Review of operating performance
Success during the first year of the new strategic phase
Baloise’s profit for 2017 attributable to shareholders was the second highest of the last ten years. This achievement is proof positive that Baloise is on the right track with its investment in the future and, at the same time, has strengthened its core business. It has already seen its first operational success in respect of the strategic targets to be reached by 2021, even though 2017 was just the beginning and saw numerous initiatives being launched. Core business also fared very well. The non-life business continues to grow in all markets and profitability remains high. The shift in the life portfolio towards life insurance products that tie up less capital is having a sustained positive effect. The contribution to EBIT from the life business rose significantly in 2017.
In 2017, Baloise’s profit for the period attributable to shareholders advanced by 2.5 per cent to CHF 548.0 million (2016: CHF 534.8 million). Excluding the non-recurring restructuring effects, Baloise would have earned a profit attributable to shareholders of CHF 601.7 million, giving a year-on-year increase of 12.5 per cent. The volume of business grew by 3.9 per cent to CHF 9,260.8 million. This was driven by business with investment-type premiums, which climbed by 14.6 per cent to CHF 2,519.5 million, and by the robust growth of the non-life business in all national subsidiaries.
The non-life business generated premium income reported under IFRS of CHF 3,229.3 million, a year-on-year rise of 2.8 per cent. All business units contributed to this improvement. Profit before borrowing costs and taxes (EBIT) in the non-life business was 5.5 per cent lower than in 2016 at CHF 374.7 million. There were two main reasons for this decrease of around CHF 20 million: the initial financing for FRI:DAY and a voluntary contribution to the employee pension fund in Switzerland. The ongoing restructuring of a portfolio in the German liability insurance segment also had an adverse effect on EBIT. The net combined ratio was on a par with the prior year at a very healthy 92.3 per cent (2016: 92.2 per cent).
A still restrictive underwriting policy and the sale of the life portfolio in Germany meant that the volume of traditional life business contracted by 1.6 per cent to CHF 3,512.0 million. However, EBIT rose by 35.3 per cent to CHF 306.0 million. This was due to a slight easing of the interest rate situation, which significantly reduced the need to strengthen reserves. Another factor was the ongoing shift in the life portfolio. The volume of investment-type premium income continued to grow, rising by an impressive 14.6 per cent to CHF 2,519.5 million.
The gains on the investment of insurance assets amounted to CHF 1,621.6 million, which was above the 2016 level of CHF 1,578.8 million. Recurring current income stood at CHF 1,300.5 million (2016: CHF 1,379.3 million). The gains on investments achieved for insurance assets equated to a net return of 2.9 per cent. The rate of return on insurance assets according to IFRS – which includes unrealised net gains and losses on investments but excludes gains and losses on held-to-maturity debt instruments – was 2.5 per cent, representing a decrease on the 3.1 per cent rate of return according to IFRS in 2016.
In operational terms, the EBIT generated by the banking business was encouraging at CHF 81.8 million. Although this was a fall of 11.2 per cent compared with 2016, the prior-year figure had been boosted by a positive non-recurring effect of CHF 11.3 million arising from a change in the pension scheme at Baloise Bank SoBa.
Baloise’s balance sheet grew even stronger, with consolidated equity rising by 11.0 per cent year on year to reach CHF 6,409.2 million at the end of 2017.
|Total business volume||8,910.8||9,260.8||3.9|
The non-life division saw a further rise in the volume of premiums (in Swiss francs) of 2.8 per cent. With increases of 0.7 per cent in Switzerland, 5.5 per cent in Belgium, 3.6 per cent in Germany and 5.0 per cent in Luxembourg, the total volume came to CHF 3,229.3 million. In local currency terms too, growth was consistently above 1.5 per cent in the non-Swiss markets. Whereas the Swiss business had benefited from a positive effect of CHF 35.5 million in 2016 owing to pension scheme changes, the strengthening of the employer contribution reserve in 2017 had a negative impact on earnings. The initial financing for the mobile insurer FRI:DAY and the losses arising on a portfolio undergoing restructuring in the German liability insurance segment also adversely affected EBIT. Consequently, EBIT in the non-life business fell by 5.5 per cent to CHF 374.7 million. The level of large claims incurred declined overall. The net combined ratio was almost the same as in 2016 at an excellent 92.3 per cent.
