Edited Transcript of GCO.MC earnings conference call or presentation 30-Jul-20 2:30pm GMT

Half Year 2020 Grupo Catalana Occidente SA Earnings Presentation Barcelona Aug 2, 2020 (Thomson StreetEvents)

Half Year 2020 Grupo Catalana Occidente SA Earnings Presentation

Barcelona Aug 2, 2020 (Thomson StreetEvents) — Edited Transcript of Grupo Catalana Occidente SA earnings conference call or presentation Thursday, July 30, 2020 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Felipe González Bailac

Grupo Catalana Occidente, S.A. – Financial Director

* Francisco José Arregui Laborda

Grupo Catalana Occidente, S.A. – Director General & Secretary

* José Ignacio Álvarez Juste

Grupo Catalana Occidente, S.A. – CEO & Director

* Nawal Rim Barange

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Presentation

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Francisco José Arregui Laborda, Grupo Catalana Occidente, S.A. – Director General & Secretary [1]

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Good afternoon. It is a pleasure to be here with you once more to talk about GCO in the year 2020. My name is Francisco Arregui, CEO (sic) [Director General & Secretary] of the group. And here with me, as usual, I have the CFO, Carlos González; and the Investor Relations, Nawal Rim.

And first of all, as usual, I would like to thank you not only for being here in this remote event, but the follow-up you conduct of our business and the value of Catalana Occidente shares.

As usual, you can ask your questions by online means, and we will try to group and answer as many as possible at the end of the session, and everything else will be answered via the usual ways.

And so we’ll talk about how things are going in this first half year of 2020 with figures of the accounts formulated this morning by the Board of Directors and that are public at the moment and that have been subject to a limited review by our auditor, PricewaterhouseCoopers, PwC, with a clean opinion with no qualifications — or an unqualified opinion.

And I’d like to say, first of all, that things have been going reasonably well, with a very good behavior of the traditional business despite certain factors that we will stress and despite the crisis we are in at the moment. And we will also see this — not so well in credit insurance. There are nonpayment of some credits, which is a lot more sensitive to the economic cycle. There are defaulted claims.

And okay, so we’ll follow what we see on the screen, we start with some words about the environment. Of course, things have changed a lot and suddenly since the beginning of the year. And the reality is that for quite many years, we’ve been saying that the development of our activity took place in a difficult environment, especially due to volatility and globalization, meaning that everything that happened anywhere in the world affected immediately our businesses. And we’ve gone through different conflicts and uncertainties, both economic and political, Brexit, protectionism, nationalisms, many which are almost forgotten at the moment. But the truth is that, for quite many years, there have been a common denominator, which was growth in almost all geographical areas and especially in an environment of low inflation and very low interest rates at historic minimums.

The truth is that it is also true that in the past couple of years, we clearly saw, especially last year, a slowing down of growth, especially in Europe and Spain. All of that context, which is the context we were in when we planned for 2020, well it has all gone away with the health care crisis, COVID-19, you all know it very well. But of course, the industry in China stopped, lack of supply — more or less in March it reached the rest of the world and then the lockdown started in different areas. And subsequently, the stopping of industry and trade funds.

This means that even today, it’s still very difficult to make any specific forecasts and precise forecast of the economic situation in a few months and what will be the actual slowdown of the economies. We’ve forgone the idea of a very quick recovery, a V-shaped recovery in the second half year. We will have a complicated second half year. And the latest estimations of the IMF are much different from the ones they issued in April, you can see this on the screen at the moment. They are forecasting a decrease of 5% globally, some 8% in the U.S., almost 13% in Spain. And many of the estimations have broad ranges, depending on different factors.

What is clear though is that the economic crisis is impacting and will continue to impact our business, especially regarding credit insurance, which is a lot more sensitive to the economic cycle, because the traditional business, and we will see this in this presentation, is very defensive as a consequence of the inertias of the portfolio amongst other things.

And I’ll move on because I already talked about this evolution of interest rates and stock changes. The truth is that the insurance sector in Spain, we’ve said for years, that it has had and it has an exemplary — has had an exemplary behavior during the crisis 2008, 2009. It had been growing for many years. And the truth is that this year, although in the first half year we’re seeing a decrease of 11%, a very significant decrease in savings of 32%, causing this greatly. We cannot say that everything else is growing because, of course, yes, there is growth in certain lines of business, but we already see a decrease in motor by 3%. And in enterprises, especially, this is what we see in the 1.7% in others.

And in the context we described, I already said at the beginning that things are going reasonably well for us in the first half year, honestly, very well in the traditional business despite the very competitive characteristics of the Spanish insurance sector and the adverse conditions. We will talk about the month of January and February we had due to the weather event Gloria, which has been the greatest in our known history, in our current history in multi-risk, EUR 29 million, claim for us with an impact, a net reinsurance impact of around EUR 9 million. And that, that despite the COVID crisis affecting us basically since the second half of March.

