Icon Gesprächsrunde mit vier Teilnehmern

C-Level Roundtable

Discussion with Gert De Winter, German Egloff and Martin Wenk

“Baloise has embarked on Simply Safe, its strategic journey for the next five years.”

Gert De Winter, Group CEO
Marc Kaiser, German Egloff, Gert De Winter und Martin Wenk sitzen an einem runden Tisch und diskutieren miteinander
Participants: German Egloff, Group CFO, Gert De Winter, Group CEO, Martin Wenk, Group CIO. Chair: Marc Kaiser, Head of Corporate Communications & Investor Relations

How satisfied are you with the annual financial results for 2016? Have the objectives of the 2013–2016 strategic phase been achieved?

Gert De Winter (GDW): Yes, I’m very satisfied with the results over the past three years. The communicated financial targets – return on equity between 8 per cent and 12 per cent, combined ratio of 93 per cent to 96 per cent and a new business margin of more than 10 per cent – were achieved against a backdrop of tough economic conditions. What’s more, despite low and even negative interest rates, Baloise cemented its reputation as an attractive investment and, with three dividend increases within four years plus share buy-backs, enabled its shareholders to benefit from the continuous improvement in profitability. The annual financial results presented for 2016, which include a 4.4 per cent increase in profit to around CHF 535 million, a return on equity of 9.7 per cent, a 1.1 percentage point improvement in the combined ratio to 92.2 per cent and a new business margin of 21.3 per cent, represent a more than satisfactory conclusion to this period.

What happens next? What are the targets for the next strategic phase?

GDW: At the Investor Day in October last year, we set out the new and ambitious objectives of our strategy for the next five years. Under the Simply Safe banner, Baloise has thus embarked on its strategic journey for the coming five years. By 2021, we want to have remitted CHF 2 billion in cash for the benefit of our shareholders, to have become one of the most popular employers in the industry and to have signed up another 1 million – or 30 per cent more – customers.

Are there already ideas about how to achieve these goals?

GDW: Firstly, we will continue to improve our core business, in which we are already doing very well. And secondly, we will broaden our business activities and become more than just a traditional provider of insurance. That’s why we’re investing specifically in growth initiatives. One example is the partnership with investment and consultancy firm Anthemis, as part of which we will make CHF 50 million available for investing in European, UK and US-based start-ups that have the potential to drive forward Baloise’s digital revolution. Generally, we are aligning our business model with the needs of society in the 21st century. If we do this with clarity of purpose, the new strategy will naturally lead to growth.

Are there other digitalisation initiatives?

GDW: As the first insurer in Switzerland, we’re introducing cyber risk insurance for retail customers and have also become a member of F10, a Swiss fintech incubator and accelerator. This gives us exclusive access to highly promising international fintech start-ups, new technologies and business models with disruptive potential.

Portrait Gert De Winter
Gert De Winter

What about in the other national subsidiaries?

GDW: In Germany, we’ve launched ‘Friday’, a mobile insurer that enables people to take out motor vehicle insurance within 90 seconds using their smartphone. Friday is a classic start-up that will act largely independently of the Group. An initial phase is currently running with ‘early bird’ customers with whom we are testing the product and processes. We aim to have a definitive product in place in the autumn.

In Luxembourg, we’re going to market with Good Drive. This is the first connected car insurance in the Luxembourg market. The premise is simple: young drivers who drive well and safely can save up to 30 per cent on their car insurance. Good Drive is initially available through an app and, as well as giving young drivers a discount on their car insurance, helps them to constantly improve their driving skills, for example with personalised safety tips.

In Belgium, we have acquired a majority of the shares in DrivOlution, which helps transport companies and organisations with large vehicle fleets to evaluate their employees’ driving style so that they can make changes. Drivers learn to drive more safely and economically, for example. DrivOlution analyses more than 700 million kilometres of journeys every year. Our partnership with DrivOlution is also teaching us how to efficiently collect and analyse large quantities of data. We can then share this experience with other national subsidiaries for use in their own solutions and services.

We have plenty more in the pipeline, and I’m looking forward to seeing the results of these initiatives in the years ahead.

Let’s return to last year. You’ve laid some good foundations for the new strategic phase with the results for 2016. What were the highlights in the non-life business?

