Capital Markets Day 2016, Aylin Somersan-Coqui

Good morning ladies and gentlemen. My name is Eileen Somar Sanuki. I'm the CEO of Allianz Turkey. I've been with the Allianz Group for 13 years, the last four in Turkey, first as CFO and integration manager of the acquisition we did in Turkey in mid-2013, and since the beginning of the year I've taken over as CEO. It's a great pleasure to be here today to present our innovative and disruptive modular health product in our private health insurance business. In the first three pages you have an overview of how the Turkish insurance sector has been. I will not go through all the numbers, but I will say that with the acquisition of Yapı Kredi Sigorta, Allianz Turkey has become the number one P&C and health player, number two life player, and number three pension player in Turkey, making us the largest insurance and pension company. Here you see the development of our revenues and operating profit. As of September 2016, our revenues have reached about 1.96 billion euros despite the depreciation of the Turkish lira versus the euro, implying year-on-year growth of 33%. Our operating profit has reached 147 million euros in nine months, with year-on-year growth of 39%. Following the successful acquisition and merger, our growth continues to be strong, and our customer numbers have exceeded 6 million. Now let me give you a short introduction to the Turkish health insurance market. Turkey is a very young country – more than 42% of our population is under 25, compared to 26.7% in Europe. This is promising, but we don't face the aging problem today, but we will in the future. By 2050, the population under 25 will increase to 33%. This has huge implications for healthcare expenditures. Total healthcare expenditure in Turkey as a percentage of GDP is less than 40% of the OECD average, and per capita spending is less than a third. Healthcare spending is increasing at over 14% nominal and 7% real, and pressure on the social security system is rising. Private health insurance penetration is only 0.18%, less than half the European average, so the potential is big. As Allianz Turkey, we have seen this potential, and with the acquisition, we have become the dominant leader in health insurance with a 36.5% market share as of end 2015 and a combined ratio of 98%, compared to the market's 92% (excluding us it would be 105%). We have 882,000 customers and the widest medical network in terms of pharmacies, physicians, and hospitals. Our customers benefit from speed and quality of our network, and we settle directly with hospitals, so customers have no out-of-pocket payments except co-payments. This allows us to process 90% of claims within our own network. We have invested heavily in integrating our systems with hospitals, achieving 70% straight-through processing – approval within two seconds, or 6.8 minutes if authorization is needed. We also offer a mobile app where customers can upload invoices and get payment the next day. Why did we want to do modular health? We wanted to address key challenges: after the acquisition we had two portfolios with nine products and 96 different plans, and we needed to retain customers and maintain service. Competition is fierce, medical inflation is well above consumer inflation, and from a customer perspective, private health insurance is difficult to understand, the sales process is cumbersome, and it's expensive. Only the socioeconomically higher segment can afford it. So we designed modular health to reduce complexity, increase transparency, reach the mass market, and diversify our hospital network to include lower-cost private hospitals. I'd like to share a video showing the sales process. The modular product lets customers choose exactly what they need. To address anti-selection, we have rules such as requiring outpatient module with inpatient, maternity with inpatient, and family members must take the same combination for discounts. We have 50 to 60 rules and monitor behavior closely. The product has significantly improved the customer journey with immediate price comparison, full transparency, user-friendly design for agents, more options, and instant contract creation with 68% straight-through policy processing, up from 30-35% a year ago. Results: business growth has been 56% year-on-year, achieving our aim of broadening the customer base. Low-cost network utilization rose from 2% to 39%, reducing customer costs and co-payments. Customer satisfaction increased 30%, with MPS reaching 48%. One agent told me, 'I'm not selling this product, it sells itself.' We are also investing in services like Dr. Allianz, a 24/7 service, a fully digital mobile app with a single customer view for all policies, and a secure home service for customers over 70 to prevent falls. Next, we will launch chronic disease management starting with diabetes – 71% of deaths in Turkey are from chronic diseases, and 7 million people have diabetes. We will proactively provide patients with devices to measure blood sugar, upload to a dashboard for monitoring and coaching, and share with their doctor with permission. Our retention rate in health after the lifetime guarantee is close to 98%, and these customers stay with us lifelong. We are working on engagement tools for well-being and doctor/network ratings. In Turkey, we are the dominant leader, but our aspirations are higher. We want to disrupt ourselves before the insurance sector is disrupted. We aim to be the wellness coach, health and safety advisor, and treatment assistant to our customers. We want to own the health space and continue to pioneer solutions. Thank you very much for listening.

