Review of operating performance
Overview of operating performance
In the first six months of 2019, Baloise generated profit of CHF 395.0 million for its shareholders (up by 46.5 per cent from CHF 269.7 million in H1 2018) and an excellent business volume of CHF 6,014.1 million (up by 10.0 per cent from CHF 5,468.3 million in H1 2018). Non-recurring effects had a positive impact on both of these figures. Tax reforms at cantonal level in Switzerland resulted in the reversal of deferred tax provisions under International Financial Reporting Standards (IFRS), which will have a positive one-off impact on earnings in an amount of CHF 127.7 million in the 2019 financial year. The volume of business should enjoy a one-off uplift of CHF 560 million as a result of a competitor withdrawing its comprehensive insurance products from the group life insurance segment.
Premium income in the non-life business advanced by 0.1 per cent to CHF 2,263.6 million in the reporting period. Profit before borrowing costs and taxes (EBIT) in the non-life business, which had been depressed by non-recurring effects in 2018, returned to normal and came to CHF 226.1 million. The excellent net combined ratio of 87.4 per cent in the non-life business was mainly attributable to a relatively low level of claims in the first half of the year. The ratio had been pushed up by 3 percentage points in 2018 as a result of reserves being created in respect of a German liability insurance portfolio. The profitability of the non-life business was encouraging across all national Baloise companies. Switzerland and Germany were the top performers with 82.6 per cent and 91.2 per cent respectively. For the 2019 financial year, Baloise is therefore aiming to achieve a combined ratio at the bottom end of the defined target range of 90 to 95 per cent.
Combined Ratio Net Performance (percent, first half of the year)
The volume of premiums collected in the traditional life business increased by 30.4 per cent year on year to CHF 2,869.8 million. This was mainly attributable to the fact that a competitor in the Swiss group life business withdrew its comprehensive insurance products from the market. Earnings in the life insurance business fell to CHF 106.3 million (H1 2018: CHF 193.6 million) as reserves had to be strengthened due to the environment of low interest rates. In the first half of 2018, EBIT had also been boosted by the fact that some reserves in the Belgian life insurance business which were no longer required could be reversed and taken to income.
EBIT in the asset management and banking segment grew by 1.4 per cent to CHF 42.6 million (H1 2018: CHF 42.0 million) in the reporting period.
Gains on investments achieved for insurance assets remained on a par with the prior-year figure at CHF 670.4 million (H1 2018: CHF 670.3 million). The net return on insurance assets stood at 1.2 per cent (H1 2018: 1.2 per cent).
Once again, Baloise presented a strong balance sheet. The company holds an A+ credit rating from Standard & Poor’s. Due to lower interest rates and the resulting higher valuation of available-for-sale financial assets, equity increased to CHF 6,591.9 million (31 December 2018: CHF 6,008.2 million). The SST ratio as at 1 January 2019 was very strong, at 242 per cent.
Performance and trends in the segments
In the first six months of 2019, the volume of premiums earned by Baloise in the non-life business grew slightly. This increase can be attributed primarily to business in Belgium and Luxembourg. Net premium income in Switzerland fell slightly. The same was true for Germany, although the business there did grow by 2.0 per cent in local-currency terms. Baloise’s consolidated non-life business advanced by 0.1 per cent (2 per cent in local currency) to CHF 2,263.6 million.
The excellent net combined ratio of 87.4 per cent for non-life business reflects the high profitability and quality in the non-life portfolio. Unlike last year, when the combined ratio had been adversely affected by the strengthening of reserves in the German run-off portfolio and severe winter storms (H1 2018: 94.1 per cent), Baloise benefited from a benign claims environment in the first half of 2019. EBIT in the business improved by 55.8 per cent to CHF 226.1 million in line with this normalisation (H1 2018: CHF 145.1 million).
The net combined ratio of all national Baloise companies was very good at the end of the reporting period. With a ratio of 82.6 per cent, the Swiss entity was by far the most profitable. The German business also performed well with an excellent net combined ratio of 91.2 per cent. The business in Luxembourg achieved a similar level of profitability (92.0 per cent).
