Ladies and gentlemen, welcome to the 2023 In-Review Analyst Conference Call and Live Webcast. I'm André, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Annelis Lüscher Hämmerli, Group CFO. Please go ahead, madam.
Thanks a lot. Welcome to our conference call to review the past year. The presentation is structured in a very similar way as in previous years. I will recapitulate the trends and developments we have seen in 2023 in terms of growth, claims, events, and capital markets. All this information has already been communicated before. In 2023, we have implemented the new accounting standards of IFRS 17 and 9. Understanding and forecasting Helvetia's numbers under the new rules, without a long track record to compare, is challenging. Therefore, we have included some additional information on IFRS 17 specific topics in the presentation. As discussed before, we will disclose a new KPI of underlying earnings with the full year results. This will give you a better view on the underlying operational development of Helvetia.
To prepare you for this new KPI, we show you the underlying earnings by business area based on prior year figures in the back of the presentation. As always, I will be available for your questions at the end of the call. Now, let's start with the review of the past year. I will start on page three. The transition to IFRS 17, 9 also led to a recalibration of our financial targets for the period up to 2025. As a reminder, you can see the recalibrated targets as communicated before on the left side of this slide. Please note that this slide shows communicated ambitions for the strategy period and not a guidance for the full year 2023. The combined ratio, new business margin, and return on equity have been recalibrated to the new accounting.
Additionally, we have raised the ambition on fee business volume based on the good development we see in these areas. At the half-year 2023, we have been well on track, as you can see from the column in the middle. After that, we have seen an exceptional level of claims from intense natural catastrophes and a few other large losses in the Q3, as communicated before. This will be reflected in some of our KPIs in the full year results. I will give more details on trends in 2023 on the next slide, starting with growth trends. From a volume perspective, the trends seen in the H1 will also be relevant for the full year. Generally, the development of exchange rates, in particular, the euro to the Swiss franc, will again influence the translation of revenues generated outside Switzerland into Swiss francs.
Meaning, the reported growth rates in Swiss francs will differ from the ones in local currency. In non-life, we continue to see broad-based growth trends at constant exchange rates in all segments, as it was already the case in the H1 of 2023. Growth in non-life is driven by price increases as well as additional business. In the life business, we expect mixed developments. In individual life, we continue to focus on capital-light business, such as investment-linked products. As in the H1, the volume with single premiums in this area is influenced by the level of interest rates and the development of financial markets. In Swiss Group Life, the continued market-wide shift from full insurance to semi-autonomous solutions leads to an expected decrease of premium volume.
This is because the savings part of the business is borne by third parties in the semi-autonomous business. On the next slide, we have a look at technical developments in non-life. As communicated before, the market environment in non-life was strongly characterized by exceptionally high claims from natural catastrophes and other major claims events in Switzerland and Europe in the Q3 of the past year. In Europe, Italy was the most affected. The country experienced the costliest year ever in terms of insured losses from natural catastrophes. Despite this unusually high claims amount, Helvetia remains strongly capitalized and resilient. I will come back to that later. Besides nat cats, 2023 has also seen persistently high levels of inflation. Helvetia has started to increase prices very early and continues to do so. Therefore, we were largely able to mitigate the impact of inflation on claims development.
With the introduction of IFRS 17, we have adjusted the definition of the combined ratio. There are new elements and a different calculation methodology with several impacts. As you know, IFRS 17 has introduced discounting of claims reserves, among other things. This leads to a benefit in the combined ratio, which we expect to be higher in 2023 compared to the previous year. I will come back to that in detail on the next slide. The additional benefit will only compensate the high level of nat cats to some extent. On the next slide, let's have a look at the influence of some important new accounting items from IFRS 17, such as the discounting in non-life I just mentioned. In non-life, the introduction of discounting of claims reserves affects the P&L mainly in two ways. First, new claims reserves are discounted.
If discount rates are positive, this present value is lower than the nominal value. Therefore, the amount of new claims reserves booked today is lower, and we benefit from the discounting. This effect positively impacts the claims ratio and the insurance service result in the current year. Second, as a counter effect, the discounting benefit will unwind over time in later years. This leads to a charge in the following years, which is booked in the insurance finance result, and therefore, does not impact the combined ratio. These discounting effects depend on a lot of factors, such as growth trends, the business mix, duration, the currency mix, and discount rates. Given the lack of a longer track record under IFRS 17, I am fully aware that it can be difficult for you to estimate these discounting effects in our P&L.
