DFV Deutsche Familienversicherung AG

XETRA:DFV

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Deutsche Familienversicherung Analyst Conference Call Q3 2022. [Operator Instructions] I I would now like to turn the conference over to Dr. Stefan Knoll, CEO. Please go ahead.

[Stefan Knoll, executive]

Thank you very much for the introduction. Ladies and gentlemen, it is good to see or better to hear you again on behalf of the Executive Board, I thank you in advance for your interest. As I do every 3 months, I will welcome you, which I have done here with, say a few introductory words about business development on the occasion of the Q3 figures, give a few hints about what else has happened after the CFO's remarks and otherwise guide you through this event. Ladies and gentlemen, it is becoming apparent that 2022 will be a difficult year. I do not need to go into the causes here. They are known to us or nevertheless, the CFO will present to you that we have undamaged sales power, which is reflected, not least in our growth. If we were less successful than we would have liked in pure new business in primary insurance, it was mainly because we had to reorganize the sales department. In this context, we succeeded in significantly increasing the presence of Deutsche Familienversicherung in social networks, which is already reflected in new business. When I talk about redesigning the sales department, it sounds a bit cautious. In fact, the redesign has dominated 2022 to date. Let me give you the main points each of which would be worth a presentation of its own. [Audio Gap]I was unhappy with our marketing and the fact that we tried to compensate for our inability by hiring external agency capacity. We now have a new Head of Marketing, who has learned what she is doing and now technically with a new build department has all the skills that are prospering insurance company needs in marketing at a disposal. And so external agency capacity could be reduced, and we have almost EUR 750,000 million in costs. We had to change and we're able to do so. The contract with ProSiebenSat. 1 TV partners because in order not to lose any new pieces in sales they have been adjusted again and again to our disadvantage. The website is gradually being freed from the self-imposed Google visibility [indiscernible] and is now once again serving the purpose of comprehensibility and customer orientation. I have taken charge of product development and by means of a new guideline have ensured that profit before sales is finally the top priority and the redesign of insurance products as well. And no matter how well Eintracht Frankfurt team from Rhein [indiscernible], the [indiscernible] of use of lodge by board members is not a sufficient design for this cooperation agreement. Eintracht must finally become a distribution channel. This should give you a forecast of what I will elaborate on after Karsten Paetzmann's remarks. But now first, the Q3 figures, which are quite respectable. Dear Karsten the floor is yours.

[Karsten Paetzmann, executive]

