Headquartered in Basel (Switzerland) and with operations in continental Europe, the Baloise Group is a solution provider in the fields of insurance and provision for the future. The Group’s strategic focus is on sustainable, incomeoriented growth. Core markets are Switzerland, Germany, Belgium, Austria and Luxembourg. The Baloise Group employs a staff of around 8,700. Bâloise-Holding registered shares are included in the Swiss Market Index (SMI) and are traded on virt-x under the symbol BALN.
The world is changing fast. It is changing us. We change. The pressures of a changing world are a call for action. We analyze. We decide. We intervene and we implement. We deliver results. Changing in order to innovate and to add value is our goal.
Non-life insurance posted a profit before tax and minority interests of CHF 91 million (2002: CHF -203 million). The gross combined ratio (claims paid and costs in relation to premiums) improved by 7.6 percentage points to 97.6%. The restructuring of various business portfolios in Switzerland, Germany and Belgium is well under way and will be pursued in 2004.
Investments achieved a performance of 4.6% as against -0.9% in 2002.
The net asset value was markedly reinforced: at the end of 2003, capital and reserves amounted to CHF 3.3 billion, up by 7.5% against 2002.
The Baloise maintained its shareholder-friendly distribution policy with an increased dividend compared to the previous year.
Consolidated net profit/loss per share in CHF - 11.56 1.67 –
Market capitalization as at 12.31. in CHF m 3,042 2,857 –
The Baloise approach Pension provision – we stand by the Swiss occupational pension system Operational excellence – we know our core business Risk management in demanding times
Income statement Balance sheet Notes to the financial statements Proposed allocation of accumulated profit Report of the statutory auditors
Things have been looking up for insurers and financial service providers since mid-2003. The Baloise recorded a net profit of CHF 91 million in the 2003 business year. Rolf Schäuble, Chairman of the Board, and CEO Frank Schnewlin present their views here on the Baloise result, the market environment and the future.
Rolf Schäuble: We have fulfilled the promise given last September that we would return to the profit zone and have, in fact, exceeded expectations.
Frank Schnewlin: For the moment we can be satisfied. The success proves that we have taken the right measures. But we haven’t reached our target yet and will be striving to enhance our profitability and business volume over the coming years.
Rolf Schäuble: We set this priority very deliberately. Given the volatility of the financial markets, our profits will have to be generated primarily on the operational side in future. Operational earning power is the essential prerequisite for sustainable growth. Our declared target is profitable growth. This is underscored by the acquisition of Securitas in Germany.
Rolf Schäuble: Our financial service provider business model is functioning and remains applicable. In Switzerland in particular, our “mobile banking” model, by which selected bank products are marketed by the insurance sales force, achieved results that were roughly 54% above target. Yet a strategy must also be adaptable to changing market circumstances. Based on changes in the asset management environment, we redimensioned our private banking sector in Switzerland in September 2003, closing the Zurich, St. Gallen and Lausanne branches.
Rolf Schäuble: Over the year 2003, the Baloise share price receded by 6.1%. Naturally, this does not please us. The main reasons were the depressed stock markets and our poor 2002 result. From March onwards, however, our share price rose rapidly on the back of positive assessments by the market and the Baloise’s healthy capital base. More telling and more suited to the role of stocks as a means of investment is the long-term comparison over the past five years. From 1999 to 2003, Baloise shares registered the best performance of all primary insurers listed in the Swiss Market Index (SMI). The year 2004 began with an encouraging performance of 8.1% (at March 26, 2004). This is a top figure in comparison with other listed insurance companies and is well above the Swiss Market Index (SMI), which came to all of 1.8% over the same period. Following shifts in the stakes of major shareholders, the Baloise is now a broadly based listed company, as envisaged by the Board of Directors, with a free float of 100%. No one shareholder reaches the 5% mark in share capital. The largest registered shareholder as at the end of March 2004 holds 4.0%. This, together with the solid funding, adds to the stability of the Baloise.
«We are striving for a return on equity of at least 10%.» What are the mid-term strategic focal points?
Rolf Schäuble: Our top priority is to become one of the most profitable financial service providers in continental Europe and to continue to grow. Two strategic thrusts will enable us to do so. One is our aim to be the partner of choice for our customers and distribution partners and to gain their lasting loyalty and trust, the other our striving for the utmost professionalism and efficiency in our core insurance and pension business. Taken together, they make for an attractive investment outlook for investors and shareholders.
Frank Schnewlin: Profitability for us is a clearly measurable factor. We are striving for a return on equity of at least 10%. Regarding premium income, we have set ourselves the target of growing faster than the market in profitable segments. In non-life insurance, the target until 2007 is a sustainably lower combined ratio than the market average. It is with a convincing performance and attitude that we want to gain the loyalty of our customers and distribution partners. The attitude is “win-win,” in other words true partnership. We can convince our customers and distribution partners through professionalism and reliability, and they in turn enable us to make the requisite profits.
«Our thoughts and actions are focused on adding value.» Frank Schnewlin: We made significant operational progress in 2003, but this was just one stage on our road to becoming one of the most profitable financial service providers. Our prime emphasis is still on improving the operating results in all our markets. In the non-life sector, we are expecting a gross combined ratio of 97% for 2004, an ambitious target in view of the comparatively low-loss 2003 business year. As we want to further optimize the non-life business quality, we anticipate organic premium growth in line with the market average. In life insurance, the framework conditions are likely to improve only hesitantly. We are counting on a slightly declining business volume and a further improvement in the IFRS result development. We remain cautiously optimistic about financial market developments. All in all, we are striving for a distinct improvement of the overall net result.
Rolf Schäuble: We have already outlined our targets regarding profitability. Our thoughts and actions are focused on adding value. We want to grow in areas where this is realistically feasible. At present, the emphasis is on expansion in the non-life business sector. But we also see opportunities on the life side, which we continue to consider as attractive in view of its long-term growth potential. The growth we foresee will be organic and by acquisition when appropriate opportunities arise. A good example of the latter is the acquisition of Securitas in Germany, which operates primarily in the non-life field, and which we were able to purchase at a very attractive price. As far as our geographical reach is concerned, our focus is on expansion in the countries we already operate in. Progressing into new markets will only be considered if we pinpoint an excellent opportunity to generate added value for the company and thus for the shareholders.
Openness, courage and trust are the qualities with which relations are formed.
The insurance industry is undergoing fundamental change. Until recently, many insurance corporations pursued an aggressive policy of growth by acquisition in order to achieve market domination. Accumulation of assets was deemed the key to adding value and so insurers sought to expand their life business. Bancassurance became the password to a golden future, and great hopes were pinned on alternative distribution channels such as direct marketing, e-commerce and insurance sold through bank outlets. Enticed by soaring share prices and correspondingly high investment income, companies pushed the equity allocation of their capital investments to the limit. What got sidelined was the core craft of any insurer, the underwriting skills.
The Baloise has actively assimilated this paradigm shift. As an international, medium-sized corporation, we see our road to success in the consistency of our focus, the high degree of professionalism in our core business, and our ability to act and implement decisions swiftly.
For the Baloise, focus means: � The right choice of geographic markets and customer segments: Already since the 1990s, the Baloise has been concentrating on selected countries in Continental Europe. Its customer range comprises private individuals and small and medium -sized enterprises. The Baloise seeks to expand exclusively in existing markets and targeted customer segments.
� Positioning as partner of choice: The Baloise sees its greatest potential in the long-lasting relations based on trust with customers and distribution partners, in conjunction with its consulting and service expertise. Trust can only be built from person to person. The Baloise therefore puts the emphasis on personal sales services and aims to strengthen this distribution line and enhance its profile as a customer-focused company.
� Expansion of non-life business: To reinforce its profitability and to achieve a balance between the life and non-life sectors, the Baloise plans to expand its non-life operations. With this in mind, we acquired the Securitas insurance company in Germany in early 2003 and merged it with the Basler Deutschland to form what is now the Basler Securitas.
By high degree of professionalism in our core business we mean the constant optimization of cost and operating efficiency, in other words the enhancement of product, customer and distribution profitability. These are, when properly linked up, our most important profit drivers. We have launched both groupwide and market companyspecific projects whose goals range from the standardization of evaluation methods to the implementation of measures tailored to individual markets.
Our third success factor is our implementation ability, in other words the ability to act and on decisions swiftly and thoroughly, since results can only be achieved by turning words into action. We are thereby developing a culture of performance founded on our corporate values. Our style and system of leadership, performance management and the development of our skills are all strictly aligned to this culture.
By concentration on the essentials, focus on core activities, and with joint efforts.
In a second step, premium rates have been adapted to the altered market environment. As of January 1, 2004, this entailed an increase in premiums on existing and new contracts by an average of 10%. Of this figure, an average of 5% goes towards covering costs while 3% covers the increased risk of disability. 1% each is needed to cover obligations resulting from the unreasonably high statutory conversion rate and the equally excessive minimum interest rate (both with regard to the extra-mandatory part of insurance cover). Having made these adjustments, we can continue to provide reliable and comprehensive group insurance solutions. So that we can still give our customers the choice between comprehensive and partial insurance, we are considering the introduction of a semi-autonomous collective foundation as an option from January 1, 2005, by which investment risks and the risk of longevity could be outsourced. However, the comprehensive insurance model is also being maintained and developed in line with the changed framework conditions.
