Baloise Holding AG

SIX:BALN

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, good morning. Welcome to the half year results 2018 analyst conference call. I am Ervinna, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Marc Kaiser, Head of Corporate Communications and Investor Relations. Please go ahead, sir.

[Marc Kaiser]

Good morning, everybody, and a warm welcome from Bâloise from our end. We're really happy to present you today the half year results 2018. With us here in the room is Gert Winter, CEO; Carsten Stolz, CFO; and Matthias Henny, CIO who would also later would like to answer your questions. Now I would like to hand over to Carsten.

[Carsten Stolz, Head of Finance & CFO]

Thank you, Marc. Good morning, everybody, also from my side, or from our side. For about 2 years at the Investors Day, in October 2016, we launched our Simply Safe strategy. Simply stands for making things much easier for our customers and our partners in terms of products, processes and communications, and safe stands for going beyond insurance, working at -- in alternative business models in order to make our customers more safe. The basic philosophy of Simply Safe is that highly motivated employees generate very satisfied clients and that this brings success and growth. There are also the three goals we set forth to reach by 2021: Cash CHF 2 billion, 1 million new customers and one of the most successful employers.Our synthesized strategy is on its way. We're very confident we are getting there, and that's also -- we can also actually observe that in this half year results. We confirm our strengths and we progressed very well in terms of the strategic intention and objectives.Personal note, it has been never been so exciting to work together with all the colleagues in Bâloise in this time of change and innovation. So we are very satisfied with 2018 half year results. Very solid P&L from CHF 270 million. We are growing in the strategic important non-life segment, and we keep our combined ratio at a very solid level. Our capital strength is huge, also confirmed by Standard & Poor's with a rating upgrade to A plus with stable outlook. Germany for the first time is in the band of the combined ratio that we won, which is 96 to 98. And as I already said, the innovation, energy and the dynamics are huge at Bâloise every month, we release a new innovative insurance solution or we make partnership for a reinvestment in things, and I think, to be honest and to be quite clear, Simply Safe is really -- we are actually addressing, anticipating the challenges of the future with our Simply Safe strategy. Having said that, I would like to hand over to questions, and we would be very glad to answer them.

[Operator]

[Operator Instructions] The first question from the phone comes from the line of Peter Eliot with Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

The first question, I guess, was on earnings, and -- you have acknowledged I think with all of the sort of guidance that you have given before in the last earnings, it's listed as an update. I'm just wondering if you are in any better position to update us on that after another half year? It is very good results, so that's for the life division, and I guess, in non-life, the prior year development was 5.5% when you strip out the reserve strengthening you did in American malpractice. So I'm just wondering whether that's a sort of sustainable level because it wasn't far off from what you had last year? And the second question, Gert, your comment in the industry recently that it's really all about cash flows drop and earnings now. So I am just wondering if there is any sort of an update you can give us on the cash flows in 2018 or what we should expect? And finally, I guess, when we look at the sort of capital and solvency, a number of other insurance companies have given us guidance on sort of target ranges and on what base that are considered to be an appropriate capital structure? I am just wondering whether you can give us any comments there are on what you think Bâloise should look like? And at what point -- if you can't comment specifically, say at what point we might get that addressed in the future?

[Gert De Winter, Group Chief Executive Officer]

Thank you, Peter. I'll try to answer the first 2 questions, and Carsten will take the third question on capital and solvency position. If you look at our life earnings, well, the interest environment has, of course, become more stable in 2018. And that's why we did not have to reserve as much as in the previous years and even some releases were possible because there was substantial reserving in the past. Underlying, I think the CHF 200 million guidance we gave at the Investor Day in 2016 was always meant to be a sort of a bottom -- not hitting the bottom actually, so -- given the difficult industry environment that was actually the CHF 200 million we put forward. If you look at today, I think, and if you look at last year, we achieved in 2017 an EBIT of around CHF 300 million in life, that would be I would say the expectation also going forward. And if you look at non-life and the reserve release, of course, a lot of that was also triggered by reserve in German, in the medical practice. So I think we don't observe any particularity. So we think it's a very stable portfolio and also moving forward. If you look at the cash update, we don't give indeed updates on our 3 targets half year. We always take into account the seasonality. So we do that on a yearly basis. But we are very confident that we will actually reach the CHF 2 billion cash by 2021, and that will be again at a run rate in 2018 of slightly over CHF 400 million. For the third question, I will hand over to Carsten.

