Total premium income 6,632.7 7,274.5 9.7 of which non-life 2,591.5 2,657.6 2.6 of which life 4,058.0 4,633.2 14.2
Consolidated net profit/loss per share in CHF 7.31 - 11.56 –
Market capitalization as at 12.31. in CHF m 8,462 3,042 –
Headquartered in Basel (Switzerland) and with operations in Europe, the Baloise Group is a solutions provider in the field of insurance, provision for the future, and asset formation. The Baloise offers its customers a broad range of products and services through their preferred sales channels. The Group’s strategic focus is on sustainable, profit -oriented growth in its core markets of Switzerland, Germany, Belgium, Austria and Luxembourg. BâloiseHolding registered shares are included in the Swiss Market Index (SMI) and are traded on virt-x under the ticker symbol BALN.
This enables us to achieve sustained rates of high profit growth.
In a turbulent year with a relentless crisis on the international financial markets, the Baloise proved steadfast. Capital and reserves of CHF 3.1 billion and a Group solvency margin of 203 percent underscore its solidity (see pages 29 ff). As a consequence, the Baloise did not have to resort to a capital increase.
This was partly offset by gratifying developments in core business resulting in organic premium growth of 11.3 percent.
The Baloise considerably strengthened its position in the German market by acquiring the Securitas Group domiciled in Bremen, thus raising its premium volume in Germany by 24 percent at the beginning of 2003.
Even for the difficult business year 2002 with its negative result, the Baloise is upholding its shareholderfriendly distribution policy of the past years and will again pay out a dividend.
including the Baloise – underestimated the duration and severity of the crisis. Our strategy, which has always been geared to value, has definitely proved its worth: the asset value of the Baloise remains solid and we have not needed any fresh capital. The fact that we did not buy up everything that was available when the stock markets were booming has paid off. And let us not forget that between 1997 and 2002, we returned capital amounting to CHF
Frank Schnewlin: We had to learn to deal with the new situation. The longer the downtrends persisted, the more important it became to adopt a systematic approach to capital and investment management in line with the situation. Our policy was always to hold on to shares when the markets were doing badly if there was no need to sell.
Even so, we gradually reduced our equity weighting from 20 percent at the end of 2001 to less than 7 percent, or around 4 percent after hedging positions, in February
– enabled us to realize substantial gains on investments and channel them back to shareholders. We still feel convinced that equities are an attractive investment category.
We are not used to such hefty losses from the Baloise. How did it happen?
156 million. On top of that, heavy losses of around CHF
70 million were incurred as a result of flood and storm 2Bâloise-Holding Annual Report 2002
damage in the core markets of Germany and Austria. It was the year that saw the worst natural disasters in the history of the Baloise.
But we have to be frank and admit that our operating performance was not particularly good either in some markets. We are also concerned by the current losses in the life business; our guaranteed, and in some cases legally binding commitments to customers are significantly greater than the earnings on our investments. In an environment such as this no insurer can perform brilliantly, particularly if the situation persists for a long time.
CHF 7.3 billion, which in local currency terms is equivalent to organic growth of 11.3 percent compared with 2001. The non-life sector accounted for around CHF 2.7 billion, while the life business accounted for CHF 4.6 billion. In Switzerland, our home market, we enjoyed growth well above the industry average in the insurance and pensions business. This leaves us feeling very optimistic about the future and shows that the Baloise offers its customers convincing services.
Switzerland was not able to generate any profit. At the beginning of 2003, we took numerous steps to restore profitability. Abroad, there is a particular need for action to address the less-than-satisfactory results of Mercator in Belgium and Baloise Germany. In Belgium, the ongoing restructuring of parts of the non-life business needs to be stepped up. Mercator Bank also needs to be significantly more profitable. In the case of Baloise Germany, the key issues are the integration of Securitas and the restructuring of parts of the non-life portfolio. In specific terms, we shall markedly reduce the potential for major claims and in particular we shall drop contracts and brokers that are not profitable on a sustained basis. The reason for buying Securitas was to bring about growth and a cost-efficient business volume. Efficiency programs are under way in the other companies too; our mid-term aim is a gross combined ratio of less than 100 percent and a satisfactory return on equity in newly-written life business.
Chairman of the Board Rolf Schäuble (left) and CEO Frank Schnewlin during the interview.
Frank Schnewlin: However, we are also making our own contribution to the profitability of the life business. From now on we shall only be writing business very selectively based on profitability criteria and we shall constantly be restructuring our existing portfolio. In the Swiss individual life segment, we are lowering the technical interest rate to 2 percent. Abroad, particularly in Germany, the industry is now having to drastically reduce exaggerated returns. As we are not one of the major players there, our possibilities are naturally limited.
Money Management Company B.V. still holds a block of shares amounting to around 21 percent.
From a strategic point of view, what were the milestones of the past year?
Frank Schnewlin: We generally strengthened our focus on the value of the business, especially the operational earning capacity. One particular point worth mentioning is that from 2003 onward we shall be able to significantly expand our position in Germany through the acquisition of Securitas in Bremen. This takeover further strengthens our core business. We have been aiming for this expansion for quite some time and have now realized our objective on decidedly favorable terms. The move has increased the Baloise Group’s premium volume in the
In particular, we stand by our business model of supplementing the insurance and pensions business with targeted banking services in specific markets. We are continuing to streamline this business model. For example, we shall be refining our underwriting policy on the basis of clear profitability criteria.
Frank Schnewlin: Last year made it very clear that the days of abundant investment income are over for the time being. In future, our value creation will, to an even greater extent, need to come from the operating business. In specific terms, this means strengthening our customer focus, further cost reductions, and systematically concentrating on valuable customer segments, products and areas of business.
Profitability is on everyone’s lips. Is growth no longer on the agenda?
Rolf Schäuble: In the insurance business growth is always on the agenda. The crucial question is whether that growth is also profitable. For us, the focus is still on organic growth. In markets in which we have yet to 4Bâloise-Holding Annual Report 2002
Frank Schnewlin: But in relation to acquisitions too the principle is that we don’t go for growth at any price. Our criteria are value, the right strategic and cultural fit and the avoidance of earnings dilutions. Growth by acquisitions has to be profitable as well. This systematic policy has very much proved its worth in recent years.
Deutscher Ring (Deutscher Ring Bausparkasse). However, we are pursuing different objectives in each market. In
Frank Schnewlin: The crucial point for us is that our customers can get insurance and pensions solutions from a single source. We wish to make the most of existing relationships and supplement them with complementary banking products. At the same time, we also give consideration to third-party products if they create value for us.
What changes have you made over the past year in terms of corporate governance?
Rolf Schäuble: We see this as a very important issue for a well managed company that is aware of its responsibilities. For example, in the 2001 annual report we already voluntarily implemented most of the SWX rules that have since become compulsory. One particular point
If it is at all possible to make any meaningful statements about the outlook for the future in the present environment, what sort of prospects does the Baloise have?
Frank Schnewlin: You are right: at the moment, it is obviously extremely difficult to make any meaningful statements on the outlook for the immediate future. There is currently no sign of any marked turnaround in 2003, particularly on the capital markets. As I have already explained – this makes it all the more important for us to focus on streamlining our operating performance. This is an area in which we have set out to achieve a great deal. In the life business, future earnings will depend very much on the legal framework.
Group. A special thank you goes to Mr. Gaudenz Staehelin, who has been a Board member since 1992. He will be leaving the Board as at the Annual General Meeting 2003.
In 2002, stock markets failed to resume their role as the driving force behind results in the insurance sector. The demand for underwriting know-how and outstanding operational management is greater than ever. As will be seen in the following overview of the company’s different segments, the Baloise Group continued to cultivate its traditional strengths in these fields. The Group’s business approach is rooted in three corporate goals: improving operational earning power and the profitability of investments, enhancing the Group’s positioning as a provider of focused financial services, and raising the
For the Baloise, focused means providing selected customers in attractive markets with a well-tailored mix of insurance, pension and asset management services through efficient distribution channels.
