Part 1 At a glance 5 Chairman’s statement 6 Group strategy 9 Group structure 14 Interview with Erich Walser 16 The Board of Directors 20 Executive Management 24 Corporate governance 28 Spotlight 42 Human resources management 47 Group results 51 Investment business 55 Market performance 58 The share 74 Our commitment to the environment 76 Corporate responsibility 77
Cautionary statement regarding forward-looking information This document is made by Helvetia Group and may not be copied, altered, offered, sold or otherwise distributed to any other person by any recipient without the consent of Helvetia Group. Although all reasonable effort has been made to ensure the facts stated herein are accurate and that the opinions contained herein are fair and reasonable, this document is selective in nature and is intended to provide an introduction to, and overview of, the business of Helvetia Group. Where any information and statistics are quoted from any external source, such information or statistics should not be interpreted as having been adopted or endorsed by Helvetia Group as being accurate. Neither Helvetia Group nor any of its directors, officers, employees and advisors nor any other person shall have any liability whatsoever for loss howsoever arising, directly or indirectly, from any use of this information. The facts and information contained herein are as up to date as is reasonably possible and may be subject to revision in the future. Neither Helvetia Group nor any of its directors, officers, employees or advisors nor any other person makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this document. This document may contain projections or other forward-looking statements related to Helvetia Group which by their very nature involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other outcomes described or implied in forward-looking statements will not be achieved. We caution you that a number of important factors could cause results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include (1) changes in general economic conditions, in particular in the markets in which we operate; (2) the performance of financial markets; (3) changes in interest rates; (4) changes in currency exchange rates; (5) changes in laws and regulations, including accounting policies or practices; (6) risks associated with implementing our business strategies; (7) the frequency, magnitude and general development of insured claim events; (8) the mortality and morbidity experience; (9) policy renewal and lapse rates. We caution you that the foregoing list of important factors is not exclusive; when evaluating forward-looking statements, you should carefully consider the foregoing factors and other uncertainties. All forward-looking statements are based on information available to Helvetia Group on the date of its posting and Helvetia Group assumes no obligation to update such statements unless otherwise required by applicable law. The purpose of this document is to inform Helvetia Group’s shareholders and the public of Helvetia Group’s business activities for the year ended 31.12.2006. This document does not constitute an offer or a solicitation to exchange, buy or subscribe for securities and it does not constitute an offering circular as defined by Art. 652a of the Swiss Code of Obligations or a listing prospectus as defined by the listing rules of SWX Swiss Exchange. Should Helvetia Group make one or more capital increases in the future, investors should make their decision to buy or to subscribe for new shares or other securities solely on the basis of the relevant offering circular. This document is also available in German and French. The German version is binding.
Helvetia Insurance accompanies its customers all their lives. This is the theme of the photos used in this year’s Annual Report. All photos come from our corporate film, which was made in September 2006 on the occasion of the introduction of our single brand strategy.
Ladies and Gentlemen, 2006 was another record year for Helvetia Group. Our business developed outstandingly well in the past year. Profit was up 40.4% on 2005, giving our best ever result of CHF 423.8 million. In both Switzerland and abroad, this success was primarily due to our own achievements. We are particularly pleased with the performance of our non-life business in Switzerland, our situation in Spain and the significant progress that has been made in the life business in Germany. Our assumed reinsurance also delivered an excellent result.
Important events in 2006 Since September 2006, we have been active in the market under the unified ‘Helvetia’ brand with the same logo throughout Europe. Our new corporate image has given us very positive momentum and has already brought us a large number of new customers. Our customers reacted positively to the change, as it allows us to better meet their high expectations.
Best result of all time Last year saw us post a net profit after taxes of CHF 423.8 million, representing an increase of 40.4% and our best ever result by far. The profit before taxes for 2006 was up CHF 142 million on the previous year, with Switzerland contributing CHF 68.6 million and all other countries contributing a total of CHF 73.4 million. In the non-life business, the pre-tax result in the reporting period was up 22.5% year-on-year, while the life business improved by 32.0%. Broken down by country, contributions to the pre-tax result came from Switzerland (CHF 289.0 million or 51% of the
In terms of turnover, Switzerland continues to be our most important country with a 53.7% share of the premium total, followed by Germany (15.2%), Italy (9.9%) and Spain (9.4%).
Forthcoming changes in Executive Management At the end of August 2007, I will step down from my function as CEO of Helvetia Group and will concentrate on my position as Chairman of the Board of Directors. The Board of Directors has appointed Stefan Loacker, the present CEO of Helvetia Austria, to succeed me as CEO. Roland Geissmann, CFO and Deputy CEO, will resign from his post of his own accord in the middle of this year. This will mark the completion of a generation change that has been long in the planning.
As a capital-market-oriented company, the predominant aim of our business is to create value for our shareholders.
Our return and financial strength have increased significantly in the past few years and reached new all-time highs in 2006. At the same time, we achieved growth in different profitable segments and improved our market position. As a result, the value of the Helvetia share and its return rose significantly.
Profitable growth Helvetia has defined a clear growth path for the future. It is directed towards above-average organic growth in existing country markets and sectors as well as the consolidation of local positions through selective acquisitions based on definite quality and income criteria. We will aim for above-average organic growth with effective centralised and decentralised growth programmes.
Differentiated positioning In future, Helvetia will remain focused on private and SME business and will concentrate its activities on the markets of Switzerland, Germany, Austria, Italy and Spain. In France and in our worldwide assumed reinsurance business we act as a niche supplier. Our success in these markets and business fields derives from our definite and differentiated market position. In Switzerland we are one of the leading suppliers in the customer and market segments important to us. Abroad, as a service and quality insurer with a Swiss identity, we occupy a market position that clearly stands out from the other suppliers.
Strategic aims and thrusts To achieve our ambitious financial targets, Helvetia Group supports the current strategy with definite strategic thrusts and value programmes. In total, there are seven different strategic thrusts: Target-oriented management of the business portfolio Improvement of operating performance Intensification of profitable growth Effective asset & liability management Targeted risk management and effective financial management Effective management model Development of employees and management.
The operating efficiency of a company does not just depend on its size. Speed, flexibility and welldefined quality standards in underwriting are factors that have contributed to Helvetia’s impressive results. In the area of reinsurance, our own Group Reinsurance purchases reinsurance capacities for the best possible price and ensures that the retention structure at Group level is optimised. With these and further measures, we as a medium-sized and well-oriented company with a long history of success have laid the foundation for above-average performance that can also be sustained in the long term.
The expansion of operating efficiency is an important component of our strategy both at Group level and in the business units. A particular aim at Group level is to exploit synergies within the Group even more effectively. Plans are afoot to set up a cross-national competence centre designed to simplify the creation of value in unit-linked life insurance on the basis of common product and system platforms as well as the full use of largely centralised asset management controlling procedures.
In the country markets, specific initiatives to improve efficiency even further have already been launched.
Intensification of profitable growth The new strategy has set the course for the appropriate and profitable future growth of the Group. Our growth strategy includes the following components: Organic growth The orientation of the overall business portfolio will be focused even stronger towards fast-growing segments and regions. Particular emphasis is to be put on life business, where we have identified very good growth potential in the long term.
The most important factor supporting growth is probably the strengthening of sales strength.
In tandem with building up our sales strength, we will continue to systematise our market development measures by focusing on customer proximity. These include measures to improve our customer service, where we attach great importance to increasing customer loyalty in a bid to achieve our growth target.
Our tried-and-tested differentiation strategy will be continued under the mottos ‘Quality & Service’ and ‘Swissness’, and will be intensified throughout the Group through the new single brand strategy.
Strategic partnerships Helvetia Group establishes, uses and intensifies strategic partnerships to increase its sales strength. The cooperation programmes in Switzerland are of overriding importance: our cooperation with Raiffeisen, in particular, has been consolidated and expanded. In the country markets, the Helvetia Group upholds a number of selective partnerships in attractive business segments/sales channels, which will be intensified even more in the future.
External growth An active acquisitions strategy will enable us to exploit strategic and financially favourable opportunities in a timely manner. The country markets of Germany, Italy and Spain in particular are the primary focus for acquisitions. Strengthening of life business is also a priority in all three markets.
The focus of the strategic measures is the development of Group-wide asset & liability management (ALM) procedure that allow investments to be managed in a way that protects equity and are oriented toward returns while maintaining a high level of security. This ALM approach favoured by our Group optimises the appreciation of value for
shareholders and policyholders without the inefficiency of mismatch risks in the case of fixed-interest investments. At the same time, we are also pressing ahead with measures that increase efficiency in the area of asset management.
Our internal demands overlap with the increase in external requirements such as, for example, the new insurance supervision requirements (VAG/AVO) and guidelines, the requirements of the stock exchange supervisory authority concerning speed of financial reporting, and the specifications regarding its transparency under the IFRS.
Financial management is oriented towards optimally supporting the Group’s achievement of goals, the business units and investments, by determining the risk capacity as the basis of the Group’s risk strategy, providing information systems that give up-tothe -minute information on the economic efficiency of equity employed in terms of risk, maintaining efficient data systems that allow transparent communication with our stakeholders, such as shareholders, financial intermediaries, employees, customers, supervisory authorities and the public.
In 2006, we made further progress toward the development and systematic employment of dynamic, economically significant and risk-based financial management instruments. We should continue to exploit the momentum achieved in the last few years in the future.
