The Baloise Group is more than just a traditional insurance company. The changing security, safety and service needs of society in the digital age lie at the heart of its business activities. The 7,900 or so employees of Baloise therefore focus on the wishes of their customers. The best possible customer service, combined with innovative products and services, makes Baloise the first choice for people who want to feel ‘simply safe’. Located at the heart of Europe, with its head office in Basel, the Baloise Group is a provider of prevention, pension, assistance and insurance solutions. Its core markets are Switzerland, Germany, Belgium and Luxembourg. In Switzerland, the Group also operates as a specialised financial services provider, offering a combination of insurance and banking services. The Group offers innovative pension products to retail customers throughout Europe from its competence centre in Luxembourg. Bâloise Holding Ltd shares are listed in the main segment of the SIX Swiss Exchange.
Annual financial results for 2016 in a nutshell
Profit to shareholders for the period rises by 4.4 per cent to CHF 534.8 million
Shift in the business volume towards the more profitable segments: non-life up by 3.0 per cent, traditional life business down by 5.6 per cent and investment-type premiums up by 5.5 per cent
Improved profitability in the non-life business despite an increase in large claims incurred and the strengthening of reserves in Germany
Net combined ratio improves by 1.1 percentage points to 92.2 per cent
EBIT of CHF 226.1 million and addition of roughly CHF 317 million to reserves in the life business
New business margin in the life business climbs to 21.3 per cent thanks to selective underwriting and improved business mix
Asset management defies uncertainties in the capital markets and persistently low interest rates, achieving a net return on insurance assets of 2.9 per cent
Equity advances by 5.9 per cent to CHF 5,773.7 million; return on equity of 9.7 per cent
Annual General Meeting on 28 April 2017 to be asked to raise the dividend from CHF 5.00 to CHF 5.20
Buy-back of up to three million treasury shares to begin in the first half of 2017
Summary of business performance
Profit and business volume
In 2016, Baloise generated a profit for its shareholders of CHF 534.8 million, which was up by 4.4 per cent year on year. Although the climate of persistently low, or even negative, interest rates and the strong Swiss franc can now be considered normal, they are still an ongoing challenge. Moreover, the strengthening of reserves in the German non-life business reduced profit by CHF 37.9 million. Conversely, profit was boosted by roughly the same amount as a result of a positive accounting effect relating to provisions for pensions and other post-employment benefits (IAS 19) in respect of bank and insurance employees in Switzerland. The strength of the Swiss franc barely changed compared with 2015, which means that currency effects were negligible. The volume of business generated was almost exactly the same as in 2015 at CHF 8.9 billion.
Non-life and life businesses
The non-life division generated premium income reported under IFRS of CHF 3,140.7 million, an increase of 3.0 per cent. At CHF 396.4 million, the non-life business's profit before interest and taxes (EBIT) was up slightly year on year, despite a higher level of large claims incurred and the strengthening of reserves in Germany. A year-on-year increase in the profit on claims reserves had a positive impact. In the life division, the traditional life insurance business declined as had been expected, falling by 5.6 per cent compared with 2015. By contrast, investment-type premiums advanced by 5.5 per cent. This trend reflects the strategy of further improving the business mix in the life business. Reserves were strengthened by a substantial amount of more than CHF 300 million in view of the low interest rates. Despite this strengthening of reserves, the life business also generated a healthy profit although, at CHF 226.1 million, its EBIT was down slightly compared with the very good prior-year figure.
Banking and asset management
The gains achieved on the investment of insurance assets amounted to CHF 1,578.9 million, which was below the 2015 level of CHF 1,685.4 million. The challenging interest rate environment was reflected in the slightly lower recurring income of CHF 1,379.3 million (2015: CHF 1,418.0 million). The gains on investments achieved in these very challenging conditions equated to a net return on insurance assets of 2.9 per cent (2015: 3.0 per cent) and therefore remained broadly in line with the return seen in recent years. As a result of increased unrealised gains, 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 3.1 per cent, representing an increase on the 1.7 per cent net return in 2015. There was further growth in the EBIT generated by the banking business, which rose by 14.0 per cent to CHF 92.1 million. The sharp increase was mainly attributable to a change in the pension scheme at Baloise Bank SoBa, which took effect in the first half of the year.