[Carsten Stolz, Head of Finance & CFO]

Thank you, Peter, for your question regarding capital. The -- we have given the last SST quota in the context of the full year results 2017, where we've been at 262%. I think largely we were still in the blue zone with regard to that. Yet we need to know that we are underway to THE standup model especially in the Swiss SST modeling context, both for the individual entities as well as for the group. And therefore, we haven't the models as well as the calibrations yet. We don't know exactly where these numbers will turn up, which is something that holds true for the entire industry. So we still have model volatility in -- but given where we are and given how we are gearing the firm, SST currently is not a limiting factor with regards to distribution considerations. And Gert already alluded to the CHF 2 billion, which can go into investments into the future into dividends and share buyback. So on that end, SST is not a limiting factor and will continue without considerations both on the dividend side as well as the execution on the share buyback.More to come, I think in the context of next year's SST reporting, when we will then, by definition, report under whatever FINMA considers to be the appropriate framework by then.

[Peter Eliot, Head of Insurance Sector Research]

Are you able to comment on your capital structure at all or in terms of your use of that type, et cetera?

[Carsten Stolz, Head of Finance & CFO]

The capital structure at the moment is as it is. And I think we were going to have a senior debt bond becoming due in this -- in spring next year. But basically on the capital side, we have pretty much all options available, hence full flexibility.

[Operator]

The next question from the phone comes from the line of Michael Huttner with JPMorgan.

[Michael Igor Huttner, Senior Analyst]

I am -- I have lots of questions. But one remark which you gave in your comments just now, a huge capital strength. That doesn't -- it seems to be different from what -- the way you answered the questions just before for Peter earlier, which was very cautious and guided, and saying, we don't track really, don't worry, but things are fine. And then suddenly you say huge capital strength. And I am kind of thinking, are these 2 different companies. So I just wondered, if you could comment on that? And say, this huge capital strength, how will it benefit shareholders because it's not obvious to me at the moment. So this is my first question. And the others are more detailed. In terms of German reserving, we've had negative surprises in -- this year, and I think last year as well and maybe the year before, which costs I think somewhere between CHF 80 million and CHF 100 million. I just wondered how much more there is to come? Clearly, it's harder to close one of these -- one of the portfolios than I thought. And the second is on digital. Clearly, you are investing a lot and that's a good thing and you're growing your portfolio. I just wondered if you could share your views on the payback of these investments, how quickly these investments will actually lead to profits to shareholders? On the life side, this reserve release of, I don't know, CHF 28 million or CHF 29 million, I just wondered if you could say where it was and where the flexibility is going forward? And how much of these various buckets you have could release more? And finally, and this is more kind of a personal obsession of mine. Maybe you could touch on the trends in motor insurance. I think that's what Peter Eliot was kind of asking in terms of the big underlying reserve release ex the German edition. And how you see these motor trends developing and reserve releases and bodily injury claims or whatever. I'm sorry, for such a big catalog of questions, felt that this is such a good opportunity.

[Gert De Winter, Group Chief Executive Officer]

We'll try to pick all of them, all of these questions up Michael. The first one was again about the capital strength and you're being a bit confused with the message we were sending out. So I will hand over to Carsten again to give a more precise answer.