And if we are to talk about turnover and results, here, we have this summarized P&L that we always bring to you. And later we will see a lot more detail given by Carlos González, the CFO. And the truth is that despite it all, we are increasing our turnover, 1.2%. And if we break it down by business or segments, in traditional business, we’re growing by 8.2%, actually 11.2% in recurring premiums, because we are decreasing by approximately 13.2% in single life premiums. We’re not concerned about that, because they are the ones with the least value for our business, especially so in the current landscape of low interest rates, where there is no margin for the brokerage of the money. And we even advise against these transactions, so — because an increase in interest rates could damage the value of our investment.

And everywhere else, in all lines of business, except for others, we are growing, except for others and motor, as Carlos will explain later.

New production has had a negative impact, especially due to the lockdown and the months of the state of emergency.

And in the traditional business, we see almost a full recovery in the month of June.

It is true that our 8.2% growth has a considerable inorganic component because in 2020 we collect the January premiums of Antares, which came into our consolidation in February 2019 after the acquisition with a strong seasonal character in premiums, especially the January premiums that we include in this year, which amount to almost EUR 120 million, a significant amount of which belongs to health. But despite that, we would still have a growth of 1.2% if we were to measure this as pro forma.

In credit insurance, you can see — you can see a decrease in invoiced premiums — in terms of acquired, we still have a growth of 1.6%, but with a reduction of 2.6% in the month of June. So we can progressively see the effect of the financial crisis, the decrease, which is a lot more significant in Spain, which has a considerable weight in our credit insurance business.

The causes of this negative trend, well, some of them are known by all of you. We have a lot less commercial activities, selling activity. Just to give you an idea, in June in Spain, sales were approximately 30% as compared to 2019 same month.

Secondly, for the first time in a long, long time, there are downward regularizations in the selling estimations of our insurance holders. This is why we have negative impact and the cancellation rate is holding up quite well.

And secondly, because the renewal premiums are increasing notably, 3% in [a liquid] manner in the half year, but with more significant increases in the past few months, especially in the month of June with 11%, and even more than that in Spain.

From the point of view of the result, you can see it on screen, significant reduction. 31.3% less in terms of consolidated result and 27.7% less in attributed results because most of the minority shareholders or minority partners are in credit insurance.

Nonrecurring, still damaging us EUR 9 million net taxes. This means EUR 18 million net of taxes in financials, negative, and an income of EUR 11.2 million, which is gross, EUR 9.2 million as a consequence of the writing back of a provision due to a tax litigation of a fund of the former Groupama.

The most important thing, which is the operational result of both results, traditional and credit insurance. As I said and as you can see on screen, a very good result of the traditional business, with an increase of 10.7% as compared to the first half year of last year, where we had a very good result indeed. And here, there are many factors. Traditional business is holding up quite well, but there are 2 key aspects.

The first one is the very good behavior of multi-risk in the past few months. We already have an increase in results of 0.2% after having suffered from the Gloria event at the beginning of the year, as I already mentioned, with an impact of almost EUR 9 million after reinsurance in our P&L. And the second factor that I should stress is a very good result in motor. You will see this, and Carlos González will explain it later, with an increase of 35% as compared to the first half year of last year, with accrued claims of 67.7%, almost 2 points below last year, as a consequence mainly of the lockdown period due to the state of emergency that you all know of and despite the portfolio defense measures that we are carrying out through our network. Of course, the increase due to circulation, road traffic, will increase as road traffic goes back to normal.

And in credit insurance, the positive result of EUR 38-point-million (sic) [EUR 35.8 million] as you see, which is almost 70% below the first half year of last year, recurring results from credit insurance business. And if you compare first quarter with second quarter, this result entails a bit of a loss of EUR 12.5 million in the second quarter, if we consider it as a stand-alone, in which claims ratio has gone from 45% to 60.7%. And therefore, there’s been an increase by 15 points.

Why? Why these evolution of claims? You all may understand this in the framework of the economic crisis and the nature of what we insure via credit insurance. At the moment, we can no longer tell you, as I said at the end of the first quarter, that we have not seen an increase of the frequency of claims as a consequence of the crisis. But the contrary, in the past few months, we’ve already seen a clear increase in the claim frequency, especially relevant in Spain, with 23% more claims than last year. A lot less in the rest of the world, 7% specifically.

And secondly, we also have an increase, quite notable increase of peak claims. For example, in this half year, we have 16 claims of over EUR 12.5 million, a lot more as compared to last year. We are having a bad claims ratio above 78%, in accepted reinsurance. And you may understand that we control this business less.

And on the other hand, it has also a negative — we also have a negative impact due to the credit insurance regulations, which lead us to a lower result, EUR 16 million less and a result of some negative EUR 8 million. And we think this will have a positive contribution at the end of the year. But this is because the threshold — the claims threshold has been reached from which we will have positive results, which would be around 70%. And in the most significant countries in Europe, which is where we have this agreement, we have claims which is up some 55% at this moment.