At the Baloise Group, strengthening our operational earnings power and our focus as a provider of targeted financial services go hand in hand. To achieve our goal of the lowest cost ratios in the underwriting business, we need to concentrate on basics and on our traditional strengths, which means on markets products customer segments and distribution channels that offer high value creation and significant growth opportunities.
Focused on markets: In respect of regional markets, the Baloise is excellently positioned. Its presence in profitable markets is the basis for its corporate growth targets. At a technical level, most group companies are profitable or on the verge of profitability, as measured by the combined ratio. However, it cannot be denied that certain markets need to improve their performance in their core business. In some cases, this reflects structural weaknesses, so that any assessment of operational results must be done on the basis of a peer comparison. An example of a structural deficiency is the Swiss group insurance market, in which the statutorily prescribed minimum rate of interest is excessively high. As the effects of the bear market become apparent, this situation is in the process of being corrected, partly through market-wide increases in premiums and partly through pressure on politicians to change the prescribed minimum rate of interest.
Focused on products: The Baloise pursues a focused financial services strategy. In accordance with the principle of “customer share, not market share”, the Baloise offers its insurance customers banking services as part of its so-called cross- and up-selling strategy. In other words, the important point is not the number of customers, but the number of services per customer. The object is to make the most of existing customer potential. For instance, a customer relationship that involves payment of a life insurance policy offers potential for linkage with asset-formation services.
Focused on customer segments: The Baloise Group targets attractive customer groups with the greatest valueadding potential. In practical terms, this means: strong customer loyalty, high product density, and a good riskreturn profile. In accordance with this principle, the Baloise focuses on private individuals and small and mediumsized enterprises (SMEs). It is only selectively active in the larger corporate segments. Professional techniques are used to measure the profitability of customer groups in each customer segment. This scoring method identifies profitable and unprofitable business relationships, triggering measures to enhance profitability.
Notwithstanding the emphasis on efficiency, customer relationships and customer service are always of overriding importance for the Baloise. They give the Group its ability to establish relationships of trust with its customers as well as with its sales partners, and to advise the former and support the latter in their choice of integrated insurance, pension, and asset formation solutions.
Focused on distribution channels: Applying the principle of value to distribution channels opens up a broad selection. Depending on the market and on market practices, we are looking for new ways to reach customers in addition to traditional channels like the sales force and brokers. Aside from the Internet and telemarketing, the Baloise is expanding its cooperation with non-industry service providers, such as automobile clubs, car dealers and banks. (For further information on sales strategy, please turn to page 18)
These maxims apply just as much to the Group as a whole as to each individual employee. They enable each individual to judge decisions and actions according to whether they further the Group’s corporate goals. To succeed in competition, each unit and team needs to generate value and be open to relationships and change.
Bean-counters are out. Creative minds go beyond the common-place. They add elegance and the seeds for tomorrow’s solutions.
The financial market’s positive reaction to the Securitas take-over reflects how well aligned it is to the Baloise’s principles. As the purchase price is lower than the company’s net asset value, all synergies realized in the integration process will be fully accretive to Group earnings. The Baloise Group tends to put a conservative valuation on synergies that may flow from any corporate acquisition. Recent developments in the insurance market prove just how right this cautious approach is.
BAM’s investment advisory services were already up and running in Switzerland and Germany, Baloise’s two most important markets, and thus in a position to provide valuable support for derivative hedging strategies and recommendations for more defensive positioning.
The blend is what counts. Created by knowledge, a love of detail and a sure hand. What may be poison on its own is made beneficial by skilful dosage and combination.
Given the prevailing conditions in the financial markets, only insurers with a truly thorough knowledge of their business will be able to survive. As the example of the Baloise in Switzerland shows, five factors are crucial for success or failure in core business in the strictest sense: underwriting product development claims processing administrative costs sales strength and customer loyalty (for more on this, see page 18)
at an early stage. Thus, small claims, which account for 50 percent of the total, but only 10 percent of expenses, will be dealt with very quickly and simply. The Baloise’s solution in these cases is to simplify the processing of claims. At the other extreme, complex claims involving larger sums account for just five percent of all claims, but 50 percent of expenses. Here, more attention will be paid to processing. The Baloise is utilizing its know-how and its network of independent specialists to achieve better, and in the final analysis also more cost-effective, solutions for all concerned.
No conjuring tricks. However artfully the colors are applied, true change needs substance to build on. As does innovation.
For the Baloise, there is no contradiction between personal customer relationships and the growing use of technology. The Group applies the principle of “high touch – high tech” in sales, i.e., a close relationship with customers, backed up by technology. Customer loyalty and selling power are the driving force behind organic growth. Forming and fostering good customer relationships goes hand in hand with the appropriate technology. Thus, profitable growth and cost efficiency are also important performance targets for each strategic business unit. The conflicting challenges of customer demands, competing sales channels and growth targets naturally cause tensions; and as a means of minimizing them the Baloise sets great store by its multichannel management. The Group optimizes the interplay between the individual channels by consistently applying the following clear sales principles in its operations: securing customer ownership focus on core and growth products sales-oriented compensation models uniform price strategies across all channels strengthening existing and building up new high-growth channels
Securing customer ownership: In selecting sales channels, the Baloise gives preference to those that foster direct customer contact and deepen the customer relationship. A close relationship also brings responsibility. Sales takes this into account by allocating to each customer a customer advisor who is directly responsible for that customer.
Focus on core and growth products: To strengthen the earnings power of its operations, the Group focuses on its core and growth products. These are not only attractive for the insurer in terms of the combined ratio or return. Thanks to low premiums and market-beating bonuses for customers and attractive commissions for sales employees, they are also able to hold their own against the competition. The model of the focused financial services provider complements the range of insurance products with attractive bank products, so that customers can be offered overall solutions for their insurance, pension and asset formation needs.
20Bâloise-Holding Annual Report 2002 2002 was an extremely difficult year for the whole financial services industry. The exceptionally poor performance of the financial markets caused the Baloise Group to sustain value adjustments of CHF 959 million on its investments and currency losses of CHF 156 million. There were also major losses in the core German and
Capital and reserves came to CHF 3.1 billion, with Group solvency reaching a very good 203 percent at the end of 2002. These are clear indications that the Baloise remains on a sound financial footing.
The non-life business experienced healthy growth aided by premium adjustments. The reinsurance market is in the midst of a “hard” phase of the insurance cycle. Premium increases are impacting on the margins of primary insurers.
The sharp falls in the financial markets, flood disasters in Central Europe, and negative interest margins in the life business were the main reasons why the Baloise Group made a loss of CHF 634 million for the year. As a consequence of the continuing slump, holdings of shares as a proportion of total investments were reduced in stages and in line with the Group’s risk policy, from 20 percent at the beginning of the year to around 12 percent at the end of 2002, with mainly derivatives being used to hedge against losses. This shifting of investments meant that extensive gains and losses were realized, and impairments amounting to CHF 814 million were recorded
Premium income from non-life also rose. The total volume of CHF 2.7 billion (2001: CHF 2.6 billion) represents organic growth of 5.3 percent in CHF and 5.8 percent in local currencies. Because of the loss on capital investments, this class made a loss of CHF 203 million. Despite the adverse effects of natural events on claims experience, there was a slight improvement in the gross combined ratio (claims expenditure plus expenses and profit allocations as a percentage of premium income) to 105.2 percent. The combined ratios (gross) of Baloise Switzerland at 97.7 percent, and Deutscher Ring at 95.4 percent, were particularly good, whilst in Belgium and at Basler Deutschland in particular there is a need to reorganize parts of the portfolio. The constant efforts to improve cost-effectiveness can be seen in a cost ratio of 30.0 percent, 0.9 percentage points better than the previous year.