[Carsten Stolz, Head of Finance & CFO]

Michael, thank you. I didn't want to confuse by no means. Maybe I had to warm up a little bit in speaking. No, but beyond -- I say this with a twinkle in my eyes. The capital strength is -- we have is unquestioned, we have -- more in the back of the capital strength, also we see the raise in the Standards & Poor's rating to A plus with stable outlook. And when I was referring to capital strength then I link this to basically 2 angles. One is the internal view with regard to our ability to upstream cash from the operations, cash being capital and stemming from the earnings power, we have and therefore delivering on what Gert said in the beginning on the CHF 2 billion cash target. So that's one angle that I link our capital strengths to. And the second is, if I look at the capital position we have in many frameworks, the S&P framework, the SST framework, and so on, nowhere capital is a binding restriction for us so far. So that's why I allowed myself to talk about huge capital strength, but maybe I shouldn't have used the adjective huge. I just wanted to make one word of caution, because of the ongoing substantial modeling efforts going on in big building blocks of our balance sheet and business portfolio. And that's why I was cautious on that side because until we have received the binding instructions from FINMA on how to go about it, we don't know what the outcome will be and this field test conversations and calibration considerations from the regulator are still going on. And obviously this is ultimately in their full duty and they will decide about it. Yet I have no doubt that whatever comes out everything I have said before will be more or less remain unchanged. So I hope that puts into perspective the tone of my voice and maybe the adjective I have used.

[Gert De Winter, Group Chief Executive Officer]

Maybe I will jump on to Germany and the question about Germany and reserving levels. Last year we are indeed hit in the medical liability by a number of huge, large claims. We have analyzed the reserving level in Germany, not only for that portfolio but for the whole portfolio intensively, internally and externally. And at this point in time, we are sure that we are reserved appropriately. Of course, if you zoom in on the medical liability, this is a long-term portfolio and you can never exclude that there is still -- there will still be some volatility in this portfolio. But we have put it actually in the realm of unit on the group level where we have the necessary expertise so that the management in Germany can concentrate on executing the strategy as we explained in October 2016 at the Investors Day.Digital initiatives was your third question, Michael. Indeed we see every month a new innovative solution or partnership or an investment coming up. So we're in a very high dynamic of innovation in digital initiatives. Of course, all these different initiatives have to come to maturity. So it's still a bit early to say, hey, what have they really [ brought ] from a financial point of view, especially also because there was cross-selling where the core of the business happens with this new initiative. What we can say is that we are winning new customers with these initiatives everywhere. We have FRI:DAY, the mobile ensuring the link, 2017, over 15,000 customers. We have our YounGo suite in Switzerland, which is a particular insurance suite for younger people, which has generated over more than 10,000 new customers over the last 12 months. We have our single unit insurance, also in Switzerland with more than 15,000 customers won over the last 6 months and the growth rate per rig is actually increasing. So in terms of winning new customers and developing them into our A and B customers, the strategy is working with the digital initiatives.Reserve release in life was, I think, also a question.

[Michael Igor Huttner, Senior Analyst]

Yes, please.

[Gert De Winter, Group Chief Executive Officer]

Yes, the interest environment, as I said, has stabilized in the first half of 2018. In the past years, we have reserved quite a lot. So we have substantially strengthened our life reserves and with a stable interest environment or even a slowly rising interest environment, we can actually release some of the reserves we've built in the past. So increasing interest rates are a positive for us from a reserve release in life, from a P&L, and from an investment point of view. So actually Belgium has been the country where we have released quite some reserves. But on the other hand, we have strengthened reserves in Switzerland. So it's always give-and-take. Net, it has influenced the EBIT in life by CHF 38 million positive. And then your last question was on motor insurance and trends. Stable, I would say, [ for ] what you see is that frequency is stable. If you look at the larger claims with all of the safety devices in the cars and so forth, they actually go down a bit. And our releasing reserves have been over the last years at the rate of 2%, 3% per year, and we believe that is -- that this is sustainable and going forward.

[Michael Igor Huttner, Senior Analyst]

And just on the last point on mergers. So large bodily injury claims are coming down. And implicitly, because it sounds like the smaller parking claims are going up. Is it net positive?

[Gert De Winter, Group Chief Executive Officer]

Yes. The net is more or less stable, I would say, because you're right in terms of physical injury actually with all the safety devices, they go down. So that's positive from a general point of view. But as cars become more and more sophisticated, even the small damages actually cost a bit more. So they equal out a bit. So the good news is that the bodily injuries go down.