The Swiss government has set the minimum interest rate at 2.25% (previously 3.25%) as of January 1, 2004. The Baloise for its part would like to see the introduction of clear criteria for the setting of this rate in future. The minimum rate should take into account the accrued obligations in the BVG sector and be based on a market-aligned model which makes changes foreseeable and readily comprehensible, which takes into account the return levels achievable in the financial markets, and which leads to economically viable results. Mandatory BVG insurance still operates with a conversion rate of 7.2%, which is far too high in view of today’s market and demographic realities and places a considerable burden on providers. The Baloise will only be able to lift its restrictions on the acquisition of new customers once the regulatory conditions have been brought into line with these realities.
Top-rate performance in our business operations is now essential if we want to become and remain the partner of choice of our customers in insurance and pension matters. Operational excellence means constantly striving to add strategic and economic value, to optimize processes and systems, and to simplify structures. In our opinion, three conditions need to be fulfilled to achieve this: a high degree of awareness of customers’ true requirements, a high level of business process awareness, and pronounced openness to change.
Based on our partnership approach, the prime distribution channels are our sales force and broker network. Yet these too are subject to change. The focus of the sales force is shifting increasingly to the expansion of existing customer relations rather than the acquisition of new ones. Building on up-to-theminute electronic consultancy tools, we can target each customer’s specific requirements and assemble solutions that are customized accordingly. Brokers for their part are especially interested in efficient processes. The Baloise’s processes and structures are therefore designed to provide the best possible support for its distribution partners.
The risks insurers are faced with have grown considerably. The costs of longevity, increasing strain on our physical and mental well-being and correspondingly higher risks of disability, ever more complex interdependences in the business world, an increasing population density and threats to the environment are some of the factors involved, all of which the Baloise takes into account in its risk management. In fact, risk management plays a part in every phase from product development and rate setting to initial customer contact. Our staff’s impressive technical know-how, underpinned by regular training, ensures competent risk advice for customers and professional risk assessment.
All these numerous measures were necessary for us to master the challenges of the 2003 business year. They helped ensure that the Baloise was able to safeguard its substance in turbulent times and retain the ability to grow profitably in future, too.
With a net profit of CHF 91 million in the 2003 financial year, the Baloise Group has demonstrated its ability to boost its performance. This success is a result of consistent cost management, profit-oriented underwriting and premium policies, and the thorough restructuring of the business portfolio. Premium income in the non-life business rose by 14.0% in local currencies, while falling by 8.1% in the life business. The Baloise has significantly enhanced its operational earning power. Further proof of this is the strong improvement in the gross combined ratio to 97.6% and the positive embedded value in newly written life insurance. In 2003, premium income came to CHF 7.4 billion, of which non-life accounts for CHF 3.1 billion and life for CHF 4.3 billion. Group solvency at the end of 2003 was 241% (including imputed banking assets); capital and reserves rose by 7.5% to CHF 3.3 billion. This provides a solid foundation on which the Baloise can build profitable growth in the future.
However, a number of factors remain unresolved: the trend in health care costs throughout Europe, the increase in the number of disability cases, and the statutory framework governing state pension schemes.
The insurance industry is willing to do its share in finding economically viable solutions. From a business point of view, the most important concerns were boosting the capital base and earning power and tightening the “nuts and bolts,” i.e. actuarial and underwriting techniques.
At most insurance companies returns on investments have also started to improve.
One burden facing the Swiss economy is the growing significance of the state sector and the corresponding tax increases that accompany this development. These and the high level of prices are constraining economic development. Once again, private consumption proved an important economic engine. Various insurers withdrew from group insurance; others are increasingly selective in the new business they will accept. Owing to the current unattractiveness of the individual life business, premium income declined.
In the 2003 financial year, the Baloise Group registered a net profit of CHF 91 million (2002: loss of CHF 634 million). There has been a huge improvement in all business lines and geographic markets. The positive business result is the consequence of numerous measures adopted to strengthen operating earning power, particularly in Switzerland, Germany and Belgium: a risk-aligned underwriting policy, consistent portfolio restructuring, and tight cost management. Other positive contributions were the favorable development in the exchange rate of the euro and the general absence of major losses. The sharply higher operating performance was manifested in particular in the combined ratio in non-life: compared with 2002, the gross value improved by 7.6 percentage points to 97.6%. The positive embedded value of newly written life business documents the Baloise’s success in turning this segment around. Group solvency (also taking into account banking assets) of 241% and an increase of 7.5% in capital and reserves prove that the financial health of the Baloise is as sound as ever. We regard this achievement as a milestone and will continue to enhance our operating performance in the coming years.
There was also a change in premium volumes by country: Switzerland generated 58% (2002: 64%), while Germany’s share rose to 30% (2002: 24%) on the back of the acquisition of Securitas; at 10%, the Benelux countries were unchanged from the previous year, as were the other countries. This shift reflects the Baloise’s endeavors to increase diversification of premium income by region.
The life business also posted a positive result, producing a profit before tax and minority interests of CHF 69 million (2002: loss of CHF 359 million). Premium income in local currency declined by 8.1% to CHF 4.3 billion (2002: CHF 4.6 billion). Excluding acquisitions, premium income fell by 10.6% in local currency. This reduction reflects the underwriting policy, which focuses strictly on profitability. In addition, single premium policies recorded a decline due to the market situation. As all Group companies quickly adjusted conditions to changed market realities, new life policies have positive margins. Although general business conditions remain challenging, the Baloise is convinced that the growth and earnings potential of the life business remains attractive in the long term; it will continue to pursue profit-oriented underwriting.
The banking business produced a profit before tax and minority interests of CHF 37 million (2002: loss of CHF 100 million), largely owing to the Swiss Baloise Bank SoBa. Thanks to improvements in its core business the bank’s profit increased by 25%. Developments at the banks in Belgium and Germany (Deutscher Ring Bausparkasse) were in line with expectations.
The realized net gains and losses (including writeback of impairments charged to income) amounted to CHF -41 million (2002: loss of CHF 807 million).
The Baloise Group’s capital and reserves on the cutoff date amounted to CHF 3.3 billion (2002: approximately CHF 3.1 billion). The increase of 7.5% is primarily attributable to changes in the value of capital investments, currency gains, and net profit. At the end of 2003, consolidated Group solvency in accordance with IFRS requirements was 241% (including banking assets) and 214% excluding banking assets.
Tax incurred in 2003 amounted to CHF 125.4 million (2002: tax yield of CHF 82.7 million). Current tax on income amounted to CHF 114.6 million (2002: CHF 33.7 million). The most influential factor – aside from the positive annual result – is the changes in tax laws for German life insurance companies. This makes itself felt in significant nonrecurring expenditures unrelated to the accounting period. Thus, the result of the life business in particular must be seen in the context of tax considerations.
Because of the rise in unrealized gains, deferred tax resulted in an expense of CHF 10.8 million (2002: tax yield of CHF 116.4 million).
Management was significantly strengthened in the year under review. New Chief Executive Officers were appointed at Baloise Switzerland (Martin Strobel), Basler Securitas in Germany (Frank Grund) and Mercator in Belgium (Jan De Meulder). These appointments mark an important step in the Baloise’s efforts to reinforce local market companies and, hence, the operations of the core insurance and pensions operations.
We expect the economic recovery to continue in 2004, which should lead to an improvement in framework conditions. At the same time, we remain cautiously optimistic about developments in the financial markets. We will focus primarily on further enhancing operational earnings power in all markets with a view to positioning ourselves for further growth. By the end of 2004, we expect a gross combined ratio in the non-life business of 97%, which, given the absence of major losses in 2003, we view as an ambitious target.
In 2003, Baloise Switzerland was spared any extraordinary losses attributable to natural causes. However, there was a rise in obligations arising from personal injury claims, particularly in the automobile and accident insurance segments. A significant decrease in claims under group daily sickness allowance policies contrasted with a sharp rise in cases of long-term disability. Technical provisions in the nonlife sector were maintained at the same high level as the previous year.
A sharp 45% decrease in single premiums in the individual life segment contrasted with an increase in policies based on periodic payments. Numerous measures have secured the profitability of the life sector and the interest margin is positive both for existing and new business. Technical provisions have increased compared with the previous year.
Baloise Switzerland’s strategy as a focused financial service provider is reflected in the comprehensive financial advice it provides for insurance and banking customers, one example being the launch of the advisory platform BALOISEHYPO PLUS – focused on mortgage financing for home owners – and BALOISELIFE PLUS – a combined life insurance and savings product. These services met with a better-than-expected reception from customers.
On the German insurance market, demand for occupational and private pension solutions was once again slack. The companies of the Baloise Group concentrated on boosting their operating profitability. German business posted earnings before tax and minority interests of CHF 77.1 million (2002: loss of CHF 25.6 million). Another key development was the integration of the insurance portfolios of the Securitas Group and the Baloise branch to form the new BadHomburg -based Basler Securitas. The integration process is well on track.
