Helvetia Baloise Holding AG (HBAN) Earnings Call Transcript

Ladies and gentlemen, welcome to the Helvetia Half Year Results 2024 Conference Call and Live Webcast. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Fabian Rupprecht, Group CEO. Please go ahead, sir.

Ladies and gentlemen, welcome to our Analyst Conference Call on the Half Year Results 2024. Within the next 20 to 30 minutes, our CFO, Annelis Lüscher Hammerli and I will give you detailed information on our business development and the key financials of the reporting period. I look forward to discussing our performance and outlook with you. As you can see on the agenda on Slide 3, I will start by giving you a brief overview of the financial highlights of the first half of the year. Annelis then will explain the key financial figures and targets in more detail. At the end of the presentation, I will give an outlook on our current focus areas. Afterwards, Annelis and I will be happy to answer any questions you may have. Moving on to Slide 4 now. Let me start with the highlights of the first half of 2024. The performance in the reporting period was characterized by solid profitability across the board, a continued strong level of capitalization and a disciplined growth with strict focus on profitable and capital-efficient opportunities. First, we generated underlying earnings of CHF 285 million, practically stable compared to the very good level in the prior year period. The result was based on a very solid performance in Non-Life and Life and supported by higher earnings in the other activity business areas. What I'm particularly pleased about is that the figures show clear signs of an improving underlying technical performance. Both Annelis and I will come back to that in more detail on the next slide. Driven by the stable development of underlying earnings and the nonrecurrence of a nonoperating one-off effect in the prior year, we have achieved an increase in the return on equity to 13.4%, which is close to the upper end of our target range. Our business, therefore, demonstrates very robust profitability. Our business mix is a crucial factor contributing to this. Our diversified setup allows us to better balance out events affecting individual market units. This is, again, visible in the results of the first half year of 2024. While claims from natural catastrophes were higher compared to the prior year period in some markets, especially in Switzerland, other areas such as specialty markets or non-life business in Spain, Germany and Italy improved their technical performance. Second, Helvetia continues to benefit from great resilience due to its outstanding financial strength and its diversifications. This is reflected in our excellent SST ratio of around 300% as of end of June 2024, and the confirmation of our S&P financial strength rating of A+ in July 2024. Third, we have achieved solid top line growth, in line with our disciplined focus on profitable and capital-efficient areas. The main driver of growth was the Non-life business, even though we have maintained a disciplined underwriting approach. In this business area, growth was significantly supported by rate increases. Despite of this, we achieved growth in non-life premium volume above the market average in both our main country markets, Switzerland and Spain and also in Germany and Austria. At the same time, we were selective in writing business in some specific lines of business, especially in the cyclical specialty business, to further optimize portfolio composition and profitability. In the life business, we successfully focused on capital light business. With this approach, we were able to grow new business volume by 8.6%, while maintaining an attractive new business margin. An increase in overall business volume in Life was driven by ongoing growth in semiautonomous solutions and pure risk products in Swiss Group Life among others. In addition to our core insurance business, we also continue to grow the fee business in line with our strategy. Growth in fee revenues of 10.4% was mainly the result of the expansion of our noninsurance business around health and care services in Spain. Growth in our fee business is profitable, as shown by an ever stronger increase in the fee result. The solid profitability, strong capitalization and disciplined growth, we have achieved in the first half of the year, form a solid foundation for our target of paying out more than CHF 1.65 billion in dividends by 2025. With this, I hand over to Annelis, who will present the financials in more detail.

