Baloise Holding AG (HBAN.SW) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Bâloise Group Half Year Results 2023 Analyst Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Markus Holtz, Head of Investor Relations. Please go ahead, sir.

Good morning and welcome to my Bâloise Q&A call on our half year 2023 results. On our call today, we have our CEO, Michael Muller; our CFO, Carsten Stolz; and our CIO, Matthias Henny. We will first give you a quick overview of our results. For this, I will hand over to Michael.

Thank you, Markus. Welcome also from my side, dear ladies and gentlemen. I'm happy to welcome you together with Carsten Stolz, our CFO; and Matthias Henny, our Group CIO. I am pleased to report that we had a solid first half year with robust growth in non-life and reliable margins and a strong capitalization. Based on the first half, we are again expecting a good cash remittance for 2023 in line with our strategic ambition to remit CHF 2 billion of cash from 2022 until 2025. The half year '23 financial results are an interim stop on our Simply Safe: Season 2 journey. Over the last 2 years, macroeconomic conditions have changed and we want to actively address the resulting challenges. For this, we will sharpen our existing strategy Simply Safe and focus more on our core business and operational excellence in the coming years, including customer and partner experience. This also means that we will review our target ambitions in the area of innovation for their visibility in the current market environment and the trust then where necessary. We are also doing this in the area of asset management by aligning its focus more closely with insurance and banking products in the core business and aiming to generate CHF 5 billion in third-party assets by '25 with this focus. Our ambition is to improve efficiency and effectiveness, a key strength of Bâloise for many decades and a key prerequisite for our cash generation today and tomorrow. Bâloise has increased its dividend 13x in the last 20 years and never reduced it. Our financial results are for the first time under the new standard IFRS 17/9. It does not affect cash, solvency or local accounting; but it changes IFRS reporting. We would like to highlight a couple of points here. For that, I will hand over to Carsten.

Thank you, Michael. When commenting on the half year results, I will make reference to the slides in the analyst presentation and I will state the respective page numbers. Let me begin on Page 5 where you see that our shareholders' profit in half year '23 amounts to CHF 206 million. Earnings in life have been higher than in the previous year. Asset management and banking are slightly higher. Life profitability has been lower. When we look at Page 8, our business has its foundation in our strong capitalization. Our capitalization remains very strong with an SST ratio of more than 230%. Our rating of A+ was confirmed in August by Standard & Poor's. On Page 9, IFRS equity was slightly down mainly due to the dividend payment in the first half of the year. Comprehensive equity defined as the sum of equity and CSM post tax amount to CHF 7.4 billion, which corresponds to CHF 161 per share. Let's now turn to our business segments on Page 12 starting with a view on the non-life business. Growth in non-life was very solid with 4.7% in local currency driven by both price increases and higher volumes. All our markets contributed to this growth. If we look at the profitability of the non-life business on Page 13, EBIT in the non-life business increased to CHF 158 million driven by a better combined ratio, which improved to 87.3%. This reflects the quality of our non-life business. It benefited from higher discount effects compared to the previous year. The better insurance service result was partially offset by a lower insurance finance result and more negative other income and expenses. The latter was driven, amongst others, by the inflationary environment. Turning to the life segment on Page 18. Here you see that in the life segment we achieved an EBIT of CHF 104 million. The main driver of the profit in life is the CSM release, which amounted to CHF 138 million in half year '23. Our other income and expense was more negative driven by higher expenses as well as oneoff effects. This together explains the lower EBIT compared to the previous year. When looking at the CSM development, there are 2 perspectives. The first perspective is the question, how has the CSM inventory developed by existing business and new business added? The second perspective is the question, how has the CSM valuation changed due to deviations between model assumptions and reality. Regarding the first perspective: from the in-force portfolio, the CSM grows by CHF 57 million expected business contribution due to the compounding effect for half year. From new business, CHF 87 million of new business is added to the CSM stock. The CSM released to the income statement amounted to CHF 138 million. Overall, the CSM stock developed positively by CHF 6 million in the first half of the year because the compounding of the portfolio and the new business more than compensated for the outflow to the income statement. Figuratively speaking, we were able to keep the water level in the CSM reservoir from our business. However, this increase was overshaded by negative valuation changes. That leads to the second perspective. Both the operating and in particular the economic variances weighed on the valuation of the CSM in the first half of the year. I focus on the economic variances. The interest rate declines in Switzerland against expectations and the strength of the Swiss franc are the main reasons for the negative economic variances. Apart from the IFRS 17/9 view in our life business, it is very important for us to have a look at the interest rate margin, reference being made to Page 20. The interest rate margin rose by 12 basis points to 129 basis points. The current yield improved by 10 basis points due to adjustments in the asset allocation and reinvestments at higher yields. The average guarantees decreased by 2 basis points due to consistently active in-force management. The resilient and rising interest margin makes us confident that the life segment continues to contribute to our cash remittance target. Finally, the segment asset management and banking on Page 23 contributed an EBIT of CHF 43 million to the group and could increase third-party assets. The net new third-party assets amounted to CHF 617 million in half year 2023. In summary, we achieved a solid half year result in 2023. Organic growth of 4.7% and a combined ratio of 87.3% in non-life, reliable margins in life with an interest rate margin of 129 basis points, very strong economic capitalization with an SST ratio beyond 230%, a confirmed A+ rating and a comprehensive equity of CHF 7.4 billion and expected strong cash remittance in 2023, in line with our cash remittance target of CHF 2 billion until 2025. With that, I hand back to Michael.

