Helvetia Baloise Holding AG (HBAN) Earnings Call Transcript

Ladies and gentlemen, welcome to the Half Year Results 2023 Conference Call and Live Webcast. I am Alice, 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, madam. Ladies and gentlemen, welcome to our analyst conference call on the half year results 2023. Within the next 30 to 40 minutes, we would like to give you detailed information on our business development and the key financials of the reporting period. After my introduction and a quick overview, I will hand over to our group CFO, Annelis Lüscher, who will then go through the financial figures. Then I would like to give you an update on the implementation of our strategy, Helvetia 2025. After my presentation, Annelis and I will be pleased, of course, to answer your questions as always. Let me turn to Slide #4 and give you the highlights at a glance. Helvetia looks back on a successful first half of 2023. I would like to highlight 3 aspects of the past 6 months. First, our strong core business; second, our resilience; and third, the ceasing of our growth opportunities. First, our strong core business backs the sustainable dividend promise. Helvetia business volume grew by 6% at constant foreign exchange rates. The main growth driver was the non-life business, which was broadly supported across all segments and lines of business. We are very satisfied with this result. The IFRS 17 result accounts to CHF 258 million. What are the reasons for this result? We are benefiting from solid technical results and from a better performance of the financial markets. We, therefore, see ourselves on track to achieve our cumulative dividend payout target. Second, we still are pretty resilient given our capital strength. At the end of June, the estimated SST ratio remained at a high level of approximately 300%. The resilience is also based on the business mix, which has continued to develop in our favor, thanks to growth in the Non-life and in the fee business. Third, we are successfully seizing growth opportunities as part of our strategy. Once again, the fee business is worth mentioning. Strong growth and already strong growth and the contribution of already 5% to the group's results are mirrored in the results you see. More on this later from Annelis, complementary acquisitions in growth areas. For Caser's noninsurance business in Spain and in embedded Insurance, in addition to strong organic growth, the bolt-on acquisitions of Mobile Garantie in Germany. Furthermore, we successfully expanded our distribution channels. We are leveraging our Smile franchise in an international environment. And we also got new distribution agreements with the Swiss Bank with Raiffeisen. We are successfully succeeding. We are successfully following our growth path of the last few years, and we will continue on this track. More on the strategy implementation at the end of the presentation. Now I would like to hand over to our CFO, Annelis Lüscher, who will present the key financial figures.

