Recognizing customers‘ risk profile – revolutionary pricing policy in Luxembourg page 31
Optimized claims management in Germany – for the benefit of all page 27
Swiss market in practice – how we stay close to customers and become trusted partners of choice page 19
The Baloise Group’s net profit rose markedly by 81% to CHF
The non-life segment posted a profit before tax and financing costs of CHF 254 million, up by 6% (2004: CHF 239 million ). The net combined ratio (combined loss and expense ratios) amounted to 100.0% (2004: 97.5%). It was severely burdened by the claims incurred in connection with the major floods in 2005.
Life insurance recorded a profit before tax and borrowing costs of CHF 151 million (2004: CHF 68 million), despite the continuously low interest rate environment. The embedded value improved to CHF 2,360 million. The value of new business amounted to CHF 12 million, with a margin of 5.3%.
The total business volume (including unit-linked life insurance ) came to CHF 7,394 million (2004: CHF 7,384 million).
In line with our earnings-related distribution policy, we will propose to the Annual General Meeting a dividend of CHF
In view of ongoing operational progress and based on our cautiously optimistic assessment of financial market developments, we are striving for a return on equity of 15%
Of which other countries * The previous year’s figures have been restated in accordance with the modified IFRS regulations. 1 The mode of determining the number of employees changed in 2004. The numbers are now stated in terms of full-time equivalents.
Profit/loss after tax and before minority interests 200�–2005 in CHF million
Swiss Market Index 1 December 29, 2000 = 100 2 Adjusted after 1:10 split of July 24, 2001 2 �
The Baloise Group, headquartered in Basel, Switzerland, operates in continental Europe. It provides insurance and pension solutions primarily for private individuals and small and medium sized enterprises. The Group’s strategic focus is on sustainable, income-oriented growth. Core markets are Switzerland, Germany, Belgium, Austria and
Austria (incl. Croatia) Basler Austria in Vienna provides private and business clients with a wide range of insurance and pension solutions.
In this market segment, Basler osiguranje has been operating successfully in Croatia for five years.
Bad Homburg n n Luxembourg n Antwerp n Basel n Solothurn
R o L f S C H ä u B L e : We had an excellent year. Our profit again rose substantially. All business lines and units made a significant contribution to our earnings. The stock exchange rewarded our performance: the Baloise share price increased 46.2%, more than our benchmark indices.
R o L f S C H ä u B L e : As an insurance man to the bone and
Chairman of the Baloise I am proud that we were able to
ciently. Although we are a business minded, exchange listed company and must satisfy the stringent requirements of our investors, we must never forget that we also have to take charge of situations like this one for the good of the community. The fact that we were able to do both is proof of the excellent shape our company is in. All this was only feasible because of the outstanding work performed by our staff and managers.
How would you assess your capital situation and what are your dividend distribution policies?
“We assess all our acquisitions according to strict added-value criteria.” rightly expect. We have a policy of income-based, continuing dividend distribution and we supplement cash dividends with additional distribution methods such as share repurchases and options. We generally distribute onethird of our annual net profit, taking self-financing of Group growth into account. We will request the Annual General
How are you managing your capital? What do regulations such as Solvency II or the Swiss Solvency Test mean for you?
R o L f S C H ä u B L e : For years we have been managing our capital in accordance with the business risks incurred by our insurance activities and our investments. Regulations such as Solvency II in the European Union or the Swiss Solvency Test have the same objectives. We welcome these endeavors as their implementation will enhance confidence in our industry. However, these regulations also have a side that we find annoying because it needlessly limits our freedom to do business, without offering the client any appreciable advantages. The guaranteed minimum interest in the Swiss group life insurance business or the so-called unisex rate in Germany are cases in point. Our message to the regulatory bodies is: moderation, please.
f R A n k S C H n e w L i n : We learned a good deal from the stock market crash of a few years ago and have made our asset and liability management even more stable. So Solvency II and the Swiss Solvency Test are fundamentally nothing new for us because we are already working with similar risk-based models. We consciously take clearly identifiable risks in order to optimize our profitability and utilize our excellent risk-bearing capacity. This provides our shareholders and customers with an attractive return on their invested capital or premiums paid.
f R A n k S C H n e w L i n : Organic profitable growth is a priority for us. In our core markets the focus is on growth in business sectors with high added value, selectively supplemented by acquisitions. Our plans include using crossand upselling to improve penetration of our target customer segments. This is precisely where we are focusing our sales efforts, which are increasingly based on measurable customer value.
How do you see the outlook in your insurance lines and your banking activities?
R o L f S C H ä u B L e : We monitor interest rates and their effect on investments closely as part of our risk management procedures. However, I would like to put the effect of interest fluctuations on the market value of bonds into perspective.
“held to maturity”. This reduces the effect of market fluctuations on our shareholders’ equity.
What opportunities do you see in the equity markets and how does this influence your investment policies?
f R A n k S C H n e w L i n : Because we believe that equity markets will remain an attractive place to invest and because of our excellent risk-bearing capacity, we aim to place 10–
What do you want to achieve in 2006 and in the following years? What are your operational priorities?
f R A n k S C H n e w L i n : We are striving for a return on equity of 15% by 2008. This target is backed by a return on equity from business operations of at least 10% and a net combined ratio of under 100%. Given that the stock market has been steadily rising for three years already, we will actively adjust to market our stock holdings, which are high in comparison with the industry average. An additional contribution to the return on equity by 2008 is expected from our active asset and capital management. After all, we want to become the preferred and trusted partner of our target customers and sales partners. We are aiming for aboveaverage growth in the target customer segment and in unit-linked life insurance. A great deal of groundwork has been done in recent years. We have acquired new capabilities, for example in scoring, risk selection, claims management, or in managing sales based on customer value.
But we haven’t yet crossed the finishing line. In 2006 and in the coming years, our operational priorities will continue to be improving and cementing customer loyalty by providing first-class service and advice. Over time we want to become the best in this field.
R o L f S C H ä u B L e : Our long-term focus is definitely on our target of becoming and remaining one of the most profitable insurers, and the key lies in the exceptional quality of our operational business. This may not sound particularly spectacular, but it is precisely what people expect from us: predictability by providing enduring outstanding performance.
On December 29, 2005, Baloise shares reached a threeyear peak of CHF 77.00 and went on to close the year at CHF
US dollar and high energy prices. The interest differential compared with Europe boosted the US currency and thereby helped to improve the competitiveness of European exporters. In late August, the destruction caused by Hurricane Katrina drove already-high oil prices even higher.
Fears of inflation and the subsequent increases in base interest rates in the EU and Switzerland reversed the trend during the fourth quarter. Since insurers welcome rising interest rates, their share prices began to outperform the market once again. As a result, the sector index advanced by 20.6% during the last three months of the year, while the SMI went up by 9.9%. In spite of natural disasters, the insurance industry index thus rose by 26.4% overall during the second half of the year, compared to the SMI’s 21.3%
There were no significant changes to the Baloise’s share-holder base during the reporting period, and the free float remains at 100%. No single shareholder owns more than 5% of the company’s shares. 1Source: Swiss Re
Baloise shares posted a highly gratifying price increase of 46.2% during 2005. Performance was 10.3 percentage points higher than that of the Swiss stock exchange’s relevant sector index, which advanced by 35.9%. The Swiss Market index SMi rose by 33.2%.
1 See Financial Report section 36 2 Average number of outstanding shares 3 Calculated on the basis of consolidated equity before minority interests 4 From 2004 calculated on the basis of average equity incl. minority interests net of the dividend sum of the previous year 5 To be proposed to the Annual General Meeting 6 Adjusted due to share split 7 Not significant
Group-wide strategic focus on operational excellence has proven highly effective. Its objective is to gain higher competence levels than our competitions in our core insurance and pension business and thereby achieve outstanding and sustainable profitability levels. The pillars of this strategic thrust are management of our sales force and distribution partners with a clear focus on added value, riskaligned products and prices, efficient claims management and continual improvement of business processes.
Claims resulting from severe floods had a net adverse effect of CHF 68 million on our operating income, eroding profit from our business in Switzerland. In connnection with the refinement of statistical methods, the actuarial provisions were reinforced, in particular for losses in the personal insurance lines. The sale of non-strategic equity holdings and expiry of shareholder agreements in Belgium and one-off reversals of allowances all had a positive effect.
The 2005 financial year was a very successful one for the Baloise Group. Profit rose by 81% to CHf 404 million despite a heavy claims burden due to catastrophic flooding in Switzerland, Germany and Austria. All business units and lines made a substantial contribution to earnings. Shareholders’ equity grew by 26% while return on equity rose to 10.3%. our capital base continued to improve, and at 309% the solvency margin reached almost triple the legally required minimum. investors showed confidence in Baloise shares, whose price rose by 46.2% during the course of the year, outpacing the relevant stock market indices.
non-life insurance The non-life segment (property and casualty) achieved a profit before tax and borrowing costs of CHF 253.6 million (2004: CHF 239.2 million). The business units outside of Switzerland as well as strong investment income and cost reductions helped offset the record expense of the devastating flooding in Switzerland, resulting in profit growth of 6.0%. The extraordinarily high damage claims were also the reason for the rise in the combined ratio to 100.6% gross (2004: 93.0%) and 100.0% net (2004: 97.5%). With the exception of Switzerland (as a result of the natural disasters) and Basler Securitas, the gross figures of the other business units as compared to the previous year either held steady or improved, with the Baloise in Luxembourg showing the strongest increase. We continued to improve operational efficiency.
The total volume of business including unit-linked life insurance products came to CHF 4,338 million (2004: CHF
Dutch Aegon Group by Deutscher Ring, also made a substantial contribution to this promising business area: its volume is derived largely from unit-linked products. Premium volume in accordance with IFRS accounting came to
Swiss market saw a particularly steep decline while the group life business rose to slightly above last year’s level.
2,137 million to CHF 2,360 million in the year under review.
Lower projected investment income (CHF -244 million) was offset by the more positive than anticipated capital market developments in 2005 (CHF +169 million) and reduced surplus participation (CHF +77 million). The value of new business amounted to CHF 12.0 million. The margin of new business declined slightly to 5.3% (2004: 5.8%).
Banking The banking segment achieved a profit before tax and borrowing costs of CHF 77.2 million (2004: CHF 33.2 million).
It achieved growth in all business segments while keeping costs and credit risks low. Baloise Asset Management and Baloise Fund Invest jointly made a significantly higher contribution of more than CHF 20 million. The one-off effect of a CHF 29 million reversal of credit risk allowances at Deutscher Ring Bausparkasse also contributed to the segment‘s profit. In all other respects the Bausparkasse is developing according to plan.
Shareholders’ equity The shareholders’ equity of the Baloise Group rose by 25.5% to a gratifying CHF 4.4 billion in the year under review. The main sources of the upswing were the annual profit and a positive trend on the capital markets, particularly in equities. The Group solvency ratio was 309%
Taxes Tax expenses for 2005 came to CHF 72.4 million, including current taxes of CHF 112.9 million and deferred tax income of CHF 40.5 million. Measured against annual profit, tax expenses are very low. Various effects are responsible for this circumstance, for example tax-free capital gains in
We are aiming for above-average growth in the target customer segment and in unit-linked life insurance. A lot of groundwork has been done over the past few years, so that we can now boast advanced skills in areas such as scoring, risk selection, claims management, and distribution on the basis of customer value. But there is still a lot to be done. For 2006 and the years beyond, our operational priority will remain set on strengthening and expanding customer loyalty through top-of-the-range services and advice.
Premium income (gross) by regional segment 2005 in percent 2004 (restated)
rise against the CHF, however, the gain for Swiss investors was more than 18%. The performance of emerging markets shares was especially impressive: these advanced by 34%, or by 55% in CHF.
CHF. As we took the strategic decision at the beginning of the year to hedge the major part of our US investments out of fundamental as well as risk considerations, we were able to limit the exchange rate risk, but were largely unable to benefit from the unforeseen surge of the US dollar. Conversely, our decision to hedge less than half the EUR exposures also proved right, as the EUR spent a long time moving sideways against the CHF within a narrow band: by year-end it had advanced against the Swiss franc by 0.5% to CHF 1.5565.
