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Review of operating performance

High level of profitability in challenging climate

Overview of operating performance

Baloise’s healthy half-year profit of CHF 248.7 million was achieved amid uncertainties in the currency and interest-rate markets. The impact of the decision taken by the Swiss National Bank (SNB) on 15 January 2015 to abandon the Swiss franc’s floor against the euro can already be seen in Baloise’s half-year results. On the reporting date, the Swiss franc had appreciated by 16 centimes against the euro since the SNB’s decision. This effect was one of the reasons why the profit for the period was down by 28.9 per cent on the first half of 2014. Nonetheless, all business units made a contribution to the Company’s healthy earnings. Non-life business performed significantly better than in the first half of 2014 with EBIT rising by 34.2 per cent to CHF 262.0 million. The scale of large claims (net) was slightly lower than in the first half of the previous year. This trend and a further fall in costs are also reflected in the combined ratio. At Group level, the net and gross combined ratios were both down by 0.9 percentage points (H1 2014: net combined ratio of 93.2 per cent, gross combined ratio of 93.3 per cent). The unfavourable interest rate situation had a particularly negative effect on life business. Earnings (EBIT) were down year on year, but this was partly because the level of gains realised in the first half of 2014 was unusually high. EBIT amounted to CHF 70.3 million, despite growth of 3.3 per cent in the volume of business at Group level as measured in local-currency terms. Lower returns on investments, the strengthening of reserves and lower gains realised on investments put particular pressure on earnings in traditional life business. In the banking business, net interest income continued to fall because interest rates remained low or even negative. Despite the hindrance of negative interest rates, EBIT was up by 5.4 per cent to CHF 42.8 million. Consolidated equity declined to CHF 5,196.8 million (down by -10.9 per cent), largely attributable to currency effects. The Group’s solvency ratio also fell, but was 333 per cent compared with 354 per cent at the end of 2014, an excellent ratio indicating that Baloise’s balance sheet remains strong. The total volume of business in continuing operations grew by 3.9 per cent in local-currency terms but declined by 1.9 per cent in terms of Swiss francs to CHF 5,621.3 million.

Business Volume

Baloise’s non-life division (indemnity and personal insurance) generated a profit of CHF 262.0 million before borrowing costs and taxes (H1 2014: CHF 195.2 million). Large claims (net) and insurance benefit payments across the Group were lower than in the first half of 2014. The gross cost ratio and the gross claims ratios were both lower, by 0.1 percentage point and 0.8 percentage points respectively. The net combined ratio of 92.3 per cent was down by a further 0.9 percentage points year on year. In local-currency terms, the volume of IFRS premiums grew slightly, by 0.2 per cent, but it declined by 6.9 per cent to CHF 2,063.9 million when currency effects were taken into account.

Combined Ratio Performance

In the life insurance division, profit before borrowing costs and taxes was substantially down on the excellent prior-year period and stood at CHF 70.3 million. The fall in earnings was largely attributable to a decline of CHF 81.6 million in income from investments, a decline of CHF 157.1 million in gains realised in traditional life business, large losses arising from exchange differences (fair-value measurements and realised losses), and the strengthening of reserves. Thanks to the Swiss and Belgian business units, the volume of traditional life insurance business in continuing operations was up by 3.3 per cent in local-currency terms. There was a year-on-year rise by 14.6 per cent in the volume of investment-type premiums in local-currency terms, mainly due to the Luxembourg business.

Despite low or negative interest rates, the banking division put in an encouraging performance. Profit before borrowing costs and taxes rose to CHF 42.8 million (H1 2014: CHF 40.6 million), primarily on the back of the robust operating performances delivered by Baloise Asset Management and Baloise Bank SoBa.

The defining events for Swiss investors were the abandonment of the euro exchange-rate floor by the Swiss National Bank and the introduction of negative interest rates.

Currency hedges made it possible to keep the impact on investments within tight limits.

However, there will be a greater long-term influence on Baloise because the level of interest rates on new investments and rollovers will fall again.

In the eurozone, quantitative easing by the European Central Bank also pushed interest rates to ultra-low levels before they started to gyrate violently in the opposite direction at the end of April. European equity markets benefited the most from this loosening of monetary policy. Volatility increased on all markets in June in response to the discussion about Grexit. In this environment, Baloise’s investments delivered a strong performance.