For minority interests, see page 172/173 (notes to the consolidated financial statements of the Helvetia Group).
Aside from the excellent results, what else stood out for you last year? Two things: our new market image and the ‘A–’ quality mark given to us by the rating agency Standard & Poor’s.
Since September 2006, we have appeared on the market under the unified ‘Helvetia’ brand with the same logo throughout Europe. I am convinced that our new market image gives us an unmistakable identity that will allow our Group to work even more effectively in future. The new single brand strategy releases new energy.
In October 2006, the rating agency Standard & Poor’s awarded Helvetia Schweizerische Versicherungsgesellschaft AG and Helvetia Schweizerische Lebensversicherungsgesellschaft AG an ‘A–’ rating with stable outlook, thereby acknowledging our strong equity base and our excellent earning power. This quality mark has improved our prospects on the insurance and capital markets even further.
Helvetia has defined a 2010 growth strategy. What exactly does it involve? Generating above-average growth, without compromising profitability, is our top priority for the next few years. We aim to concentrate on all the countries in which we are already operating. The main emphasis is placed on intensifying organic growth. In addition, we are also considering suitable acquisitions or rather additional portfolio purchases. As far as sales channels are concerned, our own sales force will continue to be our mainstay, but we will also open up new business channels and further optimise our co-operation programmes, particularly with the Raiffeisen Group. While doing so, we want to continue to concentrate on our current business lines and remain focused on private and commercial customers. On the product front, we will increase the focus of our products on the needs of our customers and push sales of products that require comparatively less capital backing. By this I am referring to unit-linked life insurance policies in particular. We are just starting to do this in all our markets.
How would you assess Helvetia’s current situation and prospects? Helvetia Group is in outstanding shape and will tackle the challenges of the coming years from a position of strength. All principal earnings indicators are at a very pleasing level. I am not just referring to the Group result, the return on equity or the combined ratio in the non-life business, but also to the embedded value, which is published in this Annual Report for the first time and confirms the profitability of our life portfolio.
Premium development is admittedly moderate, but we also stood out from our competitors in many ways in this respect and gained further shares of the market in the past year. However, we believe that we still have a long way to go and will focus considerably more attention on growth in the current year and in the future, without compromising our income targets.
‘Helvetia in top form’ Interview with Erich Walser, Chairman of the Board of Directors and CEO
Helvetia Group aims to consolidate its market position primarily on strong organic growth, yet acquisitions are also a recurrent topic. In the past, we have convincingly demonstrated that we can implement an extremely successful business policy single-handedly. When the time is right, we also look at external growth, but not at any price. We have very clear ideas about what we want.
The appointment of Stefan Loacker means that an exceptional insurance professional and internal successor will take over the operational management of Helvetia Group. I know that he will drive forward the implementation of the 2010 Group strategy with the necessary vigour, while at the same time safeguarding the strength and continuity of the business.
This interview was conducted by Wolfgang Lohr, Head of Investor Relations Helvetia Group
The Board of Directors of Helvetia Holding AG serves as the company’s highest supervisory body. It is responsible for the overall management and strategic direction of the Group, and appoints and oversees the Executive Management. The Board of Directors currently consists of nine members. In a bid to exploit the specific expertise of the individual Board members and ensure that their knowhow is brought into the decision-making process, various committees have been set up. With the Strategy and Governance Committee, the Nomination and Compensation Committee, the Audit Committee and the Investment and Risk Committee, Helvetia has four Board committees that guarantee effective corporate management and supervision.
Election The terms of office of the individual Board members have been coordinated in a manner that ensures that one-third of the seats are up for election or re-election every year. The term of office of every individual member is determined on election and may not exceed three years, though re-election is permitted.
•••• Chair * May join meetings at own request and with decision-making power + May join meetings at own request and in advisory capacity 1 Before 1996: date of joining the Board of former companies
Ueli Forster Deputy Chairman and 1984 2008 • • * • Lead Director (Lead Director until end of August 2007)
c Chairman of the Board of Directors and Chief Executive Officer of Helvetia Group, Head of the national markets of Italy, Spain and Austria; until 1978 various positions at Swiss Bank Corporation (now UBS) and Schweizerische Volksbank; 1979 joined Helvetia: various management positions; 1991 Chief Executive Officer of Helvetia Versicherungen; 1994 Chief Executive Officer of the Helvetia Patria Group; 2001 Managing Director reporting to the Board of Directors; in current function since 12.12.2003 with various mandates at subsidiaries of the Helvetia Group outside Switzerland; d in particular Vice-Chairman of the Swiss Insurance Association, Zurich; Chairman of the Sponsoring Institution of the Institute of Insurance Economics at the University of St.Gallen; Vice-Chairman of the board of directors of Allreal Holding AG, Baar; Vice-Chairman of the board of directors of Huber + Suhner AG, Pfäffikon/Herisau, as well as four board mandates at non-listed companies and four board of trustee mandates.
Ueli Forster (1939) a St.Gallen, Swiss b lic. oec. HSG c Chairman of the board of directors of Forster Rohner AG,
Silvio Borner (1941) a Basel, Swiss b Prof. Dr. oec.; Dean of the Faculty of Economics at the University of Basel c Professor of Macroeconomics at the University of Basel and
Head of the Economics and Politics Department at the Centre of Economics and Business (Wirtschaftswissenschaftliches Zentrum), Basel; d in particular Chairman of the board of directors of Patria Genossenschaft, Basel; member of the executive committee of AVENIR-SUISSE, Zurich; Chairman of the board of trustees of Helvetia Patria Jeunesse.
Since the Shareholders’ Meeting 2006 with assumption of office on 1.9.2006 Hans-Jürg Bernet (1949) a St.Gallen, Swiss b Dr. oec. HSG c 1977 joined Zürich Versicherungen, various management positions, including: 1993 member of the executive board of Zurich Switzerland, 2001 – 2005 CEO of Zurich Switzerland, 2001 – 2004 member of the executive board of ZFS Group; 2002 – 2005 Vice-Chairman of the Swiss Insurance Association, 2001 – 2005 member of the board of directors and Vice-Chairman of the Sponsoring Institution of the Institute of Insurance Economics; d in particular a board mandate for a non-listed company and two board of trustee mandates.
Since the Shareholders’ Meeting 2006 Christoph Lechner (1967) a Hettlingen, German b Prof. Dr. oec.
c 1987 – 1995 Deutsche Bank in various positions, including: Assistant to the Managing Director, Corporate Banking, Germany, Corporate Finance, Singapore; since 1995 business consultant for strategic interests; since 2004 Professor for Strategic Management at the University of St.Gallen, Director of the Institute for Business Management; d in particular member of the board of directors of Hügli Holding AG, Steinach.
John Martin Manser (1947) a Riehen, Swiss b MBA c Commercial banking in Switzerland, the UK and Brazil; 1981 treasurer at the Brazilian subsidiary of Ciba-Geigy; 1988 – 1990 CFO and 1990 – 1996 Treasurer at CibaGeigy AG, Basel (head office); since 1996 Head of Novartis Group Treasury: Novartis International AG, Basel; d in particular Chairman of the board of directors of Ciba Vision AG, Embrach; member of the board of trustees of CS Investment Foundation, Zurich; various board mandates for Novartis.
(1989 – 1997, 1994/95 as its President); d in particular Chairman of the Delegate Conference of Patria
Urs Widmer (1941) a Küsnacht, Swiss b Dr. iur., lawyer (with own company) c Management positions at ATAG Ernst & Young AG; ATAG debis Informatik AG; ATAG Wirtschaftsinformation Holding AG; Ernst & Young Europe; Ernst & Young International and ATAG Ernst & Young Holding AG, where he was most recently Chairman of the board of directors until 2002; d in particular Chairman of the board of directors (since 2005) of Vontobel Holding AG and Bank Vontobel AG; member of the board of directors of Barry Callebaut AG; board of trustee mandate for Zurich Zoo Foundation and Technopark, Zurich.
The Executive Management is the highest executive body of the Helvetia Group and is responsible for implementing the strategy adopted by the Board of Directors. The organisational structure of the Executive Management is geared to the value chain and the management of the operating business units. Key functions such as the control of financial operations, investment business, Group reinsurance and elements of risk management are centralised, making it easier to pool knowledge and resources. This management structure – with international, functional responsibilities – is extremely effective, enables rapid decisionmaking, enhances transparency and avoids duplication.
Forthcoming changes in the Group Executive Management in 2007 Erich Walser will step down from his position as CEO of Helvetia Group at the end of August 2007. The Board of Directors has appointed Stefan Loacker, the present CEO of Helvetia Austria, to succeed him. As Chairman of the Board of Directors, Erich Walser will continue to ensure that the successful strategy adopted by the Group is followed consistently.
Stefan Loacker, lic. oec. HSG, will take on the position of CEO of Helvetia Group on 1.9.2007. He joined the Planning, Controlling and Development department of the Helvetia Group in 1997, after working for many years at Swiss Life. He then went on to work on Group strategy as Head of the Business Development department and managed various M&A projects in Switzerland and abroad. In 2002, Stefan Loacker was appointed CFO and member of the Board of Directors of Helvetia Austria and, at the beginning of 2005, he was elected CEO Austria. He has made a significant contribution to the success of the company in all these positions. The appointment of Stefan Loacker means that an exceptional insurance professional will take over the operational management of Helvetia.