Particularly when taking into account that interest rates have increased strongly in 2022 and the H1 of 2023. For that reason, we are providing you with a rough estimate for the current year discounting benefit and a rough estimate for the unwind of discounting charge for the full year of 2023. We do this on a one-time exceptional basis. Currently, we estimate the current year discounting benefit to be in the range of -2.2 to -2.4 percentage points of the combined ratio in the full year 2023. As you can see, this is above the level of the prior year of -1.7%. This year-over-year increase is due to the higher level of interest rates, and therefore higher discount rates in 2023 compared to 2022.
For the same reason, we also estimate a higher unwind of discounting charge compared to the prior year. However, I want to stress that this unwind is driven by locked-in discount curves of several years, the average of which changes more slowly over time. Our current estimate for this unwind is a range of CHF 60 to 65 million. On the bottom half of the slide, we turn to life business. IFRS 17 has brought more changes to life. At the core is the concept of CSM, which shows you the expected future profits from the life business. In the chart, you see the change in the CSM over the H1 of 2023. If we write profitable new business, the CSM grows. Additionally, it is influenced by operating and economic variances.
Macroeconomic moves, such as the equity market fluctuations, are buffered in the CSM without a direct impact on the P&L. Last but not least, a part of the CSM is released to the P&L. The CSM release is the main driver of the life result and expected to be pretty stable over time. There is one additional component that was not separated in the half-year work. Not only new business contributes to the growth of the CSM, but also the existing business. We call this the expected in-force return. At the half-year results, the expected in-force return has been included in the economic variance. For the publication of the full-year results, we plan to show this item separately in this work. This new disclosure will enable you to see a normalized growth of the CSM, which excludes volatile market fluctuations or assumption changes.
The normalized CSM growth will consist of the new business CSM, the expected in-force return, and the CSM release. We expect the new business CSM and the expected in-force return to roughly compensate for the CSM release. On the next slide, we have a look at the development of capital markets in 2023 and how they are generally being reflected in our accounting. As you are aware, interest rates have seen a significant increase over the year 2022, especially on the short term. For some currencies and duration, especially at the short end, the increase has continued over the H1 of 2023. The effect of interest rate changes on our assets and liabilities is generally booked in the OCI or buffered in the CSM. Therefore, on the P&L volatility from interest rate changes is reduced.
However, the level of interest rates will influence the discounting effect in non-life, as we have seen on the previous slide. As shown in the chart in the middle, equity markets have developed positively in 2023 after a weak prior year. As a considerable part of our asset portfolio, in particular, equities and investment funds, is categorized as fair value through P&L under IFRS 9, the development of equity market is reflected in unrealized book gains and losses in the P&L in non-life. In the life business, the changes in market values are largely buffered in the CSM, with no direct influence on the P&L. The impact of market fluctuations on our P&L in non-life can cause volatility in our IFRS net income. This brings me to the next slide and underlying earnings.
Fluctuations in market values and other items in our financial statements do not directly relate to the performance of our core insurance business, but can cause volatility in the P&L. Another example is the one-off gain from the sale of Sa Nostra Vida in 2022. These special effects make it harder for external users of our financial statements to assess the underlying operating performance of our group. For that reason, we will disclose a KPI we call Underlying Earnings going forward. Underlying earnings exclude the non-operating items you see on the right side of the slide 8. This will enable a comprehensive view on the development of our core operations in the insurance business and make it more comparable over time.
Underlying earnings will also be more strongly aligned with other operating performance measures, such as the combined ratio, and the new KPI will better reflect our internal financial steering as we will use it in managing our market units, among other KPI. It is important for me to stress that underlying earnings will come as an additional disclosure. Of course, all the IFRS-related information will still be available in our results publication in the future. In the appendix of today's presentation, you can find the comparable information on underlying earnings by business area for the full year 2022. Turning to the next slide, I outline the most important developments relating to net income in 2023. As already communicated in November, profits in 2023 will be mainly characterized by the unusual number and intensity of natural catastrophes and a few other large losses in the Q3.