Thank you, Stefan. Ladies and gentlemen, let me introduce you to the financial results for the first 9 months of 2022. On this slide, I have provided 3 important KPIs. And it's not only revenue growth on the left, but it's also the other 2 figures. Firstly, on revenue growth, yes, we again have a substantial growth of the volume of business, which is due to our primary insurance business and the inwards reinsurance business, which we started last year. And I will get more into detail on this in the following: -- the center of this slide is a cost-cutting measure, measured by operating expenses, which are down 7% in the first 9 months of 2022, which we think is quite a success and has been also in the center of the activity of Deutsche Familienversicherung the first 9 months of this year. And finally, the profit before tax is EUR 2.0 million, which is in our eyes a success for the third time in a row, it's a profitable quarter in Q3. So let me dig into detail together with you on the statement of comprehensive income. On this slide, and I believe you are familiar with the way of presentation. You see in the first column, the figures for the first 9 months of 2021. To the right, the next column shows you the first 9 months of 2022. And then in the following 2 columns to the right, we have presented the inwards reinsurance business only and the primary insurance business only. And then finally, on the right-hand side, you see a column that compares the primary insurance in the first 9 months of 2022 with the first 9 months of 2021. And please do not forget that we did not record any inward insurance in the first 9 months of 2022. So what we can elaborate now based on the column on the right is how primary insurance has changed. And number one, the circuit #1 shows you that the gross written premiums in the primary insurance business have effectively gone up by EUR 8.6 million, which is an increase of 8% year-over-year. On a net basis, the net earned premiums, NEP, they have gone up a bit stronger by 17% year-over-year. So this clearly shows that also our primary insurance business is growing. However, the inwards reinsurance business adds value to the company, not only by the top line, you see the EUR 26.9 million net earned premiums, which we earned in the first 9 months of this year, but you also see that the operating income includes an amount of EUR 0.6 million coming out of invoice reinsurance.Going back to the Delta primary insurance column. The circuit #2 shows that the insurance benefits in primary insurance have gone up by EUR 5.6 million. That is an increase of 15% year-over-year or by 17% compared to a 17% growth in NEP. That means as a result that the net claims ratio has benefited from this and it is now 70.4% compared to 71.8% in the first 9 months of 2021. By presenting these figures, we would like to point at the operating income, which is, as we call it stable for the third time in this year, a quarter can be presented with a positive operating income. Now let's look at our cost management focus. This slide firstly shows you how the operating expenses have developed in the first 9 months of this year compared to the previous 2 years. And you see that from the first 9 months of 2021 to the first 9 months of 2022, they have actually decreased, and that is contrary to the development of the top line. It's a decrease by 7%, as I mentioned earlier, compared to a 17% in net earned premiums. This is partly due to our intensive measures to lower the customer acquisition cost, CAC, which is shown at the top right. This is a Deutsche Familienversicherung usually measured as a multiple of the monthly premiums. And you see that we have accomplished so far a reduction of the MB as we say in Germany, the CAC from 14.2x monthly premiums to 13.9x monthly premiums. And Stefan will elaborate on that a bit more after my presentation. Let's go further to the cost ratio, which has developed quite nicely. If you compare it to the first 9 months of 2020, it was 52%. And the previous year, 46%, and it's now 34%, including the inwards reinsurance, it's even 32%. One KPI that we usually also look at is shown on the right bottom, it's the revenue per policy, which continues to go up. It's now at EUR 250 per policy. And the increase of this KPI is is a result of our strong pet insurance business inflow. Now let me turn to the next page and show you what has in the center of our investment management activities in the first 9 months of this year. The graph depicts that compared to the number at January 1 of this year, the European sovereign bonds with a maturity more than 10 years have gone down to 70% of the initial value. For European equities, it's 77%. And compared to that, our own master fund for the, as we say, security fund [Foreign Language], which is earmarked to the actual reserve has gone down only to 88% of the value at the beginning of the year, which we feel is quite a success. And given the fact that the majority of our book is composed of the bond portfolio.Now even more important is a current revenue stream coming out of the investments, which is shown at the bottom left. And you see that we have made some progress on increasing this amount, it's now at EUR 4.7 million for the first 9 months of 2022. And this current revenue stream comes out of [ coupons ] of the bond portfolio as well as dividend streams coming out of equities. And finally, our real estate investments also carry outflow. On the bottom right, you see the total income from capital investments, which has more than halved to EUR 4.0 million compared to the first 9 months of 2021. And that is obviously due to the challenging situation on the capital market. However, we believe that we have stabilized this income. And compared to the years before 2021, you see that we have been quite successful in generating income from capital investments. Now this number of EUR 4.0 million is reflected in our statement of comprehensive income, as shown earlier during my presentation. And in addition to that, we have obviously been hit by unrealized market losses due to interest rate changes. You are aware of the situation on the capital market with substantial increases in interest rates, and that has obviously an effect on our bond portfolio, and we have accumulated unrealized losses of in total EUR 20 million since the beginning of the year. Based on this figure, we believe that we are well positioned to go further into the fourth quarter. And this is more than over today, and I can confirm that our position in the capital market is strong, and we will not get nervous about what is happening out there, but we will stay in the bond portfolio and carry on.Now to summarize. As explained to you, we have continued strong growth, and that is in relation both to the primary insurance business and the inwards reinsurance -- for the third time in a row, we have a profitable quarter in Q3 2022. And that is something that I would like to highlight. It is a stable operating profit, which we have achieved in the first 9 months of 2022. And this amounts to EUR 2.0 million before tax. We have stabilized the investment income. However, there are unrealized losses, which I have mentioned and which are reflected on our balance sheet. Our cost-cutting initiatives are quite effective. The operating expense is down 7% year-over-year. Why this is happening, we continue to work on our process automation projects. And Stefan is on the top of the sales approach, which is being reorganized and he will elaborate on that a bit more after I have finished my presentation. COVID-19 and Ukraine war I believe we are doing a great job. Our market position and our digital business model, they are not affected very much by these unprecedented challenges. Furthermore, I would like to highlight our continued robust solvency position, which is still way ahead of the minimum amount provided by regulatory law. And finally, I would like to confirm that Deutsche Familienversicherung is positive to achieve the projected and announced profit before tax of EUR 0 to EUR 1 million in 2022. And with that, I now return to the CEO, who will provide more insights on our strategy and the development of Deutsche Familienversicherung.