Total 7,274 in CHF m on the remaining share holdings. Thanks to its prudent risk and investment policy, the Baloise Group was able to report a very good solvency margin of 203 percent at the end of the year. The Group recorded a significant rise in premium volumes. With premium income coming to CHF 7.3 billion (2001: CHF 6.6 billion). This represents organic growth of CHF 714 million or 10.9 percent. In local currencies, the growth amounted to 11.3 percent.
The individual regional companies’ contributions to total premium volumes have changed: Thus Switzerland earned 64 percent (2001: 60 percent), Germany’s share of total premiums decreased by 2 percentage points, and the Benelux countries are now contributing 10 percent (2001: 11 percent). “Other countries” were responsible for 2 percent.
The Baloise Group’s capital and reserves on the cutoff date amounted to CHF 3.1 billion (previous year CHF 5.4 billion). The 43 percent reduction is attributable to changes in the value of capital investments, currency losses and losses in the insurance business. The capital and reserves base is satisfactory. Group solvency at the end of 2002 was good at 203 percent.
The embedded value of the life business fell in the year under review from CHF 3,793 million to CHF 1,631 million. The value of adjusted capital and reserves was reduced by the change in value of capital investments from CHF 2,992 million to CHF 1,192 million. Because of the lower future earnings prospects (asset mix and low interest rates) the inherent value of the insurance portfolio fell from CHF 1,341 million to CHF 855 million. It should be noted here that whilst the regulatory changes to group life insurance in Switzerland (reduction in the BVG interest rate to 3.25 percent and changes to the BVG conversion rate) improved the embedded value by around CHF 400 million, this was not enough to offset the negative effects of low interest rates.
Baloise Switzerland recorded strong growth of 17.1 percent in insurance business in 2002, to around CHF 4.7 billion. The life business made an above-average contribution to this growth figure with a 22.6 percent advance.
The rise in premium volumes by 17.1 percent to CHF 4.7 billion is offset by extensive net realized losses and impairments amounting to CHF 205 million. Overall, these factors led to a loss of CHF 232 million (2001: profit of CHF 365 million).
Premium income for non-life came to CHF 1.2 billion, representing a rise of 3.5 percent on the previous year. This increase in premiums is attributable to growth in virtually all non-life classes of personal and commercial business, resulting from more new business along with rate adjustments and reorganizations. In motor insurance in particular, despite a decline in car sales, it was possible to achieve a significant increase in premium income. This was helped by the successful acquisition of new business via the sales force and the distribution partnership with the Touring Club of Switzerland (TCS). On the claims side, Baloise Switzerland was largely spared the consequences of any major natural disaster. Claims management in motor insurance was made more efficient through structural improvements and agreements with network partners. Adverse trends in personal injury claims, especially claims for disablement and loss of support where benefits are payable over a long period, along with changes to reinsurance premiums, had a negative effect on the underwriting result. A risk-aligned underwriting policy,
higher value adjustments for default risks. The increase in value adjustments arises from the new regulations laid down by the Swiss Federal Banking Commission regarding the assessment and valuation of loan assets. The figures also reflect the significantly higher costs arising from the establishment of the Private Banking Center, which affected the accounts for the whole of the financial year for the first time in 2002.
Against the background of stagnant economic growth, efforts are continuing to strengthen our insurance business and operational efficiency through carefully targeted measures. The emphasis is on reorganizing the non-life business and on making the life business more profitable. Implementation of the “focused financial services provider ” model is continuing, with the model geared towards market conditions so as to further enhance profitability.
Workforce* Number of employees 3,944 3,976 0.8 * incl. corporate functions
The transfer of the motor and commercial insurance business to Basler Deutschland resulted in a marked decline in non-life premium income. Because of higher risks, we can expect premium levels for natural hazards to rise. The combined ratio (gross) came to 95.4 percent; nevertheless, maintaining efficient cost structures remains a top priority. Premium income in the life sector dropped by 4.2 percent in local currency. Single premium policies recorded a decline due to the market situation; premium income from business concluded by the field staff on the other hand rose thanks to a boost of the sales force numbers. Unit-linked life insurance products also registered an increase. We can expect a positive impetus in the current year from the state promotion of private pensions as well as an upswing in the field of occupational pensions.
Measures to optimize Deutscher Ring are continuing this year. The aim is to strengthen operational earning power and to keep the combined ratio for non-life business below 100 percent.
By acquiring Securitas, the Baloise is continuing to pursue its strategy of value-adding growth in Germany.
The German insurance industry was hit by extensive claims in 2002. Natural catastrophes and the accumulation of major claims cases were reflected in companies’ losses incurred. The flooding in the former East Germany alone could cost the German economy as much as EUR 9.2 billion, and insurance companies around EUR 1.8 billion. The life business was affected by the beginnings of a changeover to the funded method for pensions (“Riester” pension). Because of the complexity of the products, and the imminent introduction of pension funds, however, sales of annuity products were inadequate.
Mercator Insurance continued its efforts to reduce costs and improve profitability in 2002. Moves have been introduced to tighten the structure with the creation of four business units, to reorganize the motor and fire business, and to strengthen distribution with 30 financial service providers.
The life business was characterized by negative stock market movements. Investment-linked products, which according to IFRS rules do not fall into the premium-income category, registered an above-average surge of around 50 percent.
Mercator Bank nevertheless posted a loss in the year under review, caused partly by a reduced interest margin, but mainly by the negative results from capital investments and losses from structured investments in bonds. The balance sheet total at December 31, 2002 came to CHF 4.4 billion.
Gross premium income in CHF m 726.8 713.2 - 1.9 of which life in CHF m 163.7 154.0 - 5.9 of which non-life in CHF m 563.1 559.2 - 0.7
The insurance sector in Luxembourg benefited from farreaching tax cuts and stable private consumer demand in the year under review. Overall, Bâloise Assurances was able to gain further market share and managed to break even.
In the non-life sector, premium growth of 8.5 percent in local currency was recorded. This increase is due partly to premium advances in motor insurance in the previous year, which did not take full effect until the year under review. On the other hand, the number of new policies rose thanks to generally good new vehicle sales and further distribution improvements. The combined ratio (gross) came to 109.3 percent. Higher loss ratios for comprehensive motor and legal protection insurance will lead to rate adjustments in the course of this year. The focus for the current year is also on strengthening the fire and property insurance lines, so as to lessen the predominance of motor business in the Bâloise Assurances non-life portfolio.
This category combines companies for reinsurance, special investment forms, financing and participations. Worth mentioning for the year under review is the extensive partial amortization of goodwill arising from the phased purchase of the remaining minority shareholdings of Mercator Insurance. The amortization of CHF 70 million is based on extensive impairment testing. Moreover, the Group’s holdings in the asset management company RMF were sold to the British Man Group at a profit of CHF 45 million.
The company is seeking to improve its key underwriting figures further through organic and external growth.
particularly losses on foreign currency bonds – made a difference of CHF 156 million.
The continuing downward trend in the stock markets once again left its mark on the Baloise Group in 2002. Over the course of the year, all the major stock market indices showed substantial falls (Swiss Market Index (SMI): -27.8 percent; MSCI EMU Index: -33.4 percent; MSCI ROW Index: -19.2 percent). Following the lead of corporate investment activities, consumer demand also began to slow in the year under review. Corrective rate adjustments by the major central banks took interest rates to an all-time low, with corresponding effects on the yield markets (returns on 10-year benchmark bonds: Switzerland: - 1.2 percentage points; Germany: -0.7 points). In the past year, currencies moved to the detriment of the Baloise, which prepares its financial statements in Swiss francs. On the cut-off date, the reference currency, the US dollar, was 29 Swiss cents or 17 percent lower than at the start of the year. The euro fell by 3 Swiss cents or 2 percent.