The German insurance year was dominated by the adverse economic environment, accompanied by cutthroat competition. Life insurers still had to cope with low returns on their investments, although the situation eased toward the end of the year. Germany’s social security system is facing some major challenges. The uncertainty hanging over the state pension insurance system will give added momentum to occupational and private pensions, although the expected new business has so far largely failed to materialize. As of January 1, 2004, the life insurers reduced their guaranteed interest rate from 3.25% to 2.75%. There were no major losses from natural causes of the type seen the previous year. For the Baloise Group, the central event was the integration of Securitas and its merging with the Baloise in Germany. Since October 23, 2003, the new company has been operating under the name “Basler Securitas” based in Bad Homburg; in fiscal 2003, it was consolidated according to IFRS guidelines for the first time. The new company is very well received by customers and employees alike. The integration process is making solid headway under the new CEO Frank Grund.
In fiscal 2003, the integrated Basler Securitas posted premiums amounting to CHF 1.1 billion. Acquisitionrelated effects mean that comparisons with the previous year would be of little informative value. Securitas’ strategically insignificant legal protection business was sold retroactively as at January 1, 2003. The integration of Securitas and the Baloise branch in Bad Homburg is at an advanced stage. The new brand “Basler Securitas” has been launched, the management and sales structure is in operation and the product portfolio has been aligned. Some of the cost savings resulting from the integration will take effect in 2004 and 2005 to become fully effective in 2006.
Deutscher Ring Bausparkasse reported a very successful trend of new business. The restructuring is proceeding in line with our expectations. Thanks to cooperation with Diba – Allgemeine Deutsche Direktbank – the building loans business segment also experienced appreciable growth.
Because of the low interest rate levels, coupled with the fact that the stock markets have only recently begun to improve, Belgian life insurers are continuing to suffer from excessively high guarantees under existing life policies. In new business, the industry has adjusted its terms to market conditions.
In the non-life business, Mercator has introduced systematic risk selection, which enables it to address the general rise in the incidence of claims. In the second half of the year, the sector approached breakeven level. Low interest rates and the fact that share prices only recently began to pick up were the principal factors behind the renewed loss in life business, albeit on a significantly lower level. In new business, benefits were adjusted to an achievable level of return on investment, and premiums were increased in line with the risk involved. This resulted in a positive value for newly written life business.
Following the previous year’s substantial increase, premium growth in the non-life sector stood at around 2%. As new business was not sufficient to
Despite a difficult environment, the life sector is enjoying a robust development. Only risk insurance experienced lower-than-average growth in premiums.
The trend remains positive in the group insurance sector (second pillar), where Bâloise Assurances, Luxembourg, has established itself as one of the few local specialists in recent years. Cooperation with the new local banking partner ING Bank has got off to a good start and promises considerable potential.
Basler Austria again reduced its costs, improved the result of insurance operations and significantly enhanced its sales capacity. The premium volume grew by 6.2% in local currency terms to CHF 105.0 million (2002: CHF 95.4 million).
In Croatia, the Baloise works in conjunction with the local medical and dental association to offer nonlife and life products to meet the specific needs of medical practitioners and associated professional groups. In the physicians’ segment, market share stands at over 50% thanks to an active sales force and sales partnerships. The partnerships with banks are being further expanded. The loss ratio for fiscal 2003 stands at just under 55%.
This sector includes reinsurance companies, special forms of investment, financing operations and participations, and consolidated operations. The positive result is due to three principal factors. Firstly, consolidated business developed positively. Secondly, the reinsurance companies benefited exceptionally from the favorable situation as far as major claims are concerned, and thirdly the holding companies achieved currency gains.
The business year 2003 was characterized by a turnaround on the stock markets following the downslide in the first quarter. This trend reversal, coupled with a slight rise in bond yields, led to a shift in the investment strategy of the Baloise Group. As a result, investment performance was far better than in 2002.
The Iraq war and fears that the SARS epidemic could spread pushed the stock market down at the beginning of the year. This was followed in the second quarter by the long-awaited rally as the tensions passed and economic data improved. The leading central banks retained their extremely expansive monetary policies. This held interest rates at a low level, although above the previous record lows. Price pressure looks set to rise in the medium term as the economy gains momentum, capacity utilization increases and unemployment drops back, and this should lift the yield curve.
In the first half of the year the bond markets were overshadowed by the deflationary fears triggered by the Chairman of the Federal Reserve Board, Alan Greenspan. As a consequence, yields dropped to new lows in June. However, better economic data subsequently raised pressure both on the Swiss market and to a lesser extent elsewhere, leading to a sharp 25 to 35 basis point hike in yields.
Risk management throughout the Baloise Group ensures that a stable balance is maintained between risks borne and the available risk capital. Aspects taken into account include economic factors, legal and regulatory provisions and the demands of a variety of stakeholders. Thanks to this broadly based approach, various interests can be presented in a transparent fashion, raising the quality of the decision -making process and thus benefiting the Group as a whole. The relevant risk indicators are compiled and monitored both at corporate and business unit level.
The Group’s risk management is founded on three pillars: business risk analysis, analysis on the basis of rating-like models, and monitoring of regulatory guideline figures. Only when these three factors are properly combined can one speak of balanced and appropriate risk management.
The following business risks are at the heart of the quantitative analysis: Insurance operations � Natural hazards � Major industrial risks � Liability risks � Personal risks
Investments � Market and price risks � Interest rate risks � Foreign exchange risks � Credit and insolvency risks
� Targeted premium adjustments � Selective portfolio restructuring � Reduction of bonus allocation to life insurance policyholders
The measures are backed up by group-wide reporting procedures on risk and the development of risk capital.
Capital resources (Group) 5,008 in CHF m 1 including imputed banking assets
In 2003, the Baloise introduced a number of innovations with important consequences for its corporate governance.
In 2003, the group-wide compliance function created into 2002 was expanded and consolidated. Creating a group-wide network of compliance officers has facilitated the task of introducing and implementing compliance standards. On the basis of the analysis of the compliance situation in the individual Group companies, local concepts were drawn up in accordance with the requirements of the Baloise Group. A group-wide Code of Conduct was introduced in 2003 and distributed to all employees. It can be viewed on the Internet. The Code of Conduct lays down minimum standards of behavior for employees; additional internal directives define these norms more precisely. A practice-oriented concept has been drawn up to train employees on how apply the Code of Conduct and will be implemented on a group-wide basis in 2004. Using concrete conflict situations, employees will be trained to recognize sensitive situations and to apply the Code of Conduct.
The willingness to question current practice, to be open to new concepts and to develop solutions together are fundamental prerequisites for sustainable change. In 2003, the Baloise made substantial investments in developing an employee-oriented culture of trust and efficiency. In line with the Group’s corporate values, “Create value,” “Foster relations” and “Bring about change,” all business units drew up measures aimed at improving competitiveness and sustaining it in the long term, thus securing the future success of the Baloise.
At the beginning of 2003, the Baloise took another step in developing its existing environmental management structures. The resulting sustainability network encompasses the sections corporate ecology, products/markets, capital investment, compliance, human resources, communications, investor relations, and corporate development. The sustainability network is responsible for: the further development of the Baloise’s sustainability strategy, the internal linking of sustainability measures, and the coordination of the company’s internal and external sustainability communication activities. � Sustainability, page 51 1. Group structure and breakdown of shareholders
As at June 17, the stake held by the BZ had fallen below the 5% threshold. According to an announcement made on July 17, the Dutch firm Strategic Money
The share buybacks and nominal value repayments in 2000 and 2001 had a strong impact on the BâloiseHolding ’s capital and reserves. In the 1999/2000 and 2000/2001 reporting periods, share buybacks led to a reduction of share capital by CHF 1.9 million and CHF 1.4 million, respectively. The nominal value repayment to the amount of CHF 9 per share in 2001 lowered the share capital by CHF 49.8 million to CHF 5.5 million at the end of the 2001/2002 financial year.
Since the 1:10 split in 2001, the ordinary share capital of Bâloise-Holding has consisted of 55,307,150 registered shares entitled to dividends with a nominal value of CHF 0.10 each. Further information on Baloise shares can be found in the “Shareholders’ participation rights” section.
Bâloise-Holding does not have any authorized or conditional capital. Similarly, there are no participation certificates, dividend rights certificates or convertible bonds relating to participation rights of the company or options issued by it. Further details can be found on page 125 of the Financial Statements and in the Notes.
At end-2000, consolidated capital and reserves came to CHF 7,372.8 million. The changes up to the end of 2002 primarily reflect the hectic situation on the capital markets. At the end of 2001, the Baloise Group had consolidated capital and reserves of CHF 5,384.8 million. Subsequent price falls resulted in a further decline to CHF 3,088.1 million by the end of 2002. Thanks to a more stable capital market situation coupled with operational counter-measures, consolidated capital and reserves rose to CHF 3,319.8 million by end-2003.
Share capital stood at CHF 56.7 million at end-2000, but by end-2001 it had dropped back to CHF 5.5 million owing to nominal value repayments amounting to CHF 49.8 million and share buybacks totaling CHF 1.4 million. At the end of 2002, nominal capital was an unchanged CHF 5.5 million.