And finally, of course, we are booking provisions very cautiously, at the end of the first half year. As you know, we have a global system of provisions, which anticipates claims based on the parameters of our model that we adjust based on the evolution of the business and the financial crisis. So as a summary, we think that we are very well provisioned at the moment for the risks incurred until today. We cannot guarantee that we will not need to increase provisions in the future given the uncertainties of the current moment in time. What else can I say?

Finally, I couldn’t finish this part of the presentation without talking about the huge amount of actions, not only quantitative, but qualitative actions that we have conducted in order to support the different stakeholders in the context of the COVID-19 healthcare crisis and the economic crisis that follows. All of these actions are basic and essential for the maintenance of the business, and some of them are listed on screen at the moment. I will not stop to talk about each of them, but they go from employee protection; going through many customer service measures, which are basic for us. For example, flexibilization of terms and prices. Helping society through our day-to-day activities, the Jesús Serra Foundation. And the most significant one is the contribution of around EUR 2.5 million that we made to the health care professional protection fund which was channeled via the UNESPA Employers Association.

So the general lines of our business has not changed in the half year. And as usual, I always mention the weight of credit insurance, too, and after the incorporation of Atradius, we are now at 60-40. And secondly, from an international point of view, we are, even if it’s limited to credit insurance, we are multinational or international. And as you can also see on screen, approximately 2/3 of our activities of our turnover are in Spain and the rest are essentially in Europe. And basically, the old Europe, as you can see on screen, approximately 6% of our business is located in the rest of the world.

And the third message after income and results is that we keep a solid solvency position. There is a chapter for that.

And fourth message is that we have a dividend policy which is always stable and cautious. And we maintain our remuneration commitment to shareholders even at difficult times.

Going into that and before talking about dividends, regarding the evolution of the share that you can see on screen, share price performance, you all know it very well in the long term. Here, we can see from 2002 to 2019, so a lot better than the indexes pertaining to us, even after the drop this year of around 10%, as you can see on screen.

And in the short term, honestly, the outlook is not so good. You know that last year, the share price dropped by almost 5%, some 4%. And despite the rebound and the increase in the stock exchanges in the fourth quarter, which we did not make the most of in the same measure as the index, but we have also experienced a significant drop in the first quarter of 2020, where together with the shock of the stock markets, about some institutional investors went back on some positions, and this leads us — due to our liquidity involved a proportional or more than proportional decrease of our share price. And it’s gone back up again to around EUR 20 per share now.

As to earnings per share, you can see the profitability long-term graph. We had from 2002 to 2008, a significant dividend increase period, around 30s percent. And the truth is that we were able to even increase dividends at the toughest times of the economic crisis. And the crisis of result of credit insurance in 2008 and 2009, from that moment onwards, we’ve had consistent growth. And in the past few years, this has been around 6% and 7.5%. You know perfectly well that a few months ago, we proposed to the April AGM an increase of 10%, so that we could place the dividend [charge] results up to an increase of [7 — 7.3%.] But unfortunately, in the framework of the recommendations that caution recommendations, suspension of shareholder remuneration and different recommendations of the different bodies due to the COVID crisis, we were forced to reconsider it. We withdrew this item of the agenda for the AGM.

And by the way, before the 30th of October, we need another shareholders’ meeting — to hold a shareholders’ meeting to approve the final application of results. But we were able to combine this nonapproval of the application of results with a fourth interim dividend, which was agreed upon by the Board of Directors of exactly half of the complementary dividend initially proposed.

So the dividend charge results of last year was left at EUR 81.5 million, which is a payout of — a bit above 21%.

And as you can see on the chart, and as you know, the Board of Directors in June agreed on a payment on July 1, which has already taken place, an interim dividend, the result of 2020, of the same amount as last year, EUR 19.1 million.

Given the fact that despite the caution recommendations are still ongoing, we are very solvent group, and we want to maintain our strong shareholder remuneration commitment.

Carlos, do you want to continue?

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Carlos Felipe González Bailac, Grupo Catalana Occidente, S.A. – Financial Director [2]

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Good afternoon. So as usual, I will now start to break down and give more information. The information given by Mr. Arregui were already quite thorough, but I will give you more information about the evolution of both businesses. And we, as usual, start with the traditional business and the first-line of the P&L, turnover.

Generally speaking, we have not been able, of course, to maintain the commercial activity of pre-Covid times, even if our diversification and the hybridity of our customers has allowed us to maintain a growth trend, an increasing trend in turnover. With these figures that we can see on screen, with an increase of recurring premiums of 11.2%, part of this is due to the incorporation of Antares to consolidation scope. And even without that, we would be growing around 1.2% if we discounted this effect.

In terms of result, the result is on a positive path, with an increase of the technical result by 15.7%, which has translated into an improvement of recurring result, an increase of recurring results of 10.7%, as you can see on screen. And this is based on a positive evolution of the general insurance business, with a positive impact with the reduction in mobility and road traffic at the beginning of the COVID period and with a positive impact due to COVID in the health care business that we will talk about later. With that, the combined ratio has improved by 0.8 basis points up to 88.4%, and we maintain a positive spread as compared to the industry.