[Stefan Knoll, executive]

Karsten, thank you very much. Ladies and gentlemen, as already announced in my introduction, I would like to talk about distribution in more detail. To do so, let's go back to the 4th of December 2018, the IPO of Deutsche Familienversicherung. Growth was one of our promises from the IPO. And so we promised to double the previous year sales results. The target was around 100,000 contracts for 2019, which we actually achieved. However, distribution costs kept rising in 2020 and especially in 2021, which necessitated the reorganization in distribution. The global crisis, the end of which is not in sight, I personally estimate it to be another 5 years, has prompted us to drive this very reorganization much more decisively. Exceeding the self-imposed 12 NEP rule according to which we do not want to spend more than 12x the average monthly premium per newly acquired contract may be acceptable up to a certain point in times of prosperity but not in a crisis which is a pandemic, war in Europe and a gas embargo. And because one is not always accustomed to words of praise from me with regard to BaFin are explicitly endorsed the economic assessment of BaFin at this point, namely that of its Executive Director, Dr. Grund. Keeping money together is the order of the day. We take this advice of BaFin seriously. A sales force that essentially pays attention to the sales result and less the acquisition budget looks like it has fallen out of time. At the last -- latest now, the challenge is, therefore, to replace strength with intelligence, and this is what characterizes the new sales department of Deutsche Familienversicherung. Finally, this category also includes the fact that we are building up the necessary know-how ourselves and replacing marketing inability with ability. The distribution of Deutsche Familienversicherung will be determined by 3 focal points, namely, an increased presence in the social networks, a change in TV advertising and the use of Eintracht Frankfurt as a distribution channel. It goes without saying that we will continue to use our fast closing rules and try to implement the 12 NEP rule. Perhaps something fundamental in advance, namely the relationship between the use of social networks and actual sales. In fact, we consider social networks are what parties like to call the pre political base. Social networks are real breeding ground of any sales activity because it gives the following distribution, the attention it needs. For example, we now operate the fastest-growing TikTok channel in the insurance industry, 2.6 million views speaks for themselves.Although I cannot assume that you are aware of the efforts of the city of Frankfurt and its citizens to vote out the scandalous mayor. I will mention this in connection with our efforts to increase our presence in the social networks. 1.2 million views have significantly raised the profile of Deutsche Familienversicherung, at least in the Rhein [indiscernible] region. And for those who think that it is not specific enough, I would like to point out that an excellent campaign led to fourfold increase in sales in this product segment compared to the previous quarter. A long-term care insurance campaign is currently underway, where I can't give any figures yet because it was only launched a few days ago. I will report on it when I see or hear you again. Our television advertisement had to be substantially structured. I spoke about this at the beginning. And at this point, I would like to emphasize the fairness of ProSiebenSat. 1 in their willingness to restructure an existing 3 years contract. In the future, it will also be about branding, but we also expect at least 15,000 new units from the distribution channel. Eintracht Frankfurt. We have been running the insurance shop for a long time. But unfortunately, it has fallen [ asleep ]. Although we are Eintracht sole insurance partner, we have done nothing with it, [ a scandal ]. The integration of DFV Snap into the Eintracht mainaqila app makes sense and is the right thing to do because it gives fans a form of insurance cover that they can't get from any other insurance company and 115,000 members is worth thinking about. You know about the DFV Snap from Capital Market Day. We are now going to Austria with it, uploading an app and having insurance cover for 24 hours for full EUR 5 is the future of the insurance industry. That brings me to the end of my remarks, we have been profitable again since the IPO and remain so, keeping money together is the order of the day. New business growth is respectable and the sales realignment will be completed by the end of 2022. I thank you for your attention. I wish you because we will not speak or see again until next year a reflective Christmas season and come well into the New Year. Goodbye.

[Stefan Knoll, executive]

We can now start with questions.

[Operator]

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] One moment for the first question, please. And the first question comes from Jochen Schmitt with Metzler.

[Jochen Schmitt, analyst]

I have 3 questions on new business in primary insurance. Firstly, can we expect a higher new business volume for primary insurance in Q4 of this year relative to Q3? Secondly, what about 23, just in qualitative terms, may we expect you to increase new business volume and primary insurance in '23 relative to '22. And thirdly, it seems that distribution costs in terms of monthly premiums were higher in Q2 than in 6 months '22. Could you please comment on that? These are my questions. Thank you.

