Value means nurturing and creating quality. We care for the value of relationships and the value to be found in change. We value ourselves and others. We focus on the requirements of our customers, our shareholders and our staff. We employ our time, money and human resources with great care. Creating and adding value are our targets.
We live in a networked world which links us to a lot of people. We care about these relationships. We talk to others and we are prepared to listen. We are honest, open and communicative. We are critical and able to accept criticism. We create unambiguous mutual expectations. We stand by our word. Together we are strong.
The Baloise Group registered a clearly improved result for 2003 and is well positioned for the future. The net profit of CHF 91 million (2002: CHF -634 million) underscores the success of the numerous measures the Baloise took in all its markets to enhance operational profitability.
Life insurance recorded a profit before tax and minority interests of CHF 69 million (2002: CHF -359 million). The embedded value overall advanced by 21.4% to CHF 1.98 billion. The value of new business attained CHF 15.5 million. The life sector has been successfully realigned to the significantly changed market circumstances.
The banking sector achieved a profit before tax and minority interests of CHF 37 million (2002: CHF -100 million). The success is largely due to Baloise Bank SoBa.
Of which other countries 4,727 4,971 5.2 1 adjusted for degree of employment
Rolf Schäuble: Conditions improved noticeably last year. We are particularly pleased about the revival of the stock markets, though nobody can tell whether this upturn will prove sustainable. But there are still conditions that are causing headaches. I’m thinking of the increase in statutory regulations and the unresolved problems of the social security systems particularly in Switzerland and Germany.
Frank Schnewlin: The stock market collapse made it clear to the entire industry that sustainability-minded insurers must base their activities primarily on solid, professional insurance craftsmanship. The phenomenal investment income of the stock market boom years enabled many insurance companies to conceal their operational weaknesses and engage in a price battle. This is a thing of the past. Today, we all have to get a grip on risks and, wherever necessary, adjust our premiums. Many clients understand this, as a lot of them are themselves business people and know that a company needs profits to secure its future. The Baloise, too, is obliged to restructure contracts and raise prices. Unfortunately, our entire industry, including the Baloise, was rather late in acting. Our sometimes tough, but necessary measures did not always meet with understanding.
In 2003 you focused on improving operational earning power. What did you undertake in concrete terms and where do you stand today?
Frank Schnewlin: In all our companies and business segments, we have restructured portfolios and reduced costs. Our broad-ranging program has clearly proved successful. All segments are profitable, and the combined ratio in non-life insurance (claims paid and costs in relation to premiums) improved to 97.6% gross. At the end of 2002, the gross combined ratio was 105.2%. The net figure also registered an excellent improvement by 7.7 percentage points. Major progress was made in Switzerland with a combined ratio of 95.9% gross, and much was achieved in Belgium, Germany, Austria, and Luxembourg too. On the life insurance side, guarantees and bonus payments to policyholders were brought in line with market realities. New business is nowadays only concluded if it corresponds to our profitability expectations. New life insurance concluded now has a positive profitability margin, as reflected in the embedded value figures. In order to use our capital as efficiently as possible, we have taken into account a reduction in premium income in the life sector. The Baloise remained a solid Group in 2003 with a strong solvency margin of 241% (including imputed banking assets). And I would like to add another aspect that is often underestimated: At a very early stage, we prompted a sense of urgency among our executives and staff, encouraging them to go about their business with the appropriate attitude. And finally, we strengthened the top management in Germany, Belgium, and at Basler Securitas in Germany.
Frank Schnewlin: In Belgium, we were indeed forced to take some tough measures. Significant parts of the insurance portfolio were successfully streamlined by the end of 2003, with the combined ratio in nonlife insurance down by an excellent 16.3 percentage points to 98.1% gross and only profitable new busi-
ness being written on the life side. The investment portfolio was also restructured as we continued to sell off participating interests of no strategic value to us. Mercator itself was thoroughly reorganized. A largely new management team is now in place to tackle the challenges of the future. In 2003, we managed to reduce the loss by roughly two-thirds. And the optimization process is ongoing. We’re not there yet, but we are expecting further significant improvements in operational profitability in 2004.
The banking business was redimensioned. What were the reasons behind this?
Baloise shares performed and how has the structure of share ownership developed?
What dividend is the Board of Directors going to propose to the General Meeting?
Rolf Schäuble: It is vital for us to have people with the proper skill set in all key positions. One focal point will no doubt be filling the vacancies on our Board of Directors. I would like to thank our long-serving Vice Chairman, Walter Frehner, for his loyalty to the Baloise and his highly competent and telling contribution to our company’s development. He will be stepping down from the Board as at this year’s General Meeting after reaching the age limit. As his successor, we will propose Hansjörg Frei to the General Meeting. Mr. Frei has a long track record as a proven insurance specialist. He was formerly a member of the Executive Board of Credit Suisse Financial Services and Chairman of the Swiss Insurance Association (SVV). We were deeply shocked and saddened by the sudden death of our highly valued Board member Dietrich J. J. Forcart. We will remember him as a good colleague and a man of competence and integrity.
The insurance industry is undergoing fundamental change. When the stock market boom came to an end, the industry had to refocus sharply on its core business. The Baloise has actively assimilated this paradigm shift. As an insurance and pension specialist, we have an important social responsibility to fulfill, for which we need to gain the long-term trust of our customers and distribution partners. We can achieve this by living and reflecting our corporate values: creating value, fostering relations with our stakeholders, and demonstrating our strength in implementation. The four short texts on the following pages are meant to give an impression of how we go about our business.
Then came the stock market crash and with it the big disillusionment. Sheer size, which had been acquired at a sometimes exorbitant price, in many cases turned into a liability and contributed to the destruction of value. Life business for its part had passed its peak, with many a bancassurance concept failing to live up to its promise. And the great majority of customers simply did not warm to the alternative distribution channels on offer. Finally, the sharp downturn in investment income and the substantial reduction in capital and reserves showed up the limits of asset management as the key to running an insurance business.
� Insurance and pension banking: Banking for the Baloise is a complementary line to its core business of insurance and pension provision. It is only pursued where the core business has reached a critical mass and the banking operations prove profitable. In Switzerland, the distribution of banking products via the insurance sales service has expanded very encouragingly: Baloise Bank SoBa’s volume of loans, custody accounts, client assets and mortgages registered much stronger growth in 2003 than anticipated.
� Uncompromising focus on results: The Baloise aims to figure among the most profitable financial service providers in its core markets and is therefore striving for a return on equity of at least 10%. In non-life business, the target is a combined ratio (claims paid and costs in relation to premiums) better than the market average. Further cornerstones are – depending on the market – cost leadership or ranking among the top 25%. The target for investment income is outperformance of the relevant benchmarks. Marginal business activities and those whose return does not cover the cost of capital in the medium term will be terminated.
The Swiss national and occupational pension systems are at a crossroads. The aging of society, the growing number of disability cases, adverse developments on the financial markets, and hesitant statutory adjustments to the new financial and underwriting realities together pose a daunting challenge. To date, this has led to reduced risk capabilities and substantial undercoverage at numerous pension funds. The excessive benefit obligations to customers required by law are jeopardizing the stability of these occupational benefit institutions.
The insurance industry bears a heavy burden of responsibility in the pension fund sector. Roughly 30% of Switzerland’s 3.2 million registered employees are insured with a private insurance company via collective foundations. Most of these employees work for small and medium-sized enterprises. There is a change in trend noticeable among the 9,000 occupational benefit institutions to move from autonomy to semi-autonomy by hedging a part or all of their risks. An increasing number of small pension funds are affiliating themselves to collective foundations.
The Baloise takes its role as one of the country’s leading life insurers seriously. However, the changing legal, demographic and economic circumstances are forcing us to adapt our occupational benefits (BVG) model. To retain the trust of our customers, we are taking great pains to effect these changes gradually and transparently. Already in 2002, we introduced a more restrictive underwriting policy – limiting the volume of new business and the duration of contracts – in order to protect existing customers and ensure profitability. In reaction to the steady increase in disability cases, we have been gradually introducing scaled premium rates since 2001, as claims levels differ markedly from one business sector to the next. For life insurance providers, too, it is becoming increasingly important to know your customers, to tailor products to their specific needs and to set rates that are commensurate with the actual risks.
The Baloise has also instituted cost-cutting measures to contend with the tight financial circumstances. Together with partner companies it has developed new software solutions for the administration of occupational benefit contracts. These facilitate more efficient management of existing and new contracts and can be adapted to future changes in the regulatory environment. On the strength of such measures, we are convinced that we can reinforce our position as an efficient and fair provider in the group insurance market. It is now up to Swiss legislators to set this market on a sustainable track.
at a round table, without chair person and fronts, in a spirit of solidarity.