Capital reserves changed only slightly in the period under review. At the end of 2000, capital reserves totaled CHF 81.2 million. During 2001, they rose by CHF 28.1 million to CHF 109.3 million owing to net sales of treasury stock (own shares) but then edged down again by CHF 0.4 million to CHF 108.9 million owing to net purchases of treasury stock.
Accumulated profit decreased during 2001 from CHF 3,834 million (position as at December 31, 2000) to CHF 3,810.5 million net owing to dividends, net profit and the repurchase of shares. In 2002, the accumulated profit declined – owing to the dividend payment and the net loss for the year – to CHF 3,043.3 million.
In 2000, the Baloise Group posted a consolidated net profit of CHF 634.4 million, its best result so far. Owing to the weak equity markets, the net profit for the following year fell to CHF 404.4 million. With the financial markets remaining bearish, and owing to exchange rate losses and major claims payments in the core German and Austrian markets, the Group posted a loss of CHF 634.5 million in fiscal 2002.
For details on changes in the consolidated capital and reserves in 2003, please see the corresponding section on page 74.
Bâloise-Holding and other companies in the Group have issued bonds on public markets. As at December 31, 2003, five bonds floated by Bâloise-Holding and other Group companies on public markets were outstanding. Details about the outstanding bonds can be found in the Notes to the Financial Statements from page 103.
In the year under review, Christoph J.C. Albrecht, Andreas Burckhardt and Dietrich J. J. Forcart † were elected for a further three-year term of office. Klaus Jenny, a noted financial expert, was elected as a new member of the Board for a three-year term of office.
Rolf Schäuble (born 1944, CH, Dr. oec., University of St. Gallen) has been a Member of the Board of Directors since 1993 and Chairman since 1994. From 1996 to February 28, 2002, he was also Managing Director and CEO. He graduated in economics and obtained a doctorate from the University of St. Gallen. From 1975 to 1993, Rolf Schäuble held various positions at the Zurich Insurance Group, Zurich, culminating in a seat on the Corporate Executive Board.
Gertrud Höhler (born 1941, D, Prof. Dr. phil.) has been a Member of the Board of Directors since 1998. She is an economic and political consultant, and was a professor of literature and German studies at the University of Paderborn from 1976 to 1993. She studied literature and art history in Bonn, Berlin, Zurich and Mannheim. From 1987 to 1990 Gertrud Höhler was a PR consultant for Deutsche Bank AG, and from 1992 to 1995 a non-executive Member of the Board of Grand Metropolitan PLC, London. She is a Member of the Board of Directors of Ciba Specialty Chemicals, AG, Basel, and Georg Fischer AG, Schaffhausen. She is an independent, non-executive Member of the Board.
1 We were deeply saddened by the death of Dietrich J. J. Forcart in January 2004. Mr. Forcart was a highly respected member of the Board of Directors, on which he served for many years.
Werner Kummer (born 1947, CH, Dipl.-Ing. ETH, MBA Insead) has been a Member of the Board of Directors since 2000. From 1990 to 1994 he was CEO of Schindler Elevator Corporation and then until 1998 member of the Executive Committee of the same company, responsible for the Asia Pacific region. From 1998 to March 2004 he was CEO of Forbo Holding AG/Forbo International S.A. Werner Kummer is a Member of the Board of Directors of WMH Walter Meier Holding AG. He is an independent, non-executive Member of the Board.
Arend Oetker (born 1939, D, Dr. rer. pol.) has been a Member of the Board of Directors since 1996. He studied business management and political science at the Universities of Hamburg, Berlin and Cologne, obtaining a doctorate in political science from the University of Cologne. He is Executive Partner of Dr. Arend Oetker GmbH & Co., Berlin. Arend Oetker is Chairman of the Supervisory Board of Schwartauer Werke GmbH & Co. KGaA, Bad Schwartau, Chairman of the Board of Directors of Hero AG, Lenzburg, member of the Supervisory Board of Degussa AG, Düsseldorf, Member of the Supervisory Board and Board of Partners of Merck KGaA, Darmstadt, and Deputy Chairman of the Supervisory Board of KWS Saat AG, Einbeck. He is an independent, non-executive Member of the Board.
Jean-Marc Rapp (born 1951, CH, Prof. Dr. iur.) has been a Member of the Board of Directors since 1999. He gained his doctorate in law at the University of Lausanne and obtained a postgraduate diploma in Berkeley, USA. He is an attorney-at-law and has been professor of commercial and contract law at the University of Lausanne since 1989 and Principal of the University of Lausanne since 1999. Jean-Marc Rapp is an independent, non-executive Member of the Board.
Eveline Saupper (born 1958, CH, Dr. iur.) has been a Member of the Board of Directors since 1999. She studied law at the University of St. Gallen, where she obtained her doctorate. She is an attorney-at-law and a certified Swiss federal tax expert. From 1983 to 1985 she worked for Peat Marwick Mitchell (today KPMG Fides), Zurich, and from 1985 to 1992 for Baker & McKenzie, Zurich and Chicago. In 1992 she joined the firm Homburger Attorneys, Zurich, where she is a partner. Eveline Saupper is Chairman 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 Member of the Board.
Further information about the Members of the Board of Directors can be found on the Internet. � www.baloise.com/Profile/Organization/
Functions of the Board of Directors Subject to the decision-making powers of the shareholders at the General Meeting, the Board of Directors is the highest decision-making body of the company. In principle, unless the organizational regulations delegate powers to the Chairman of the Board of Directors, the Board committees or the Corporate Executive Committee, decisions are taken by the Board of Directors.
The Chairman’s Committee is responsible for deliberating on particularly important business, especially in connection with major decisions on strategy or personnel. The Chairman’s Committee also functions as the Nomination Committee and as the Investment
The Compensation Committee determines the structure and amount of compensation for Board members and the salaries of the members of the Corporate Executive Committee. In the incentive plan, it defines the overriding Group objectives and their attainment, and it approves the rules governing compensation for members of the Corporate Executive Committee and monitors their correct application.
The Audit Committee assists the Board of Directors in tasks that cannot be delegated relating to supervision and financial monitoring (Art. 716a Swiss Code of Obligations) by forming its own judgment on the organization and functioning of the internal and external monitoring systems and on the annual and consolidated financial statements. Furthermore the
Audit Committee assesses the functioning of the internal monitoring system for risk management and reviews the state of compliance. The Audit Committee discussed the Group financial statements for the 2003 financial year with the management and the external auditors. As a result, the Audit Committee recommended that these audited annual statements be incorporated into the Group’s Annual Report for the financial year ended on December 31, 2003, that is to be presented to the General Meeting. The Board of Directors accepted this recommendation.
In accordance with the organizational regulations, the full Board of Directors meets as often as business requires, but at least four times a year. � www.baloise.com/Profile/Corporate Governance/
The management structure of the Baloise Group can be found on page 42.
Frank Schnewlin (born 1951, CH, Dr ès sc. écon., Master of Science LSE, MBA Harvard) studied business management at the University of St. Gallen and graduated with a degree in economics (lic. oec. HSG), majoring in insurance and risk management. After gaining an M.Sc. at the London School of Economics, he took an MBA at Harvard Business School in Boston. While a Research Fellow of the Harvard Business School, Frank Schnewlin obtained his doctorate in economics at the University of Lausanne. He worked at the Institut für Versicherungswirtschaft in St. Gallen and at Citibank N.A., New York. From 1983 to 2002, he was employed at Zurich Financial Services in various positions. In 1993 he was appointed a Member of the Group Management Board with responsibility for the Business Division Southern Europe, Asia/Pacific, Latin America, Middle East and Africa. Since November 2000, he has been Head of Corporate Center and a Member of the Executive Committee of the Group Management Board. Since March 2002, Frank Schnewlin has been Chief Executive Officer of the Baloise Group and Head of the International Corporate Division.
Bruno Dallo (born 1957, CH, Dr. iur.) graduated from the University of Basel with a doctorate in law. He is an attorney-at-law. After a period in various law offices and in the legal department of a major bank, he joined the Baloise Group in 1986. From 1994 to 2001, he was General Counsel (Head of Legal and Taxes); from 1999 to 2001, he was also secretary to the Board of Directors. He was in charge of various merger and acquisition projects. He has been a member of the Corporate Executive Committee since 2001 (Head of Corporate Center), responsible for corporate development, human resources, legal, tax, compliance and runoff.
Bruno Dallo is Chairman of the Board of Trustees of the Baloise Pension Foundation. Furthermore, he is a member of the Basel-Stadt tax appeals committee and the tax and finance committee of the Chamber of Commerce of Basel-Stadt and Basel-Landschaft.
Martin Strobel (born 1966, D, Dr. rer. pol.) studied computer science, business management and business systems at the Universities of Kaiserslautern, Windsor (Canada), and Bamberg, where he obtained his doctorate. From 1993 to 1999, he worked for the Boston Consulting Group, Düsseldorf, in different positions dealing with questions of strategic IT management in the banking and insurance sectors. He joined the Baloise Group at the beginning of 1999. He was Head of IT at Baloise Switzerland and responsible for large interdivisional projects in the fields of insurance and finance. Since 2003, he has been a member of the Corporate Executive Committee (Head of the Switzerland Corporate Division). Martin Strobel is a member of the Board of the Swiss Insurance Association (SVV) and a member of the “Finance Forum” Advisory Committee.