Thank you, Fabian. Also from my side, I would like to welcome all of you to our conference call today. I will give you an overview of our financial performance in the first half of 2024. 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. First, let's have a look at our key figures relating to profitability and growth on Slide 5. Once again, our results in the first half of 2024 demonstrate the benefits of our diversified business model. All business areas and segments showed a solid profitability despite the demanding market environment in part. Helvetia generated underlying earnings of CHF 285 million compared to CHF 290 million in the prior year. This performance metric focuses on the operational development of our insurance and fee business. The volatility from capital market developments and other nonoperating effects are excluded. Therefore, the major component of the underlying earnings are technical results of our insurance businesses. This developed well in many parts of the group's business. The Specialty Markets segment, the fee business and nonlife business in Spain, Germany and Italy increased their underlying earnings. In Switzerland, the Non-life business was affected by higher claims from natural catastrophes, in particular, from floods and storms at the end of June, combined with lower gains from the development of prior year claims and a slightly higher unwind of discounting charge. This led to a decrease in underlying earnings in the non-life business on group level, considered together with group reinsurance, which substantially increased its insurance service results but is included in the other activities business area. The non-life business still showed a remarkably solid performance. Similarly, the Life business demonstrated a very stable development with the CSM release on the level of the prior year period. Underlying earnings in Life were slightly below the prior year, mainly due to a lower result from changes in the loss component within the usual range of volatility. Our IFRS net income stood at CHF 259 million. Besides underlying earnings, nonoperating effects that were more favorable than in the prior year period, influenced the result. In particular, the prior year had been affected by a one-off impairment in the intermediary and advisory business in Switzerland. The IFRS result corresponds to a return on equity of 13.4% in the upper half of our target range. As you can see in the second box on the slide, fee business continued to grow in line with our strategic ambition to diversify income streams. Fee and commission income increased by 10.4% at constant exchange rates to CHF 211 million. Growth was mainly driven by the expansion of Costa's noninsurance businesses around health and care services in Spain. Our fee business again demonstrated its solid profitability in the first half of 2024. The fee result increased from CHF 21 million to CHF 24 million before tax. With this, the fee business contributed more than 5% to the group's IFRS net income. We are, therefore, well on track with regards to our targets on fee business. I continue with the combined ratio in non-life at the bottom left side of the slide. As you can see, the combined ratio was above our target range at 95.4%. This was due to an increase in the claims ratio by 1.8 percentage points to 68.4%. To a large part, the increase is attributable to higher claims from natural catastrophes in particularly in Switzerland. The nominal NatCat ratio of the group increased to 2.4% from a low 1.4% in the prior year. Besides natural catastrophes, lower gains from the development of prior year claims and the low discounting benefit due to the development of interest rates had an effect on the claims ratio. At the same time, the underlying technical profitability showed a remarkable improvement, excluding natural catastrophes and discounting effect, the current year claims ratio improved by 1.6 percentage points. This development reflects the success of the measures we took to strengthen technical profitability. These have started to take effect in the first half of the year and will continue to be implemented. The cost ratio, which also includes nonfulfillment expenses, improved by 0.5 percentage points to 27%. Main driver was a reduction in the administration cost ratio resulting from efficiency gains, in particular, in Switzerland. Besides technical profitability, we also continue to work on improving operational efficiency. Despite the higher headline figure, we are therefore very well on track to move the combined ratio back towards our target range, and we hold on to our ambition of 92% to 94% for 2025. Continuing with the next box on the slide, the new business margin in life was well within our target range at 4.9%. An increase of the margin in Switzerland could not fully compensate for a decrease in Europe. Both developments were largely driven by updated assumptions and model changes. At the same time, Helvetia achieved a higher new business volume compared to the prior year period. This demonstrates our successful focus on growth in profitable lines of business in Life insurance. Helvetia generated the new business volume measured by the present value of new business premiums of CHF 1.6 billion, 8.6% higher than in the prior year period. The main contributor to the volume of new business were investment-linked products. In individual life, the share of this capital-light products on new business was 77%. Finally, on the right side of this slide, you can see the development of business volume. Helvetia continued to grow its core business with a focus on profitable and capital-efficient areas. In some specific lines of business, we have taken a selective approach to further optimize the portfolio composition and profitability. In total, we achieved a business volume of CHF 