Baloise continues to have a very robust balance sheet. Consolidated equity went up by 5.9 per cent to CHF 5,773.7 million. This figure was bolstered by the profit for the period and by the gains from the sale of treasury shares after a convertible bond, which had not been fully converted, reached maturity in November 2016.
Explanatory notes on business performance
The volume of business rose by 3.0 per cent in the non-life division and reached a total of CHF 3,140.7 million. While the volume held steady in Switzerland due to the selective underwriting policy for accident and health insurance, Luxembourg (rise of 7.1 per cent), Belgium (rise of 6.6 per cent) and Germany (rise of 2.9 per cent) contributed to the increased volume. The amount paid out for large claims was up on the prior year due to losses across Europe in connection with flooding and hail, various large claims in the industrial business (losses in connection with fires in Germany and Switzerland) and large claims in the Swiss accident business. The claims ratio was also adversely affected by the strengthening of reserves in Germany. Nonetheless, the claims ratio went down overall and the combined ratio improved by a further 1.1 percentage points compared with 2015. One of the contributing factors was the year-on-year improvement in the profit on claims reserves. The net combined ratio stood at 92.2 per cent, underlining the excellent profitability of the non-life business. At CHF 396.4 million, EBIT in the non-life business was down slightly compared with 2015.
Business volume rises by 3.0 per cent
Improved profitability: combined ratio improves by 1.1 percentage points to 92.2 per cent
In the life insurance division, the business volume contracted by 1.7 per cent. This decrease reflected the continuing shift in the business mix away from classic life business, which is no longer a focus because of the ongoing phase of low and, in some cases negative, interest rates. Premium income from traditional life business declined by 5.6 per cent, while investment-type premiums were up by 5.5 per cent. Total premium income, including investment-type premiums, amounted to CHF 5,770.1 million. There were further encouraging increases in the volume of partially autonomous solutions for occupational pensions in Switzerland. Because of the low interest rates, a substantial CHF 316.7 million was added to reserves. Although EBIT in the life business was lower than in 2015, it still amounted to a very healthy CHF 226.1 million.
The positive operating income resulted in an increase in the embedded value of the life insurance business from CHF 3,876.2 million to CHF 4,409.4 million in 2016, which is equivalent to a return on embedded value of 14.7 per cent. The new business margin improved to 21.3 per cent (2015: 9.8 per cent) owing to a higher margin in Switzerland. The value of new business also rose, reaching CHF 68.5 million.
EBIT contribution of CHF 226.1 million despite strengthening of reserves
Premium income in the traditional life business decreases by 5.6 per cent to CHF 3,570.9 million
Strong growth of 5.5 per cent in the life target segment 'investment-type premiums', with premium income rising to CHF 2,199.2 million
New business margin of 21.3 per cent
Banking and Asset Management
The banking business achieved a good profit once again, raising its EBIT by 14.0 per cent to CHF 92.1 million. This was due, in particular, to a non-recurring effect in connection with the change to the pension scheme of Baloise Bank SoBa. Profit would have held steady without this one-off item. As usual, the main contributors to the division's profit were Baloise Asset Management (CHF 44.5 million) and Baloise Bank SoBa (CHF 41.7 million).
Healthy profit contribution from the banking business
Baloise is, and will continue to be, underpinned by a strong capital base. Consolidated equity rose by 5.9 per cent year on year, reaching CHF 5,773.7 million. This figure was bolstered by the good profit for the period and by the gains from the sale of treasury shares after a convertible bond, which had not been fully converted, reached maturity in November 2016. The shares held for conversion had been recognised at a low purchase price. The total receipts from the sale of treasury shares during the course of 2016 amounted to CHF 121.4 million. This resulted in an increase in capital reserves. Further impacts on equity came from dividends paid of CHF 232.0 million and other factors.
