Baloise Holding AG (HBAN.SW) Earnings Call Transcript
August 25, 2022
Earnings Call Speaker Segments
Ladies and gentlemen, welcome to the Baloise Group Half Year Results 2022 Analyst 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's my pleasure to hand over to Markus Holtz, Head of Investor Relations. Please go ahead, sir.
Good morning, and welcome to Baloise's Q&A call on our half year results 2022. In our call today, we have: our CEO, Gert De Winter; our CFO, Carsten Stolz; and our CIO, Matthias Henny. And now I would like to hand over to Gert who will give you a quick summary of our results before we open the Q&A.
Thank you, Markus. A very Good morning from my side -- from our side, and a very warm welcome to all of you. Let me start by saying that I'm very, very glad to be back. The last 6, 7 months have not been that easy given my cancer therapy, but I've got well through it. And what is more importantly, the treatment has worked. So since the beginning of August, as planned, I'm fully back at work. And that's why I'm very pleased to present the half year's results today. In summary, if you look at our half year results, we have a very solid result. We have a very strong balance sheet, and we have started very dynamically into our new strategic phase, Simply Safe: Season 2. That's the reason why we are satisfied and we are confident looking into the future, and to the future course of Season 2. Now if you look at some of the key numbers, the shareholder profit lies at CHF 287 million. It is well diversified across geographies and business lines. And this result shows the stability and the reliability of Baloise in a challenging macroeconomical environment. With an EBIT of CHF 178 million in Life, we achieved a very strong result, also thanks to the higher interest rates, but despite the headwinds on the capital markets. We show a very good growth of 2.3% in Non-Life and a robust combined ratio of 91.9%, despite a major winter storm in February that particularly affected our Belgium operations. In Asset Management, we have achieved an investment return of almost 1% and have won over CHF 700 million of net new assets from third-party clients. This is 41% more than the last -- or the previous half year. So we are executing against our third-party asset management strategy. Our balance sheet is strong. Of course, equity has declined as expected, given the higher interest rates, but the economical capital strength has increased. We expect the SST ratio to be in the area of 230%, which is higher than at the beginning of the year. We have also made further progress in expanding our home and mobility ecosystems, and we continue to develop our core business in all areas. That also includes simplification. And let me give you 2 examples. In Germany, we have sold the entire portfolio of our hospital liability business, a portfolio that in the past has generated unwanted volatility in our figures. And another example of simplification is our rebranding project. As of the end of October, all our entities will operate solely under one brand, the Baloise brand. And in addition, the brand identity is being completely revised in order to make the unique or Baloise culture even more tangible. I am convinced that our Baloise culture is unique. It makes me proud to be part of this company, and our Baloise culture, our corporate culture is the basis for our ongoing success. With that, I would like to open the Question-and-Answer Session.
[Operator Instructions] The first question comes from Thomas Bateman from Berenberg.
Very good to hear you back as well. I'm glad everything's gone well. 3 questions for me, please. Just on your innovation spending. I think you said at the end today that you're still guiding towards CHF 50 million for 2022. Could you give us -- is that correct? And kind of what are you thinking for the later years in the strategic period as well? Just on the growth outlook for Belgium, in particular, clearly, there's been a bit of pressure in motor. But what are the trends in other lines of business? And finally, just on inflation. You seem to be mitigating any inflationary pressures pretty well at the moment. But could you just give us a bit of an update on where you do see inflation in your claims estimates?
Let me try to kick it off on those 3 questions. And of course, Carsten and Matthias can join me in adding points. On the innovation side, what we have said at the Investor Day, October 2020 is that, from the cash generated, we will actually innovate -- or use it for innovation in the area of 10% to 30%. What we see today is that for '22 and also moving forward that we are rather at the lower end of this number, so 10%. So we're actually around this CHF 50 million that you mentioned, Mr. Bateman. So that's one. Growth in Belgium, if you look at the local currency, we have a growth of 0.6% in Non-Life. The main reason of this slowdown, if you look at it compared to other years, is that the dynamics in the car market -- and the car portfolio is the biggest chunk of our business in Belgium. The dynamics in the car market, given logistical problems, is much lower. So we see a decline of the sales of new cars and of used cars of over 10%, and this, of course, had also an impact on the insurance contracts in car business being closed. On the other lines of business, we don't see -- we see normal evolution. So nothing spectacular to mention there. On the inflation side, a couple of thoughts. If you look at the inflation in Europe and Switzerland, it is, of course, different. We're talking about 8%, 9% in Europe and only 3% in Switzerland. Non-Life is, of course, more sensitive to inflation than the Life business. What we see in the data in Switzerland is that, we don't see any claims inflation yet. So that's an interesting, I think, data point. So no payment inflation in Switzerland. Which might also be due to the fact, of course, that the new cars are safer, which means less public injuries, and that's why also less higher claims. That's certainly one reason. I think what is very important to mention is that part of our business lines are automatically linked in Non-Life to inflation. So they adjust -- the premiums adjust automatically to inflation as we speak. And on the other side, every year, of course, we have the opportunity to increase the premiums according to the inflation. Taking just an example of Germany in terms of expectation in the property, we expect to have an increase of the premiums from 5% to 20% in 2023. And in liability, even after a substantial increase last year, the expectation is also that the reason there will be an increase of 10%, just -- as 2 examples where we, of course, can react rapidly and adequately to the rising inflation. Don't know colleagues, any other thoughts apparently? No? So, I've -- according to my colleagues, I've been quite extensive and complete.