Thank you very much, Carsten, also for leading us through the slides. With that, let's open the Q&A session.

[Operator Instructions] Our first question comes from the line of [ Luke Young ] with UBS.

This is [ Kim ] from UBS. Two questions for me, please. The first one is on your group life business mix. So I can see that you continue the shift towards semi-autonomous over the course of 1H. I'm just wondering what's the rationale for still writing full coverage insurance? Are you planning on like a full complete shift from full coverage to semi-autonomous and if yes, over what time frame? And secondly is on your large reserve release, can we expect more reserve release from your life business? Any color on this would be really helpful. And finally is on your non-life business. So the combined ratio improved year-on-year, but I think that's mainly driven by higher discounting and lower net cash. So are you seeing any deterioration in the underlying and if yes, what's driving that?

Okay. Thank you very much for the questions. So three questions overall. First about the group life business, then the reserving life and then about the non-life part. I think I will start the group life business and the mix to give a little bit more in there. So it's about the group life business that we do have in Switzerland. We do offer there all the possible solutions so the full insurance part, but also the semi-autonomous part. In the last year what we have seen is that it was more requested the semi-autonomous part. That had also a little bit to do with the environment we are in. That's also where we had quite a strong growth in our semi-autonomous part in the group life business and less new business coming from the full insurance part. So I think at the end, it's more a question also what's the requested also from the market and from the customers and it's also a question on the environment we are in. For us it's clear, we want to have all the possible solutions also in future because I think it's also a question of giving all the possible solution to our customers, but we do have our clear underwriting guidance for the full insurance part also because the economic environment and also the legal requirement is as it is at the moment and that means also that we have to look on the operational excellence there and we have quite strict rules what are we underwriting and whatnot. That's overall what it adds to grow in that direction that we have less business coming in the full insurance and more in the semi-autonomous solution. So that's about the group life business mix. And for the second one, I think I hand over to Carsten about the reserve releases in the life and the interest margins.

Yes. So thank you for your question on reserve releases in life. We have to distinguish here the perspectives. Under IFRS 17/9, we are looking at best estimate reserving and changes there and particularly go through the CSM process. But what is true is that on the local level, we do have very different reserving regulations in the different markets and that has an impact on statutory accounting. We had some reserve releases in H1. But as I said, you don't see this in IFRS anymore, but in local GAAP. We expect further releases if interest rates remain where they are because the reserving mechanisms usually take averages and therefore, it takes a while until the higher interest rate level is reflected then also in the average reference rates. It helps, therefore, the statutory balance sheet and in turn further strengthens the capacity of the life business to pay dividend and therefore, remit cash.

Thank you, Carsten, for this reserve part in life. And the third question was about the lower nat cat underlying of non-life business. So it's true, we had not a lot of nat cat events in the first half year as we already said. So there have been some ones in the second half. But overall if you're looking at the underlying, I think it's more or less in a situation as it was also before in the previous period that we had. What we see is on a part some inflation effects also. But overall I think the book, if you're looking on large claims except of the nat cat part, it's more or less on a similar level as before. It's also clear that for the part for inflation, it's also sometimes we are also reacting, as I said, also a question of the price increases.