Okay. Thanks Eileen. We have time for some questions if there are any. Farooq, please.

The gentleman.

Thank you. Farooq Kenny from Credit Suisse. Could you talk about profitability of the product in combined ratio terms? And also, one of the problems in Turkey, whether in pensions or motor insurance, is regulation. What risk do you see from increasing regulation on pricing, especially as you go to the mass market?

On our retail product, the combined ratio is approximately 95-96%. With the modular introduction, our aim was to maintain profitability while expanding the customer base, and we have achieved that. You're right about regulation – there have been significant changes in Turkey. In 2015, regulations changed 152 times, mainly on MTPL. But for modular health, we have received Treasury approval and have not seen any negative reactions so far.

Okay. Here, Stephanie Thomas Bernstein.

Thomas Bernstein. One question on the model app you showed us. How much did you benefit from the group digital factory in this exercise? How much was coming from the group as opposed to being a decentralized initiative?

We actually started working on the digital app before the digital factory was founded, and we created it internally in Turkey. It went live in 2016. What we are benefiting from are the components of the mobile app as it continues to expand. For example, on motor claims, we have been in interaction with the global digital factory. Regarding cost savings from using group components versus standalone, I don't exactly know right now. It's difficult to predict because we have also been an exporter and a big contributor to the global digital factory. Our cost base is significantly lower in terms of expense ratio, so currently we are on the exporter side rather than the importer side.

Michael, back there. HNA in the back, please.

It's really about the same. How expensive did it cost to develop this, and how do you account for it? Do you expense it immediately or spread it over a number of years? Just to understand the numbers effect.

If it's an investment, we capitalize it over the course of 3 to 5 years. For ongoing maintenance, we expense it directly. I don't know the exact number, but it's low single-digit millions. It was a very pragmatic effort done internally, so a relatively low number.

Yeah, we can take one more question. James, please over here.

Let me stand up. Don't worry. This is very important. When you think about productivity gains, what Eileen has said before – we are in Turkey in a growth market. The idea is not to reduce expense ratio by 30 basis points to improve margin, but to take a company that already has 35% market share in traditional markets and build the market. The problem of our industry, Michael, is that it's not growing. That's why investors want to see higher payouts and dividend yields – you're saying take the money and put it elsewhere. That becomes a self-fulfilling prophecy if leading companies like Allianz don't grow the business. That's why we went to Turkey. Even though the Turkish lira dropped 30%, we are growing the company in euro terms. That is the strategy of Allianz – we are not going to shrink, we want to grow. The focus of digital is to bring clients more value, protect margins, but start growing the business. You will see in life that as we transform the life side, Allianz will be growing again in a market that overall is shrinking. That's the objective. We can debate the basis points on manufacturing cost, but it's about effectiveness and serving clients better. Sorry for the intervention, but just to put the perspective right.

Okay, we take the last question from James.

James Shark from UBS. My question is about the integration of all products in Turkey. There must be a halo effect from having a strong relationship with the customer on the health product. Can you share insight on cross-sell information on the motor product, retention rates, and the benefit from better service in other areas?

A couple of things. First, the retention ratio in health is approximately 95%. Health customers tend to be from higher socioeconomic levels, and we also see a correlation with good risk in motor. We are working heavily on cross-selling to these customers through our agencies. This afternoon you will see our digital agency platform, which shows how we plan to cross-sell. It shows renewal times and what other products you can sell. We're doing this on motor and health. The cross-sell opportunities are there. Customer service enables greater loyalty – when customers can see all their policies and interact digitally, they prefer to have their next policy with us. We are seeing significant benefits, but these are still early numbers. Next year I'll be able to share the exact cross-sell ratios.

Okay. Thank you, Eileen. We now move to the next presentation.