Management structure of Helvetia Group * Member of Group Executive Management as at April 2007
c Chairman of the Board of Directors and Chief Executive Officer of Helvetia Group, Head of the national markets of Italy, Spain and Austria; d until 1978 various positions with Swiss Bank Corporation (now UBS) and Schweizerische Volksbank; 1979 joined Helvetia: various management positions; 1991 Chief Executive Officer of Helvetia Versicherungen; 1994 Chief Executive Officer of the Helvetia Patria Group; 2001 Member of the Board of Directors and Managing Director reporting to the Board of Directors; in current function since 12.12.2003 with various mandates at subsidiaries of the Helvetia Group outside Switzerland; e in particular Vice-Chairman of the Swiss Insurance Association, Zurich; Chairman of the Sponsoring Institution of the Institute of Insurance Economics at the University of St.Gallen; Vice-Chairman of the board of directors of Allreal Holding AG, Baar; Vice-Chairman of the board of directors of Huber + Suhner AG, Pfäffikon/Herisau; as well as four board mandates at non-listed companies and four board of trustee mandates.
Philipp Gmür (1963) a Lucerne, Swiss b Dr. iur., lawyer, LL.M.
c Chief Executive Officer of Helvetia Switzerland; d 1988 – 1990 Positions at district courts, administration and legal practice; 1991 – 1993 Clerk at the High Court of Lucerne; 1993 joined Helvetia: general agent in Lucerne; 2000 Member of Executive Management Switzerland: Head of Sales; 2003 Member of Group Executive Management in current position with various mandates for subsidiaries of Helvetia Group in Switzerland; e in particular member of the boards of trustees of the pension funds of Helvetia Versicherungen, Vice-Chairman of the Helvetia Patria Jeunesse Foundation; Vice-Chairman of the Swisscanto Vested Benefits Foundation and the Swisscanto Supra Joint Foundation of the Cantonal Banks; member of the board of directors of Swisscanto Verwaltungs AG, Basel; member of the board of directors of Coop Rechtsschutz AG, Aarau; two board mandates at non-listed companies and three board of trustee mandates.
c Head of Human Resources and Services; d until 1984 Canton of St.Gallen Planning Department; 1985 joined Helvetia: various management positions, including: Head of Real Estate, Head of Staff, Secretary General; 2000 Member of Group Executive Management in current position with various mandates at subsidiaries of the Helvetia Group in Switzerland and abroad; e in particular chairman of the pension funds of Helvetia Versicherungen; Chairman of the board of directors of swissregiobank, Wil/SG; board mandate for a non-listed company and two mandates for housing co-operatives.
With this strategic focus, Helvetia wants to comply with the applicable standards of the Swiss Code of Best Practice for Corporate Governance and the SWX Swiss Exchange Guidelines concerning Information on Corporate Governance dated 1.7.2002, including appendices. The comments concerning our corporate governance principles therefore follow the order of content of the above Guidelines. If relevant information is provided elsewhere in the Annual Report or in other documents, reference is made to the location or document concerned. Important documents such as the articles of incorporation (also available in English) and the by-laws, with appendices (in German only), may be viewed on our website (www.helvetia.com/gruppe/governance.htm), which also contains plenty of additional interesting and up-to-date information.
1. Group structure and shareholder base 1.1 Group structure Helvetia is an internationally active Swiss all-lines insurance group that focuses primarily on central and southern Europe. The parent company,
Helvetia Holding AG has its head office in St.Gallen and is listed on the SWX Swiss Exchange in Zurich: security no./ticker 1 227 168/HELN. Key data for investors are presented on page 74 under ‘Investor information’.
c) The Pension Fund of Helvetia Versicherungen, St.Gallen, holds 2.4% of the shares of Helvetia Holding AG.
2.3 Changes in capital In 2001, the Group’s share capital was reduced by CHF 16,492,980 to CHF 65,971,920 by a reduction in the nominal share value from CHF 50 to CHF 40 and a share split at the ratio of 1:4 to CHF 10 per share.
In 2002, the share capital was reduced by 4.61% to CHF 62,930,000 through a buyback programme and the cancellation of shares amounting to CHF 3,041,920.
Changes in equity are presented on pages 84 and 85, those for the 2004 financial year are presented on page 90 of the Annual Report 2004, and those for 2005 are presented on page 140 et seq. of the Annual Report 2005.
mercial Register. Here the term ‘individual’ also includes buyers of shares who are connected to each other either by way of capital or votes, or by united management, or in any other form. This restriction also applies if, for example, shares were subscribed or acquired by means of convertible rights that are associated with value rights issued by the company or third parties.
In the year under review, no new exceptions were declared regarding the restriction of transferability (for major shareholders: see section 1.2).
3.1 Members of the Board of Directors The Board of Directors of Helvetia Holding AG consists of nine members. It is identical to the boards of directors of the two subsidiaries, Helvetia Leben and Helvetia Versicherungen. Members of the Board of Directors are required to possess experience and know-how from a variety of sectors. They should hold the qualifications that ensure a clear business strategy in consultation with the Executive Management. Since the Helvetia Group conducts a significant proportion of its business abroad, the Board of Directors also includes members who have extensive international experience. Members of the Board of Directors should possess strong personal values (including integrity), specialised business and insurance knowledge, experience in strategic and executive management, the ability to think in a visionary manner, and social skills. They must also have the necessary amount of time at their disposal for the efficient and proper performance of a director’s mandate. Each year the Board of Directors assesses the level of compliance with these requirements and the quality of the services it has performed, both in its entirety and within each committee, and – where necessary – identifies any improvements that may be required.
Apart from Erich Walser, Chairman of the Board of Directors and Chief Executive Officer of the Helvetia Group (who will hand over the function of CEO to Stefan Loacker on 1.9.2007), all other members are non-executive, and in the financial years prior to the year under review did not belong to the Executive Management of Helvetia or any of its consolidated companies. None of the members of the Board of Directors have any significant business relationships with Helvetia other than as policyholders at normal conditions.
Meeting) and Olivier Vodoz represent Patria Genossenschaft, Pierin Vincenz represents the Raiffeisen Group, and Urs Widmer represents the Vontobel Group, as he is also Chairman of the board of directors of Vontobel Holding AG. Silvio Borner and Marguerite Florio are also members of the Board of Directors, and Olivier Vodoz is President of the Delegate Conference, of Patria Genossenschaft, Basel, the statutory objectives of which are to promote the conclusion and execution of life insurance contracts with Helvetia in the interests of its members, and to secure and promote its independence and development through financial participation in Helvetia.
For information concerning the first-time election and the remaining term of office of the members of the Board of Directors, please refer to the table on page 20.
Committees appointed by the Board of Directors In order to use the broad business experience of its individual members in its decision-making processes and to meet its supervisory reporting obligations, the Board of Directors has formed special committees from among its own members to assist the Board and the Executive Management in its management and control activities: Strategy and Governance Committee, Nomination and Compensation Committee, Investment and Risk Committee, and Audit Committee. The duties and powers of these committees are described in detail in the by-laws, and the composition of each committee is presented on page 20.
specific issues, it may call on internal or external specialists to attend its meetings, which is regularly the case. In 2005, the Audit Committee held three meetings, and one member was absent from one of them. The meeting at which the annual accounts are discussed usually lasts a full day, while other meetings normally last half a day.
Lead Director (in function from 20.2.2004 to 31.8.2007) The main duty of the Lead Director in relation to good governance is to secure balanced leadership and control at the highest level of management. If required due to circumstances relating to balanced leadership and control, he may convene a meeting of the Board of Directors, specify the agenda and chair the meeting, and decide on the attendance of the Chairman and CEO and other persons at the meeting. If required due to specific interests, control or supervisory duties, he may in his own right add specific items to the agenda of meetings of the Board of Directors, monitor communication, information flow and the co-ordination of activities within the Board of Directors and between the latter and the Executive Management, and may at any time inspect any company records and accounts and request members of the Executive Management to provide him with any information he may deem necessary. He may at his own request attend and participate in decisions of meetings of Board Committees of which he himself is not a member.
Full Board of Directors The Board of Directors convenes as often as business requires, though as a rule at least six times a year. Most of its half-day meetings are held at Group head office in St.Gallen, one is held at the head office of Helvetia Switzerland in Basel, while the executive seminar, which usually lasts two days, is generally held at the premises of a subsidiary abroad. A quorum is constituted if the majority of the members of the Board of Directors are present. Its resolutions are carried with a majority of the votes of the members in attendance. Resolutions may also be made by circular letter. As a rule, all members of the Board of Directors and (in an advisory capacity) all members of the Executive Management attend its meetings. In the year under review, six meetings were held, with the absence of one member of the Board of Directors at two meetings, while the attendance rate for members of the Executive Management was one hundred per cent. In order to deal with specific issues, it may call on specialists to attend its meetings, which is regularly the case. Members of the Board of Directors and all executive bodies are obliged to abstain if business is being dealt with that involves their own interests or the interests of associates (natural persons or legal entities).
Every month, the members of the Board of Directors receive key data concerning the course of business. As a rule, they also receive monthly information on current issues relating to governance as well as selected analyses and situation reports concerning market trends, market players and noteworthy occurrences. The regular reports submitted to the Board of Directors and its committees are listed in detail in Appendix II of the by-laws (available in German only) (www.helvetia.com/ gruppe/governance.htm).