The life business is evolving as intended. The ongoing shift in the portfolio was reflected in the 1.6 per cent decline in traditional life insurance. Investment-type premiums grew at a very encouraging rate of 14.6 per cent. Total premium income, including investment-type premiums, amounted to CHF 6,031.5 million (2016: CHF 5,770.1 million). In traditional life insurance, the business volume increased by 0.9 per cent in Switzerland (despite a restrictive underwriting policy) and by 3.7 per cent in Belgium, but contracted by 18.7 per cent in Germany and by 2.7 per cent in Luxembourg. The sharp fall in Germany was due to the sale of a closed life insurance portfolio to Frankfurter Leben.
Investment-type premiums increased to CHF 2,519.5 million (2016: CHF 2,199.2 million). By far the biggest growth driver in 2017 was business in Luxembourg, which was up by 25.2 per cent. In the other markets, business held steady or contracted. Business in Luxembourg (including Liechtenstein) accounts for around 70 per cent of all business with investment-type premiums. EBIT in the life business again rose year on year, reaching CHF 306.0 million (2016: CHF 226.1 million). This was mainly because there was less of a need to strengthen reserves than in the prior year thanks to the slight bounce-back of interest rates.
The positive operating income and economic growth resulted in an increase in the embedded value of the life insurance business from CHF 4,409.4 million to CHF 4,896.8 million in 2017, which is equivalent to a return on embedded value of 12.8 per cent. The new business margin went up in all countries thanks to operational measures and further improvements to the business mix, and stood at 33.4 per cent (2016: 21.3 per cent). The value of new business also rose, reaching CHF 125.8 million.
If the prior-year positive non-recurring effect of CHF 11.3 million arising from a change in the pension scheme at Baloise Bank SoBa is excluded, the banking division’s earnings improved slightly in operational terms. EBIT in the banking business amounted to CHF 81.8 million (2016: CHF 92.1 million), a year-on-year fall of 11.2 per cent. As in prior years, the main contributors to profit were Baloise Asset Management, whose contribution was up slightly at CHF 44.9 million, and Baloise Bank SoBa, which contributed CHF 30.7 million.
The balance sheet of Baloise improved once again, with consolidated equity rising by 11.0 per cent year on year to reach CHF 6,409.2 million at the end of 2017. The profit for the period and other comprehensive income played a big part in this increase, which was partly offset by dividends paid of CHF 248.7 million. The Annual General Meeting held on 28 April 2017 voted to cancel 1.2 million shares. This was carried out on 12 July 2017, reducing the share capital by CHF 120,000 million. Under the announced programme to buy back more than three million shares, a total of 423,450 shares had been repurchased by the end of 2017. This meant CHF 63.3 million was returned to the shareholders.
The increase in equity, the credit rating of ‘A with a positive outlook’ awarded by Standard & Poor’s and an SST ratio of significantly above 200 per cent are signs of the strong foundations provided by Baloise’s sustained and robust level of capitalisation.
Broad-based growth and the support from the continued expansionary monetary policy of many central banks provided fertile conditions for a good year in the capital markets. Volatility in equity markets was at historically low levels throughout 2017, making it an excellent year for shares. The Swiss Market Index rose by a healthy 14.1 per cent. Three interest rate hikes by the US Federal Reserve led to a widening of the interest spread at the short end compared with Switzerland and the eurozone, whereas long-term interest rates mainly remained within a narrow range.
The gains on the investment of insurance assets amounted to CHF 1,621.6 million, which was above the 2016 level of CHF 1,578.9 million. The interest rate environment remained challenging and this was reflected in the lower recurring current income of CHF 1,300.5 million (2016: CHF 1,379.3 million). Of the total decrease, CHF 54.8 million was attributable to the transfer of the closed life insurance portfolio to the Frankfurter Leben Group. As there was limited appeal in the reinvestment of maturing bonds denominated in Swiss francs, Baloise avoided doing so for the most part and instead opted for currency-hedged euro-denominated bonds and senior secured loans. It continued to build up its portfolio of investment property and mortgages with stable income, thereby slightly mitigating the effect of declining income.
At CHF 467.6 million, the gains recognised in the income statement were up by CHF 45.1 million compared with the prior year. Baloise made use of the buoyant equity markets to realise some of the gains. By contrast, it registered significantly smaller gains on bonds than in 2016. The remeasurement of available-for-sale real estate led to extraordinary gains of CHF 39.0 million. As a result of the good market conditions, gross impairment losses fell by CHF 87.6 million year on year to CHF 28.0 million. The currency-related losses of CHF 117.7 million were virtually equal to the currency hedging costs.
