Helvetia Baloise Holding AG (HBAN) Earnings Call Transcript
August 25, 2020
Earnings Call Speaker Segments
Ladies and gentlemen, welcome to the Helvetia Analyst Conference Call. I'm Hailey, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] [Audio Gap] to be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Paul Norton, CFO. Please go ahead.
Good morning, everybody, and thanks for taking part at short notice in this short call. The reason is, obviously, the press release we put out this morning regarding the write-off of a IT project and going in different directions, in particular, our IT project. I'll give you some background on that in a second. The reason we produced the press release only a couple of weeks before our press conference is obviously because of the ad hoc rules. CHF 40 million before tax is actually not very material to a normal half year, but because of the special effects that we announced a few weeks ago from the precaution for COVID and with a profit of just around about CHF 20 million is obviously in that context material, which is why we had to go to the market earlier. As you correctly guessed through the consensus, you guessed the consensus around CHF 26 million, we would actually be slightly lower. You can see that from the -- working backwards from the calculations. But given the circumstances, that's a pretty good hit against the information that we gave you. There are 3 big effects this half year, 2 of which we've already mentioned in the previous conference call. The first one is the losses from COVID, the actual claims. And we're still sticking by our high double-digit millions net of reinsurance. There's still a lot of uncertainty in the market. It's not a Helvetia-specific problem but a market problem regarding the reinsurance recoveries, and we think we've booked that reasonably conservatively. The reinsurers are being very quiet. They're not actually coming out and telling us or our peers whether they fully agree with coverage or not. We believe we have a very good case. But at the moment, we're still working with the high-double digit. I know from the conversations you've had with our IR team, there's been some questions, what exactly is high-double digit, what is low-double digit? My personal view is high-double digit is always at the 7, 8 or 9 and [indiscernible], double digit in that case or low-double digit would be 1, 2 or 3. And we tend to be conservative people, so that gives you an indication of how we came up with the numbers. The other thing is the investment result. And we still stick with the low triple-digit result after deducting the policyholder share and also extraordinary reserving. And this has been predominantly caused by the movements in the equity markets. And I think the biggest -- the 2 biggest factors have been as follows. The first is, we decided in March that we were not going to renew our options predominantly. We're going to use mainly these futures. And the reason is we want to lock-in the market at the time. We took the view that we didn't see an immediate recovery. And so we decided to lock-in and keep the losses as it is. And with the futures being certainly cheaper than the options, that was the bet we took. As it happens, the markets have recovered better than we expected. And so we missed out to some extent on that, but we preserved our position where we were. And for that, we do not apologize. That was a view we took, and we're relatively conservative people, as I mentioned earlier, and that's how it turned out. Some people took a bet the markets to recover better and used a different hedging strategy, and that came out to them all right. It could have gone the other way. The second important thing to mention, and I think you know it already, is that we have a larger proportion by far of our investments booked as fair value through profit and loss, which means you see that volatility all the way through into the P&L, whereas most other companies book it through the OCI, so in equity. We've mentioned that in the past. It's a historical reason to do with the way we manage the internal funds. We did look at it about a year or so ago, whether we can change it. Given the upcoming change to IFRS 9, it made no sense to start redoing everything when it will have to be redone in another year or 2's time anyway. So that's what we left with our volatility. Economically, it makes no difference. It's left pocket, right pocket, if it goes to P&L or the OCI. The other issue, which we didn't do, we didn't take any major gains on the assets. We didn't sell investments to make gains to improve the P&L. If you look at some of our peers, I think you'll see that they made substantial gains. They realized assets in order to show a decent P&L. We were clearly of the view, we are not going to do that, particularly if you sell bonds, which is the biggest component of an insurer's balance sheet, you are selling basically the future for the present by selling off the profits to be gained from future coupons and having to reinvest at a lower coupon rate. And we're not going to do that just to show a nice profit for the half year. So those are the impacts around the investment result. And the COVID claims, as it happens, the non-life business showed a very good growth, actually. Not super growth, but given the current situation in the market at the time, we are actually seeing some really quite good growth in the non-life business. And that applies to all our markets: Switzerland, Europe and also the Specialty Markets business. We'll give you more details at the half year press conference. I don't want this to become a half year press conference. In the Specialty Markets area, in particular, we're seeing substantial rate increases as well as volume increases, which is a very pleasing thing. You'll see that, in particular, in areas like engineering, that -- in property, there's big property, I see these rate increases. Then also, just to make it clear, the solvency ratio, which we'll give you a bit more detail on when the press conference comes around, it's still within the range that we expected. And the other thing is the integration of Caser is going very well. We're finalizing at the moment the integration balance sheet. Just to remind you, there will be no profit and loss reported in the half year from Caser because we only acquired it about 4 days before the year-end -- well, more than -- about 5 days. So it's only a balance sheet, but despite the lockdowns, particularly in Spain, the integration and the preparation of the final balance sheet has gone extremely well. And we can also give you a bit more detail then about the Caser local figures for the half year at the half year press release. So let's go to the write-down on the IT system. We started a couple of years ago to renew our Swiss non-life back-end systems as the policy administration systems, which we haven't invested in for some time. And those of you who have been following us will know