This section is divided into three parts: � the Members of the Board of Directors other than the Chairman,
As published in accordance with the Guidelines, compensation for the 11 nonexecutive Members of the Board of Directors in 2003 was as follows: Compensation in the year under review
Mortgages and loans against insurance policies CHF 650,000 1 see “Change of control and countermeasures” page 38 2 Mortgages are granted at conditions that apply to employees (1% below the interest rate paid by customers for variable-rate mortgages). There were no loans against insurance policies.
In 2003, the company introduced the direct allocation of shares at a preferential price for all persons entitled to incentives in all Group companies. The subscription price at any time is 10% lower than the market value at the time of subscription. Thus, shares may henceforth be subscribed either directly or, as in the past, linked to a loan on which interest strengthens the impact of the shares allocated (leverage effect).
The loan repayment after a three-year-blocking period is hedged with a put option financed by the sale of a corresponding call option. After expiry of the blocking period, employees receive the shares remaining after repayment of the loan for their free disposal. Finally, under the options plan, the options, quoted on the stock market, are purchased by the Baloise Group from third parties at market value. Options subscribed may not be sold for two years.
The share capital of the Baloise consists exclusively of registered shares. There are no shares with preferential voting rights. In order to ensure broad-based shareholding and to protect minority shareholders, no shareholder, regardless of the size of holding involved, is registered with more than 2% of voting rights. The Board of Directors may approve exceptions to this rule by a majority of two-thirds of all members (Art. 5 of the Articles of Incorporation). There are no exceptions at present.
31. Notice of the convening of the General Meeting must be given at least 20 days before the appointed date of the General Meeting. Each registered shareholder receives a personal invitation that includes the agenda of the Meeting. Invitation and agenda shall also be published in the Swiss Commercial Gazette (Schweizerisches Handelsamtsblatt), in various newspapers and on the Internet.
Shareholders’ requests pursuant to Article 699 (3) of the Swiss Code of Obligations for the inclusion of items on the agenda may be submitted by one or more shareholders representing at least 10% of the share capital or shares with a nominal value of at least CHF 100,000. Such requests including the motions to be put to the General Meeting must be submitted to the Board of Directors in writing at least six weeks before the annual General Meeting (Art. 14 of the Articles of Incorporation).
The admissibility of nominee registrations, including the relevant percentage clauses and conditions of registration, is dealt with in Article 5 of the Articles of Incorporation. The procedures and preconditions for canceling or restricting transferability are laid down in Articles 5 and 17 of the Articles of Incorporation. � www.baloise.com/Profile/Corporate Governance/
Shareholders, whether acting alone or as a group by agreement, that acquire 331/3% of all Baloise shares are obliged to submit a take-over bid to all remaining shareholders. The Baloise has never made use of the possibility to deviate from or waive this regulation. The Articles of Incorporation contain neither an optout nor an opt-in clause as defined in the Federal act on the stock exchanges and share trading (Stock Exchange Law).
The Baloise has an Audit Committee made up of independent members qualified in finance and accounting. The Audit Committee monitors the coordination of the internal audit, risk management, and compliance with the external auditors. It also verifies the independence of the external auditors.
The Baloise Group informs shareholders, potential investors, employees, customers and the general public as comprehensively, openly and regularly as possible. This enables the Baloise to foster an understanding of its objectives, strategy and business activities.
� Annual and Semi-Annual Reports � Annual and semi-annual media conferences � Meetings with financial analysts and investors, and � the Annual General Meeting.
Shareholders can access media releases, disclosure reports, presentations, addresses and Annual and Semi-Annual Reports on the Internet. In 2004, the Baloise published, for the first time, a Sustainability Report that informs readers about the sustainable business approach of the Baloise.
“What is true of our inner, personal values also applies to the values of our company. They drive our actions and must be clearly reflected in what we do. The more consistently I act in accordance with our values, the more intensively and convincingly I live them, the less I need to talk about them. I can be measured by my actions. Last year, I initiated a focus program with five key factors by which we can improve our value creation. My vision is to transform the Baloise into a gem in its field for customers, employees and shareholders. As CEO I am responsible for the implementation of this vision. The past year showed that we are on the right track. We made good progress, and I know we can improve further. I am optimistic, and hopefully my optimism will inspire everyone at the Baloise.”
“Playing a part in designing integration processes and new structures, motivating managers on our road to a common future, communicating the culture of our company and establishing new partnerships are key tasks for me. Setting up Basler Securitas in 2003 was a case in point where we realized these targets in the German market. We grow with such tasks. In this context, the Baloise corporate values serve as a compass for me.”
“Within the framework of our high-earning power strategy, our focusing on value has effected real change. We have boosted value-adding activities and, after thorough evaluation, put an end to value-reducing ones. The earning-focused approach to all our activities was discussed and implemented at all levels. We also put our ‘foster relations’ principle into action, for instance by organizing customer events, which were very well received owing to the clear and open information we provided. Transparency makes for trust.
“Capital investment is basically about creating and enhancing value for the benefit of customers, staff and shareholders. Even if we primarily think of material values, the past years have shown that sustainable success is only possible if higher and long-term values serve as guidelines. That is why the introduction of the corporate values has met with such interest at the Baloise. After analyzing the first surveys, we immediately began with the implementation. At various events we developed special measures and activities with the aim of deliberately shaping our relations and the change we are subject to. A beginning has thus been made; the conditions for creating new values are there. The program is being continued.”
Our staff are entitled to participate in the value of the company. A well-endowed system of social and fringe benefits is in force, and performance-related remuneration as part of the pay package serves as incentive in particular at middle and senior management level. 480 staff members were included in the incentive program. Performance-related pay made up around 4.7% of the overall wage costs.
Bring about change: The unwavering implementation of our corporate strategy and the changes this often necessitates places high demands on staff and management alike. In the annual objective-setting process, the line manager formulates his/her expectations – ultimately derived from the corporate strategy – and agrees with the individual staff members what they are expected to contribute. Thus expectations are clearly and transparently expressed. Reporting lines between Head Office and the strategic business units were also clarified and were actively developed in several areas in 2003.
Insurance and financial services business is geared towards long-term action. It is concerned with managing the present and future risks to individuals, society and the environment, and it focuses on safeguarding the fundamentals of life. Successful insurance and financial services business thus makes a major contribution to a sustainable development of the economic, social and ecological spheres of our life.
Following on from the first environmental audit in 2001, the Baloise Group has now produced a Sustainability Report. In it, we examine our core business from the point of view of sustainability, for example commenting on the future of the European pension systems or the role of the insurer in providing risk advice to business customers. Members of the Corporate Executive Committee and the Board of Directors answer questions in interviews and explain what sustainability means for the Baloise in concrete terms. Professor E.A. Brugger, one of Switzerland’s leading experts on sustainability, sets out future challenges facing the insurance industry from a sustainability standpoint. Analysts, employees, customers and suppliers of the Baloise explain what they want in the long term from the Baloise. Pointers for the further development of the Baloise’s own sustainability management come from external rating agencies such as the Sustainable Asset Management Group (SAM), which credits the Baloise with very good overall sustainability performance compared to the sector as a whole (see chart). As regards economic criteria, the company has excellent corporate governance and strong performance in risk management and crisis management, placing it above the industry average. The Baloise recorded a significant improvement in environmental performance as compared with the previous year. The Group is also above average when it comes to social criteria. The Baloise’s commitment to sustainability also meant that, in the year under review, Baloise shares were included in the major sustainability indices and funds, such as the Dow Jones Sustainability Index and the FTSE4good index.
The Baloise is a publicly traded company with broadly spread shareholdings and a 100% free float. The number of registered shareholders rose by 25.6% year-on-year to 15,027 (2002: 11,974).
Consolidated capital and reserves per share2 in CHF 127.6 130.0 97.4 55.8 60.0
Number of shares entitled to dividend in units 58,620,000 56,704,000 55,307,150 55,307,150 55,307,150
Daily volume traded shares in CHF m 23.0 24.5 15.4 21.4 23.6
Consolidated capital and reserves in CHF m 7,477.6 7,372.8 5,384.8 3,088.1 3,319.8
Ratio, market capitalization/gross premium in percent 120.7 150.6 127.6 41.8 38.7
Combined ratio: non-life 2002 2003 2002 2003 as a percentage of premiums earned
Combined ratio (gross) Switzerland Germany Benelux Other countries as a percentage of premiums earned
Premiums earned and policy fees - 179.4 - 218.6 - 39.8 - 53.0
Total underwriting result for own account - 266.5 - 91.4 - 1,044.8 - 1,125.0
Profit/ loss before tax and minority interests - 203.3 90.8 - 358.7 68.7
Profit/ loss after tax before minority interests - 173.6 47.5 - 327.2 27.0 in CHF m
The embedded value of life insurance business comprises three elements: the adjusted capital and reserves for life insurance activities and the value of insurance in force at the end of the period under review, minus the solvency expenses. Embedded value does not take into account any new business that will be concluded in the future.
The value of insurance in force is understood to be the earnings generated from this insurance in future, established by discounting all the anticipated cash flow. A large number of assumptions need to be made to calculate this value, the most important of which are listed in the table below.