The next question comes from Peter Eliot from Kepler Cheuvreux.
Likewise, very pleased to have you back, Gert. Yes. 3 questions from me as well, please, if it's okay. First one, I was just wondering if you could sort of update us on your Non-Life target, in particular, and whether they're sort of still appropriate in this environment? I mean I'm just thinking combined ratio with rising interest rates, I mean you've commented on no impact from inflation as yet, but I guess there's a number of other considerations. So just wondering if you still think that's any reason to sort of review that target? And I noticed on the expenses as well and it's that your expenses are up seem sort of 6% year-on-year despite slightly lower premiums. So again, I'm just wondering if there's any sort of more pressure there perhaps than you're expecting at all? And then on the underlying loss ratio, an increase of 2 percentage points. Would you got to split that out in terms of the drivers of that? I mean, I understand that the reinsurance reinstatement premium has had an effect, but it would be good to know how much that was and what the other factors were? And then finally, on the Life risk results. Even without the longevity update, it seems a little bit lower than normal. So I was just wondering if you could sort of update us on what you expect there on average going forward.
We'll also try to kick it off. So if you look at the targets of Simply Safe: Season 2, including the Non-Life target, they're all intact. So they are all in place, also the 90% combined ratio. We're working on it every day, as we speak on both the loss ratio side and the cost ratio side. So they're all intact. Nothing has changed there. So the 90% combined ratio target for Season 2 is absolutely standing. I think you mentioned a couple of points, and I think they are important, and they're related to each other also. And we had the winter storm event in February which affected mostly our Belgium operations. There's not only that on the loss ratio side, but there also has been a restatement premium from reinsurance, and that has an impact on the cost ratio side. If you would take off that one-off, then we would also be in terms of the underlying loss ratio in the area of 2021, which is around 60%. So if you take up the winter storm and the reinstatement premium reinsurance out of the equation, we actually have a similar -- very similar underlying loss ratio. So that's related. The expenses are also driven by this one-off cost of the reinstatement premium. If you would take that one throughout, actually, the cost ratio despite bigger projects, IFRS 79 and a lot of IT investments, the cost ratio would be stable in Belgium and on the group level. So, that's also the reinstatement premium that has a point there, or that has an impact there. In the Life risk result, I think you mentioned the most important reason, which is indeed the impact of the adaptation of the longevity assumptions. So, that's actually, I think, the biggest reason why you see there a difference compared to half year '21. And overall, of course, half year '21 or '22 is, of course, also driven to some volatility, given the fact that it's half year results being in Non-Life or in Life.
The last question comes from Jimmy Fan from UBS.
It's great to hear you back, and I have 3 questions, please. So first on the Life earnings. So we see there's a release of reserves because of higher interest rate, but I think that number is CHF 30 million if we compare that to some of the reserve strengthening that happened in the past, that the scale of the release actually relatively small. Could you give us an idea what to expect in the next few half years, on this result given the higher interest rate environment. And do you consider to revise that target on the Life side -- on the life EBIT, which is greater than CHF 30 million because it seems like you can confidently feeding that. So and my second question is around the hedging. So I see there's a negative CHF 73 million impact on the fixed income hedging side that came through the P&L, and I presume that flows through to the savings result also. And you had the notes on the slide which suggest is offsets somewhere else in the results. Could you give us an overview of how that hedging has worked on an economic basis for you? And my last question is on Belgium Non-life. So -- and I presume there's some elements of that storm impact in February -- has fall into the underlying -- and some of that has fall into the large loss side. Could you give us the overall losses for -- from the February winter storms and how much of that falls into the large part and how much that has fallen into the underlying part.