[Operator Instructions] We have a question coming from the line of Rene Locher with KBW.

Okay. I just would like to follow up on the statutory accounts. And I was wondering when you have set the CHF 2 billion target, have you already included some reserve releases or is this just from the operating business with hardly any oneoffs? So that's the first question. And the second one is well, I guess if you are aware of the market is not really happy with your life business and first of all, you're struggling a bit to understand why the release ratio is so low. I mean the big 4 in Europe, they have an annual release ratio of close to 10%, yours is 2.6%. If I annualize that, I end up at 5.2%. But perhaps some little bit more insight here? And then you just mentioned cost. In other income and expenses, there we have seen quite a strong swing and I was wondering what are the oneoff effects included in other income and expenses? Any chance to get kind of a half year run rate for this item? And then last question on investment in innovation, it's very interesting. I mean very good to see that you have high transparency. Last year revenues were at CHF 82.5 million. You invested some CHF 250 million in innovation in the period 2017 to 2022 and now it looks as you will, how can I say, just take a closer look at where do you invest money and how much money do you invest? So perhaps give a little bit more insight from the so-called new CEO.

Thank you very much, Mr. Locher, for these 4 questions that we have. I think we go in that direction as you already have done the questions. So we will start with the statutory accounts, the question about the CHF 2 billion target we have and about the reserve releases and I hand over for this first question to Carsten.

Thank you, Rene, for your questions. So I mean we do projections on the statutory accounts and as always, there are pluses and minuses; some elements move up, some elements move down. So the CHF 2 billion target when we set it in October 2020 has been based on the then prevailing view on the statutory accounts. But statutory accounts are relatively stable overall and therefore, we have a sound basis for the CHF 2 billion target achievement.

Okay. And second one is about the life business and the release. It's always difficult to do a comparison to other companies, but it's also depending on geography. So they're in which markets we are also in the business mix I think at the end and I think there it's always also the question in which markets we are in, there are differences in how big the release is. So we do have quite a big CSM overall. So a big lake of CSM and the release was quite stable now if you take the percentage if you're looking on that. So that's where we are in. But overall, I have also to say that at the end, it's how the standard is and how we modeled it. And I think there will also be in future some kind of perhaps standards then because we do not know how others are modeling it. That's where we stand at the moment. As far as we see, it's the business as we are doing it and that's why we are standing there at the moment.

If I may, I mean very quick. It's interesting to see I mean the market I guess in general is just looking at the CSM release, what you show then as EBIT, but the market is not looking at the size of the CSM. This is interesting. I fully believe you have -- I do believe compared to main competitor here in Switzerland quite a strong CSM, but it's interesting to see that the market is really focusing on the CSM release in my view.

It's what we see at the moment, I completely agree with that. If you're looking at how to model it, it's more coming from the balance sheet and there it's more on the lake, but I absolutely agree. Then about life and other income, there I hand over to Carsten.

So you're making reference to the development of other income and expenses in the life segment that deteriorated from minus CHF 34 million to minus CHF 66 million in the first half 2023. That's the reference point, right? So about half of this development is stemming from oneoff effects that I have been mentioning and those effects are depreciation on investments and associates participations so about half of it is oneoff. We expect this position to be a little bit higher by the end of 2023 because as a tendency we have higher inflationary effects in there. So the movement on a year-on-year comparison is about half is a oneoff effect.

Okay. And then the fourth one was about investments in innovation. Perhaps first, I think innovation is something which is very important for a company which has 160 years. Innovation also in the core business is very important to be also ready for the future so that's an important part for us. I think you were discussing or asking about this part of innovation also. We also communicated we have this CHF 2 billion target about the cash remittance, which is our overall goal we do have and we are committed to that. We see there for dividends, which is our dividend policy to the shareholder and this is also a very important part, 60% to 80% for that. And we do have a part for the innovation, which is 10% to 30%, which is what's also the figure in our strategy we gave. We are going then more to the lower end and that's also the direction we are going in future. That's also bringing the innovation part closer to the core business means also to be faster in having break even for a start-up. It means also to be closer to the business for having better customer experience. So it goes more to the lower part of our goal we have. Overall, you also have to take in account that from the CHF 2 billion part, we do also have rest for the holding cost and things like that.