GDW: I’m delighted that we’re growing in the target segments of our non-life business. This year, the volume of business rose by 3 per cent to CHF 3,141 million. The main contributors to this growth were the target segments in Luxembourg (up by 7.1 per cent), Belgium (up by 6.6 per cent) and Germany (up by 2.9 per cent). The profit for shareholders increased by 4.4 per cent, which shows that we didn’t just generate growth but also continued to work on our profitability. Large claims had a greater adverse impact than in 2015, but this was mitigated by the profit on claims reserves, which rose by 2.1 percentage points. Moreover, the claims environment was generally more benign than in the previous year. As a result, there was a slight increase in EBIT in the non-life business, which advanced by CHF 0.9 million year on year to around CHF 396 million, while the combined ratio improved by 1.1 percentage points to 92.2 per cent.

Martin Wenk (MW): And with the net investment yield rising by 0.2 percentage points to 2.6 per cent, the investments also played their part in the improved results for the non-life business.

German Egloff (GE): I think we should also mention that the net combined ratio improved despite the strengthening of reserves in Germany in the first half of the year, which added 1.9 percentage points. Without this one-off item, the ratio would have stood at 90.3 per cent.

What about the results in the life business? It contracted significantly, didn’t it?

GDW: Yes, premium income in the traditional life business declined by 5.6 per cent compared with 2015. This is because we deliberately took a more restrictive approach to underwriting risk in this division. However, it is also clear that we are continuing to push ahead with improving the business mix in the life division, as we said we would. This can be seen in business involving investment-type premiums, which climbed by an encouraging 5.5 per cent to CHF 2,199 million.

GE: Further proof is provided by the more than doubling of the proportion of new individual life business accounted for by risk products. The proportion of classic guarantee products decreased again, falling from 27 per cent to 25 per cent. While we deliberately restricted the growth of full-insurance coverage in the Swiss group life business, the partially autonomous pension solution Perspectiva went from strength to strength and is emerging as one of the fast-growing collective foundations in the Swiss SME segment. A total of 466 SMEs have now signed up to Perspectiva, whereas there were only 177 in 2015.

What about the results in the life business? It contracted significantly, didn’t it?

GDW: Yes, premium income in the traditional life business declined by 5.6 per cent compared with 2015. This is because we deliberately took a more restrictive approach to underwriting risk in this division. However, it is also clear that we are continuing to push ahead with improving the business mix in the life division, as we said we would. This can be seen in business involving investment-type premiums, which climbed by an encouraging 5.5 per cent to CHF 2,199 million.

GE: Further proof is provided by the more than doubling of the proportion of new individual life business accounted for by risk products. The proportion of classic guarantee products decreased again, falling from 27 per cent to 25 per cent. While we deliberately restricted the growth of comprehensive BVG insurance contracts in the Swiss group life business, the partially autonomous pension solution Perspectiva went from strength to strength and is emerging as one of the fast-growing collective foundations in the Swiss SME segment. A total of 466 SMEs have now signed up to Perspectiva, whereas there were only 177 in 2015.

Is the improved business mix in the life division also the reason for the excellent increase in the new business margin, which climbed to 21.3 per cent?

GE: This was due to more selective underwriting and the very encouraging improvement in the composition of the portfolio. There was also a positive effect from using a market-oriented calculation method for the margin. The margin in the Swiss business saw a particularly strong increase.

Is the 18.5 per cent decline in EBIT in the life business also attributable to the changes to the business mix?

GE: The decrease was primarily caused by the strengthening of technical reserves in view of the interest-rate situation. By adding more than CHF 300 million to reserves, we are making the balance sheet more robust and reducing the average return required to meet guarantee obligations. Moreover, the life business had reported a particularly good EBIT in the previous year.

To what extent is the return required to meet guarantee obligations changing in the life business?

GE: It decreased by a substantial 25 basis points compared with the prior year. Of this total decrease, reserve strengthening accounted for 13 basis points, lower guarantees in Swiss group life for 8 basis points and the improved business mix for 4 basis points. Although current income also went down – because of the challenging environment – the reduction was less significant than for the return required to meet guarantee obligations. The interest margin, i.e. the difference between current income and the return required to meet guarantee obligations, therefore actually advanced from 108 basis points to 117 basis points. Overall, this means that earnings in our life business have proven encouragingly resilient despite significant headwinds from the level of interest rates. This can also be seen in other key figures. The market-consistent embedded value of the life business rose by 14 per cent compared with 2015, despite interest rates continuing to fall. What’s more, the analysis of sources of profit reveals year-on-year improvements in the savings result and the risk result. These are both key pillars of profitability for our life business.

Portrait Martin Wenk
Martin Wenk

Baloise’s third profitability pillar – banking and asset management – proved to be a stable source of income again this year. What are the reasons for the 14 per cent increase in EBIT compared with 2015?