In the investment properties sector, higher demand from institutional investors pushed up the prices of residential property while demand for commercial properties eased. The number of properties that meet our strict yield and risk criteria is dwindling. As a result, we have launched several construction projects of our own. In our international organization, the lack of suitable properties and the need to diversify our investments prompted us to invest in European institutional real estate funds.
The individual life sector experienced a decline in premiums of 13.0% although the annual premiums in this difficult market were slightly up on last year’s level. Single premium income lost significant ground as a result of both lower interest rates and a one-off effect: a stamp tax campaign in the second half of 2004 was not repeated in 2005, leading to lower premium revenue. In the group life sector, premium revenue rose by 0.6%, which means that we actually gained market share in this shrinking comprehensive insurance market. Increasing demand for comprehensive insurance helped offset the loss of several major clients.
The implementation of the new Swiss regulatory requirements diminished the annual profit of the life insurance segment for 2005 as did the continuing low interest rates.
This trend prompted us to adjust the policyholder bonuses for insurance products with a savings component and for pensions accordingly.
Baloise Bank SoBa Baloise Bank SoBa held its ground very well in a harshly competitive market and exceeded our expectations.
Growth in all business sectors along with lower costs and the net reversal of allowances in the lending business led to a substantial increase in profit. Baloise Bank SoBa’s return on equity including the results from our Focused
R E V I E W O F B US I N E SS Y E A R 20 05 – T H E B A LO IS E G R O U P M A R K E T D E V E LO P E M E N T S
– that very day. At 7 a.m. Dumoulin was at the customer’s door with a ready-to-sign contract in his briefcase.
To become a trusted partner of choice, it takes close acquaintance with the customer and his requirements, commitment and regular contact.
The Customer Value Model signifies a paradigm change for the Baloise and its staff, away from the previously applied product-oriented approach. Instead of differentiating by customer segments, the focus is on the profitability of customer relationships. Nowadays, market image depends less on a company’s products and more on the quality of the services provided by staff members. Customer service is a key competitive advantage.
For Pasquale Zarra in Chur, Canton of Grisons, customer service is also of prime importance. At 7.30 a.m. he is organizing the coming day at his agency. Benefits are due for payment in four endowment policies, and in the case of four other customer contacts he is accompanying and supporting a new staff member. What can an experienced sales agent like Zarra teach a newcomer on the one-hour drive up to Arosa about what it takes to succeed in this field? “You cannot earn money on every visit. First, the foundations have to be laid.”
On the road again. Close contact with customers cannot be maintained from the office alone.
Shortly before 9.30, Bieri is on the motorway heading to the south of Berne. At 10 o’clock, he is due to present an analysis to the owner of a small construction company together with suggestions not only on how the company’s insurance coverage can be optimized, but also for improvements in the owner’s personal pension scheme.
At the same time, Pasquale Zarra is walking through the historic center of Chur to meet Celestine Meyer in her store.
“Today’s target is not necessarily the conclusion of a contract,” says Daniel Bieri before presenting his analysis to the building contractor. “Quickly done business is often quickly gone business.” The discussions last for over an hour. “Raise the waiting period to 24 months (occupa-
DA N I E L B I E R I ”
“Any risks an entrepreneur can bear himself, he should bear himself. My job is to take care of the rest.”
stonemason’s workshop to discuss the washbasin damage in the bathroom. The hotel owner whom Zarra and his sales manager, Ivan De Gani, are meeting for lunch recently announced his intention of cancelling his insurance policies with the Baloise. They now want to find out the reason why.
Trust is gained only by proving your competence. Good preparation and in-depth analysis are the key.
plan. For ten years now, Dumoulin has been Joye’s contact in insurance matters. “My relationship is with Mr. Dumoulin, not with the Baloise,” says Claude Joye. When Dumoulin moved on to the Baloise four years ago, he was allowed to take the Joye portfolio along. “In Switzerland, personal relations play a far greater role in the insurance business than for example in England.”
The Customer Value Model takes this into account. With its CVM, the Baloise has created an efficient target cusassurance that I will be broaching the right subjects when we meet next time”. And how does CVM help him structure his work and find the right kind of clients? “It helps me avoid unproductive work processes and approach sales and advice talks with clearly defined selection criteria. Target customer management is also a good tool for customer retention.” However, CVM also means additional administrative work. “Here I would like to offload some of the burden to have more time to spend with customers.”
Robert Wälti, his General Agent, who has just received the provisional target figures for 2006. “Turning C customers into B customers and B customers into A customers sounds simple in theory,” says Wälti. In practice it means a lot of hard work. They discuss the possibility of organizing an information event on the topic of occupational pension schemes. Getting together a list of whom to invite will, at least, be easy thanks to CVM.
After the meeting Bieri sits down at his desk with some thick files in order to prepare some analyses for the coming week before calling it a day at 6 o’clock. He takes particular pleasure in analyzing the file of a business IT specialist, an Iranian who came to Switzerland as a student and took out a household contents policy with the Baloise in 1991 with an insurance sum of CHF 20,000. One single contract.
3 p.m. Bieri is back in his office. Time to write up the details of the day’s customer visits. “This gives me the
PA S Q U A L E Z A R R A
All insurance contracts are included in the system and together reflect the “value” of the customer in question.
The Customer Value Model is one of the Baloise’s strategic tools in the Swiss market. The underlying goal is market leadership in target customer management.
employer, himself a customer of Bieri’s. After the event, the former student contacted Bieri of his own accord.
Jean-Marie Dumoulin is using the early evening hours to update his customer files and organize some forthcoming meetings when the phone rings with a customer on the line. He has just totaled his BMW. Can Dumoulin handle the claim? Of course he can. Customer service is everything.
Daniel Bieri, Jean-Marie Dumoulin and Pasquale Zarra are among the Baloise’s top sales agents in Switzerland. They are also living proof of the excellence of the company’s internal training system. All three originally worked in different industries before making their mark in the insurance business. They were given the opportunity to acquire a thorough knowledge of insurance matters and spend several weeks a year undergoing further training (legal changes, new products, technical issues, etc.), which enables them to give first-class, up-to-date advice to customers.
Pasquale Zarra (48) is an expert in overall solutions, a certified investment fund adviser and a certified financial planner at the Baloise. In 2005 he attended a specialist course in social security. Before joining the Baloise in Chur in 1995, he was head of sales for Ferrari at an auto dealership. He is in charge of a portfolio worth around CHF 2.3 million, mostly made up of private individuals.
Daniel Bieri (52) is an expert in risk management and asset/liability protection at the Berne-East General Agency in Ostermundigen and, as a corporate advisor, manages a portfolio worth around CHF 2.6 million. Before joining the Baloise in 1998, Bieri worked as a sales agent instructor at another insurance company, where he was subsequently made agency head in the Canton of Berne.
Germany with a combined CHf 145.6 million profit before tax and borrowing costs, the Basler Securitas and Deutscher Ring business units made a substantial contribution to the Group’s profit despite sharp price competition in the property insurance segment and the unfavourable environment in the traditional life segment.
(2004: 95.8%). Together with the better lapse rate this is evidence for stronger customer loyalty in the target segment and better operational efficiency.
M A R K E T D E V E LO P M E N T S
Securitas, explained: “It was a representative cross-section of all claims. We were particularly interested in how claims were processed in the past and where there is potential for improvement. The results were used to make projections covering the total annual number of claims. We expect to realize about two thirds of the total amount of potential savings calculated, i.e. between seven and ten million euro.” However, according to Manfred Feldmann, cost-cutting is not the only goal of the exercise: “On the contrary, the object is to optimize our organization in the interests of customers and company. The changes in the processes and structures will directly affect about 170 employees in the claims section.” Concrete improvements are possible in the routing of incoming damage claims alone. “For instance, we do not have a uniform telephone system. To become even more service-oriented, we urgently need to shorten communication paths and to process claims more quickly.”
Many companies talk about cost-cutting and process optimization. Basler Securitas in Germany is taking action to achieve these targets in a major project with the core objective of enhanced customer service through more efficient claims processing. A recent visit shows the progress that has been made.
M A N F R E D F E L DM A N N
impact Basler Securitas’s first internal analysis of claims data – a common practice throughout the industry – revealed a theoretical savings potential of around EUR 13 million. This is expressed as “lost economic opportunities” (LEO; see box). Every single identified improvement approach will have to be realized for the entire potential to be exploited.
According to Hack, the associated changes will have a farreaching impact: “This project will involve structural, process and content related changes. Almost every interface within the company will be affected.” At present the claims optimization project is one of several major ongoing projects. Others include the optimization of target-customer management, targeting a more efficient cooperation with
Deutscher Ring and the reorganization of our core non-life business. Many of the data and insights gained in the other projects will be incorporated in the claims optimization project.
L EO: LOS T ECONOMIC OPP OR T UNIT IE S
Cases of lost economic opportunities (LEO) play a crucial role in claims data analysis. They reflect qualitative and quantitative possibilities of optimization and hence are a key factor in professionalizing claims management.
Belgium The Belgian company Mercator made good on the promise of a very positive trend that was already beginning to emerge at the 2005 mid-year mark. The successful completion of restructuring measures and the explicit strategic concentration on its core business of insurance and pensions resulted in a jump in profits after the major loss posted the previous year. Tax-free capital gains from the sale of equity holdings and expiring shareholder commitment agreements had a significant impact on the gratifying annual profit.
In the non-life segment Mercator posted premium revenue of CHF 540 million (2004: CHF 557 million), a decline of 3.2%. With a gross combined ratio of 94.1% we were able to improve on the previous year’s figure of 95.3% despite the disposal of the bank as cost bearer and the aggressive price competition on the market. This enabled Mercator’s core segment to significantly build its operating earning power within a short period of time.
Business volume in the life segment including unitlinked products grew by 11.8% to CHF 218 million (2004: CHF 195 million). At the half-year mark the trend had still been declining so we regard this as a positive course of events, even though overall growth lagged the Belgian market. Owing to the sale of Mercator Bank, the premium volume generated by this distribution channel is below the previous year’s level. Premium volume life under IFRS
Substantially lower costs and lower claims incurred, very positive growth in the property insurance business and gratifying performance in the unit-linked life segment were the determining factors, resulting in a 5.3% increase in business volume to CHF 342 million. Premium revenue in accordance with IFRS accounting grew by 3.7% to CHF 78 million (2004: CHF 75 million).
CARe product, built strictly on scoring techniques, helped us achieve both a strong competitive position and efficiency gains.
The life segment, heavily affected by ongoing low interest rates, achieved a premium volume under IFRS of CHF 35 million (2004: CHF 35 million). This stagnation is primarily attributable to the interest rate-sensitive individual life insurance business. Business volume in the unit-linked life segment (not counted as premiums under IFRS accounting rules) reached CHF 264 million. This figure surpasses our expectations, exceeding even last year’s already very high
A n D R é B R e D i M uS: Until recently, the Luxembourg insurance market was pretty much set in its ways. Two companies together controlled two thirds of the market, obviously benefiting from the recognition value that this bestowed. In addition, prices in the past decades were laid down by the political authorities according to social criteria. For customers, it hardly made any difference which insurer they opted for, given that price differences from one provider to another were minimal at best. Even ten years after deregulation, the situation hasn’t changed much. We have now decided to tread new paths in our attempt to find and retain good customers.
C L A u D e M e y e R : Because this was the best way to distinguish ourselves from the competition. Certain insurers prefer undercutting their rivals’ prices, but this sooner or later takes its toll on their profitability. Nor does this, as a rule, help the company’s market share. It is not a procedure that would be in line with the Baloise philosophy.
Nowhere in Europe are there more families that own more than one car. Besides, young people tend to live with their parents for longer now. And the parents usually pay for their offspring’s motor insurance. So you see that with our offer of a single family insurance covering several vehicles we anticipate a latent customer requirement.
A . B . You’re quite right. However, the most innovative thing about polyCARe is its rate structure. We have introduced a strongly segmented and technically well founded pricing concept. And this is a novelty in our market. We are finally basing our pricing on objective criteria. We now have a completely new tool at our disposal. Over a period of three years, we built up a very extensive database. This has enabled us to identify roughly a dozen pricing criteria. We no longer have to rely exclusively on crude data such as replacement value and engine capacity. And this is a true revolution. Thanks to this new approach, we can rest assured that all new risks we will be taking on with polyCARe will be priced in a proper, risk-aligned way.