EBIT in the life business came to CHF 106.3 million in the first half of 2019 (H1 2018: CHF 193.6 million). The previous year had been particularly strong for this business because the interest-rate environment was more stable in 2018. This meant that additional reserves in the Belgian business which were no longer required could be reversed and taken to income. The absence of this non-recurring effect and more challenging interest-rate conditions once again in 2019, which required the Company to strengthen reserves, led to a fall in EBIT.
The volume of premiums collected in the traditional life business increased significantly to CHF 2,869.8 million (up by CHF 669.0 million year on year). Of this CHF 669.0 million increase, around CHF 560 million was generated from customers won as a result of the withdrawal of a competitor from the business with comprehensive insurance solutions. Adjusted for this non-recurring effect, the premium volume in the traditional life business increased only slightly, in line with strategic targets (H1 2018: CHF 2,200.8). The modest rise was mainly attributable to growth in the Swiss portfolio.
The volume of premiums in the business with investment-type premiums was also down in comparison with the prior year, falling by 12.4 per cent to CHF 880.7 million (H1 2018: CHF 1,005.2 million). This decline was due to the overall market conditions for these products in Luxembourg.
The new business margin in the life business was solid at 34.2 per cent in the reporting period.
Business Volume 2019 (gross) by Strategic Business Units (percent)
The asset management and banking segment achieved a healthy profit for the half-year period that was on a par with the prior year, generating EBIT of CHF 42.6 million (H1 2018: CHF 42.0 million). The most substantial profit contributions came from Baloise Bank and Baloise Asset Management.
After a volatile period in the equity markets at the end of 2018, January brought some respite. The renewed intensification of the trade dispute between the US and China in May 2019 caused another volatility flare-up in the markets. In light of weakening global economic growth, the leading central banks promised to take a more expansionary monetary policy approach. This triggered steep falls in yields. Temporarily, yields on 10-year US Treasuries even dropped below the short-term money market rate and yields in Europe sank to new record lows. At the end of June, 10-year Swiss government bonds carried a yield of minus 0.53 per cent. This environment bolstered the appeal of equities. The Swiss stock market, as measured by the Swiss Market Index, gained 17.4 per cent over the first six months of 2019.
The gains achieved on the investment of insurance assets amounted to CHF 670.4 million and thus remained almost unchanged compared with the prior-year period (H1 2018: CHF 670.3 million). The interest-rate environment became more challenging once again in the reporting period. Current income fell below the prior-year level to CHF 615.0 million (H1 2018: CHF 677.1 million). This was a direct result of a reduction in equity exposure and a much smaller exposure to bonds denominated in US dollars, which led to a decline in income before currency hedging costs. At CHF 246.6 million, the gains recognised in the income statement were up by CHF 78.8 million compared with the first half of 2018. This was mainly attributable to slightly higher gains realised on bonds and greater increases in value in the property portfolio. Compared with the first six months of 2018, impairment losses went up by CHF 28.3 million to CHF 48.5 million. The currency-related losses of CHF 77.8 million were attributable to currency hedging costs and to currency effects arising on unhedged currency exposures. Thanks to systematic changes in the asset allocation, these losses have come down by CHF 13.0 million compared with the first half of 2018. The gains on investments achieved for insurance assets equated to a net return of 1.2 per cent, which was exactly the same as in the previous year (H1 2018: 1.2 per cent). Unrealised gains rose by nearly CHF 2 billion as a result of the significant fall in interest rates. 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 – rose by a substantial 3.5 percentage points compared with the previous year to 3.9 per cent.
Performance and trends in the regional markets: Switzerland
Basler Switzerland had a successful first half of 2019. EBIT rose by 8.6 per cent year on year to CHF 277.9 million (H1 2018: CHF 255.8 million), despite reserves being strengthened in the life business in light of more challenging interest-rate conditions. This growth was mainly driven by higher gains on investments compared with the previous year and a lower volume of claims in the non-life business. Total business volume was boosted by the life insurance business and grew by an impressive 22.1 per cent to CHF 3,649.7 million (H1 2018: CHF 2,990.0 million).