At every meeting, every member of the Board of Directors may ask other members and members of the Executive Management for information concerning all matters pertaining to the Group. Outside of meetings, every member of the Board of Directors may ask the Executive Management to provide information about the general course of business or the course of specific business cases, and/or may inspect any business documents as required.
The Board of Directors also has the Internal Audit unit at its disposal as an auditing and supervisory body that monitors compliance with legal and regulatory provisions, internal guidelines and directives systematically, purposefully and in a risk-oriented manner.
It also receives reports concerning the general development and specific activities of Helvetia in the areas of corporate governance, risk management, compliance and the environment.
national markets, he is responsible for the operational management of the Group.
For the Board of Directors (i.e. for the Chairman, Vice-Chairmen, members of the Board, the Lead Director and the chairpersons of the Board Committees), annual fixed amounts are specified in the remuneration regulations, together with the procedure for determining variable remuneration, fees for attending meetings, and remuneration of expenses. The variable remuneration which depends on the financial results and share performance takes the form of shares (without voting rights) at market value. These shares are blocked for a period of three years. The remuneration regulations also stipulate that the remuneration of the Chairman and CEO is to be calculated as follows: for his activities as Chairman of the Board of Directors, on the basis of the cited regulations; for his activities as CEO, on the basis of his employment contract. He is not entitled to receive variable Board of Directors remuneration, payments for attending meetings, or remuneration for his chairmanship of the Strategy and Governance Committee.
5.2 Remuneration of members of executive bodies In 2006, the total amount of remuneration paid to members of the Group Executive Management (including the Chairman and CEO) was as follows: Fixed component (including agreed expenses, child/education allowance and jubilee bonus) CHF 2,961,214, Variable component for 2006 CHF 1,633,013 A special bonus amounting to 700 shares at the market price of CHF 528 on 27.3.2007, which are blocked for three years. This bonus was granted in view of the good performance in 2006.
In the year under review, the eight serving (nonexecutive ) members of the Board of Directors (excluding the Chairman and CEO, including M. Florio until the 2006 Shareholders’ Meeting) received remuneration amounting to CHF 1,682,577 (gross) including payments for attending meetings, consisting of fixed remuneration of CHF 1,238,001 and variable remuneration for the year in the form of 842 shares at the market price of CHF 528 on 27.3.2007 (CHF 444,576). These shares are blocked for a period of three years.
Members of executive bodies are not entitled to severance pay upon termination of their term of office. In the year under review, Marguerite Florio (member of the Board of Directors) stepped down from her function and – in accordance with the policy referred to above – did not receive any form of severance compensation.
5.3 Remuneration of former members of executive bodies In the year under review, a total of CHF 33,494 was paid to former members of executive bodies for supervisory board mandates and special duties.
5.4 Allocation of shares Within the scope of the employee share purchase plan (cf. section 5.1), members of the Group Executive Management (including the Chairman and CEO) received a total of 925 shares in the year under review. See section 5.2 for details of share allocations in 2007 for the 2006 financial year.
5.6 Options The option programme was discontinued at the end of 2002. No further options are outstanding.
5.7 Additional fees and remuneration In the year under review, no members of an executive body or persons close to them billed the company for fees or remuneration relating to the provision of additional services.
5.9 Highest overall remuneration In the year under review, the Chairman and CEO received remuneration amounting to CHF 250,000 for the function of Chairman of the Board of Directors. As CEO, he is entitled to the salary specified in his employment contract. In the year under review, he received a fixed and a variable component amounting to a total of CHF 940,138 as well as a special bonus as a result of the company’s good performance in 2006. This bonus amounted to 200 shares at the market rate of CHF 528 on 27.3.2007, which are blocked for three years. In addition, the company contributed an amount of CHF 112,262 toward pension plans.
6.1 Voting right restrictions, proxy voting Certain restrictions on voting rights that are identical to restrictions relating to the transferability of registered shares of Helvetia Holding AG are described in section 2 above.
6.4 Addition of items to the agenda Shareholders with voting rights who together represent shares to the nominal value of at least CHF 200,000 may request the addition of items to the agenda in writing no later than 45 days before the Shareholders’ Meeting, and stating the motions to be put forward.
6.5 Registration of shares The right to attend the Shareholders’ Meeting (4.5.2007) and exercise voting rights is reserved for persons who were registered in the share register as shareholders with voting rights as of the cutoff date (20.4.2007) specified by the Board of Directors and announced in the Swiss Commercial Gazette and various other newspapers. In the period between the above cut-off date and a few days (1.5.2007) prior to the Shareholders’ Meeting, shares will still be registered in the register but no additional invitations to the Shareholders’ Meeting will be issued. The share register is only blocked for a few days (2.5.2007 to 10.5.2007). In exceptional cases, guest tickets may be issued, but holders of such tickets do not have any voting rights. Every share registered in the register entitles the holder to cast one vote.
7. Change in control, protection measures 7.1 Obligation to announce takeover bids Art. 30 of the articles of incorporation states that the obligation to announce a takeover bid in accordance with Art. 32 of the Stock Market Act only applies if the acquisition of shares results in the possession of more than 40% of the voting rights.
7.2 Clauses regulating a change of control Employment contracts of Helvetia do not contain any clauses regulating a change of control. The practice of ‘golden parachutes’ does not apply at Helvetia. Normal periods of notice apply, during which contractual salary and bonus arrangements remain applicable.
For the 2006 financial year, the composition of the audit team was as follows: Hieronymus T. Dormann, Swiss Certified Accountant, partner, auditor in charge; Bill Schiller, Chartered Accountant, partner.
Internal audit In addition to an external auditor, the Helvetia Group has an internal auditing section that reports directly to the Audit Committee and the Chairman of the Board of Directors and Chief Executive Officer. The contents of the employment contract of the Head of Internal Audit (e.g. appointment, dismissal, salary, bonus) must be approved by the
Chairman of the Audit Committee, and this enhances the degree of Internal Audit’s independence.
External and Internal Audit Representatives of the external auditors and the head of Internal Audit attend meetings of the Audit Committee in an advisory capacity. The minutes of the Audit Committee are submitted to all members of the Board of Directors and during meetings of the Board of Directors it reports on its activities. In the year under review, three meetings were held, whereby the external auditors attended the meetings on the annual and interim accounts. The third Audit Committee meeting was held outside Switzerland without the external auditors. Discussions between the external auditors, the Chairman of the Board of Directors and CEO, the Chairman of the Audit Committee and the Head of Finance (CFO) are held annually. Meetings or an exchange of experiences with specialists from areas such as accounting, risk management, law and compliance are held periodically. The External and Internal Audit teams are also frequently in contact regarding issues such as audit planning, audits and results as well as current problems.
As a rule, Helvetia provides its shareholders with information twice a year in the form of a detailed letter to shareholders included in the annual and interim reports. In its address to shareholders, it deals with a variety of current issues, including vision, strategy, market positioning and business policy. Copies of our sustainability report and the brief portrait of Helvetia Switzerland are available to anyone who may be interested. Furthermore, our website (www.helvetia.com) contains a great deal of current and archived information about the Helvetia Group, including strategy, organisation, Group structure, facts and figures, corporate governance, sustainability, the insurance markets in which Helvetia is involved, investor interests, e.g. rating, analysts’ reports, annual and interim reports, share including share price trends, news alert, investor and media contacts as well as further publications, media releases, interviews, and important dates. Helvetia periodically meets with institutional investors and presents the published financial results at special road shows. These presentations may also be called up on our website.
Our Investor Relations team will be pleased to assist with any personal enquiries (contact details are indicated at the end of this report as well as on our homepage). Helvetia – Just ask us!
In order to calculate embedded value, different assumptions based on reality are made, notably concerning return on capital, costs, claims experience and policyholder participation in profit. The key assumptions are listed in a table on the following page. The embedded value depends on these assumptions, while the dependency is shown in the table ‘Sensitivities’.
Since the embedded value depends, as mentioned, on many assumptions and there are no general standards regarding the calculation methods, the published embedded values of different companies can only be compared up to a point.
The embedded value that Helvetia has published here was calculated in accordance with the traditional method. In contrast, the European embedded value incorporates other variables, such as guarantees and options included in the business. Both embedded value variants are closely connected to shareholder value and are useful to company management. Future new business is not taken into consideration in either of the variants.
Deloitte & Touche LLP has examined the calculation method chosen by Helvetia Group and the assumptions applied to the calculation of the embedded value as at 31.12.2006. Deloitte considers the calculation method used by Helvetia Group and the assumptions applied to be appropriate and reasonable and the disclosures on embedded value shown below and based on the selected calculation method and corresponding assumptions to be in proper form. For the purpose of this report, Deloitte audited some of the data provided by Helvetia on a test basis, relying, however, on the financial information published in the financial report.
At the end of 2006, the embedded value of Helvetia Group amounted to CHF 1,881.7 million, which represents an increase of CHF 208.1 million or 12.4% year-on-year. This sizeable increase is mostly due to very favourable developments in investment income and the claims experience. The value of underwritten new business also rose, in particular influenced by the higher share of equity-protecting products and increased yield from new funds in the area of interest-bearing securities. This is, however, offset by higher customer participation in profit.
