Against the background of the crisis on the financial markets, the focus has returned to value and the core operating business. Board Chairman Rolf Schäuble and CEO Frank Schnewlin comment on this key issue.
Switzerland and Belgium and also, with some limitations, in Germany through the building and loan arm of
I might mention is the introduction of various committees of the Board of Directors to ensure efficient monitoring.
By grasping the growth opportunities offered by each individual market, we have created a product mix of insurance, pension and asset formation solutions. In Switzerland and Belgium, where the Group’s insurance business has achieved the necessary critical market mass, the Group already offers complementary insurance and pensions banking with Baloise products. But the motives for this development differ from one country to another. In Belgium, the banking sector is the most important distribution channel for life insurance products. About 60 percent of all policies are sold through banks and their agents. To build up life insurance alongside its strong non-life business, Baloise consistently promotes Mercator Bank as a distribution channel for life-insurance products. In Switzerland it is different: here the emphasis in on crossand up-selling to insurance customers.
Thanks to its healthy finances and operations, the Baloise is able to buck the market trend and make acquisitions. Even in view of the low valuation of potential take-over objects, the Group still applies strict value-based principles to its corporate acquisitions.
The most recent acquisition reflects the Baloise’s growth strategy, which in principle gives preference to organic growth over growth by acquisition. Acquisitions are targeted only where it would be difficult to achieve critical corporate size or significantly improve market share through organic growth. Using an anticyclical approach, the Baloise exploits sharp price swings in the mergers and acquisitions market. However, the purchase price is only one of several criteria used to evaluate a prospective target. Other value-oriented principles include: strategic, financial and cultural fit profitable growth, if possible without diluting earnings acquisitions in core markets – no geographic expansion focus on non-life and sales – life business only if lucrative bank acquisitions only with a sufficiently strong position in the core insurance business
As the bear market has dragged on, asset and liability management has become even more important. In the past, thanks to its relatively large risk capacity, the Baloise Group could pursue almost unlimited, exclusively long-term asset management. As the cushion provided by undervalued reserves has shrunk in the course of the three-year bear market, however, internal and external risk parameters have shifted to the center of attention. In the current difficult stock market environment, supervisory law requires that margins comply with solvency regulations (funding surplus), which, in turn, is an important guideline for investment decisions. Hence, in a project involving all segments, the Baloise has closely harmonized liability performance targets with their effects on asset management.
Product development: Aside from strict cost management, another crucial opportunity for differentiation is customer-specific product design. By focusing on private individuals and small and medium-sized enterprises (SMEs), it is possible to tailor policies to customer needs. Regular feed-back from customer advisors helps to adjust existing insurance solutions and develop new ones. Combined modular products facilitate the desired customization, while at the same time permitting standardization in underwriting and business processing.
Only insurers who have mastered their core business will survive. Rigorous observance of this principle is paying off for the Baloise as it seeks to become a leader in the underwriting business.
The regulatory environment for insurance companies was affected in Switzerland by discussions around the Federal Law on occupational old-age, survivors’, and disability pensions (BVG). Fundamental factors governed by statute are currently not in line with market conditions. For instance, the conversion rate does not correspond with demographic trends, as insufficient account is taken of the trend towards longevity. On the other hand, it was not possible for the investment side to meet the interest rate obligations imposed by the BVG minimum interest rate which currently stands at 3.25 percent (up to December 31, 2002: 4 percent), leading to substantial losses on BVG business for pension funds and life insurers. These underlying conditions, both the conversion rate and the minimum interest rate, need to be adapted once again to suit current conditions, so that BVG business can remain a successful second pillar of provision for old age in Switzerland. Old-age pensions are also a matter of concern in the German insurance sector. The change to the funded method for occupational pensions has been introduced, but major market improvements have yet to be seen. The negative interest margin, that is, the discrepancy between commitments to customers and achievable returns on investments, is the major challenge facing traditional life business in all markets.
Despite the difficult market conditions in insurance and banking, the Baloise Group was able to press ahead with its growth strategy in 2002. The purchase of the Securitas insurance company means that the market position in Germany can be extended considerably, starting in 2003. In view of the current trend towards concentration, and the consolidation of various companies, it was possible to make the acquisition on very attractive terms and without any payment for goodwill.
In the year under review, the Baloise focused on the ongoing improvement of its underwriting result and on strengthening its market position. These efforts were rewarded with a combined ratio of 97.7 percent in non-life. Optimization of processes and products, strengthening of customer relationships using all forms of communication, adapting products to meet the needs of customers, and the introduction of a new sales force structure with three regional offices resulted in additional market share and an improved competitive position. Baloise Switzerland is strongly placed in fourth position on the Swiss insurance market.
Baloise Bank SoBa recorded a profit of CHF 10 million after tax, as compared with CHF 19 million in the previous year, a decline of around 47 percent. This fall in net profit compared with the previous year is attributable partly to
Premium income on the life side was slightly below the previous year’s figure at CHF 116 million. This is attributable to continued uncertainty about future changes in occupational and personal pensions. Thus sales of “Riester” products fell considerably below expectations, as they did in the market as a whole. The company expects demand to catch up during the current year. Life earnings deteriorated in the face of the weak financial markets.
The considerable deterioration of the earnings situation of Mercator Insurance is attributable both to the underwriting shortfall and to the negative result from capital investments with the associated impairments. The company’s loss also includes reserves for the continuing restructuring measures and the planned shedding of around 190 jobs.