Martin Wenk (MW): The banking business generated EBIT of CHF 92.1 million in 2016, another good result. The 14 per cent increase is primarily attributable to a non-recurring accounting effect in provisions for pensions and other post-employment benefits at Baloise Bank SoBa. Otherwise, EBIT would have been on a par with the previous year. We are highly satisfied with the results from the bank and the asset management business, which each made a roughly equal contribution to profit. The stable cash distributions to the holding company from the banking and asset management business, which this year accounted for around 20 per cent of the total dividend payout, played a significant part in ensuring that Baloise shares are able to pay a steady and attractive dividend.

The combination of insurance and banking seems to be working for Baloise?

GDW: Yes. Thanks to this pairing, the reinvestement rate of assets has already reached the very good level of 30 per cent in Switzerland. Client assets from insurance sale forces meanwhile amount to CHF 1.9 billion. They could - depending on our customer's preferences and requirements - potentially be reinvested in a insurance product. An enormous new business potential. We thus offer our customers maximum flexibility, whatever their personal situation.

While we’re on the subject of reinvestment, how satisfied were you with asset management in 2016?

MW: Given the current market situation, we’re satisfied with the level of gains on investments. At 2.9 per cent, the net return on insurance assets was on a par with the prior year despite a further decrease in interest rates. We achieved this by focusing our reinvestment more heavily on the assets in currency-hedged US investments, such as senior secured loans, as well as in investment property – which continues to generate stable current income, even in the current environment.

One example being the acquisition of the Pax Anlage portfolio?

MW: Exactly. This enabled us to increase our real-estate portfolio by around CHF 300 million in one fell swoop. We also purchased real estate totalling more than CHF 400 million in Belgium and Switzerland. These attractive investment properties had a significant steadying effect on our asset allocation.

The investment environment is challenging. How high was the reinvestment return?

MW: The return on new investments was 1.9 per cent and the average guaranteed return on life insurance policies is 1.6 per cent, so we’re satisfied with the reinvestment return.

What notable changes have there been to asset allocation?

MW: We’re continuing to pursue our conservative strategy of high-quality investments. We have expanded our real-estate portfolio. Our equity exposure has reduced slightly. However, this is because we sold CHF 230 million of senior secured loans in the fourth quarter in order to reinvest this amount in our own senior secured loans portfolio at the start of March.

Has the duration gap changed?

MW: The duration of our investments is slightly longer than it was in 2015. The duration gap is unchanged/slightly smaller and is around one to two years.

Besides the healthy gains on investments, Baloise has a robust balance sheet. Have there been any changes?

GE: Baloise’s equity increased by a pleasing 5.9 per cent to CHF 5,774 million, which equates to a carrying amount of CHF 123.8 per share. This figure was bolstered by the higher profit for 2016 and by the proceeds from the sale of treasury shares after a convertible bond, which had not been fully converted, reached maturity in November 2016. The total proceeds from the sale of treasury shares came to CHF 121.4 million.

What does this mean for capitalisation?

GE: We’ve been actively managing our capital for years. We’ve increased the dividend and announced a new share buy-back programme. What’s more, we’re optimising our capital structure and realigning our business to focus on capital-efficient products. Rating agency Standard & Poor’s reaffirmed our credit rating of ‘A with a stable outlook’ and confirmed Baloise’s AAA capitalisation.

So it can be assumed that we’ll meet the regulatory requirements of the SST and Solvency II?

GE: Of course – and this is also underlined by our active capital management and the recent reaffirmation from Standard & Poor’s.

Portrait German Egloff
German Egloff

What was the return on equity?

GE: At 9.7 per cent, it was comfortably within the target range. Adjusted for unrealised gains and losses, it would have been even higher at 12.1 per cent.

To what extent do the shareholders benefit from this strong business performance?

GDW: We will propose to the Annual General Meeting that our dividend be raised from CHF 5.00 to CHF 5.20 per share. In the first half of 2017, we’re also launching the previously announced new programme to buy back up to three million treasury shares. This will enable us to repurchase up to 6 per cent of the registered share capital over the next three years. Once the shares have been cancelled, shareholders will see a rise in earnings per share.

Ensuring that Baloise remains an attractive investment for its shareholders.

GE: Correct. The requested dividend increase will result in an attractive dividend yield of 4.1 per cent. If you compare this to a risk-free alternative investment, such as one-year Swiss government bonds, the difference is just over 5 per cent. Baloise is thus maintaining its track record as a shareholder-friendly company that actively manages its capital and returns surplus capital to its shareholders.

Thank you for this fascinating discussion.

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