Derivatives transactions carried out to hedge against foreign currency and share price losses resulted in an increase in holdings of derivatives to CHF 213 million by the end of the year. Losses on shares and foreign currencies were thus offset by CHF 59 million. In view of the uncertain developments in the stock markets and the low interest rates, holdings of short-term and liquid assets rose to CHF 3.5 billion.
The impairments amounting to CHF 959 million included over CHF 100 million on private equity investments, mainly in Belgium. As the private equity program is still in an early stage, it is not possible to make any meaningful statements about the returns achieved.
Changes in the value of hedge fund investments resulted in a 5.1 percent price increase expressed in US dollars. Investments in this category are characterized by a wide range of different investment styles.
The Baloise Group has practised Group-wide risk management since 1998. This system has the task of ensuring a balance between the company’s individual and portfolio risks and its risk capital. The Group’s overall risk position as well as that of each individual business unit is actively managed in order to compensate for fluctuations and other events.
The most serious risks associated with capital investments include: market and stock market risk (equities, real estate) interest rate risk (bonds) exchange rate risk (euro, dollar) credit and counterparty risk (mortgages, loans, bonds)
Both the central corporate units (Risk Management, Controlling, Reinsurance, Capital Investments, Accounting, Actuary) and the corresponding departments of the local business units are involved in the risk management process. Together they investigate and evaluate the risks of the local units in annual asset & liability analyses. This procedure ensures that all essential information pertaining to risk is available at both the local unit and Group headquarters and is incorporated into the management process.
The events of 2001 and 2002 have demonstrated the necessity of integrated risk management. For this reason, in the year under review the Baloise further expanded and refined its risk management processes. In the past two years, the focus of risk management has shifted from a strategy approach to quick and efficient risk controlling. Internal risk indicators and numbers specified by supervisory law, e.g. solvency, can be calculated on an ongoing basis and evaluated for each individual company and the Group as a whole.
In the year under review, the continuous decline in equity prices and some of the heaviest floods in Germany and Austria in centuries gave rise to a situation in which the Group had to take precautionary measures to safeguard its risk position. Selective equity sales and hedges ensured that a proper balance was maintained between the Group’s risk and capital and contributed to safeguarding the Group’s solvency. As a consequence of these measures, the Group’s share ratio fell from 18 percent in July 2002 to 12 percent as of December 31, 2002. Through the use of hedging instruments, the exposure to equity loss was further reduced to an acceptable level.
An integrated risk management system must analyze and manage as much corporate risk as possible. Hence, it is necessary to embrace very different parameters of varying relevance and varying application. Together, these parameters and information provide an overall picture of the current situation, on the basis of which management formulates the appropriate measures.
The effects of the management measures taken to safeguard the solvency of the Group as a whole and of the individual Group companies can be demonstrated by the example of the development of the share ratio held by Baloise Life Insurance Switzerland. In the first six months of 2002, the ratio moved only slightly as the risk management level which induces action had not been reached.
Apart from its internal risk management, compliance with the regulations under supervisory law has to be assured at Group and individual company level. In IFRS terms, the Group achieved a consolidated solvency margin of 203 percent at December 31, 2002.
The Baloise Group’s commitment is motivated by its conviction that companies have a responsibility towards society. Insurance companies in particular, who in the course of business are confronted for instance by natural catastrophes, cannot simply shrug off ecological and social concerns. The Baloise is convinced that the role of the insurance industry in dealing with risk makes a substantial contribution to society’s sustainable development. Used to dealing with customer relationships that stretch over very long periods of time, in particular in the life insurance business, long-term planning – a core component of any sustainability consideration – is a normal part of everyday business at the Baloise.
The Baloise Group’s active interest in sustainability dates back to the mid-90s. In 1994, Baloise Switzerland, the parent company at the time, published its first ecoaudit. Other milestones followed in the next years: signatory to the UNEP Insurance Industry Initiative, an annual Group-wide environmental audit, the launch of the Baloise’s own “Sustainability” security portfolio within the Baloise Foundation for Pension Funds in October 1999 and the publication of the first environmental report in 2001. Among the outstanding events of the year under review was the decision of Ethos and the Swiss Agricultural Credit Cooperatives (Raiffeisenbanken) in spring to include the Baloise in their respective investment universes for sustainable investments, as well as inclusion in the component pool for the Dow Jones Sustainability Index and in the FTSE4Good Index of the “Financial Times”. The Baloise regards these developments as an affirmation of the years of effort it has put into ecological and ethical concerns.
The Baloise focuses in particular on the sustainability of investment and insurance products. With its Sustainability investment portfolio, based on the SAM Sustainability Rating™, the Baloise offers pension funds in Switzerland the opportunity to invest retirement assets in shares in the Dow Jones Sustainability Index. This index is comprised exclusively of companies that seek to ensure their long-term corporate success by integrating ecological and social as well as economic aspects.
One product offers added sustainability benefits by combining motor vehicle insurance policies with a project to save the rain forests: for every new motor vehicle policy signed the Baloise buys two shares in Precious Woods, which runs a reforestation project in the South American rain forests. In doing so, the Baloise combines CO2 neutralizing measures in the southern hemisphere with car insurance in the northern.
For further information and news about these and other activities in the sustainability field, please consult the specific Baloise reports and the Baloise website.
Baloise is one of Switzerland’s most highly rated companies. Human Resources want to boost this by a series of concrete measures. Motivated and committed employees are the prime capital for a successful future.
As at December 31, 2002, the Baloise workforce amounted to a total of 8,703 employees. By their hard work, they proved their high commitment level towards the company. Indeed, the relationship of trust between the Baloise on the one hand and its customers, shareholders and the general public on the other hinges on the motivation and dedication of the company’s workforce.
In a comprehensive survey on employee satisfaction conducted by the Swiss business magazine “Cash” at 1,000 companies in Switzerland and involving 40,000 employees, the Baloise ranked 11th. The company interprets this as a reflection of its ongoing efforts to foster an employee-focused corporate culture; it is also motivation to further improve its standing as an employer of choice. Measures recently realized include the introduction of flexible working hours based on a yearly total required and the establishment of an in-house crèche at the Head Office in Basel.
A further factor in promoting job satisfaction is the attractive salary system including variable components.
In the past year, the Baloise defined three fundamental values applicable to the entire Group under the headings “Create Value”, “Foster Relations” and “Bring About Change”. They are closely linked to the Group’s vision and strategy and are seen as directly influential on the business results. In the year under report, 150 executives were enrolled in the corresponding project during a management meeting. In 2003, introductory and implementation courses will be held to familiarize all Baloise Group employees with these values.
However, the issuing of guidelines and codes of best practice also brings a danger that companies may content themselves with conforming to these edicts as far as possible, without addressing corporate governance in any depth or seeking solutions tailored to the companies in question. First and foremost, corporate governance needs to be practised rather than portrayed in grandsounding words. The first section in this chapter therefore focuses on steps actually taken.
The second section then essentially follows the structure of the SWX guideline with the aim of increasing transparency and hence comparability with other companies.
March 1, 2002 saw Frank Schnewlin take over as the Baloise Group’s new CEO. Rolf Schäuble will once again be concentrating full-time on his role as Chairman of the Board of Directors – as he had done when he began working at the Baloise.
In 2002, shareholders’ participation rights were improved by two changes to Article 14 of the Articles of Incorporation. The required shareholding threshold of CHF 1 million in nominal value in order to have items included on the agenda has been lowered to CHF 100,000; in the past, such requests had to be submitted at least eight weeks ahead of the General Meeting, but for the benefit of shareholders this time limit has now been reduced to six weeks.
While an announcement made in December 2001 puts the size of the shareholding of the Dutch firm Strategic Money Management Company B.V. at around 21 percent, the stake held by BZ Group decreased in several stages from 20.1 percent to 8.2 percent at the end of 2002 – partly as a result of the sale of BK Vision to Zürcher Kantonalbank. Having risen above the 5 percent threshold in July, Zürcher Kantonalbank announced in December 2002 that it was back below the threshold.