In times of persistently low returns on the financial markets, the core business of financial service providers again moves sharply into focus. Operational excellence becomes the cornerstone for sustained profitability. And at the Baloise operational excellence was indeed established as one of the main thrusts of corporate strategy in 2003.
Operational excellence also means building on a limited number of products and product modules, standardized as far as possible, that can be combined to create solutions that meet the customer’s specific needs. Existing products are regularly subject to scoring to assess their profitability, which enables improvements to be implemented at an early stage. New products are only launched if required by law or if there is a convincing business case for their introduction. With regard to the financial services provided by Baloise Bank SoBa, we are retaining our strategy of offering insurance and pension solutions from a single source. This pooling of services has been welcomed by many of our customers. Ultimately, operational excellence can only be achieved by a competent and committed workforce. We consider investments in the training and development of our staff as vital investments in the future of our company. Only motivated employees with up-to-date knowledge and skills are in a position to provide the kind of services that lead to customer satisfaction and loyalty.
By improving our services, the ongoing optimization of our processes and structures raises the benefit level for customers, thereby enhancing our profitability. Through operational excellence, the Baloise aims to rank among the most profitable insurance and financial service providers in its target markets. Already now, the Baloise boasts a better cost ratio than any other player in its home market, Switzerland.
How We Do Business Operational excellence – we know our core business
As an insurance company, the Baloise is a professional risk manager. We bear the risks of our insureds and thus shield millions of people from financial harm. In order to accomplish this mission, the Baloise assumes a large number of individual risks and manages them by utilizing diversification effects and a comprehensive system of limits. Assessing and properly handling risks is of prime importance both on the underwriting and the capital investment side.
Each of our regional business units is responsible for a comprehensive assessment and the ongoing monitoring of the specific risks it bears. At corporate level, we group the subsidiaries’ risk positions and manage them globally. This global system is based on various benchmarks and models that complement one another. A “surcharge factor” model – similar to the widespread rating models – enables us to swiftly evaluate the risk level of important risk positions. Furthermore, an internally designed, scenario-based model not only provides detailed insights into key risks involved, but also serves to optimize profitability. Finally, regulatory requirements are met by constantly monitoring solvency and coverage levels. Coverage in Switzerland is assured by the “Sicherungsfonds” (security fund), in Germany by the “Deckungsstock” (coverage reserve).
Eventful business years such as 2003 require particularly attentive risk management. We adopted a number of measures to keep business in line with changing circumstance. Premiums were raised selectively where required. Risk selection played an even bigger part in our product development, leading to rate adjustments. Like the rest of the insurance industry, we had to cut back surplus allocations to life insurance policyholders due to capital market imponderables.
To keep business profitable and give direction to our sales efforts, we focused sharply on segments where profitability is intact. Loss ceilings were reassessed in several places. In our German industrial business, for instance, this led to a reduction of underwriting limits. In the life sector, we introduced further Asset & Liability modules. These facilitate a finely tuned balancing of insurance-related obligations and investments.
We contributed to the growth on the operational side with market-aligned adjustments to our asset allocation, including a reduction in equity exposure. An important factor was the acquisition of Securitas Versicherungen in Germany, which operates predominantly in the non-life sector – an area we favor. Risks were further limited by continuously tracking volatility in the individual investment categories and applying appropriate hedging instruments. The foreign exchange risk in connection with the US dollar was reduced by hedging at the beginning of the year. By partly re-classifying bonds from “Available for sale” to “Held to maturity” we greatly reduced the impact of fluctuating interest rates on the IFRS capital and reserves.
In view of the increasingly complex regulatory environment, we instituted a compliance structure both at corporate level and at the individual business units as a basis for minimizing legal and reputational risks.
In the year under review, the European insurance industry finally turned the corner. Companies took decisive measures to prepare the ground for a sustainable recovery. A number of these measures produced results quickly; others will take longer to bear fruit. This development was supported by the rising financial markets.
In 2003, all companies reported an improvement in their non-life business. After years of cutthroat competition, more and more insurers are now in a position to set fair risk-aligned rates and charge realistic premiums. This process has been helped by the restructuring of unprofitable areas, as evidenced by the underwriting results of non-life insurance companies.
The German market has not yet benefited from the modest revival in demand for insurance products. The bureaucratic hurdles posed by the state-funded direct-contribution pension scheme (“Riester” pension ) and uncertainty about the tax treatment of life insurance have contributed to the reticence of potential buyers of insurance. Despite the adverse economic environment, the German insurance industry expects premium growth of 3.9% in 2003, most of it on the non-life side.
In the 2003 financial year, the scope of consolidation was widened to include the Bremen-based Securitas Group. The integration of Securitas and Basler Deutschland to form the new “Basler Securitas” is proceeding successfully. A number of crucial steps in the integration process have already been completed: company and management structures, the launch of the new brand, the new distribution organization, and the new product portfolio.
Premium income amounted to CHF 7.4 billion as against CHF 7.3 billion in 2002; this represents growth of 1.4% in CHF. The strong growth in non-life exceeded expectations. Premium volumes in the life sector on the other hand declined. Owing to unsatisfactory profitability, the Baloise – in keeping with the rest of the industry – was very selective in underwriting new life business.
The breakdown of total premium volume shows a shift from life to non-life in 2003: non-life accounted for 42% (2002: 36%) and life for 58% (2002: 64%). This development is in keeping with the strategic focus on non-life in future business expansion.
Growth in non-life was greater than expected: premium income of CHF 3.1 billion (2002: CHF 2.6 billion ) resulted in a rise of 14.0% in local currency. Organic growth in local currencies amounted to 3%, the remaining growth coming from the acquisition of Securitas Versicherungs-Gesellschaft. Thanks to the consistent restructuring of portfolios, stringent cost discipline, and the favorable development in claims for major losses, this class posted a profit before tax and minority interests of CHF 91 million (2002: loss of CHF 203 million). The gross combined ratio of 97.6% as against 105.2% in the previous year underlines the enormous progress made in operational efforts, in particular in Switzerland, Germany, and Belgium. The improvement in the corresponding net value of 7.7 percentage points is equally impressive. The actual restructuring of business areas, particularly in Germany and Belgium, has largely been completed; however, measures to further improve operational efficiency will continue.
Owing to the realization of investments in spring 2003 aimed particularly at reducing the equity exposure, realized investment losses rose by CHF 738 million to CHF 1,862 million. Realized gains sank by CHF 59 million against the previous year to CHF 1,218 million. Current income overall increased slightly and amounted to CHF 2,105 million for the year under review.
The embedded value of the life business rose from CHF 1,631 million to CHF 1,980 million in the year under review. Factoring in the planned introduction of the legal quote in the Swiss occupational benefits business (BVG) led to a CHF 303 reduction in the embedded value. Rate adjustments in group life insurance engendered an increase in the value of the insurance portfolio of CHF 257 million. The financial markets had a positive effect in 2003. The investment income is likely to be lower in future, but this effect can be offset by a reduction in policyholder bonuses. The net effect is an increase in the embedded value by around CHF 140 million.
Baloise Switzerland has recovered its earning power. The Baloise’s largest business unit produced a profit before tax and minority interests of CHF 62 million (2002: loss of CHF 245 million). Aside from developments in the financial markets, this result can be attributed to the numerous measures adopted to improve the earning power of the insurance business: strict cost management, a profit-oriented underwriting policy, and technically necessary adjustments to premiums. Baloise Bank SoBa also recorded a positive development: it achieved a profit before tax of CHF 13.8 million, which represents an increase of 25% year-on-year.
In the 2003 financial year, Baloise Switzerland produced a solid operational performance. Accounting for 58% of all premium income of the Baloise Group, it posted a profit before tax and minority interests of CHF 61.5 million (2002: loss of CHF 244.9 million). Both insurance classes and the banking side contributed to this marked improvement. Strict cost management and risk-oriented underwriting bore fruit: the gross combined ratio improved noticeably to 95.9% (2002: 97.7%) and the gross cost ratio in nonlife fell to an exceptional 23.8% (2002: 26.0%). Total premium volume amounted to CHF 4.3 billion (2002: CHF 4.7 billion). The decline of 8.2% precisely reflects management’s operating priorities. Premium volumes in the non-life business grew by 5.3%. Because of insufficient investment income, we reduced interest rate guarantees and bonuses to policyholders on the life side. This step and the substantially lower demand for single premium policies explain the sharp drop in premium income of 12.8%. At the same time, the Baloise managed to noticeably increase the profitability of its life business.