6.9 billion. At constant exchange rates, this is a solid increase of 4.7%. Growth was mainly driven by the non-life business, which showed an organic increase of 6.4% at constant exchange rates. In all segments, growth in non-life was supported by substantial rate increases. In Switzerland, we have strengthened tariffs at the beginning of this year. Supported by this, Switzerland, once again, achieved broad-based growth in traditional non-life business, which was above the market level. In addition, embedded insurance business and the online insurer Smile contributed to growth. In Europe, non-life business generated a higher business volume than in the prior year period in all country markets. In Spain, Germany and Austria, growth rates exceeded the market level. We are thus, further strengthening market positions in our core insurance business with retail and SME customers. At the same time, we strictly focus on profitability -- profitability under our selective in writing business in specific lines of business with a challenging market environment, for example, in Italian, motor insurance. Specialty markets also developed positively with sustained high growth rates in property business in active reinsurance and in France. In this area, Helvetia continues to seize opportunities for profitable growth in a persistently attractive market environment. In some specific other lines of business in the Specialty Markets segment, we have been selective in the writing business in the first half of 2024, in order to actively manage market cycles and optimize the composition and profitability of the portfolio. This applies to aviation in specialty lines or liability in active reinsurance, for example. In the Life business volume, business volume grew by 2.3% at constant exchange rates. Helvetia continue to focus on capital-light products in this area. In life business in Switzerland, group price was the main driver of growth. Helvetia recorded higher single premiums in this area and achieved further growth in the number of actively insured person in its semi-autonomous solution and in pure risk insurance. As a result, the number of actively insured persons in Swiss Group Life increased compared to the end of 2023 to around 224,000 in total. Individual life business in Switzerland recorded a slight decrease in the business volume, mainly because of a strong development of investment-linked in premiums in the prior year period. Life business of the Europe segment, growth was driven by Spain and Germany. In Spain, the volume of investment linked premiums, traditional products and burial insurance increased. In Germany, we recorded a very successful development of investment-linked products. Finally, growth in Life business was supported by active reinsurance, where we are establishing business with reinsurance solution for biometric risks. Let's now move to Slide 6 and have a look at the CSM, the balance sheet and our dividend strategy. Slide 6 shows that our CSM stock is developing positively and that we are very well on track with regards to our financial targets on capitalization and dividend payout. Our CSM in the Life business has increased compared to the end of 2023. Profitable new business we have written in the first half of 2024 contributed CHF 126 million. The expected in-force return shows the contribution of the existing business to growth of the CSM. It amounted to CHF 78 billion. Together with the new business CSM and the expected infos return were overcompensating for the CSM release of CHF 189 million. Normalized CSM growth which includes these three items I just mentioned, was at 0.4%. The operating variance of CHF 302 million was largely driven by positive experience variances and operating assumption changes, in particular for costs. In addition, growth of the CSM was supported by favorable economic variance, mainly attributable to positive effects from equity markets, changes in interest rates and foreign currency. As you can see in the bottom left corner of the slide, Helvetia's capitalization remains on an excellent level. S&P has confirmed our financial strength rating of [ single ] A+ in July. The target of at least a single A rating is therefore met comfortably. And our regulatory solvency measured by the solvency test continues to stay on an outstanding level. We estimate our SST ratio to be around 300% and as of 30 June 2024. The fourth box on the slide relates to our dividend strategy. Helvetia has a strong basis for its payout policy of sustainably increasing dividends year-by-year. Our business shows solid profitability across the board. We are growing in a disciplined manner, and our financial strength is excellent. With the dividend for the financial year 2023, that has been paid to shareholders in May 2024, we have reached a cumulative dividend distribution of almost CHF 940 million since 2021. Helvetia is therefore well on track to reach its target of paying out more than CHF 1.65 billion in dividends over 5 years until 2025. To enhance the fungibility of our surplus capital and to reinforce the resilience of our dividend strategy, we have announced our intention to create approximately CHF 375 million of what we call free deployable funds in 2024. Free deployable funds are a buffer of unencumbered liquid assets at holding level. The surplus capital has been transferred from the subsidiaries to Helvetia Holding during the first half of 2024, in addition to remitting the regular dividend. With this approach, we have increased the fungibility of free capital for the group and, therefore, our financial flexibility. In this context, the free deployable funds also support our dividend strategy to always pay at least the same dividend per share as in the previous year and reach our targeted payout by 2025. With that, I now hand over to Fabian again.