And here again if I can make a remark. I mean you do have this CHF 350 million revenue target now for 2025, but I do believe it will be quite hard to achieve. And if you then take a 3x revenue multiple, you end up at least CHF 1 billion value creation I do believe. I'm very happy to see that you review your investment in innovation.

Thank you for the remarks. And that's also what we are doing and we have this ambition under review.

The next question comes from the line of Bhavin Rathod with HSBC.

So I have 3 on my side. So the first one would be on the life CSM. Can you help us understand how should we think about the normalized CSM growth if interest rates were to stay at current level, i.e., excluding the impact of all the variances? We have seen a stable growth at the first half, but any indication how should we think about this normalized growth in future would be helpful. The second one would be on the P&C combined ratio. Currently, we are seeing the impact of discounting is exceeding the impact of unwinding. Given the nature and the duration of your P&C book, can you help us understand when we should expect both to broadly offset each other? The third and the final would be on the overall pricing and claim inflation trend in your key markets. It would be helpful if you can provide some color on what are the trends you are seeing in your major market in terms of the pricing vis-a-vis the claim inflation.

Thank you very much for the questions. So we will start with the more technical questions coming from the IFRS 17/9 part so the first and the second one, which are coming from the life business and the non-life business. And we start with the life business about the CSM and this question of what's the sustainable part for the future, which is not an easy question. I hand over for that to Carsten.

Thank you for your questions. A few reflections on normalizing the CSM if that's possible at all. If normalizing means that the development into the future is in the real world as we assumed in the models, then you wouldn't have economic variances and then the only development of the CSM would stem from the unwinding from the existing book, from the value of new business added and from the outflow into the P&L due to the modeling. So in a "normalized world", the variances would be 0 and then you would just have the underlying business effect. We all know and history told us also from a market consistent embedded value perspective and others that we will always have variances in operating and economic terms. We have up to now very little data points in the new IFRS 17/9 world. I think it's fair to say that we need a couple of more iterations until we get into a, how do you say, into a smoothly running system there. And while talking about interest rates and its effects on CSM, I allow myself to move on right away to the P&C question. So for the near future, we expect further positive discounting effects. How long? Honestly, it's very difficult to predict because we are in a very particular interest rate situation with inverted yield curves and that's a quite unique situation and we'll see how this continues to develop. So in particular how interest rates are going to move at the shorter end of the yield curve because given the duration of the non-life book, that's where the rubber hits the road because that affects the non-life book in particular more at the short end and that's why we have the inversion at the moment. So difficult to predict how this is going to evolve and how persistent this situation is. Then for the pricing in the key markets, I give the word back to Michael.

About the pricing and also inflation, I think we have to differentiate also between the different markets we are in. It's a completely different view if you are going to the EU part or Switzerland because also inflation was completely different in this market; which means I think in the EU markets, there has been quite a big step in the inflation, which is also reflected then in our price adjustments we already have done. You see this overall growth. We said it's 4.7%. If you're looking a little bit closer, you also see that in Belgium and Germany, it's higher and also in Luxembourg, it's much higher and it's close to 10% there, which means we already have started to increase our prices and also to adopt that to this inflation part. It's not as high for Switzerland, that's also because inflation is by far lower there. But overall, I can also say for the future, there is also work for the future to do because inflation is not a way and I think we do have to increase also in future. The prices adopted also what's possible on the market, but also what inflation is in these different parts we are in, which means that we will and have to do also more in future.

[Operator Instructions] Gentlemen, there are no more questions at this time. Back to you for closing remarks.

Okay. Then I'll take it back. Thank you very much. In summary, I think we had a solid first half year with robust growth in non-life, reliable margins and strong capitalization. Based on the first half, we are again expecting a good cash remittance for '23 in line with our strategic ambition to remit CHF 2 billion of cash from '22 to '25. We will increase our focus and continue to further optimize the solid basis of our insurance business in terms of efficiency and effectiveness to build on existing strengths as well as to ensure reliable cash generation today and in the future. So ladies and gentlemen, thank you very much. We hereby close the call. Thank you for joining and have a good day.

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