Baloise Holding: Strong Cash Remittance Covers The 5% Dividend Yield (OTCMKTS:BLHEF)

Michael Derrer Fuchs/iStock Editorial via Getty Images Introduction Baloise (OTCPK:BLHEF) (OTCPK:BLHEY) is a Swiss insurance company focusing on Switzerland, Belgium, Germany and Luxembourg as its core markets. In 2023, the company wrote gross premiums of approximately 8.6B CHF, of which approximately 47% came from the non-life division while 42% was generated in the life segment. Additionally, the insurance company also generated close to 900M CHF from investment-type premiums. About 47% of the total business volume was generated in Switzerland while Belgium is a distant second, representing approximately 24% of the business volume. Yahoo Finance Baloise has its primary listing in Switzerland, where it is trading with BALN as its ticker symbol. The current market cap is just over 7B CHF and the average daily trading volume is 125,000 shares, representing roughly 20M CHF per day. I will use the CHF as the base currency throughout this article. Focus on the cash remittance levels Thanks to the relatively high amount of gross premiums written, the insurance company’s reported net insurance revenue was 5.4B CHF, resulting in an insurance service result of 594M CHF. Additionally, as you can see below, Baloise recorded a 2.8B insurance expense offset by a 2.98B CHF positive result from its investment portfolio. Baloise Investor Relations As the income statement above shows, this resulted in a total operating profit of 344M CHF and after deducting the interest expenses and the taxes, the total net income was 236M CHF, which is a tad lower than the almost 245M CHF realized in 2022. The total net income attributable to the common shareholders of Baloise was 239.6M CHF, which works out to 5.29 CHF per share. Keep in mind this is the accounting profit, and the income statement also has to deal with certain non-cash expenses that have a negative impact on the bottom line but have no impact on the cash performance of the subsidiaries in the different countries. It may come as a surprise to see the insurance company hiked its dividend by 30 cents to 7.7 CHF considering the official EPS was just 5.29 CHF. Baloise Investor Relations That being said, the cash remittance from the operating subsidiaries to Baloise as a holding company was very strong (and showed an increase on a YoY basis). In fact, the total cash remittance was 493M CHF. Considering there are approximately 45.3M shares outstanding, the cash performance of Baloise was almost 10.7 CHF per share and that means the dividend was well-covered from a cash perspective. And as Baloise expects the cash remittance levels to remain high, it is appropriate to say the dividends remain quite well-covered with a payout ratio of just over 70%. The long-term plan A few years ago, Baloise mentioned it was investing heavily in its ecosystem strategy, but it recently changed its course and is abandoning its initial ecosystem plan and the innovation targets. The Swiss insurance company will refocus on its core business, as that’s where it sees the best potential to further grow the business. Despite changing course, the company is maintaining its strategic targets for the 2022-2025 era. It has specific focus targets for its employees (become a leading employer in Europe) and customer growth (adding 1.5 million customers in the 2022-2025 era), but what I’m most interested in, is the insurance company’s cash remittance target. Baloise Investor Relations As you can see in the image above, Baloise is making good progress towards its targets, although I’m not sure it will meet its customer growth target as it added just over 50,000 customers in the past year, which means it will have to add about 600,000 customers per year in 2024 and 2025 to meet its targets. The cash remittance target, on the other hand, remains very feasible. The Swiss insurance company was able to stream up almost 500M CHF last year and the cumulative amount has now reached 963M CHF. This means we’ll need another mid-single percentage increase in 2024 and 2025, but the 2B CHF target appears feasible. Now Baloise has dropped its ecosystem plans and we are getting close to 2025 – which is the final year of its current financial plan – I’m expecting to see a lot more details from Baloise when it organizes its investor update in September. I expect to see a 2025-2028 framework with new financial targets and more details on whether or not the anticipated cost efficiencies of 200M CHF could be achieved by the end of 2025. There is one element I’d like to highlight one last time, and that is the strong solvency ratio. Not only is 210% pretty strong, the company has also provided a sensitivity analysis of how the solvency ratio would be impacted by a simultaneous 100 bp drop in the interest rates while the equity markets would crash by 50% (a pretty grim scenario). Baloise Investor Relations As you can see above, even in that scenario, the solvency ratio would still exceed 140%. The investment portfolio of the insurance assets (shown below) predominantly consists of fixed rate securities, representing 53% of the total 50.8B CHF float. This represents a 27B CHF portfolio. Baloise Investor Relations That fixed income portfolio has a very conservative investment approach. Baloise has earmarked about 66% of its fixed rate securities to be invested in AA-rated and AAA-rated securities, and 58% of the fixed rate debt was issued by governments and other issuers in the public domain. Baloise Investor Relations Swiss companies have a reputation of being managed in a conservative way, and Baloise definitely falls into that category. And considering the company is sticking to its cash remittance target of 2B CHF, it basically implies about 1.04B CHF in cash will be upstreamed to the mother holding in 2024 and 2025. This represents 22.9 CHF per share. As the earnings from the investment portfolio should also stabilize now the interest rates on the financial markets are stabilizing, the reported earnings should increase as well. According to the consensus estimates, the EPS will increase again to 9.37 CHF this year and 11.16 CHF in 2026 and this, in combination with strong cash remittance levels, should indeed underpin the dividend. Unfortunately, the Swiss dividend tax rate is 35%, and that could be a deterrent, so investors should consult with a tax specialist to see if there is any way to reduce the effective tax rate. The biggest risk to the investment thesis would be a more volatile interest rate environment. That being said, the insurance division is putting in a strong performance on its own, with a combined ratio in the low-90% range. Additionally, as the majority of the float is invested in fixed income securities, the cash flow from the investment portfolio should remain robust as well. And with S&P rating Baloise with an A+, the balance sheet risk appears relatively limited. Investment thesis I like insurance companies as a well-managed insurance company could be seen as a hedge against inflation: it will be able to hike its annual premiums in line with inflation. The main downside risk would be to have a large economic shock with a high inflation rate, while there always is a lag in the ability to hike the insurance premiums. That’s for instance, the issue Direct Line Insurance had to deal with in the past two years as it was paying out higher amounts of claims while it could only gradually hike the insurance premiums. At the end of last year (Baloise does not provide detailed quarterly updates), the book value was approximately 71.7 CHF per share on an IFRS basis. That’s pretty low, but keep in mind the increasing interest rates on the financial markets have put pressure on the market value of the (fixed income) portfolio. As interest rates will decrease again, the market value of those securities will increase again, and that will boost the equity value and thus the book value per share. I currently have no position in Baloise, but I like the insurance sector and a well-managed insurance company with an A+ credit rating sparks my interest. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.