Letter to shareholders

Andreas Burckhardt and Gert De Winter
March 28, 2019
Letter to shareholders on the 2018 financial statements.

Dear shareholders

Andreas Burckhardt & Gert De Winter

Dr Andreas Burckhardt, Chairman of the Board of Directors (on the left), and Gert De Winter, Group CEO (on the right), on site of the Baloise Park.

The continuing success and strong positioning of Baloise underpin its five-year strategic phase, Simply Safe, which is intended to equip the Company to face the challenges of the future. We are now two years into the initiative and the progress made so far towards the strategic goals is extremely promising. The holding company has already received CHF 864 million in cash of the total target amount of CHF 2 billion, we have signed up 304,000 new customers (our target: 1 million) and we are among the top 23 per cent of the most attractive employers in our sector in Europe (our ambition: top 10 per cent).

In 2018, Baloise’s profit for the period attributable to shareholders amounted to CHF 523.2 million (2017: CHF 548.0 million). In the non-life business, we achieved an improved net combined ratio of 91.7 per cent (2017: 92.3 per cent) while in the life business, stable interest rates and further portfolio reallocations led to an improved EBIT of CHF 333.2 million (2017: CHF 306.0 million). In Asset Management, we achieved a net investment yield on the insurance assets of 1.2 per cent (2017: 1.3 per cent).

The change in corporate culture that began two years ago is being vigorously driven forward and we have achieved a balance between the core business that underpins our current business performance and the initiatives that are designed to secure our future. Sustainable value generation requires a strong focus on the core business, but at the same time it needs the core business to be expanded and new, modern, streamlined business models to be introduced. Only by balancing all these aspects can value be continuously created. Baloise also has a strong balance sheet and strong operational profitability, which has been optimised in terms of risk-bearing capacity and earnings opportunities. Ultimately, successful value management relies on having the right corporate culture and the ability to adapt.

The value of Baloise is measured by the return on equities or total shareholder return. It is driven by four, equally important dimensions: profit, capital, cash and the value of optionalities. The last of these is reflected in the development opportunities created by Baloise. They influence the future value and therefore have to be taken into account in the value appraisal. Cash and profit reflect the current earnings power of the Baloise Group, while capital indicates the resilience of the Company’s financial position. The value of optionalities includes the effect of capital spending and initiatives that should generate additional income from existing and new areas of business in future. The Company has a dynamic process in place to ensure that these innovations bring the Baloise business model in line with the needs of the future.

In the existing business model, Baloise is driving forward the adjustment and renewal of its core business with services such as a simplified digital claims handling process, property insurance and cyber insurance. When developing new areas of business, we have four approaches: we invest in young companies, develop our own start-ups, acquire companies and enter into partnerships. For example, we are investing up to CHF 50 million in insurtech and fintech companies in partnership with the investment firm Anthemis. We are working to develop start-up companies with digital insurer FRIDAY in Germany and Mobly in Belgium, a platform for mobility services that focuses on the used car sector. But we are also buying companies such as the removals platform MOVU in Switzerland and Drivolution in Belgium, a company specialising in drive safety for fleets. Finally, we are entering into partnerships such as that with the Baselbieter Kantonalbank and Bank Cler in Switzerland, which offer our insurance services in combination with new customer solutions via their sales channels.

The course is set for the next stage of the strategic phase.

The Baloise innovation cycle is a four-phase process. As well as launching new initiatives, it is important to have a system in place to halt those that are less successful while they are still in their early stages. The more phases an initiative goes through, the more resources and capital expenditure it consumes. The initial, exploratory phase requires little capital spending and generally lasts one to two weeks. Thanks to the strong entrepreneurial spirit that now exists within the Company, the pipeline is currently well stocked. If an idea makes it through the first couple of weeks, it enters a two to three month validation phase which culminates in a “minimal viable product”. This then passes to the third phase – incubation – which can last up to a year. The objective for the end of the incubation phase is to have a marketable product that can be used to invest in growth, i.e. to increase the number of customers and the level of revenue. Baloise can invest in such a phase itself or bring in third parties. At the beginning of this phase, the focus is still not yet on profitability. However, it is important to get as many initiatives as possible from the growth phase onto the road to success.

Over the past year, we have also implemented a number of organisational changes. The demands placed on IT systems at Baloise have always been immense, but are now skyrocketing due to the rapid pace of the innovation process and the new challenges of digitalisation. The Board of Directors of Baloise has therefore created a Group IT corporate division in order to simplify the IT landscape, leverage synergies and drive forward the change process and further digitalisation with the necessary speed and sense of purpose. Alexander Bockelmann has been appointed to the newly created post of Chief Technology Officer.

The first two years of the new strategy have focused on Baloise’s objectives and strategic direction. The experience gathered during this period has been used to make necessary and useful adjustments, setting the course for the coming years. Agility in the implementation of this strategy will be crucial to our future success. With the support of our employees and a strong corporate culture to build on, we believe we are on the right track. Our shareholders should also be able to reap the benefit. As an indicator of the confidence we have in our targets, the Board of Directors will be asking the Annual General Meeting to increase the dividend by CHF 0.40 to CHF 6.00.

Basel, March 2019