Let me give you an example, one that came as a surprise to us: Statistics show that cars running on diesel are more frequently involved in accidents than those powered by petrol.
The reason behind this is probably that people who drive a lot
There is the danger that clients will see their premiums surge with this new product...
But the numbers speak for themselves. For 51% of the insureds, polyCARe actually leads to a reduction in premium. In 25% of the cases the price remains unchanged.
A . B . Technical problems, particularly in the software field, were solved pretty quickly. The real challenge was to see how our sales agents would react. We work together with nine independent general agencies and 200 “agences non professionelles” who sell exclusively Baloise products.
C . M . This brings us to another problem. The less dynamic among the agents will lose customers whose premiums are set to rise. To maintain their own income level, they will have to actively acquire new customers who fit our new model. And as we know, it is not easy changing firmly established habits and work patterns.
A . B . We should have invested more in communication and the motivation of our sales agents. Those who grasped the philosophy behind the new product have become convinced of its potential, often turning into keen proponents.
C . M . At the moment they’re just observing us. But we can feel that they’re getting nervous. Our innovation is going to hurt them not in the short term, but certainly in the long run. I believe some insurers are going to wake up simply too late.
A . B . I am sure we will. polyCARe is much more than a shortlived marketing gag. It is a revolution in the way that we do business here in Luxembourg. And if we continue to update and expand our statistical database, we will keep our competitive edge. In 2007 we are going to evaluate and finetune the model and, if necessary, add new pricing criteria.
A . B . We are determined to take on a challenger role in this line of insurance. We aim to double the average market growth, in other words to up our market position to anything between 7.5 to 10%. And we will use the experience gained to develop further new products. For instance a comprehensive property and household contents insurance. I can’t tell you any more at this stage. But come back again next year…
· polyCARe offers a choice of seven contract types adjusted to customer preferences
· polyCARe offers the possibility of monthly premium payment provided at least one car has full comprehensive insurance. There are no additional fees.
We have to edge on our rivals because we know what the good risks are.
Austria and Croatia Basler Austria and the Croatian business unit that it manages generated sizable organic growth and higher operating income in 2005. Basler Austria’s consistent customer orientation together with the ongoing expansion of its sales force is evidenced in a marked 11.7% expansion in premium volume to CHF 128 million (2004: CHF 114 million). Growth in both of its business sectors, property and life insurance, outpaced that of the Austrian market overall. The consistent implementation of scoring instruments in product development and in customer value-based sales management resulted in stable operating earning power in the core segments. The Croatian unit shored up its already strong position with significant growth in the core medical practitioner segment.
In the non-life insurance segment Basler Austria continued to improve its business performance compared to the previous year with a 9.5% increase in premium volume to
(2004: 105.2%), resulting from ongoing cost reduction and lower claims as this business unit continues to focus on profitable, risk-conscious target customers.
Under “Other countries” we also include reinsurance, financing companies and equity holdings as well as activities at Group level. The profit before tax and borrowing costs in this segment amounted to CHF 192.2 million (2004: CHF
All-around performance management We have redesigned this important management process in our Individual Performance Management project.
ongoing training as a basis for personnel development One of the characteristics of the Baloise’s corporate culture is its emphasis on recruiting future senior executives from our own ranks wherever possible. We build on personalities that can point and lead the way with natural authority and play a part in shaping their company’s identity. This is what the program launched at Deutscher Ring for future executives focuses on most. Following a rigorous selection process, twelve staff members have been undergoing a two-year, on-the-job preparation for the challenges of senior management and project leadership since spring 2005.
Category Men in % Women in % Men in % Women in %
H U M A N R E S O U R C E S
Human Resources help shape corporate culture Accompanying change, fostering a culture of togetherness, strengthening the Baloise spirit – these were some of the further focal points of Human Resources in 2005. Tangible results were produced for instance by Mercator in Belgium and Basler Austria, who devised training concepts aimed at improving communication with clients and at fostering collective energy within the company.
Staff development at all management levels The groupwide Management Development Programs have been geared to the requirements of the corporate strategy.
Long-term thinking and acting is in the nature of insurance business. we can only be successful in the long-run if we are guided not only by economic but also by ecological and social considerations.
Sustainability for us means responsible resource management from an economic, social and ecological point of view. We support society in handling its risks and thereby make a key contribution to economic sustainability. Sustainable and successful business activities-particularly in the world of insurance – can only be based on trust. By being transparent and maintaining an open dialogue with stakeholders, we provide evidence of our credibility on a daily basis.
P e T e R k A L B e R e R : Quite a lot was already being done in the field of compliance, but the Executive Committee decided to go a step further. Top priority was given to the establishment of a Code of Conduct. First came an analysis of existing responsibilities such as data protection and prevention of money laundering, which were already being dealt with at national company level. The next step was a groupwide risk based analysis. Then we introduced the Code of Conduct, which represented the first compliance standard for the entire Group. It took account of legal provisions as well as requiring a day-by-day conduct of our employees in line with our corporate values.
Pk: Yes, the Compliance Policy. It defines standards governing the organization and the responsibilities within the Baloise Group. The Compliance Policy is the basis for groupwide compliance reporting, our internal control tool. The reports inform the Executive Committee and the Board of
Pk: By industry standards, we are already a progressive company in terms of compliance. But we must and want to aim higher. “Action, not reaction” is our motto. We don’t just wait until there is pressure from the outside. An example is our introduction of software that enables us to monitor all business relationships with regard to possible financing of terrorism. In addition, the reporting system ensures that all business units optimize their processes on a regular basis.
Basel and is listed on the SWX Swiss Exchange. On December 31, 2005 the Baloise Group had a market capitalization of CHF 4,244.8 million. Information on the Baloise’s shares can be found from page 10 of the Annual Report – Business
December 31, 2005 are found in the Notes to the financial statements in the Financial Report starting on page 74. Other than Bâloise-Holding there are no exchange-listed companies in the Group.
Segment reports by region and line of business are found in the Notes to the financial statements in the Financial Report from page 38.
Shareholders Changes in share ownership The distribution of shareholdings and trading liquidity of the shares remains unchanged from the previous year. As before, no single shareholder holds more than 5% of registered shares.
As a widely-held public corporation, the Baloise is part of the Swiss Market Index (SMI) and is included in the SWX’s index calculations with 100% of shares in free float.
More information on the structure of shareholders as at December 31, 2005 can be found in the section “Baloise shares” starting on page 10 of the Annual Report – Business Review.
Cross-shareholdings There are no cross-holdings either of share capital or voting rights.
Distribution policy The changes in capital in recent years have been a result of our shareholder-friendly dividend policy. Since 2001 the
Year Dividend payments Share buybacks Par value repayments Total in CHF, at March 31 of each year before 2005, at December 31 in 2005. In accordance with the amendment to Art. 29 of the Articles of Incorporation adopted at the 2005 Annual General Meeting, the financial year ends on December 31.
As a value-oriented enterprise, the Baloise is committed to good corporate governance. This is for the benefit of our shareholders, policyholders and employees. in accordance with the definition of corporate governance in the Swiss Code of Best Practice, we strive in the shareholder’s interest to achieve transparency and a system of checks and balances in management and control, while preserving the decision-making ability and efficiency of corporate management.
shareholders since 1997, along with the dividend policy, are published on the Internet.
Bâloise-Holding shareholders’ equity 588.6 679.7 756.8 in CHF million, at March 31 of each year before 2005, at December 31 in 2005. In accordance with the amendment to Art. 29 of the Articles of Incorporation adopted at the 2005 Annual General Meeting, the financial year ends on December 31.
Authorized and conditional capital, other financing instruments Authorized capital Bâloise-Holding has no authorized capital.
CHF 0.10 each, for a maximum increase in nominal share capital of CHF 553,072. This conditional capital was created by the Annual General Meeting of 2004 (Art. 3 of the Articles of Incorporation).
The conditional capital is intended to secure any option or conversion rights granted in connection with bonds or similar instruments. No such financing instruments have been issued to date.
Subscription rights for shareholders are excluded. The right to purchase the new registered shares belongs to the current holders of options and conversion rights. The Board of Directors may restrict or exclude shareholders’ pre-emption rights for the issue of options and convertible bonds on international capital markets. Further details on the structure of the conditional capital can be found in Art. 3 of Bâloise -Holding’s Articles of Incorporation.
Baloise Group consolidated equity The consolidated shareholders’ equity of the Baloise Group as at December 31, 2005 totalled CHF 4,391.4 million.
“Consolidated statement of changes in equity” on page 75 of the 2003 Annual Report.
Statements in the Financial Report from page 61 and on the
Rolf Schäuble, Arend Oetker and Eveline Saupper were confirmed in office for a new three-year term in the year under review.
Rolf Schäuble (1944, Swiss, Dr. oec. HSG) has served on the Board of Directors since 1993, since 1994 as Chairman.
Director and CEO. Upon completing his studies in economics he was awarded the degree of Dr. oec. at the University of
Board of Directors since 1995, as Vice-Chairman since 2004. He studied law and holds the degree of Dr. iur. He is
Christoph J. C. Albrecht (1938, Swiss, Dr. iur.) has served on the Board of Directors since 1985. He studied law and was awarded the Dr. iur. at the University of Basel and is currently a partner at the law firm of Joerin Hopf, Basel, working as an attorney-at-law and a notary. Christoph J. C. Albrecht is Chairman of the Board of Directors of Thüring AG, Basel and sole member of the Board of Directors of Interhaba AG,
Hansjörg frei (1941, Swiss, Dr. iur.) has served on the Board of Directors since 2004. He studied law and was awarded the Dr. iur. at the University of Zurich. Hansjörg Frei was employed at Winterthur from 1982, culminating as member of the Group Executive Board for operations in Switzerland, and was a member of the Executive Board (Head of International Country Management) at Credit Suisse Financial Services from 2000 until his retirement in mid-2003. From 2000 to 2003 he was Chairman of the Swiss Insurance Association (SIA). Hansjörg Frei is a member of the Board of Directors of Ems-Chemie Holding AG and Chairman of the Pension
Chairman of the SVP (Swiss People’s Party) for the Canton of
Gertrud Höhler (1941, German, Prof. Dr. phil.) has served on the Board of Directors since 1998. She is a business and political consultant and was Professor of Literature and German at the University of Paderborn from 1976 to 1993. She studied literature and art history in Bonn, Berlin, Zurich and
klaus Jenny (1942, Swiss, Dr. oec. HSG) has served on the Board of Directors since 2003. He studied economics and was awarded the Dr. oec. at the University of St. Gallen. Klaus Jenny was a member of the General Directorate of Schweizerische Kreditanstalt and member of the Credit Suisse Group Executive Board from 1987, serving most recently as CEO of the Credit Suisse Private Banking business unit. Since 1999 he has been a private financial advisor for businesses and individuals. He serves on the Boards of Directors of Clariant AG, Maus Frères SA and several private companies. Klaus Jenny is an independent non-executive director.
has served on the Board of Directors since 2000. From 1990 to 1994 he chaired the Executive Board of Schindler
Werner Kummer is a self-employed business consultant, member of the Board of Directors of WMH Walter Meier Holding AG, Chairman of the Board of Directors of Gebrüder Meier AG, Regensdorf and member of the board of the Zurich
Board of Directors since 1996. He studied management and political science at the Universities of Hamburg, Berlin and
Schwartau, Chairman of the Board of Hero AG, Lenzburg, member of the Supervisory Board of Degussa AG, Düsseldorf, member of the Supervisory and Partnership Board of
Merck KGaA, Darmstadt and Deputy Chairman of the Supervisory Board of KWS Saat AG, Einbeck. He is also Chairman of the German Council on Foreign Relations. Arend Oetker is an independent non-executive director.
Board of Directors since 1999. She studied law at the University of St. Gallen and holds a Dr. iur. degree. Today she is an attorney-at-law and certified tax expert. From 1983 to 1985 she worked at Peat Marwick Mitchell (now KPMG Fides), Zurich and from 1985 to 1992 for Baker & McKenzie, Zurich and
Chicago. Since 1992 she has been a partner at Homburger Rechtsanwälte, Zurich. Eveline Saupper is Chairwoman of the Board of Directors of BZ Bank AG, Freienbach and member of the Board of Directors of Intershop Holding AG, Winterthur. She is an independent non-executive director.
