Review of operating performance
Overview, profit and business volume
The COVID-19 pandemic posed huge challenges for the global economy in the first six months of 2020. Nonetheless, Baloise demonstrated a high level of resilience at this demanding time. The Company grew both organically and through strategic acquisitions. This shows that, despite the limitations imposed by the lockdown, the Company upheld its usual high level of customer service, for example by using alternative advisory channels. The level of profitability in the non-life business is also excellent despite high claim payments in connection with the COVID-19 pandemic, which underlines the high quality of the non-life portfolio. Progress in the digitalisation of the business in recent years and the flexibility afforded by Baloise’s corporate culture have enabled the Company to adjust very quickly to the new circumstances and to continue to operate without constraints. The Company remained focused on driving its cultural transformation and expanding its ‘Home’ and ‘Mobility’ ecosystems. Baloise is proving that it is able to achieve its strategic objectives even in challenging circumstances. At the Investor Day in October, the Company will present a plan for the next strategic phase. In the first six months of 2020, Baloise generated profit of CHF 177.7 million (H1 2019: CHF 395.0 million) for its shareholders and a solid business volume of CHF 5,389.2 million (H1 2019: CHF 6,014.1 million). The decline compared with the prior-year period is mainly attributable to non-recurring effects that had a positive impact on the figures for the first half of 2019. Negative factors in connection with the COVID-19 pandemic in the first half of 2020 also had an adverse impact.
The profit attributable to shareholders for the first half-year of 2019 benefited from tax reforms at cantonal level in Switzerland, which resulted in the reversal of deferred tax provisions under International Financial Reporting Standards (IFRS). This reversal provided a non-recurring contribution to earnings of CHF 127.7 million, which was not repeated in the first half of 2020. Gains on investments achieved for insurance assets were down by CHF 54.6 million due to the turmoil in the capital markets caused by the COVID-19 pandemic. Claim payments and provisions set aside in light of the COVID-19 pandemic resulted in net claims incurred of CHF 62.6 million.
Combined Ratio Net Performance (percent, first half of the year)
The biggest proportion of COVID-19-related claims arose in the Swiss business with small and medium-sized enterprises (SMEs) as a result of preventive measures implemented by the Swiss government which forced businesses to suspend operations. Together with the Swiss Insurance Association (SIA), Baloise is advocating a private-public solution intended to ensure broad insurance cover for economic operators in future in the event of a pandemic.
The volume of business enjoyed a one-off uplift of CHF 560 million in 2019 as a result of a competitor withdrawing its comprehensive insurance products from the group life insurance segment in Switzerland. Most of this uplift was attributable to single premiums. The volume of business has therefore normalised compared with the prior-year period, with a fall of 10.4 per cent. It is encouraging to see that the customer support and customer acquisition measures implemented in recent months are having an effect and that, in addition to the acquisitions of Fidea and Athora, the attractive non-life business also generated organic growth of just over 1.1 per cent Despite the preventive measures taken by governments in the Company’s core markets, Baloise was able to successfully continue its business activities for existing customers and its acquisition of new customers.
Despite the challenging nature of the current environment, Baloise is proving its credentials as a solid business with a strong capital base and balance sheet. In the first half of 2020, Standard & Poor’s (S&P) confirmed its rating of A+ for Baloise. The outlook for the German business unit Basler Sachversicherungs-AG was upgraded from ‘stable’ to ‘positive’ by S&P in light of its improved profitability. Although equity fell to CHF 6,208.4 million (31 December 2019: CHF 6,715.6 million) as a result of the dividend payment, the share repurchase completed in March and a downward adjustment of the valuation of available-for-sale financial assets, it remains at a high level.
Performance and trends in the segments
The volume of premiums in the non-life business advanced by a very encouraging 6.9 per cent (10.6 per cent in local currency terms) to CHF 2,419.5 million (30 June 2019: CHF 2,263.6 million). All business units in the non-life business reported growth in local currency terms. The largest share of the premium growth was attributable to the two acquisitions in Belgium. The premium volume of the Belgian business unit grew by 24.8 per cent (32.4 per cent in local currency terms) as a result of the acquisitions of Fidea and the non-life portfolio of Athora, earning the business unit a place among the top 4 providers in this market. Non-life premiums in Switzerland increased by a solid 1.4 per cent. The business units in Germany and Luxembourg reported growth in premium volumes of 2.3 per cent and 5.2 per cent respectively in local currency terms.