Switzerland Risk discount rate 7.0% 7.0% Yield on bonds 2.8% 2.3% – 2.9% Yield on equities 6.5% 6.5% Yield on real estate 4.5% 4.5%
Yield on equities 7.5% 7.5% Yield on real estate 5.1% 5.2%
EU Value of new business in CHF million 4.6 6.1 Annual premium equivalent (APE) in CHF million 62.1 62.3 Value of new business (APE) in % 7.4% 9.8% Present value of new business premiums (PVNBP) in CHF million 441.9 465.1 Value of new business (PVNBP) in % 1.0% 1.3%
Total Value of new business in CHF million 21.7 19.9 Annual premium equivalent (APE) in CHF million 179.1 192.2 Value of new business (APE) in % 12.1% 10.4% Present value of new business premiums (PVNBP) in CHF million 1624.9 1751.3 Value of new business (PVNBP) in % 1.3% 1.1%
Annual premium equivalent (APE): 100% annual new business premium +10% single premium PVNBP: present value of new business premiums
This quality mark pays tribute to the excellent shape in which Helvetia finds itself, and reflects the strong equity base, the outstanding operational earning power over the last few years, and the good competitive position in Switzerland and abroad (one of the leaders in Switzerland; a well-diversified niche strategy in the other European countries).
The ‘A–’ quality mark considerably improved our future market prospects in numerous product and customer segments.
The HR managers at Helvetia are guided in their actions by a standard HR process model that sets down rules on their powers and responsibilities. This basic approach to HR serves as a guideline for HR management in the various business units. In operational terms, HR Management helps the company to optimise its deployment of human resources and skills. Staff with HR responsibilities have confidential relationships with managers as well as employees and assist both sides as consultants, partners or service providers, depending on the situation. A further aim is to continue developing the HR process model through constant improvement as part of quality management.
The management development team has joined with two research institutes at the University of St.Gallen to organise new strategy modules in the International Executive Programme (IEP). The focus is on achieving profitable growth and on strengthening the Helvetia brand and values. In the 30 fourday IEP modules staged thus far, seven as followup seminars, nearly 150 members of Executive Management and senior executives from the various business units applied strategic models of thinking and deepened their knowledge of issues relevant to the insurance market by examining practical examples. The General Management Navigator (GMN) is a tried-and-tested method of strategic development and has given rise to successful strategic initiatives. Most managers also gave top ratings to the extensive transfer of knowledge at these events, to their concrete practical benefits and to the management network these events helped to forge. A good third of all participants said their expectations were exceeded.
Slight decrease in staff numbers The total number of employees in our Group in the various national markets declined marginally against the previous year. Staff numbers in Germany and Spain were reduced slightly in the course of redesigning business processes or as a result of various organisational adjustments, whereas the total number of employees in Italy was increased somewhat at year-end in response to business developments. This partially explains the low rate for termination of employment in our Italian unit (1.0%) while the slight reduction in personnel in Spain contributed to the higher rate for termination of employment (11.3%). The number of employees remained more or less constant in all other business units, thanks in part to improvements made during this same period in business processes.
With its specially designed and farsighted generational policy, Helvetia is countering demographic changes and positioning itself as an appealing employer for young and old. The company actively promotes respect and equality for employees of different generations. No matter what the gender or age, the company practices and supports equality in what it demands of employees and in the effort it puts into developing them.
Women constitute about one-third of total staff at all business units except in France (55%) and
To increase its rate of success in recruiting customer advisors, Helvetia Austria adopted ‘AC online’, an electronic interview instrument successfully used in Switzerland, and adapted it to its needs. The system integrates the criteria of its own successful customer advisors and the latest knowledge about candidates’ potential success in sales.
Health promotion at the workplace A comparison of the number of days of illnessrelated absences per employee showed a marked difference between Spain (3.6) and Austria (9.3). This figure ranges from 6 to 7 days for other business units. Illness or accident is the main reason for absences in all countries. In Switzerland, HR Management launched a health promotion programme called ‘Fit+Wohl’ (‘Fitness+Well-being’) several years ago. It covers, inter alia, ergonomic tips, relaxation exercises, training units, diet information and active health programmes for various target groups. HR staff have also drawn up a checklist on how employees returning to their jobs after a prolonged absence due to illness can be helped more effectively to reintegrate into the workplace. In Germany, Helvetia stages company sports activities as well as regular health campaigns. At Helvetia Austria, the works doctor increasingly examines health issues and advises the management on how employees can cope with stress on the job. In Italy, Helvetia employees can have a free health check. With the new laws in Italy and Spain, employees are no longer permitted to smoke on the business premises in those countries. Finally, every larger company in Spain must train a manager in all issues relating to work risks.
Helvetia garnered 82 points, a top score compared with the rest of the market. The participation rate was extremely high, too, at 76%. The company received high marks for management conduct, the employee goal agreement process, job content and customer-oriented conduct. Surveys of employees in Germany and France yielded similarly high satisfaction figures. For instance, four out of five Helvetia employees in Germany said they would apply to Helvetia if they had to do it all over again. They expressed particular satisfaction about their employment and said they were highly confident of Helvetia’s business policy and its ability to succeed in the future. Finally, a number of steps were taken in Spain and Italy to further increase employee satisfaction and personal identification with the company.
Further gains of market shares in several markets Consolidated gross premiums (CHF million) Growth in CHF (%)
All in all, Helvetia Group recorded growth of 1.5% in 2006, 5 percentage points down on 2005 (6.5%). This is partly due to dramatic premium erosion in assumed reinsurance, where the focus falls on income rather than volume.
In terms of business lines, property insurance posted growth of 3.5% in 2006 after adjusting for foreign currency differences, followed by liability insurance with an increase of 2.9%.
In the direct life business in 2006, we again achieved double-digit increases of 12.7% and 11.2% in Germany and Spain respectively. On the other hand, our most important market, Switzerland, reported a marked slowdown in growth compared to the previous year (8.8%) due to the capital market environment and relatively low interest rates. However, at +2.0%, we outperformed the sector average (–2%) and were able to increase our market share. In the Italian life business, we identified a need for some consolidation in the reporting year after the enormous growth recorded in the past few years (2004: 42.5%, 2005: 67.5%). For considerations of income, we were particularly cautious when concluding policies with high single premiums, which ultimately led to a fall in premiums of around 24%. All in all, the growth of the Group’s total direct life business slowed dramatically to 1.4% (previous year: 12.1%) due to the abovementioned developments in Italy and Switzerland.
In terms of business lines, capital-protecting unitlinked products saw the largest increase by far (14.5%) after adjusting for foreign currency differences. Group insurance grew by 3.1% after adjusting for exchange rate effects.
Last year saw the Helvetia Group increase its net profit after taxes by CHF 121.9 million or 40.4% to CHF 423.8 million – by far our best ever result.
Helvetia’s gross combined ratio improved in 2006 by 2 full percentage points to 93.2%, mostly thanks to the dramatic improvement in the claims ratio (3.1 percentage points to 61.2%). On the other hand, the cost ratio climbed to 32.0%, partly due to the costs incurred with the implementation of the new unified market image. At 94.1%, the net combined ratio was practically on a par with the previous year’s outstanding ratio (94.0%). In contrast to the development of the gross ratio, the net ratio saw only a marginal increase, because the reinsurance balance burdened the accounts by approximately CHF 36 million in 2006, while in the previous year it was in our favour. Nevertheless, reinsurance costs remained at a pleasingly low level.
Switzerland accounted for the major share of total pre-tax profit in the life segment. Spain and Germany also delivered results in the double-digit CHF million range in 2006.
Current income on investments 139.6 136.3 714.3 689.4 Gains and losses on investments 70.4 53.6 135.6 410.8 Other income and expenses –16.0 –53.8 –36.1 –48.5 Profit of non-technical account 194.0 136.1 813.8 1051.7
The investment policy was thoroughly reviewed at the same time as the business strategy with the aim of earning sustainably attractive and secure returns for our customers and shareholders. The strategy should protect capital, without restricting future income potential. Investment risks are only taken on board if compensation in the form of higher income can be expected. In our judgement, this is largely the case with our mix of real estate, equities and alternative investments. On the other hand, additional income cannot be earned systematically with mismatch risks, which arise from the differences between the maturities of liabilities and assets. In line with our risk capacity, equity commitments should therefore be expanded gradually, while the maturities mismatch between the interestbearing assets and interest-sensitive liabilities from the insurance business should be minimised step by step. Currency risks should be reduced further, while the portfolio weighting of real estate and mortgages should be maintained.
Rising interest rates in the first half of the year were used to increase the maturities of the interestbearing instruments. The maturities mismatch with liabilities was reduced significantly. The share of mortgages and real estate dropped slightly compared to the previous year by 0.2 and 0.6 percentage points respectively. In total, asset volume increased year-on-year by CHF 1,144.5 million (4.1%) to CHF 28,927.7 million.
Equities perform well again The continued and broadly supported economic upturn coupled with pleasing corporate profits pushed equity markets to new heights, despite slight increases in interest rates. With a few exceptions, performance reached double digits. On the other hand, bond markets tended to be weak due to the slight increase in interest rates, which was to be expected, and encumbered the performance of the investment portfolio. The resulting performance of 3.1% was well below the previous year’s performance of 5.5%.
Derivative financial instruments –102.9 –22.0 Other investments 2.6 0.8 Impairment of financial assets of the period –4.6 –3.3 Reversal of impairment losses on financial
Comprehensive risk management In order to protect the balance sheet and secure income targets, comprehensive hedging measures were required again. These measures focused on currency and equity positions. The euro and dollar commitments were heavily hedged during the entire year, while the hedging of equities could be relaxed in line with the progressively positive performance of the equity markets. Interest-bearing instruments were not hedged. The good quality of the portfolio is highlighted by the number of securities with at least an ‘A’ rating. Less than 1% of all rated securities have a lower rating. The quality of the mortgage portfolio is also very good: compared to the total portfolio value of CHF 3.1 billion, capital and interest rate losses are practically negligible. The marketability of the real estate portfolio is maintained through continuous investment. The vacancy rate fluctuates between 2% and 3%.
