Helvetia Holding AG (0ACB.L) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Helvetia Baloise Holding Ltd. Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Peter Eliot, Head of Investor Relations and Founding of Helvetia Baloise. Please go ahead.

Thank you very much. Good morning, everyone, and thank you for joining the first conference call of Helvetia Baloise. We're excited to have come together after months of planning, and we look forward to telling you more about our combined vision in due course. For today, the focus is on guiding you through the accounting impacts of the merger and the pro forma financial information that we published this morning. We do appreciate this is a bit of a specialist subject, and today's presentation is necessarily a technical one. Nevertheless, we'd ask if you could restrict your questions to this topic for today. We look forward to presenting a broader range of subjects in the future, including at our Capital Markets Day on the 15th of April. To guide you through today's presentation and answer your questions, I'm pleased to introduce our new Group CFO, Matthias Henny. Matthias, the floor is yours.

Thank you, Peter, and good morning also from my side, and thank you for your interest in Helvetia Baloise. Let me briefly introduce myself. I have dealt my entire professional life with finances of insurance companies, first as a consultant, later as an executive in the investment management and finance functions. Up until last Friday, I was the Chief Investment Officer of Baloise Group, in which function I've been in touch with many of you over the last few years. I'm now very much looking forward to leading the finance function of the new group. I am fortunate in being surrounded by a strong team selected from 2 very strong individual organizations. I will start on Slide 3 with the key messages for this morning. We successfully closed the deal last Friday, 5th of December, and the preparation for the operational integration is well advanced. The top 3 management layers below the Group Executive Committee have already been fully appointed and are working well together. We have much work behind us and a lot of work ahead of us, but there is huge energy and ambition in the team for the tasks ahead. Our ambitions have not changed since we first announced the deal back in April. And everything we told you then still applies. It is early days, but we are highly confident of delivering on all the targets previously set. The most tangible of these is probably the cash and dividend uplift we indicated, but the wider benefits remain equally valid. As Peter said, we look forward to elaborating on those with a full update in April. We are breaking new ground with a merger of this size under IFRS 17, and we are aware that you will be seeing some of the accounting consequences of this for the first time. I will explain these to you today. Acquisition accounting, in particular, will have a significant impact on the balance sheet and P&L that we report. I am sure you all understand that this is accounting only and it will, of course, have no impact at all on cash, on solvency or on our ability to pay attractive dividends. As part of the Swiss listing rules, we have this morning published pro forma financial information in respect of full year 2024 and half year 2025. These PFFI include a preliminary purchase price allocation with a pro forma combined balance sheet and income statement. I would urge you not to treat numbers in this disclosure as guidance. However, we are committed to providing you with as much disclosure as possible, and we'll come back with more help with the full year '25 closing at our Capital Markets Day. Why do I say not to pay too much attention? There are many reasons, but the calculations behind the numbers you see today were carried out at the high materiality levels and the assumptions used are as of different dates. They will be reset to the 31st of December 2025 assumptions when we calculate the actual pGAAP numbers, which form the basis for the 2025 annual report. However, this disclosure does at least enable us to reference some numbers to help explain the accounting concepts. I will refer predominantly to the half year '25 numbers in this presentation. This is because there were additional elements that distort the 2024 result because half year '25 is more recent and because some of the economic assumptions such as interest rates are closer to those we see today. However, you will also find the full year '24 numbers in the appendix. In the balance sheet, the most material impact comes from the creation of significant goodwill and intangible assets. In the P&L, the most material impact is the amortization of these intangible assets. While this means the reported net income will be distorted, we will define underlying earnings and other KPIs to adjust for acquisition accounting effects where appropriate. These will aid visibility on the underlying performance of the group. Turning to Slide 4. Before we get into the numbers, let me briefly remind you of what this merger means. We are now a leading player in Europe with attractive positions in 8 markets as well as a global specialty business. We are also now proud to be Switzerland's largest multiline insurer, offering a broad range of products and services. Overall, we rank as the second largest insurance group in Switzerland with around 20% market share. The deal brings significant synergies with attractive value creation for all stakeholders. We told you we would achieve CHF 350 million run rate pretax cost synergies. We also said this will lead to an extra CHF 220 million in cash generation and an uplift in dividends of 20% by 2029. This comes on top of the roughly CHF 300 million stand-alone cost efficiency programs of Helvetia and Baloise that were already communicated. The 