Sound balance sheet: equity advances by 5.9 per cent to CHF 5,773.7 million
Return on equity of 9.7 per cent
The gains achieved on the investment of insurance assets amounted to CHF 1,578.9 million, which was below the 2015 level of CHF 1,685.4 million. The challenging interest rate environment was reflected in the lower recurring income of CHF 1,379.3 million (2015: CHF 1,418.0 million). As reinvesting maturing bonds has limited appeal in Europe, there was a preference for currency-hedged US dollar investments and tangible assets offering regular income. The duration of the bond portfolio was further increased. Investment property continues to be a stable source of income. The same applies to mortgages. The gains recognised in the income statement were lower than in 2015 because it was not possible to increase the valuations of investment property by as much as in the previous year. Moreover, impairment losses of CHF 108.2 million gross had to be recognised on financial instruments with characteristics of equity (2015: CHF 72.0 million). The flagging Swiss stock market was one of the contributing factors. Gains realised on bonds were at a lower level than in 2015. They were used in the life companies to strengthen reserves. Currency effects were much more positive than in the previous year; the currency-related losses of CHF 99.8 million were virtually equal to the currency hedging costs. The gains on investments achieved in these very challenging conditions equated to a net return on insurance assets of 2.9 per cent (2015: 3.0 per cent) and were therefore broadly in line with the return seen in recent years. The volume of unrealised gains improved. 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 3.1 per cent, which was above the net return and the prior-year IFRS figure of 1.7 per cent.
Asset management defies uncertainties in the capital markets, achieving a net return on insurance assets of 2.9 per cent (2015: 3.0 per cent)
Investment performance under IFRS climbs from 1.7 per cent to 3.1 per cent
Profit from the non-life business in Switzerland was exceptionally good, rising by 61.1 per cent compared with the excellent prior-year figure. This improvement was due to a higher profit on claims reserves than in 2015. In the life business, profit rose only slightly because of the significant strengthening of reserves required due to low interest rates. The EBIT of the Swiss entities rose by a total of 31.6 per cent to CHF 546.6 million. This was the second-best figure since the introduction of IFRS in 2000. It included a positive non-recurring accounting effect under IAS 19 resulting from changes to the pension funds for Baloise's own banking and insurance employees. The volume of business fell by 5.7 per cent to CHF 4,307.2 million, primarily due to the selective underwriting policy.
In the non-life division, premiums were on a par with 2015 at CHF 1,315.8 million. The selective underwriting policy for accident and health insurance ultimately meant that premium income held steady. Following a low level of claims in 2015, claims incurred were up slightly in 2016, although this was mitigated by a higher profit on claims reserves than in the previous year. The net combined ratio decreased by 6.0 percentage points year on year to 81.2 per cent. This is another excellent result and reflects the success of the strategy of targeting particular kinds of customer.
In the life division, premium income from classic life insurance reduced by 6.7 per cent year on year to CHF 2,879.3 million. One reason for this decrease was that the growth of comprehensive BVG insurance contracts was deliberately restricted by means of a selective underwriting policy. However, the partially autonomous pension solution Perspectiva emerged as one of the fast-growing collective foundations in the Swiss SME segment. Individual life insurance business continued to contract, declining by 5.8 per cent. The decrease was particularly strong in the case of single premiums, which was the result of the restrictive underwriting policy. Annual premiums from new business were on a par with 2015 thanks to the new Baloise Safe Plan family. Business with investment-type premiums contracted by a substantial 31.0 per cent. This was primarily because it was decided not to launch a tranche product in view of the persistently low interest rates. However, the proportion of insurance assets reinvested was in excess of 30 per cent – an excellent figure. Moreover, the combination of banking and insurance products enables us to offer customers a broader range of savings products.
The banking business conducted by Baloise Bank SoBa continued to perform very well. EBIT rose sharply to CHF 41.7 million. This was mainly attributable to plan changes in the pension fund of Baloise Bank SoBa, which had a positive impact under IAS 19. EBIT would have increased year on year even without this effect, which is a very good achievement given the economic environment.