In November, we have estimated the net claims amount from nat cat and large losses in the Q3 of around CHF 200 million. Based on our current information, this is still roughly the level we expect for Q3. To give you an idea of the magnitude of this amount, it is about 1.5x as high as in the whole financial year 2022. In non-life, the exceptional level of nat cats and large losses in the Q3 will have an impact on net income. It will clearly outweigh the higher discounting benefits we expect due to the higher level of interest rates. The life result is generally expected to be quite stable under the new IFRS 17 rules. In contrast to the prior year, the contribution of Sa Nostra Vida, which was sold at the end of 2022, will not be included anymore.
Other activities will also be influenced by the exceptional level of nat cats and large losses in the Q3 because our internal group reinsurance is included in this business area. In addition to these operating developments, non-operating items will be reflected in IFRS net income. In particular, I am referring to fluctuations in market values of assets in non-life and the impairment at MoneyPark that was already included in the half-year results. Please also bear in mind that we have had a one-off gain of CHF 87 million from the sale of Sa Nostra Vida in the prior year. All these non-operating items will be reflected in the IFRS net income, but excluded from underlying earnings to give you a more adequate view of our operating development. This brings me to the last slide of the presentation, a reminder of our capital position and dividend policy.
2023 has demonstrated that Helvetia's capital position remains very strong, even in a challenging market environment. This has been underscored by the confirmation of our S&P financial strength rating of A+. Our capitalization, measured by the Swiss Solvency Test, remains on an excellent level. We estimated our SST ratio to be around 300% at the end of June and to remain on a similar level at the end of September. The strong capital position supports our financial target of distributing more than CHF 1.65 billion of dividends to our shareholders over the period from 2021 to 2025. We stick to our proven dividend policy and confirm this target. With a strong capitalization and solid dividend capacity, Helvetia is well positioned to deliver on this ambition. I thank you very much for your attention, and I'm happy to take your questions now.
We will now begin the Q&A session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to use only handsets and eventually, turn off the volume from the webcast. In the interest of time, please limit yourself to two questions. Anyone who has a question may press star and one at this time. The first question comes from the line of Peter Eliot with Kepler Cheuvreux. Please go ahead.
Thank you very much. And thank you for the additional information, Annelis. It's very, very helpful. I had my two questions were basically both just related to trying to understand the impact of interest rates, and you've given some information, so thank you for that. But I just want to follow up, one on non-life and one on life. If I could start with non-life, can you remind us how you calculate the interest rates for the discounting and unwinding? So I guess a lot of people use the average of the start of quarters, so full year 2022, Q1, Q2, and Q3. Can you remind us how you do it for both discounting and unwinding? And I might have a follow-up after your answer. Thank you.
Yeah, sure. Happy to do that. Thanks, Peter, for your question. So in general, we, Helvetia, uses discount curves for non-life as of 30th of June of the respective year.
Okay. So when you-
So, it's always the 30th of June. And, yeah.
So when you calculated the half year of 2.6%, that would have been based what? On the-
Of course, for the previous year's claims, it's the relevant curves of the previous years.
Yeah. No, no, but the discount, the discount benefit you showed for H1 2023, that was 2.6%.
Yeah.
that was calculated using the interest rates as at which date?
End of June.
End of June. 'Cause I'm just trying to work out why the benefit is falling from 2.6% at the half year to between 2.2% and 2.4% of the full year. 'Cause I think you said not to expect seasonality, and if they're both taking the rates of 30th of June, I'm just trying to work out what's caused the drop.
Yeah, sure. Yeah. So the reduction in the current account year discounting benefit from 2.6 in half year 2023, to our estimate of 2.2-2.4 for full year 2023, is due to several drivers, such as the amount of unpaid new claims, the changes-
Yeah
... in business and claims mix, and also the changes in currency mix, which has quite an effect in our case, as the Swiss franc gained, let's say, a stronger weight in the portfolio as the euro claims by the end of the year.
Perfect. Okay, thank you very much. If that hopefully counted as one question, even though it was very long, could I also slip in one on the life business? So, I guess when we look at the CSM and the CSM release, there's two factors driving that. One is, how does the stock of CSM move? And then the other is, how does the release ratio move? So I'm wondering if you could help us look through that and think, you know, well, when—I mean, interest rates have gone down, I guess for the Swiss franc over the course of the year, if we're looking at a sort—I assume we're looking at a sort of 10-year duration, maybe, or something like that. So interest rates have gone down.