Because interest rates remained low, and because of the exchange rate used to translate income earned, recurring income declined from CHF 896.6 million in the first six months of 2014 to CHF 784.4 in the first half of 2015. Realised gains returned to normal compared with the exceptionally strong first half of the previous year. Consequently, net income came to CHF 921.0 million, which was well below the CHF 1,172.0 million reported for the first half of 2014. This equates to a non-annualised net return of 1.6 per cent on insurance assets (H1 2014: 2.0 per cent).

Unrealised gains on bonds were down because of currency translation differences, a slight rise in euro interest rates since the start of the year and the realisation of gains. Consequently, the rate of return on insurance assets according to International Financial Reporting Standards (IFRS) – which includes unrealised net gains and losses on investments but excludes gains and losses on held-to-maturity debt instruments – was 0.4 per cent for the first half of 2015, which was well below the prior-year figure of 3.8 per cent.

Asset Allocation Insurance 1

      31.12.2014     30.06.2015
  Non-life Life Total Non-life Life Total
CHF million            
Investment property 883.0 5,052.3 5,935.3 878.5 4,920.7 5,799.2
Equities 1,106.6 2,912.5 4,019.1 1,265.5 3,103.3 4,368.8
Alternative financial assets 298.9 1,042.3 1,341.2 257.8 973.4 1,231.2
Fixed-income securities 5,346.3 26,965.7 32,312.0 4,854.6 25,636.5 30,491.1
Mortgage assets 435.9 4,166.6 4,602.5 436.0 4,078.6 4,514.6
Policy loans and other loans 1,281.2 6,051.6 7,332.8 1,015.0 6,119.0 7,134.0
Derivative financial instruments 18.9 299.3 318.2 20.9 282.4 303.3
Cash and cash equivalents 503.1 890.0 1,393.1 312.8 512.2 825.0
Total 9,873.9 47,380.3 57,254.2 9,040.9 45,626.2 54,667.2

1 Excluding investments for the account and at the risk of life insurance policyholders and third parties.

Baloise increased its equity exposure further. All alternative financial assets generated positive returns in local-currency terms. The impairment losses recognised on financial instruments with characteristics of equity totalled CHF 37.9 million (gross). Investment property continued to yield stable returns and slightly higher valuations. The values and income streams generated by mortgages remained consistent.

Performance and trends in the regional markets

Switzerland

Baloise’s Swiss business achieved an impressive technical result in its non-life insurance and generated healthy growth in attractive sectors. Profit before borrowing costs and taxes was down by 32.5 per cent to CHF 203.6 million due to interest-rate and currency effects and, among other things, because the level of gains realised was lower than the unusual and extremely high level realised in the first half of the previous year. Its total volume of business grew by 2.1 per cent to CHF 3,437.9 million.

Compared with the first half of 2014, the gross combined ratio improved by 1.8 percentage points to an outstanding 81.5 per cent, the lowest in the Group. The volume of premiums written in its non-life business contracted by 0.7 per cent to CHF 1,052.8 million, largely because underwriting of daily sickness allowance insurance and group accident insurance remained cautious. By contrast, growth was seen in the general liability, motor vehicle and property insurance sectors.

EBIT for the life insurance division declined by CHF 119.8 million to CHF 65.2 million, mainly due to the unusual and extremely high level of its prior-year earnings. The decision taken by the Swiss National Bank on 15 January 2015 also affected the division’s earnings. The volume of conventional product premiums written grew by 4.5 per cent to CHF 2,300.8 million. This was primarily attributable to robust growth in group life business. The Swiss business unit won further target customers in this segment and gained a foothold in this major market by offering new, partially autonomous solutions for occupational pensions. The volume of investment-type insurance decreased by 19.4 per cent to CHF 84.3 million because it was only launched in the form of a tranche product in the first half of the year.

Baloise Bank SoBa (all figures reported according to local accounting standards) managed to shrug off the tough environment. It inched ahead of its half-year financial results for 2014 and achieved encouraging growth. Savings grew by 1 per cent and investments by 2.2 per cent. Profit for the half year advanced by 1.2 per cent to CHF 13 million and its total assets expanded by 4.6 per cent to CHF 7.4 billion in the same period.