Many thanks, Annelis. On that last slide of the presentation, let me share an overview of what we focus on in the near future. As Annelis explained, our financial targets are within reach. Our targets on ROE fee business, life new business and capitalization has been met comfortably in the first half of 2024. And we have made strong progress compared to the full year 2023, in moving the combined ratio back towards our target range, by considerably improving the underlying technical performance in Non-Life. At the same time, we're advancing with the works on the new strategy. I'm very much looking forward to presenting it at our Capital Market Day on 12 December. As a first step to further evolve into an integrated international insurance group, we have adjusted Helvetia's corporate structure at the beginning of July. The organizational changes are strengthening Helvetia's international dimension and collaboration within the group, thus, laying the foundation for continuing to create value for shareholders and other stakeholders. Moving to the second box on the slide. Technical excellence remains a key priority. We've already made good progress. Portfolio planning methods have been approved and a wide range of measures to strengthen our technical profitability has been implemented in all market units. These measures mainly relate to tariff adjustments, renewal pricing, re-underwriting, risk selection and claims management. Going forward, these efforts will be further intensified. In terms of tariff adjustments and your renewal pricing, we have achieved considerably rate increases in non-life. We increased rates by a high single-digit figure at 2024 renewals in lines of business that are exposed to inflation, such as motor or property. In some market units, rate increases in these lines of business even reached a double-digit range. At the same time, lapses stayed on a very reasonable level, with lapse ratios remaining slightly above prior year but in line with expected levels across market units. This shows that we're able to push through rate increases. These rate changes have significantly supported our growth and started to earn to the P&L in the first half of 2024. Combination with other measures. The rate increase has resulted in a substantial improvement in the current year claims ratio, excluding NatCat and discounting of 1.6 percentage points. We expect all the measures to take effect over time. The impact on our financial numbers will continue to gradually become visible in 2024 and 2025. Moving to operational efficiency. As Annelis explained, we have achieved a further reduction in the non-life administration cost ratio through efficiency gains in the first half of 2024. Operational efficiency is an ongoing task and will remain key going forward. As such, we will continue to regularly review our structures and processes to build on our strength and fully leverage the existing potential for synergies and further efficiency gains going forward. Finally, focus is on selective growth. We have an international and well-diversified setup. It allows us to selectively pursue attractive growth opportunities and to benefit from specific market conditions in the different business fields. In the first half of 2024, we have benefited from rate increases in our retail and SME business, and a persistently favorable market environment in some lines of business in specialty markets. These developments led to strong growth in property business, for example. At the same time, we have been very disciplined in more challenging areas such as liability and active reinsurance. With our flexible and diversified setup, our strong capital position and excellent reputation, we're well repositioned -- well positioned to further progress in these areas and leverage our strengths to serve our shareholders. Our customers, our partners, our employees and other stakeholders in the best way possible. This brings us to the end of our presentation. Thank you for your attention. And Annelis and I are now available to answer your questions.