2 companies have similar DNA and deep mutual knowledge. We have a highly experienced management team already in place, committed to delivering on our goals and ensuring a smooth integration. Returning to today's topic on Slide 5, I will briefly outline the main assumptions used to calculate the pro forma financials and explain some of their limitations. Under IFRS, the absorption merger is an acquisition of Baloise by Helvetia, achieved by Helvetia doing an equity increase equal in size to Baloise's market cap. Baloise's assets and liabilities are recognized at fair value in the consolidated balance sheet of the combined entity. As I mentioned, the pro forma financials were carried out at high materiality levels, not a proper bottom-up calculation. And in the case of full year '24, it assumes that the acquisition happened 2 years earlier than was, in fact, the case. The assumed purchase price is taken from the 27th of November, but for the opening balance sheet, we will use the lower 5th of December market cap. You should not assume any roll forward in the numbers you see. The individual PFFI P&Ls are mostly based on fair values as at the start of period, 1st of January 2024 for the full year '24 numbers, while intangible asset amortization is based on values as per end of period, 31st of December 2024. The full year '24 balance sheet is based on fair values as at 31st of December 2024. It is not rolled forward from the start of the year. The PFFI for full year '24 and half year '25 and the eventual opening balance sheet, therefore, represent 3 separate revaluations, all on different assumptions. You cannot roll one forward to get the next. Because of the absorption merger, Baloise also moves on to Helvetia's accounting policy. So for example, discount rates are adjusted. Once again, please keep in mind that this is all accounting only and that these assumptions will differ from those used for the final financial closing. Slide 6 summarizes the main accounting impacts you need to be aware of. I'll briefly explain each in turn. The letters in each box link to topics to where you see them later in the presentation. First, in a business combination, we need to recognize all identifiable intangible assets. This includes brands, customer relationships, technology and software. These assets are typically amortized. Within the PFFI, the newly identified intangibles are amortized over about 10 years on average. Then we have goodwill. This represents the future economic benefits arising from the value that is not individually identified and separately recognized. It is the excess of the purchase price over net asset value. The goodwill and other intangibles are like the other effects you see, purely accounting with no impact on cash generation or dividend paying capability. Next, under IFRS 17, acquisition accounting requires that the liability for incurred claims or LIC is recognized as a liability for remaining coverage, LRC, which is relevant in non-life. This reflects the fact that the entity essentially provides coverage for the adverse development of claims. After the acquisition, the LRC along with any CSM is released into insurance revenue over time. This process increases both reported insurance revenue and service expenses compared to the previous accounting treatment. In the half year '25 PFFI, the insurance revenue is increased by CHF 1 billion and the insurance service expenses rises by CHF 0.9 billion. The next topic is that Baloise acquired non-life insurance contracts still in their settlement period will now be measured using the building block approach. This change is required by IFRS 17 for some of our business, and we felt it was cleaner to treat everything the same way. This results in the recognition of a small CSM, which will gradually be released into the P&L. The non-life CSM of CHF 0.4 billion is relatively small in the context of our balance sheet. Given the short duration of the business on average, we expect a relatively quick release into the P&L. As a very rough guide, this might be about a quarter in the first year. This comes in addition to the normal non-life earnings, it is not a replacement. However, as with the other accounting effects, this is not backed by economic value or cash. Moving to topic E. For the calculation of investment income, Baloise's assets are considered newly acquired, so amortized cost adjustments apply. The new locked-in interest rates impact the income. Bonds and mortgages are most effective. Finally, as Helvetia's accounting policies are leading, we see some other effects as we move Baloise onto these policies. Both Helvetia and Baloise assumptions were perfectly valid. However, there will always be differences in a principal-based accounting standard. One example is that, as you are aware, Helvetia used lower discount rates than Baloise. Hence, you see an increase in the fair value of insurance liabilities. This also impacts the discount benefit and insurance finance expenses in non-life. Again, this revaluation has no impact on statutory valuations, solvency ratios or on cash and dividend capacity. So now let's look at the numbers, starting on Slide 7, referencing to half year '25 PFFI. I mentioned earlier that the accounting assumes an equity increase for Helvetia equals in size to the market cap of Baloise. Helvetia's total equity of CHF 4.3 billion thus increases by CHF 9.7 billion to get the pro forma combined equity of CHF 13.9 billion. Of the increase, CHF 3.5 billion represents Baloise's stand-alone equity position before any adjustments. Like the Helvetia equity, this is after payment of the 2024 dividend. As part of acquisition accounting, Baloise's existing goodwill of CHF 0.2 billion is eliminated from the balance sheet to avoid double counting when new goodwill is recognized for the combined group. The alignment