Company’s supreme decision-making body. Decisions are in principle taken by the Board of Directors unless competencies have been delegated by the bylaws to the Chairman of the Board of Directors, the Committees, the Corporate Executive Committee or the CEO.
Art. 716a of the Swiss Code of Obligations and Section 1 II
Committees are governed by the Bylaws and the written regulations pertaining to each Committee.
The Chairman’s Committee provides advice on particularly important business transactions, especially important strategic and personnel decisions. It also functions as a Nomination Committee. The same members make up the Investment Committee, which approves the Group’s investment policies and real estate investments for the Group’s own use at Head Office.
The Audit Committee supports the Board of Directors in its general and financial oversight duties, which cannot be delegated (Art. 716a, Swiss Code of Obligations), by forming its own judgement of the organizational structure and functioning of the internal and external auditing system and the annual and consolidated financial statements.
Group’s Annual Report for the fiscal year ended December 31, 2005 for submission to the Annual General Meeting. The
Board of Directors and Committee meetings In accordance with the Bylaws, the full Board of Directors meets as often as business requires, but no less than four times a year.
In 2005 the full Board of Directors met five times. The directors ’ attendance at full Board meetings can been seen in the following table. All Committee members were present at all of the additional 13 Committee meetings. Thus board attendance by members of the Baloise Board of Directors is a respectable 97.8%.
Eveline Saupper x x x x x x = present; o = absent n www.baloise.com –› Porträt –› Corporate Governance –›
In 2005, as every year, a seminar was held for members of the Board of Directors. This year’s topic was corporate strategy.
The Chairman’s Committee met five times last year, including one two-day strategy session. The Investment
Committee met twice. The Audit Committee held five meetings, the Compensation Committee two.
Members of the Corporate Executive Committee are regularly invited to meetings of the full Board of Directors.
Auditing and monitoring the Corporate executive Committee The Corporate Audit department with its ten auditors reports directly to the Chairman of the Board of Directors. The auditors are experts in underwriting, actuarial theory, finance and information technology.
Report starting on page 24 is dedicated to the management of financial risks.
The management structure of the Baloise Group is presented on page 49.
Changes on the Corporate executive Committee Bruno Dallo resigned from the Corporate Executive Committee effective August 31, 2005. The Executive Committee now consists of four members. Corporate Human Resources reports to the Chief Executive Officer. Corporate Development and Run-off now report to German Egloff, CFO. Compliance reports to Thomas Sieber, head of Legal, Tax and
Science LSE, MBA Harvard) studied business management at the University of St. Gallen, graduating with a degree in economics (lic. oec. HSG) with specialization in insurance and risk management. He earned a Master of Science at the
London School of Economics, Master of Business Administration at Harvard Business School, Boston and a doctorate in economics (Dr. ès. sc. écon.) at the University of Lausanne.
Committee of the Group Management Board from November 2000. Frank Schnewlin has been Chief Executive Officer and
Support from 1990 to 1995, where among other things he was responsible for developing a management information system. From 1997 he was responsible for individual nonlife insurance as a member of the Executive Board, including managing Wincare and serving as Chairman of the Board for Sancare. From 1998 to 2002 he was Chief Financial Officer of Winterthur Switzerland and member of the Administrative Board of Wincare, serving as Chairman from 2000. From 2002 to 2004 he was Chief Financial Officer at Zurich Financial Services, Switzerland, with responsibility for finance, human resources, IT, logistics and procurement. Since
Committee (Head of Corporate Finance) with responsibility for financial relations, financial management and financial accounting, as well as corporate development and run-off since August 31, 2005.
Group. Since 2003 he has served on the Corporate Executive Committee with responsibility for the Switzerland division. Martin Strobel serves on the Board of the Swiss Insurance Association (SIA) and on the Board of Prevo-System AG,
Chairman of the Investment Commission of the Swiss Insurance Association SIA and serves on the boards of Unigestion
There are no management contracts assigning management duties to third parties n www.baloise.com –› Profile –› Organization –›
Compensation for the entire operating management team consists of a base salary and an incentive based on the attainment of corporate and individual goals.
Members of the Board of Directors The members of the Board of Directors other than the Chairman receive a lump-sum cash emolument established by the Board’s Compensation Committee. Beginning in 2006, 25% of directors’ annual fees will be paid in shares with a vesting period of three years. As is the case for direct share subscriptions by management, the members of the Board of Directors will receive a discount of 10% from the market price.
Two forms of share-based compensation are available to all individuals eligible for an incentive: The shares may be subscribed directly at a preferred price 10% below the current market price.
Or the subscription is associated with a loan which leverages the effect of the share subscription. Repayment of the loan upon expiry of a three-year vesting period is hedged by a put option financed by the sale of a call option. Upon expiry of the vesting period, the employee may freely dispose of the shares remaining after repayment of the loan.
CHF 666,668 was paid to the departing member of the Corporate Executive Committee in settlement of continuing contractual obligations, pay continuation and severance. A
There are no shares with preferred voting rights. With a view to maintaining a broad shareholder base and protecting minority shareholders, no shareholder is registered with more than 2% of voting rights, regardless of the number of shares held. The Board of Directors may approve exceptions to this rule by a two-thirds majority of all members (Art. 5 of the Articles of Incorporation). There are currently no exceptions.
“Schweizerisches Handelsblatt”, in various newspapers and on the Internet. Extraordinary General Meetings are convoked by resolution of the Annual General Meeting, the
Directors, in accordance with applicable law, at the request of shareholders (Art. 11 Articles of Incorporation). Pursuant to Art. 699 (3) Swiss Code of Obligations, these shareholders must represent at least 10% of the share capital.
Shareholders or groups of shareholders acting in collusion have an obligation, upon acquiring 331⁄3% of all Baloise shares, to tender a takeover offer to all remaining shareholders. The Baloise has not opted to modify or waive this rule. There is neither a statutory opting-out nor an opting-up clause as specified in the Federal Act on Stock Exchanges and Securities Trading (SESTA).
There are agreements with the members of the Corporate Executive Committee and other senior managers which, in the event of termination by the employer (or under certain circumstances by the employee) will trigger a severance benefit within a certain period after a change of control. The amount of these benefits is within the customary range for the market.
Group companies in a competitive bidding process. Implementation was largely complete in 2004 and concluded in 2005. This and the comprehensive IFRS restatements (oneoff effect) explain the 2005 rise in fees.
Before the start of the annual audit, the Audit Committee reviews the scope of the examination and proposes areas warranting special attention.
The Audit Committee thereupon investigates the independence of the external auditors. It proposes external auditors to the Board of Directors for election by the Annual
n Annual General Meeting: Shareholders are given information on the course of business at the Annual General
n Road shows: Regular road shows are held at various financial centers.
n Investor conference: Key business and strategy topics are reviewed in depth.
Financial Reports, Semi-Annual Reports and further documents are available to the public on the Internet. All documents are available from the Investor Relations department or can be downloaded from the Internet.
Secretary to the Board of Directors Thomas Sieber, Rheinfelden internal Audit
B OA R D O F D I R EC T O R S O R G A N I Z AT I O N
Reserve ratio non-life in percent 1 In accordance with the accounting principles of the Baloise Group, investment-type premiums are not included in premiums earned and policy fees 2 Including financial liabilities held for trading (derivative financial instruments)
Combined ratio (gross), non-life 2005 Group Switzerland Germany Benelux Other countries Basler
Annual net profit/loss in CHF million 1 including claim processing costs 2 including financial liabilities held for sale (derivative financial instruments)
+/– 0.5% change in new money rate in percent 1 Annual Premium Equivalent = 100% annual premium of new business + 10% single premium
Embedded Value am ��. Dezember in CHF m; all figures “after tax”
���.� �,2�0.� ��2.2 ���.� –��5.� 2,�5�.0 2�,�2�.� �,���.� 5,�00.5 ��,��5.5 �,���.� 5�,��2.�
25�.� �,�5�.2 �,��5.� 2�2.� �,�50.� �,���.5 9.1 –15.1 –�.0 –33.5 –81.7 –��5.2
foster relations 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.
The previous year’s figures have been restated in accordance with the modified IFRS regulations.
Bâloise-Holding for the 2005 financial year as well as the reports of the Group and external auditors are contained in the Financial Report. These annual financial statements have been examined by PricewaterhouseCoopers AG as
Group and external auditors. PricewaterhouseCoopers provided an unqualified opinion in its auditor’s reports of
Investments for the account and the risk of life insurance policyholders
�,���.� �,�2�.� �,0��.2 �,02�.� 2,�20.� ���.� �5.� ���.0 ���.5 ��.� �5�.�
Reserve ratio in percent in CHF million 1 Premiums written and policy fees (gross) 2 Group business, run-off 3 Excluding legally required interest on annuity reserves
Operating profit from insurance business in force and adjusted equity and profit from new business
Sensitivity of new business value to risk discout rate (+/– 1.0%)
Geographic breakdown of embedded value Switzerland of which: Value of insurance business in force of which: Adjusted equity of which: Cost of solvency
Realized gains and losses and valuation changes charged to income (net)
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.
General remarks 12 1. accounting basis 12 2. application of new accounting standards 12 3. consolidation and accounting principles 14 4. critical accounting principles and measurement uncertainties 25 5. Management of insurance and financial risks 25 6. information on regions and business segments 37
Notes to the consolidated balance sheet 42 7. property, plant and equipment 42 8. intangible assets 43 9. investments in associated companies 44 10. investment properties 45 11. Financial assets 45 12. Mortgages and loans 46 13. Derivative financial instruments 47 14. Receivables and assets from reinsurance 48 15. Receivables from the insurance business 48 16. employee benefits 49 17. Deferred income taxes 52 18. non-current assets held for sale and discontinued operations 53 19. Share capital 53 20. change in unrealized gains and losses in shareholders’ equity 54 21. actuarial provisions (gross) 54 22. liabilities from the banking business and financial contracts 60 23. Reconciliation of minimum lease payments to their present values for finance leases 60 24. Financial liabilities 61 25. Financial provisions 61 26. liabilities from the insurance business 62
27. premiums earned and policy fees 62 28. income from capital investments 62 29. Realized gains and losses on capital investments 63 30. income from services 65 31. other operating income 65 32. overview of expense types 65 33. number of employees 65 34. expenses from financial contracts 66 35. Borrowing costs 66 36. earnings per share 67 37. income taxes 67
Derivative financial instruments liabilities from the insurance business liabilities from employee benefits other liabilities and deferrals
–��9.8 �87.7 7 –45.3 –84.0 8 –50.9 –84.4 38 –/– –60.8 9 –19.2 –19.0 7�.� –�5�.6 consolidated statement of cash flow note 2004 �005
Adjustments for Valuation allowances and amortization/depreciation on intangible assets and property, plant and equipment income from investments in associated companies
Additions and disposals of cash-effective assets and liabilities purchase/sale of investment properties purchase/sale of financial instruments of an equity nature purchase/sale of financial instruments of a debt nature addition/disposal of mortgages and loans addition/disposal of derivative financial instruments addition/disposal of financial contracts and liabilities from the banking business other changes in assets and liabilities from operating activities
Financial RepoRt 2005 Financial RepoRt 2005 8 Bâloise-Holding Financial Report 2005 9
Cash flow from financing activities capital increases capital reductions addition to financial liabilities
Balance as of January 01 change during the fiscal year changes in exchange rates on cash and cash equivalents
Supplemental disclosures on cash flow from operating activities other interest received
20 –97.6 –97.6 –0.3 –97.9 20 –179.8 –179.8 –179.8 20 –45.2 –45.2 –45.2 20 –4.7 –4.7 –4.7
Total effects on equity recognized and not recognized in the income statement
–25.0 7.2 –17.8 –17.8 2.3 –90.3 –88.0 –88.0 5.5 ��5.6 –79.5 ��0.9 �,���.� �,���.9 6�.9 �,�97.8 5.5 ��5.6 –79.5 ��0.9 �,�6�.8 �,�56.� 6�.9 �,5�0.�
20 –0.9 –0.9 –0.9 20 –240.0 –240.0 –240.0 20 –/– –/– –/–
20 –242.0 –242.0 –242.0 20 –118.1 –118.1 –118.1 20 –32.2 –32.2 –32.2
Measurement is done based on local accounting principles; in the case of the Baloise Group, these are the american Generally accepted accounting principles (US Gaap).