Operating income from insurance in force, adjusted capital and reserves, and earnings from new business 164.5 275.7
Economic changes, especially changes in unrealized gains and losses on investments - 2,296.3 20.5
+/- 10% change in market value of property – + 4.6/- 7.6
External Review: Deloitte has reviewed the choice of methodology together with the assumption and calculations made by Baloise Group in the calculation of the embedded value results of its Life Business at December 31, 2003. Deloitte have reported to Baloise that they consider that the methodology is appropriate, Baloise’s assumptions are reasonable and that the embedded value results as published above have been properly compiled on the basis of methodology and assumptions chosen. For the purpose of this report, Deloitte have performed certain checks on data provided by Baloise, but have not verified and have relied on financial information underlying Baloise’s financial statements.
Impairment in value charged to income (net) - 26.9 - 813.7 – 16.2 - 134.4 - 958.8 in CHF m
Fixed-interest Investment policy loans derivatives securities Shares property and other loans and other Total
Change in unrealized gains and losses taken to capital and reserves - 307.3 642.4 – – 180.2 515.3
Impairment in value charged to income (net) 10.0 607.6 – 18.4 - 33.3 602.7 in CHF m
Amortization of intangible assets and depreciation of tangible non-current assets - 9.9 - 9.6
Investments for account and risk of life insurance policyholders 550.5 798.2
Gross premiums written and policy fees1 6 6,085.3 6,701.2 6,632.7 7,274.5 7,374.7
Premiums written and policy fees for own account 5,845.8 6,470.4 6,425.3 7,070.9 7,121.5
Change in unearned premiums reserves for own account - 20.6 14.3 8.1 - 24.9 - 6.8
Surplus and profit allocations to policyholders 17 - 731.4 - 870.9 - 177.6 29.2 - 440.5
Amortization of intangible assets and depreciation of tangible non-current asset 12/13 - 61.8 - 113.7 - 153.3 - 184.8 - 152.3
Investments for account and risk of life insurance policyholders 11 251.1 362.4 512.4 550.5 798.2
Deposit fund liabilities arising from reinsurance 322.3 281.7 269.0 205.1 451.5
Liabilities from banking business and loans 19 1,548.3 10,048.9 9,697.2 9,659.2 11,411.7
Notes to the consolidated financial statements Report of the Group auditors
Change in unearned premiums reserves for own account - 24.9 - 6.8
Realized gains and losses on investments (net) 7.3 - 806.5 - 41.3
Gross premiums, policy fees and investment-type premiums 7,527.5 7,635.7 in CHF m
Financial Report 2003 Consolidated cash flow statement 1 Cash flow from operating activities Note 2002 2003
Amortization of intangible assets and depreciation of tangible non-current assets 184.8 152.3
Acquisition of intangible assets and tangible non-current assets - 94.1 - 138.8
Less gains and Accumulated Total capital Share capital Capital reserves treasury stock losses (net) profit and reserves
Movement on unrealized gains and losses on investments (gross) – – – -1,679.0 – -1,679.0
Movement on unrealized gains and losses on investments (net) – – – -1,511.4 – -1,511.4
Purchase/sale of treasury stock – - 0.4 - 17.7 – – - 18.1 in CHF m
Share capital Capital reserves treasury stock losses (net) profit and reserves
Purchase/sale of treasury stock – - 18.6 35.1 – – 16.5 in CHF m
Premiums written and policy fees for own account 4,492.3 4,100.1 1,507.9 1,930.3
Change in unearned premiums reserves for own account 1.0 - 5.9 - 17.3 10.6
Premiums earned and policy fees for own account 4,493.3 4,094.2 1,490.6 1,940.9
Realized gains and losses on investments (net) - 205.1 - 38.3 - 320.8 - 82.1
Claims incurred including processing costs (non-life) - 802.9 - 836.7 - 373.3 - 606.4
Net profit/ loss by region - 232.3 62.1 - 15.6 - 17.1
Cash flow from investing activities (net) - 2,209.7 - 1,161.8 - 36.6 - 182.5
Premiums earned and policy fees for own account 2,452.0 2,866.2 4,593.4 4,248.1
Of which between business segments - 35.4 - 32.5 - 30.1 - 25.1
Administrative and other operating expenses - 476.4 - 564.7 - 340.5 - 353.2
Acquisition of real estate, equipment and furnishings and intangible assets for own use 4.3 32.8 5.6 15.1 in CHF m
The consolidated financial statements consist of the financial statements of Bâloise-Holding and of its subsidiaries. A subsidiary is consolidated where the Baloise Group has over 50% of the voting rights, whether directly or indirectly, or exercises control over it. All intragroup transactions or profits and losses arising therefrom are eliminated.
Foreign currency translation: The financial statements of all business units which were not originally prepared in CHF have been translated at year-end rates (for balance sheet figures excluding goodwill) or at average rates for the year (for the income statement). The total exchange differences arising are taken directly to capital and reserves.
Changes in the value of financial assets under Held for trading are recognized as realized book profits/ losses in the income statement in the period in which they arise. Financial assets under Available for sale are revalued at their market value, and unrealized gains and losses are taken to capital and reserves. In the case of monetary assets classified as Available for sale, any foreign currency revaluation is credited to income. Monetary assets include primarily fixedinterest securities. Shares do not count as monetary assets. For life insurance companies, deductions are made from the unrealized gains and losses in view of those amounts which will be used in future to amortize acquisition costs and to pay bonuses and dividends to policyholders (shadow accounting).
When financial assets are disposed of, any unrealized gains or losses are transferred from capital and reserves to the income statement. The same applies where an investment has suffered a permanent diminution in value (become impaired).
3.3.2 Investment property Investment property is shown at fair market value. This is determined each year by a valuation based on prevailing market conditions and carried out by inhouse specialists. The fair value of holdings is derived principally from future cash flows, using mathematical calculations based on similar transactions. External valuation reports are obtained at regular intervals. Scheduled depreciation is not charged on investment property. Changes in value are immediately recognized in the income statement, in the period of occurrence, as realized book gains/losses.
The carrying values of assets are reviewed on a regular basis for recoverability. A permanent diminution in value (impairment) loss arises if the recoverable amount of an asset is less than its carrying amount. The recoverable amount is the higher of an asset’s net selling price (the estimated amount obtainable from the sale of an asset less incremental costs directly attributable to the disposal of the asset) and an asset’s value in use (the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life).
The estimated future cash flows are based on reasonable assumptions about the economic conditions that will exist over the remaining useful life of the
asset and on cash flow projections and budgets/forecasts approved by the Corporate Executive Committee. Permanent diminutions in value are recognized in the income statement.
Structured products are financial instruments, either assets or liabilities, which consist of a host contract and embedded derivatives. In the majority of cases, the embedded derivatives are not separated from the host contract and are classified in the trading portfolio of the host business, with the effect that unrealized gains and losses are recorded directly in the income statement. Some derivatives are separated from the host contract and are separately recorded, valued and disclosed. For this to be the case, the following conditions must apply: that the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract and that the embedded derivative itself would meet the definition of a derivative financial instrument.
sales channels. The value of the capitalized goodwill is reviewed annually. If the book value of the goodwill is greater than the recoverable amount, the difference will be amortized via the income statement.
Badwill is offset against positive goodwill. Badwill written of is credited to the income statement (offset against the amortization expense) on a systematic basis over the remaining average useful life of the acquired, non-monetary assets, at most, however, over 20 years.
Lease agreements relating to real estate, fixtures, fittings and other tangible non-current assets, whereby basically all the risks and rewards relating to ownership of the asset are transferred to the Baloise Group, are defined and treated as finance leases. The fair value of the leased property, or the cash value of the leasing payments if lower, is disclosed as a tangible non-current asset at the inception of the lease. Each lease payment comprises a depreciation expense for the asset and interest payment. The depreciation expense is deducted from the liability for the leased asset, which is shown under Liabilities from banking business and loans. The value of the leased item is reviewed on the balance sheet reference date. If the cash value of the leasing payments is lower than the book value of the leased item, the value will be corrected via the income statement.
Premiums are accounted for as income when due. Claims and benefits paid and costs are accounted for so as to ensure that the profit from the contracts is allocated equally over the anticipated term of the policies. Premiums and services relating to investment -type products are accounted for as follows: the risk and cost element is taken to the income statement, while the savings element is directly credited to or deducted from the policyholder’s deposit.
Statutory regulations and the rules set out in contracts and company articles of incorporation are authoritative in determining the share of future policyholder bonuses. Where there are no such statutory regulations or rules set out in contracts and
Gross premiums written are recognized in the fiscal year in which they fall due. They include an amount required to cover the insurance risk and any loading. Any part of the premium which relates to future fiscal years is deferred under the contract and is included in the unearned premiums reserves in the balance sheet, together with any provisions for premium shortfalls relating to the fiscal year. Premiums which do relate to the fiscal year are referred to as premiums earned. This figure comprises premiums written and the change in the unearned premiums reserves.
The process involves the application of mathematical, statistical methods and the expertise of claimshandling specialists. The aim is to establish provisions for outstanding claims and for claims processing costs which are as realistic as possible. An additional provision is set for claims processing costs.