Profit before borrowing costs and taxes (EBIT) in the non-life business fell to CHF 135.7 million (H1 2019: CHF 226.1 million) due to coronavirus-related claims and lower gains on investments. After measures to reduce the impact of claims, coronavirus-related expenses amounted to CHF 62.6 million, which is consistent with the estimate of a figure in the mid-tens of millions published at the end of April. Nonetheless, the net combined ratio remained at an excellent level of 91.1 per cent (H1 2019: 87.4 per cent) and is within the communicated target range of 90–95 per cent. All business units contributed to this high level of profitability, although the excellent net combined ratio of the Luxembourg business unit (83.7 per cent) and the net combined ratio of the German business unit (93.1 per cent) deserve particular mention. The latter illustrates the encouraging turnaround of the German business. The Swiss business unit’s net combined ratio was excellent as usual, at 88.6 per cent, despite the adverse impact of COVID-19. The Belgian business unit also performed well with a ratio of 92.0 per cent.
The volume of premiums collected in the traditional life business fell by 24.4 per cent year on year to CHF 2,168.1 million (H1 2019: CHF 2,869.8 million). In the prior-year period, the premium volume had benefited from the non-recurring effect of a competitor in the Swiss group life business withdrawing its comprehensive insurance products from the market. The corresponding uplift was mainly attributable to single premiums and was not repeated in the current year. The volume of premiums therefore normalised accordingly. The interest margin stood at a solid 107 basis points and the risk result in the life insurance business came to a healthy CHF 107 million.
The volume of premiums in the business with investment-type premiums was down in comparison with the prior-year period, falling by 9.0 per cent to CHF 801.6 million (H1 2019: CHF 880.7 million). This decline was due to the persistently challenging market conditions for investment-type products in Luxembourg.
Profit before taxes and borrowing costs (EBIT) in the life business improved by 23.5 per cent to CHF 131.3 million (H1 2019: CHF 106.3 million), which was partly attributable to a slightly reduced need to set aside reserves compared with the prior-year period. The new business margin in the life business was healthy at 44.9 per cent in the first half of 2020 (H1 2019: 34.2 per cent).
Business Volume 2020 (gross) by Strategic Business Units (percent)
The Asset Management and Banking division achieved a solid half-year result with an EBIT of CHF 37.0 million (H1 2019: CHF 42.6 million). EBIT in the Asset Management division remained stable despite the market turmoil, but extraordinary capital investment by Baloise Bank SoBa in the optimisation and improvement of its sales structure, aimed at strengthening its future competitiveness, resulted in a non-recurring charge.
The gains achieved on the investment of insurance assets amounted to CHF 615.8 million and were therefore lower than in the prior-year period (H1 2019: CHF 670.4 million).
The interest-rate environment became more challenging once again in the reporting period. Current income fell below the prior-year level to CHF 571.6 million (H1 2019: CHF 615.0 million). This decline was a direct consequence of the fall in yields to be earned on reinvestments of maturing bonds and mortgages. The net gains recognised in the income statement were up by CHF 64.7 million compared with the first half of 2019 at CHF 311.3 million. Impairment losses increased by CHF 100 million to CHF 148.5 million compared with the prior-year period. This was mainly due to the turmoil in the equity market caused by the COVID-19 pandemic. The currency-related losses of CHF 55.4 million were attributable to currency hedging costs and to currency effects arising on unhedged currency exposures. The gains on investments achieved for insurance assets equated to a net return of 1.0 per cent, which is slightly lower than the figure for the prior-year period (H1 2019: 1.2 per cent). The volume of unrealised gains contracted due to the correction in the equity market and spread movements. 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 – fell by 3.3 percentage points compared with the prior-year period to 0.6 per cent. In spite of the challenging market conditions, Baloise was able to generate an increase in external clients’ assets of CHF 341 million. The total volume of client assets acquired since the start of the strategic realignment in 2017 now stands at CHF 2.4 billion.
Performance and trends in the regional markets: Switzerland
Despite the coronavirus-related increase in claim payments, especially in connection with the suspension of operations of many SMEs, Basler Switzerland had a successful first half of 2020. Profit before borrowing costs and taxes (EBIT) came to CHF 174.9 million (H1 2019: CHF 277.9 million). This decline was mainly due to lower returns on investments and higher claims incurred compared with the exceptionally good previous year. The net combined ratio in the non-life business stood at an excellent 88.6 per cent despite the COVID-19 pandemic (H1 2019: 82.6 per cent). The volume of business declined in line with expectations by 19.2 per cent, from CHF 3,649.7 million as reported in the 2019 half-year results to CHF 2,949.3 million in the 2020 half-year results. This was mainly due to the fact that a competitor in the group life business withdrew its comprehensive insurance products from the market in 2019, which resulted in a one-off rise in the volume of premiums, most of which were single premiums.
The premium volume in the non-life business increased by a solid 1.4 per cent to CHF 1,056.5 million (H1 2019: CHF 1,042.3 million). This is encouraging news, because it indicates that the customer support and customer acquisition measures implemented by the Company have been effective, even under the challenging conditions in recent months.