Premium income for non-life came to CHF 1.24 billion (2002: CHF 1.17 billion), which represents a 5.3% increase on the previous year (2002: 3.5%). This stems from the expansion of business and from premium adjustments in general liability, property and automobile insurance. The sales partnership with Touring-Club Switzerland (TCS) once again played a key part in the increase in premiums. By contrast, there was a slight decline in premium income in the transport, accident and health insurance segments. Transport insurance was affected by the weakness of the US dollar, and premiums for health insurance were depressed by essential restructuring measures and associated policy terminations.
After a record year in 2002, individual life policies were back at the same level as in 2001. Premium income amounted to CHF 1.1 billion (2002: CHF 1.5 billion). This decline is explained by the fact that guaranteed interest rates and bonuses have been reduced in order to ensure profitability and by the generally difficult market environment.
For Baloise Switzerland’s life business as a whole, the result was a premium volume of CHF 3 billion (2002: CHF 3.5 billion), which represents a decline of 12.8%.
Through comprehensive restructuring measures and selective underwriting guidelines, the German companies of the Baloise Group were able to significantly increase their operating profitability and return to the profit zone. Thanks mainly to the first-time consolidation of the Securitas Group, premium volume in local currency rose by 20.9% to CHF 2.2 billion (2002: CHF 1.8 billion). In organic terms, the result was a 2.1% decline in local currency terms. The segment posted earnings before tax and minority interests of CHF 77.1 million (2002: loss of CHF 25.6 million).
The property insurance segment accounts for premium income totaling CHF 901.1 million. Thanks to a combination of measures taken to strengthen operating profitability and significantly lower claims paid, the loss ratio was reduced from 99.6% to 69.3%. This means there has been a considerable improvement in the gross combined ratio which stands at 99.9% (2002: 127.0%). In the automobile insurance segment, the premium rate adjustments from the beginning of 2003 and the restructuring of the insurance portfolio had a clear impact on the result. Further progress was made in the successful reorganization of the commercial and industrial business, and the underwriting limit for major industrial risks was halved.
Thanks to the acquisition of Securitas Gilde Lebensversicherung and as a result of a reinforced sales drive, premium volume in the life business grew slightly. Just as in the market as a whole, the expected increase in occupational and private pension plans failed to materialize. The result is on the same level as the previous year.
Deutscher Ring focused mainly on improving the profitability of its portfolio and on new business. At the same time, it proved possible to significantly reduce costs, and further progress was made in the restructuring of Deutscher Ring Bausparkasse. The improvement in the capital markets supported the positive trend in the earnings situation.
The year under review saw the total premium volume decline by 6.8% in local currency to CHF 1 billion (2002: CHF 1.1 billion). This was due to the marketwide decline in single premium insurance. By contrast, unit-linked life insurance made gains. Further cost savings were realized in 2003. The easing of the situation on the financial markets led to an improvement in the financial result.
In preparation for the future demand for occupational pension solutions, Deutscher Ring set up an independent pension fund. Direct property insurance business achieved a gross combined ratio of 103.1%.
The Flemish Mercator Group – the main component of the Benelux segment – made further significant operational progress. Most of the actuarial restructuring measures in the non-life sector were completed, although work is still under way with a view to further optimizing the portfolio’s profitability. In the life sector, benefits were reduced to a level commensurate with returns on investments. The embedded value of new life business is positive. In 2003, Mercator’s investment losses continued to depress the segment result. The loss before tax and minority interests amounting to CHF 103.9 million represents a clear improvement against the previous year (2002: loss of CHF 373.0 million).
Against this background, Mercator Insurance posted premium income amounting to CHF 674.4 million (2002: CHF 646.9 million). This represents 0.6% growth in local currency, a figure which has been dampened by the restructuring effects. In 2002, the restructuring process had led to a decline in premiums as expected. The restructuring of the automobile and fire insurance sectors showed a positive impact. The loss ratio decreased by 15 percentage points to 67.7%. Further cost-cutting measures and targeted reduction of capacity resulted in a markedly improved gross combined ratio of 98.1% (2002: 114.4%).
Mercator Bank ended fiscal 2003 with a profit. Operating efficiency and the margin in interest operations are being improved on an ongoing basis.
State promotion of private pensions, which has been introduced over a one-year period for the first time, had a positive impact on business. The restructuring of the policy portfolio through adjustments to premiums rates was accompanied by systematic risk selection. This made it possible to significantly improve the loss experience. Costs were lowered by reducing capacity in back-office services. At the same time, the Baloise expanded its sales force, which resulted in a higher volume of business.
In non-life business, the higher premium income, differentiated underwriting policy and reduced costs led to a significant improvement in the combined ratio to 108.0% (2002: 130.9%).
The United States were once again the driving force on the equity markets. Generous fiscal and monetary impetus did the trick in the US economy and also boosted the Asian and European economies through demand for imports. Moving in tandem with Wall Street, the Swiss Market Index (SMI) recovered from its March low and was up roughly 50% by year-end. Year-on-year, it gained 18.5%. The MSCI EMU – the index of euro-zone equity markets – posted a performance of 25.6% while the Standard and Poor’s 500 index in the United States gained 26.4%.
The foreign exchange markets were dominated by the massive weakening of the US dollar against the euro and the Swiss franc. Reasons included the widening budget and current account deficits in the United States and the resultant reversal of capital flows. The Swiss National Bank adopted a policy of extremely low interest rates to counter the initial upward pressure on the franc as a safe haven for investments.
In an environment of volatile financial markets and rising insurance risks, the significance of risk management and risk control at the Baloise Group has increased noticeably. Findings in this area have become an important factor in the Group’s strategic decisionmaking process. Consequently, risk management processes and methods were again enhanced in the year under review.
There are various instruments available to keep these risks under control. Some are direct and immediately effective, such as reinsurance or hedging, others indirect and slower to take effect, such as a carefully focused underwriting policy, targeted Asset & Liability Management (ALM), or profit-oriented growth strategy in selected market areas.
In fiscal 2003, the Baloise Group focused on a large number of risk management topics, giving greater
Business Year 2003 strategy. Equity hedges were raised in the first quarter and the equity weighting was subsequently reduced further on risk grounds. At the same time, undesired foreign exchange risks, especially those resulting from investments in US dollars, were hedged, chiefly through foreign exchange derivatives. Proceeds from the sale of equities and new inflows of funds were initially “parked” in short-term investments and time deposits. Once yields had risen they were shifted into bonds.
Largely unaffected by the volatility of the equity markets, property investments once again made a stable contribution to total investment results, with a performance of around 4.8% in 2003 (2002: 4.9%). This was essentially attributable to the strategy of focusing on popular regions of Switzerland and the rental housing market.
The mortgages and loans performance declined from 4.1% to 3.7%, reflecting the persistently low interest rates and far more aggressive terms offered by Swiss banks. Given the widespread belief that interest rates will rise in the mid-term, there is a clear trend towards fixed-rate mortgages.
The assets managed by the Baloise Group, including the investment funds, rose by 13.7% to CHF 66 billion. This was due to the improvement in investment performance, subscriptions to investment funds and new clients and to the first-time consolidation of Securitas. Thanks to the clear recovery on the equity markets, the value of all BFI equity and strategy funds rose considerably. The floor (guaranteed level) of the BFI Capital Protect (EUR) fund issued in early 2003 was raised six times during the year and the fund ended the year with an attractive “guaranteed” performance of 4%.
Work in ALM field of the Life business was coordinated in a group-wide project. This joint approach, and the existence of a uniform Group platform, will generate synergies in the area of software development and operation as well as in analysis and in the management of assets and liabilities.
By implementing specific measures, the Group was able to realign investment risks to the given market circumstances. The Group’s equity exposure was reduced from 12.5% to 7.1% on the eve of the Iraq war. Derivative hedging instruments were employed to keep risks under control. Foreign exchange risks in connection with the dollar were eliminated entirely by means of forward selling, and equity risks were reduced through put options until into the 4th quarter 2003. The reclassification of 35% of the bonds from “Available for sale” to “Held to maturity” meant that the influence of interest rate fluctuations on the Group’s capital and reserves in accordance with IFRS was lowered by around 50%.
The implementation of rate adjustments, restructuring measures and revised underwriting guidelines have led to a sustainable improvement of the Group’s risk situation. The enhanced quality of the insurance portfolio will have a positive and lasting effect on the Group’s risk position and profitability. The following measures deserve special mention from the risk perspective: � Underwriting limits in the German industrial business halved
As a value-oriented company, the Baloise is committed to good corporate governance. In keeping with the description of corporate governance in the Swiss Code of Best Practice, we are convinced that – while preserving management’s decision-taking competencies and efficiency – transparency and checks and balances are desirable goals that serve the interests of our shareholders.