The whole process of projecting the future can never entirely eliminate the uncertainties inherent in future developments. Therefore, future developments may well be different to those projected. The provisions established in a particular year are systematically reviewed, which means that variances can be controlled. On the basis of such reviews, the projection process can be adjusted if necessary. Surplus and profit allocations to policyholders: insurance contracts may provide for surplus sharing with a client arising from the surplus on his contracts. Payments made during the fiscal year and the change in the relevant provisions combine to give the figure referred to in the income statement as surplus and profit allocations to policyholders.
Receivables and payables from deposit accounting contracts are recognized mainly using the interest method. The effective interest rate is calculated on the basis of cash flows which have already occurred or are expected in the future. Otherwise, the insurance coverage financed by the deposit is amortized over the expected term of the deposit. Liabilities are included in Deposit fund liabilities arising from reinsurance.
The provision for deferred tax in the consolidated financial statements is calculated under the liability method, i.e. based on current or future expected tax rates. Deferred tax takes into account the income tax effects of temporary differences between the assets and liabilities carried in the consolidated balance sheet and their fiscal base. When deferred tax is calculated, unused tax losses are only carried forward to the extent that it is probable that future taxable profit will be available against which the tax losses can be utilized.
The following amounts need to be established: shortterm benefits (such as wages), benefits due in the long term (such as anniversary payments) and benefits upon termination of employment (such as severance pay and benefits from redundancy schemes).
Equity benefits: Employee shares, share participation schemes, shares subscribed directly and shares subscribed through options are equity benefits.
Employee shares: The Baloise Employee Trust set up in 1989 gives the employees of various Group companies the opportunity, subject to the rules issued by the Trust’s Board, to acquire shares in BâloiseHolding, usually on an annual basis, at a preferential subscription price. The Trust acquired the shares set aside for this purpose from previous increases in the share capital of Bâloise-Holding. Due to the low acquisition cost of the shares held by the Trust and the number of shares held, Bâloise-Holding will be able to continue with this profit-sharing initiative in the years to come. The Trust is managed by a Trust Board which is independent of the Corporate Executive Committee, reports to the cantonal fund authority of the city of Basel and is not consolidated.
Share participation scheme: Since May 2001, most middle and senior managers working in Switzerland can opt to have a freely determinable part of their performance-related earnings (incentive) remitted as shares instead of cash. To boost the effectiveness of the share participation scheme, employees receive a loan at a market rate of interest, enabling them to purchase a far greater number of shares than provided by the incentive scheme. The loan repayment after a three-year blocking period is hedged with a put option that is financed by the sale of a corresponding call option. After expiry of the three-year blocking period, employees receive the shares remaining after repayment of the loan for their free disposal. The Baloise does not incur any additional costs by this share participation scheme.
Option rights: The members of the Corporate Executive Committee and of the Executive Boards of the subsidiaries, and other employees in key positions, are granted options to purchase shares in BâloiseHolding as part of their remuneration. These options are purchased from third parties by the Baloise Group at market value and are quoted on the stock market. The conditions which apply to the option rights are specified at the beginning of the fiscal year. The number of options alloted by the end of the financial year depends on whether the parties concerned have met their personal performace objectives. The alloted share options may not be sold for two years. The associated costs are already included in personnel expenses.
Exchange differences arising from transactions in foreign currencies included in the consolidated income statement resulted in a gain of CHF 47.0 million in fiscal 2003 (2002: loss of CHF 122.4 million). This also comprises a foreign exchange gain of CHF 135.6 million resulting from monetary investments classified as Available for sale.
During the course of 2002, all 2.2% outstanding minority interests in Deutscher Ring Leben were purchased for CHF 6.1 million. Deutscher Ring Leben is now wholly owned by the Baloise Group.
5.2 Acquisitions and disposals of subsidiaries and other business units in 2003
The purchase of the German insurance group Securitas was formally and substantively completed as of January 7, 2003. The Group was therefore consolidated at this time and is included in the present statement figures. During the course of fiscal 2003 Securitas was merged with parts of the German branch of the Baloise, Insurance Company Limited, Basel, to form Basler Securitas Versicherungs-Aktiengesellschaft.
Gilde Lebensversicherungs AG which forms part of the Securitas Group was acquired by the German branch of the Baloise Life Insurance Company Ltd, Basel.
During the year under review, the fully consolidated real estate company Rubens 2000 N.V., Antwerp, was sold for CHF 37.5 million.
On the life insurance side, a broad range of assetforming insurance, pure risk coverage and unit-linked products is provided for private individuals and companies. The banking segment comprises Baloise Bank SoBa, an all-purpose bank operating in Switzerland, Mercator Bank in Belgium, which is involved in all types of savings business, principally financing real estate and small and medium-sized enterprises, and Deutscher Ring Bausparkasse in Germany, predominantly active in traditional real estate financing.
The accounting principles applied to the segment reporting are the same as apply to the entire financial report. Transactions between business segments and geographical segments within the Baloise Group are conducted on the same terms as transactions with third parties. Information analyzed by geographical and business segments is given in the segment reports, in the Management Information section and in the following tables.
Premiums for investment-type products - 253.0 - 261.0 3.2 in CHF m 6.4 Investments by business segments 2002
Investment income of CHF 58.1 million (2002: CHF 65.2 million) from value-adjusted mortgage loans and policy and other loans has accrued as at December 31, 2003, but has not been recognized in the income statement.
7.2 Realized gains and losses: 2002 7.3 Realized gains and losses: 2003 1 Upon disposal of financial instruments, any impairment in value charged to the income statements of former periods is registered as reinstatement of original value in the income statement. The difference between the original purchase value and the income from sale is recorded as profit or loss.
Fixed-interest Investment Realized gains on disposal and book gains securities Shares property Other Total
Originated by the Group – – – - 79.8 - 79.8
Cumulative impairment of value charged to income (net) 22.1 356.9 – 545.3 924.3 in CHF m
In fiscal 2003, some fixed-interest securities classified as Available for sale were reclassified as Held to maturity. At the time of the reclassification, the unrealized gains and losses on the relevant securities position amounted to CHF 262.6 million.
Surplus shares to policyholders (life) - 134.6 - 275.8 -141.2 in CHF m
Movement in unrealized gains and losses on financial assets available for sale - 1,603.7 368.3
As a result of various restructuring measures in Germany and Belgium, vacated properties for the company’s own use were converted to investment properties (see also table 13.2., Property, plant and equipment for own use). Most of the investment property is located in Switzerland.
In connection with the business restructuring, undisclosed reserves at DePfa Beteiligungs-Holding II GmbH were realized and to the greatest extent paid to the parent company in 2002. The distributed amount of CHF 59.2 million was repaid to the share premium account of DePfa Beteiligungs-Holding II GmbH in the course of the same year.
Accumulated amortization and write-downs -521.4 72.5 – - 151.8 - 600.7 in CHF m
Accumulated amortization and write-downs -574.3 87.8 - 1.8 - 190.0 - 678.3 in CHF m
Accumulated depreciation and write-downs – - 268.1 - 53.1 - 321.2
Reinstatement of original value charged to income – – – –
Accumulated depreciation and write-downs – - 292.4 - 63.9 - 356.3
Additions arising from changes in composition of consolidated Group 2.1 1.7 3.8
Written off in the year under review - 229.6 - 249.3 - 152.9 71.4 - 382.5 - 177.9
Written off in the year under review due to anticipated loss - 2.4 - 2.3 – – - 2.4 - 2.3
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. Ascertaining when such cases might arise and determining the potential extent of such claims involves much greater uncertainty than in all traditionally used claims models. Therefore, the provisions set up for these claims are surrounded by a higher level of uncertainty. At the end of 2002, these gross provisions, which are included in the total provision, amounted to CHF 353.9 million, and they stood at CHF 320.1 million at the end of 2003. The decline by 33.8 million is due to claims processing amounting to CHF 12.3 million and currency effects amounting to CHF 21.5 million, as a large part of the provisions are held in foreign currencies.
Loss reserves at December 31 (gross) 4,196.1 4,786.3 in CHF m
Deposits and assets from reinsurance – – 1.1 85.0 – –
Total net premiums earned 2,866.1 4,248.2 0.4 7,114.7 in CHF m
Of which deposit liabilities - 0.2 - 12.3 in CHF m
Security number SWX 858858 SWX 858851 SWX 1123532 SWX 1422292 SWX 1726032
Addition due to changes in composition of consolidated Group – 17.9 17.9
21. Tax on income 21.1 Current and deferred tax on income
The expected average tax rate of the Baloise Group came to 23.3% in 2002 and to 17.8% in 2003. These rates correspond to the weighted average of the tax rates of those countries in which the Baloise Group operates. The decrease in the average tax rate is attributable to the differences in different regions’ contributions to the result – in comparison with the preceding years.
The non-deductible losses from shares and participating interests amounting to CHF 43.5 million (2002: CHF 88.3 million) were mainly incurred by the Belgian companies.
The tax elements unrelated to the accounting period amounting to CHF 59.1 million are essentially attributable to changes in tax legislation affecting life insurance companies in Germany.