Many, thanks, Philipp. Also from my side, I would like to welcome all of you to our conference call today. It is a very special result publication as it is the first under the new accounting rules of IFRS 17/9. Therefore, please note that all the IFRS figures in this presentation are based on the new accounting rules. The prior numbers have been restated accordingly. As always, we use a short version of the presentation for this conference, the full slide deck with additional information is available on our website. Now let's first have a look at our financial targets. The next slide shows you which target we have recalibrated to IFRS 17/9. So 3 of our financial targets of the strategy period 2025 are influenced by the transition to IFRS 17/9. The combined ratio in non-life, the new business margin in life and the overall return on equity. We have, therefore, recalibrated the target ranges for key figures based on the new accounting standard. In non-life, the combined ratio has seen both increasing and decreasing effect from the transition. For example, the new calculation method and the deduction of reinsurance commissions from revenue had an increasing effect on the ratio. The introduction of discounting, however, is decreasing it. Overall, the 2022 combined ratio did not change considerably due to the transition to IFRS 17/9. For that reason, our target range for the combined ratio remains the same at 92% to 94%. We continue to focus on a broadly diversified portfolio with an attractive overall return on risk capital. Considering the resulting shift in our business mix with an increasing share of international business outside of Switzerland and the current market environment, this target range for the combined ratio remains ambitious. In life, the target rate for the new business margin is increasing to 4% to 6%. The reason for that is a mechanical uplift due to the transition to IFRS 17/9. Compared to the old embedded value methodology, the new business value is now growth of tax. Measurement differences overall also have a positive influence. Therefore, to recalibrate the target range is above the old one. The return on equity also sees an uplift from the transition to IFRS 17/9. The new target range is 3 percentage points higher than before at 11% to 14%. The main reason for this is that the denominator of the return on equity, the shareholders' equity is lower under the new accounting groups. Besides these 3 recalibrated targets, we also increased our ambition relating to the fee business. Since introducing the 2025 strategy and acquiring Caser and its noninsurance business in 2020, the fee business has developed very well. We see a commission income of CHF 351 million in 2022. We have already exceeded our previous ambition of generating fee revenues of more than CHF 350 million by 2025. Our different types of business fields in this area, such as the ecosystem health and care in Spain or third-party asset management remain an attractive opportunity to further diversify our income stream in a capital-efficient way. Therefore, we will continue to focus on growing the fee business and set the new target to reach more than CHF 450 million of fee volume by 2025. With that, let's turn to the key figures of Helvetia's performance in the first half of 2023 on Slide 7. The half year results in 2023 demonstrates that Helvetia is well on track to achieve the updated financial targets. In an environment that remains challenging, this once again proved the strength and resilience of our diversified business model. Helvetia generated an IFRS net income after tax of CHF 258 million. This corresponds to an annualized return on equity of 13.1%. This is at the upper end of our new target range. The result was based on a resilient technical performance in both non-life and life and supported by a good performance of capital markets. In line with our strategic ambitions, fee business continued to grow significantly. Fee and commission income increased by 10.2% at constant exchange rates to CHF 194 million. Fee business contributed close to 5% to the group's net income. At 94%, the combined ratio was at the upper end of our target range. In view of a challenging market environment, characterized by an above-average frequency of midsized claims and inflationary effects, the combined ratio remained on a robust level. Once again, it benefited from the growth diversification and profitable growth of the portfolio. The new business margin in life amounted to 5.6%, and this was at the high end of our target range. The increase compared to the prior year demonstrates our successful focus on growth in profitable lines of business in life insurance. The business volume was at CHF 6.7 billion at constant exchange rate, this is an increase of 6%. Growth was driven by the non-life business, which showed a strong organic increase of 13.2% or 13.2%. In our 3 biggest country markets, Switzerland, Spain and Germany as well as in Austria, the growth rates of our non-life business were above market. We are thus further strengthening market positions in our core business. I will give you more details on all of these key performance indicators later. On the next slide shows that we are also well on track with regard to our financial targets on cost efficiencies, capitalization and dividend. At the full year 2022, we have raised cost efficiencies of CHF 91 million, close to our target of CHF 100 million. In 2023, we are continuing our path of increasing efficiency, as can be seen