The first section of this chapter focuses on steps implemented in 2003. The second section follows the structure of the SWX guideline with the aim of increasing transparency and hence comparability with other companies.
The investment regulations of the Baloise Group, which regulate the asset management and asset allocation, were revised. The purpose of the investment activities is to generate a risk-adjusted performance on the basis of wide diversification and clear rules of competence while fulfilling the provisions required of the insurance business.
The Baloise is organized as a joint-stock holding company under Swiss law. The company has its head office in Basel and is quoted on the SWX Swiss exchange. As at December 31, 2003, the Baloise Group had a market capitalization of CHF 2,856.6 million. Further information on Baloise shares will be found in the “Baloise Shares” section from page 53. A list of important Group companies and participations as at December 31, 2003, can be found in the Notes from page 119. Apart from Bâloise-Holding, no Group companies have a stock exchange listing.
Segment reporting by business segments and regions can be found from page 76 of the Annual Report.
Dividend Share Nominal value Year payments buybacks repayments Total in CHF m always at March 31
Share splits in 1997 and 2001 considerably increased the trading liquidity of Baloise shares. Details of all distributions and capital transactions in favor of shareholders and the Baloise’s distribution policy can be found on the Baloise website.
Management was back below the 5% threshold and the shareholding of the Zurich Financial Services Group had risen to 27%, of which 21.48% were held in shares and 5.52% through options. This shareholding was subsequently sold on the broad market, and the stake of Zurich Financial Services fell back below the 5% threshold again as at November
As a widely held joint-stock company, the Baloise is included in the Swiss Market Index (SMI) and features in the SWX’s index calculations with a free float of 100%.
Breakdown of shareholders As at December 31, 2003, the most significant registered shareholder (Deutsche Bank Nominee) held 3.8% of the company’s outstanding shares, of which 2% were voting shares. No shareholder held a stake in the company that was legally required to be disclosed as at the end of the year. As at December 31, 2003, 15,027 shareholders were recorded in the Baloise’s share register. By comparison with the previous year, the number of registered shareholders rose by 25.6%.
The “Baloise Shares” section from page 53 of the Annual Report provides further information on the breakdown of our shareholders as at March 31, 2004.
Own shares As at December 31, 2003, the Baloise held 414,303 of its own shares. These shares are used for, inter alia, incentive and employee profit-sharing programs.
There are no cross-shareholdings either in terms of capital or voting rights.
The capital changes in recent years were marked by a shareholder-friendly distribution policy. Since 1997 roughly CHF 1,875 million have been paid out to shareholders in the form of cash dividends, share buybacks and nominal value repayments.
For full details on the development of the consolidated capital and reserves in fiscal years 2000–2002, please see the corresponding sections in the annual reports for these years (Annual Report 2000: page 47, Annual Report 2001: page 64, Annual Report
Only the Chairman of the Board of Directors has an executive function. All the other members of the Board of Directors are independent, nonexecutive members. None of them held executive responsibilities at any Group company in the past three financial years and have any other substantive business relationships with the Group.
Gaudenz I. Staehelin, a member of the Chairman’s Committee and Chairman of the Compensation Committee, retired from the Board of Directors. Klaus Jenny took his seat in these two committees, while Georg F. Krayer assumed the chairmanship of the Compensation Committee. In conformity with the Articles of Incorporation, the Vice-Chairman of the Board of Directors, Walter G. Frehner, will resign from the Board in 2004.
A proposal is being submitted to the 2004 Annual General Meeting to elect Hansjörg Frei, an experienced insurance industry expert, as a new Member of the Board of Directors. Mr. Frei (born 1941, CH, Dr. iur.) worked at Winterthur Insurance from 1982, latterly as member of the Executive Board with responsibility for Swiss business; from 2000 until his retirement in mid-2003, he worked for Credit Suisse Financial Services as a member of this bank’s Executive Board (Head of International Country Management ). From 2000 to 2003, he was also the Chairman of the Swiss Insurance Association (SVV).
Walter G. Frehner (born 1933, CH) has been a Member of the Board of Directors since 1989 and Vice-Chairman since 1995. He graduated from commercial school and completed a bank apprenticeship. From 1987 to 1993 Walter G. Frehner was CEO and subsequently, until he reached retirement age in 1996, Chairman of the Board of Directors of Swiss Bank Corporation (today UBS AG). He was a Member of the Board of Directors of Novartis AG, Basel. Walter G. Frehner is an independent, non-executive Member of the Board.
Christoph J.C. Albrecht (born 1938, CH, Dr. iur.) has been a Member of the Board of Directors since 1985. He graduated from the University of Basel with a doctorate in law. Today he works as an attorney at law and notary with Joerin Hopf, Basel. Christoph J.C. Albrecht is Chairman of the Board of Directors of Thüring AG, Basel, and a Member of the Board of Directors of Interhaba AG, Basel. He is an independent, non-executive Member of the Board.
Andreas Burckhardt (born 1951, CH, Dr. iur.) has been a Member of the Board of Directors since 1999. He studied law at the Universities of Basel and Geneva and obtained a doctorate. From 1982 to 1987 he worked for the Fides Treuhandgesellschaft and was General Secretary of the Baloise Group. He has been Director of the Chamber of Commerce of both BaselLandschaft and Basel-Stadt since 1994. Andreas Burckhardt is an independent, non-executive Member of the Board.
Klaus Jenny (born 1942, CH, Dr. oec., University of St.Gallen) has been a Member of the Board of Directors since 2003. He graduated with a doctorate in economics from the University of St. Gallen. From 1987 Klaus Jenny was a member of the Executive Board of Credit Suisse (later the Credit Suisse Group). Before leaving the Credit Suisse Group, he was CEO of the Credit Suisse Private Banking Business Unit. Since 1999 he has worked as a financial advisor to companies and private individuals. He is a Member of the Board of Directors of Maus Frères SA and Huber & Suhner, Herisau and Pfäffikon. Klaus Jenny is an independent, non-executive Member of the Board.
Georg F. Krayer (born 1943, CH, Dr. iur.) has been a Member of the Board of Directors since 1995. He studied and obtained the doctorate in law. He is Chairman of the Board of Directors of Bank Sarasin & Cie AG, Basel, a Member of the Board of Directors of Pirelli SpA, Milan, and was Chairman of the Swiss Bankers Association until 2003. He is an independent, non-executive Member of the Board.
As at December 31, 2003, the Board of Directors consisted of 12 members who are elected by the General Meeting for a term of three years. Each year, one-third of the members retire unless re-elected (staggered renewal). Under an age restriction, board mandates end at the latest at the General Meeting that follows the member’s 70th birthday. The average age is currently about 60. Each Member of the Board of Directors is elected – and, at the shareholders’ request, granted discharge – individually.
Under Art. 716a of the Swiss Code of Obligations and Section 1 II of the organizational regulations, the main tasks of the Board of Directors are to oversee and supervise the company’s general and financial operations and to determine its organization. � www.baloise.com/Profile/Corporate Governance/
Committees of the Board of Directors 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 four 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.
Committee, which approves the Group’s investment policy and investments in real estate for the Group’s own use at Head Office.
In 2003, the full Board of Directors met four times. Members’ attendance at the meetings was 93.7% in 2002 and 95.8% in 2003. � www.baloise.com/Profile/Corporate Governance/
In 2003 – as in every year – a seminar was held for the Members of the Board of Directors. The subject this year was “Life,” with the focus on group life and individual life.
Last year, the Chairman’s Committee and the Investment Committee met eight times, the Audit Committee and the Compensation Committee four times each. Meetings of the full Board of Directors are regularly attended by members of the Corporate Executive Committee, while meetings of the Audit Committee are attended mainly by the Group CEO, the Group CFO, the Head of Group Internal Audit and representatives of the external auditors.
The division of powers and duties between the Board of Directors and the Corporate Executive Committee is laid down primarily in the organizational and investment regulations. Both documents are regularly reviewed to ensure their suitability and where necessary adapted to changed circumstances. As a consequence, the organizational regulations were revised in 2002; the revised investment regulations entered into force on July 1, 2003. � www.baloise.com/Profile/Corporate Governance/
The significance of a well-functioning risk management at an insurance group cannot be emphasized enough, which is why this Report devotes a separate chapter to the risk management at the Baloise (page 26).