If we now go business by business, we’ll start with multi-risk, which is growing in a sustained manner, growing by 3.7%, which is a bit better than the industry, which is growing at 2.9%. And we believe that, in a way, this is due to the high retention of customers. The combined ratio is at 87.4%, 0.3 points below last year, and with a clear improvement as compared to the last quarter.

And I would like to remind you again that in the first quarter, we were affected by the weather event Gloria. We have already assessed its impact, it’s practically 9-net-million in our P&L, after reinsurance. And this quarter, we have not had weather events, no impact from weather events, but there’s been a certain reduction of the number of claims due to COVID. The technical results balances out both, with EUR 41.7 million total, as you can see on screen, almost the same as last year.

In motor, net increase of number of insured parties, a positive effect of COVID, combined ratio goes down to 91.3% with a reduction of 1.8 points of technical costs, with a reduction in the number of claims in the lockdown period due to COVID, which will normalize, actually. We are already feeling that effect. And the average reduction was 40%, around 40% in this past quarter. This reduction of the technical cost is allowing us to increase the result, as we can see, 35% to EUR 28.3 million that you can see.

As to multi — as to others, minus 0.5% in written premiums, especially business related to economic activities, which lines of business are very much related to economic activities due to enterprises, with an excellent combined ratio of 84.6%. So the maintenance of technical result at almost EUR 24 million.

Life — Life continues to increase in terms of periodic premiums and funerals. And as you may remember, single and [supplementary] premiums dropped because of the interest rate environment. And therefore, we’re not promoting there, selling. Health includes Antares, as we mentioned earlier. This is why you see this exponential growth. And at any rate, the growth in the health care business measured in acquired or earned premiums is above 10%.

In terms of results, the technical results improves significantly, thanks to the good behavior of claims in health and thanks to the result of Antares, because the health care business has been particularly affected in the COVID crisis due to a reduction of medical interventions for nonsevere conditions. In all of the lockdown period, our policyholders would not go to hospitals or doctors unless they really needed to.

In funeral, on the other hand, there’s been an increase in the claims ratio, but this has been offset by lower commercial expenses. So we have been able to maintain a combined ratio below 80% and 0.5 points above the previous half year.

As a summary for the traditional business, the maintenance of earned premiums, the 0.8 points in the combined ratio due to the lower frequency in motor and health care and other businesses and the good evolution of health care allows us to increase the technical result by 15.7%, up to EUR 132 million, again, showing the resilience of the business in the event of any crisis. And at the moment, of course, due to the COVID crisis. On the other hand, in terms of the financial result, it has been affected. And finally, the recurring result increases by this relevant 10.7%, up to EUR 128.8 million.

Now we talk about the credit business. Acquired premiums in this business reached a volume of EUR 890 million with a growth of 1.6%. And this growth effect is mainly as a consequence of issuing premiums due to risks acquired the year before. And the turnover of the year itself is, however, dropping in around the environment of 2.8% due to the COVID crisis and due to 2 factors. First is the reduction of commercial transactions of our customers. And secondly, the lower risk appetite on our side, because we are reducing our total exposure to risk. As you can see, on the previous chart, we are doing so in a dynamic fashion, 9.1%, as you can see. And this reduction mainly focuses on the last quarter, mainly takes place in the last quarter. And as you can see, this reduction has different intensities depending on the buyer, the industry and especially based on whether the country has any government agreements that can support us or can support this buyer, these insurance holders, and therefore, guaranteeing the coverage level that these agreements are aiming at.

These 2 negative effects cannot be offset by the increase in taxes that we [are conducted] or the increase in fees. As we’ve already mentioned, they are around 3% in the half year. So if in the first half year we’re not being too active in increase in fees, you may realize that in this second quarter, we’ve been a bit more active or a bit more aggressive due to the increase of risk perceived by our policyholders and ourselves, because we are indeed seeing an increase in the claims ratio.

As was to be expected in terms of the result, this crisis is affecting the profitability of the business with a drop in the technical result to the EUR 42.1 million, which translates directly into a reduction of recurring result, translates into a reduction in the recurring results.

As to the drop in the growth level of turnover, it’s generalized, as you can see on the screen. It is true that we are already seeing global reductions in the areas most affected by the pandemic, Spain, Southern Europe, with a drop of 1.5%. Whereas in the rest of Europe, it is slowing down, although we do not see it yet at the level of earned premiums.

As to profitability, the gross combined ratio, reinsurance increases up to 94.3%. However, the net combined ratio, the one that you were used to seeing and following, has gone down to 92.2%. We thought it was convenient to inform you on gross combined ratios because all of the government agreements make it difficult to follow up on the business on a historic basis.

But you can see the evolution of combined ratios, both gross and net, in the annexes.

So in summary, these ratios, both gross and net, show an increase of the technical costs, in the case of the gross combined ratio, of 15 points. And this is as a consequence of different factors. On the one hand, factors that are not related to COVID-19 that have already been mentioned, basically a greater number of peak events before lockdown. And the second reason, the most relevant reason is related to the increase of the claims frequency that has taken place in the last few months, with a greater impact in Spain, with an increase of the frequency by 23%, but this has also been observed in the rest of countries, with a bit of a lower increase, a bit below double digits.