I would like to address the first question on the Life earnings and the reserve release. These reserve additions and releases are dependent on the regulations in the different markets affected. Additions go quicker than releases because there is lock-in effect under IFRS. So the releases take more time in comparison to additions. And therefore, we stick to our EBIT guidance of around CHF 300 million for now. With regard to FX hedging, I would like to hand over to Matthias.
Yes. So your question on the CHF 73 million derivative loss on fixed income securities, that's related to hedging of variable annuities product, and it's actually offset on the liability side. So in the savings result, it's actually netted, and it's a hedge against lower interest rates that is put in place to ensure the guaranteed annuities in that product. And given the strong increase in interest rates, this effect has been highly negative.
And to your third point with regard to Belgium, the storm impact the storm impact has been a medium 2-digit number. I cannot provide you with the split between large claims and frequency claims, but the storm impact as such has been in the medium 2-digit number. It has been, to a large extent, covered by reinsurance. We talked about it already. So that's the guidance on the Belgium situation.
And just a quick follow-up. So that's the 2 digits number is your net loss. Right?
Sorry, say again, can you say...?
The mid 2-digit number in Belgium storm losses, is that a net or a gross loss?
That's the net number. Small 2-digit net number.
We have a follow-up question from Peter Eliot from Kepler Cheuvreux.
I was wondering if you could also comment on the reserve releases in Non-life. They were a bit higher than normal. So I'm just wondering if you could say anything in particular that's happening there, and what we should expect going forward? Secondly, the most new business in Switzerland looked a little lower at first sight. I'm just wondering whether there's anything you can say there. And the third one, the tax rate in Life was very low indeed. I mean, I assume it's sort of a regional related -- regional mix. But I'm wondering, could you give us maybe some better guidance -- sorry, some guidance on what you would expect on a normal period?
Let me try to pick up with question 1 and 2. Actually, we have -- I think that the release -- or the reserve releases in Non-Life of slightly over 4%. They show that we are very well reserved because we actually released reserves on a case-by-case basis. I think it's a bit higher half year. It's also of course half year volatility to some extent. The normal guidance would be a reserve release of 2% to 3% per year. So it's a bit higher in half year 2022. If you look at the new business in Life in Switzerland, this is, of course, driven by the fact that we are, I would say, careful in underwriting new business in especially the group Life business in Switzerland. So we're paying attention to a profitable business, which has -- which is determined by the age structure in group Life, which is determined by the mandatory and non-mandatory split. So we are holding back there for some quite good reasons. What you also see, and that's an impact, is that, given the higher interest rates, the semi-autonomous solutions whereby the risk or the -- or the investment risk is carried by the client, is more attractive today. And so you see a shift from group Life or normal traditional group Life to the semi-autonomous solutions, but you don't see them in the numbers because actually, they are at least partially off balance. So I think it's -- especially we've been careful in underwriting group like business that has lowered the numbers of new business in Life in Switzerland. Then with regard to your question on tax rate in Life, we expect a run rate of slightly below 20% for the group. Half year 2022 was below that with 14.6%, as you said. That has to do with the geographic split of profit contribution as well as to tax exempt income from some investment parts, but the run rate expectation is slightly below 20%, and that applies for the group overall. There is no specific difference between the Life and the Non-Life book. And then, Peter, you had a fourth question. Can you please remind me what the fourth point was that you wanted to have an answer to.
No, I think you covered everything, to be honest.
The next question comes from René Locher from KBW.
Yes. Well, first of all, good to have you back, Gert. And I have 3 questions. So first of all, on Page -- or Slide 20, the Life. I was a little bit surprised that you have yet this new longevity assumption. I thought in an environment that's wise interest rates I did not expect that you have to change your some -- So I'm not the -- perhaps you can explain a little bit of what were the key drivers here? And the second question is for Mr. Henny on the asset allocation. I was just wondering where -- if you have to change your asset allocation, what we hear, for example, from other insurance companies, they are following spread widening, that they will go a little bit more into corporate bonds, that it's tough to invest in real estate. So an update would be very much appreciated. And then my usual question on Germany is that from Slide 38 and 40, to see it's going in the right direction, but when as look at the EBIT, Germany Non-Life, it's now CHF 24 million. When I take the business volumes and the combined ratio of 91%, there is still a little bit of a spread here. So I guess, question is how do you proceed with your IT -- Non-Life IT system, Guidewire in Germany.