in the development of the administration cost ratio in non-life. The exact figure of cost efficiencies achieved will again be reported on a yearly basis with the annual results. The Helvetia capitalization remains on an excellent level. S&P has confirmed our financial strength rating of in life close in June, and our regulatory solvency measured by the Swiss solvency test continues to stay on an outstanding level. We estimate our asset ratio to be around 300% as of the 30th of June 2023. The resilient development of our core business and our outstanding financial strength form a solid basis for our payout policy of sustainably increasing dividends year-per-year. Helvetia aiming for a dividend distribution over 5 years of more than CHF 165 billion. With our strong capital position and the resilient development of our business, we are well on track to make a further step towards this target in 2023. Slide 9 provides you with an overview of the net income after tax of the individual segments and business areas. Helvetia generated an IFRS net income after tax of CHF 258 million in the first half of 2023. With the less 17/9 claims environment and ongoing macroeconomic and geopolitical uncertainties, the market environment has been challenging. Against this backdrop, the results demonstrate the stability and resilience of our broadly diversified business model. Basis for the result were local technical results in both non-life and life. The resilient technical development was supported by a good investment results due to the favorable performance of financial markets. In non-life, the operating insurance service result remained on a solid level, slightly below the prior year. The market environment was characterized by an above average frequency of midsized claims events and a few large losses in Europe. The non-life portfolio benefited from its growth diversification and profitable growth, which resulted in scale effects. Apart from the resilient technical development, the non-life business recorded an increase in its investment result. This was attributable to higher current income due to the rising interest rates and book value gains from the positive performance of equity markets. In life, the main component of the result, the CSM release remains stable. Even though the contribution of Sa Nostra Vida, which was sold in the second half of last year was not included anymore. At the same time, the CSM stock was growing compared to the end of 2022. I will comment on the CSM development later in the presentation. In life, the investment gains and losses from market value fluctuations were largely buffered in the CSM with no direct influence on the P&L. Fluctuations in market-wise of assets that do not cover the SA business resulted in book value gains and losses in the first half year. The other activities business area was influenced by the usual accounting effect from the consolidation of own investment funds and a one-off from the previously announced impairment at MoneyPark of CHF 27 million. Both the fluctuations in market values of assets categorized at fair value through profit and loss and the one-off effect in other activities are non-operating in nature and flaring the picture on the development of our core insurance business. For that reason, we will additionally disclose underlying earnings that exclude such effects with the full year results as previously announced. Looking at the individual segments, we see that Switzerland, Europe and specialty markets all increased their profit contribution. In Switzerland, Helvetia recorded a solid result of CHF 174 million. Technical results in both non-life and life remained stable compared to the prior year. In Swiss non-life, the operating insurance service result was on the level of the prior year. The business was thus able to compensate for an above-average frequency of midsized claims and the increased inflationary pressure. In the life business, in Switzerland, the CSM release was slightly higher than in the prior year. While the market fluctuations on equity investments were largely buffered in the CSM, the IFRS result was impacted by changes in the value of investments that do not cover the SA business. In addition, the one-off in connection with MoneyPark was booked in the other activities area of the Switzerland segment. Net income of the Europe segment amounted to CHF 107 million. The result in Europe was underpinned by a resilient technical development, even though the challenging marketing environment had an impact. In the segments, non-life business, the operating insurance service result was somewhat below the prior year. A few large losses and above average frequency of midsized claims and the persistently high inflation had an effect. Due to its broad diversification and focused growth, the portfolio remains resilient and profitable. In European life business, the CSM release decreased mainly because the contribution of Sa Nostra Vida which was sold in the second half of last year was not included anymore. Post the IFRS result of nonlife and life in Europe were also supported by the good performance of equity markets. Net income of specialty markets amounted to CHF 49 million. The on-life operating insurance result of the second increase. The portfolio proved to be resilient in view of the ongoing inflationary environment. Once again, it benefited from its broad diversification and the strong profitable growth over the past years. The results of the corporate segment was below the prior