that we've reported and said, "Look, we have systems which -- they're okay, they worked, but they weren't really designed for the future. And at some point, they need to be replaced," so we started a program to do that. And what we have discovered over the last couple of years is that the route we went down is probably not the right route. And we need to spend more time and effort on actually the front-end, the interfaces with the customers, and we also need to standardize the software at the back-end more. So we had -- it was more of a development project with an external partner. And the progress was not as good as we hoped. Part of the system is up and running for a particular line of business, and that is working. That's fine. But for the development for the further modules and to the further lines of business, we decided that the risks and the costs were going to be too high. And so we stopped that, and we're now going to looking -- we're looking now, evaluating an alternative. And it's not that we're in the dark, we have various solutions. We sort of finalized which one to do to work on the back-end systems with much more standardized software and consolidate some of the stuff on existing software that can be used and then concentrate more on the front end that is the interface with the clients, the customer centricity and interface with intermediaries. So yes, it's regrettable, but it's important that at some point in time, you make a cut and change direction. And that's what we've done. And in a normal half year, it would have been irrelevant, CHF 40 million after taxes, sort of CHF 35 million around about something like that. And we said, yes, unpleasant, but not a big deal because of the COVID effects and it being material, we have to release this press release according to fixed rules. So with that, I'm open to questions, but I would like to repeat that I don't want it to become the half year press conference, which will take place on the 15th, where we'll give you obviously much more detail. And who would like to start off?
[Operator Instructions] And the first question is from the line of Peter Eliot of Kepler Cheuvreux.
If I can maybe just focus on each of the sort of the 3 areas that have caused a disappointment in H1. I guess, I mean, on the write-down, I just -- 2 years ago was when you were showcasing a lot of your digital initiatives for the first time and pushing that. So I guess the obvious question is just whether anything else might be at risk. How wide-ranging the review is and whether there might be anything else sort of down the line? And also now that you're looking at alternatives here, whether those alternatives -- what they might add the cost expense based in the future? And secondly, on the Swiss gastronomy settlement, you mentioned 95% acceptance to date in your press release. Just wondering if you could comment on the other 5%, whether they have indicated they won't accept or whether it's just that they're yet to make a decision. And then finally, on the investment result. I mean Paul, you commented on the sort of going defensive in mid-March and locking in the losses. Just wondering if you could update us on the position today. Are you still positioned in the same way that you were at the bottom of the market? Or have you taken any more risk since then?
Good. The write-down is related really to this development of the back-end systems. It's not related at all to the digital initiatives. There's nothing in the digital initiatives that we're aware of at the moment that requires a write-down. They're all working very well. And we see nothing at the moment for that. In terms of the alternatives adding to the risk and the cost, actually, the whole decision was taken to reduce risk and cost. It was based on the risk assessment. And the main alternative we're looking at, actually, is one of the standard softwares in the market, and it's just a question of how we apply it. And I think the idea is we make it as simple as possible. And there's always a balance in these projects as to how much bells and whistles you want, how much you want to develop it for yourself and how much that is a trade-off with cost of risk. And I think we've come to the conclusion that actually less bells and whistles and more standardization is what we need. So it's really a risk and cost mitigation exercise, not the opposite. In terms of the gastronomy solution, I don't have any details about the 5%. I suspect that a lot of them will be those that -- so there might be a few of those sitting on the fence, and most of them are saying that they won't accept. But quite frankly, with a 95% acceptance, they're going to have a problem, I think, if they want to take it through to the courts. And on the investment side, we're just -- we've been steady with the futures. But we're now going to look at taking on a little bit more risk over the next few months.
Okay. Just to quickly follow up on the first point. Do I take it then that the main alternatives that you're looking at should cost you less than the system you were working on? So therefore, if anything, we might expect a small reduction in expenses going forward or that will be optimistic?
Yes. That's really too early to tell. The primary thing was risk reduction and getting in place as quickly as possible and effectively as possible, and the second one was cost reduction. So it shouldn't -- it certainly shouldn't cost anymore. But I don't want to talk about now at this stage about significant cost reductions.
[Operator Instructions] The next question is from Jonny Urwin of UBS.
Just 2. So going back to the IT write-down. I mean, yes, from insurance companies across the sector these days, what we really hear about is the kind of front-ends, digitization, looking out to the customer journey, et cetera. And it's kind of -- the assumption is that the back-end is largely fixed or less bad than it was before. So it's quite -- it is quite concerning when you hear an insurance company pointing out kind of back-end issues and an insurance company that's hideously complicated and hard to assess from the outside. So I mean how would you give investors confidence that you're on top of this and it doesn't impact towards the stuff you're doing at the front-end to kind of drive sales and retention? And how quickly can you fix it, basically? And then secondly, on the growth, you call out specialty growth and European growth, in particular, alongside sort of solid trend, Swiss trend in non-life. I thought you might use this kind of repricing theme going on in commercial insurance to grow that book. It makes commercial and specialty insurance -- it makes sense to kind of try and franchise a bit of growth into improving margin. But obviously, that can also bring a bit of volatility to your P&L. So can you just elaborate a bit on the growth plans in specialty? Is -- are you seeing an acceleration? And if so, how are you controlling the volatility that, that could bring?