So I'm sort of thinking, how should I be thinking about the CSM release? Because obviously, there's the two factors there. There's the movement in CSM, and then there's the release ratio. Sorry for the long question.
So, yeah, sure. So I can give you a few thoughts on the question, but probably for details, you will have to contact IR in the aftermath. But generally, we have set up the life model under IFRS 17 to have a largely stable CSM releases, let's say, almost independent of the interest rate level in the background of the modeling of the release. So of course, the interest rate level will influence the profitability of the new products, so the new products we generated, but it will not really influence the CSM release to a large extent. So we expect the CSM release to be really stable over time.
That's very helpful. Thank you.
... The next question comes from the line of Nasib Ahmed with UBS. Please go ahead.
Hi, it's just a follow-up from Peter's question on CSM. Can you kind of directionally give us sensitivities of the market movements for interest rates and equities on the CSM? Whether equities up is positive, interest rates down, what's the duration mismatch? Just directionally some sensitivities. And then on the underlying earnings, what's in the operating investment on non-life versus market variance? Is it just the fair value to P&L of equities? And again, I'm not sure if you can give us some sort of indication of what's in the operating investment return, what kind of assumptions you're putting in, in the underlying earnings.
Um-
Thank you.
Let's start with your first question. So we will re-release CSM sensitivities with the full year 2023. Generally, what you can see from our already disclosed numbers is that we have quite good hedge of the interest rate, so the duration gap on the life portfolio is rather small. So, interest rates, depending on how the curve moves or twitches in which direction, can have an influence, but generally on the CSM amount, but generally, the duration gap is almost completely closed. And as we said, on equity exposure in the CSM, we will give you sensitivities in the full year 2023 results.
So in the underlying earnings, what we include in underlying earnings is a sort of let's say the current income of our investment portfolio in non-life. That means the dividends that equity investments are paying or the coupons or amortization on our fixed income portfolio. But what we exclude is the valuation changes or the unrealized gains and losses of the assets.
Thank you. What percentage overall return would there be, including the dividends and the coupons? Are you able to share that in the operating investment return?
We will give you more information with the full year. But if you think about it, the part of the profit, which is not in Underlying Earnings, this part is generally volatile as it moves-
Yeah
with financial markets up and down. So it can be, it can be higher in one year and lower in another year.
Okay, thank you. Thank you.
As a reminder, if you wish to register for a question, please press star followed by one. The next question comes from the line of Thomas Bateman with Berenberg. Please go ahead.
Hi, good morning. Thanks very much for taking my questions. Could you just remind us how the group's reinsurance structure has changed over the course of the year? How much more are you paying for your cover, and also how the attachment point has moved?
Yes, I'm happy to do that. All of you probably remembered the quite tough renewal we had at the end of 2022. So, yeah, at the end of 2023, the renewal was much more normal and expected than in the year before, so that was good. The prices are still, or in the reinsurance area, are still a hard market, but the price increases were rather small compared to one year ago. So, that was generally okay. Now, how did our reinsurance structure change? We were able to keep more or less the retention levels. What we overall for the group, so there were not material changes. What we optimized is also the retention levels of first and second and third claims events.
So in the case we have not only one large claim event in a year, but a second or maybe even a third, our retention reduces for the second and third event. So that was a measure we took to mitigate this risk of having not only one, but two or three large events in one year.
Brilliant. Thank you very much. Could you also talk a little bit about the loss environment, specifically, I guess, where the claims, both in your primary business, specialty, and reinsurance in Q4?... clearly you gave us the, the guidance at Q3 of CHF 200 million, but I think there's, there's been worse weather since you gave that guidance.
Yeah. So the Q3 development is still more or less what we communicated. So this around CHF 200 million of net claims in—so claims after insurance cover, but before tax in the Q3. In the Q4, of course, we also had claims, that's quite logical, but these were in line with—so they were not increased compared to last year's, not elevated.
Great. Thank you very much.
The next question comes from the line of René Locher with KBW. Please go ahead.
Yes, good morning. Thank you. Just a question on slide 10, on the dividend, right? So just want to understand the big picture. So on one side, we do have now the IFRS result, which will suffer because of the heavy losses we have seen in Q3. Then we have Swiss GAAP, from which you're paying out the dividend, and we have the net economic dividend capacity of CHF 0.8 billion. So my question is: where is the offsetting factor in the cash generation for the above average claims environment we have seen in Q3? Thank you.