[Stefan Knoll, executive]

The connection was not very well. Mr. Schmidt, I hope I was able to understand everything. And I hope I keep in mind all your questions. The first answer, we expect a growth rate in the primary insurance next year of 10%. Second, we do not expect in the fourth quarter, higher sales results than in the third quarter. And in respect of the development of the 12 MP rule, well, we work very hard on this, but one of the main drivers of not acceptable sum of money we spent per acquired contract is the existing direct response TV advertising because there is a contract that ends at the 31st of December this year. And then we expect a lower cost out of this. I hope I have answered all your questions.

[Jochen Schmitt, analyst]

Yes. Thank you very much. And sorry for the bad line. I have the same issue. I can't hear you quite well. But if I may, just one very brief follow up the 10% growth in primary insurance next year compared to '22. Does this refer to Gross Written Premiums or to new business volume?

[Stefan Knoll, executive]

Gross Written Premiums.

[Operator]

[Operator Instructions] And the next question comes from René Locher with Stifel.

[René Locher, analyst]

I cannot -- here we go. Here we go. -- [indiscernible] Can you hear me?

[Stefan Knoll, executive]

Now I can hear you. Yes.

[René Locher, analyst]

Wonderful. Okay. So first of all, yes, on Slide 15, this is quite a surprise to me. When I see that you have like 2,600,000 views on TikTok. So I mean, just a general question. What are your potential clients looking at? So which products? And can you give an indication what is the age structure of Deutsche Familienversicherung so the policyholders. So that's the first question. And then the second one, I guess, this is for the CFO Paetzmann month. I mean I did a rough calculation on Slide 8, you show a net claims ratio of 70.4%. And on Slide 9, if I'm right, you show a net cost ratio of 32%. So am I right that your combined ratio as per 9 month is slightly above 100%? And then if I may, on Slide 10 the investment result, just did I get it right, perhaps here again for CFO, you have a current revenues from investment of EUR 4.7 million, and the income from capital these. So the [ delta ], the 700,000, I guess this has it is something with with the bond portfolio, so like unrealized losses. Perhaps you can just help me out here? How do I get from the 4.7% down to the EUR 4 million. And then just the last question, the reinsurance contract, this is a quota share contract when I'm right? Thank you.

[Karsten Paetzmann, executive]

Yes. This is Karsten Paetzmann. I'll start answering some of the questions, and I will hand over to Stefan. I start with the last one to confirm, this is a quota share contract the reinsurance contract. This was an easy one. The next one, why is, I rephrase your question. Why is the current revenue of EUR 4.7 million higher than the total income from capital investments of EUR 4.0 million. And the answer is, and I think you have touched on it already, that we have recorded extraordinary losses from securities, which we have disposed and with the resulting and realizing a loss. That's effectively what has happened. But to us, it's more important to have the current revenue in a stable manner. And I think I have elaborated on this during the H1 presentation a few weeks ago. And another question I would like to answer is what it's, again, a confirmation that, yes, based on the first 9 months of 2022, our combined ratio is almost 100%. It's a bit above 100%. And actually, that's what we aim for that based on our operating business before income from capital investment, we are profitable. We are almost there, and that is -- that's something that makes the CFO happy that we [Audio Gap]not in any case, will need positive income from capital investment in any case to be profitable. But the substance and the nature of our business is turning profitable. And that is what we have effectively been telling you and the community for a few quarters now. And with that, I turn over to Stefan Knoll for the remaining questions.

[Stefan Knoll, executive]

Yes. First of all, long Mr. Locher, it is a great pleasure to hear you again. We talk to each other every 3 months and always, I think that it would be better to see a minimum 2 times a year. But however, I'm happy to give you some answers. And first of all, the average age of our customers seems to become step-by-step younger. The average age is around about 35 years of of age. Second TikTok is a little bit younger at the moment, we assume between 20 and 30. The interesting thing is that we focus step-by-step more on the younger generation. Why? Because they have less insurance. And products like DFV's net or a new product, we will present after the 1st of January next year is a product for younger families, for singles, not for people in my age. There is a difference in respect of long-term care. Long-term care is unfortunately more a product for elderly people when they had the first experience with long-term care cases, for instance, in the family with France or something like that. But TikTok, viewers of TikTok and the user of TikTok became step-by-step older. And our customers, I assume, become step-by-step younger. Though TikTok is for Deutsche Familienversicherung really interesting channel in order to make Deutsche Familienversicherung public to well known and the results are respectable, and -- please follow us on TikTok, and I think you will be delighted what we are doing the whole day over there. And even if I am present in TikTok, the views are on a pretty high level. So even a person that my age is able to convince younger people.