Okay. We'll talk about the write-down. I mean, you're right, I mean, about the front-end, and that's why we moved to that. I mean, to be honest, I think the problem we had was that we overestimated the importance of the back-end. Like I said, the back-end systems were and are still good. They're not going to be what we potentially need for the future -- right into the future. And that's why we put a lot of effort and have put a lot of effort into front-end systems. I think what we overestimated was the need to really develop the back-end systems and replace them. And I said, to be honest, I think it was -- there was a -- we had this feeling that we needed if you wanted to offer the whole package digitally everything, you needed to have all singing, all dancing systems back-end integrated with front-ends and everything. And that's where I entered into this development stage. And we did was we -- or developed project, what we did was we overcomplicated the matters. And so that's why we said that okay, "Look, let's pull back. We can actually exist very happily with the back-end that we've got with a bit of adjustment of it and then some software -- new software engines being placed". So new software coming in on top, which is standardized software. And so it's often the case in software development where people think, can I produce this whole singing or dancing and develop it myself and with obviously the partner, but it's going to be the greatest system on earth, when in fact, it's probably easier to buy it off-the-shelf and just bolt it on to existing stuff. And so we've done that. That was the mistake we made. And it's cost us CHF 40 million, and that's bad. But the point is, we have the guts and the insight to be able to say, "No, no, that's taking -- we've got to do it differently and get on a different route." And sometimes these things don't work, sometimes you make the wrong decision, and that's what's happened, but it's over. And it was the project team themselves that came up with it and said, "Look, this isn't working. We've got to do it differently." And I think we're more into the mainstream now. And so I think when the project team itself comes up and says, "All right, so it's not the right way of going about it." I think that, for me, gives me a lot of confidence that they will get it right. Because often, you end up with people just going down a dead end blindly trying to create their own or singing or dancing at best, whatever it may be, the software system, aircraft, car or whatever and not accepting that maybe there's a better way of doing it. And the whole management philosophy during these days is proving to fail, and I don't like that very much. And [indiscernible] at all, but sometimes, you can't be safe all the time. So that's the background. In terms of the pricing, we're seeing very good pricing on the -- we'll go into more detail, as I said, during the press conference. We are seeing good pricing increases. We are developing, particularly in the engineering, and we started last year, aviation, and that's been one of the drivers. I know aviation at the moment is something in the doldrums. So certainly in the first 6 months of the year compared with, obviously, last year, we didn't have aviation stuff in the first -- fourth quarter last year. We've got some growth out of it. So -- and the reinsurance markets and the rates are hardening, so we're seeing growth there. So yes, we've been pushing the -- and particularly in France, which is the specialty lines insurer. It's not just any more transport insurer. It does engineering, it does aviation, it does specialist property. We've been using that pricing wave to write more business.
And how are you making sure you're on top of the volatility that, that growth can bring?
Well, it will bring volatility. We've changed a little bit the reinsurance program, and we're going to be reviewing the whole reinsurance program for next year -- well, probably in time for next year, but that will dampen out volatility. But it's one of those things that you need to live with in that business. And to some extent, you're going to have to live with it. You, obviously, -- and I would be careful with what I say. I mean, reserving is something which helps you, but I mean, you obviously are limited by what you can reserve and how you can reserve. We have controls in place. We have what we call a virtuous circle in each unit, particularly in the specialty markets, where they'll review all the potential loss ratios going forward arising from the business. They look at the potential trends coming out of the business. They also have an underwriting committee and a chief underwriting, obviously, who's doing reviews. So there's a reasonable amount of control, but there will be some volatility in the growing book and relatively -- particularly, the engineering world has special risks. You know there will be occasionally 1 or 2 large claims out of that. And we're prepared to live with that. And if necessarily, in the specialty markets if we put it down through reinsurance, but then that would be taken into the group. And then from the group, we have to decide, do we want to take the overall volatility or do we want to pass it on? But there's generally a feeling that we're prepared to take more underwriting on this if necessary because we've got the capacity to do so. And we're talking about margin. We're not talking about a huge volatility of the whole results.
[Operator Instructions] And there are no more questions at this time. I would like to hand the conference back over to Paul Norton for any closing remarks.
Okay. Thank you very much for taking part on this call, and you all had very good questions. We're looking forward to seeing you on the 15th of September or hearing you on the 15th of September, when we'll give you further details, and you'll be able to hopefully ask and get answers to questions on the details of the year, the particular elements that I mentioned. And also, we'll show you the integration of Caser. So, everyone, have a good rest of the day, and see you or hear you on the 15th. Bye-bye.
Ladies and gentlemen, the conference has now concluded. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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