The gains on investments achieved for insurance assets equated to a net return of 2.9 per cent, which was exactly the same as in 2016. The slight rise in interest rates in euros and Swiss francs led to a reduction in unrealised gains of CHF 323.7 million. Consequently, the rate of return on insurance assets according to IFRS – which includes unrealised net gains and losses on investments but excludes gains and losses on held-to-maturity debt instruments – was 2.5 per cent, representing a decrease on the 3.1 per cent rate of return according to IFRS in 2016. The banking and asset management segment reported net inflows of CHF 406.3 million in 2017. The volume of assets managed for third parties had thus risen to CHF 8,958.6 million at the end of 2017.
|Alternative financial assets||1,304.1||1,112.6||– 14.7|
|Mortgage assets||10,690.6||10,596.4||– 0.9|
|Policy loans and other loans||5,664.1||5,972.1||5.4|
|Cash and cash equivalents||1,935.5||2,133.2||10.2|
1 Excluding investments for the account and at the risk of life insurance policyholders and third parties.
|as at 31 December 2016||Non-life||Life||Banking||Total for the
|Investments for own account and at own risk||9,166.6||46,006.1||8,120.6||62,892.3|
|Asset portfolio for the account and at risk
of life insurance policyholders and third parties1
|Total recognised assets||9,166.6||58,007.2||8,120.6||75,229.5|
|Third party assets||7,984.7|
|as at 31 December 2017||Non-life||Life||Banking||Total for the
|Investments for own account and at own risk||9,605.9||48,141.2||7,397.8||64,678.9|
|Asset portfolio for the account and at risk
of life insurance policyholders and third parties1
|Total recognised assets||9,605.9||62,685.0||7,397.8||79,706.3|
|Third party assets||8,958.6|
1 Including CHF 70.5 million (2016: CHF 54.5 million) in other assets (precious metal holdings from investment-linked life insurance policies).
|Key figures for Switzerland||2016||2017||+/-%|
|Of which: life||2,991.4||3,015.9||0.8|
|Of which: non-life||1,315.8||1,324.6||0.7|
|Net combined ratio (per cent)||81.2||83.5||–|
|Profit before borrowing costs and taxes||546.6||618.4||13.1|
The profit from business in Switzerland was up significantly year on year and was one of the best results in the history of the Swiss company. This was thanks, in particular, to a very good portfolio resulting from disciplined implementation of the target customer strategy, a healthy profit on claims reserves and fewer large claims in 2017. Large claims are likely to be higher in 2018 as a result of the weather. There was growth in the non-life and life businesses in 2017. The overall volume of business rose by 0.8 per cent to CHF 4,340.6 million. The business model combining banking and insurance gained further momentum, with customer assets generated by the insurance sales force increasing by around CHF 115 million net at Baloise Bank SoBa in 2017 . EBIT advanced by an exceptional 13.1 per cent to CHF 618.4 million.
In the non-life division, premiums were up by 0.7 per cent to CHF 1,324.6 million. There was also an encouraging rise in new customers, primarily thanks to the YounGo product line, the new insurance for personal items and the acquisition and integration of the Movu platform for home-moving services. However, EBIT in the non-life business fell by 4.1 per cent to CHF 289.3 million. This was mainly due to two countervailing non-recurring effects. There had been a positive effect of CHF 35.5 million resulting from pension scheme changes (IAS 19) in 2016, whereas earnings in 2017 were squeezed by the strengthening of the employer contribution reserve in the pension fund for employees. The net combined ratio stood at an outstanding 83.5 per cent, which was 2.3 percentage points higher than the exceptionally good prior-year figure.
The life insurance division achieved growth of 0.8 per cent. In the individual life insurance business, there was a rise in single premiums because, contrary to 2016, two tranche products were offered in 2017. There was a conscious decision to take a cautious approach to underwriting new group life business, resulting in a low rate of growth. By contrast, the products of the partially autonomous collective foundation Perspectiva generated strong growth. EBIT in the life business amounted to CHF 317.6 million (2016: CHF 221.7 million). Despite larger allocations to policyholders’ dividends in the group life business, profit rose sharply thanks to a slight increase in interest rates and the reduced need for additional funding.
The banking business of Baloise Bank SoBa continues to perform steadily, which is testament to the success of the unique business model of banking and insurance in Switzerland. The number of asset management and investment advice mandates increased by 59 per cent to more than 1,500. EBIT came to CHF 30.7 million, which was below the prior-year figure of 41.7 million. The reduction (in Swiss francs) was due, in particular, to the non-recurring boost to earnings of CHF 11.3 million in 2016 resulting from pension scheme changes (IAS 19).
|Key figures for Germany||2016||2017||+/-%|
|Business volume||1’431.2||1’369.3||– 4.3|
|Of which: life||675.2||586.3||– 13.2|
|Of which: non-life||755.9||783.0||3.6|
|Net combined ratio (per cent)||109.7||108.3||–|
|Profit before borrowing costs and taxes||– 60.9||– 76.0||24.8|
EBIT in the German business amounted to a loss of CHF 76.0 million, which was below expectations. The non-life business was weighed down by large claims and a liability insurance portfolio undergoing restructuring. The overall volume of business contracted by 4.3 per cent to CHF 1,369.3 million. This decrease and some of the loss were attributable to strategic restructuring, such as the sale of Deutscher Ring Bausparkasse. In operational terms, Germany is achieving profitable growth – particularly in the non-life business.