Excellent result and improved market position Helvetia Switzerland concentrated on the successful implementation of its ‘Results before growth’ strategy for 2004 to 2006. In retrospect, all the goals that were set in 2003 have been achieved. These goals involved restoring profitability in life business, pushing for quality and service orientation, and engaging in strict cost management. In addition, we increased our market shares in both the life and non-life segments.
Gross premiums in 2006 from direct life business in Switzerland in CHF million
In group life business, we gained market share against fierce competition by taking full advantage of our excellent reputation, our own sales power and our ready access to brokers as well as our strategic partnership with the Cantonal Banks. Regular premiums grew by 4.3% in 2006. One innovative product we launched was BVG Invest, featuring attractive investment vehicles for yieldoriented customers wishing to bear the investor risk themselves.
The excellent result in life business can be traced in part to a friendly capital market but is mostly the result of the company’s yield-oriented product strategy, a selective subscription policy and another year of higher results for disability insurance.
Excellent non-life results The performance in the non-life segment was encouraging all around in 2006. Premiums grew by a total of 4.2%, while property and motor vehicle insurance rose by 4.8% and 5%, respectively. The company thus substantially improved its market position in both the private and the corporate customer segments.
Private customer business was dominated in the year under review by the conversion to the new range of house products. Customers benefit from modern cover concepts designed to meet their specific needs and by new insurance components covering assistance and legal expenses. Our compelling expertise in product design was demonstrated in other areas, too. In cooperation with Raiffeisen, Helvetia developed a unique product concept for building and construction insurance policies and integrated it into the Raiffeisen advisors ’ mortgage consulting process. This innovation was impartially singled out for the 2006 innovation award of Schweizer Assekuranz.
Awards for excellent service quality We are convinced that a high standard of quality is indispensable for differentiation in the market. Our successful efforts to achieve quality and service also garnered praise from impartial quarters.
The Esprix Foundation selected Helvetia as a finalist for the Swiss Quality Award in recognition of its many efforts to promote quality orientation. Comparis, a company that issues product comparisons, confirmed the quality of our services in a survey on the handling of motor vehicle claims. The high customer satisfaction ratings show that our customers also recognise and appreciate our efforts.
Strategy 2010: first in growth, profitability and customer loyalty At the start of 2007, we began a new strategy period with the launch of our ‘Strategy 2010’. The vision of being ‘First in growth, profitability and customer loyalty’ expresses the ambitious goals we have set for Switzerland. Based on the Group strategy, we have defined concrete strategic thrusts and value programmes for this vision.
Efficient management of the business portfolio We employ capital efficiently and continue to focus on lucrative segments. Private customers and SMEs are the central customer groups. The goal is to expand property insurance in the property and casualty segment and to introduce products with minimum impact on equity and corresponding innovative force in the life segment.
Stepping up efforts to achieve profitable growth We strive to achieve above-average growth. The thrust of these sustained efforts are two-prong: to be the leader in terms of sales strength and access to customers, and to apply best practices in product innovation.
To apply best practices in product innovation: Our strategic product programmes are based on outstanding expertise in innovation in our three market segments: private pensions, company pension plans, and property and casualty insurance. These programmes take account of the fact that cover concepts must keep up with constantly changing customer needs.
The economic upswing, however, did not support growth in the non-life segment. Rather, growing competition led to further premium erosion, with the result that premium income in the market probably fell by 1.5%, as indicated by the latest extrapolation. The concept of expanded cover led to an increase in claims expenditure, and actuarial sector results fell year-on-year.
The upswing also affected the labour market, with the result that employment figures improved slightly. At the same time, wages increased nominally by approximately 1.4%, but if inflation of 1.7% is taken into account, wages actually suffered a slight downswing.
Gross premiums in 2006 from direct life business in Germany in EUR million
The Italian economy experienced a marked recovery last year. The growth in gross domestic product is expected to be around 1.7%. This growth was mainly driven by private consumption, whereas a clear slowing in investments could be observed. As in the previous year, consumer prices are expected to have increased by approximately 2% in 2006. At the same time, unemployment decreased, reaching its lowest level for many years with an estimated 7.8% in 2006. The political will to institute reform provides hope that the Italian national budget will stabilise positively, which in turn might encourage a medium-term growth spurt in economic development. At the same time, it must be noted that the discrepancy between the economically strong north of the country and the south, which continues to develop slowly, will probably remain unchanged. We consider this significant for our strategic planning.
With the entry into force of the new private insurance law and the introduction of the new direct claim system as of 1.2.2007, consumer and investor confidence should be further strengthened and service quality continuously improved.
Gross premiums in 2006 from direct life business in Italy in EUR million
Continued high earning power In 2006, in terms of earnings, the non-life business was in very good shape. In the year under review, the gross combined ratio is 2.4 percentage points above the extraordinarily good ratio of the previous year at 97.0% and thus once more exceeds our ambitious expectations as well as the market value. Although the risk results continue to be very good in the life business, our high expectations were not quite met.
At EUR 17.6 million, the overall pre-tax result is approximately EUR 0.6 million lower than in the previous year, whilst in the non-life business a slight decrease and in the life business an improvement in results were posted.
In the future: focus on growth With the new strategic orientation the signs clearly point to profitable growth. Helvetia Italy plans the following strategic initiatives: Continuing expansion of the sales network in the regions and the cities in the north of the country that are of interest to us. Stronger focus on the single person/family target groups and SMEs and developing particularly attractive overall solutions for these groups.
Launching new unit-linked life/investment products that exploit the Group’s synergies. Increasing operational efficiency, especially in sales, by designing a uniform IT-supported process model. Targeted marketing campaigns: promotion of target group competence, exploitation of ‘Swissness’, etc.
Last year the Spanish economy continued its dynamic trend; according to the latest projection, the increase in the gross domestic product was 3.8%. This growth was driven both by private consumption and by investments. With an estimated 2.7%, inflation was above the European Union mean. The employment situation is thought to have improved considerably in 2006. However, the foreign trade deficit, low productivity in comparison with the EU and the restructuring of the state pension system continue to cause problems for the country.
Insurance sales continue to be divided: whilst in the non-life segment the traditional sales channels (agents and brokers) still clearly dominate overall new business with a share of just under 70%, almost 70% of the new business in the life segment is generated by bank sales.
Excellent business development in 2006 Last year, Helvetia achieved double-digit premium growth of 11.2% in life insurance, which is slightly above the sector mean. Traditional risk insurance and family financial provision showed particularly satisfactory development. The newly introduced unit-linked life products also posted a highly successful start.
Nationally, Helvetia is among the 30 leading insurance groups in Spain. In Andalusia and Navarre, which are the focus of our business activities, we are among the top market players. About 44% of our entire premium income, totalling approximately EUR 314 million, is allocated to southern Spain and about 28% to the north and centre of the country respectively. Overall, Helvetia’s sales network includes 54 subsidiaries throughout Spain. The extensive product range is aimed at private individuals as well as small and medium-sized businesses. At the end of 2006, Helvetia had 547 employees, a good 25% of whom worked in sales.
In the non-life business, not only the excellent investment results, but also the ongoing favourable claims experience and the clear progress regarding the administrative cost ratio made a positive contribution. At 89.4%, the gross combined ratio is still at an extremely good level, whereby a very favourable trend is noted across all segments.
We are convinced that we can positively exploit the growth opportunities in the Spanish insurance market to our benefit through these actions. The growth forecast of the Spanish economy, which can still be assessed as very favourable, and the ‘backlog’ in the life segment overall paint a very positive picture of the basic conditions.
Helvetia Austria – successful start under a new company name The year 2006 was characterised by the introduction of the new brand in Austria and the repositioning of our operations under the motto ‘Helvetia, individual insurance from individual Switzerland’. This brand promise is just as relevant for our customers as it is believable, and builds on the company’s existing strengths.
Other important milestones in the reporting year included the successful finalisation of the upgrading of all actuarial IT systems, the improvement of the risk management process and the launch of a programme to optimise the business processes in compliance with the guidelines of the European Foundation for Quality Management (EFQM). In spring 2006, Helvetia Austria was the first Austrian provider of financial services to be awarded the distinction ‘Committed to Excellence’ by the Austrian Foundation for Quality Management, the local EFQM subsidiary.
Operating performance in 2006 In spite of the strict focus on earnings, the reporting year saw a further increase in premium volume: regular premiums financing the core life segment grew by almost 4.2% to EUR 81.3 million, but single premiums, by definition subject to large annual fluctuations, fell by almost half year-onyear. Overall, premium volume in the life business rose by 0.2% to EUR 85 million, while the increase for unit-linked policies was just more than 11%.
Gross premiums in 2006 from direct non-life business in Austria in EUR million
Gross premiums in 2006 from direct life business in Austria in EUR million
The non-life segment saw total growth of 1.2% across all segments, achieving a premium volume of EUR 124.3 million. The motor vehicle business reported particularly dynamic growth with an extrapolated increase in premiums of 3.1%, thereby outperforming the sector average of 0.8%.