[Operator Instructions] The first question is from is Simon Fössmeier with Vontobel.

Simon from Vontobel. My first question was on the Property & Casualty on the measures to improve technical profitability. You just explained that. So if I may ask specifically on motor pricing in Switzerland and Germany, because some of your peers had really poor experience specifically in Germany. And I was curious if you could talk about motor pricing a little bit. The second question is on the solvency ratio. Very strong solvency, very strong capitalization. If you could share your thoughts on capital repatriation. How you would like to get this closer to your target range?

Thank you, Simon, for your questions. So I suggest that I take the first question on Motor pricing and I will leave the second question to Annelis. So to start with the first question. We already had said that at the year-end, we have been able to increase motor prices in Switzerland by around 8%. And we have, basically, not experienced lapse rates higher than what we had in previous years, so on the same level. And what has, of course, helped is that in the whole market, we saw similar trends. And we should not forget that we have a very important proprietary customer base, our own customer base, and we see very, very high loyalty. Concerning Germany, we have increased prices even beyond 8%. And overall -- so partly double digit. And overall, with that compensated for the inflationary trend, which we had in the past, here is the same -- we have seen slightly higher lapses, but fully in line with the expectations, and are very happy with the progress which you see as well in the numbers of Germany. I hand over to Annelis.

Yes. Thank you, Fabian. So I'm happy to speak about our capitalization, which is very strong and the SST ratio. So generally speaking, we see our strong capitalization as an advantage. It provides additional security and financial flexibility, which underlines our profile as a defensive, reliable name. The limiting factor of excess capital distributions to shareholders generally decreased that [indiscernible] equity, not the Swiss solvency test or SST. Our, absolutely, first priority is providing regular, predictable and sustainable increasing dividends to our shareholders. And we stick to our strategic target, as mentioned, of distributing more than CHF 1.65 billion in dividends for the strategy period. We believe that not only dividends, but overall long-term return or growth of return is attractive for our shareholders. And we, therefore, regularly look at the opportunities for allocating excess capital to profitable growth, both organic and through M&A, as well as controlled risk taking. And of course, we also invest in efficiency initiatives to reinforce future profitability.

The next question is from Ahmed Nasib with UBS.

So firstly, on the holdco cash or the CHF 375 million. So I understand you did highlight that a full year, but you're not reporting the net economic dividend capacity, is that still at CHF 800 million? And then related to that, on Slide 45, you show the increase in the remittance sales, especially in life by about CHF 100 million. Are there any nonoperating remittances that are coming through as well? And is that just increasing the FTS from CHF 375 million to, let's say, CHF 400 million, CHF 500 million. So that's question number one. Second question is on the semiautonomous business. What is the AUM and the fee margin that you earned on the semi-autonomous business? And then thirdly, on M&A, what is your M&A strategy? Is it just going to be bolt-on? Or are you looking for bigger areas or bigger M&A as well? Are you open to those?

Thank you for your questions. So I suggest that your first question is taken by Annelis on the semi-autonomous business, I will take -- and the M&A strategy, I will take. Let me start with the last one first. So on the M&A strategy, our focus is currently on growing our own business. So our focus is on internal growth. Our focus is on technical excellence as we lined out. We will always look opportunistically at any opportunities that are there. But as I said, our focus is not on that -- is our focus is on our internal growth. So that's my answer on M&A. I just -- Annelis, now you take question one -- on the answer.

Yes, you're happy to comment on the holdco cash. So what we show on Page 45. On the operating cash remittance slide is that the cash remittance that happened in the first half year of 2024 and 2023, and most of the cash remittance of our subsidiaries happens in the first half of the year. This includes, let's say, regular operative cash remittance out of the earnings, but it may also include one-off payments from our subsidiaries to the group or to the mother companies. So it's a mix of recurring payments and one-off payments and especially in half year 2024, there was a one-off payment from Swiss Life business. Swiss Life business is now very well capitalized. So it's also possible to -- for us to transfer some of the excess cash to the mother company. This does not automatically mean that we will increase the holdco cash, though the so-called redeployable funds, but it means it's available at the mother company just below the holding company for deployment for additional growth in the group. Now the third question was the question on the margin of our semi-autonomous business. So we usually do not disclose margins of specific business lines. And you have some information where you see how it's growing. We said that the capital-light products for 77% of our growth in Life business.