Wolfgang Drunk (born 1965, D, Dipl.-Phys., MBA Insead ) studied physics, mathematics and business management in the USA and Germany, and took an MBA at the Insead Institute at Fontainebleau. From 1991 to 1998, he worked for McKinsey & Company in different positions, initially as a management consultant for insurance companies, banks and car manufacturers in various European companies, and subsequently as Project Manager in a range of projects for insurance companies. In this period he also completed a number of advanced training courses focusing on risk management, reinsurance, corporate finance, and strategy and organization. In 1998 he was appointed head of the risk management and reinsurance units at the Baloise Group, and in 2001 he became a member of the Corporate Executive Committee, responsible for financial relations, financial management and financial accounting.
Martin Wenk (born 1957, CH) graduated in law from the University of Basel, before working for a large bank in different positions between 1982 and 1992. After initially working as an investment advisor to institutional clients, he went on to head a private banking group in New York and then became a sector head in securities sales, attending primarily to the needs of major institutionals. During this period, he completed further training courses in Switzerland and the USA. From 1992 to 2000 he headed Portfolio Management Switzerland at the Baloise Group, with responsibility for managing the assets of various Baloise companies in Switzerland and of the Group, including
pension funds. In 2001 he was appointed a member of the Corporate Executive Committee, responsible for Corporate Division Asset Management comprising the units Baloise Asset Management, Real Estate and Mortgages, and Baloise Fund Invest.
Further information about the members of the Corporate Executive Committee and about other activities and interests can be found on the Internet. There are no management agreements in which management functions are transferred to third persons. � www.baloise.com/Profile/Organization/
� the Chairman of the Board of Directors and � the Corporate Executive Committee.
To facilitate assessment of the Baloise’s compensation policy, gross compensation figures are used rather than tax figures.
With the exception of the Chairman, the members of the Board of Directors receive flat-rate compensation in cash, which is determined by the Compensation Committee of the Board of Directors.
The nature and amount of the compensation paid to the Chairman of the Board of Directors and the members of the Corporate Executive Committee are determined by the Compensation Committee of the Board of Directors. It consists of a basic salary and an incentive based on achieving corporate objectives on the one hand and individual objectives on the other up to a maximum amount equal to two-thirds of the basic salary. 50% of the incentive must be taken in the form of shares or options. The corporate objectives for the coming year are determined in a multistage process and approved by the Compensation Committee at the end of each year. Individual objectives are directly related to the respective responsibilities of each member of the Corporate Executive Committee; they are set in consultation with the superior and approved by the Compensation Committee.
Given the choice of taking the mandatory part of the incentive in either shares or options, employees chose shares without exception in 2003 (either directly or linked to a loan). In view of the imminent changes in the law, the options plan will not be offered as an incentive choice in 2004.
Mortgages and loans against insurance policies CHF 500,000 1 see “Change of control and countermeasures” page 38 2 Mortgages are granted at conditions that apply to employees (1% below the interest rate paid by customers for variable-rate mortgages). There were no loans against insurance policies.
The Corporate Executive Committee consists of five members. No severance payments were made in 2003.
Mortgages and loans against insurance policies CHF 1,586,000 1 see “Change of control and countermeasures” page 38 2 Mortgages are granted at conditions that apply to employees (1% below the interest rate paid by customers for variable-rate mortgages). There were no loans against insurance policies.
Every share gives the right to one vote. In exercising voting rights, no shareholder may, either directly or indirectly by combining his own with proxy votes, hold more than one-fifth of the shares with voting rights at the General Meeting. Any shareholder may transfer his/her voting rights to another shareholder by written power of attorney (Art. 16 of the Articles of Incorporation). Any annulment of statutory restrictions on voting, see the following section on statutory quorums. � www.baloise.com/Profile/Corporate Governance/
The General Meeting constitutes a quorum regardless of the number of shareholders and represented votes attending the Meeting unless there are compelling statutory requirements to the contrary (Art. 17 of the Articles of Incorporation).
As a rule, the General Meeting takes place in May, and at the latest six months after the end of the financial year. Bâloise-Holding’s financial year ends on March
Extraordinary General Meetings may be convened by decision of the General Meeting, the Board of Directors or the external auditors. Furthermore, in accordance with the statutory provisions, the Board of Directors has to convene an extraordinary General Meeting if requested to do so by shareholders (Art. 11 of the Articles of Incorporation). According to Article 699 (3) of the Swiss Code of Obligations, the request must represent at least 10% of the company ’s share capital.
Shareholders entitled to vote at the General Meeting are those who, on the reference date specified in the invitation from the Board of Directors, a date a few days ahead of the General Meeting, are entered in the share register as shareholders with voting rights (Art. 16 of the Articles of Incorporation). � www.baloise.com/Profile/Corporate Governance/
Articles of Incorporation and Regulations 7. Change of control and countermeasures
However, there are two different types of change of control clauses: Since 1999, agreements have been in force with the members of the Board of Directors and the Corporate Executive Committee that in the event of a change of control they will be compensated for the intrinsic value of their options (contractual options that expire in 2004), subject to a guaranteed minimum. This amounts to CHF 7.6 million for the Board of Directors and the Corporate Executive Committee together.
Agreements also exist with the members of the Corporate Executive Committee and other members of senior management whereby severance payments will be triggered if the employee is given notice (or, under certain conditions, if the employee gives notice) within a specified period of time following the change of control. The amount of these payments will be in conformity with market practice.
PricewaterhouseCoopers (PwC) and its predecessor, Schweizerische Treuhandgesellschaft/STG Coopers & Lybrand, have been the statutory auditors of the Baloise since 1962. The statutory auditors are chosen by the General Meeting each year. The lead auditor, Mr. Peter Lüssi, who assumed this office in 2002, has worked on the Baloise audit since 1999.
The Baloise is actively involved in committees and bodies working towards the conception and implementation of accounting standards and drawing up of concepts specifically for the insurance industry.
Media releases on important projects and initiatives are a further important form of communication. At special events and roadshows the Baloise engages in dialogue with investors and media representatives.
Investors will find the most important dates for investors on the Internet, including the publication dates of the Annual and Semi-Annual Reports. In connection with the General Meeting, the calendar contains the date of the invitation to the General Meeting, the closing of shareholder registration, and, if applicable, the ex-dividend date.
All documents can be obtained through Investor Relations (see below) or ordered on the Internet. � www.baloise.com/Investor Relations/
Secretary of the Board of Directors / Head of Legal and
Rolf Schäuble, Chairman, Lenzburg Walter G. Frehner, Vice Chairman, Riehen Christoph J.C. Albrecht, Basel Andreas Burckhardt, Basel Dietrich J. J. Forcart †1, Riehen Gertrud Höhler, Berlin Georg F. Krayer, Basel Werner Kummer, Küsnacht Arend Oetker, Berlin Jean-Marc Rapp, Lausanne Eveline Saupper, Pfäffikon SZ Klaus Jenny, Zurich
Walter G. Frehner, Chairman Christoph J.C. Albrecht, Vice-Chairman Dietrich J. J. Forcart †1
Management structure on April 1, 2004 * Member of the Corporate Executive Committee
“Creating, measuring and optimizing value are part of the day-to-day business of a performance-oriented finance division. Value creation owes a lot to a company ’s ability to relate and to change. We have therefore very consciously intensified our dialogue with customers, employees and the sales force, as well as our cooperation with investors and their representatives. For they all, like us, need value not as words, but in the form of action and results. This is what we are committed to.”
This also holds true for our in-house activities. A dialogue culture was fostered at staff events, departmental visits, the general agents’ tour and the Management Summer School; a culture that has helped gear the Baloise up for the challenges of the future.”
It is our employees who make the most vital contribution to the success of the Baloise. To support them in their daily work and in the achievement of our exacting common objectives, the Group continued to invest heavily in the enhancement of corporate culture, management structure and personnel skills development in the year under review. The Baloise’s corporate values, encapsulated as “Create value,” “Foster relations” and “Bring about change,” served as overall guidelines.
Foster relations: The success of our company is built on the performance of our staff. Their motivation, dedication and job satisfaction are therefore prime success factors, and these are closely linked to clear management structures and a people-oriented culture of trust. In-house surveys show that what our staff value most are interesting and challenging tasks, sufficient creative freedom, and good and open relations with colleagues and line managers.
To become more competitive, it is essential that we develop our staff’s skills in line with our strategic requirements. A key skill to be fostered is the ability to implement, i.e. the ability to attain operational excellence in all relevant fields. Both in Switzerland and Germany, the Baloise maintains its own personnel training and management development centers. In addition, a large number of staff members make use of external training opportunities, the costs of which are usually borne by the company. In all, the Group invested nearly CHF 13 million in personnel training and development in 2003. Thanks to its well-established and comprehensive management training programs, the Baloise was again able to recruit managers at all levels from its own ranks – people who have gained the technical knowledge, interpersonal skills and high customer awareness necessary to make a difference to the success of the company. Finally, 420 positions offered to apprentices, trainees and interns throughout the Group prove that the Baloise also takes its social responsibility for the education and training of young people very seriously indeed.