2. Application of new accounting standards IFRS � — Share-based Payment
IFRS � — Business Combinations the Baloise Group has been applying iFRS 3 for business acquisitions since March 31, 2004. as of January 1, 2005, in accordance with iaS 36 “impairment of assets” and iaS 38 “intangible assets”, goodwill is no longer subject to regular amortization, but rather undergoes a periodic impairment test. the negative goodwill of cHF 22.4 million existing at the end of fiscal year 2004 was charged directly to equity as of January 1, 2005.
January 1, 2004. as iFRS 4 does not address the measurement of insurance contracts, the US Gaap provisions regarding their measurement shall continue to be applied until a corresponding standard exists. However, the application of iFRS 4 engenders the modification of certain US Gaap provisions (e.g. the liability adequacy test). iFRS 4 requires that all insurance products be classified as insurance contracts or financial contracts. there must be a significant insurance risk to be classified as an insurance contract. to the extent that they do not include a discretionary participation feature (DpF), financial contracts are treated in accordance with iaS 39 revised. Depending on their classification and the applicable standard, the measurement of such financial contracts is made at fair value or pursuant to the amortized cost method. Due to the application of iFRS 4, certain insurance contracts were reclassified as financial contracts or, due to the limitation on the applicability of this standard, as liabilities under iaS 19 “employee Benefits”.
IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations
IAS �7 revised — Consolidated and Separate Financial Statements under IFRS
the revised iaS 39 essentially affects the Baloise Group with regard to the impairment of financial assets. the previous provision with regard to impairment losses on available-for-sale financial assets of an equity nature applied by the Baloise Group required that impairment losses be recognized on securities whose fair value on the balance sheet date was less than half of their cost. an impairment test is required for securities whose fair value on the balance sheet date is between 20% and 50% below cost. a new addition to the previous provision requires the Baloise Group to recognize an impairment if the fair value is continually below cost during the 12 months prior to the balance sheet date. this new impairment provision applies independently of the previously applied criteria.
New IFRS Standards not yet applied the Baloise Group has not yet applied the following standards or revised standards issued by the iaSB due to their effective date: Standard Subject Applied as of: iaS 19 amendments employee Benefits Jan. 1, 2006 iFRS 7 Financial instruments: Disclosures Jan. 1, 2007
Reconciliation of the IFRS restatements Consolidated balance sheet as of December 31, 2004
Financial assets of an equity or debt nature investments for the account and at the risk of life insurance policyholders
Total equity and liabilities in cHF million 1 including shadow accounting 2004 consolidated annual profit (after minority interests) Before restatement and reclassifications
Before restatement, after reclassifications iFRS 4 iaS 39 rev. iaS 32 rev. other
3.1 Consolidation method 3.1.1. Subsidiaries the consolidated annual financial statements comprise the financial statements of Bâloise-Holding and its subsidiaries, including special purpose entities (“Spes”). a subsidiary is consolidated if the Baloise Group directly or indirectly controls the company. this is normally the case if more than 50% of the voting rights are held.
all costs directly allocable to the business combination. the identifiable assets, liabilities and contingent liabilities of the company are recognized at fair value as of the date of the first-time consolidation, regardless of possible minority interests. if the purchase price exceeds the assets and liabilities measured at fair value, the difference is recognized as goodwill. conversely, if the fair value exceeds the purchase price, the difference is recognized directly in income in
Deutscher Ring Krankenversicherung, a mutual insurance association. the contractual agreements are structured such that the majority shareholder does not have control. these companies are consolidated on a proportional basis, i.e. the Baloise Group recognizes its share of the assets, liabilities, income and expenses.
3.1.3 Associates associates are initially recognized at cost and subsequently using the equity method (the Baloise Group’s share in the intrinsic value of the company) if the Baloise Group has significant influence on the management of the company in question. adjustments of associates are normally recognized in income, taking possible dividend flows into account. if the share in the losses exceeds the value of the associate, no additional loss shares are recognized. the goodwill paid for associates is included in the carrying value of the equity investment.
exchange rate differences on available-for-sale non-monetary financial instruments are recognized in unrealized profits and losses within equity.
3.3 Property, plant and equipment property, plant and equipment are recognized at cost less accumulated depreciation. the cost of an item of property, plant and equipment includes all directly allocable costs. Subsequent costs are capitalized only if there is a flow of future economic benefits related to the asset and these costs can be reliably measured. all other repair and maintenance costs are recognized as an expense when incurred.
property, plant and equipment are normally financed in full using internal resources. if any outside financing is used, interest is recognized as appropriate during the period of accrual.
land is not depreciated on a regular basis. Straight-line depreciation on other property, plant and equipment is taken based on the expected useful life as follows: n Buildings for own use — 25 to 50 years n equipment and furnishings — 5 to 10 years n computer hardware — 3 to 5 years the impairment and expected useful life of an item of property, plant and equipment are reviewed at the end of each fiscal year.
the gain or loss resulting from the sale of an item of property, plant and equipment is immediately recognized in the income statement under “other operating income” or “other operating expenses”, respectively.
(b) The Baloise Group as lessor investment properties leased in connection with operating lease agreements are recognized in the consolidated balance sheet as investment properties. there are no additional lease agreements as a lessor as of the balance sheet date.
3.5 Intangible assets 3.5.1 Goodwill Goodwill arises as the difference between the purchase price and the assets and liabilities taken over recognized at market value at the time of the takeover. Goodwill is disclosed under intangible assets. Goodwill is measured at cost less all accumulated amortization and impairment losses up to December 31, 2004. as of January 1, 2005, goodwill is no longer subject to regular amortization, but to an annual impairment test. Upon acquisition of a new equity investment, the closing date for future impairment tests is determined and subsequently conducted annually at the same date. prorata goodwill is recognized in income for disposals. For purposes of impairment testing, goodwill is allocated to cash-generating units
3.5.2 Present value of the profits on acquired insurance contracts (present value of future profits — PVFP) the present value of the profits from acquired insurance contracts arises from the purchase of a life insurance company or upon the purchase of a life insurance portfolio. the initial measurement as well as the determination of the amortization model is made in accordance with actuarial principles and the pVFp is subjected to regular impairment testing. See also Section 3.17.2.
in the case of debt financing, the interest is charged to equity during the period of accrual. With the exception of goodwill, the Baloise Group has no intangible assets with an indeterminable useful life.
For mixed-used investment properties (used by the Group/used by a third party), if a division is not possible the entire property is allocated based on the intended purpose of the majority of usable space.
the reclassification is made at the fair market value as of the reclassification date.
3.7 Financial assets For reasons of comprehensibility, in some places in the financial report and paragraph headers in the notes the term capital investments is used. the term capital investments itself is not defined in the iFRS. in addition to financial assets, mortgages and loans, derivative financial instruments and cash and cash equivalents, capital investments also include investment properties.
the Baloise Group classifies its financial assets of an equity or debt nature in the following categories: recognized in income at fair value, held-to-maturity, and available-for-sale financial assets. classification follows the motive in the acquisition of the financial asset.
3.7.2 Held-to-maturity financial assets Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments — but not mortgages, loans
3.7.3 Available-for-sale financial assets available-for-sale financial assets are those non-derivative financial instruments that are classified as available-for-sale or have not been classified in any of the categories mentioned above or as mortgages, loans, or receivables.
3.7.4 Recognition, measurement and derecognition all commercial purchases and sales of financial assets are recognized as of the trade date. Financial assets are initially recognized at fair value. With the exception of financial assets recognized in income at fair value, transaction costs are included in the acquisition costs.
the cash inflow is recognized under liabilities. With respect to securities and lending transactions, the Baloise Group only conducts securities lending transactions. the lent financial instruments continue to be recognized as financial assets. the securities coverage of repurchase and reverse-repurchase transactions, as well as securities lending transactions is made daily at the current fair values.
Regardless of the classification, changes to the fair market values of
nized in the income statement for the duration of the hedge.
Derivative financial instruments are measured based on listed market prices or on models.
For private equity investments, to the extent that no fair value is available, various methods are applied for the estimate, such as analysis of the discounted cash flows or reference to comparable recent transactions between knowledgeable, willing and arm’slength contractual partners.
analyst reports from banks as well as ratings by rating agencies are used for assessing an impairment.
the mortgage portfolio is tested for impairment at regular intervals. if there are objective indications that the entire amount owed pursuant to the original contractual conditions or the corresponding equivalent value of a receivable can be obtained, an adjustment is recognized. loan commitments are measured individually, taking into consideration the character of the borrower, its financial situation, its payment behavior, the existence of any guarantor and, if necessary, the disposal value of possible collateral recognized. all mortgages classified as not at risk at the individual counterparty level are divided into economically homogeneous portfolios, which are tested for impairment as a whole, and in any case, are adjusted based on the historical default probability.
3.10.2 Financial assets measured at fair value on each balance sheet date the Baloise Group determines whether there are objective indications of an impairment loss on financial assets classified as available-for-sale, which also include financial assets of an equity nature. an impairment loss must be recognized for financial assets of an equity nature, the fair value of which on the balance sheet date is more than 50 percent below cost, or whose fair value was below cost during the entire 12 months prior to the balance sheet closing date. an impairment test is conducted for securities whose fair value on the balance sheet date is between 20% and 50% below cost and an impairment is recognized if necessary.
in the case of an impairment, the cumulative net loss recorded directly to equity is reversed to the income statement.
other non-financial assets are subjected to impairment testing whenever there are objective indications of an impairment.
3.11 Derivative financial instruments Derivative financial instruments are recognized on the balance sheet at fair value. Upon the conclusion of a contract, they are classified either as a hedging instrument for the fair value of an asset or liability (fair value hedge), as a hedge of future transactions (cash flow hedge), as a hedge of a net investment in a foreign company, or as a trading instrument. Derivative financial instruments which did not satisfy the iFRS requirements for a hedging transaction, even though they have a hedging function pursuant to the Baloise Group’s risk management rules, are treated as trading instruments.
the Baloise Group documents the effectiveness of the hedge as well as the goals and strategies followed for each hedging transaction. effectiveness of the hedge is monitored continuously from the conclusion of a contract. Derivatives that no longer satisfy the requirements of a hedging transaction are reclassified as trading instruments.
3.11.2 Cash flow hedges changes to the fair value of derivatives classified as cash flow hedging instruments are recognized directly to equity. the amounts recognized in shareholders’ equity are later recognized in the income statement in accordance with the hedged cash flows.
if a hedging instrument is disposed of, terminates or is exercised, or no longer satisfies the criteria for a hedging transaction, the cumulative gain or loss remains recognized in shareholders’
the detailed disclosure of discontinued operations, if any, is made in the notes to the annual financial statements.
3.14 Cash and cash equivalents cash and cash equivalents consist predominantly of cash, demand deposits and short-term liquid assets with maturities of up to 24 hours. they are measured at their nominal value.
3.15 Equity 3.15.1 Share capital equity instruments are classified as equity unless there is a contractual obligation for repayment or the contribution of other financial assets. transaction costs in connection with equity transactions are reduced by all income tax advantages related to the transactions and are accounted for as a deduction from equity. the transaction costs of an equity capital transaction in connection with a business combination are allocated to the cost of the acquisition.
3.15.3 Treasury stock treasury stock held by Bâloise-Holding or by subsidiaries appears in the consolidated financial statements at cost (including transaction costs) as a deduction from shareholders’ equity. there is no ongoing adjustment to fair market value. Upon resale, the difference between the cost and the sales price is recognized as a change to equity. only shares of Bâloise-Holding are considered treasury stock.
contracts without any significant insurance risk are financial contracts. Such financial contracts may contain a discretionary participation feature (DpF), which determines which recognition and valuation regulations are to be applied.
a discretionary participation feature (DpF) is present if the policyholder has a contractual right to benefits in excess of the guaranteed benefits: n that are likely to be a significant portion of the total contractual benefits; n whose payment amount or timing is contractually at the discretion of the insurer; and n that are contractually dependent on: n the performance of a specified pool of contracts or a specified type of contract; n realized and/or unrealized investment returns on a specified pool of capital investments held by the insurer; or n the insurer’s net income.
in addition, iFRS 4 creates exceptions for the treatment of embedded derivatives that are contained in an insurance contract or financing contract with DpF. to the extent that such embedded derivatives themselves satisfy the definition of an insurance contract, separate measurement and disclosure is not required. For the Baloise Group, this concerns among others certain guarantees for annuity conversion rates as well as additional special exceptions, such as certain guaranteed surrender values on traditional policies.