[Michael Igor Huttner, Senior Analyst]

And what proportion of your portfolio is bodily injuries and what proportion is damage? I can see the data for various countries is completely different. I was looking at Italy, Italy is 80% in HPL, it looks like Scandinavia is 80% in damage. I just wondered what it is in your portfolio, which is Switzerland, Belgium and Germany.

[Gert De Winter, Group Chief Executive Officer]

Let me hand that question over to Marc Kaiser, Michael.

[Marc Kaiser]

We will get back to you on that.

[Operator]

The next question from the phone comes from Daniel Bischof with Baader-Helvea.

[Daniel Bischof, Head of Swiss Equity Research & Analyst]

Three questions from my side, and the first one is on the Swiss nonlife business. I mean, last year Bâloise had still restructuring of the accident and health businesses. I thought this process will come to an end in 2017. Could you explain what happened in the Swiss nonlife business in the first half? I think there were some changes on the distribution side, but growth was still tepid on the lower end. So what was going on there? And then secondly, -- sorry, again, on the capital strength, maybe from a different perspective, I'm interested to know where you see enough capital deployment opportunities organically or inorganically in the current environment or at which level you will consider additional payout to shareholders? And then lastly, on the life side, just enlighten here, if you could talk a bit about the moving parts, some you have explained already the decline on the savings result, is it simply because of lower realized gains or whether there was any other effect and the risk results, on the other hand, improved a bit more than your self-provided guidance and then also lastly the cost result was a bit weaker. Any comments here would be helpful.

[Gert De Winter, Group Chief Executive Officer]

Let me take the first question, Danny, and I think Carsten will actually pick up the questions, two and three on capital strength and the sources of profit in life. In this Swiss nonlife business, so we have actually also moderate growth in the saturated market, which I think is, very good news. Your question about accident and the health business, it stood at -- it is still a market we look at, and we watch because it's -- we did some cleaning up of the portfolio and reunderwriting of the portfolio in the past 2 years, however, this market has become a bit more technical. And the fact that we have a slight growth in this business is actually due to the fact that we increased premiums given the reunderwriting. So that is actually what happened there. On the distribution model, what we piloted over the last 2 years, we have actually rolled out, beginning of January of this year, which is what we call the omnichannel strategy, which means that the customers are no longer owned by a channel, but the customer chooses how to interact with us and all the channels work together, meaning agents, be direct, be it call center, and so forth, so they all work actually together, and that's quite a big change in the Swiss market. And we are the front runners there in terms of really deploying this omnichannel strategy. Overall, stable, profitable nonlife Swiss market.

[Carsten Stolz, Head of Finance & CFO]

And regarding your second question on capital and deployment, I go back to the CHF 2 billion target that we are pursuing. We had CHF 450 million -- CHF 415 million cash remittance in 2017. At the moment everything points to the direction that we will be able to confirm this level of cash remittance for 2018. Given the dividend and the share buyback that we've executed so far in the first half of this year with dividends around CHF 260 million flowing back to the shareholders and around CHF 120 million from the share buyback. We have returned nearly CHF 400 million to the shareholder in the first half of this year. And obviously, the second layer is investing into the strategy and into new [ bets ] . So I think given the cash remittance that we have had given all angles with regard to investments in dividends and buybacks. There is plenty of deployment opportunities with regard to use of the CHF 2 billion cash flow remittance until 2021.Then your question was on the profit by sources and [ highlighted ] from the life segment. What has happened there, you see a savings result that was lower in comparison to the first half of 2017. One of the major reasons here was that we have to realize less capital gains not the least to put additional reserves, especially in the German business according [ to the prudence principle repair the ] dynamics. And the second part of the equation, which is the reserving is not visible under IFRS profit by sources analysis, so, therefore, you only see on the one side of the coin and this explains a large part the lower savings results in the first half of this year. On the risk results, we are thinking to our expectations that the risk results for the full year will be around CHF 200 million to CHF 250 million; and on the cost side, we don't see any substantial effect or trend. So if we pull all this together, as being said before, gives the CHF 200 million bottom guidance as we've given in the context of the Investor Day, as too cautious in the current environment. So we think that a target area of CHF 300 million for the life EBIT for 2018 is a better ballpark figure.