Okay. I try to give you some answer, and we will see if that goes in the right direction.
Mm-hmm.
So the net economic dividend capacity has a direct link, really, of course, with our dividend capacity. In that sense, that all the constraints we have in all the market units regarding paying dividends, paying excess cash based on local results, all the constraints are included in that area. So the strongest effect we have or the most restricting effect regarding dividend capacity is on the local stat results.
Mm-hmm.
And in the local stat results, of course, you see effects from claims very similar to IFRS. But yeah, what we intend to do is to, we are also have the possibility to smooth the local results. Or, let's say, even if the local result may be not so good in one year, we are still able to pay dividend because there are reserves from past years-
Mm-hmm.
-which you see in this net economic dividend capacity.
Okay. Yeah. That's okay. Which is very interesting, right? At the end of the day, if a generalist is looking at your numbers, and then you have, like, CHF 200 million losses in Q3, one could argue, well, they should not be in a position to pay at least the same dividend or even higher dividend, right? So that means, at the end of the day, you have, like, not pockets full of money, but you have a little bit of reserves at local stats level you can use to pay an at least unchanged dividend.
Yes. So it's not really reserves. It's-
Mm-hmm.
It's statutory free equity, right?
Okay.
So if you have a profitable business, also on the local stat, you build up statutory free equity.
Mm-hmm.
You can either, very similar to under IFRS, you can either pay it out fully to your investors. You, of course, you use part of it for organic growth. You use part of it for inorganic growth. So, this statutory free equity is a sort of, yeah, sort of a buffer to be able to, as we do, to pay steady increasing dividends.
Mm-hmm.
—even if years which are not so good.
Okay. Well, it's really nice to ask. Thank you very much.
As you know, our dividend policy is to steadily pay increasing dividends in absolute terms or in very bad years, to at least keep it stable, and to that, we fully commit to that dividend policy.
Mm-hmm. No, no, that's, that's what you also show on, on, on slide 10, right? So 2023-
Yeah.
is going slightly up. It's good news. Thank you.
Well, I mean, I will, of course, not comment on that.
That's nice. Thank you very much.
We have a follow-up question from Thomas Bateman with Berenberg. Please go ahead.
Hi, just a couple more follow-ups if possible. I think you talked to the FX rate having an impact on the discounting? And I wasn't sure if I understood this correctly. Well, are you saying that the stronger effects, that i.e., the Swiss franc strengthening against the euro, is reducing the kind of the total discounting for the non-life business? Or is it because there are a lot more Swiss claims that are reducing the total amount of discounting?
No. It's rather the first point. So if you have, yes, if you have a portfolio with CHF 100 million of claims in Swiss francs and EUR 100 million of claims in euro, not yet discounted, and then euro Swiss loses 10% or so, then the weight of the euro part in your Combined Ratio will lose as a weight in the Combined Ratio of the total.
Understood. So it's purely FX, not due to the mix-
Yes
of claims. I thought you said the mix of claims was a factor in the discounting.
No, it's purely an FX effect, but due to the large moves in FX, especially in the H2 year, this effect can—yeah, we will see that effect in the full year.
Okay. And secondly, can you just talk about the gap between the technical interest rate on your life portfolio and the investment yield that you're generating, and what you think the outlook for that looks like?
So, yeah, the interest margin in that sense. So in the last many years, we have strengthened the reserves on the life side, and therefore also lowered the technical interest rate. And as interest rate or reinvestment rates now are higher due to the higher interest rate levels or since one or two years, this interest margin is expected to slightly increase, and therefore we will be able to release very attractive profits over time.
Excellent. Thank you very much.
For any further questions, please press star followed by one. We have a follow-up question from Peter Eliot with Kepler Cheuvreux. Please go ahead.
Thank you. Sorry, just a quick follow-up on that, on that last point on the reserve releases. I mean, I think you've said in the past that, you know, you would like to be prudent and, you know, delay the recognition of those, you know, really sort of until the policies run off. Just, just checking that nothing has changed on that front. Thank you very much.
No. Yeah, exactly. Nothing has changed. So, also regarding our dividend policy, we are quite happy to be able to release attractive profits over time.
Great. Thank you very much.
That was the last question.
Okay. So thanks a lot, and looking forward to talk to you soon with the full year results, 2023. Have a good weekend, and bye.
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