Helvetia Baloise Holding AG (HBAN) Earnings Call Transcript

Ladies and gentlemen, welcome to the analyst conference call on the acquisition of the Spanish insurance company Caser by Helvetia. I am Alessandro, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Mr. Philipp Gmür, Group CEO. Please go ahead, sir.

Thank you. Ladies and gentlemen, welcome to our conference call. We are very pleased to be able to inform you today that we reached another milestone that perfectly fits with our current strategy. Helvetia is acquiring a majority stake in the Spanish insurer Caser. This acquisition will considerably reinforce the European business as a second pillar of the group. We will be gaining substantial market share in Spain, and together with Caser, we will improve our positioning to a meaningful #7 in non-life. Moreover, we will not only be significantly strengthening our core business but also improve the business mix for the group through a higher share of non-life and a more balanced geographical mix. Helvetia is also significantly improving its distribution channel mix by increasing its presence in the area of bank distribution. Caser operates very successfully in Spain. We see Spain as a very promising growth market, and market economics for Spain look positive. We repeatedly emphasized that an acquisition in Spain would be very interesting, and now we are seizing the opportunity offered to us. For our shareholders, the good news is that Caser will also immediately make a significant profit contribution, and the acquisition is EPS-accretive. Furthermore, Helvetia will be preserving its strong capital position. I will provide you with more details of the acquisition on the following charts. Let's move to Slide 3. As I have already mentioned, the acquisition of Caser is a unique opportunity to strengthen the European business as a second pillar of the group. Our business in Spain has developed very well in recent years and will be additionally reinforced by this transaction. Helvetia will significantly increase its market share in Spain, which also substantially increases the importance of our European activities. The acquisition of Caser perfectly fits with Helvetia's strategy. Caser also is strongly focusing on the attractive non-life business, which made up 68% of Caser's premiums in 2018. Caser has a balanced product portfolio offering products and services in all retail insurance segments. Helvetia is also opening up valuable new sales channels in the area of bank distribution. Caser has had distribution agreements with Ibercaja, Unicaja and Liberbank and further banks for a long time. The bank distributors will remain as minority shareholders and the distribution agreements will be continued. Hence, Helvetia is gaining important new strategic partners in Spain. Ibercaja, Unicaja and Liberbank are present across Spain with around 3,100 branches serving more than 7 million customers. Both Caser and Helvetia focus on customer centricity and digitalization. In addition, Caser, like Helvetia, is developing new business models to further diversify the business. With Caser, Helvetia gains access to attractive ecosystems in the health and old-age sector with stable fee income. Among other things, Caser operates nursing homes and hospitals. Given the demographic development, this offers further growth opportunities. The 2 companies complement each other in a perfect manner, be it business-wise, be it culturally. Furthermore, Caser will also immediately make a significant profit contribution. Finally, we see additional potential to realize synergies over time. On the next slide, our CFO, Paul Norton, will provide you with more details on the structure of the acquisition, the financing structure and the financial implications.

Thank you, Philipp. Good morning also from my side. Caser is owned by a group of shareholders, most of whom are banks with distribution agreements with Caser. Helvetia has reached an agreement with a group of these shareholders on the sale of their share packages. Helvetia will acquire up to 70% of Caser. Purchase price for stake of almost 70% in Caser is EUR 780 million and is close to the book value of Caser. Helvetia intends to finance 2/3 of the acquisition of Caser by issuing hybrid bonds and 1/3 by issuing new shares. This financing mix enables efficient capital management and contributes to a balanced capital base. The Annual General Meeting on 24th of April 2020 will vote on the issuance of new shares. Until the capital transactions are completed, the acquisition will be financed with existing liquidity. Helvetia's capital position remains solid after the transaction. The SST ratio will remain within the target range of 180% to 240%. Helvetia has already had confirmation that the S&P rating of A will remain unchanged subject to completion of the transaction financing actions. In addition, as Philipp already mentioned, the acquisition will be EPS-accretive. At the moment, the full IFRS numbers remain provisional because Caser reports under local GAAP. We will obviously give you more details once the acquisition has been completed. And as with the Nationale Suisse acquisition, we will report the impact of acquisition accounting in the future results so you can see the underlying results. We expect the transaction to be concluded in the first half of 2020. With that, I will hand back to Philipp, who will provide you with more details on Caser as a company.