Based on the most recent disclosure reports, the Baloise had the following significant shareholders on December 31, 2002: Size of shareholding Disclosure Significant shareholders (in percent) report
The share buybacks and nominal value repayments in the years 2000 and 2001 had a strong impact on the Bâloise-Holding’s capital and reserves. In the 1999/2000 and 2000/2001 reporting periods, share buybacks led to a reduction of share capital by CHF 1.9 million and CHF 1.4 million respectively. The nominal value repayment in 2001 to the amount of CHF 9 per share lowered the share capital by CHF 49.8 million to CHF 5.5 million at the end of business year 2001/2002. Despite these capital transactions in favor of our shareholders, free reserves were substantially raised in the past three years.
Since the 1:10 split in 2001, the ordinary share capital of Bâloise-Holding has consisted of 55,307,150 registered shares entitled to dividends with a nominal value of 0.10 CHF each. Further information on Baloise shares can be found in the chapter on participation rights.
Bâloise-Holding does not have any authorized or conditional capital. There are no participation certificates, dividend rights certificates or convertible bonds relating to participation rights of the company or options issued by the latter. For further details, readers are referred to page 132 in the financial statements and the notes.
Full details of the changes in the consolidated capital and reserves in fiscal 1999, 2000 and 2001 are shown in the statements of changes in consolidated capital and reserves in the relevant annual reports (Annual Report 1999: page 74, Annual Report 2000: page 47, Annual Report 2001: page 64). For the statement of changes in capital and reserves for fiscal 1999, the 2000 Annual Report contained a restatement on an IAS basis because of the changeover to IAS standards.
Rolf Schäuble, Chairman CH 59 1993 2005 Walter G. Frehner, Vice-Chairman CH 70 1989 2004 Christoph J. C. Albrecht CH 65 1985 2003 Andreas Burckhardt CH 52 1999 2003 Dietrich J. J. Forcart CH 67 1973 2003
Georg F. Krayer CH 60 1995 2004 Werner Kummer CH 56 2000 2004
Jean-Marc Rapp CH 52 1999 2004 Eveline Saupper CH 45 1999 2005 Gaudenz I. Staehelin CH 67 1992 2003
investment policy and investments in real estate for the Group’s own use at Head Office.
The Compensation Committee determines the structure and amount of compensation for Board members and the salaries of the members of the Corporate Executive Committee. In the incentive plan, it defines the overriding Group objectives and their attainment, and it approves the rules governing compensation for Corporate Executive Committee members and monitors their correct application. In the year under review, the Compensation Committee adopted a share participation plan – in addition to the existing option plan and leveraged share plan – that makes remuneration in shares without combination with a loan possible. Furthermore, the range of choice in the mandatory part has been extended, so that as of 2003 shares or options can be selected.
In 2002, an Audit Committee was appointed which assists the Board of Directors in tasks which cannot be delegated relating to supervision and financial monitoring (Art. 716a Swiss Code of Obligations) by forming its own judgement on the organization and functioning of the internal and external monitoring systems and on the annual and consolidated financial statements. The Audit Committee reviewed the Group statements for the business year 2002 both with the management and with the external auditors. As a result, the Audit Committee recommended that these audited annual statements be incorporated in Group’s Annual Report for the business year ended on December 31, 2002. The Board of Directors accepted this recommendation.
Last year, the Board of Directors as a whole met five times, while the Chairman’s Committee and the Investment Committee met seven times. The newly created Audit Committee held three meetings and the Compensation Committee met on two occasions. Meetings of the Board of Directors as a whole are regularly attended by members of the Corporate Executive Committee, whereas meetings of the Audit Committee are mainly attended by the Group CFO, the Head of Internal Audit and representatives of the external auditors.
To facilitate assessment of the Baloise’s compensation policy, the focus is on gross compensation figures, rather than on tax figures.
www.baloise.com Profile/Corporate Governance/Rules and Regulations www.baloise.com Profile/ Organization/ Corporate Executive Committee
Mortgage loans CHF 650,000 * see “Change of control and countermeasures”, page 39
Any annulment of restrictions on voting rights imposed by the Articles of Incorporation will require the agreement of at least three quarters of the votes represented at the General Meeting which must also account for at least one third of the total shares issued by the company. This qualified majority is also required in the cases envisaged in Art. 17(3) letters a–h of the Articles of Incorporation. Otherwise, subject to any compelling statutory requirements to the contrary, resolutions will be adopted by a simple majority of votes cast.
Any shareholder may also transfer his/her voting rights to another shareholder by written power of attorney (Articles of Incorporation, Art. 16).
There are no opt-out or opt-up clauses, which means that after any acquisition of 331/3 percent of all Baloise shares, a mandatory takeover offer must be submitted to all remaining shareholders.
However, there are two different types of change of control clauses: Since 1999, agreements have been in place with the members of the Board of Directors and the Corporate Executive Committee of Bâloise-Holding whereby in the event of a change of control compensation will be paid for the intrinsic value of the options (contractual options limited to 2004), subject of a guaranteed minimum.
For the Board of Directors and the Corporate Executive Committee combined this amounts to CHF 7.6 million.
Agreements also exist with the members of the Corporate Executive Committee and other members of senior management whereby severance compensation payments will be triggered in the event of notice being given by the employer (or under certain conditions by the employee) within a certain period of time following the change of control. The amount of these payments is within the usual market framework.
Corporate Governance page 34 www.baloise.com Profile/Corporate Governance/Rules and Regulations www.baloise.com Profile/Corporate Governance/Rules and Regulations
The Baloise has an Audit Committee made up of independent members qualified in the fields of finance and accounting. The Audit Committee monitors the coordination of the internal audit, risk management and compliance with the external auditors effectiveness and independence of the external auditors. It also verifies the independence of the external auditors. The following fees were charged by PricewaterhouseCoopers in the year under review. The figures refer to its Group-wide activities.
The Baloise Group provides information for shareholders, potential investors, employees, customers and the public on as comprehensive, open and regular a basis as possible. This enables us to foster an understanding of our objectives, strategy and business activities.
Walter G. Frehner, Chairman Christoph J. C. Albrecht, Vice Chairman Dietrich J. J. Forcart
Last year saw a significant increase in the Baloise shares ’ free float. While the shareholding of the Dutch firm SMM Company B.V. still stands at around 21 percent, the stake held by BZ Group decreased in several stages from 20.1 percent to 8.2 percent at the end of the year – partly as a result of the sale of BK Vision to Zürcher Kantonalbank. In July, Zürcher Kantonalbank (including ZKB Finanz Vision, the former BK Vision) held a stake of more than 5 percent in the Baloise, but thereafter this shareholding successively decreased and has been below the 5 percent threshold since December. Deutsche Bank also briefly held a stake of 5.25 percent in July, but soon reduced this
Swiss Market Index (SMI) 117 2 adjusted after 1:10 split of July 24, 2001 commitment again. The table on page 46 provides information on the current composition of the circle of shareholders as of March 31, 2003. In parallel with the reduction in shareholdings held by our major shareholders, SWX revised our free float weighting in its indices as at October 1. The Baloise has since been included in SWX’s index calculations with a free float of 100 percent.
For many years, the Baloise has been pursuing a consistent, earnings-geared dividend policy. Traditional cash dividends were frequently supplemented by nominal value repayments, share buybacks and options. The Baloise basically strives for a sustained distribution of a third of its annual result, taking into account also the self-financing of corporate growth. The Group’s adequate operating performance and intact operating profitability will also enable it to distribute a cash dividend for 2002. In light of the reported loss, the Board of Directors is proposing a reduced dividend in comparison with the previous year amounting to CHF 0.40 per stock. The proposal for this year’s dividend will be submitted to shareholders at the General Meeting on May 16, 2003 for approval.