3.17 Recognition and measurement of life insurance contracts and financial contracts with DPF For insurance contracts and financial contracts with DpF, iFRS 4 grants users the option to continue using the previous measurement principles for the obligations as well as assets resulting directly from the contracts (deferred acquisition costs and portfolio assets). the measurement principles based on US Gaap thus continue to apply for the Baloise Group.
the following Baloise Group life insurance products include sufficient insurance risk to be classified as insurance contracts under iFRS 4: n endowment life insurance, conventional life insurance and unitlinked life insurance policies n the Swiss group life business (BVG)
n pure term insurance policies n immediate annuities n Deferred pension insurance with pension conversion rate guaranteed as of conclusion of the contract n all supplemental insurance policies such as premium waiver, additional accidental death, disability, etc.
Hence, the following accounting principles find application: 3.17.1 General measurement principles For traditional life insurance, the US Gaap measurement principles under FaS 60 (long duration) or FaS 120 are applied depending on the type of profit participation. in so doing, premiums are basically recognized as income and benefits as expenses when due. in each case, the establishment of provisions is based on actuarial principles or the net premium principal, which provides for a balanced development of the provision from the premium. the actuarial assumptions for calculating provisions are determined either as best estimates with explicit safety margins for particular transactions (FaS 60) or pursuant to local practice regarding provisions and thus also take premium loading into account when contracts are concluded. the assumptions used are retained unchanged over the contractual period (“lock-in”) unless a liability adequacy test (lat)
traditional insurance with low cover and unit-linked insurance are treated pursuant to FaS 97. Here, in contrast to other traditional business, those portions of premiums that are not used to cover costs and risk are not recognized through the income statement, but rather are posted directly against the provision. For unit-linked insurance without maturity guarantees, the actuarial provision normally corresponds to the deposit account value of the shares per policyholder and hence to the fair value of the related share in the fund. the change in the value of the corresponding fund is recognized in income in the same manner as the corresponding change in the provision. the liability adequacy test is conducted analogously to traditional products. For unit-linked life insurance with maturity guarantees, for which the maturity guarantee is not secured either by an investment approach or by the purchase of cover at an investment company, a provision to cover this obligation is also established. this supplemental provision is posted under the actuarial reserve for non-unit linked life insurance.
3.17.2 Present value of the future profits (PVFP) on acquired insurance contracts the present value of the profits on acquired insurance contracts represents an identifiable intangible asset that arises in connection with the purchase of a life insurance company or of a life insurance portfolio. the initial measurement as well as the determination of the amortization model is made in accordance with actuarial principles. the pVFp is regularly tested for impairment using the liability adequacy test.
3.17.3 Capitalization of acquisition costs acquisition costs are deferred as part of the paid commissions
3.17.5 Policyholder bonuses For a major portion of the life insurance contracts, the policyholders have a claim to surplus participation (bonus).
the surpluses are refunded in the form of benefit increases, premium reductions, or terminal bonuses or are aggregated at interest to a surplus account. Surpluses already allocated, which are aggregated on an interest-bearing basis, are recognized the balance sheet item
“policyholder bonuses credited and provision for future policyholder bonuses”. Surpluses that have been used to finance an increase in the insurance benefit are recognized in the actuarial reserve.
ture (DpF), which is not only relevant for classifying contracts, but also for the disclosure of surplus reserves in accordance with policyholders ’ share in the unrealized gains and losses recorded in the iFRS equity and the share in the higher or lower values recognized in income in the consolidated financial statements — as compared to the financial statements prepared under commercial law. accordingly, that portion of the obligation from an insurance contract that is attributable to a DpF (“DpF component”) must be recognized separately. the standard does not provide any clear guidelines regarding the measurement and disclosure of the DpF component.
the applicable minimum quotas prescribed by statute, by contract or in corporate by-laws are specific to each country.
in Germany, austria and for some of the Swiss group life insurance, life insurance companies are obligated under law to refund a minimum portion of their profit to policyholders in the form of bonuses.
in Germany, this minimum quota is 90%. However, in its corporate articles Deutscher Ring has obligated itself to a minimum quota of 95%.
in austria, the minimum quota is stipulated in the contract terms and conditions. it is normally 90%.
3.18 Non-life insurance Basically, all standard products in the non-life business contain sufficient insurance risk for classification as insurance contracts under iFRS 4. Within the Group, the non-life business is divided into seven main segments: n accident all standard product types that are normal for the respective market are offered in the accident segment. in particular in Switzerland and
Belgium. in addition to the typical treatment costs, the products in this segment also comprise benefits such as daily sickness allowance and are offered to individuals as well as small and mediumsized enterprises as so-called group insurance.
n automobile the two standard products normal to the market, comprehensive and liability insurance are offered here. in certain countries there are also special products for cooperative agreements with automobile clubs or with individual automobile companies.
Beginning with conventional home insurance policies, there is a broad offering of property insurance including fire, buildings, water and all other usual forms.
n transport transport insurance policies are primarily sold in Switzerland and
3.18.1 Premiums the gross premiums written are those that have become due in the fiscal year. they include an amount necessary for covering the insurance risk as well as all cost mark-ups. those portions of the premiums attributable to future fiscal years are contractually deferred and, together with any provisions for premium shortfalls for the fiscal year (impending loss) as well as aging reserves and any capitalized settlement premiums, comprise the unearned premiums disclosed on the balance sheet. owing to the special characteristics of transport insurance, premiums are deferred not by contract, but on the basis of estimates. the premiums actually attributable to the fiscal year are designated as earned premiums. they are calculated from the premiums written and the change in unearned premiums.
these provisions represent a forecast of all payments to be made in future for these claims. the claim reserves are determined based on experience from recent years and future expectations.
the forecast process does not completely eliminate uncertainties inherent in forecasting future developments. Systematic tracking of the provisions recognized in a particular fiscal year allows deviations to be monitored and, if necessary, the forecast process to be adjusted accordingly.
3.18.3 Policyholder participition in surplus and profit insurance contracts can provide for the customer’s participation in the surplus on his contracts (in particular in his claims history).
in addition, all existing provisions, claim reserves and annuity provisions from the non-life segment are analyzed. an appropriate subsequent provision is recognized in case of a shortfall. all liabilities are thus recognized with regard to the claims already received.
this lat also involves a determination of whether the company can in each case meet the obligations it has undertaken under all of the current contracts in the fiscal year. contracts that automatically renew at the same terms are also taken into account. in addition, it is especially important to conduct a profitability analysis of these transactions and/or impairment testing of the deferred acquisition costs. if a loss is expected, the deferred acquisition costs must be reduced by the appropriate amount. if the total deferred acquisition costs are insufficient or the resulting liability cannot be covered, a separate provision for impending losses is recognized within the premium surplus.
inward (i.e. accepted) reinsurance is recognized in the same period as the initial risk. the actuarial provisions for the non-life insurance line are contained in the “Unearned premiums (gross)”
and “claim reserves (gross)” liabilities accounts and in the “actuarial reserve (gross)” liabilities for the life insurance line. For non-life insurance they are estimated as realistically as possible based on experience and the most recent information; for life insurance they are established based on the opening transaction. outward reinsurance (i.e. insurance ceded) is the business ceded to non-Group insurance companies and includes levies from the direct life and non-life business and from inward reinsurance.
outward reinsurance assets are calculated over the same period and on the same bases as the original transaction and are recognized under the “assets from reinsurance” account. adjustments to income are recognized for assets that are at risk due to recognizable insolvency.
otherwise, the insurance cover financed from the deposit account is amortized over the expected term of the deposit account.
3.21 Financial liabilities Bonds issued on the capital market, with the exception of bonds from the banking segment, are recognized in financial liabilities.
3.22 Employee benefits the Baloise Group’s benefits to employees comprise all forms of compensation granted in exchange for services rendered or in special circumstances.
the following benefits are measured: short-term benefits (such as wages), benefits due over the long term (such as anniversary payments) and benefits upon termination of employment (such as severance pay and benefits from employee benefit plans and postemployment benefits). the following benefits may be especially significant due to their extent: 3.22.1 Benefits upon termination of employment the main pension benefits are pensions from the retirement pension and contributions to mortgages assumed by the employer, as well as certain insurance policies for pensioned employees. the benefits are paid upon completion of employment but are financed during the period the employee is actively working. the Baloise Group’s pension benefits currently consist almost exclusively of defined benefit plans. the liabilities are calculated using the projected unit credit method.
the Baloise Group’s pension agreements are tailored to local conditions with regard to enrolment and the scope of benefits.
3.23 Financial provisions Financial provisions for restructuring and legal claims are recognized for current legal or actual liabilities which will probably result in a future outflow of funds that can be reliably estimated. the assessment is based on the best possible estimate of the expected outlays.
3.24 Taxes provisions for deferred income taxes are recognized pursuant to the liability method, i.e., they are based on the current or future expected tax rate. Deferred income taxes take into account the income tax effects of the temporary differences in recognition and measurement of assets and liabilities under iFRS and for tax purposes. When calculating deferred income taxes, tax loss carry-forwards are accounted for only insofar as it is probable that sufficient taxable profits will be generated in future.
3.25 Recognition of income income is recognized at the fair value of the consideration received or to be claimed. intra-Group transactions and the resulting gains or losses are eliminated. income is recognized as follows: Financial RepoRt 2005 Financial RepoRt 2005
3.25.2 Interest income interest income on financial instruments which are not recognized in income at fair value is recognized using the effective interest method. if a receivable is remeasured, a write-down equal to the present value of the estimated future cash inflows and outflows is made to the recoverable amount, discounted using the contract’s original discount rate. the future write-up is recognized in “other operating income”.
3.25.3 Dividend income Dividend income on financial assets is recognized as soon as the legal claim to payment arises.
4.2 Impairment losses of mortgages and loans the mortgage portfolio is tested for impairment at regular intervals.
4.3 Impairment losses on available-for-sale financial assets of an equity nature an impairment must be recognized on available-for-sale financial assets of an equity nature whose fair value on the balance sheet date is more than 50 percent below cost or whose fair value between the balance sheet date and the previous year’s balance sheet date is constantly below cost. an impairment test is conducted for securities whose fair value on the balance sheet date is between 20% and 50% below cost.
4.4 Held-to-maturity financial assets of a debt nature the Baloise Group applies the provisions of iaS 39 for classifying non-derivative financial instruments with fixed or determinable payments as “Held-to-maturity”. to do so it assesses the possibility and feasibility of holding these financial instruments to maturity. if, contrary to the original intent, these financial instruments are not held to maturity (disregarding specific circumstances such as the sale of an insignificant portion), the Baloise Group must reclassify all heldto -maturity financial instruments into the “available-for-sale” category with a subsequent measurement at fair value. pursuant to Section 5.6.4, the fair value of those financial assets of a debt nature which are classified as “Held-to-maturity” may be excluded.
Germany) banking products. the Baloise Group is exposed to various corresponding risks.
Group review and analyze the mortality, cancellation and reactivation behaviors of the respective customer portfolios locally and generally utilize standard market statistics that are determined actuarially and include sufficient safety margins. the information obtained in this way is used both in price setting (premium setting) and to establish sufficient reserves for fulfilling future insurance obligations. the conservative rate calculation required by the relevant legislation and the comparatively good statistical basis make the risks here well manageable. in the pension insurance segment there is also a trend risk, namely the continuous increase in life expectancy, which results in longer and longer pension payments. this risk is taken into account by including appropriate actuarial bases. in addition, an increasing number of pension insurance agreements are
the risk with regard to contracts entitled to share in surpluses
the significant risk categories for the banking segment of the Baloise Group are credit risk, interest risk and liquidity risk. these risks are recorded and controlled by the banks locally. the loan portfolio is continually reviewed and analyzed using various tools such as standardized lending regulations and processes, scoring and rating processes, focusing on low risk markets and automatic dunning systems. information thus obtained is then used in the loan decision.