[Operator]

[Operator Instructions] The next question comes from Jonny Urwin with UBS.

[Jonathan Peter Phillip Urwin, Director and Equity Research Insurance Analyst]

Just a couple, please. I just want to dig into the German medical malpractice bit a little bit. Apologies if these questions are repeating. I missed the very start of the call. So firstly, what was -- can you give us the size of the reserves now for that German med mal book? And could you also give us the duration of the book? And I guess, where do you believe your reserves on the best estimate range are now for that specific book? I wouldn't normally ask you to this level of detail on a specific book, but given the consistent sort of deterioration we've seen, I think it would be helpful. And then secondly, the carve-out of that book into the runoff unit. I mean, is this just -- is it just [ a help that ] the German management focused on the new business in the front book rather than have to manage legacy? Is it to do with presentation, so we can see the progress of that book more clearly? Or is there another reason like you're thinking about divestments or a reinsurance arrangement?

[Gert De Winter, Group Chief Executive Officer]

Well, if you look at the medical liability in Germany, what we've done is an intensive review internally and externally of all reserves, not only the medical liability book, and we are sure that we are reserved adequately. So that's for the whole book. What we have also done in the first half year, if you have seen that is actually reserve strengthening for this medical liability of about -- over CHF 45 million gross. So we -- this is in the reserve book. How long will it take? How -- there will be some volatility in this run of book, that is clear. It's probably around 7 to 10 years. So it's long-term business. So it will still linger on to some extent. What we have done in separating this business and completely exiting this business and in actually addressing it as a runoff unit on the group level is because we already have for a long time a run off group practice, which is specialized with the necessary expertise. So actually it is on one side enabling the German management to focus on the strategy execution away from industry into private customers and SME business, and actually, to have the specialized experts here in headquarters, actually managing and executing this runoff in a good way. That's actually the decision we took.

[Jonathan Peter Phillip Urwin, Director and Equity Research Insurance Analyst]

I guess, maybe just a follow-up on the reserving adequacy. I mean, we've heard that comment before that you're comfortable with the current reserving of the book, and you think it is adequate and then this further deterioration. I wonder if you can just give us more comfort via either anecdotal evidence or some hard numbers around the best estimate range?

[Gert De Winter, Group Chief Executive Officer]

We're actually -- so the amount we put in, in terms of the additional reserve strengthening in the medical liability is the best estimate.

[Jonathan Peter Phillip Urwin, Director and Equity Research Insurance Analyst]

That is best estimate. So you're not reserving with a specific buffer over best estimate for that book?

[Gert De Winter, Group Chief Executive Officer]

No. It's a best estimate reserve strengthening.

[Jonathan Peter Phillip Urwin, Director and Equity Research Insurance Analyst]

Okay. All right. And can you give us the overall size of the reserve now, just for the med mal book?

[Gert De Winter, Group Chief Executive Officer]

We don't disclose normally the reserves by branch. So that's difficult to answer.

[Operator]

The next question from the phone comes from the line of Stefan Schürmann with Vontobel.

[Stefan Schürmann, Head of Insurances and Real Estate]

Just 2 questions. One is to follow-up on the reserve adjustments in life. You mentioned that there was a reserve strengthening in Switzerland. If I take sort of a pooled estimate, I think it was around CHF 100 million. Maybe could you give some more insight here how much was relating to the individual [ on the group ] life? And second question, just a very small one. I didn't find net new money on the asset management side. Maybe some elaboration on that side as well, please.

[Gert De Winter, Group Chief Executive Officer]

Well, net new assets is CHF 354 million that compares with CHF 405 million for the total of 2017. You can actually find that number in the presentation on Page -- just a second, Page 26 on the left-hand side, you can find net new asset number.

[Stefan Schürmann, Head of Insurances and Real Estate]

Okay. And were the assets responsible for the inflows?