I would like to say here that we continue with our conservative provisioning, and we are collecting the future impacts of increased of claims ratio detected in the risk that we are covering as this is our best estimation that we could come to at the end of this half year.

Another summary. We will go through the drivers of the half year. On the one hand, reduction of income, reduction of turnover in Spain and Southern Europe due to the portfolio management actions have not been offset with turnover increases. The technical result before reinsurance has been affected by the increased frequency of claims due to the COVID crisis, as I mentioned before. But it is also true that as a mitigating element, we continue with relevant reinsurance coverage, with the coverage of standard contracts at 37% transfer.

And we also have, and this is a novelty, as compared to previous crisis, we have government agreements for at least half of the portfolio that cover future claims, future events. However, the current levels of claims, as Mr. Arregui said, have a negative impact on our profitability. We mentioned EUR 8 million directly as losses due to government contracts and another additional EUR 8 million as less profit due to the traditional fees.

And finally, the financial result improves. It improves mainly because of the differences in exchange rates. And with all of that, the recurring results, which is this EUR 35.8 million, that, of course, compares poorly with the previous year. But bearing in mind the COVID crisis, we feel we’re comfortable in giving you these figures as a result as of today. Mr. Arregui?

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Francisco José Arregui Laborda, Grupo Catalana Occidente, S.A. – Director General & Secretary [3]

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Okay. So we leave behind the P&L now. And I think you may see that we’ve made an effort to be transparent not only in the good times, but in the difficult times as well. So let’s now leave the P&L behind, and let’s now talk a bit about capital investments and solvency.

On screen, you can see, as usual, the evolution of our permanent resources in the past 20 years, in the 20 years of this century. And on the left-hand side, the evolution in the current year. I would say that the historic evolution of permanent resources is spectacular going from a bit over 300 to over 4,400, so multiplied times 13 without diluting — without asking for money to third parties or our shareholders and because we have applied this conservative policy of dividend payout we have referred to, which our shareholders have allowed us to do to fund this period of growth and expansion.

This is a bit what has taken place. In this half year, we have retained a significant part of the result, EUR 155 million versus EUR 72 million.

But in this half year, as we’ve announced, these negative valuation adjustments of around EUR 200 million, lower than what we saw in the first quarter, but EUR 217 million net of tax and asymmetries due to participation of life insurance in the capital gains.

So solvency, the last official communication of solvency we made was in 2019. This is what you can see on screen at the moment. In the last year, a bit over a year, I’ve been saying that the solvency ratio was for us the most important thing in the past few years in terms of solvency was the approval of the internal model of risk by the College, not because it improves — it improved the ratio somehow, which it did, but basically, because we understand that the standard former does not adequately capture the risk inherent to credit insurance, which is a lot better captured because of the financial model based on exposure, probability of default. And basically, because this is the model that we use in management. And for the past 2 years, we are perfectly aligned in this and in the official solvency data.

Other than that, all the particulars at the end of last year, you can find them in the solvency report, which sensitivities and the adverse scenario, we provide 6 points, the main drivers were the generation of own resources and the generation of capital gains, which is very important and significant in the past year and onwards; the integration of Antares, which we have repeated in some areas today with the — [probably] you can see on screen. And we have also the greater redemption in 2019 of credit insurance by 2 points, which is, on the other hand, the one that consumes the most capital and most risk, as you know.

213% is very good, our company is above 170. The ratio is around 180 even in adverse scenario. Own funds of great quality, 95% Tier 1; equity of high-quality. And this equity solidity is the reason why the 2 rating agencies working with us, AM Best and Moody’s, improved our ratio at the end of 2018 to A and A2 and they are maintaining it there in this context of crisis due to COVID-19, with the only qualification of the negative perspective of Moody’s due to the economic crisis.

Other than that, you see here the distribution of our investments, $14.328 billion, almost the same value as in December 2019, as you can see. And the situation has improved a lot as compared to the first quarter of this year, where the value of our equity dropped by 25%, and now it’s at minus 16% as compared to December. I don’t want to bore you with the details — all details are on screen and in the annexes and the summary of last year, last year’s report.

And again, I would like to say that we have a cautious and conservative investment policy with a diversification, as you can see on screen. And mainly, we have assets that are adequate in terms of our liabilities duration, profitability and in all of the terms of joint management of assets and liabilities.

And finally, I cannot but talk about sustainability, especially now during the COVID crisis, which is involving so many assets by so many. For us, the GCO group, we have underwritten the Global Compact principles of the United Nations; and also the Sustainability in Insurance principles, PSI; as well as PRI, Principles for Responsible Investment. For the most recurrent activity and social action, we contribute to sustainable development goals.