Excellent combined ratio of 81.2 per cent in the non-life business
Stable EBIT contribution from the life business despite strengthening of reserves
Second-best pre-tax profit since the introduction of IFRS
Baloise Bank SoBa: healthy profit contribution and high proportion of insurance assets reinvested
The strengthening of reserves by CHF 54.8 million before taxes, which was carried out in the non-life business in the first half of the year, meant that a loss was generated overall. However, this action laid the foundations for a turnaround in 2017 as it will put the German business on a stronger footing. The total volume of business grew by 1.2 per cent to CHF 1,431.2 million in the year under review.
The total premium income in the non-life business advanced by 2.9 per cent to CHF 755.9 million. In this area, Basler Germany is focusing more on products for retail customers and SMEs rather than on industrial business. The net combined ratio increased by 6.0 percentage points to 109.7 per cent. This was also a consequence of the strengthening of reserves, which had a negative effect of 7.5 percentage points on the net combined ratio. The level of large claims was lower than in 2015 but, at more than CHF 70 million, was still very high. On the basis of the measures already initiated, the aim is to achieve a combined ratio of below 100 per cent in the next few years.
While classic life products decreased by 2.3 per cent overall, despite a very encouraging rise relating to risk products, investment-type premiums were up by 3.4 per cent. The shift towards capital-efficient life products, i.e. risk and unit-linked products, is intentional and is a strategy that has already been pursued with great success for a number of years in Germany. The growth in new business from the new products is more than making up for the absence of 'Riester' business. The sale of the closed life insurance portfolio of Direktion für Deutschland to the Frankfurter Leben Group was approved by the relevant regulatory authorities at the start of January 2017. The sale was completed on 3 February 2017, which means that 87 employees of Basler Versicherungen in Germany are moving to the Frankfurter Leben Group. The portfolio comprises around 130,000 life insurance policies and investments amounting to some EUR 1.72 billion.
Strengthening of reserves reduces profit but lays foundations for a turnaround in 2017
Growth in the target segments
Life portfolio successfully transferred to the Frankfurter Leben Group
Target of a combined ratio of below 100 per cent from 2017
The Belgian business continues to generate impressive growth, with premium income rising by 8.1 per cent overall to CHF 1,561.4 million. The non-life business and investment-type premiums continue to be the growth drivers in Belgium. Owing to the interest rate-related strengthening of reserves in the life business, profit for 2016 was down on the exceptionally good prior-year figure. EBIT declined by CHF 20.0 million to CHF 171.7 million. The non-life business grew by 6.6 per cent, which was above the average for the Belgian market. Once again, there were significant increases for transport and marine insurance. Growth in business with SMEs and retail customers was also encouraging. The net combined ratio fell slightly, by 0.2 percentage points, to 93.4 per cent. This was primarily thanks to the improved claims ratio, which was achieved despite Belgium being affected by storm and flood damage in the spring. These results show that the steady growth of the non-life business is not detrimental to profitability as this business continues to be very profitable. Growth in the life business has stabilised. Classic life business declined by 0.7 per cent, which was primarily attributable to the challenging environment of low interest rates.
At 14.2 per cent, the growth in investment-type premiums was particularly encouraging in 2016.
In view of the low interest rates over the course of 2016, the reserves in the life business were strengthened by an amount of around CHF 50 million, which had a corresponding negative impact on profit in the life business.
Premium income rises by 8.1 per cent
Growth in the target segments
Very good combined ratio of 93.4 per cent in non-life business
EBIT adversely affected by strengthening of reserves due to low interest rates
The business unit in Luxembourg continues to grow, increasing the business volume by 7.7 per cent to CHF 1,605.5 million. The non-life business was up by 7.1 per cent.
This growth was mainly attributable to the strong motor vehicle business. Baloise has made a name for itself in this market, particularly among young drivers, with its Game of Roads and Game of Roads Experience apps, which analyse driving behaviour in a fun way. The net combined ratio improved slightly, falling to 93.9 per cent. EBIT was virtually unchanged. In the traditional life business, the 10.8 per cent growth was predominantly the result of products for biometric risk, while classic savings products were discontinued. Investment-type premiums also generated a strong increase of 7.6 per cent, the main factor being the international life business, which is operated from Luxembourg. The growth of this business outstripped that of the market.