CIG Pannonia - One-Off Losses Overshadowed Strong Underlying Q3 Results

 

CIG Pannonia – Instant Earnings Comment

Recommendation: Under revision (prev. Neutral)

Target Price (12-month): Under revision (prev. HUF 315)

Current Share Price: HUF 215.5

 

CIG Pannónia (“the Insurer”) reported after-tax profit of HUF 256 mn in Q3/19 compared to HUF 406 mn in the same period last year. Results were affected negatively by provisioning needs of HUF 525 mn for cross-border surety insurance activity pursued by its wholly owned subsidiary, CIG Pannónia First Hungarian General Insurance Company Ltd. (EMABIT) in Italy.

The Insurer said that based on its best estimate losses (including claims, legal fees and relief in deferred reinsurance fees) arising from its Italian surety insurance activity amounted to nearly HUF 1.3 bn. It added that reinsurance, if it existed, would have been covered HUF 525 mn out of these losses.

Based on Solvency II report for the third quarter of 2019, EMABIT’S solvency margin stood at 102% compared to 150% required normally by the NBH to keep a prudent level of solvency. As there is the risk that EMABIT’s regulatory capital might fall below the statutory level for the next three months, the NBH under the Article 309 of the Insurance Law required EMABIT to prepare a recovery plan and take prudent and reliable measures to ensure the sound operation of its insurance business, with enhanced risk management and controls, - in particular with regard to the insurance risks already undertaken in its cross-border activity in the guarantee and surety sector. It is worth noting that, EMABIT had as at September 30, 2019 liquid investments to the tune of HUF 9.3 bn and net reserves and other liabilities of HUF 5.7 bn, allowing for it to meet its payment obligations. EMABIT has so far paid out HUF 478 mn of the claims to the beneficiary Customs and Monopoly Agency (ADM), which is responsible for the supervision of gambling in Italy, on a request for drawdown of insurance promissory notes for five clients. In the case of the remaining four claims, claim settlement is still ongoing.

Consolidated GWP rose 19% YoY in Q3/19 to HUF 6.82 bn with life insurance GWP increasing by 28% YoY and non-life GWP rising by 5%. Life insurance GWP was mainly driven by new policies sold and an improved ratio of renewals of existing policies.

In the life segment, the new acquisition was HUF 3.2 bn in the first nine months of 2019 which is nearly 150% of the previous year’s amount. With its new intermediary subsidiary (PPK), which sold insurance policies of HUF 309 mn in annualized premiums in in the first three quarters of 2019, and it also started its credit intermediation business, the Insurer’s sales channels continued to expand, while its product mix shifted towards to risk and traditional products, including the rise of group insurance.

Operating costs increased by 42.3% YoY and accounted for 43.3% of GWP in Q3/19 (vs. 36.3% of GWP in Q3/18), of which fees, commissions and other acquisition costs represented 62% (vs. 71% in Q3/18), while admin costs and other expenses (mainly provisions) accounted for the rest.

Acquisition costs rose 25.2% YoY, whereas gross premiums earned increased by 19.1% YoY. The primary reason for the rise in acquisition costs was that the new sales rose significantly in both core segments, especially those for traditional insurance products, as compared to the previous year. Other admin costs decreased by 12.9% YoY mainly due to cost cuts. Other expenditures rose significantly from HUF 102 mn to HUF 675 mn due to provisioning needs for the expected losses on the Italian cross-border surety insurance activities. Other income dropped by 9.4% YoY driven by the decline of the existing non-life insurance portfolio.

Net claims and related settlement expenses rose by 39.8% YoY in Q3/19, as a combined result of a decline in the number of unit-linked surrenders and a significant increase in claims in the non-life segment net claims due to losses on the gaming surety insurance activity.

Total reported other comprehensive income of HUF 47 mn was negatively affected by deferred income tax expense of HUF 18 mn and an decrease in the fair value of available-for-sale financial assets of HUF 191 mn, the latter was a combined result of unrealized exchange losses on OPUS shares (HUF -394 million) and unrealized exchange rate gains of HUF 204 mn on Hungarian government bonds.

In the first nine month of 2019 CIG Pannonia generated consolidated after-tax loss of HUF 354 mn compared to after-tax profit of HUF 1,561 mn in the corresponding period last year. The life insurance business brought HUF 1,558 mn after tax profits in the first nine months of 2019 vs HUF 971 mn in the same period of 2018 (+60.5% YoY). The non-life segment’s after tax loss amounted to HUF 510 mn in the first nine months of 2019 compared to after-tax profit of HUF 565 mn in the same period last year.

After capital reduction the insurer’s shareholders’ equity decreased from HUF 17.96 bn to HUF 14.99 bn.

The case will likely drag on for months or even years. It is too early to quantify the exact amount of losses that may arise from the Italian cross-border gaming surety insurances. We warn that our profit estimates for the coming years as well as out TP may also need to be revised, but we will only be able to provide the new estimates once more public information is available on the approximate amount of losses on gaming surety insurance activities in Italy.

 

Attila Vago
Senior Analyst

CONCORDE SECURITIES LTD.

Hillside
55-61 Alkotás street, H-1123 Budapest.
Phone:  | Fax: | Mobile:
|
MEMBER OF THE CONCORDE GROUP

 

This message and its attachments contain confidential information, and their disclosure is restricted by law and the relevant regulations. If you are not the intended recipient, it may be forbidden and illegal to disclose, copy, distribute or use the information in this message. If you are not the intended recipient, please notify the sender immediately and delete this message and its attachments. If you are a client of Concorde Securities Ltd., the standpoints and suggestions described in the message should be interpreted in accordance with the relevant parts of the agreement in effect between us.