Thank you, Paul. Slide 5 shows that, together with Caser, Helvetia will become an important player in the Spanish non-life market. While Helvetia currently ranks #20, the combined companies will advance to a #7 position, an excellent market positioning and basis for future growth. This premium volume in Spain even exceeds the non-life book we have in Switzerland. Also in the life business, Helvetia significantly improves its positioning. Let us move to Slide 6 that provides you with an overview on Caser's business. Founded back in 1942 in Madrid, Caser is a Spanish composite insurance company that is active in non-life and life. The company has a strong focus on the non-life business, where it holds a top 10 position stand-alone. In 2018, Caser generated on a local GAAP basis revenues of EUR 1.6 billion and a profit of EUR 87 million. Non-life business accounts for 62% of the revenues. Alongside the insurance business, Caser has developed nursing homes, hospitals and real estate services to diversify its operations. As you can see on the right side of the slide, the company has also built up comprehensive bank distribution networks. Caser has non-life distribution agreements with Ibercaja, Unicaja and Liberbank and other banks. These cooperations will be continued, and Helvetia is gaining important new strategic partners in Spain. Let us move on to Slide 7. Slide 7 shows Caser's business mix, with 68% of premiums coming out of the attractive non-life business. Because Caser reports based on local GAAP, its figures are only comparable to Helvetia's numbers to a limited extent. However, Caser contributes significantly to the top line figures in Spain and improves the share of the non-life business from a group's perspective. In addition, Caser generated EUR 141 million of revenues with fee income from the ecosystems in the health and old-age sectors offering future growth potential. On Slide 8, we will provide you with further information on the bottom line impact. Also here, I would like to emphasize that due to the fact that Caser reports based on local GAAP, its figures are only comparable to Helvetia's numbers to a limited extent. However, they can give a broad indication of the impact of the acquisition. Any numbers in this presentation related to the acquisition and its impact on Helvetia Group are preliminary and will only be finalized after the completion of the conversion of Caser's number to IFRS and the related acquisition accounting. Nevertheless, it is already apparent today that Caser will also provide a substantial positive bottom line impact. With that, I move on to Slide 9. Caser will continue to operate in the Spanish market with its existing well-established brand as well Helvetia Seguros in Spain. The management teams and locations of both companies will also remain in place. Helvetia aims to combine its strengths with Caser. For this particular reason, a joint management committee will be set up after the transaction has been completed, in which members of Helvetia Spain and Caser will be represented. The joint management committee will coordinate common activities in the market also with the aim of realizing synergies. Moreover, it ensures the exchange of knowledge and experience. Let's move on to Slide 10. Helvetia has reached an agreement with the main shareholders on the sale of their shares in Caser. Other shareholders have the opportunity to sell their shares at the same conditions to Helvetia. Helvetia expects to acquire a stake of up to 70% in Caser. By last night, we have a contractual commitment of 67.1%. We expect the remainder within 1 weeks’ time. The above-mentioned 3 strategic bank distribution partners will each remain invested with around 10%, underscoring the importance of these strategic cooperations. On Slide 11, you see that the acquisition of Caser supports Helvetia's growth ambition without compromising its financial targets. It is very important for me to emphasize that, together with Caser, Helvetia will reach its volume ambition of 10 billion by the end of 2020 but without jeopardizing profitability. To the contrary, the transaction supports our strategy of profitable growth. Let's end our presentation with a summary on Slide 12. To sum up, with the acquisition of Caser, Helvetia is, first, achieving its strategic aim of reinforcing its position in Europe and strengthening Europe as a second strong pillar of the group; second, strengthening the core business and exploring new business models; and third, creating shareholder value by acquiring a successful insurance company under financially attractive conditions. Now Paul Norton and I are ready to answer your questions.

[Operator Instructions] The first question comes from the line of Peter Eliot from Kepler Cheuvreux.

I'll try to limit myself to 3 questions initially. The first one was on earnings. I mean, I guess, given your comments, you can't give us a better indication of the underlying IFRS earnings. But I was wondering if you can sort of give us any ideas or sort of quantification of the synergies you expect, and also whether you can quantify the one-off in Caser's 2018 numbers. The second one was on capital structure. I'm just wondering whether you're happy with the sort of financial leverage as it will be after this deal, or whether you might look to sort of decrease that over time, and whether it leaves you with any capacity for further deals. And then the third one was just on the dividend. I'm just wondering whether it has any implications for the dividend policy, given this should increase your earnings if you kept the dividend policy unchanged. And I guess, your payout ratio would go down a little bit. Just wondering if you can comment anything or whether -- at this stage.

Okay. Thank you, Peter. Let me answer question number 3 and then hand over to Paul. With regard to our dividend policy, of course, our dividend payout ratio is slightly changing according to the number of shares and all that, but we are not planning, as of today, to have a major change in our dividend payout ratio as we used to comment on that during the last years. So there is no -- instantly, there is no change in dividend policy. Now for the other 2 questions, I'd like to hand over to Paul.