In the life business, the volume of IFRS premiums fell by 27.5 per cent due to the aforementioned reasons, from CHF 2,556.4 million in H1 2019 to CHF 1,852.6 million. This means that the volume of premiums in the life insurance business has normalised to a level consistent with that of previous years, which have been characterised by a restrictive underwriting policy because of the low interest rate environment.
In terms of the combined insurance and banking business model implemented in conjunction with Baloise Bank SoBa (all figures reported according to local accounting standards), it was clear once again in the first half of 2020 that the strategic focus on insurance and asset management from a single source addresses existing customer needs. The bank’s net profit was down from CHF 12.6 million in H1 2019 to CHF 8.8 million. This is attributable to the non-recurring effect of investments of CHF 4.8 million in the strategic development of the business model. Without this effect, net profit in the reporting period would have been higher than in the prior-year period. Assets under management increased by 12.1 per cent.
Although the coronavirus pandemic did not leave the insurance market unscathed, Perspectiva continued to report an encouraging level of growth as at 30 June 2020. At present, Perspectiva has 2,776 corporate customers with more than 12,000 policyholders in total. This is equivalent to a 40 per cent increase in corporate customers compared with 30 June 2019. Perspectiva currently manages assets of around CHF 837 million (30 June 2019: around CHF 660 million). Baloise also continued to progress measures initiated under its Simply Safe strategy to drive forward the Company’s digital and cultural transformation. Baloise expanded its range of offers in the ‘Home’ ecosystem in Switzerland by investing in and cooperating with Batmaid, a digital platform for domestic cleaning services.
Performance and trends in the regional markets: Germany
The 2020 half-year financial results demonstrate the turnaround of the German business unit and underline its strong resilience. EBIT in the financial statements for the first half of 2020 came to CHF 32.4 million and thus exceeded the prior-year figure by CHF 20.5 million. The excellent net combined ratio of 93.1 per cent (H1 2019: 91.2 per cent) in spite of coronavirus-related effects clearly demonstrates the resilience of the successfully restructured German non-life business. 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 3.7 per cent due to currency effects, from CHF 507.3 million in the prior-year period to CHF 488.8 million in the first half of 2020. In local-currency terms, however, the non-life business of Basler Germany grew by a healthy 2.3 per cent.
The life business delivered a solid performance as well, in spite of the challenging environment. Gross premiums written in the traditional life insurance business fell by 5.1 per cent to CHF 179.2 million as a result of currency effects (H1 2019: CHF 188.9 million), but grew by 0.7 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, despite a fall in investment-type premiums of 11.5 per cent to CHF 93.0 million, equivalent to a 6.1 per cent fall in local-currency terms.
The total volume of IFRS gross premiums generated came to CHF 668.0 million (H1 2019: CHF 696.2 million). This equates to a decline of 4.1 per cent in Swiss francs, but growth of 1.8 per cent in local-currency terms.
The successful turnaround and the positive performance of the business have also been recognised by Standard & Poor’s. The rating agency upgraded its assessment from an A rating with a stable outlook to an A rating with a positive outlook, which underlines the improved profitability of Basler Germany. But the improved strength of the German business unit and its return to a profitable path are reflected not only in the key performance figures. Its popularity with customers also shows that the efforts undertaken in recent years have started to bear fruit. In the first half of 2020, Basler Germany welcomed its two millionth customer and was ranked among the best 50 companies in the TOP SERVICE Deutschland competition for the fourth time in a row. Last time, it even reached a great 14th place in the ranking. The employees of Basler Germany have played a decisive part in achieving these successes and this was reflected in a significantly higher level of employee satisfaction.
Performance and trends in the regional markets: Belgium
The Belgian business unit also proved resilient amid the turmoil of the first six months of 2020 and achieved a significantly better result than in the prior-year period. The EBIT of the Belgian business unit rose by 46.6 per cent to CHF 105.1 million (H1 2019: CHF 71.7 million). The acquisition of Fidea and an improvement in the combined ratio of 4.2 percentage points contributed substantially to this result. The volume of premiums also grew strongly in the first six months of 2020 compared with the prior-year period. IFRS premiums rose by 23.3 per cent to CHF 864.9 million (H1 2019: CHF 701.4 million). This steep increase is attributable to the integration of the Fidea and Athora portfolios. But even excluding these acquisitions, the Belgian business unit still generated a healthy level of organic growth in premiums of 9.8 per cent in local currency terms (3.4 per cent in Swiss francs) in the non-life business and 0.9 per cent in local currency terms (minus 4.9 per cent in Swiss francs) in the life business.
Gross premiums in the non-life business came to CHF 772.7 million (H1 2019: CHF 619.3 million), which is equivalent to a 24.8 per cent increase in spite of negative currency effects. The main drivers behind this rise were the acquisitions of Fidea and the non-life portfolio of Athora.