Germany

The ongoing restructuring operations in Germany and the associated reduction in headcount are on track. The previously announced process of cutting 400 jobs by the end of 2017 is going to plan and the anticipated efficiency goals are being achieved. EBIT rose by CHF 16.6 million to CHF 33.7 million. Because the gross volume of large claims incurred was higher than in the first half of 2014 and premiums were down by a modest 1.5 per cent, the combined ratio rose by 8.6 percentage points to 111.9 per cent. The total volume of business transacted by the German unit shrank by 2.4 per cent in local-currency terms and by 15.4 per cent in Swiss francs to CHF 805.7 million. Low interest rates put the greatest pressure on life business. The fall in non-life premium income was partly due to the ongoing review and restructuring of the client portfolio and improvements in the business mix.

Belgium

The unit’s profit for the period before borrowing costs and taxes was impacted by currency effects. Measured in Swiss francs, EBIT contracted by 4.1 per cent to CHF 91.3 million while the combined ratio improved by 7 percentage points to 94.6 per cent because both the cost ratio and the claims ratio were lower. The unit’s volume of business was down on the first half of 2014 due to currency effects and amounted to CHF 738.9 million, although growth of 6.6 per cent was measured in local-currency terms. The performance of investment-type insurance business was particularly encouraging. It grew by 14.0 per cent year on year in local currency terms on the back of successful distribution alliances with financial advisors.

Luxembourg

The unit’s profit before borrowing costs and taxes stood at CHF 13 million, a fall of 17.2 per cent in Swiss-franc terms that was mostly due to currency effects. Although Baloise Luxembourg’s gross combined ratio of 82.0 per cent was 0.4 percentage points higher than in the first six months of 2014, it remained an excellent ratio. The unit’s total volume of business rose to CHF 637.1 million, which constituted growth of 20.2 per cent in local-currency terms and was driven by non-life business and investment-type premiums. Baloise’s purchase of non-life insurer HDI-Gerling Luxembourg in early August (premium volume of around CHF 5 million) is set to put it in the top three insurance companies in Luxembourg.

Outlook

These healthy half-year financial results reaffirm the focus strategy that Baloise has adopted. The Company’s strong level of capitalisation will enable it to continue growing organically in its core markets. Growth focusing on earnings in target customer segments, extremely strong capitalisation and a clear geographic focus are laying the foundations for Baloise’s next strategic phase starting in 2016.

Baloise Shares

Equity markets edged slightly lower amid high volatility in the first half of 2015. Financial markets were preoccupied with the festering conflict in eastern Europe and the possibility of Greece leaving the eurozone. The Swiss Market Index fell by 2.3 per cent during the first six months of the year.

Having performed well in the first three months, Baloise shares (Baloise shares = shares of Bâloise Holding Ltd) shed some of their value in the second quarter to close the first half of the year at CHF 114.00, which constituted a decline of 10.8 per cent on the beginning of the year. The Swiss insurance sector index also underperformed the broad market over the same period, posting a negative return of 4.7 per cent. The European insurance sector index gained 8.7 per cent on the back of slightly higher eurozone interest rates.

The Baloise shares were widely held and their free float remained unchanged at 100 per cent. There were no material changes in the Company’s shareholder base during the first half of the year.

Key figures on the company's shares

  30.6.2014 31.12.2014 30.6.2015

Change (%) versus 31.12.20141

Shares issued (units) 50,000,000 50,000,000 50,000,000 0.0
Basic earnings per share (CHF) 7.45 15.15 5.30 – 28.9
Diluted earnings per share (CHF) 7.37 14.63 5.27 – 28.5
Equity per share2 (CHF) 111.9 123.4 110.1 – 10.8
Closing price (CHF) 104.50 127.80 114.00 – 10.8
Market capitalisation (CHF million) 5,225.0 6,390.0 5,700.0 – 10.8

1 Changes in earnings per share compared with 30 June 2014.
2 Calculation based on consolidated equity before non-controlling interests and including the average number of shares outstanding.