Due to the negative claims experience, the nonlife segment did not quite match the previous year’s outstanding results. The gross claims ratio was approximately 5 percentage points above the previous year’s extraordinarily good ratio due to claims related to the snow pressure suffered in late winter 2006. This underlines the fact that the quality of the company’s portfolio is still very good.
Despite the extraordinary claims burden, the gross combined ratio fell well short of the 100% mark. The non-life financial result was on a par with the good performance of the previous year.
The life result was slightly less good year-onyear, due to a smaller financial profit and a rather unfavourable mortality risk experience.
All in all, Helvetia Austria successfully generated a gratifying annual profit in spite of the fact that the claims experience was not favourable.
Positive outlook The conditions for profitable growth in Austria remain good. With the new name ‘Helvetia’, welldesigned new products and many measures to improve the efficiency of the sales force, Helvetia Austria is well equipped to improve its growth and earning power this year.
Helvetia Austria has set itself ambitious growth targets for the strategy period 2007 to 2010. The foundation for its future success has already been laid in part and comprises: Strengthening its position in the life business with new unit-linked products Developing new broker relationships and professionalising the broker management system Repositioning itself in the commercial segment with new marketing and product concepts Implementing additional measures to improve the productivity of the in-house sales force Continuing to implement measures designed to improve process quality.
Our products are sold via a network of about 1,700 brokers and agents, who contact industrial and commercial enterprises, importers and exporters and the most important transport specialists directly. A large number of renowned major enterprises are among our customers.
With gross premium income of EUR 58.9 million in 2006, and a market share of approximately 6%, Helvetia remains the fifth largest transport insurer in France. In 2006, premium volume remained virtually unchanged in comparison with the previous year. This is primarily due to the fact, as mentioned above, that the entire transport business stagnated to a large extent, as a result of development in the carriage of goods by road. Another factor was the fierce competition in the transport insurance market.
In 2006, the transport business again presented excellent results. Pre-tax earnings in Swiss francs are once more in the double-digit million range. Compared with the extraordinary results of the previous year, the gross combined ratio increased, but it is still below the 80% mark in 2006. This is thanks to the ongoing extremely good claims experience.
Outstanding annual profit for 2006 Assumed reinsurance at Helvetia had an excellent year. The 2006 result again outstripped the previous year’s already excellent results. The positive claims experience supported our performance. Europe, in particular, was more or less spared from expensive natural disasters and major claims, with the result that the claims ratio for 2006 was the lowest reported this decade. In addition, as a niche player our cost ratio was very low compared to the rest of the market and therefore extremely competitive. Thanks to last year’s good claims and cost experience, the combined ratio was less than 100% and served as the basis for the outstanding Swiss franc result in the double-digit million range.
Market capitalisation (in CHF million) at year-end price 3474.1 2405.5 Ratio market capitalisation/consolidated equity 127% 97% Ratio market capitalisation/gross premiums 66% 46% Number of shareholders as of reporting date 4366 4129 Annual dividend per share (in CHF) 13.501 9.00 Dividend yield2 3.4% 3.2%
Payout ratio 35% 34% Securities number/ticker 1 227 168 / HELN Trading exchange SWX Swiss Exchange 1 Proposal to the Shareholders’ Meeting 2 Based on year-end price
Private individuals 12.8% 13.9% Banks and insurance companies 24.8% 24.8% Other institutional investors 62.4% 61.3%
At the balance sheet date of 31.12.2006, 91.5% of investors were based in Switzerland, while 8.5% lived abroad. The free float stood at 53.7% at the end of 2006 (end 2005: 51.8%).
The purchase of registered Helvetia shares is not subject to any restrictions. Shareholders who purchase the shares in their own name and on their own behalf will be entered in the share register for up to a maximum of 5% of the total number of issued registered shares with voting rights.
Helvetia views sustainable behaviour as an important investment in its future. The idea of sustainability influences the daily work of all our employees. For years, Helvetia has been exerting great effort to lower its energy consumption and has been quite successful. The goal of our in-house ecological campaign was to inform employees about their consumption of water, electricity and paper, and to make them more aware of the need to conserve these resources.
Activities at our business units The sections below describe the major ecological activities conducted this past year in the national markets of Switzerland and Germany.
Helvetia attaches special importance to applying the latest energy-conserving standards. The high quality brick façade and the effective thermal insulation ensure low operating costs, as do the ultra-modern building installations. All flats have large windows at the front and feature modern baths and electrical installations.
With its use of classic brick to retain the typical Hamburg architectural style, Helvetia shows how superbly tradition and innovation can complement each other.
Products suited to the market and the environment Helvetia Germany also offers insurance protection for photovoltaic systems that far exceeds concepts usually available in the market. In the short time since the product launch, insurance has been taken out on systems worth some EUR 100 million. The production of electricity using solar cells is steadily gaining in importance. The product is designed for private individuals and companies and for their environmentally friendly systems of electricity production.
Aware of its corporate responsibility, Helvetia supports numerous non-profit projects and organisations promoting the public welfare. It is especially involved in funding charitable and social organisations, but also supports youth and the arts. In addition, Helvetia is an important source of revenue for the public authorities, having paid CHF 81.2 million in direct taxes last year alone.
Foundation for promoting Swiss youth Helvetia Patria Jeunesse is a foundation that promotes Swiss youth groups, clubs and youth projects in keeping with the foundation’s purpose. It donated some CHF 184,000 to 41 institutions in the year under review. Of particular note is the annual donation of CHF 25,000 to support the youth programme of the Congress of the Swiss Abroad.
The year under review marked the eighth time that Helvetia sponsored the Blue Balls Festival in Lucerne. This festival is the ideal forum for communicating with our customers, featuring famous stars, the world-famous backdrop of the lake, and no end of musical delights.
Helvetia was a chief sponsor, financially and logistically, in staging the second international World Ageing and Generations Congress at the University of St.Gallen in autumn 2006. Business leaders from around the globe gather together at this forum to engage in high-level talks on possible solutions to demographic trends.
Helvetia also promoted research on multiple sclerosis by sponsoring benefit concerts organised in four major Swiss cities by the MS Society.
In Spain, Helvetia sponsors the Spanish Basketball Federation, whose national team won the FIBA World Championships in Japan in 2006. The company also sponsors a number of other sports.
Financial statements 176 Notes to the annual financial statements 177 Report of the Statutory Auditors 178
Consolidated income statement 81 Consolidated balance sheet 82 Consolidated statement of equity 84 Consolidated cash flow statement 86 Notes to the consolidated financial statements 89 Report of the Group Auditors 174
Attributable to: Shareholders of Helvetia Holding AG1 423.0 301.4 Minority interests 0.8 0.5
Valuation reserves for contracts with participation features 11.2.5 608.8 588.6 Equity of Helvetia Holding AG shareholders 2 735.0 2 477.7 Minority interests 3.4 3.1
Unearned premium reserve (gross) 9 890.5 844.7 Financial liabilities from financing activities 8.1 199.1 198.8 Financial liabilities from insurance business 8.2 1 489.5 1 719.8 Other financial liabilities 8.3 37.2 32.1 Liabilities from insurance business 9.5 703.5 754.4 Non-actuarial provisions 12.1 64.1 61.2 Employee benefit obligations 13.2 272.1 245.7 Deferred tax liabilities 10.4 465.7 457.7 Current income tax liabilities 115.9 97.0 Other liabilities and accruals 186.8 126.6
Transfer from/to retained earnings – – – 0.4 Change in minority interests – – – 0.0 Treasury share transactions – 2.3 7.3 – Employee share purchase plan – 0.7 – – Dividends – – – – Shareholders’ contribution – 5.0 – –
– – –20.5 –41.1 0.0 –41.1 0.0 –0.2 – –0.1 –0.3 –0.4
Adjustments: Depreciation/amortisation of property, equipment and intangible assets 31.8 45.4 Realised gains and losses on financial instruments and investment property –182.0 –192.5 Unrealised gains and losses on investments in associates –0.9 7.9 Unrealised gains and losses on investment property 47.2 29.9 Unrealised gains and losses on financial instruments –77.2 –321.0 Share-based payments for employees 0.8 0.1 Foreign currency gains and losses –87.4 –24.6 Other income and expenses not affecting cash 13.9 –24.1
Purchase of property and equipment –86.1 –62.8 Sale of property and equipment 1.4 3.8 Purchase of intangible assets –20.4 –16.4 Sale of intangible assets 0.0 0.3 Purchase of investments in asscociates – –51.0 Sale of investments in associates – 0.6 Purchase of investments in subsidiaries, net of cash and cash equivalents 0.0 –0.3 Sale of investments in subsidiaries, net of cash and cash equivalents – – Dividends from associates 0.6 0.6 Cash flow from investing activities (net) –104.5 –125.2
Increase of share capital – – Decrease of share capital – – Sale of treasury shares 9.6 69.7 Purchase of treasury shares – –0.3 Shareholders’ contribution 5.0 – Issuance of debt instruments – – Repayment of debt – –150.0 Dividends paid –77.6 –45.5 Lease payments under finance lease 0.0 0.0 Cash flow from financing activities (net) –63.0 –126.1
The other income and expenses affecting cash primarily contain the change to interest-accruing profit participation of owners of contracts with participation features.
The Board of Directors approved the consolidated financial statements and authorised them for issue on 27.3.2007. The financial statements will be submitted to the shareholders for approval at the Shareholders’ Meeting on 4.5.2007.