Compared with the prior-year period, which had been adversely affected by severe weather and large claims, the claims environment in Belgium in the first half of 2020 was benign despite the COVID-19 pandemic – not least because the latter did not result in extraordinary claim payments in Belgium. As a result, the net combined ratio fell by 4.2 percentage points compared with the prior-year period to 92.0 per cent. This excellent figure also shows that the integration of Fidea has been carried out successfully and that initial synergies have been generated.
The performance of the life business was encouraging too. Gross premiums written rose by 12.4 per cent to CHF 92.2 million in the wake of the acquisition of Fidea (H1 2019: CHF 82.1 million). The volume of investment-type premiums exceeded the strong prior-year figure by 2.8 per cent, reaching CHF 229.6 million in the first half of 2020 (H1 2019: CHF 223.3 million).
In addition to this strong business performance, the Belgian business unit also focused on expanding its ecosystems. The product offering for the ‘Home’ ecosystem was expanded substantially through equity investments in the property management platforms ImmoPass and Keypoint. Moreover, the Cyber Safe Family product offered by the Belgian business unit won the international award for the most innovative solution in the Product and Services Innovation category at the Efma-Accenture Innovation in Insurance Awards. The product is the first e-insurance product for private individuals in Belgium which offers customers and their families protection when using social networks, shopping online or generally browsing the internet.
Performance and trends in the regional markets: Luxembourg
The Luxembourg business unit is absorbing the impact of the COVID-19 pandemic well. All in all, IFRS premiums rose by 1.1 per cent to CHF 128.4 million (H1 2019: CHF 126.9 million). Premiums in the non-life business recorded a slight fall of 0.8 per cent to CHF 84.3 million (H1 2019: CHF 85.0 million), but adjusted for currency effects, the segment recorded healthy growth of 5.2 per cent. This was mainly attributable to the recently implemented new sales strategy in the segment for promising SMEs. This underlying positive growth trend was also reflected in the performance of the traditional life business, which recorded a rise in premium volume of 5.2 per cent to CHF 44.1 million (H1 2019: CHF 41.9 million). Adjusted for currency effects, this equates to an increase of 11.6 per cent.
The market environment for investment-type premiums was challenging due to persistent volatility in the market. As a result, business in this segment fell by 12.5 per cent to CHF 438.8 million in the first half of 2020 (H1 2019: CHF 501.2 million).
In spite of the turmoil in the capital markets, the Luxembourg business unit manages customer assets of around CHF 11 billion.
The profitability in the non-life business increased significantly compared with the prior-year period. The net combined ratio improved by 8.3 percentage points to 83.7 per cent (H1 2019: 92.0 per cent). This was due to the fact that fewer claims were incurred in Luxembourg during the lockdown and that the result was not affected by restructuring costs, which had resulted in a non-recurring charge in the prior-year period.
Baloise continued to invest in the ‘Mobility’ and ‘Home’ ecosystems. Investments in the first six months of 2020 were primarily focused on the ‘Home’ ecosystem. In Switzerland, Baloise further expanded its range of offers in this ecosystem by cooperating with and investing in Batmaid, a digital platform for domestic cleaning services. Customers visiting the batmaid.ch website can hire properly insured and qualified cleaning staff online within one minute. The company’s integrated trust service registers workers and takes care of payroll taxes on behalf of its customers. The cleaning staff have the benefit of declared work and social insurance cover. In Belgium, Baloise impressed customers with two new innovations. In collaboration with the Belgian start-up Keypoint, Baloise has developed a new digital assistant designed to simplify the work of property managers. In a bid to address the shortage of professional property managers in Belgium, Keypoint has developed a digital platform that brings all relevant parties together and helps them to carry out property management tasks. The second innovation involved an investment by Baloise in the Walloon start-up ImmoPass, a service provider in the field of technical property checks. Potential buyers or property managers can use the ImmoPass system to assess the technical condition of their building in order to avoid unexpected renovation costs. In the coming months, Baloise will continue to use the fresh input generated by these innovations in order to offer new and compelling solutions to its customers.
“What we have achieved in the first half of 2020 is extraordinary and it makes me proud to know that, as a company, we were able to deliver our services for all of our stakeholders without interruption and at the high level they have come to expect of us. In the past few months, we have mastered a steep learning curve, improved our efficiency and become quicker thanks to the use of new technologies. This strengthens my confidence that we are going to achieve our Simply Safe goals by 2021 and conclude the 2020 financial year with solid earnings and a level of cash generation as robust as before. Building on these strong foundations, we will move into the next strategic phase with ambition and courage. At our Investor Day in October, we will explain what this phase is going to involve.” Gert De Winter, Group CEO