Dividend per registered share in CHF 1.4 1.9 2.4 2.4 2.4 0.44
ROE on capital and reserves as shown in the balance sheet3 in percent 6.6 7.2 7.4 8.5 6.3 - 15.0
Annual internal rate of return (IRR)8 in percent 45.0 18.1 20.9 3.0 - 21.2 - 39.9
Significant shareholders at March 31, 2003 Total Share of holding voting rights
Income Statement 130 Balance Sheet 131 Notes to the Financial Statements 132 Report of the Statutory Auditors 134 Proposed Allocation of Available Earnings 135
Amortization of intangible assets and depreciation of tangible non-current assets 12/13 - 153.3 - 184.8
Net profit/ loss after tax before minority interests 406.1 - 631.6
Earnings/loss per share (identical values for “basic” and “diluted”) 25 7.31 - 11.56 in CHF
Policyholder bonuses credited and provision for future policyholder bonuses 17 4,197.7 3,685.0
Realized gains and losses on the sale of investments 7 - 149.4 806.5
Other movements in operating assets and liabilities - 257.3 - 229.2
Cash flow from increase in share of investments held - 38.4 - 6.5
Acquisition of participating interests in associates (net) - 20.1 - 73.8
Cash flow from financing activities (net) - 538.8 55.6 of which from joint ventures - 50.0 - 4.9
Effect of foreign exchange rate changes on cash and cash equivalents - 39.4 - 27.3
Deferred acquisition costs charged to capital and reserves – – – 255.8 – 255.8
Consolidated loss for the year – – – – - 634.5 - 634.5
Premiums written and policy fees for own account 3,819.1 4,492.3 1,520.5 1,507.9
Change in unearned premiums reserves for own account 10.3 1.0 4.6 - 17.3
Premiums earned and policy fees for own account 3,829.4 4,493.3 1,525.1 1,490.6
Realized gains and losses on investments (net) 353.7 - 205.1 - 265.6 - 320.8
Income from other services 24.3 25.9 128.1 92.8 of which between geographical segments 64.7 64.5 168.1 208.0 of which income from associates – – 15.4 68.1
Change in actuarial reserve (life) - 1,229.6 - 1,993.2 - 128.6 - 136.5
Surplus and profit allocations to policyholders - 107.5 42.8 - 55.5 - 12.5
Administrative and other operating expenses - 460.1 - 482.5 - 400.0 - 324.0
Net profit/ loss by region 364.7 - 232.3 34.3 - 15.6 in CHF m
Assets by geographical segment 33,235.8 33,041.2 14,825.7 14,347.6 of which participating interests 0.2 0.1 121.8 120.5
Liabilities by geographical segment 28,482.8 30,221.7 14,440.1 14,097.1 of which technical provisions 20,907.4 22,845.7 12,186.4 11,958.6
Cash flow from operating activities (net) - 464.7 2,309.7 241.5 74.2
Cash flow from investing activities (net) 17.1 - 2,209.7 - 84.0 - 36.6
Impairment of value recognized in the income statement - 119.5 - 612.8 - 34.5 - 238.0
Premiums written and policy fees for own account 2,412.1 2,477.5 4,013.2 4,593.4
Change in unearned premiums reserves for own account 7.2 - 25.5 – –
Income from other services 1.7 0.2 27.4 0.2 of which between business segments - 39.4 - 35.4 - 24.1 - 30.1 of which income from associates 1.8 1.6 3.5 0.2
Claims incurred including processing costs (non-life) - 1,794.2 - 1,931.1 – –
Claims and benefits paid (life) – – - 2,887.0 - 2,935.8
Amortization of intangible assets and depreciation of tangible non-current assets - 52.4 - 47.0 - 33.7 - 39.5
Profit/ loss after tax before minority interests 225.9 - 173.6 236.2 - 327.2
Net profit/ loss by business segment 229.3 - 173.6 236.7 - 327.2
Acquisition of real estate, equipment and furnishings and intangible assets for own use 28.1 4.3 13.3 5.6 in CHF m
Premiums earned and policy fees - 181.0 - 179.4 - 44.8 - 39.8
Profit/ loss after tax before minority interests 225.9 - 173.6 236.2 - 327.2 in CHF m
The adjusted capital and reserves are based on market value for investments and statutory value for liabilities from insurance operations. The sums of unrealized investment gains and losses, which can be subject to strong movements, represent the most significant capital and reserves component. Declared capital and reserves only are considered for the embedded value in the case of the Baloise Group’s business from Luxembourg and Austria.
Operating income from insurance in force, adjusted capital and reserves, and earnings from new business 292.0 164.5
Economic changes, especially changes in unrealized gains and losses on investments - 1,310.0 - 2,296.3
Change in unrealized gains and losses taken to capital and reserves 724.3 - 2,240.4 – – - 162.9 - 1,679.0
Medium-term fixed-rate notes, bonds and mortgage bonds - 112.6 - 98.3
Sales other than premium-type, in particular sale of fund untits for unit-linked life insurance 736.9 451.0 in CHF m
The consolidated financial statements of the Baloise Group are prepared on a historical cost basis, taking into account adjustments resulting from regular reassessments of the fair market value of certain investments, and are established in accordance with the International Financial Reporting Standards (IFRS). They comply with Swiss legal requirements. As the International Financial Reporting Standards do not currently contain any insurance-specific guidelines, insurance business has been valued on the basis of the US “Generally Accepted Accounting Principles” (US GAAP).
IAS 40 – Investment Property. The standard requires the inclusion of yield-earning real estate at fair market value and recognition of value changes in the income statement.
In fiscal 2002, no new standards affecting the Baloise Group were introduced, nor were any existing ones changed.
The consolidated financial statements consist of the financial statements of BâloiseHolding and of its subsidiaries. A subsidiary is consolidated where the Baloise Group has over 50 percent of the voting rights, whether directly or indirectly, or exercises control over it. All intragroup transactions and profits and losses arising therefrom are eliminated.
Companies acquired in the course of the year under review are included in the consolidation from the date when effective control was acquired, while all companies disposed of during the year are included in the consolidation until the date of disposal. Companies which are acquired for the purpose of resale are held and accounted for as investments.
Foreign currency translation: The financial statements of all business units which were not originally prepared in CHF have been translated at year-end rates (for balance sheet figures excluding goodwill) or at average rates for the year (for the income statement). The total exchange differences arising are taken directly to capital and reserves. Assets and liabilities in foreign currencies in the accounts of the individual companies are translated at year-end rates. Income and expenses are translated at the rate applicable on the transaction date or at the average rate for the year. The resulting exchange differences are taken to the income statement.
Alternative financial assets such as private equity investments and hedge funds are held as Available for sale. However, private equity investments that have a substantial influence on management policy are classified under Participating interests in associates.
Financial assets under the headings Held to maturity or Originated by the Group are valued at amortized cost, less any necessary adjustments for permanent diminution in value (impairment). The effective interest method is used to amortize or write back the difference between cost and the redemption value. An adjustment is made for impairment if the present value of expected future cash flows discounted at the financial instrument’s original effective interest rate, including the effect of any hedging transactions, is lower than the book value and this situation is not expected to be temporary.
The carrying values of assets are reviewed on a regular basis for recoverability. A permanent diminution in value (impairment) loss arises if the recoverable amount of an asset is less than its carrying amount. The recoverable amount is the higher of an asset’s net selling price (the estimated amount obtainable from the sale of an asset less incremental costs directly attributable to the disposal of the asset) and an asset’s value in use (the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life). The estimated future cash flows are based on reasonable assumptions about the economic conditions that will exist over the remaining useful life of the asset and on cash flow projections and budgets/forecasts approved by the Corporate Executive Committee. Permanent diminutions in value are recognized in the income statement.
The Baloise Group determines any impairment of financial assets according to the following rules: If the market value is more than 50 percent below the purchase value, an impairment entry must be booked in any case. Provided the market value is more than 20 percent but less than 50 percent below purchase value, impairment is to be considered and an entry made where applicable. The extent of impairment is to be based on a number of factors, including reports by bank analysts, ratings by rating agencies, dividend developments, underlying capital and reserves. The prime yardstick for the extent of impairment is, however, the appraisal by the asset manager responsible. Impairment, based on the above-mentioned criteria, may not, however, lead to any entry below the applicable market value.