And maybe I would like to stress that during this year, we have, after 2 years, conducted a second materiality analysis for all of these issues. We have updated materiality after an internal and external analysis, including the weighing of factors such as new legal requirements, requests by analysts, investors, sectorial challenges and challenges of the group. And in light of the result, we have these material issues, as you can see on screen, and we will, therefore, redesign and modify our sustainability master plan. And that would be all, I think, with this.

We have given you a general overview, a general look at how things are going this year. And Nawal, could you give us the questions adequately arranged and summarized, and we will do our best to answer them.

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Questions and Answers

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Nawal Rim Barange, [1]

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Thank you, Francisco, Carlos for the presentation. We will start now with the Q&A, questions that we have received throughout the presentation. The questions were grouped by topics.

First of all, they ask us about motor business. Seeing the improvement in claims ratio, do you think this will be maintained for the rest of the year?

Additionally, the industry is now commercially very aggressive in terms of increasing coverage months and reducing premiums. Have you thought of any measures of this sort?

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Francisco José Arregui Laborda, Grupo Catalana Occidente, S.A. – Director General & Secretary [2]

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It’s a fact, I think we have stressed a lot at the beginning, me and Carlos after. The claims ratio has dropped in motor, 1.8 points as compared to the end of June last year. And basically, the secret here is that with the lockdown during the emergency, the state of emergency, the number of claims has dropped specifically by 23%.

But we must say that given the fact that road traffic is going back to normal, in as much as this continues this way, the effect will be diluted throughout the year.

Regarding whether these improvements in claims ratios will translate into lower prices or better service to customers, well, the insurance sector in Spain, I always say that this is the case and especially in motor, the insurance sector is very, very competitive. So I have no doubt that this will be the case, that the reduction in claims ratio that we experienced, especially the reduction in claims that stays, will be translated into lower prices for consumers.

But aside from the commercial measures we implemented from the beginning via our network, we are still analyzing with the data of the lockdown that are more or less final. If things don’t go south again, we are analyzing whether we take any immediate measures to keep our customers happy, generally speaking, and to make sure we retain our customers. The retention of our customers is essential for us, and customers are at the core of our strategy.

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Nawal Rim Barange, [3]

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The next few questions are about credit insurance. Of course, this is what the most — generates the most data out of the market. What measures are you taking in credit insurance? Do you think the combined ratio of the business can be negatively impacted and go down to levels equivalent to those of the 2008 crisis?

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José Ignacio Álvarez Juste, Grupo Catalana Occidente, S.A. – CEO & Director [4]

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Well, there are no formulas, there are no easy recipes or tricks to do one thing or the other. In a situation as delicate as the one we’re in now, we need to act on many fronts. But there are basically two things that we must do. One is we need to be next to our customers. We need to support our customers, basically via counseling, in terms of the solvency level of their customers. And we need to be more flexible in terms of terms and translation of claims, as we’ve done from the beginning. And the second line of action that we need is the adequate management of risk to protect the profitability of our portfolio. This risk management, we’re not doing it in this [currently.] We’re doing it by country, by sector, by buyer and also based on the insolvencies perceived and the protection of reinsurance that we have at each moment.

All of these factors are factors that impact our risk tolerance level. And as we have already explained, the reinsurance agreements with governments and government agreements are demanding a maintenance optimal exposure. We can reduce risks in specific situations with specific debtors.

And the result of all of these measures that we’re taking, and Carlos González already stressed this, is while the truth is that risk exposure has dropped as compared to end of 2019 by 9.1%, but this has not been homogeneous in all countries. This has been based on the risk that we run in each country. And of course, Spain is the country in which we have reduced risk exposure the most, around 17% since the end of last year because of the considerations that we’ve made throughout the presentation.

You cannot forget that in our pricing system, our pricing system is set by the probability of default, bearing in mind the country and other risk conditions. And the premium is adjusted to the risk. And renewal premiums have increased in accrued terms, 3% this half year. Although a lot more in the past — in the last months of the half year. Actually, the increase has been 11% in the month of July.

With all of these measure applied, the consequence is a gross combined ratio of credit insurance reaching 94.3%, as we said. And the main factor is the increase of 15 points that we mentioned in claims ratio. And the background of this, the reason of this increase in claims ratio, and we’ve mentioned it throughout the presentation, is on the one hand, as I said, we’ve seen an increase in the frequency of claims more significant in Spain, 23% in Spain, 7% outside of Spain, an increase of key claims that I also explained.

And fundamentally, the system of provisions. We are provisioned in a very cautious and conservative manner. We have a global system of calculation which is predictive and it adjusts based on the parameters that are based on the system and the economy. We’ve been very cautious at the end of the second quarter, and we are very well provisioned vis-à-vis the risks we’re covering at the moment.

If I remember correctly, the last part of the question was whether we would reach 2008, 2009 crisis levels. In this regard, I would like to be as clear as possible. We don’t have much doubt that 2020 will be bad for credit insurance. It will be a bad year. We’ll probably close with negative results, with losses. But it’s also clear that we do not foresee we will get to levels of 2008, 2009. Because as I said before, our portfolio is now a lot better with — it bears in mind many different factors and the conditions are much better in terms of prices, franchises, et cetera. Secondly, because we have reacted a lot earlier than we did in 2008, 2009. In March, we were already taking strict measures that multiplied in April. And due to all of that, the acceptance ratio has dropped. And also, we have reduced risk exposure significantly by 9.1%.