The Swiss business unit improved its net combined ratio even further (1 percentage point down from the prior-year level) to an excellent 82.6 per cent. The claims environment in Switzerland was very favourable in the first half of 2019. Total premium income in the non-life business fell by 1.2 per cent to CHF 1,042.3 million.
In the life business, the volume of IFRS premiums rose to CHF 2,556.4 million (H1 2018: CHF 1,891.3 million). The withdrawal of a competitor from the segment of comprehensive insurance services in the group life business created a non-recurring effect for Basler Switzerland that produced a sharp increase in single premiums by 116.6 per cent to CHF 1,190.3 million (H1 2018: CHF 549.5 million). Without the uplift from these new customers, the volume of premiums in the traditional life insurance business would have grown only modestly, due to the low-interest rate environment and the restrictive underwriting policy still in place as a result of these conditions. The small growth in the adjusted premium volume was attributable to an increase in premiums collected from existing customers.
The growth of the partially autonomous pension solution Perspectiva continued unabated as it remained in high demand in the small and medium-sized customer segment. The customer base of Perspectiva expanded significantly once again. At the end of the first half of 2019, the product counted 1,985 customers – a 48 per cent increase compared with the end of 2018. This means that around 9,300 policyholders now entrust their occupational pension assets – with an aggregate value of around CHF 660 million – to the Perspectiva collective foundation.
In addition to these strong results, the first half of 2019 was also a success in terms of further progress in the focused implementation of digitalisation and innovation initiatives under the Simply Safe strategy. Basler Switzerland continued to develop the ‘home’ ecosystem through equity investments in Devis.ch, an online marketplace for tradespeople, and Bubble Box, a digital laundry and textile care start-up.
Baloise Bank SoBa (all figures reported according to local accounting standards) also generated solid results in the first half of 2019. Its net profit fell slightly year on year to CHF 12.6 million. The business model combining banking and insurance saw an encouraging trend in asset management mandates. Over the first six months of 2019, the number of mandates grew by more than 10 per cent to 2,366. This is a great success in the current environment of record highs in the stock markets, which proves that the combined positioning of this banking-and-insurance model with its strategic focus on provision for old age and wealth creation really speaks to the customers’ needs.
Performance and trends in the regional markets: Germany
The first half of 2019 confirmed the initial signs of recovery that had emerged in the 2018 financial year and Basler Germany continued on its upward trajectory. EBIT in the financial statements for the first half of 2019 came to CHF 11.9 million and thus exceeded the prior-year figure by CHF 8.3 million. The German non-life business performed particularly well. The segment achieved an excellent net combined ratio of 91.2 per cent in the reporting period (H1 2018: 96.4 per cent). This historically low ratio was mainly attributable to an extremely low volume of claims for Basler Germany in the first six months of 2019. The combined ratio of the German business for the reporting period was therefore well below the long-term target range of 96 to 98 per cent. The business mix in the non-life business developed according to plan: The retail customer business grew, while the proportion of business from industrial clients was reduced through systematic portfolio management. The volume of IFRS gross premiums written in the non-life business fell by 1.5 per cent to CHF 507.3 million (H1 2018: CHF 515.3 million). Currency effects, which had been beneficial in 2018, now had an adverse impact in the first half of 2019. In local-currency terms, however, the non-life business of Basler Germany grew by 2.0 per cent.
The life business was hit by the same currency effects. Gross premiums in the traditional life insurance business fell by 2.2 per cent to CHF 188.9 million (H1 2018: CHF 193.1 million), although the business recorded premium growth of 1.3 per cent in local-currency terms. The new business mix in the life insurance segment remained positive with a very high proportion of risk products and products with investment-type premiums.
Overall, the volume of IFRS gross premiums fell by 1.7 per cent to CHF 696.2 million (H1 2018: CHF 708.4 million). The first half of the year saw not only a consolidation of the positive business trend but also the successful launch of several important modernisation and digitalisation initiatives. Examples include the launch of the strategic project for the modernisation of the non-life business with the introduction of Guidewire, the implementation of the online application process for life insurance sales partners and the implementation of the BiPro claims settlement interface for brokers. Another great achievement was that Basler Germany secured a spot for the third time in a row in the ‘excellence group’ at the TOP SERVICE Deutschland awards. This means that Baloise has been rated one of Germany’s top 50 service providers across all industries.