Changes in the market value of derivatives which have been classified as cash flow hedging instruments are taken directly to capital and reserves. The amounts accounted for in capital and reserves will be recorded at a later date in the income statement together with the hedged cash flows.
The Baloise Group keeps records of hedge effectiveness and the aims and strategies pursued for each hedging transaction. Hedge effectiveness is closely monitored from the date the contract begins. Derivatives which no longer meet the requirements for a hedging instrument are reclassified as trading instruments.
Negative goodwill is offset against positive goodwill. Negative goodwill written of is credited to the income statement (offset against the amortization expense) on a systematic basis over the remaining average useful life of the acquired, nonmonetary assets, at most, however, over 20 years.
Financial assets classified as Available for sale are stated at market value. Changes in the value of these investments are treated as unrealized gains and losses and taken to capital and reserves without affecting the income statement. Amounts relating to the future amortization of acquisition costs and future policyholder bonuses are deducted from these unrealized gains and losses. Local statutory regulations and the provisions set out in contracts and company byelaws are authoritative in determining the share of policyholder bonuses. Companies operating in Germany and Austria are required to use approximately 90 percent of the unrealized gains and losses arising from investments available for sale for the policyholder bonuses. The transfer between accounts has no effect on the income statement.
This figure comprises premiums written and the change in the unearned premiums reserves.
These provisions represent a projection of all future payments to be made in respect of these losses. Loss reserves are calculated on the basis of prior year experience and expected developments in the future. The process involves the application of mathematical, statistical methods and the expertise of claims-handling specialists. The aim is to establish provisions for outstanding claims and for claims processing costs which are as realistic as possible, making allowance for unforeseeable future events.
The whole process of projecting the future can never entirely eliminate the uncertainties inherent in future developments. Therefore future developments may well be different to those projected. The provisions established in a particular year
The technical costs shown in the Management Information section comprise costs arising from insurance operations which have been charged in the fiscal year, including the change in the figure for deferred acquisition costs. Claims processing costs which relate to claims and benefits paid and to loss reserves are not included; neither are other costs of the Baloise Group (especially costs incurred by Group functions).
Reinsurance contracts are insurance contracts between insurance companies. If a transaction is to be recognized as a reinsurance transaction, there must be a transfer of risk as defined in US-GAAP, otherwise the contract would be dealt with outside the income statement as deposit accounting.
Reinsurance assumed is recognized in the same accounting period as the initial risk. The technical provisions are included in liabilities under the headings Unearned premiums reserves (gross) and Loss reserves (gross). These provisions are as realistic as possible and are based on empirical values and the most up-to-date information available.
Receivables and payables from deposit accounting contracts are recognized mainly using the interest method. The effective interest rate is calculated on the basis of cash flows which have already occurred or are expected in the future. Otherwise, the insurance coverage financed by the deposit is amortized over the expected term of the deposit. Deposits are included in Investments and deposits arising from reinsurance business, while liabilities are included in Deposit fund liabilities arising from reinsurance.
Own shares (treasury stock) held by Bâloise-Holding or by its subsidiaries are shown at cost in the consolidated financial statements as a deduction from Capital and reserves. The shares are not restated at their current market value. When the shares are sold, the difference between cost and selling price is adjusted under Capital and reserves.
Because of the amounts involved, the following benefits can be particularly significant: Postemployment benefits: The main retirement benefits are pensions and insurance contributions assumed by the employer. The benefits are paid when the employee ceases to be employed and are financed during the period in which the employee is working. The retirement pensions in the Baloise Group are predominantly defined benefit plans. The present value of the defined benefit obligation is discounted using the Projected Unit Credit Method (accrued benefit method prorated on service). Plan assets which match the benefits payable are only recognized if they are brought into an entity which is legally separate from the employer, e.g. a foundation. The plan assets are stated at market value. If a difference arises between the assets and liabilities when IAS 19 is used, this is shown as an asset or liability in the consolidated balance sheet. An asset is only recognized to the extent that the Baloise controls a resource which may be used to reduce future contributions or improve future benefits, but this resource cannot be returned to the employer.
Share participation scheme: Most middle and senior managers working in Switzerland can opt to have a freely determinable part of their performance-related earnings (incentive) remitted as shares instead of cash. To boost the effectiveness of the share participation scheme, employees receive a loan at a market rate of interest, enabling them to purchase a far greater number of shares than provided by the incentive scheme. The loan repayment after a three-year blocking period is hedged with a put option that is financed by the sale of a corresponding call option. After expiry of the three-year blocking period, employees receive the shares remaining after repayment of the loan for their free disposal. The Baloise does not incur any additional costs by this share participation scheme.
Option rights: The members of the Corporate Executive Committee and of the Executive Boards of the subsidiaries, and other employees in key positions, are granted options to purchase shares in Bâloise-Holding as part of their remuneration. These options are purchased from third parties by the Baloise Group at market value and are quoted on the stock market. The conditions which apply to the option rights are specified at the beginning of the fiscal year. The number of options allotted by the end of the fiscal year depends on whether the parties concerned have met their personal performance objectives. The allotted share options may not be sold for two years. The associated costs are already included in personnel expenses.
The fair value of financial instruments is based on quoted market values or on estimates (present value method, etc.) and on the following assumptions: Cash, cash equivalents and short-term investments: The amounts shown in the balance sheet are stated at market value (fair value).
Derivatives: Derivatives are stated at market prices as supplied by independent brokers or in accordance with market practice.
Other financial assets: The fair value is generally a quoted market price. The fair value of other financial assets is not measured where quoted market prices are not available and the amounts are of little significance to the Baloise Group.
Exchange differences arising from transactions in foreign currencies included in the consolidated income statement resulted in a loss of CHF 122.4 million in the 2002 fiscal year (2001: loss of CHF 27.7 million). This also comprises a foreign exchange loss of CHF 169.3 million resulting from monetary investments classified as Available for sale.
5. Acquisitions and Disposals of Subsidiaries and Other Business Units 5.1 Acquisitions and disposals of subsidiaries and other business units in 2001
In the course of the year, all the remaining outstanding minority shareholdings in Deutscher Ring Leben (2.2 percent) were purchased for CHF 6.1 million. Deutscher Ring Leben is now 100 percent owned by the Baloise Group.
The strategic geographical segments of the Baloise Group are: Switzerland (including the Principality of Liechtenstein), Germany, the Benelux countries and Other countries.
6.1 Gross premiums by geographical and business segments 6.1.1 Gross premiums by geographical and business segments 2001
Premiums for investment-type products - 248.4 - 253.0 1.9 in CHF m
Investment income of CHF 65.2 million (2001: CHF 52.2 million) from value-adjusted mortgage loans and policy and other loans has accrued as at December 31, 2002, but has not been recognized in the income statement.
Realized gains on disposal and book gains: Held for trading 36.4 – – 41.6 78.0
Realized losses on disposal and book losses: Originated by the Group – – – - 79.0 - 79.0
Impairment of value accounted for in the income statement - 3.3 - 103.2 – - 72.9 - 179.4
Realized losses on disposal and book losses: Originated by the Group – – – - 66.2 - 66.2
Impairment of value accounted for in the income statement - 29.2 - 914.9 – - 202.3 - 1,146.4
Less amounts relating to: Surplus shares to policyholders (life) - 110.8 - 134.6 - 23.8 in CHF m
Shares not stated at market value to the amount of CHF 66.7 million (2001: CHF 69.9 million) are included in the financial statements at December 31, 2002. No market price for these shares could be established. They have been entered at purchase value, or lower if there are justifiable reasons for this.