[Gert De Winter, Group Chief Executive Officer]

That's the net new asset. That is the inflows.

[Stefan Schürmann, Head of Insurances and Real Estate]

Yes, but what kind of basically assets did produce that inflows, is it fixed income or...

[Gert De Winter, Group Chief Executive Officer]

It's mostly -- most of the assets product primarily are product, as with DrivO, which has been sold quite successfully in the recent past.

[Carsten Stolz, Head of Finance & CFO]

So Stefan, with regard to reserves in Switzerland and reserve strengthening in Switzerland, we have done reserve strengthening for the entire book in Switzerland in order to bring the interest requirement further down. That was one of the major reasons why if you look at the interest rate margin that we disclosed in Slide 20, for contributing to reducing on an overall level of 7 basis points. The book, I think with regard to further detail, I will transfer you to Marc and the team, and they will get back to you.

[Operator]

The next question from the phone comes from Frank Kopfinger with Deutsche Bank.

[Frank Kopfinger, Research Analyst]

I have 2 questions. My first question is a follow-up on Jonny Urwin's question regarding the churn in runoff unit. For me, it was not clear whether your preferred strategy now is an internal rundown, and you keep it over the -- also the sale of this runoff unit could be -- portfolio could be an option. And then secondly, on the life business, if interest rates were stable now from here on, should we expect further positive interest rate developments, or would you still further strengthen reserves for example in Switzerland, which would lead to a negative effect here?

[Gert De Winter, Group Chief Executive Officer]

I think in -- the German runoff decision that we took, again, it was to enable the German management to focus on executing the strategy away from industry into private customers and as [ a mean ] . And as we have this runoff unit already on the group level, is to use that expertise to actually have a solid runoff business. So that's the idea behind it. I think -- towards the future, I think different options are possible, including a potential sale of this book of business. But it's too early to say now. I think we first have to go into managing the runoff in an appropriate way. In terms of life and the interest environment, if interest would remain stable or increase slightly, it would still have a positive effect for us, one, on potential reserve release, which we have strengthened massively in the past, in terms of also recurring income, of course, on new investment, in terms of P&L. So indeed it's -- I think we have seen in the first half year that depending on the situation, depending also on the local situation, you have -- you can have some reserve release or you can have some reserve strengthening, which is required. Overall, a stable or a slightly increasing interest environment would be very beneficial for Bâloise.

[Operator]

[Operator Instructions] The next question is a follow-up question from Mr. Huttner from JPMorgan.

[Michael Igor Huttner, Senior Analyst]

Three questions. The first one is, you pointed out to 7 basis points on Page 20, and if I multiply that by your life reserves in Switzerland, which is CHF 26 billion, I get an answer of CHF 18 million, 1 8 in reserve strengthening. So I wondered if that's roughly the calculation we should be doing? The second is on the total cost of [ total ] investments in these innovation projects. I was just wondered if you could give a total figure and maybe how it breaks down between an investment in -- like a startup, I mean, in an ongoing business and how much is in the combined ratio so far? And then on the medical malpractice, I am not sure it's very fair, but I remember in Zurich in 2012 or '13, had a very significant addition for medical malpractice or hospital claims, and they kind of pulled out of that business. And I just wondered, your portfolio, is that -- is this effectively the Zurich book which you took over back then. It's just out of curiosity to kind of see the moving parts?

[Gert De Winter, Group Chief Executive Officer]

Okay. So I take the first question on Slide 20. The 7 basis points reduction that you see here is, first of all for the entire life book, so it is not only Switzerland, it's the entire life book. And obviously, it is also the runoff of the book, policy is coming to maturity, so there is a mixture of elements in it. The thing that I wanted to say is that part of the reserve strengthening in Switzerland in order to get the interest rate requirement down is also reflected on this, Page 20 is group perspective, and therefore, you cannot directly calculate back from the Swiss reserves to the 7 basis points. But again, as I alluded to before the IR team can come back to you as we said.