Number of employees at December 31, 2003 1 of which 240 Group
In early 2004, the Baloise became the first Swiss primary insurer to publish a Sustainability Report. It demonstrates how professionally conducted insurance business and a sustainable corporate focus can complement one another perfectly.
The Sustainability Report can be obtained from the Baloise. � Contacts, inside cover flat
Further information about our activities in connection with sustainability can be found on our website. � www.baloise.com/Profile/Sustainability
Stock markets went through two phases in 2003: The first quarter, which was overshadowed by the war in Iraq, saw a massive price collapse on stock markets around the globe. In the further course of the year, markets recorded a substantial recovery. The Swiss Market Index (SMI) closed 2003 with a year-on-year performance of 18.5%. The insurance industry also recovered, as reflected in the Swiss Performance Index Insurance (SXIS) figure of +13.4%, yet underperformed the market as a whole.
The Baloise shares’ -6.1% performance year-on-year reflects the plunge in the first quarter followed by a vigorous recovery since. In the first quarter, the share price plummeted by 42.6% amidst the general stock market collapse. The low-water mark was reached in mid-March. After that, towards the end of the Iraq war and boosted by the Baloise’s strong capital base and a positive assessment by the market, the share price picked up significantly.
It closed the second quarter up 39.4%, the thirdbest quarterly performance of a Swiss insurance company. The trend continued in the third quarter, in which the share price advanced by 11.6%. The development was again positive in the fourth quarter, though the gain of 5.1% was still somewhat below the Swiss market average. The Baloise Group maintained its policy of consistent distributions and paid a dividend of CHF 0.40 per share.
In line with the company’s long-standing policy of regular, profit-linked distributions and in view of the positive result of fiscal 2003, the Board of Directors is proposing a cash dividend, up on the previous year, of CHF 0.60 per stock. The proposal for this year’s dividend will be submitted to shareholders for approval at the General Meeting on May 14, 2004.
There are no restrictions on the acquisition of BâloiseHolding shares. Shareholders who have purchased shares under their own name and for their own account are entered in the share register with voting rights up to a maximum of 2% of all shares issued. This also applies to shares held by nominee companies, provided the beneficial owner has been made known to us (Art. 5 of the Articles of Incorporation).
Net profit per share1 in CHF 9.1 11.2 7.3 - 11.6 1.7
Time-weighted number of shares entitled to dividend in units 58,620,000 57,824,280 56,087,855 55,307,150 55,307,150
Ratio, market capitalization/consolidated capital and reserves 98.2 136.9 157.2 98.5 86.0
ROE on capital and reserves as shown in the balance sheet3 in percent 7.4 8.5 6.3 - 15.0 2.9
Change in unearned premiums reserves - 26.2 - 4.0 – –
Change in loss reserves/actuarial reserve 114.5 - 108.4 - 2,240.6 - 1,096.6
Total underwriting result of business ceded - 130.7 - 164.1 - 2.0 0.3
Other non-technical income and expenses 9.5 - 14.3 - 133.9 - 161.9
The reported technical costs 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 Asset Management).
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, Austria and Croatia.
Of which solvency expenses - 417.0 - 264.0 in CHF m, all figures “after tax”
+/- 10% change in market value of shares – + 4.3/- 4.8
+/- 0.5% change in money market interest – + 17.5/- 17.6 in percent
Ratio of new business to APE in percent – 5.0 1 Annual Premium Equivalent = 100% annual premium of new business +10% single premium
Medium-term fixed-rate notes, bonds and mortgage bonds - 98.3 - 99.5
Sales other than premium-type, in particular sale of fund units for unit-linked life insurance 451.0 541.8 in CHF m
Premiums earned and policy fees for own account 5,825.2 6,484.7 6,433.4 7,046.0 7,114.7
Realized gains and losses on investments (net) 7.3 628.5 826.7 149.4 - 806.5 - 41.3
Claims incurred including processing costs (non-life) 15 - 1,675.4 - 1,727.9 - 1,785.0 - 1,920.8 - 2,031.1
Claims and benefits paid (life) - 2,515.0 - 2,756.5 - 2,896.6 - 2,946.5 - 3,704.2
Change in actuarial reserve (life) 16 - 1,407.9 - 1,680.3 - 1,449.4 - 2,235.0 - 952.2
Administrative and other operating expenses - 984.4 - 1,267.3 - 1,238.6 - 1,226.5 - 1,318.4
Profit/ loss before tax and minority interests 646.3 732.1 523.0 - 714.3 223.7 in CHF m 1 Additional information
Gross premiums written and policy fees 6,085.3 6,701.2 6,632.7 7,274.5 7,374.7
Total liabilities and capital and reserves 49,682.8 59,284.0 57,494.8 56,913.8 64,300.8 in CHF m
Consolidated income statement Consolidated balance sheet Consolidated cash flow statement Consolidated capital and reserves
Claims incurred including processing costs (non-life) 15 - 1,920.8 - 2,031.1
Total investments for account and risk of life insurance policyholders 11 550.5 798.2
Policyholder bonuses credited and provision for future policyholder bonuses 17 3,685.0 4,063.4
Technical provisions for account and risk of life insurance policyholders 554.6 798.1
Total liabilities and capital and reserves 56,913.8 64,300.8 in CHF m
Net profit/ loss for the year before tax - 714.3 223.7
Realized gains and losses on the sale of investments 7 806.5 41.3
Technical provisions for account and risk of insurance policyholders - 2.9 4.3
Cash flow from increase in share of investments held - 6.5 –
Acquisition of subsidiaries where there is no effect on cash and cash equivalents 5 - 9.3 - 115.1
Disposal of subsidiaries where there is no effect on cash and cash equivalents 5 – 37.5
Of which from joint ventures - 29.5 28.3 in CHF m
Effect of foreign exchange rate changes on cash and cash equivalents - 27.3 22.6
Deferred acquisition costs charged to capital and reserves – – – 97.7 – 97.7
Deferred acquisition costs charged to capital and reserves – – – - 99.1 – - 99.1
Movement on unrealized gains and losses on investments (net) – – – 145.9 – 145.9
Consolidated net profit for the year – – – – 91.4 91.4
Claims and benefits paid (life) - 2,014.2 - 2,372.1 - 825.4 - 1,096.1
Change in actuarial reserve (life) - 1,993.2 - 962.5 - 136.5 6.7
Amortization of intangible assets and depreciation of tangible non-current asset - 42.1 - 48.6 - 39.5 - 35.9
Profit/ loss before tax and minority interests - 244.9 61.5 - 25.6 77.1
Cash flow from financing activities (net) - 434.7 114.0 - 26.7 90.7
Impairment of value charged to income - 612.8 - 57.1 - 238.0 - 73.2
Reinstatement of original value charged to income 130.4 502.7 55.0 219.8 in CHF m
Premiums written and policy fees for own account 2,477.5 2,873.4 4,593.4 4,248.1
Change in unearned premiums reserves for own account - 25.5 - 7.2 – –
Realized gains and losses on investments (net) - 195.7 - 47.1 - 498.9 - 90.4
Claims incurred including processing costs (non-life) - 1,931.1 - 2,039.1 – –
Claims and benefits paid (life) – – - 2,935.8 - 3,696.3
Change in actuarial reserve (life) – – - 2,234.5 - 951.4
Surplus and profit allocations to policyholders - 10.5 - 12.4 39.7 - 428.1
Amortization of intangible assets and depreciation of tangible non-current asset - 47.0 - 58.6 - 39.5 - 53.5
Net profit/ loss by business segment - 173.6 47.5 - 327.2 27.0
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 in accordance with the Generally Accepted Accounting Principles in the United States (US GAAP).
In fiscal 2002 and 2003, no new IFRS or US GAAP standards affecting the Baloise Group were introduced, nor were any existing ones changed.
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. Com-
Financial Report 2003 Notes to the consolidated financial statements panies which are acquired for the purpose of resale are held and accounted for as investments.
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. Deutscher Ring Beteiligungsholding is a joint venture in which the Baloise Group has a direct 65% interest. The remaining 35% are held by Deutscher Ring Krankenversicherungsverein, a mutual insurance company. The contractual arrangements are such that the majority shareholder does not have overall control. These companies are consolidated on a proportionate basis, therefore the Baloise Group reports only its share of assets, liabilities, income and expenses.