Performance and trends in the regional markets: Belgium
Following an unusually strong first half-year in 2018, EBIT returned to normal in the reporting period and came to CHF 71.7 million (H1 2018: CHF 137.2 million). In the first six months of 2018, the Belgian business had benefited from a non-recurring effect, as reserves that had been added in the prior years on account of the low-interest-rate environment were no longer needed and were therefore reversed and taken to income. Gross premiums grew by a healthy 3.6 per cent to CHF 701.4 million in the reporting period (H1 2018: CHF 677.1 million). Both the non-life and the life business contributed to this increase.
Gross premiums in the non-life business came to CHF 619.3 million (H1 2018: CHF 598.6 million), a solid increase of 3.5 per cent in spite of negative currency effects. The claims environment in Belgium was less favourable in the first half of 2019. Damage caused by storm Eberhard and a higher number of large claims had a negative impact on the claims ratio. As a result, the net combined ratio deteriorated by 1.1 percentage points to 96.2 per cent (H1 2018: 95.1 per cent).
The performance of the life business was encouraging. Gross premiums written rose by 4.7 per cent to CHF 82.1 million (H1 2018: CHF 78.4 million). The volume of investment-type premiums remained on a par with the strong prior-year figure at CHF 223.3 million (H1 2018: CHF 224.8 million). Financial effects from the completion of the takeover of the Belgian insurance company Fidea NV in July 2019 will be recognised in the 2019 annual financial statements of Baloise Insurance Belgium. The acquisition of this business has strengthened the life and non-life business of Baloise in Belgium significantly and is proving to be a key source of earnings within the Group.
Performance and trends in the regional markets: Luxembourg
In Luxembourg, both the non-life business and the life insurance business grew in the first half of 2019. IFRS gross premiums in the non-life business went up by 4.7 per cent to CHF 85.0 million (H1 2018: CHF 81.2 million), while premiums in the traditional life insurance business grew by 11.7 per cent to CHF 41.9 million (H1 2018: CHF 37.5 million). In the reporting period, Bâloise Assurances Luxembourg S.A. was able to further expand its network of brokers. The systematic implementation of the entity’s strategy for small and medium-sized enterprises and the formation of new partnerships at a local level also contributed to the growth of the Luxembourg business. Investment-type premiums fell by 18.7 per cent because the current market environment is unfavourable for these products, but still came to CHF 501.2 million (H1 2018: CHF 616.7 million). This means that the Luxembourg business unit is now managing assets worth more than CHF 11 billion. Profitability in the non-life business remained very good with a net combined ratio of 92.0 per cent, although the expense ratio was negatively affected by higher personnel and IT expenses as a result of internal restructuring measures. This was the main cause for the year-on-year deterioration in the net combined ratio by 1.1 percentage points (H1 2018: 90.9 per cent).
“Baloise underpinned its excellent position with solid results at the end of the first half of 2019. The result was boosted by a one-off accounting effect related to tax, but the figures are still encouraging even after adjusting for this effect. The same is true for the volume of premiums in the life and non-life business. The outstanding profitability of the non-life business, which is reflected in a combined ratio of 87.4 per cent, marked a particular highlight. The completion of the takeover of Fidea in July was also a great success. Our colleagues in Belgium are now working hard to integrate the new entity into the business as quickly as possible. In addition to excellent operating results in the core insurance business, we are also systematically pursuing the creation and expansion of our ecosystems, with a special focus on transport and the home environment. For our home ecosystem, we recently invested in two new businesses in Switzerland – Bubble Box und Devis.ch. The addition of these new partners further expanded our network of providers of essential customer services. We were also successful in finding third-party investors for our German insurtech FRIDAY. Baloise is well on track to achieve its targets for the Simply Safe strategic phase.”
Gert De Winter, Group CEO