year, but below the prior year result at CHF 73 million minus. A higher technical result of the internal group reinsurance was more than offset by the usual accounting effects related to the consolidation of our own investment funds. Let's now have a more detailed look at the development of business volume on Slide 11. In the first half of 2023, Helvetia successfully continued to grow its core business with a focus on profitable and capital-efficient areas. We achieved a total business volume of CHF 6.7 billion. This equates to a currency-adjusted increase of 6% over the previous year. The growth was driven by a remarkable organic increase in the non-life business of 13.2%. We were able to increase premiums across all market units and lines of business. Growth in non-life was above market in our 3 biggest country markets, Switzerland, Spain and Germany as well as in Austria. Helvetia was not able to further expand its market shares. In Switzerland, nonlife business volume increased by 10%. On the one hand, this was driven by broad-based growth across lines of business in traditional non-life. On the other hand, growth was supported by strong development of embedded insurance business and online insurance life. In the life business in Switzerland, and Helvetia continues to focus on captive products. In Individual life, we recorded a successful development of investment-linked insurance products and of deposits. Together, these capital life products grew by around 20%. Business volume in Swiss group life was influenced by an ongoing market-wide trend of a shift from full insurance to semi-autonomous solutions. As expected, this effect resulted in a lower business volume compared to the prior year in the life business in Switzerland overall. Helvetia is well positioned in this environment with its semi-autonomous products and flat rate risk solutions. As a result, the number of active insured persons in Swiss group life increased in total compared to the end of 2022, despite the shift away from full insurance. In the Europe segment, fee increased its currency adjusted business volume in non-life in all country markets and all lines of business. The non-life business grew by 7.6%, with growth rates of more than 7%, the increase in non-life business volume was above market level in Spain, Germany and Austria. In life insurance in Europe, total business volume was lower compared to the previous years. There were 2 main bases for this development. First, business volume in the prior year still included the contribution of the Spanish companies and Sa Nostra Vida, which we have sold in November 2022. And second, in the current market environment with higher interest rates, the volume of single premiums in investment-linked business in Europe was lower than in the prior year. The business volume of the specialty markets segment again developed positively. It grew by 32.7%. Growth in this segment was due to the increase in new business driven by our focused growth strategy in all 3 market units, specialty lines, front and active reinsurance. In addition, increasing prices supported the growth in specialty markets. Retargeting accounted for about 1/3 of the segment's growth. Now let me turn to Slide 13 and to the fee business. Helvetia has not only profitable grown its core insurance business in the first half of 2023. We have also achieved a strong development of fee business in line with our strategic ambitions to grow these types of income streams. The group fee and commission income rose by 10.2% at constant exchange rates to CHF 194 million. This increase was mainly driven by the expansion of Caser noninsurance businesses around its ecosystem, health and care in Spain. Caser has further expanded the fee business with targeted bolt-on acquisitions. For example, it has acquired 4 dental clinics and the network of more than 10 veterinary clinics in the first half of 2023. Fee business also proved to be profitable. The fee result on the right side of the slide shows fee income after deducting the related costs. It amounted to CHF 16 million before tax in the first half of 2023. With this, fee business contributed almost 5% to the group's net income. We are now moving to the combined ratio in non-life on Slide 15. At 94%, the combined ratio was on a good level at the upper end of our target range. It increased compared to the prior year due to a challenging environment. In view of a less 17/9 claims environment and ongoing inflation to a portfolio remains resilient. Once again, it benefited from its growth diversification and profitable growth. The claims ratio was 1 percentage point higher than in the prior year at 66.6%. The positive impact of the higher discounting effect and lower claims from large NatCat were offset by a less favorable general claims environment. The market environment was characterized by an above-average frequency of midsized claims and persistent inflation. In addition, a few large losses, particularly in the second Europe had an influence. Please note that Helvetia has also recorded a large loss in Switzerland and several weather-related claims in Italy and Switzerland in July. These are, of course, not yet reflected in the half year results. Helvetia is closely monitoring claims inflation and frequency trends and is continuously viewing and adapting the pricing of its non-life policies. Against this backdrop, a positive development in specialty markets, it's worth mentioning, in particular, in France and active reinsurance. Besides the