Maybe overall on the Life result -- you referred to as Slide 20. Let me give some general comments, and of course, colleagues, please jump in if there are more details to be given. I think if you compare last half year to this half year, of course, last year, there was a very strong tailwind from the capital markets, which is, of course, the opposite in half year 2022. On the other hand, of course, rising interest rates have allowed us to release some of the reserve, which has made a positive change. I think the specific question also linked to the risk result is the longevity assumption where you have actually a new mortality table, which takes into account that people tend to live longer. And so we adjusted for that. And that has an impact of low to mid-sized 2-digit numbers on the risk. So that's question one. Question 2 is for Matthias.
Yes. So our overall asset allocation, our investment strategy is unchanged. We have been, over the last few years, reallocating to asset classes with a high and stable current income. And so we have ramped up corporate bonds and real estate and doing more and more in private debt. So the underlying strategy is unchanged. Now given the market changes with higher interest rates and higher credit spreads, we have further increased the corporate bond exposure in the first half year, so taking credit of the higher spreads. On the real estate side, in the recent years, we have been very selective in adding additional real estate exposure. We have built up the real estate exposure up to 2 or 3 years ago. And so we continue to be very selective on the real estate part. What a further ramp up in private debt is infrastructure debt, which has also benefited from higher interest rates and credit spreads.
And lastly, with regard to your question on the Guidewire implementation in Germany, the Guidewire implementation is proceeding as planned. We have the first lines of business fully migrated. We are able to write new business on the platform. The journey is not finished, so there will be still IT investments in the future, but the Guidewire implementation is proceeding as planned.
The next question comes from Fulin Liang from Morgan Stanley.
And first of all, welcome back. I've got just 2 simple questions. First one is the German -- the book -- the German book disposal, what is the structural impacts to your combined ratio in Germany? And that's the first question. And the second one is because your target -- the 3-year target is based on cash. So I was wondering, if I look at the Life results -- I was wondering actually whether that interest rate kind of the effect, which is a reserve release of Life, results essentially non-cash elements. So therefore, when we consider where your cash remittance position for the year 2022, actually, that element should be taken out? And how should we think about the 2022 kind of cash. Can you just give us some color?
Let me take the first question, Carsten will take the second question. What we did in Germany is actually, we sold our hospital liability book, which is a business line we started to write in the beginning of the 2,000 years with which we have already put into runoff in 2018. The reason for that is that it's a highly expertise big line of business with a very long tail and quite some uncertainty about the regulatory environment. So that's why we have put it into runoff in 2018. Over the last couple of years, this portfolio has been rather stable. So this means that there has not been real impact on the combined ratio. So that's one point. Of course, the sale will have an effect on a better solvency of the Non-Life business in Germany because it consumes quite some capital. And otherwise, it has also a small effect on the bottom line positive effect -- on the bottom line, but not that material. Overall, a good thing. We plan to have been able to sell this portfolio. And this is an exercise we continuously do. So we take a look at our business lines, our portfolios, and we always ask ourselves the question, are we the best owner? And if not, then we look for alternative solutions. Question 2 for you, Carsten.
So you are absolutely right. Life EBIT contains by nature non-cash items, reserve adjustments being part of that. With regard to cash and cash remittance, nothing has changed. So we have -- we are pursuing the CHF 2 billion target over the strategic horizon. We have a well-diversified basis for cash remittance as we have proven in the last years. And structurally, nothing has changed on that. So we will report by the end of this year on cash remittance with regard to the financial year 2022. So no changes there with regard to cash generation and its sources from the portfolio of the group.
Gentlemen, so far there are no more questions from the phone. I just wanted to ask you if you would like to conclude or make any closing remarks?
I was just about to start to answer to. That's okay. Then I would like to thank you very much also for wishing me welcome back. That's highly appreciated. Thank you very much. And of course, hoping to see all of you once very soon. Have a nice day, and take care.
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.
Read the full transcript via the API
You're viewing the first half of this call. Get the complete Baloise Holding AG transcript - plus 251,000+ transcripts from 12,000+ companies, speaker segments and full-text search - through the EarningsAPI REST API or hosted MCP server.
Get an API key View API docs →For developers and AI pipelines
Programmatic access to Baloise Holding AG earnings transcripts and 251,000+ others is available through the
EarningsAPI REST API and the hosted MCP server.
Quarterly plans from $105 - full transcripts, speaker segments, full-text search,
and the /api/v1/transcripts/recent polling endpoint for ETL pipelines.