of assumptions, notably lower discount rates result in a net increase in the insurance contract liabilities of less than 3%. This corresponds to a remeasurement impact of CHF 1.4 billion. On the right, we have an F against this number as this was one of the accounting topics I mentioned on the previous slide. Intangible assets such as brand, customer relationships and technology are identified and amount to CHF 3.4 billion. The next item aggregates the effects of deferred taxes and other minor adjustments that arise from the remeasurement of assets and liabilities during the acquisition process. Tax and other reduces equity by CHF 0.3 billion. If we now compare the CHF 9.7 billion equity increase with the items I have just explained, the residual amount of CHF 4.7 billion is recognized as goodwill. The market has assigned this goodwill via the share price. However, we can easily justify it, given the value of the business. The NAV does not recognize Baloise's high returns, its CSM or any future efficiency or synergy targets. As I mentioned earlier, this CHF 4.7 billion is based on the 27th of November share price. Based on Friday's closing price, the goodwill is CHF 4.2 billion. As already mentioned, we have conducted a first assessment of the goodwill and consider the headroom to be substantial. We, therefore, feel very comfortable with the level of goodwill we have. On Slide 8, we give you a bit more detail on the CSM, which is part of the insurance contract liabilities. Baloise's reported life CSM of CHF 4.9 billion is CHF 0.8 billion lower after applying the fair value adjustment. This is driven mainly by lower discount rates and by revised assumptions for future bonuses. However, we also expect the CSM release ratio to be higher than Baloise reported before at about 7%. Hence, we don't expect a significant change in the life profit. The newly created non-life CSM from the Baloise acquired business only at CHF 0.4 billion. This non-life CSM will be released much quicker than the life CSM with we estimate about 1/4 being released in the first year. Please note that as I mentioned earlier, no roll forward is modeled here. These are not the opening balance sheet numbers. Finally, let us look at the P&L for half year '25 on Slide 9. Before we look at the IFRS net income pro forma combined and how it is composed, it is important to mention that there is a lot which is not intuitive or useful for you. Therefore, we will focus on the numbers that we think are most useful on the right-hand side. A positive number here means that the pro forma half year '25 is more positive or less negative than Baloise reported. We see most of the effect in non-life. The new CHF 0.4 billion CSM will be released into the P&L over the next few years. We think there is a bit of positive seasonality in the CHF 62.3 million you see here. Hence, I would not quite double that number. But the run rate is not too far off what we would expect initially. The move to Helvetia's lower discount rates has a recurring negative impact of high double-digit Swiss franc million per year. However, over time, this will be fully offset in the insurance finance expenses. It is not intuitive that insurance finance expenses start off lower by CHF 33 million, but this is due to some Baloise locked-in rates from historical years being very low. The rates at the opening balance sheet assumed date are higher, creating the initial negative unwind delta of minus CHF 33 million as we move on to these rates. As I say, this is a temporary effect and the number will turn positive. The non-life investment income is lower, possibly by a mid-double-digit Swiss franc million amount when annualized. This is because the assets are revalued using lower Swiss franc interest rates. This drag will reduce each year as maturities are replaced with new assets. Life insurance is much easier. Here, we do not expect a material change in the CSM release, as I just mentioned. Other items, including investment income are distorted, but are buffered in the CSM. So you also do not see any material P&L effect. The largest item is then the amortization of the newly identified intangible assets, which you find under other expenses. The average period of this amortization is assumed to be about 10 years. The amount you see here is slightly less than 1/10 of the total because we no longer amortize Baloise's legacy intangible assets. In summary, you see many effects in the P&L that are one-off in nature, some effects which are recurring, but decreasing fast and very little that is fully recurring. However, all accounting changes have no impact on cash or dividends. I remind you that the PFFI numbers make no allowance for the synergies we expect from the deal of CHF 350 million run rate savings on top of existing efficiency plans, translating into an additional CHF 220 million cash generation. These are spelled out again on Slide 10. We said 80% of these synergies would be realized by 2028, and we expect a 20% uplift in dividend capacity by financial year 2029. We signaled likely integration costs of CHF 500 million to CHF 600 million, mostly to be incurred by the end of 2028. These will, of course, fall outside of underlying earnings. To conclude, let me briefly remind you of our next steps on Slide 11. Between the public announcement of the merger this April and closing last Friday, we completed many milestones on time, including extraordinary general meetings where shareholders voted overwhelmingly in favor of the merger. Now we are beginning to implement the new group structure and functional organization as planned. We look forward to giving you more insights at our Capital Markets Day next April. Here, we will present the strategy and targets for Helvetia Baloise together with the full year 2025 results. With that, we are happy to take your questions.