[Carsten Stolz, Head of Finance & CFO]

Maybe on the investments in digital initiatives, I think what is important to say is that we actually consider those initiatives on a case-by-case basis. That means if an [ ID ] , even an initiative, even an investment makes sense, then we do that. So we don't have an overall budget where we say, well we're going to invest that much in digital initiatives. It's on a case-by-case basis that the business case has to make sense. I think also digital is certainly not only about technology, I think it's truly a change of mind, a change of behavior in the customer, and it's a change of mind in our culture to actually deal with digital. Digital is by far not a technology thing only. If you would name a number, I think if you look back at our digital initiatives and it also depends on how you define digital, of course. I mean, investing in our core business and our core IT systems to make them more agile and to make them more easy for the customers are also digital investments. I would say run rate of investment is CHF 150 million more or less per year, but again, evaluated on a case-by-case basis. And then the third question, the medical malpractice, if you look at the portfolio we have, it's a [ pretty one ] , it's a pretty small portfolio that we still have. We started writing medical liability in the mid-2000, so 2005, 2006. There was indeed, a big shock in 2012 with Zurich. We did not take over that portfolio at all. Our portfolio is much, much smaller and actually, over the last years, we stopped writing new business. And in 2016, '17 and '18, we exited from everything. So that's actually what happened over the last year. So since the early [ tuppence ] we actually reunderwrite a lot and we exited the whole medical liability. But we still have to deal now with the runoff of that portfolio.

[Operator]

The next question comes from Rene Locher with MainFirst.

[Rene Locher, Director]

Just a quick one on Germany. I remember that you were guiding for a German combined ratio of 96%, 98% in the medium term, now in H1 you are at 96.4%. So my question is, how sustainable is this? And perhaps you can also comment on your business mix in Germany. As far as I know, 1/3 was commercial business, 2/3 was retail business. You have shown a little bit of growth in the shared book that would be my first question. So the second one, we have discussed it already, realized capital gains are more than CHF 100 million lower year-over-year. And I was wondering, of course, it is hard to quantify, but perhaps you can just kind of a -- for guidance what we should expect for H2?

[Gert De Winter, Group Chief Executive Officer]

Thank you, Rene. And I think if you look at Germany the combined ratio target we set was 96% to 98%, and indeed, we reached that in the first half year. If you look at the business, it's solid. So if we don't have big catastrophes or events in the second half year, we are very confident that we will remain at this level, 96%, 98%. The underlying quality of the portfolio is good. So the private business that we are writing more and more has a claims ratio of just below 60%. So that's solid, that's quality and that's sustainable. And if you look at the execution of the strategy, so away from high-risk industry business in which we only took portions of bigger contracts into private customers as an e-business, I think we have seen clearly growth in the business in private customers. So we increased it by 5% in the first half year. So we are generating a lot of new customers in private business, based on 2 elements. We are working together in a very simple solution, with brokers, which generates standard commoditized high-volume business, that's one. And secondly, our Medallion strategy, which is, if we actually release a new product be it in nonlife or life, we always want to be in the top 3 of the comparable side, and this brings, of course, a lot of new customers. So we are clearly increasing our exposure in the industry, and we are clearly increasing our success and business mix in private customers and SME. So the strategy is working.

[Carsten Stolz, Head of Finance & CFO]

On the realized capital gains, I can add -- there has been a decrease compared to first half year of 2017. Although basically in 2017, the number has been rather high. Since we have to undertake very strong reserve strengthening on the life side that was partly triggered by legal requirements, especially in Germany with the [indiscernible], and so capital gains have always to be seen in the context of this reserve strengthening, especially in the life business. So given the outlook that really depends on the interest rates environment. In PNC, it also, of course, depends on the market environment. So it's difficult to give a clear outlook for the rest of the year.

[Gert De Winter, Group Chief Executive Officer]

If there are no further questions then I would actually close it here. Many thanks for your attendance and the questions. I think with the half year results we have, again, proven to build further on our strength. And with Simply Safe strategy, we're actually building the future of Bâloise. Thank you very much.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing chorus call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.