The non-life division reported encouraging growth of 3.6 per cent with a volume of business of CHF 783.0 million. Non-life business with retail customers is growing at a far stronger rate than the market, especially in the accident, general liability, motor vehicle and property insurance segments. Industrial business is declining, above all due to the scheduled exits and restructuring in these segments. The net combined ratio improved only slightly, falling to 108.3 per cent (2016: 109.7 per cent). The main reasons for this were the strengthening of reserves in the aforementioned portfolio and the high number of moderately large claims below the priority limit for reinsurance. Moreover, the volume of large claims incurred was higher than in 2016.
The volume of business in the life division decreased by 18.7 per cent to CHF 379.2 million. However, this was mainly because of the sale of the closed life insurance portfolio of Direktion für Deutschland to the Frankfurter Leben Group, which was completed on 3 February 2017. The portfolio comprised around 130,000 life insurance policies. Excluding this effect, the volume of business would have remained stable owing to reduced non-recurring income. By contrast, biometric products and business involving investment-type premiums performed well. These now account for around 90 per cent of new business.
|Key figures for Belgium||2016||2017||+/-%|
|Of which: life||614.4||588.1||– 4.3|
|Of which: non-life||947.1||999.0||5.5|
|Net combined ratio (per cent)||93.4||91.9||–|
Last year was very successful for the Belgian market. The volume of business increased by 1.6 per cent to CHF 1,587.1 million, which was primarily due to the strong growth of 5.5 per cent in the non-life business. A reduction in large claims incurred and a higher profit on claims reserves resulted in improved profitability. The life business saw growth in both periodic and single premiums. However, EBIT declined by 18 per cent to CHF 140.8 million.
Belgian non-life business again registered strong growth, expanding by 5.5 per cent to CHF 999.0 million (2016: CHF 947.1 million). This shows that Baloise Insurance Belgium was able to hold its own in a very competitive market. The inward reinsurance business notched up particularly buoyant growth due to an agreement entered into with Europe Assistance, an organisation providing emergency assistance and other services. As a result of this growth, the Belgian market now accounts for 31 per cent of the Baloise Group’s total non-life premiums. Business remains highly profitable. Large claims had less of an adverse impact in 2017, and the profit on claims reserves also contributed to performance. As a result, the net combined ratio decreased by 1.5 percentage points to 91.9 per cent.
Against the backdrop of a shrinking Belgian life market, the volume of business fell by 4.3 per cent to CHF 588.1 million. Traditional life business generated growth of 3.7 per cent, mainly thanks to a rise in periodic premiums. Investment-type premiums were down by 6.7 per cent. While unit-linked products achieved healthy growth, sales of products with limited guarantee periods declined.
|Key figures for Luxembourg||2016||2017||+/-%|
|Of which: life||1’489.1||1’841.2||23.6|
|Of which: non-life||116.4||122.3||5.0|
|Net combined ratio (per cent)||93.9||91.5||–|
|Profit before borrowing costs and taxes||23.3||27.5||18.0|
The business unit in Luxembourg significantly increased its volume of business, which grew by 22.3 per cent to CHF 1,963.5 million. It also reported the best profit in its history. The main factors were the growth of the life business, where investment-type premiums were up by 25.2 per cent. The non-life business saw stronger growth and improved profitability, with premium income advancing by 5 per cent to CHF 122.3 million. This increase was primarily driven by motor vehicle insurance and products for small and medium-sized enterprises. A reduction in high-volume minor claims led to better profitability. The net combined ratio decreased by 2.4 percentage points to 91.5 per cent.
Once again, the life business was the main driver of growth in Luxembourg. Investment-type premiums, which are predominantly sold from Luxembourg and Liechtenstein, increased by 25.2 per cent to CHF 1,761.6 million. Products are largely sold through banks and brokers, while the main market for products from Liechtenstein is Italy and they are mainly sold by inhouse salespeople through contacts in banks and asset management companies. Traditional life business contracted by 2.7 per cent. This was in line with the planning, as classic guarantee products with guarantees above zero are no longer offered in Luxembourg.