Baloise Shares

Securities symbol BALN
Par value CHF 0.10
Securities number 1.241.051
ISIN CH0012410517
Stock exchange SIX Swiss Exchange
Type of shares 100 % registered shares
Indexed price performance

Business volumes, premiums and combined ratio

Business volumes

First half of 2014 Group Switzerland Germany

Belgium

Luxembourg2 Other units3
CHF million            
Non-life 2,291.5 1,060.1 553.0 529.7 70.0 75.7
Life 2,628.9 2,202.1 284.8 72.5 53.8 15.7
Sub-total of IFRS gross
premiums written1
4,920.3 3,262.2 837.8 602.2 123.8 91.4
Investment-type premiums 910.4 104.6 115.1 198.2 483.5 9.1
Total business volume 5,830.7 3,366.8 952.9 800.3 607.3 100.4

Business volumes

First half of 2015 Group Switzerland Germany

Belgium

Luxembourg2 Other units3
CHF million            
Non-life 2,063.9 1,052.8 471.7 474.8 63.0
Life 2,646.6 2,300.8 236.3 68.4 41.1
Sub-total of IFRS gross
premiums written1
4,710.5 3,353.6 708.0 543.2 104.1
Investment-type premiums 910.7 84.3 97.8 195.7 533.0
Total business volume 5,621.3 3,437.9 805.7 738.9 637.1

1 Premiums written and policy fees (gross).
2 Including Baloise Life Liechtenstein.
3 Other units: Austria (until 28 August 2014), Croatia and Serbia (both until 11 March 2014).

Premium earned (gross) first half of the year

    Non-life   Life   Total
  2014 2015 2014 2015 2014 2015
CHF million            
IFRS gross premiums written 2,291.5 2,063.9 2,628.9 2,646.6 4,920.3 4,710.5
Change in unearned premium reserves – 610.4 – 565.1 – 610.4 – 565.1
Premiums earned and policy fees 1,681.1 1,498.8 2,628.9 2,646.6 4,309.9 4,145.4

Non-life gross premiums by sector

  1st 2014 1st 2015 +/- %
CHF million      
Accident 305.8 270.0 – 11.7
Health 104.9 98.6 – 6.0
General liability 247.6 233.3 – 5.8
Motor 786.1 712.6 – 9.3
Property 662.5 592.9 – 10.5
Marine 104.8 95.7 – 8.7
Other 46.3 37.9 – 18.1
Inward reinsurance 33.5 22.8 – 31.9
Gross premiums written, non-life 2,291.5 2,063.9 – 9.9

Life gross premiums by sector

  1st 2014 1st 2015 +/- %
CHF million      
Business volume of single premiums 1,695.6 1,747.8 3.1
Business volume of periodic premiums 1,843.7 1,809.5 – 1.9
Investment-type premiums – 910.4 – 910.7 0.0
Gross premiums written (life) 2,628.9 2,646.6 0.7

Compared with the premium income earned in the corresponding period of 2014, the premiums earned in the first half of 2015 were strongly adversely affected by movements in the exchange rate between the Swiss franc and the euro.

Gross Combined Ratio

30 June 2014 Group Switzerland Germany Belgium Luxembourg Other units1
As a percentage of premiums earned            
Claims ratio2 62.3 58.1 67.6 67.0 47.8 60.0
Expense ratio 31.0 25.2 35.7 34.6 33.8 33.6
Combined Ratio 93.3 83.3 103.3 101.6 81.6 93.6

Gross Combined Ratio

30 June 2015 Group Switzerland Germany Belgium Luxembourg Other units1
As a percentage of premiums earned            
Claims ratio2 62.2 56.2 76.1 61.9 50.9
Expense ratio 30.2 25.2 35.8 32.7 31.1
Combined Ratio 92.4 81.5 111.9 94.6 82.0

1 Other units: Austria (until 28 August 2014), Croatia and Serbia (both until 11 March 2014).
2 Including profit-sharing ratio.

Gross and net Combined Ratio as at 30 June

    Gross   Net
As a percentage of premiums earned 2014 2015 2014 2015
Claims ratio1 62.3 62.2 61.0 61.3
Expense ratio 31.0 30.2 32.2 31.0
Combined Ratio 93.3 92.4 93.2 92.3

1 Including profit-sharing ratio.