[Operator Instructions] Our first question comes from Iain Pearce from BNP Paribas.

The first one was just on statutory earnings. It might be a bit early to talk about them. But just thinking about the amortization charge and the intangibles, do you expect a similar impact in the statutory earnings is what you're seeing in the IFRS? And then the second one is on the useful life. Thank you for disclosing the useful life of the intangible assets. Do you expect that the amortization charge will be linear across that useful life? Or are you expecting any sort of distortions in how we can expect -- assume amortization in the P&L over the course of the next few years?

Thanks very much, Iain. So the first one was on statutory earnings. How does the amortization translate into those, if at all?

So there is absolutely no impact on statutory earnings. So what we just presented is purely IFRS accounting. And this is also the reason why all these accounting impacts have no effect on cash or dividends. Statutory is not touched at all. Yes. On the useful life intangible, the roughly 10 years has been the assumption for the PFFI. When we present the opening balance sheet on the Capital Markets Day, we will do a new assessment over the useful lifetime. And there it might be different for different components, but more to come at the Capital Markets Day.

The next question comes from Ahmed Nasib from UBS.

So first one on the fair value changes in the balance sheet, the CHF 1.4 billion. Is it right to kind of assume that CHF 0.8 billion is coming from the CSM and the rest is best estimate liability, so CHF 0.8 billion CSM, CHF 0.6 billion impact to make up the CHF 1.4 billion? And then the second question on, Fabian, you kind of mentioned there's a change in Helvetia amortization. So what I'm trying to get at is [Technical Difficulty] closer to the 340, 340 is basically CHF 3.4 billion divided by 10. So is that the normal run rate? And then finally, at the Capital Markets Day, have you thought about maybe if you can -- you've been executing at pace. Can you accelerate the time line for that? Or maybe I'm front-running some of the stuff that you're going to say at the Capital Markets Day?

Thank you, Nasib. You broke up a little bit on your second question there. I think the second question was essentially, should the amortization be the CHF 3.4 billion divided by 10? And why is that not the case on the slide? Just to remind you, the slide shows the delta in amortization. So that might answer that question. But do come back if we misunderstood that. Otherwise, the first question was on the fair value changes of the CHF 1.4 billion and is the CSM included in that?

Yes. So the CHF 1.4 billion is calculated based on CHF 1.8 billion in fulfillment cash flow change and CHF 0.4 billion of CSM, where again, CSM is the difference of the CHF 0.8 billion life CSM change and CHF 0.4 billion non-life CSM change. On the second question, can you rephrase that again, the intangibles, Peter?