higher discounting, the benefit of the rate increases we have seen in specialty markets over the past months and years started to become apparent. Helvetia continues to see attractive potential in the business fields of this segment as a diversifying and growing part of our portfolio. The cost ratio, which includes nonfulfillment expenses remained stable compared to the previous year. An improvement in the admin cost ratio was mainly driven by scale effects resulting from the profitable growth of the business. This compensated for a slight increase in the acquisition cost ratio from shifts in the business mix due to the growth of embedded insurance business and also due to the different rates of the geographical mix, which becomes with growing stronger inflation in Europe more tilted towards non-Swiss franc countries. Now let's continue its life business and the development of the CSM on the next slide. As you know, the CSM shows expected future profits from the life insurance portfolio. Over the first half of 2023, the CSM has developed well. It increased by 8.5% compared to the end of 2022. You can see the drivers of the increase in the CSM book on the Slide 17. First of all, Helvetia was writing profitable new business in the first half of 2023, which increased the CSM by CHF 123 million. Operating variances mainly relate to model adjustments, assumption changes and effects from buffering variances on VFA business. The second main driver of the increase of the CSM were economic variances. This positive effect of CHF 421 million is mainly driven by the good performance of equity markets, the development of interest rates and lower credit spreads. This position also includes the positive contribution of the expected in-force return, which we plan to split out in the future. Finally, the profit release from the CSM to the P&L amounted to a stable CHF 189 million, as we have already seen on the previous slides. I will continue with a closer look at the volumes and profitability of new business in life on the next slide. New business in life was developed profitably in the first half of 2023. The strong margin of 5.6% demonstrates Helvetia successful focus on profitability than writing new business. Helvetia generates the new business volume measured by the present value of new business premiums of CHF 1.5 billion despite strong growth in life reinsurance, where we only underwrite biometric bids, the overall volume was below the prior year figure. There were 3 main reasons for this development. First, Sa Nostra Vida was sold in the second half of 2022 and therefore, was still included in the first half of the prior year. Second, volumes with single premiums in investment-linked business in Europe were lower due to the market environment with higher interest rates. And third, the increase in interest rates led to a higher discounting of new business volume. The main contributor to the volume of new business work investment-linked products in individualized the share of this capital-light products on new business was more than 80%. New business generated in the first half of 2022 was very profitable with the value of new business increasing by 6% despite the lower volume. Accordingly, the new business margin increased to 5.6% and thus was at the upper end of our target range of 4% to 6%. Besides the growth in life reinsurance, the increase was driven by a favorable influence of higher interest rate on new business in Europe. Let me now move to capitalization on the next slide. Helvetia's financial strength remains outstanding. This is demonstrated by both our regulatory solvency measured by the solvency test and the financial strength rating assigned by Standard & Poor's. We estimate our SST ratio to be around 300% as of end of June 2023. This figure remains on an excellent level, considerably above the minimum of 140% we have set ourselves. Our financial strength rates in our similarly talk have been confirmed by standard and paused by the end of June. The target of A rating is therefore met. On the right side of the slide, you can see our capital structure in which we considered the IFRS equity, the net CSM and hybrid and senior debt. With a leverage ratio of 28% at the end of June, our capital structure presents itself a solid and well balanced. I will finish my part of the presentation with a wrap-up of the financial highlights of the first half year of 2023 on the next slide. The financial figures of the first half of 2023 once again proved Helvetia's profitability and growth potential. This is on the line by 3 aspects. First, we have a strong profitably growing core insurance business. Our non-life business showed broad-based growth in the first half, which was above market in most countries. Both the non-life and life businesses recorded resilient technical results in a challenging environment. Second, Helvetia's capitalization remains on an outstanding level. This reinforced its Helvetia's resilience enabled us to seize attractive growth opportunities and support the sustainable dividend payout. And third, we are continuously beating attractive growth opportunities. For example, in capital-light fee business or in specialty markets, which continues to experience a very favorable market environment. All these positive developments are reflected in our ambition to sustainably create value and our updated financial targets for 2025. With the half year results, we are well on track to reach these. With that note, I will hand over to Philipp Gmür.