Additions due to changes in composition of consolidated Group 13.1 0.2
Disposals due to changes in composition of consolidated Group – - 0.3
Reinstatement of original value accounted for in income statement – – – – –
Accumulated amortization and write-downs - 431.5 60.9 – - 117.6 - 488.2 in CHF m
Additions arising from changes in share of investments held 6.1 - 4.5 – – 1.6
13. Tangible Non-Current Assets 13.1 Property, plant and equipment for own use: 2001
Additions arising from changes in composition of consolidated Group 1.0 0.6 1.0 2.6
Accumulated depreciation and write-downs – - 268.1 - 53.1 - 321.2 of which assets under finance leases – 133.2 – 133.2 in CHF m
Additions arising from changes in composition of consolidated Group 0.4 0.1 0.5
Accumulated depreciation and write-downs - 54.5 - 82.0 - 136.5 of which assets under finance leases 0.1 5.5 5.6 in CHF m
Loss reserves at December 31 (gross) 4,182.0 4,196.1 in CHF m
Policyholder bonuses credited and provision for future policyholder bonuses 4,197.7 3,685.0 0.1 0.0 4,197.6 3,685.0
In the year 2002 3 percent of gross premiums and policy fees were ceded to external reinsurers (2001: 3 percent). 67 percent (2001: 81 percent) of reinsurance are ceded to reinsurers rated AA (Standard & Poor’s) or better.
18.2 Premiums earned and policy fees 18.2.1 Premiums earned and policy fees: 2001
Total net premiums earned 2,419.3 4,013.2 0.9 6,433.4 in CHF m 18.2.2 Premiums earned and policy fees: 2002
Total net premiums earned 2,452.0 4,593.4 0.6 7,046.0 in CHF m 18.3 Deposit funds with reinsurers and deposit fund liabilities relating to deposit accounting
Total deposits (net) 8.7 0.1 in CHF m 18.4 Movements on deposits in deposit accounting
19. Liabilities from Banking Business and Loans 19.1 Liabilities from banking business and loans
Of these, CHF 96,2 million (2001: CHF 18.9 million) relate to subordinated liabilities as at December 31, 2002.
The tax-exempt losses from shares and participating interests amounting to CHF 88.3 million were mainly incurred by the Belgian companies.
The Baloise Group had 8,703 employees on December 31, 2002; on December 31, 2001, the number of employees was 8,623. Total personnel costs for the fiscal year 2002 amounted to CHF 1,105.1 million, compared with CHF 1,079.4 million the previous year.
Net liabilities relating to defined benefit plans - 226.9 - 227.6 of which disclosed as liabilities - 383.3 - 387.6 of which disclosed as assets 39.2 39.0 of which not disclosed as assets 117.2 121.0 in CHF m
Total expense relating to defined benefit plans 68.6 64.0 in CHF m 23.2.3 Income from plan assets
Total income from plan assets 19.6 97.7 in CHF m 23.2.4 Net obligations in respect of pension benefits
The Bâloise-Holding registered shares are fully paid up and have a nominal value of CHF 0.1 (2001: CHF 0.1). A total of 560,000 shares at December 31, 2001 and 702,540 shares at December 31, 2002 were held by Group companies. Entry in the share register is limited to 2 percent of voting rights for individuals and bodies corporate. In the course of its normal investment business, the Baloise Group purchases and sells its own shares.
Dividends proposed are not paid until they have been approved by the Annual General Meeting. At the Annual General Meeting on May 16, 2003, a dividend of CHF 0.40 per share (2001: CHF 2.40) will be proposed for the 2001 fiscal year, a total figure of CHF 22.1 million (2001: CHF 132.7 million). The proposed dividend has not been included in the consolidated financial statements for the 2002 fiscal year. It will be charged to accumulated profit following the adoption of the resolution at the 2003 Annual General Meeting.
The diluted net earnings coincide with the basic earnings per share because no option rights exist (either for capital market transactions or for employee share schemes) that could raise the current number of outstanding shares.
Increase/decrease due to changes in share of investment held 18.1 - 21.5
In the course of its ordinary business activities, the Baloise Group conducts transactions with associated companies and with members of the Board of Directors and the Corporate Executive Committee of Bâloise-Holding. Deutscher Ring Krankenversicherungsverein, a mutual insurance company, is not included in the consolidation of the Baloise Group, yet is linked with Deutscher Ring Lebensversicherung and Deutscher Ring Sachversicherung through an organization agreement and is therefore considered to be a related party. These transactions are not material to the Baloise Group either individually or in aggregate and are conducted at market conditions.
In 1998, the Baloise Group implemented comprehensive, Group-wide risk management at all levels to control these risks. This involves both the active operational management of individual and portfolio risks on the finance and insurance side, and the development of general risk-based business management systems. Not only does this provide security for shareholders and clients; it also leads to a positive rating on the capital market. By benchmarking all activities based on their contribution to value added (measured by the return on risk-adjusted capital), it is possible to focus on the most profitable segments.
At the end of 2001 and 2002, no derivatives were held as fair value hedges.
Credit risk grows as the concentration of counterparties in a single line of business or geographical area increases. Economic developments which affect entire lines of business or geographical areas can put at risk the debt-paying ability of a whole group of otherwise independent counterparties. For this reason, the Baloise Group permanently reviews its portfolios of counterparties on a Group-wide basis.
Liabilities from banking business and loans - 5,274.5 - 2,512.5 - 1,872.2 - 9,659.2
Payables arising out of insurance operations - 2,101.8 0.0 – - 2,101.8
The following table contains information on the book and market values of significant financial assets and liabilities which are not shown in the balance sheet at market or fair value.
Liabilities from banking business and loans 9,697.2 9,659.2 9,719.4 9,896.6 in CHF m
The market values of these financial assets and liabilities have been determined in accordance with the rules set out in Note 3.20, “Fair value of financial assets and liabilities”.
Switzerland Principal activity in percent inclusion1 Currency in millions in millions
Roland Rechtsschutz Beteiligungs GmbH, Cologne Other 60.00 F/P EUR 21.8 –
Austria Principal activity in percent inclusion1 Currency in millions in millions
Basler Versicherungs-Aktiengesellschaft Life and in Österreich, Vienna Non-life 100.00 F EUR 429.7 63.1
Basler Zivotno Osiguranje d.d., Zagreb Life 97.00 F HRK 25.2 3.0
In our opinion, the consolidated financial statements give a true and fair view of the financial position, results of operations and the cash flows in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law.
Basel, March 27, 2003 1 The German version of the Financial Report is binding.
The holdings have been rounded to the nearest percent. Additional information about the participating interests of Bâloise-Holding is given on pages 126 to 128.
While Netherlands-based Strategic Money Management Company B.V.’s holding amounted to approximately 21.0 percent as per their disclosure notice of December 27, 2001, BZ Group’s investment contracted successively from 20.1 to 8.2 percent at year-end, due in part to the sale of BK Vision to Zürcher Kantonalbank. After exceeding the 5 percent threshold in July, Zürcher Kantonalbank reported on
December 20, 2002 that its shareholding had again fallen below 5 percent. The following table provides a current breakdown of shareholders as at March 31, 2003.
Bâloise-Holding is jointly and severally liable for value-added tax payable with all the companies in the tax group set up by the Baloise Insurance Company.
Total Share of voting Total Share of holding at rights at holding at voting rights at
Basel, April 2, 2003 1 The German version of the Financial Report is binding.
Dividend distribution required by Articles of Incorporation - 276,536 - 276,536
The above distribution is in accordance with the provisions of Article 30 of the Articles of Incorporation and results in a distribution of CHF 0.40 gross per share (CHF 0.26 after deduction of withholding tax).
Mercator Verzekeringen Desguinlei 100 B-2018 Antwerpen Phone +32 3 247 21 11 Fax +32 3 247 27 77 E-mail info@mercator.be www.mercator.be
This Annual Report is also available in German and French. The German version is binding.