This year will see completion of the move to a new administration system, which has been tying up staff and financial resources up until now. Organic growth and growth by acquisition are envisaged to improve cost efficiency.
To selectively reduce risk to desirable levels, management can resort to reinsurance, diversification of its investment portfolio, and hedging instruments. The remaining acceptable risk must be covered by own risk capital, primarily the company’s capital and reserves. Further sources of risk capital include minority interests, reserves for taxes and provisions for future policyholder bonuses.
The capital changes between 1999 and 2001 were marked by a shareholder-friendly distribution policy. Since 1997, roughly CHF 1,853 million was paid out to shareholders in the form of cash dividends, share buybacks and nominal value repayments. In the years 1999 to 2001 alone, such payments came to around CHF 1,067 million.
The Board of Directors consists of 12 members who are appointed by the General Meeting for a term of three years. Each year, one third of the members leave unless re-elected (staggered renewal). Under an age restriction, board mandates end at the latest at the AGM that follows the member’s 70th birthday. The average age is currently just under 60.
The Board of Directors has four committees to assist it in its work. The committees report to the Board of Directors and submit proposals; the Compensation Committee in particular has its own decision-making powers.
The committees appointed by the Board of Directors consist of at least three members reselected annually by the Board of Directors. Further points to bear in mind are that the Chairman and Vice-Chairman of the Board of Directors are ex officio members of the Chairman’s Committee and that the Chairman of the Board of Directors cannot be a member of the Audit Committee. The committees ’ basic tasks are defined by the organizational regulations and the written regulations applicable to the committees.
Based on the Swiss Market Index (SMI), 2002 ranks as the worst year the stock market has seen since 1974. The index lost 27.8 percent in comparison with 2001. Baloise’s share price did not escape the sustained and far-reaching market downturn and lost 64 percent of its value in the course of the year. In comparison both with the Swiss Performance Index Insurance (SXIS), which fell by 51 percent, and with other SMI-listed primary insurers, Baloise’s share price suffered more than average from the poor state of the financial market after regularly having outperformed the industry as a whole over the past few years.
Consolidated capital and reserves per Bâloise-Holding share2 in CHF 78.7 90.5 128 130 97.4 55.8
Daily volume traded shares CHF m 20 40 23 24.5 15.4 21.4
Consolidated Income Statement 51 Consolidated Balance Sheet 52 Consolidated Cash Flow Statement 54 Consolidated Capital and Reserves 56
Cash flow from investing activities (net) - 851.8 - 2,692.8 of which from joint ventures 66.1 - 29.5 in CHF m
Realized profits and losses on investments in business year 2002 include a loss on structured investments in bonds at Mercator Banque S.A. amounting to CHF 71.9 million.
Loans, policy loans and similar financial assets issued by the Baloise Group are shown under the heading Originated by the Group, unless they are held in the trading portfolio.
Cash and cash equivalents comprise cash on hand, demand deposits and shortterm highly liquid investments with maturity periods of up to 24 hours. Cash and cash equivalents are stated at their nominal value. Term deposits are entered under Other short-term investments.
Gross premiums written and policy fees are recognized in the fiscal year in which they fall due. They include the amount required to cover the insurance risk and any loading. Any part of the premium which relates to future fiscal years is deferred under the contract and is included in the unearned premiums reserves in the balance sheet, together with any provisions for premium shortfalls relating to the fiscal year. Premiums which do relate to the fiscal year are referred to as premiums earned.
In 2002 the acquisition of the German insurance company Securitas was announced. The purchase was formally effected per January 7, 2003. This new subsidiary will be consolidated per January 1, 2003, and is thus not contained in the figures of the 2002 business year.
7.5 Movement in unrealized gains and losses (included in capital and reserves)
In connection with the business restructuring, undisclosed reserves at DePfa Beteiligungs-Holding II GmbH were realized and to the greatest extent paid to the parent company. The distributed amount of CHF 59.2 million was repaid to the share premium account of DePfa Beteiligungs-Holding II GmbH in the course of the business year 2002.
Where life insurance policyholders have a right to receive policyholder bonuses on the basis of statutory provisions or contractual agreements, an appropriate provision is set up. The provision consists of the following: Amounts which have irrevocably been set aside for future surplus sharing Policyholders’ share of results disclosed Policyholders’ share of unrealized gains and losses on investments.
The tax on income payable at the end of 2001 and 2002, which is included in other liabilities, amounted to CHF 114.5 million and 29.6 million respectively. At December 31, 2002, the Baloise Group capitalized losses brought forward that can be offset against tax amounting to CHF 151.8 million (subject to statutory regulations; 2001: CHF 58.2 million). Most lapse after five or more years.
Increase due to changes in composition of consolidated Group – –
Liabilities without fixed due date – – – - 38,534.7 in CHF m 30.7.2 Liquidity risk at December 31, 2002
Capital and reserves 83.0 113.4 in CHF m 30.8.1 Financial assets and liabilities not shown at market value
Antwerp Real Estate N.V., Antwerp Other 84.00 F EUR 5.6 –
Baloise Bank SoBa Amthausplatz 4 CH-4500 Solothurn Phone +41 32 626 02 02 Fax +41 32 623 36 92 E-mail bank@baloise.ch www.baloise.ch