Thank you, Annelis, for presenting the financial figures of the past first half year. The strategy period lasts until the end of 2025. And what we have achieved so far is impressive. Of course, the numbers are a result of our strategic plan. And thus, I will give you an overview in the next slide of the most important milestones of the past few months. Let's turn to Slide number 24. With the Helvetia 2025 strategy, we are pursuing the ambition to be the best partner for financial security and to set standards in customer convenience and accessibility. In order to do so, we have defined 4 strategic priorities. This slide provides an overview of the most important achievements for each strategic priority. Let's first turn to customer convenience. As I said before, we have a new distribution agreement with Raiffeisen Switzerland. It is a nonexclusive sales cooperation, starting as of January 1, 2024, and it means that Raiffeisen is distributing Helvetia's products. Second, if it comes to customer convenience, we have to take the opportunity, which digitalization is bringing for all of us. We've introduced our chatbot Clara in Switzerland quite some time ago. And now we are using an open artificial intelligence GPT technology on a test basis in order to make Clara even more effective. The digitalization of our core business is also well on track. In Spain, Helvetia offers the possibility to report motor claims directly in a newly launched customer app. In addition, we have automated the accounting processes at active reinsurance on the basis of a block chain technology. This involves the processing of "normal settlements, premiums and claims as well as the payment process." Currently, as much as 30% of all settlements can be handled in this way. Customer convenience is only sensible if we hire the right offering for our customers. What have we achieved so far within the last few months in this respect? As we communicated some weeks ago, we are integrating the distribution network of MoneyPark into the Helvetia distribution organization in Switzerland. Our customers can now obtain everything they need related to real estate from a single source, be it real estate acquisition, financing, financial planning or insurance. This is an important step in the further development of MoneyPark as the distribution power of MoneyPark will be significantly increased. Furthermore, we were launching new products, such as a capital-efficient tranche product called Helvetia Value Trend in Switzerland with a volume of roughly CHF 75 million at the end of June. Here, we achieved a growth of over 5% compared to the previous year's tranche. Moreover, there are several new insurance products from Caser in Spain, for example, a digital health offering with unlimited online service advice and the new term life insurance with an app that measures behavior and gives a discount if you take more than 10,000 steps a day. We are also expanding the product scope. For instance, if it comes to cyber, we are investing in cyber prevention and telling our clients how to focus on prevention, which is the only way to make risks such as cyber insurable. We are cooperating with a specific firm, which is an expert in this respect. Having customer convenience and making sure that we have the right offerings should lead to profitable growth. As Annelis pointed out, the driver was the non-life business with currency-adjusted growth of 13.2%. Specialty markets also developed strongly with a currency adjusted growth of more than 60 -- sorry, 36% in France and almost 30% in specialty lines. Similarly, active reinsurance where 1/3 of the currency adjusted growth of 34.1% can be attributed to great increases. Apart from profitable growth and seizing the so-called growth opportunities we have when it comes to organic growth. We are also seizing growth opportunities if it comes to new business models or new partners. We are looking for targeted growth in the embedded insurance and fee business. Talking about the embedded insurance. We want to be present where the need for insurance arises. Therefore, we are strengthening this business area and have further developed it with the acquisition of Mobile Garantie in Germany, among others. Talking about the fee business. Annelis has already explained the impressive growth of over 10%. In addition to organic growth, we are pursuing an active acquisition strategy, particularly in the noninsurance business of Caser in Spain. The fee business contributes nearly 5% to the group's results. This demonstrates the attractiveness and profitability of these new business areas. Furthermore, we are launching SMILE on an international basis. As I told you a couple of months ago, Smile has been present in Austria since 2025, initially 2022 initially with a household insurance product. In the meantime, we successfully launched the motor product, which is the first product that can be purchased directly from SMILE. The next step now is the launch of an app and the launch of the freemium model, a franchise, we successfully launched like 18 months ago in Switzerland, which helps us to get access to non-SMILE customers and change them and transfer them into Helvetia customers. And in the meantime, in Switzerland, we are very glad to have a rate of roughly 300 noncustomers being transferred to Helvetia and/or SMILE customers' amount. Furthermore, the Swiss property funds contributes to our commission income. It is today probably one of the largest property funds, which is not yet listed on the stock exchange. We have, however, as announced earlier, plans to list these property funds in due time. Finally, we are also successfully implementing a group-wide climate strategy. Let me very quickly wrap up. Helvetia is well underway, we have good growth, and we have a strong, resilient balance sheet. We have a very pleasing net income. We have the signal and the ambition to really deliver on our promise if it comes to dividends, and we see many opportunities going forward. And with that, I would like to close our presentation and to go on with the questions, the Q&A session.