Maybe I can just add to the dividend policy. As you know, we have a new strategy period coming up, and we'll update our dividend policy as part of the strategy. As you know, we also have -- or the [ strategy gave ] increase in dividends. And with the Nationale Suisse transaction, we increased dividends due to the synergies. I'll come onto that in a minute, on the synergies. But obviously, Caser will bring additional net income to us, which is available for the dividend. So it may or may not have an impact on the payout ratio. But I think the most important thing is we have a clear strategy, which we'll -- going forward. In terms of the earnings, you're right. It's very difficult at the moment to give you guidance on the underlying earnings under IFRS until we've gone through the details. The one-off was in the low double-digit millions net impact. As far as synergy is concerned, we have specifically not mentioned synergies. We've said this is a deal which has distribution to us. It's not specifically a synergy deal as the Nationale Suisse deal was. Having said that, we do know of areas where we will, over the next few years, be able to achieve them, but we're being very conservative. And I'm not saying anything at the moment, so I hope you will understand that. In terms of the capital and leverage, we are very happy with that. On a small amount you probably saw earlier, this year, we repaid CHF 150 million of senior because we just need it, and it will help structure a little bit. You've seen, hopefully today, S&P have confirmed our A rating and taken off the credit watch, including the impact of Caser, as we spoke to them about it last week. So they're saying, as far as we're concerned, if you succeed with the financing of the transaction as you propose, then we think the capital structure is absolutely fine. So we have no intention at the moment of decreasing the leverage, and we will look at it as we go along. Obviously, given the size of Caser, talking about future acquisitions is probably a bit too soon.

More questions?

The next question comes from the line of Jonny Urwin from UBS.

Well done for getting this over the line. It looks like it was quite competitive. I guess, from our perspective, as Peter has touched on it, it's just quite difficult to get a feel for the financials. You've helped us with the one-off. Just conceptually on the local GAAP versus IFRS point, I mean what should we expect the direction of travel they -- normally, IFRS is higher than local GAAP. So any comments there would be great. Any broad comments on EPS accretion? I mean we will put our calculations this morning, which, invariably, will be wrong, given the accounting differences. But any just rough steer there would be really helpful. And then just on the funding structure, I mean it looks like you could have done this essentially just from internal resources, given where you are in the solvency range, maybe the difference is on -- from a credit rating perspective. But is the funding structure that you propose to give you more kind of powder for future M&A going forward?

Okay. Jonny, thanks. I would like to hand over for answering the 2 questions to Paul.

I understand your needs to get more direction on the earnings and the EPS. I really -- at this stage, we'd not like to give you anything there. I mean the EPS will be very mildly accretive at the moment. It's not -- we don't foresee huge EPS accretion. But given the differences, and we're also dealing here, by the way, there's a small amount of revenue, which is not under IFRS 7 or 4 for insurance accounting. It's under IFRS 15 for revenues from some of the various hospitals and nursing homes, the sort of ecosystem health business. So at the moment, I really wouldn't want to give you any steer on that, I'm afraid. In terms of the funding, we've always had a very conservative funding approach, and it's not so much about giving capacity for future M&A deals because this is going to take us some time to integrate. Just on the Nationale Suisse, we said, look, we're not going to do any major deals for a couple of years. It's about making us resilient and ensuring that we have that backbone that enables us to keep going without any problems while we integrate the company. So that's why we didn't want to do that with existing funding.

More questions?

The next question comes from the line of Simon Fössmeier from Bank Vontobel.

I see your EPS accretion. On the other hand, it looks like the deal is slightly ROE-dilutive. Just [ direct ROE ], is that correct? The second question is on the life book. Is this a book with guarantees? And third, if you have any estimate on what your costs will be on the hybrids that you will issue.

Thank you, Simon. Paul?

Yes. I have to look at the EPS -- the return on equity ratios. We think we're actually going to be not much different. Actually, we'll be probably slightly positive, given that 2/3 funding is on hybrid and not in equity. So it should be slightly positive on there. The hybrid costs, we estimate to be under 2%. It's pretty good at the moment. And what was your third question, Simon?

On the life guarantee.

Yes, there are guarantees. It is -- traditional book, it is relatively small. We think we have to do all the acquisition accounting for it and so on, but we think we can manage that book of business and make sure that it's more than adequately reserved. So we don't have a problem with that.

The next question is a follow-up from Peter Eliot from Kepler Cheuvreux.