The tax on income payable at the end of 2002 and 2003, which is included in the balance sheet under Other liabilities and deferred income, amounted to CHF 29.6 million and 108.5 million respectively. At December 31, 2003, the Baloise Group capitalized losses brought forward that can be offset against tax amounting to CHF 143.4 million (subject to statutory regulations; 2002: CHF 151.8 million). All expire after five years or more.
In countries in which pension plans are effected by means of separate funds into which contributions are made, it is possible that funding surpluses or shortfalls may arise, as evidenced in the table above. Such surpluses are only capitalized and recognized as assets to the extent that they represent future cost savings to the Baloise Group.
23.2.3 Income from plan assets 23.2.2 Expenses relating to defined benefit plans
Of which not disclosed as assets 121.0 97.4 in CHF m
Total expense relating to defined benefit plans 64.0 93.2 in CHF m
Total income from plan assets 97.7 - 53.0 in CHF m
CHF 23.6 million (2002: CHF 20.5 million). No plan assets were deducted for long-term benefits. Other long-term employee benefits amounting to CHF 3.0 million (2002: CHF 2.2 million) are included in the income statement.
During the year under review, 212,744 shares (2002: 80,491 shares) were purchased through the Baloise Employee Trust set up in 1989 at a price of CHF 23.10 (2002: CHF 42.50). The fair market value of the shares subscribed amounted to CHF 45.90 (2002: CHF 78.75).
Addition due to changes in composition of consolidated Group – 49.4
Expected increases in pension benefits 1.2 1.2 in percent 23.5 Equity benefits: share participation scheme
Market value of subscribed shares at time of subscription in CHF m 2.0
The Bâloise-Holding registered shares are fully paid up and have a nominal value of CHF 0.1 (2002: CHF 0.1). A total of 702,540 shares at December 31, 2002 and 414,303 shares at December 31, 2003 were held by Group companies. Entry in the share register is limited to 2% of voting rights for individuals and bodies corporate. In the course of its normal investment business, the Baloise Group purchases and sells its own shares.
Capitalization regulations: Under supervisory law, minimum capital regulations (solvency regulations) apply to subsidiaries which carry out insurance business. At December 31, 2002 and December 31, 2003, the subsidiaries complied with all relevant supervisory regulations in respect of capitalization.
Change in share of unrealized gains and losses in capital and reserves 3.7 - 0.2
Addition/disposal due to changes in composition of consolidated Group – –
Balance at December 31 28.1 40.7 in CHF m 24.2 Dividends
Dividends proposed are not paid until they have been approved by the Annual General Meeting. At the Annual General Meeting on May 14, 2004, a dividend of CHF 0.60 per share (2002: CHF 0.40) will be proposed for the 2003 fiscal year, a total figure of CHF 33.2 million (2002: CHF 22.1 million). The proposed dividend has not been included in the consolidated financial statements for the 2003 fiscal year. It will be charged to accumulated profit following the adoption of the resolution at the 2004 Annual General Meeting.
Restrictions on dividend payments by subsidiaries: Subsidiaries of the Baloise Group which carry out insurance business are subject to certain supervisory restrictions relating to dividend payments.
In the course of its ordinary business activities, the Baloise Group conducts transactions with associated companies and with members of the Board of Directors and the Corporate Executive Committee of Bâloise-Holding. Deutscher Ring Krankenversicherung, a mutual insurance company, is not included in the consolidation of the Baloise Group, yet is linked with Deutscher Ring Lebensversicherung and Deutscher Ring Sachversicherung through an organization agreement and is therefore considered to be a related party. These transactions are not material to the Baloise Group either individually or in aggregate and are conducted at market conditions.
Remuneration remitted to the members of the Board of Directors and the Corporate Executive Committee amounted to CHF 7.7 million in the year under review (2002: CHF 6.8 million).
The insurance activities of the Baloise Group are conducted almost entirely in Swiss francs and in euro, and therefore the technical provisions are also in these two currencies. Most of the provisions are currency -matched by investments. In order to increase income, the Swiss companies hold a net euro position of CHF 4,119.7 million (2002: CHF 3,255.6 million ), a net US dollar position of CHF 237.6 million (2002: 2,142.5 million) and a net Japanese yen position of CHF 11.0 million (2002: CHF 81.4 million). The remaining currency excess positions are of little significance. For risk reasons, USD foreign currency exposure was almost fully hedged and EUR exposure hedged to around one third.
Credit risk is defined as the risk that one party or counterparty to a financial instrument will fail to discharge an obligation. The risk is managed by reviewing the creditworthiness of each individual counterparty, setting high standards as regards their rating. As the credit risk of the Baloise Group is spread over a large number of counterparties, clients, etc., the Baloise Group has no significant credit risk with a single counterparty.
Interest rate risk refers to the potential fluctuations in the market value of assets and liabilities as a result of changes in market interest rates. In the Baloise Group, the interest rate risk for fixed-interest securities is controlled by regular, active, benchmark-oriented reviews of maturity dates.
Shares and fixed-interest investments > 10% of consolidated capital and reserves 2002 2003
Financial Report 2003 30.7 Liquidity risks 30.7.1 Liquidity risk at December 31, 2002 30.7.2 Liquidity risk at December 31, 2003 30.8 Market value of financial assets and liabilities and market risks
Liabilities without fixed due date – – – - 39,828.7 in CHF m
Due in: Due in: Due in: < 1 year 1–5 years > 5 years Total
Payables arising out of insurance operations - 2,109.6 - 4.1 - 0.3 - 2,114.0
Liabilities from banking business and loans 9,659.2 11,411.7 9,896.6 11,548.8 in CHF m
31. Companies consolidated on a proportionate basis 32. Contingent liabilities and commitments 32.1 Legal disputes
The Baloise Group and its subsidiaries are constantly faced with legal disputes, claims and complaints which in most cases stem from normal insurance operations. No new facts in this respect have been reported to the Corporate Executive Committee since the last balance sheet date that could have a significant impact on the consolidated annual accounts 2003.
Up to the completion of the present consolidated financial statements on March 24, 2004, we were not aware of any events that would have a significant effect on the financial statements as a whole.
Total warranties and guaranties for the benefit of third parties 843.1 962.6
Baloise Life Insurance Company, Basel Life 100.00 F CHF 50.0 25,088.1 3,031.6
Baloise Bank SoBa, Solothurn Banking 100.00 F CHF 50.0 5,203.8 –
Baloise Beteiligungs-Holding GmbH, Bad Homburg Holding 100.00 F EUR 0.0 95.5 –
Deutscher Ring Bausparkasse AG, Hamburg Banking 100.00 F/P EUR 12.8 609.8 –
Deutscher Ring Beteiligungsholding GmbH, Hamburg Other 65.00 F/P EUR 12.8 327.6 –
DePfa Beteiligungs-Holding II GmbH, Düsseldorf Other 40.00 E EUR – – –
Roland Rechtsschutz Beteiligungs GmbH, Cologne Other 60.00 F/P EUR 0.1 22.6 –
Roland Rechtsschutz Versicherungs-AG, Cologne Other 25.02 E EUR – – –
Mercator Banque S.A., Antwerp Banking 100.00 F EUR 37.0 3,700.1 –
Corluy en C° Beurvennootschap N.V., Antwerp Banking 37.50 E EUR – – –
Bâloise (Luxembourg) Holding S.A., Luxembourg Holding 100.00 F CHF 313.0 873.5 –
Bâloise Assurances Luxembourg S.A., Luxembourg Non-life 100.00 F EUR 7.5 116.1 25.6
Basler Versicherungs-Aktiengesellschaft in Österreich, Vienna Life and non-life 100.00 F EUR 5.1 436.3 66.3
Basler Osiguranje d.d., Zagreb Non-life 97.00 F HRK 18.0 43.4 15.6
Grand Cayman, Cayman Islands Asset management 100.00 F USD 0.0 857.6 –
Baloise Private Equity Ltd., Cayman Islands Asset management 100.00 F USD 0.0 265.3 –
Financial Report 2003 Notes to the financial statements of Bâloise-Holding 1. Bonds outstanding 2. Participating interests
The holdings have been rounded to the nearest percent. Additional information about the participating interests of Bâloise-Holding is given on pages 119 to 120.
Owing to major shareholders’ disposal of shares, the distribution of shareholders and the trading liquidity of Baloise shares improved noticeably in the past year.
The companies in the Baloise Group bought a total of 502,214 shares at an average price of CHF 40 per share during the year under review, and sold 476,396 shares at an average price of CHF 41. At March 31, 2004, they together held a total of 179,458 BâloiseHolding shares.
At March 31, 2004, an amount of CHF 6.0 million was transferred from the reserve for own shares to the free reserve of Bâloise-Holding.
Total Share of Total Share of holding at voting rights holding at voting rights
As statutory auditors, we have audited the accounting records and the financial statements (income statement, balance sheet and notes to the financial statements, pages 123 to 126)1 of Bâloise-Holding for the financial year ended March 31, 2004.
In our opinion, the accounting records and financial statements and the proposed appropriation of the accumulated profit comply with Swiss law and the Company’s Articles of Incorporation.
Basler Securitas Versicherungen Basler Strasse 4, Postfach 1145 D-61281 Bad Homburg
This Annual Report ist also available in German and French. The German version is binding.