[Operator Instructions] Our first question comes from the line of Simon Fössmeier with Vontobel.

I have 2 questions. The first is on the CSM walk on Page 17. The CHF 421 million economic variances, can you give us an estimate of what would be a reasonable range in the future because that number is quite a swing. And what is the key driver for these economic variances. I would assume that's interest rates, but I'm not sure. And the second question refers to Slide 29. That's the overview of the combined ratios. The majority of the combined ratios appear to be above 94% and they appear to be trending up. And I'm not quite sure if that's accounting, if that's interest rates or if this is some underlying problem, are you taking any measures on the combined ratio?

I suggest that Annelis is coming on with the answers to both of those questions, starting with the CSM.

So let's start to CSM work. So this is your first question. So you asked about the 421 economic variance you see in our CSM work. So a part of this economic variance is also the expected in-force return, which we have not yet separated but which we plan to separate in the future. Now to give you a bit an orientation on the side for the first half year, yes, we expect when we separate this expected in-force return that together with the new business, CSM, that D2 value together would more or less equal to CSM we pay out. So part of a bit more than 10% of the CHF 421 million of economic variance will be in this expected in-force return. Now of course, there's still a part left, which needs to be explained. Now if you remember, asset discussions in the last 10 years, then changes in asset ratios are very similar to this economic variance always influenced besides other factors, of course, by changes in market values such as interest rates, such as economic, such as equity movement of the equity market, such as credit spreads and all these effects have an impact on this economic variance. The important thing is here, as you, of course know that this economic variance is largely buffered in the CSM and this also the CSM or the economic variance may vary from half year or from closing to closing. But still overall, the CSM release is and will remain pretty stable as we have shown in half year '23. So this is to your first question. Then second question, you were referring to the combined ratios and the development in the different segments. So I think what is quite obvious that as we stated in the specialty market segment, we are profiting from the heart and market environment and higher rates in the last years that are now becoming a parent. And in the rest of the market, of course, since the end of '21, we are very actively managing inflation, meaning that besides automatic index-linked price increases, we are actively increasing pricing, sometimes even several times a year in order to manage inflation. So there are different effects in each market unit. And what we have also mentioned is that the higher frequency of above mid-sized claims, of course, also affected us. What we always do in non-life is that we watch the frequency and the impact very closely and then take measures on price increases if it's necessary.

The next question comes from the line of Peter Eliot with Kepler.

I'll start with 2 questions. The first one would be on the life division again. I guess it's got a lot of moving parts this period, in particular. I'm just wondering if you can sort of help us look through those to understand what it might have looked like without the economic variances. So I'm thinking, basically, if we take Slide 31, but assume that assets have just returned their expected return rather than the large variances you saw? That would be the first one. Second one, looking at Slide 44, it looks like you've taken quite a big bet on equities from June. Just wondering if you can talk us through what's happening there and the reasons for it.

Peter, sorry. The second question is dealing with the group investments.

Yes, exactly. Slide 44, yes, it seems the equity exposure after hedging has gone up 3.8% in June 23.

So again, Annelis, I ask you to first referring to Slide 31, answer the question, what would be or what a normalized excluding the economic variances life results would look like and then you will go to Slide 44, explaining group investments, and the strategy if it comes to hedging.

So I commit myself to start with the second question. So the hedging ratio on the equity exposure, this is actually quite a simple topic. The point is that we have adapted our hedging strategy also in the light of IFRS 17, meaning that due to the buffering of this year then, we have less requirement for a strict or strong hedging overlay, but rather we keep the explosion more open, let's say, so more direct equity exposure or not more exposure, but a bit smaller exposure, but less hedging. So that's the first one. And the second one is that due to the increasing equity markets, our hedge overlay consisting mainly of options of put option was more out of the money, and therefore, the hedge ratio was a bit lower. So that's one. And then the second one on page 31. So what exactly are you interested in here?

Well, I mean, obviously, I guess, the items the way we've seen very large movement year-on-year or I mean, if I look at the third line, for example, you've highlighted the CHF 106 million, but I'm wondering, should I just literally back out that CHF 106 million to get a normal run rate? And yes, then, I guess, the various items of the finance result as well would be very helpful.