3.3 Investments 3.3.1 Financial assets The business activities of the Baloise Group include the issuing of insurance policies, as a result of which the Group incurs financial liabilities and assumes guarantees. To ensure that it is in a position to meet its financial liabilities, the Baloise Group acquires financial instruments which correspond as closely as possible in type and maturity period to the expected level of claims and benefits paid. The composition of the investment portfolio is therefore determined mainly by the expected investment return for
each type of investment by the type of liabilities arising from insurance business and by the availability of risk capital, which is used to even out fluctuations in the price of investments.
The following criteria are used to classify financial assets: Financial assets which were acquired with the purpose of realizing a short-term gain by taking advantage of fluctuations in market price are shown under the Held for trading heading. Financial assets which are held for an indefinite period of time and may be sold at any time to improve liquidity or to react to changes in market conditions are shown as Available for sale. Financial assets with a fixed maturity date are shown under the heading Held to maturity, provided the Baloise Group has the opportunity and intention of holding them until their maturity date. There is also the possibility of classifying investments as Originated by the Group. Investments are classified under one of these headings when they are first recorded in the books. The classification is then reviewed at year-end to ensure that it is still appropriate.
Alternative financial assets such as private equity investments and hedge funds are held as Available for sale.
Loans, policy loans and similar financial assets issued by the Baloise Group are shown under the heading Originated by the Group.
The main tool for the management of investment risk and return on the asset side of the balance sheet is the strategic allocation of investments to the various investment categories (asset allocation). Derivative instruments are used to underpin this asset allocation. They are particularly useful for hedging investments, when preparing to purchase or sell investments, or to slightly increase investment income.
However, no trading or speculative business is undertaken in derivatives. Derivative transactions are undertaken only with counterparties who have at least an A credit rating from Standard & Poor’s.
All derivatives are recorded in the balance sheet at their market value. When the contract is concluded, the derivative is classified either as a hedging instrument against the market value of an asset or a liability (fair value hedge), as a hedge against future transactions (cash flow hedge) or as a trading instrument.
Derivatives which do not fulfill IFRS requirements for hedging transactions are treated as trading instruments, even if they have a hedging function according to the Baloise Group’s own risk management regulations.
Changes in the market value of derivatives which are classified as trading instruments or do not fulfill the requirements of a hedging transaction are shown in the income statement.
Capitalized goodwill is amortized on a straight-line basis over its expected useful life, which may not exceed 20 years. The period over which the goodwill is to be amortized is determined mainly by the future economic benefits expected to flow from the company acquired. These depend, among other things, on the type of business acquired, the lifespan of the insurance contracts, relationships with clients and
Tangible non-current assets are shown at cost less accumulated depreciation. Depreciation is calculated on a straight line basis over the estimated useful life of the asset, as follows: buildings for own use 25 to 50 years, equipment and furnishings 5 to 10 years, computer hardware 3 to 5 years. Land is shown at cost less any necessary provisions for impairment. Repairs and maintenance are always charged to the income statement.
Cash and cash equivalents comprise cash on hand, demand deposits and short-term 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 shortterm investments.
Receivables arising out of insurance operations and other receivables are recognized and stated at amortized cost. This generally corresponds to the nominal value of the amount receivable. Permanent diminutions in value (impairment losses) are charged directly to the income statement.
The actuarial reserve is calculated on the basis of actuarial principles from the cash value of future claims and benefits paid less the cash value of premiums not yet paid. The calculation is made in accordance with the following Financial Accounting Standards: FAS 60, FAS 97 or FAS 120. The accounting principles (e.g. in respect of interest or mortality) vary depending on the country, product and year of acquisition and take country-specific empirical values into consideration. Unearned premiums, unearned revenue reserves and provisions for final policyholder bonuses are included in the actuarial reserve.
Amounts for future surplus shares to policyholders are fixed on the basis of local statutory and contractual regulations and are allocated to a separate provision. This provision also includes policyholders’ share of the unrealized gains and losses covered by the IFRS shareholders’ equity and their share of the higher or lower values recorded in the consolidated financial statement – as compared with the statement based on commercial law – and taken to income.
Policyholder bonuses credited: Bonuses already allocated which have been accrued on an interest-bearing basis are included in Policyholder bonuses credited and provision for future policyholder bonuses.
The term gross is added to technical account headings where these refer to business concluded by the Baloise itself. The terms net or for own account are used after deducting any reinsurance element.
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.
Costs which are directly associated with the acquisition of insurance contracts (e.g. commissions) are deferred and written off over the period of the contract, or over the premium payment period, if shorter. Deferred acquisition costs are reviewed when the contract is acquired and thereafter on an annual basis for recoverability.
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 the US-GAAP, otherwise the contract would be dealt with outside the income statement as deposit accounting.
Reinsurance ceded is business which has been ceded to insurance companies outside the Group and comprises amounts which relate to direct life and nonlife business and reinsurance assumed which is to be ceded.
The convertible loan issued by Baloise Finance Jersey, which confers the right to subscribe for shares in a non-group company, consists of a liability and an embedded option. When the loan was issued, the market value of the embedded option was determined and shown separately as a derivative financial instrument. The cost of the liability component is the present value of future cash flows, which was calculated when the issue was made. The discount factor applied is the market interest rate for similar loans without conversion or option rights.
Amounts due from the Baloise Group to employees include all types of employee benefits given in exchange for services rendered by employees or in special circumstances.
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.
Shares subscribed directly: Since January 2003, employees of all Group companies who are eligible for incentives have been able to subscribe shares at a preferential price as part of their variable, performance -related pay component (incentive). The subscription price is always 10% lower than the market value at the time of subscription. The shares are committed to safe custody for a blocking period of three years.
Shares: Fair value is the quoted share price. If this is not available, the fair value is estimated using gen-
erally recognized methods and in light of the current state of the market. If the value cannot be estimated reliably, stocks are reported at acquisition value.
Mortgage loans, policy loans and other loans: The fair values are determined by discounting the cash flows, using the current interest rate applied by the Baloise Group to similar loans. 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. If no market prices are available, the market value is estimated. If the value cannot be estimated reliably, financial assets are reported at acquisition value.
5. Acquisitions and disposals of subsidiaries and other business units 5.1 Acquisitions and disposals of subsidiaries and other business units in 2002
DePfa Beteiligungs-Holding II GmbH, Düsseldorf, valued at equity, sold its participating interest to DePfa Bank PLC, Dublin, through the stock market in the second half of 2003.
No other significant acquisitions or disposals were effected in fiscal 2003.
Cash and cash equivalents used to make the acquisitions 94.2 20.9 115.1 in CHF m 6. Information about geographical and business segments
The business segments are non-life insurance, life insurance, banking (including asset management and investment funds) and other activities and Group business. Non-life insurance includes accident insurance, health insurance and products for liability, automobile, property and transport lines of business. The products are geared to the requirements of our clients – mainly private clients – and the core competencies of the companies in the Baloise Group.
The other activities and Group business segment include in particular investment and real estate companies.
Financial Report 2003 6.1 Gross premiums by geographical and business segments 6.1.1 Gross premiums by geographical and business segments 2002 6.1.2 Gross premiums by geographical and business segments 2003 6.2 Change in gross premiums by geographical and business segments 2003
Cash and cash equivalents 244.4 145.9 301.7 692.0 in CHF m
Originated by the Group – – – - 66.2 - 66.2
Cumulative impairment of value charged to income (net) 30.1 942.6 – 511.0 1,483.7 in CHF m
value is due to the reclassification of securities for which, in the meantime, reliable market values have become available.
Shares not stated at market value to the amount of CHF 89.2 million (2002: CHF 66.7 million) are included in the financial statements at December 31, 2003. It was not possible to establish a market price or make a reliable estimate of the value of these shares. They have been entered at purchase value, or lower if there are justifiable reasons for this.
As of December 31, 2003, the fixed-interest securities classified as Available for sale do not include any securities valued at purchase value (2002: CHF 38,836).
During the year 2003, no fixed-interest securities without market value were sold. The change in book
Movement on unrealized gains and losses on associates - 90.5 61.0
Balance at December 31 (gross) 781.5 1,296.8 in CHF m 7.5 Movement in unrealized gains and losses
DePfa Beteiligungs-Holding II GmbH, Düsseldorf 94.9 89.9 59.2 39.8 40.0% 40.0%
Further information about associates is given in Note 34, Significant subsidiaries and participating interests at December 31, 2003.
Additions due to changes in composition of consolidated Group 0.2 84.5
10. Derivatives 11. Investments for account and risk of life insurance policyholders
12. Intangible assets 12.1 Intangible assets 2002 12.2 Intangible assets 2003
On the basis of impairment testing, a further CHF 20.0 million have been written down to zero in addition to the planned amortization of goodwill from the participation in Mercator Verzekeringen N.V. in the business year 2003.