[René Locher, analyst]

This is very helpful. So I have to download the Tiktok app not just to keep the Deutsche [ community ]

[Stefan Knoll, executive]

It's important... But more important is, unfortunately, if in Switzerland, yes, I know. But more important is to download DFV's Snap and spend the next skiing holidays in Austria because then you can use a DFV Snap. It is an international app for everybody who stays in Austria for a short time of period. And I think this is more important, but TikTok is not so bad.

[René Locher, analyst]

Okay. No, that's fine. And then just a last question on the direct TV. I mean I do understand it's now much more focused on DFV on your brand. So what what is the financial impact? I mean, you don't have to give me numbers, but I do believe it's now more expensive for DFV to use this direct team.

[Stefan Knoll, executive]

We spend a specific sum of money. And well [Foreign language] The media volume is around about EUR 40 million, but we do not spend EUR 40 million. But the media volume is calculated with EUR 40 million. So I think if you look broadcast from ProSiebenSat 1. you will see Deutsche Familienversicherung every day and the whole next year. So I invite you to do this after you have downloaded TikTok and DFV Snap, please have a look on the advertisement at for ProSiebenSat 1.

[Operator]

There are no further questions at this time. I would now turn the conference back over to Dr. Stefan Knoll for any closing comments.

[Stefan Knoll, executive]

Yes. Thank you very much. There is -- there are 4 other questions from [indiscernible] from [indiscernible ] AG. I used the opportunity and say, I want to say hello [indiscernible], it's time to see again, and now I repeat the questions and then we will answer them. First question is -- can you already say something about the claims ratio at DFV Snap?Well, the claims ratio is 0 at the moment. So there was no claim so far. And no claim means always claims ratio is 0. We expect that the claims ratio will be very low, but nobody knows. So the next question is, what do they earn from the reinsurance business with Barmenia? And the third question is hidden burdens in the investments currently? And number four, is this myself the end -- Okay. So I hand over to Karsten in order to answer the question number 2 and 3.

[Karsten Paetzmann, executive]

Now again, number two is the question what we earn from the reinsurance business with Barmenia. I think we have provided a statement of comparative income with the specific column called inwards reinsured. We did the same after the first 6 months of 2022. And there we showed a profit of EUR 0.4 million. We now, for the first 9 months of 2022 show a profit of EUR 0.6 million. And now guess what the result will most likely be for the first and all months of -- first 12 and all months of 2022 most likely something in the area of EUR 0.8 million. I hope that gives you an indication what we can expect from this in what to insurance agreement.The third question relates to hidden burdens or I also understand hidden losses the investments currently. Now our group accounts are based on IFRS. And under IFRS, we effectively have no hidden losses in the investment portfolio because all our investments are measured mark-to-market. And therefore, we -- the only thing what we have is we have accumulated unrealized losses. And my understanding is that your question refers to these. And they are, and I think I mentioned it earlier, they are now accumulated unrealized losses of EUR 20 million since the beginning of this year. We had EUR 15 million, I believe, after 6 months. And now the third quarter added some EUR 5 million to it. So now it's EUR 20 million compared to the market value at the beginning of 2022.

[Stefan Knoll, executive]

Okay. That gives me the opportunity to answer the fourth question from [indiscernible], the question is number of NEP from quarter-to-quarter.Unfortunately, I have no exact figures here on my desk. So I must give you a written answer later. You see the development of the NEPs from year-to-year on Page 9 of our presentation. It is -- well, it differs because it is a question what kind of sales channels we use. If we use in 1 month more direct sales channel activities, then the acquisition costs went down. If we use more direct response TV as the sales costs increase, so it is not an exact line from month to month. On a yearly basis, the sales costs went down a little bit, but we expect much more next year, especially because we changed the contract with ProSiebenSat 1. yes, that's my answer. Now I hand over to the operator and...

[Operator]

Yes. Thank you. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining us, and have a pleasant day. Goodbye.