What's left?

No, I think Peter answered that and...

And the third -- yes, on the Capital Markets Day, no, we cannot accelerate. There is a whole lot to do to get everything done with this very complex business combination and all the calculations for the opening balance sheet.

The next question comes from Thomas Bateman from Mediobanca.

Could you just remind us what the duration of the non-life portfolio will be now with the combined entities? And the second question, just -- I think I just missed this. You talked about the LIC and LRC changes. Could you just repeat what you said one more time? And then finally, does the IFRS net income and the potential dividend cover or maybe slightly thin cover at the moment, does that have any impact on your ability to pay dividends going forward?

Thanks a lot, Tom. So the first question was on the duration of the non-life portfolio. What further information you can give there?

Yes. I mean, roughly, you can assume something around 4 to 5 years for the Baloise book, which is here under consideration as a rough guideline for the duration of the book. And the LRC changes, so first of all, there is a shift from LIC to LRC. And so from the liabilities for incurred claims to liabilities of remaining coverage. And this will inflate the revenues and expenses. So that's one effect that you will see. And the second topic is the CSM, which is built in non-life business, given the switch to building block approach. And that will produce some CSM relief in the P&L statement that will decrease, however, very fast over time and will have no impact on cash or dividend. And the third question was again?

The third question, I think, was the payout ratio. The fact that the net income might change, changes the payout ratio. Does that have any impact?

Yes, that's right. I mean all what we have shown here is IFRS only, doesn't affect the dividend coverage. However, if we have the impairment of intangible assets under IFRS without touching the dividend, it might lead to actually a high payout ratio if you just compare the dividend with the net income of IFRS without correcting for this.

The next question comes from Matteo Lindauer from Vontobel.

I have a quick question on the non-life CSM of CHF 0.4 billion. So the assumption of a release of about CHF 0.1 billion for the next year is right. And so we can assume that the non-life CSM of CHF 0.4 billion will be released over the next 4 years. Is that the correct assumption?

Yes, it's right that about -- we expect that about 1/4 will be released in the first year. That's one thing. It also means that over 4 years, most of it has disappeared, not everything because you have also long-tail businesses covered here. But in any case, this has no economic relevance. I mean it's just accounting, which will be eliminated from underlying earnings. So all these accounting effects that we discussed here, it's just important that you know them, that you're aware of them, how to treat them, but they have no economic value or implication on cash or dividend.

We have a follow-up question from Iain Pearce from BNP Paribas.

Just in the slide, you mentioned you've been working obviously on the operational integration, and that's going to get started as of now. I'm just wondering if you can give any insight to any sort of findings or anything you've learned as part of that work you've done to this point since the merger was announced.

I mean what I can -- I mean this call is mostly about accounting. But what I can say from the work that has been done so far, the culture is very similar. So the integration is going on in a very smooth way. And the teams are highly motivated and committed to deliver on the targets that have been laid out.

The next question comes from Anne-Chantal Risold from Octavian.

Just one question on the Life part. As you mentioned, since it's Helvetia acquiring Baloise, the assumption will maybe trend towards Helvetia assumption. And on the Life side, we always had this release pattern that was quite significantly different between the 2 companies. So what can we expect for 2026 in the P&L of Baloise -- Helvetia Baloise?

Yes. So it's right that we are aligning Baloise's insurance contract liabilities to Helvetia's accounting policies. So that's just a matter of fact of how this business combination is reflected. In the CSM Life, this means we have a lower CSM stock to start from. But as we're going to adjust to the accounting policies of Helvetia, it means that also we expect a higher release ratio of around 7% for the Baloise book. So that in the end, we can expect a similar amount of CSM release in absolute terms. And again, to reiterate, also this is purely an accounting effect. Also, the dividend paid out from the Life business is not relying on the CSM release.

Gentlemen, so far there are no further questions. Back over to you for any closing remarks.

[Operator Instructions] Yes. I would like to thank you for your participation in today's call and for your interest in Helvetia Baloise. If you have further questions or require additional information, please reach out to our Investor Relations team, who will be very happy to help.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.