Deutsche Ring Bausparkasse aG also has a so-called collective risk: the home construction savers must collectively provide for longterm equal allocation of building loan contracts. this requirement is met if it can be proven based on simulated calculations that the fluctuation reserve remains at least positive over the long term. collective risk is monitored and controlled at Deutsche Ring Bausparkasse using a simulation model, with the collective overall portfolio of the building and loan association carried forward on an individual contract basis by including new business scenarios and behaviors observed in the past.
5.1 Organization of risk management at the Baloise Group Due to its insurance activities in various european countries as well as its worldwide capital investments, the Baloise Group is exposed to financial risks such as currency risks, credit risks, interest rate risks, liquidity risks and market risks.
at the highest level, the total risks of the Group and the individual business units are restricted and monitored by appropriate internal and external performance bandwidths. there are various limits and rules at the finance and business risk level to keep identified individual risks to a level acceptable for the Group or eliminate them altogether.
Baloise Group. the risk controllers, who are defined in tandem with the risk owners, are responsible for conducting systematic risk controlling and risk reporting. particular attention was paid to the independence of the job position when selecting the risk controllers.
the Baloise Group’s central risk management function falls within the purview of the Group cFo within the corporate Finance Division. the office coordinates intra-Group guidelines, risk reporting and the ongoing technical development of suitable risk management processes and tools. on a monthly basis, it monitors economic market developments and their effects on the risk portfolio and individual risk-bearing capacity of all business units and of the Group as a whole. the accountable risk owners and risk controllers verify the figures and take them into account in their management decisions.
all identified risks are reported annually. each business unit prepares a risk report which serves as a basis for the Group risk report.
5.2 Underwriting strategy — life and non-life the Baloise Group primarily underwrites insurance risks of private individuals and of small and medium-sized enterprises in selected countries in continental europe. industry insurance in the property and liability segments is offered predominantly by Basler Versicherungsgesellschaft in Basel, Switzerland and its branch in Bad
Homburg, Germany. centralized control of the industrial insurance business ensures consistent quality and high transparency of the business underwritten in this particularly high-risk segment.
eUR 30 million for Germany. the only other comparable underwriting limits in the Group are for transport insurance. additional tools for determining adequate premium levels and for overall portfolio management are applied for risk management in industrial insurance.
5.3 Non-life and life reinsurance strategy the Baloise Group’s obligatory reinsurance in non-life business is structured and placed on the market for all of the Group’s business by corporate Reinsurance in the corporate Finance Division. corporate Reinsurance structures the programmes with an eye on the entire Group’s ability to carry risk.
5.4 Non-life 5.4.1 Insurance-specific risk the Baloise Group primarily underwrites insurance risks of private individuals as well as of small and medium-sized enterprises in selected countries in continental europe. in addition, business with industrial customers is also conducted in Switzerland and Germany. Rate monitoring and adjustments, as well as underwriting guidelines and limits adapted to the respective portfolio’s size and country are used to limit underwriting risks.
5.4.3 Changes to the assumptions the assumptions for establishing claim reserves are basically constant. the basis for calculating annuities is readjusted from time to time over the years.
no changes to these assumptions were made compared to the previous year. However, methods of determining appropriate claim reserves in the Swiss non-life field were improved and adapted to regulatory changes in the year under review.
5.4.4 Sensitivity analysis in addition to the natural volatility of the insurance business, there are parameters for determining actuarial provisions which have a significant influence on the earnings of an insurance company.
5.4.5 Claims processing Analysis of claims processing — gross (before reinsurance) by regions
pure risk insurance provides lump-sum and/or annuity payments upon early death (term or whole life insurance) and upon disability
(disability insurance), while saving for old age is at the forefront with capital redemption insurance (savings-oriented insurance). endowment insurance combines risk protection with savings.
the guaranteed technical interest rate represents a risk for the traditional life insurance and group life business.
With declining interest rates, there is the risk that the investment income is no longer sufficient to finance the technical interest. this risk is reduced both through asset liability management (alM) and by the participation feature bonuses.
Estimated loss expenses claim occurrence year at the end of the occurrence year one year later two years later three years later
Unit-linked life insurance in general refers to endowment insurance or deferred pension insurance, which gives the insured greater flexibility in investing. During the deferral period, unit-linked pension insurance is similar to endowment insurance. During the pension payment period, the contract converts to a traditional pension insurance policy.
typically this involves funds that fix the maturity value for a given contract duration by taking a certain investment approach (reducing the allocation in shares when share prices are falling). this type of business is offered in Switzerland and Germany. With these specific contracts, the life insurance maturity guarantee can deviate somewhat from the fund value based on the terms of the contract. this risk is taken into account using appropriate actuarial methods.
Unit-linked assets rose by cHF 477.0 million thanks to the first-time inclusion of MoneYMaXX lebensversicherung -aG, Düsseldorf.
in pure risk insurance, substantial risks can arise, for example from epidemics and terrorist attacks, as well as lifestyle changes such as a lack of movement.
ance, i.e. premium waiver for life insurance contracts with periodic premium payments in case of disability. the independent disability insurance business is of minor importance. overall, measured on the actuarial reserve, the disability risk represents approximately 6% of the business.
actuarial reserve 12.31.04 (restated) actuarial reserve 12.31.05 in cHF m Share % in cHF m Share %
Total ��,66�.� �00.0 ��,8�9.0 �00.0 allocation of the actuarial reserve to the above categories was made based on products, i.e. each product was assigned a risk type. the actuarial reserve was not apportioned into various risks within a product. each product was allocated to a category based on the actuarial table used.
5.5.3 Sensitivities For the sensitivities, the effect of changes in assumptions on net income for the year and on equity was determined. the calculations examine variances in the assumptions used for the liability adequacy test (lat).
– Reduction in net new capital inflow by 50 base points only the tested assumption is changed when determining sensitivities. the other parameters are held constant, except for the participation feature, which is adjusted appropriately.
the total effect on net income for these units is less than cHF 1 million per unit. in the Swiss unit, the lower allocations to supplemental annuity provisions actually result in a net positive effect on net income of roughly cHF 24 million, even after the added cost of additional Dac amortization is considered.
in the Swiss life business, a reduction in mortality results in a roughly cHF 26 million charge to the income statement assuming a reasonable adjustment of the participation feature. as in the scenario above, the effect on equity is very small.
n 50 basis point reduction in the net new capital inflow this scenario assumes that net new capital inflows (including reinvestments ) fall by 50 basis points. the change in unrealized gains and losses on fixed-income securities is ignored, as explained above.
at the German units, this scenario leads to a faster amortization of the
in Belgium this scenario leads to increased Dac amortization and to a provision for anticipated losses. the effect on the income statement is greater than in other countries due to a business model involving high guaranteed interest rates and small surpluses. the result is a negative income effect of cHF 17 million, combined with a marginal decrease in non-income equity. this increase is due to the reduction in shadow Dac.
n correlations of the currencies with other risk parameters in the context of the portfolio the Group-wide risk management standards require ongoing monitoring of foreign exchange risks and the effectiveness of currency derivative transactions entered into. taking the diversification effect attained in the portfolio into account, forex risk exposure is in a reasonable relationship to the potential additional revenue to be gained.
the Baloise Group’s insurance activities are denominated almost entirely in Swiss francs and euros, so actuarial provisions are also primarily maintained in these currencies. the provisions are largely covered by capital investments in the same currencies.
(2004: cHF 2,810.4 million), a net USD position of cHF 547.9 million
the Baloise Group uses derivative foreign currency instruments for hedging a net investment in a foreign company.
Total ��6.� –/– –/– �55.5 in cHF million the Group hedges net investments in a foreign company by means of USD forwards.
Because the Baloise Group’s credit risk is distributed across a large number of counterparties and customers, the Baloise Group does not have any significant credit risk with a single counterparty.
in order to limit credit and cumulative credit risk in the Baloise
Group, the Group-wide risk management standards strictly and sufficiently limit the portion of capital that Group companies may invest in a single issuer or borrower. the corresponding rules are explicitly defined in the Group’s investment instructions: the investment portfolio generally comprises only investments in bonds, loans or financial derivatives whose issuer and borrower have at least a Standard & poor’s “a-” rating or comparable, or for whom there is a corresponding third-party guarantee or real security. For other borrowers and issuers with at least a Standard & poor’s
the Group-wide risk management standards further restrict the maximum counterparty risk of an individual issuer and debtor for the individual business units or the Group as a whole.
�,�06.� �,���.9 ��,600.8 ��,�58.7 –�8,790.7 �,�97.8 capital investments > 10% of consolidated equity: 2004
in addition to the economic risk that the maturities of assets are not in line with those of liabilities, the somewhat different accounting standards give rise to an accounting risk.
pursuant to the Group-wide risk management standards, assetliability committees have been established in all of the Baloise
Continued liquidity risk as of December 31, 2005 Matures in: < 1 year Matures in: 1–3 years Matures in: 3–5 years Matures in: > 5 years Without fixed maturity Total
Mortgage assets policy and other loans other capital investments other assets assets without fixed maturity
Total liabilities from the banking business and bonds liabilities from the insurance business other liabilities liabilities without fixed maturity1
Net liquidity risk in cHF million 1 the residual terms and maturities of the actuarial provisions concerned are stated in the tables of Section 21.
the Baloise Group has strategic operations in the following regions: Switzerland (including the principality of liechtenstein), Germany, the Benelux countries and other countries.
the segments are divided into non-life insurance, life insurance, banking (including asset management and investment funds) and other activities and corporate business. accident and health insurance and products for the liability, automobile, property and transport insurance lines are offered in the non-life insurance segment.
the products are tailored to the needs of our customers — primarily private customers — and the core competencies of the companies in the Baloise Group. the life insurance segment offers private individuals and companies a broad spectrum of capital formation insurance, pure risk coverage, as well as unit-linked insurance products.
the accounting principles applied for segment reporting correspond to those for the rest of the financial report. the Baloise Group conducts business between the business segments and the regions at the same terms as with third parties. information broken down by regions and business segments is included in segment reporting, management information and the following tables.
Segment reporting a region (geographical segment) offers its insurance products and services within a particular economic environment that is subject to risks and returns different from those of other regions. a business line (business segment) is a distinguishable component of an enterprise that offers products and services with risks and returns different from those of other business segments.
Additional information assets by region of which: capital investments of which: investments in other enterprises liabilities by region of which: actuarial provisions cash flow from operating activities (net)
Additional information assets by segments liabilities by segments acquisition of real estate, operating equipment, and intangible assets for own use in cHF million
notes to the consolidated balance sheet 7. Property, plant and equipment 7.1 Property, plant and equipment 2004 land Buildings operating equipment
Reversals of an impairment loss recognized in income currency translation adjustments
of which: assets in finance leases in cHF million the assets in finance leases primarily concern a lease agreement with a purchase option for an administrative building for own use. the lease agreement includes a repayment schedule and is contractually fixed until mid-2018.
Deferred acquisition costs capitalized investment fees other intangible assets internally developed intangible assets Totallife non-life cost accumulated amortization and adjustments
Reversals of an impairment loss recognized in income amortization as a result of impending losses change due to unrealized gains and losses on financial instruments
in cHF million 1 negative goodwill (badwill) as of January 1, 2004: cHF 65.0 m. negative goodwill (Badwill) as of December 31, 2004: cHF 22.4 m.
in cHF million 1 as of January 1, 2005, negative goodwill (Badwill) amounting to cHF 22.4 million was reclassified to profit reserves recognized directly in equity. 2 owing to the application of iFRS 3 “Business combinations” and the related changes in iaS 36 “impairment of assets”, accumulated amortization is offset against liabilities cost. accumulated adjustments continue to be disclosed separately.
Significant investments in associated companies, 2005 assets liabilities Revenue profit Share %
additions additions from change in the reporting entity structure additions from change in percentage of equity investment
in cHF million in fiscal 2005, the Baloise Group business unit in Belgium invested in long-dated fixed-interest securities. this has substantially increased the interest rate risk on equity. to counter this risk, a part of the portfolio was reclassified from “available-for-sale” to “Heldto -maturity”.
in the case of financial assets held to maturity and available for sale, the multiple reinvestment of time deposits in the course of the financial year leads to correspondingly high amounts under “additions”
Financial assets of a debt nature publicly listed, fixed interest rate publicly listed, variable interest rate not publicly listed allowances
Total in cHF million alternative financial assets contain hedge funds at a carrying value of cHF 1,617.9 m (2004: cHF 1,232.7 m).