Impairment of value charged to income – – – - 0.7 - 0.7
Reinstatement of original value charged to income – – – – –
Present value of profits from insurance Further Goodwill Badwill contracts acquired intangible assets Total
Additions arising from changes in share of investments held – – – – –
Impairment of value charged to income - 37.6 – – - 0.7 - 38.3
13. Tangible non-current assets 13.1 Property, plant and equipment for own use: 2002 13.2 Property, plant and equipment for own use: 2003
Additions arising from changes in composition of consolidated Group 4.1 21.6 – 25.7
Of which assets under finance leases – 139.8 – 139.8 in CHF m
13.3 Other tangible non-current assets: 2002 13.4 Other tangible non-current assets: 2003 14. Deferred acquisition costs
Of which assets under finance leases 0.1 0.7 0.8 in CHF m
Deferred during the year under review 251.7 266.5 134.3 135.4 386.0 401.9
16. Actuarial reserve: life 17. Policyholder bonuses credited and provision for future policyholder bonuses 18. Reinsurance 18.1 Technical provisions and assets from reinsurance
In 2003, 3.7% of gross premiums and policy fees were ceded to external reinsurers (2002: 3.0%). 69% (2002: 67%) of reinsurance is ceded to reinsurers rated AA (Standard & Poor’s) or better.
Financial Report 2003 18.2 Premiums earned and policy fees 18.2.1 Premiums earned and policy fees: 2002 18.2.2 Premiums earned and policy fees: 2003 18.3 Deposit assets and liabilities from deposit accounting
Total net premiums earned 2,452.0 4,593.4 0.6 7,046.0 in CHF m
Financial Report 2003 19.3 Terms applicable to the bonds outstanding 19.4 Reconciliation between minimum lease and their present value for financial leasing 20. Financial provisions for the year 2003
Unused amounts reversed and released to income - 6.2 - 26.7 - 32.9
Amounts used not charged to income - 12.8 - 7.1 - 19.9
As at December 31, 2003 no tax assets were capitalized on losses carried forward amounting to CHF 584.3 million (2002: CHF 411.2 million). Of these, CHF 20.8 million expire after one year, a further CHF 0.8 million expire after two to four years and CHF 562.7 million expire after five or more years.
The most significant part of total personnel costs consists of actual direct benefits provided to employees. These are divided into the following categories: short-term and long-term benefits, postemployment benefits, termination benefits and equity benefits.
23.1 Assets and liabilities relating to employee benefits 23.2 Benefits from occupational benefit plans
Benefits from occupational benefit plans comprise all amounts provided for current employees and pensioners. The following table aggregates pension plans under Pensions and shows other benefits (such as subsidized mortgages) under Other benefits.
Net liabilities relating to defined benefit plans - 227.6 - 364.3
Financial Report 2003 23.2.4 Net obligations in respect of pension benefits 23.2.5 Actuarial assumptions
Benefits payable to current employees twelve months or more after the end of the fiscal year are disclosed separately in accordance with specific requirements. The requirements are similar to those applying to pension obligations. Most of the benefits are employee service anniversary benefits. At December 31, 2003, the present value of the obligation was
Disposal due to changes in composition of consolidated Group – - 0.5
Market value of subscribed shares at time of subscription in CHF m 14.0 16.4
23.6 Equity benefits: share participation sheme 23.7 Equity benefits: share option sheme
Given the choice of taking the mandatory part of the incentive in either shares or options, employees chose shares without exception in 2003 (either directly or linked to a loan).
Addition/disposal due to changes in share of investment held - 21.5 3.8
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.
in CHF m 30.1 Derivatives: fair value hedges 30.2 Derivatives: cash flow hedges
Time deposits make up CHF 668.0 million of the total amount placed with UBS AG, Zurich/Basel (2002: CHF 1,252.0 million).
The foregoing 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 - 5,196.1 - 2,276.2 - 3,939.4 - 11,411.7
Liabilities without fixed due date – – – - 45,097.1 in CHF m
32.2 Capital commitments 32.3 Warranties and guaranties for the benefit of third parties
Of which own share of joint venture capital commitments – –
Financial Report 2003 32.4 Warranties and guaranties for the benefit of third parties 32.5 Assets assigned or pledged and securities lending 32.6 Obligations under operating leases 33. Events after the balance sheet date
Holding Method of company capital Total assets policy fees Switzerland Principal activity in percent inclusion1 Currency in millions in millions in millions
Baloise Insurance Company, Basel Non-life 100.00 F CHF 75.0 5,414.9 1,237.7
Baloise Asset Management Switzerland AG, Basel Asset management 100.00 F CHF 1.5 9.4 –
Baloise Asset Management International AG, Basel Investment advice 100.00 F CHF 1.5 4.4 –
Basler Versicherung Beteiligungsgesellschaft mbH, Hamburg Holding 100.00 F EUR 20.5 249.4 –
Deutscher Ring Lebensversicherungs-AG, Hamburg Life 100.00 F EUR 22.0 7,939.6 550.7
Securitas-Gilde Lebensversicherungs AG, Bremen Life 100.00 F EUR 4.1 959.4 78.0
Deutscher Ring Sachversicherungs-AG, Hamburg Non-life 100.00 F EUR 50.0 587.0 168.8
Deutscher Ring Financial Services GmbH, Hamburg Other 100.00 F/P EUR 0.1 6.6 –
Grocon Erste Grundstücksgesellschaft mbH, Hamburg Other 100.00 F EUR 0.7 19.6 –
Grocon Zweite Grundstücksgesellschaft mbH, Hamburg Other 100.00 F/P EUR 1.5 16.3 –
OVB Vermögensberatung AG, Cologne Other 57.70 F/P EUR 12.4 62.6 –
Mercator Verzekeringen N.V., Ghent/Antwerp Life and non-life 100.00 F EUR 105.0 2,545.7 409.4
Amazon Insurance N.V., Antwerp Non-life 100.00 F EUR 3.7 19.3 14.7
Antwerp Real Estate N.V., Antwerp Other 84.00 F EUR 1.2 4.3 –
Automobielcenter Gent N.V., Ledeberg Other 97.38 F EUR 0.3 4.4 –
Plastic Investment Company, Kortrijk Other 29.00 E EUR – – –
1 F: fully consolidated, P: consolidated on a proportionate basis, E: stated at equity valuation
Holding Method of company capital Total assets policy fees Luxembourg Principal activity in percent inclusion1 Currency in millions in millions in millions
Bâloise Vie Luxembourg S.A., Luxembourg Life 100.00 F EUR 12.5 285.8 20.6
Baloise Fund Invest Advico, Luxembourg Investment advice 100.00 F EUR 0.1 3.3 –
Basler Zivotno Osiguranje d.d., Zagreb Life 97.00 F HRK 15.0 27.3 5.3
Basler Immobilien GmbH, Vienna Other 100.00 F EUR 14.5 47.9 –
As auditors of the Group, we have audited the consolidated financial statements (income statement, balance sheet, cash flow statement, statement of changes in capital and reserves, and notes to the financial statements, pages 69 to 120)1 of the Baloise Group for the year ended December 31, 2003.
Basel, March 24, 2004 1 The German version of the Financial Report is binding.
Baloise Insurance Co. (I.O.M.) Ltd., Isle of Man 100 100 CHF 31.2
BZ Group’s holdings dropped under the 5% threshold as at June 17. Strategic Money Management B.V. from the Netherlands fell below the 5% mark as at July 17 after selling its stake to Zurich Financial Services. Following that transaction, Zurich Financial Services for a while held 27% of the Baloise – 21.48%
At March 31, 2004, warranty obligations amounted to CHF 435.8 million (prior year: CHF 443.6 million). Of these, CHF 204.0 million relate to the warranty in respect of the convertible bond issued by Baloise Finance (Jersey) Ltd. The securities needed for hedging are recognized as other investments.
Administrative costs include CHF 1.1 million relating to personnel expenses in the year under review (2002: CHF 1.1 million).
in shares and 5.52% in options. The majority of this stake was then placed across a broad range of investors, leaving Zurich Financial Services below the 5% threshold as of November 5, 2003.
As a widely held joint stock company, the Baloise is included in the Swiss Market Index (SMI) and features in the SWX’s index calculations with a free float of 100%.
The following table provides a current breakdown of shareholders as at March 31, 2004.
in percent * pursuant to notification according to article 20, SESTA
The above distribution is in accordance with the provisions of Article 30 of the Articles of Incorporation and results in a distribution of CHF 0.60 gross per share (CHF 0.39 after deduction of withholding tax).
Available for distribution by the shareholders at General Meeting 22,482,464 41,577,533
Report of the statutory auditors to the General Meeting of Bâloise-Holding, Basel