And as we said, we also have the government schemes to support trade via credit insurance. And it is true that in the first half year, second quarter actually, we have seen that they contribute to negative results because we do not reach the claims threshold that would mean a positive result of the contract for us. But this will mitigate — significantly mitigate losses at the end of the year.

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Nawal Rim Barange, [5]

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Also related to credit insurance, they say, can you explain again how the agreements with the government are working? Because you said they are not beneficial for now, but they will be. Are there any conditions for the return of losses? And why did you not sign the agreement with the consortium?

These are a series of questions related to government agreements, but — well, these are actually not one question, but many.

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Francisco José Arregui Laborda, Grupo Catalana Occidente, S.A. – Director General & Secretary [6]

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It is true. Currently, there are agreements signed and published with different European governments of the main countries where we operate, Germany, the Netherlands, Belgium, Luxembourg, France, Denmark. Some of them are signed, but pending ratification or publication, such as that with the U.K.

And at any rate, both in the notes and the annexes of the report, you have a breakdown of these agreements, with the main characteristics of each of them because they are not all exactly the same. Each of them have their specific conditions, but most of them are proportional contracts in where the premiums of the country are transferred and the associated claims with a payment as a fee or by any other mechanism to cover this, which is around 35%, and most of them to cover the management expenses on our side.

With this type of cover, we get to minimize potential losses deriving from credit insurance in those countries. But in order for the result of each contract to be positive for us, we need to go over a specific claims threshold, plainly speaking. And on the fees, claims should be above premiums.

And in general terms, even if the agreements are different, we get that threshold of claims with a claim ratio of 70%, 72% or above that, and we are currently not there, because the claims ratio in these countries is around some 50%.

In that regard, at the moment, the contracts are yielding a negative result at the end of the first half year, as I said in my first intervention and as Carlos González explained in more detail.

It is obvious that the aim of all of these government aids, all of these contracts is not to act in favor of credit insurance. They want to protect and give liquidity to businesses and the economies of the different countries via the coverage of credit insurance. And therefore, as a whole, there is a certain general strictness, as long as there is no specific impairment of a debt or a specific situation.

Due to all of that, what we foresee will happen in the second half year is that we will not need to implement aggressive exposure reduction measure, and we will exceed the credit threshold so that the result of the contracts is favorable for the group. And on the other hand, this condition helps us to maintain a good relationship with our policyholders, which in the future should allow us to quickly go back to the previous levels of activity.

What I can guarantee is that in none of these contracts there is a return clause, a payback clause, as they are commonly known.

And why did we not sign the agreement with the consortium of insurance compensation? There were declarations in UNESPA explaining this. The agreement proposed, but then was very similar to the one proposed in the previous crisis, some sort of funding on loans with a payback clause. And in our case, with a strong solvency position with no liquidity problems, we did not think it was adequate to sign it. At any rate, it is foreseeable that at the moment the government of Spain is analyzing measures to support trade assets [in other] countries.

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Nawal Rim Barange, [7]

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There’s a question related to investments. Could you give some more information about the impact that you’ve sustained in your investments due to the current crisis? Are you comfortable in equity or property? Or are you thinking of changing your investment strategy?

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Francisco José Arregui Laborda, Grupo Catalana Occidente, S.A. – Director General & Secretary [8]

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Well, regarding the first part of the question, or the second part, we will — I can already say we’re not going to radically change our investment policy. And I’ll give you more details in a minute.

And regarding the first part of the question, in the report you have the specific figures and data. As all insurance companies, we’ve had negative valuation adjustments, of course, due to the shock of the stock market in March, although this has been reduced in the second quarter. And I mentioned that a few minutes ago. If you want more information, here I have the capital gains which have been reduced in the first half year by EUR 259 million, of which EUR 190 million come from equity and EUR 57 million fixed income, private fixed income. We have also sustained losses with a net amount of 15.8 in traditional business and 0.7 in the credit business.

We don’t know what will happen with the stock market and interest rates. In as much as the stock markets recuperate, if that happens, but probably those impacts will improve — will improve. But it is also true that we expect a certain recovery in capital gains due to real estate, which has not been incorporated into the balance sheet yet. And we may have a bit of an impact once the appraisals of real estate that we are obliged to conduct every 2 years. And the latest ones have been done in offices in prime areas of Madrid and Barcelona. And as to the alteration of our investment policy, other than small fine tunings, that take place due to the context, the profitability of equity and fixed income, the truth is that we have always had a conservative investment policy, and we will not substantially change our investment policy which should continue focusing on the long term, bearing in mind that most of our assets are matched with our liabilities.

And at any rate, other than that, the negative valuation adjustments that we have had in this half year, you should bear in mind that they are quite below the increase that we had in the past year in 2019.