Benefits paid interest and change in liability additions/disposals from change in the reporting entity structure currency translation adjustments
Receivables from the insurance business in cHF million 14. Receivables and assets from reinsurance
25.0 �5.0 16. Employee benefits 16.1 Receivables from and liabilities to employees Receivables from benefits to employees liabilities from benefits to employees
Short-term benefits due post-employment benefits - defined contribution plans post-employment benefits - defined benefit plans other long-term benefits
December 31, 2003. the plan assets do not includes any real estate leased to the Baloise Group.
the capital investments resulting from the group life contract and further capital investments carried in the balance sheets of the consolidated corporate units serve to cover the net liabilities from defined benefit plans.
Total return on plan assets in cHF million 16.2.4 Change in net liabilities from pension benefits
currency translation adjustments addition from change in the reporting entity structure
24.3 million). no plan assets are disposed of for long-term benefits.
Financial RepoRt 2005 Financial RepoRt 2005 50 Bâloise-Holding Financial Report 2005 5�
16.4 Share-based compensation the Baloise Group offers staff and management members various plans in which shares are granted as part of the total compensation package. employee shares, employee share ownership plans, direct share subscriptions and option subscriptions (up to 2002 only) are treated in accordance with iFRS 2 “Share-based payment”.
Switzerland have been able to obtain any desired fraction – within a given bandwidth – of their variable, performance-based compensation component (incentive) in shares instead of cash. to increase the effectiveness of this share ownership plan, employees receive an interest-bearing loan at market conditions, allowing them to acquire shares, at fair value, at a multiple of the incentive net of the discounted dividend right over three years. Repayment of the loan on expiry of the three-year holding period is secured using a put option, which is financed by the sale of a countering call option. after expiration of the three-year holding period, the employee receives the shares remaining after repayment of the loan, which are freely disposable.
Fair value of the subscribed shares as of the subscription date* 20.8 �8.�
*in cHF million 1 net of the discounted dividend right over three years.
Blocked until 6.1.2003 6.1.2004 number of underlying shares in Bâloise-Holding 66,660 41,762 exercise price in cHF 167.8 197.1 in the year under review, the plans created as of 2001 and 2002 expired. no new option plans have been created.
as of December 31, 2005, no tax assets had been recognized on loss carry-forwards in the amount of cHF 674.0 million (2004: cHF
in the 2004 and 2005 fiscal years no long-term assets or discontinued operations were held for sale.
change recognized directly in equity in unrealized gains and losses on (available-for-sale)
financial instruments as a result of a change in fair value impairment losses taken to the income statement
Gains and losses from sales taken to the income statement change recognized directly in equity in unrealized gains and losses from associated companies change in hedging reserves on derivative financial instruments held for cash flow hedges
Settlement taken to the income statement addition as a result of reclassification of investment properties transfer to profit reserve as a result of disposal change in shadow accounting (Dac, URR, terminal policyholder bonuses)
change in policyholder bonuses change in deferred income taxes recognized directly to equity currency translation adjustments
in cHF million 1 see comments to section 11 21. Actuarial provisions (gross)
Total actuarial provisions – life in cHF million 1 the actuarial reserve includes unearned premiums and the claim reserves.
Up to 1 year 1 to 5 years 5 to 10 years
all maturity information is based on residual term of the contract.
Disposals from the sale of policy portfolios or insurance companies currency translation adjustments
the actuarial reserve as of December 31, 2005 for business with DpF is cHF 32,083.3 million; for business without a DpF cHF 105.1 million.
Disposals from the sale of insurance portfolios or companies currency translation adjustments
adjustment from unrealized gains and losses as of January 01 (shadow accounting)
interest and change in liability terminal policyholders bonuses paid additions from the acquisition of insurance portfolios or companies
terminal policyholder bonuses, which are only paid upon the contract’s expiry, are financed and accrued over the life of the policy in proportion to the profits attributable to the contract.
Surpluses paid additions/disposals from change in the reporting entity structure currency translation adjustments
adjustment from unrealized gains and losses as of January 01 additions
additions/disposals from change in the reporting entity structure currency translation adjustments
Policyholder bonuses credited and provisions for future policyholder bonuses as of December ��
More than 1 year no determinable residual term in cHF million all maturity data is based on assumptions. the item “no determinable residual term” contains in particular retirement provisions and annuity reserves.
premiums charged less: premiums earned during the year under review additions/disposals from changes in the reporting entity structure currency translation differences
Other changes additions/disposals from changes in the reporting entity structure currency translation adjustments
in cHF million particular attention is paid to environmental claims relating to disposal sites, waste, asbestos material and, in general, substances which are harmful to humans and to the environment.
SWX 1422292 23. Reconciliation of minimum lease payments to their present values for finance leases
in cHF million includes finance leases of a self-used property in accordance with
Measured at amortized cost liabilities to banks liabilities from time deposits loans
Financial RepoRt 2005 Financial RepoRt 2005 60 Bâloise-Holding Financial Report 2005 6�
Utilization recognized directly to equity increase as a result of compounding currency translation adjustments
27. Premiums earned and policy fees 2004 (restated) �005 life non-life Total life non-life Total
in cHF million 1 excluding income from associated companies notes to the consolidated income statement income from investment properties comprises primarily rental income. income from financial assets of an equity nature contains predominantly dividend income, income from financial assets of a debt nature primarily interest income and net income from writeups /amortization owing to the application of the actual interest method. income from mortgages and loans as well as cash and cash equivalents is mostly interest income.
as of the balance sheet date, investment income of cHF 52.2 million has accumulated on capital investments (2004: cHF 48.8 million), which is not recognized in the income statement.
in cHF million 1 excluding investments in associated companies 2 the realized profit an alternate financial investments is cHF 4.4 million 3 a loss of cHF 13.1 million from fair value hedging was included in the realized disposal and book profits from mortgages and loans.
4 in the case of capital investments of a debt nature held to maturity, currency effects are carried under realized book profits/realized book losses.
in cHF million 1 excluding investments in associated companies 2 the realized profit an alternate financial investments is cHF 33.2 million 3 a loss of cHF 8.5 million from fair value hedging was included in the realized disposal and book profits from mortgages and loans.
4 in the case of capital investments of a debt nature held to maturity, currency effects are carried under realized book profits / realized book losses.
Financial RepoRt 2005 Financial RepoRt 2005 6� Bâloise-Holding Financial Report 2005 65
�005 interest income on receivables from the insurance and reinsurance business other interest income
Gains from the sale of property, plant and equipment intangible assets other income
Other operating income in cHF million 32. Overview of expense types
Marketing and advertising adjustments and depreciation/amortization on property, plant and equipment on intangible assets it and other technical equipment expense for software development expense for rent, upkeep, and repairs other
Total in cHF million the income statement includes the expenses for the items acquisition costs, operating and administrative expenses for the insurance business, expense for the management of capital investments, and other operating expenses.
Measured at amortized cost interest on loans interest due interest from banking business acquisition costs – banking business expenses from financial contracts
the diluted profit corresponds to the basic earnings per share, because there are no option plans that could have a diluting effect.
Total the temporary differences between iFRS values and fiscal values in the actuarial provisions were reduced in the year under review. this reversion mad a considerable contribution to the cHF 40.5 million income from deferred income taxes.
Actual income taxes in cHF million in 2004, the Baloise Group’s expected average tax rate was 22.7%
and 22.0% in 2005. these rates correspond to the weighted-average tax rates in the countries where the Baloise Group operates. the non-deductible losses from the disposal of companies in 2004 originated for the most part from the sale of Mercator Bank.
Receivables from the insurance business other receivables cash and cash equivalents actuarial provisions liabilities from the banking business and financial contracts
Goodwill/negative goodwill cash and cash equivalents used for the acquisition cash and cash equivalents acquired
From that date to the closing date of the financial year, MoneY-
Financial RepoRt 2005 Financial RepoRt 2005 68 Bâloise-Holding Financial Report 2005 69
–/– –/– –/– –/– –/– –/– –/– –/– –/– –/– –/– –/– –/– –/– –/– –/–
Included in the income statement premiums earned and policy fees income from capital investments other income expenses impairment losses on doubtful receivables
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�005 capital investments intangible assets and property, plant and equipment liabilities income expense in cHF million 42. Contingent liabilities and future liabilities 42.1 Contingent liabilities 42.1.1 Legal disputes the Baloise Group and its subsidiaries are continually confronted with legal disputes, claims and litigation stemming in most cases from the normal operating activities as an insurer. Since the previous balance sheet date, the Group management is unaware of any new circumstances that could have a significant influence on the 2005 consolidated annual financial statements.
Total guarantees and payment guarantees for the benefit of third parties of which: For the benefit of partners in joint ventures of which: From joint ventures of which: For the benefit of joint ventures in cHF million
�005 capital investments property, plant and equipment intangible assets other assets
43. Operating leases 43.1 Baloise Group as lessee the Baloise Group has concluded non-terminable leasing agreements for buildings, vehicles and operating equipment as a lessee.
Future income from subleasing in cHF million contingent lease payments result if the tenancy is linked to an index.
43.2 Baloise Group as lessor the Baloise Group has concluded operating leases in connection with the leasing of investment properties to third parties. the average non-terminable residual term of the lease agreements is between four and six years. there were no additional leasing agreements on the balance sheet date.
Financial RepoRt 2005 Financial RepoRt 2005 7� Bâloise-Holding Financial Report 2005 7�
45. Significant subsidiaries, joint ventures and associated companies and equity investments as of December 31, 2005 primary activity Business area1 equity holding in percent Manner of inclusion2 currency
Hamburg other o 100.00 p oVB Vermögensberatung aG, cologne other o 54.44 p
Financial RepoRt 2005 Financial RepoRt 2005 7� Bâloise-Holding Financial Report 2005 75
Douglas / isle of Man / British isles Reins. nl 100.00 F
Baloise private equity ltd., cayman islands investment management nl/l/o 100.00 F
1 l: life, nl: non-life, B: Banking, o: other activities/corporate business 2 F: Full consolidation, p: proportional, e: at equity measurement
our audit was conducted in accordance with Swiss auditing Standards and with the international Standards on auditing, which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements. We have also assessed the accounting principles used, significant estimates made and the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
Financial RepoRt 2005 Financial RepoRt 2005 76 Bâloise-Holding Financial Report 2005 77
Gains on securities income from participating interests interest on loans to Group companies income from financial assets other interest receivable
Overall result total income total expenses pre-tax profit tax on income and capital
3. Bonds Amount interest rate issued Maturity date cHF 300 million 4.7.2008 cHF 250 million 12.15.2009 cHF 350 million1 12.20.2010 1 Raised by cHF 100 million in 2005 4. Provisions
Financial RepoRt 2005 Financial RepoRt 2005 80 Bâloise-Holding Financial Report 2005 8�
Share of voting rights 12.31.2005Shareholders chase nominees Group nortrust nominees ltd.
7. Contingent liabilities at December 31, 2005, warranty obligations amounted to cHF 447.6 million (prior year: cHF 446.3 million). of these, cHF 204.0 million relate to the warranty in respect of the exchangeable bond issued by
Based on the decisions of the General Meetings of Baloise Fund invest advico, luxembourg of February 9, 2006, of Baloise Bank
(Jersey) ltd. amounting to cHF 200 million in respect of this bond. in respect of this, the Bâloise Holding’s contingent liabilities contain a warranty of cHF 204 million.
Financial RepoRt 2005 Financial RepoRt 2005 8� Bâloise-Holding Financial Report 2005 8�
Included in balance sheet and income statement 4.1.04–3.31.05 �.�.05–��.��.05 annual net profit
Dividend in accordance with articles of incorporation available for distribution at General Meeting proposed by the Board of Directors allocation to unallocated reserve additional dividend
2.20 gross per share (cHF 1.43 after deduction of withholding tax).
to the General Meeting of Bâloise-Holding, Basel as statutory auditors, we have audited the accounting records and the financial statements (income statement, balance sheet and notes, pages 79 to 82)1 of Bâloise-Holding for the financial year, comprising the period from april 1, 2005 to December 31, 2005.
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