Yes. So what we showed you here is actually the bridge, let's say, to the IFRS numbers. However, I would agree with you that it's in some part, it's quite difficult to understand them because there are some parts that are buffered in other areas. So for example, the variances from claims and expenses are then largely compensated in the insurance finance results and buffered into CSM. So I mean we could go through each of them. The important part is that we have the CSM release, which is quite stable. Then we have some smaller components out of the BPA business, moving a bit up and down but at the end of the day being almost neutral. And then we have a smaller impact from these assets, which are not allocated to the VFA business. However, what I said now is the internal version on how we analyze the insurance or the net profit, and it's not directly visible in this table.

Yes. I guess, I mean what we're trying to do is look at what would a normalized result be going forward. So I guess if you try and -- if one to sort of try to back out the economic variances, then it looks like the underlying run rate for the Insurance Service result was about CHF 200 million, and it looks like the finance result was probably fairly neutral. Or would be fairly neutral, if not for those economic variances. I don't know if you can confirm that or if I should just follow up off-line in more detail with IFRS.

Yes. I looked at it a little bit differently, but the bottom line, so this CHF 140 and CHF 137 million actually are more or less normalized results. Actually, I'm saying the same as you, but on other line.

The next question comes from the line of René Locher, KBW.

Yes. I would also like to quickly discuss the CSM walk on Slide 17. So just as a general remark, I mean, we have learned from your friendly competitors that the economic variance was negative in H1 '23 due to the strong Swiss franc and due to a drop in 10-year risk recite by 66, which makes sense to me. So it's Interesting to see you know that you have such a strong uplift in these economic variance. And I guess it would be really very helpful if we get here a little bit more details. And then the question is on the new business CSM. Here again with comp niche. I just take the new business value, which was CHF 83 million, shown on Slide 19. And this is more or less the number which makes it into the CSM walk, and we view Slide 19 is CHF 83 million, but the new business, CSM is CHF 123 million. So I was wondering what's the delta here?

I will sum it up into 2 questions. Well, I'm referring to Slide 17 and to Slide 19. Annelis, It's the delta of the CSM and the new business value and the other question, how to cope with this.

So let's start with the economic clients and the CSM. If you think of what creates the CSM in a simplified world, you would have cash flows from assets and cash flow from liabilities very, very simplified going in the next years and discount them. And these cash flows have some equity components, have some credit to risk components and so on. Now these cash flows or these patterns of cash flows for sure do not look the same for each company. As you know, in implementing CSM and IFRS 17, the rules were clear, but the methodology in detail, probably differs from company to company. Therefore, for sure, possible that our sensitivity now looks different than other sensitivity of peers. Our economic variance is the result of basically of the market movements, first of interest rate, of course, the Swiss franc discounting curve we are using. Second, also of the Euro discounting curve. It's also important in our business, then of credit spreads. And then, of course, of equity markets and a little bit of real estate market that is a big influence in first half of '23. So it's a whole complex mixture of market effects on a very large portfolio, creating a net effect in this economic variance at the end of the day. And of course, we are calculating sensitivities on the CSM and so on, but sensitivity would help to understand the movements. But also there, it's a bit similar like in the SST world, it could be that an interest rate makes a strange twist or movement in whatever direction. And then your classic parallel shift, interest rate sensitivity to also not help to understand or to predict the results. Or what do I want to say that the CSM movement or the economic variance is really no simple stuff. So of course, we will give you from time to time more or we will -- the plan is to give you more information to give you sensitivities in order to be able to understand the movement, but it can still be as with movements in the SST ratio that it's very hard to predict from a few sensitivities how this economic variance moved from half year to half year. Then second, regarding the new business CSM and the new business value. So in a nutshell, the new business, CSM, as you stated, is CHF 123 million in half year 23 million includes several components that we excluded for the new business value. The new business value of CHF 83 million does include the nonfulfillment expenses, which are not included into new business CSM does include the CD3 insurance and has also some very small other adjustments. Why do we do that? Because we think to include the nonfulfillment expenses and the TT3 insurance is a more economic reality than to not include them according to standard in the new business CSM. You can also find information on Page 64 of our half year report.

The next question comes from the line of Thomas Bateman with Bamberg.