Okay. Just to follow up on the remittances. There's nothing outside of the operating cash remittance in 1, right, the 4 to 6 is the entire remittances.

Yes, these are the entire remittances.

The next question is from Hanif Farooq with JPMorgan.

Just returning a little bit on the topic of cash and the capital structure. Will the creation of this [ FDF ] contract and your structure and just increase fundability, will that get taken -- get you to reconsider your debt leverage position. I mean the reason I ask is, obviously, your capital ratio is well, well above any sure think that exists in -- you do on high debt leverage. So I think this is a question you've asked for, but I wondered if the redeployable fund kind of helped you think about reducing debt? That's question one. Second question is on the operating of the result. So it seems that you've got to your target of IFRS net in approaching result. But is there room now for further growth in the fee result? And I noticed that the other result also benefited the lower central costs or will that also be sustainable. My third question is on the underlying loss ratio in P&C, which clearly improves very impressively in 1H. You seem to be suggesting some of your comments on pricing that they need for that to go down further? And I note in 2022, for example, it was probably even another 1% down from being the 1H performance. I mean do you think you could return back to that kind of level? That's my last question.

So I suggest that the question on the FDF impacting capital structure, Annelis take that. as well on the growth on the fee result and the underlying claims ratio. I'm happy to comment on that one.

Sure. Let's start with the FDF impacting capital structure. So generally speaking, the free deployable funds are one part of the toolbox in -- have actually uses in capital management, where another important metric there is the leverage ratio where we have a target range. And when replacing debt or issuing new debt or you have -- the refinancing of debt, we always look at various aspects and then optimize between the options available. So let's say, we have a senior debt refinancing, then we look at does it make sense to refinance at all? Does it make sense to refinance with a senior? Or does it make sense to refinance with a hybrid? In these considerations, many dimensions play a role. On the one hand, the capitalization. On the other hand, the interest level at that point in time. And as you may know, many more financial considerations. Generally, the redeployable funds are important to us, especially since our results with IFRS 17 got a bit more volatile. And we want to make sure and show our commitment to our dividend strategy which says that we pay the increasing dividend year after year, only been exceptionally bad years, and that's very seldom. We keep it stable. And in order to show you -- to ensure you that we are able to do that, we have placed about onetime a dividend in these redeployable funds at holding level completely unencumbered. That's the idea and the reason behind the redeployable funds.

On the question #2 on the growth in results. I'm not sure we got your question completely. Could you be so kind just to repeat that one?

Of course, I was talking about the fee result and the fee income. I mean you've basically got to your target level in terms of that -- those numbers in terms of the mix of IFRS profit for coming from -- so I was wondering whether you think there's more upside there in the near term? And also in your other operations was online, which I think is where the field probably came? There was an improvement in costs. So I just wanted to understand, therefore, if I look at the under operating income line, if we get better further greater results. So what costs remain at a low level, whether that's the potential for that to grow or improve?

Okay. So on the fee income, yes, we have achieved what we put into our strategy. And we have as well invested in new service units in Spain, in particular. And we expect that this number will further increase in the years to come. We will overall give you an outlook on how we want to go about the fee business in the Capital Market Day on 12 December and then elaborate more on that. And the share of the fee business in the net income with 5% is unchanged. We have still -- your third question on the underlying claims ratio, which I think is an important one. So as you pointed out, our current year combined ratio has improved by 1.6%. And the measures which we have taken on profitability, so we have started. So there is more things to do and more things to come. So we are optimistic that we will be able to improve further. We have as well said that our combined ratio, which we want to have in the range of 92% to 94%. Our current combined ratio is above that. And we said that we're optimistic that we get back to '24 -- 92% to 94% by 2025. So we expect that trend to continue. Of course, with some volatility as always. But overall, that's the direction we want to take.

The next question is from Anne-Chantal Risold with Octavian.