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Nawal Rim Barange, [9]

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Next question is related to the share price. The share price sustained a more negative impact than the rest of the industry did, but it’s recovering. Do you think this is due to your exposure to credit insurance risk?

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Francisco José Arregui Laborda, Grupo Catalana Occidente, S.A. – Director General & Secretary [10]

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Well, the share price, the share has gone up a bit, it’s around the EUR 20 mark. And I said this before, the first quarter, well we saw the shock in the stock markets and — or at the same time, some institutional investors got rid of some significant investments in GCO and these determined a harsh drop in the share price.

The liquidity of the share, in our case is as you know, and this meant that share price reached almost EUR 16. Now this is normalized. In the current context, it has gone back to EUR 20, around EUR 20.

And it’s true that credit insurance is the most cyclic part of our business, so the one that may be most affected by the bad part of the cycle — we’ve explained this at length in a crisis as the one we’re going through now, so it’s normal for the market to see this impact quickly. But we’ve proven in the past few years, that if we bear in mind the entire cycle of the business, credit insurance is highly profitable in the mid and long term.

And on the other hand, we are capable and know how to manage the credit business. The implicit valuations and current share prices make us think that the credit business is being valued by the market despite the current consensus is to buy, with a consensus of around EUR 30 per share, some EUR 28 per share.

And even if there might be some uncertainty about the exact result of the credit business in this year, the group is solvent and strong enough to manage the current context.

And on the other hand, the traditional business, which is more than half of the business, is barely impacted by this crisis.

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Nawal Rim Barange, [11]

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Regarding dividends, we received the following question. You have already paid out the first dividend in 2020. Given the regulations of the European regulations, will you maintain your dividend payout policy?

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Francisco José Arregui Laborda, Grupo Catalana Occidente, S.A. – Director General & Secretary [12]

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You know very well that the — you know very well that the strong recommendation included in the solution of the Supervisory Board in Europe, the EIOPA, and the general management of insurance in April — well, we adopted this Solomonic solution of distributing 1/4 interim dividend, which was half of the original dividend proposed, to maintain our strong commitment to shareholders. Along the same lines, we’ve distributed a first interim dividend for 2020, which was paid out in July for the same amount as last year. And at the moment, the recommendations of EIOPA and the general management of insurance are still ongoing, this recommendation of reducing or suspending shareholder remuneration.

We believe, though, that our solid solvency position, which is known by the regulator, allows us to pay out this interim dividend that we’ve paid out. And we hope to maintain this commitment throughout the year.

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Nawal Rim Barange, [13]

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One last question about solvency. Given the impairment of investments and the credit insurance business, how has this impacted or how may this impact your solvency ratio?

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Francisco José Arregui Laborda, Grupo Catalana Occidente, S.A. – Director General & Secretary [14]

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Regarding the potential impact of the economic crisis on solvency, at the end of the first half year, truth is that I cannot give you data. We have not yet closed the solvency analysis of the first half year, which always takes place after the close of accounts that we just conducted. And what I can anticipate is that in some preliminary estimations that we’re making, we, of course, have a very solid balance sheet. And our best estimation is that the solvency ratio will stay very similar to that of the end of 2019.

There’s several factors contributing to that being possible. On the one hand, the recovery of equity markets that we are seeing in the second half year, which pushes away from the negative levels that we saw in the first quarter. Secondly, this will also help us with the reduction of corporate spreads and interest rate curves. And the solidity of our traditional business, which has even improved its management ratios, and the risk management measures adopted in credit insurance, which involved a reduction of — selective reduction of risk exposure by 9.1%. And we cannot forget that risk exposure, together with probability of default, is the main driver of our internal model of credit insurance subscription risk.

And finally, again, we must mention the government protection plans in the main European countries for credit insurance, which involve more proportional transfer in the insurance, and we are therefore transferring a lot of business.

And just to give you an example for you to understand. In Germany, you’ll see that in the annex, we are transferring 65% of the premiums and some 90% of the claims. And the margin is the remuneration with — [which will be and] — we are saying we are transferring 90% of the claim. So we keep 10% in this.

If we look at the traditional proportional reinsurance chart, this is about 37%. So in Germany, we are retaining 63% of the 10%, which is the 6.3% of the business. So the reduction of risk is very significant. And this should translate into solvency as well, in solvency margin.

As I said, our best estimation is that in the first half year, our solvency ratio will stay at similar levels to the ones at the end of last year.

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Nawal Rim Barange, [15]

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Thank you very much, Francisco, for answering all of these questions. We finish. This concludes our presentation of results of the first half year. The questions that we have not answered will be managed directly via the Investor Relations team in the coming days.

And we remind you that the next presentation will be 29th of October with the results of the third quarter of 2020. You can always visit our website, www.grupocatalanaoccidente.com with information that may be of interest to you, those reports and spreadsheets with all of the P&Ls, et cetera so this can help in your analysis.

As usual, we thank you for your attention and your participation and see you again soon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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