. And I remember I asked CFO, Paetzmann, if this is sustainable, this 1.1 million current revenue. And yes, perhaps if we get here, again, a little bit more flavor because, I guess, this is very important for analysts for [ Frank ] to mobile DFV. So that's the first question. Then push backs from investors on the new business. And here, I recall the Slide 39, which was presented by CFO, Schinnenburg, at the Capital Markets Day. And I'm wondering, is there a weak spot in new business generation, still, the broker and the cooperation sales channel? And my third question is a little bit of an outlook. I was wondering where do you stand with the launch of your Life product.

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

Okay. Mr. Locher, I would like to start with the questions that there are problems with your business. Now, there are no problems in new business. But at the end of the year, you have to make the decision whether you want to reach your targets on almost every, every price. However, it is better to keep the purpose on the 12 monthly -- 12 times month a premium role. And our main target is not to invest more than 12x monthly premium for new business. And particularly, there is -- there are competitors who pay much more than 12x monthly premium, and we do that one to start a rave or together with these competitors. And because of this, we decided to flatten the curve of new business a little bit at the end of the year, especially in respect of the reinsurance contract and the better results overall, we expect at the end of the year. The first question, second or first life insurance. Life insurance is – life insurance is a tricky question. We work on this. And -- but we think that we must -- or we should find another solution as an alternative to found a new life insurance company. When we are in the -- we are right now, we are in a decision-making process. And your question is, sorry to say this, is exactly 1 or 2 weeks too early. So my suggestion is, I give your phone call in the next 2 weeks. It is okay. It's a little bit too early. There is an interesting alternative for a white label solution, which is much cheaper and which brings or gives us a possibility to start much quicker in comparison founding and own life insurance company at this moment. But the target still remains that is we want to found a life insurance company, maybe not now, maybe later. And in the meantime, we decide probably for a white label solution, again, giving you a phone call in the next 2 weeks, I'll give you a correct answer. The question is now a little bit too early.

[Karsten Paetzmann, CFO & Member of Management Board]

And your first question, Rene, referred to investment income. And if I understand you correctly, again, questions is the level of sustainability of the income from capital investments. Well, during the presentation of the half year report, we show to you that the first 6 months generated investment income of EUR 4 million. And now 3 months later, I show you EUR 8.5 million, which is obviously not a proportional development. It has been better than proportional. And as I said earlier, we have made use of the market development, generated some extra returns. Nevertheless, I regard the level of EUR 4.0 million, which we generated in the first half of 2021 as being sustainable. I hope this answers your question.

[René Locher, Director]

Yes. Can I just follow-up, if I may. And I think what is really very interesting and very positive to see is that the average premium in the portfolio, for example, in supplement health includes increased from EUR 250 to EUR 279 million in property, also up from EUR 94 million to EUR 115 million. And I was just wondering, for example, supplementary health insurance. What is the reason that the premium per contract is going up. Is this [ preadjustment ] or what is the [ driver ].

[Karsten Paetzmann, CFO & Member of Management Board]

Quality products. If I may answer, well, it's a mix of impact factors. It's actually an increase in premium, but it's also a different product mix if customers decide to buy other products, which have a higher value. If they change to another version of a product with a higher value, it obviously has an impact on the average. But what we have seen over the last years is a constant increase of this figure, the average premium per year as our product development -- as our product portfolio evolves and the pet insurance also has quite an impact because it is of high-value compared to, let's say, private liability insurance, for example. So it has more than 1 impact factors, but we see this as a nice development, if I may say so.

[René Locher, Director]

Definitely full agree. This is well done. I don't know. But just the last question is a new combi product. I mean the next premium per contract could be as high as EUR 600. And I'm looking on your homepage, could this be. So that means the combi product could also increase the average premium per policy new backroom.

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

First of all, Rene, as you can imagine, I'm deeply convinced about this type of combination products. By the way, we started with products like this when we founded the company. And for me, especially online sales is a question of convenience and a combination product that includes more or less the most important insurance product is a question of convenience or an answer that people more and more asked for convenience and an online internet, all the modern types of communications are based on convenience. And because of this, again, I'm deeply convinced, and we introduced a new combination product, which is [ model less ]. It contains all the ideas we had in the past and this combination product modernized the first combination product we used when we started with the company. And -- but it takes time in order to make customers familiar with the idea behind. It's easier to sell a dental insurance, where we can say everything is included and you have must make a decision or you have to make a decision, whether you ask for a compensation of 30%, 60%, 90% or 100% or a combination product, which includes a variety of insurance products. If a person decides for our type of combination products, it is necessary that is not insured in household insurance, that he is not insured in private liability insurance and so on. And this makes sales a little bit a little bit complex. So -- but again, we are -- I am fine with the sales results. And we think that this is or this could be an answer why the sales numbers in [ P&C ] insurance increased so much over the last month. I think that -- I know that the combination product is one of the results besides pet insurance and among other reasons. I hope it in sort of an answer -- I hope it's a sort of an answer.

[René Locher, Director]

Yes, it's perfect. Again, I think it's a very interesting pro. What I wanted to say is, I'm now on your homepage. There is -- if you're a family, you are paying EUR 50 a month, x12. So that means if you sell these products, the premium per contract is then EUR 600 million. And for example, in supplementary health insurance, you're at EUR 279 million. So I think was a very good [ combined product ]. I want to make sure I -- okay.

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

Rene, thank you very much. It's a perfect product. It is, I think, the best product in the German market. So unfortunately, you live in Switzerland. So we -- I cannot ensure you in person. But I think you have -- you know a lot of German friends give them advice, and we are happy to ensure all your German friends with this perfect product.

[René Locher, Director]

Okay, we'll talk about commission.

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

That's not a problem. It is -- but not 12x months in premium, by the way.

[René Locher, Director]

Thank you very much.

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

Okay. Welcome.

[Operator]

That concludes today's question-and-answer session. Stefan Knoll, at this time, I would like to turn the call back to you for any additional or closing remarks.

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

Okay. So there are no additional questions in line. There is -- I got a paper with a couple of additional questions from [ Hans ] these questions are in Germany. So I would like to repeat the German questions and give a [ chairman ] answer if this is okay. The first question from [Foreign Language].Okay. The main administrator announced that I should finalize this presentation, the conversation and the other questions. I will do this. I say thank you very much to everybody for the interest. I wish you the best for the near future, stay healthy and see you next time when we present you perfect figures of '21. Yes, thanks very much. Bye-bye.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.