The balance sheet is now broken down according to liquidity. As a result, adjustments had to be made to some balance sheet positions for the 2005 reporting year. Some components were simply reclassified. The positions 'Financial assets held for trading' and 'Money market instruments' were transferred in total to the positions 'Financial assets at fair value through profit or loss' (CHF 253.3 million ) and 'Loans (LAR) including money market instruments' (CHF 1,002.1 million). The share of short-term liabilities due to employees was reclassified from the position 'Other liabilities and accruals' to the position 'Employee benefit obligations' (CHF 44.7 million). The offsetting of deferred tax assets and liabilities and the separate disclosure of current income tax assets and liabilities led to a reduction of assets and liabilities of CHF 284.9 million as at 31.12.2005. The effects of the offsetting of the deferred taxes are disclosed in Note 10.4 (page 135). Further insignificant reclassifications in the balance sheet resulted in an additional reduction in the balance sheet total of CHF 4.3 million.
Adoption of the standards did not lead to any significant adjustments to accounting policies. The amendments that are relevant to the Helvetia Group are explained below: Amendment to IAS 19 – Actuarial gains and losses, group plans and disclosures When recognising pension liabilities, IAS 19 now introduces an option for an entity to recognise actuarial gains and losses in full as they arise, outside profit or loss, in the statement of equity. Helvetia Group does not make use of this option. Actuarial gains and losses will continue to be recognised in profit or loss in accordance with the corridor method. Other amendments concern the expanded disclosure requirements (see Note 13, beginning on page 142).
Helvetia Group does not expect the first-time application of the new standards to have a significant impact on the consolidated financial statements, as they will primarily affect the type and extent of disclosure. The new interpretations that were published are also not expected to have material repercussions on the financial statements.
Subsidiaries The consolidated financial statements include the financial statements of Helvetia Holding AG and its subsidiaries as well as of special purpose entities. Consolidation occurs when Helvetia Holding AG exercises indirect or direct control over the company’s operations. Subsidiaries acquired during the course of the financial year are included in the consolidated financial statements from the date on which the Helvetia Group took effective control. Acquisitions of companies are recorded using the purchase method. Intercompany transactions and balance sheet items are completely eliminated.
n The contract has an embedded derivative, provided that the derivative does not lead to a significant change to the cash flow of the contract or it is evident that it would be permissible to recognise the derivative separately.
All financial instruments classified at the Helvetia Group as 'designated as at fair value through profit or loss' meet one of the above conditions. As a result, no financial instruments were reclassified.
2.1.2 Standards not yet applied in the reporting year Due to the effective dates on which they enter into force, the following published sector-relevant standards, interpretations and amendments to standards were not applied to the 2006 consolidated financial statements: Notes to the consolidated financial statements of Helvetia Group 2006
Foreign currency transactions Foreign currency transactions in the individual entities are accounted for using the exchange rate on the date of the transaction.
For non-monetary items classified as availablefor -sale investments, such as shares and shares in investment funds, the unrealised foreign exchange gain is recognised in equity without affecting the income statement until the financial instrument is sold. However, for monetary items such as bonds and loans, the unrealised foreign exchange difference is immediately recognised in the income statement. For financial assets recorded at fair value through profit or loss, the foreign exchange gain is not recorded separately.
Preparing the financial statements in accordance with IFRS requires Group management to make assumptions and estimates that affect the reported amounts of assets and liabilities for the ongoing business year. All estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual figures and estimates may differ as a result. The assumptions to be made that are relevant to preparing the financial statements are as follows: Fair value of financial assets and liabilities The fair value of financial instruments is the quoted market price for which an asset could be exchanged in an active market between knowledgeable, willing parties in an arm’s length transaction.
If no market value in an active market is available, fair value is estimated using valuation methods, such as the discounted cash flow (DCF) method, comparison with current transactions in the market, or with reference to similar instruments and option pricing models. Such methods are considerably influenced by assumptions that have to be made, which can lead to varying fair value estimates. This affects the following positions in particular: n Alternative investments: The fair value of private equity investments is calculated using the DCF method and applying the internal rate of return (IRR). Hedge funds are valued on the basis of the fair values of the listed securities contained in the fund in question.
n Mortgages and loans: The fair value of mortgages and borrower’s note loans is determined on the basis of discounted cash flows. Mortgages are measured by applying the current interest rates of Helvetia Group for comparable mortgages that have been granted. The Swiss franc swap curve is used to measure borrower’s note loans.
Impairment of available-for-sale investments The judgement as to whether an equity instrument classified as available-for-sale is subject to impairment depends on the existence of objective indications. One decisive criterion is the constant or considerable decrease in value of an instrument: at Helvetia Group, instruments are considered impaired if their fair value remains below cost for longer than nine months or falls 20% or more below cost irrespective of the period of time. In addition, ratings and analysts’ reports can serve as an indication that a company’s circumstances have changed with respect to technology, the market, economy or law, to such an extent that the cost can probably no longer be recovered. In these cases, the assets are examined for impairment.
Fair value of investment property The fair value of investment properties is calculated in Switzerland using a model-supported valuation method (see Note 2.10.1, page 97). In order to determine the fair value, different capitalisation rates are used, which are subject to assessment by Group management. The capitalisation rates applied in the reporting period are set out in Note 7.3 (page 120). The portfolio is regularly reviewed and appraisal reports prepared by independent experts. All other countries use independent experts to determine market estimates at intervals of three years, at the most.
Accounting estimates specific to insurance The estimate uncertainties in the area of actuarial practise are explained in Note 2.13 (beginning on page 99). Any significant change to the parameters used for reserve calculation is documented in Notes 9.3 (non-life business) and 9.4 (life business ).
The following items are fundamentally classified as current : 'Current income tax assets and liabilities', 'Accrued investment income', 'Cash and cash equivalents' and 'Other liabilities and accruals'.
Property and equipment are carried at cost less accumulated depreciation and accrued impairment. Depreciation is normally calculated using the straight-line method over the estimated useful life as follows: n Furniture 4–15 years n Technical equipment 4–10 years n Motor vehicles 4–6 years n Computer hardware 2–5 years
Useful life is adjusted if the pattern of consumption of the economic benefit has changed. Investments are offset against the current carrying value in the period and are depreciated over the entire term if an increase in the economic benefit is expected from the investment and reliable estimates exist for the cost. Depreciation is recognised in the income statement under 'Operating and administrative expenses'. Repairs and maintenance are charged to the income statement as incurred. Tangible assets are regularly tested for impairment (see Note 2.9, page 96).
The carrying value of tangible assets or an intangible asset amortised using the straight-line method is tested for impairment if there is evidence for impairment. Goodwill and intangible assets with an indefinite useful life are reviewed for impairment annually in the second half of the year.
2.10.2 Financial assets Helvetia Group recognises the following categories of financial investments: 'Loans' (Loans and receivables, LAR), 'Held-to-maturity' (HTM), 'Availablefor -sale' (AFS) and 'At fair value through profit or loss'.
'Financial assets at fair value through profit or loss' comprise 'financial assets held for trading' and 'financial assets designated as at fair value through profit or loss'. An instrument is classified as 'held for trading' if it is held with the aim of making short-term gains from market price fluctuations and dealer margins. Upon initial recognition, financial investments are irrevocably classified as 'designated as at fair value' only if they are a component of a particular group of financial assets that, according to a documented investment strategy, are managed on a fair value basis, or their recognition as at fair value serves to compensate for market value fluctuations of liabilities due to policyholders. The value fluctuations that result from the fair value valuation are directly recognised in the income statement and reported separately from 'Interest and dividend income' in the position 'Gains and losses on investments'.
(including 'Financial assets at fair value through profit or loss'). Dividends are recorded when a legal claim arises. Depreciation and appreciation resulting from the amortised cost method are offset against interest income in the income statement.
Those financial liabilities that are either held for trading or irrevocably classified upon initial recognition as 'designated as at fair value through profit or loss' are recognised at fair value. The latter classification is given to deposits if they are associated with the growth of investment funds or are made for products of which the policyholder benefit is mostly identical to the benefit from the investment. For these deposits for investment contracts without a discretionary participation feature (see Note 2.13), only the withdrawals and allocations that are part of the operating result are recorded in the income statement. The risk and cost portions
Loss reserves are set aside for all claims incurred by the end of the accounting period. The reserves also include provisions for claims incurred but not yet reported. Actuarial methods that take account of uncertainties are applied to determine the amount of reserves. These are included in the reserve calculation on the basis of assumptions that have to be made using available statistics and the overall expected extent of the claims (including claims handling and processing costs). Reserves are not discounted, except for those provisions for claims for which there are payment arrangements.
Premiums are booked at the beginning of the contract period. Earned premiums are calculated pro rata per individual contract and recorded as income for the relevant risk periods. Premium proportions relating to future business periods are
Unearned premium reserves and actuarial reserves are calculated using local methods. Zillmering is not applied to actuarial reserves in any country market apart from Germany and Austria.
Policyholders with contracts containing discretionary participation features may have the right to participate in local investment returns on capital or local company results under statutory or contractual regulations. Provisions set up for that purpose in accordance with local accounting principles are not changed under IFRS rules and are included under 'Provision for future policyholder participation ' in the balance sheet.
Portions of the valuation differences in relation to local accounting principles allocated to contracts containing discretionary participation features which affect either the result or unrealised gains in equity are also reserved under the aforementioned balance sheet item. The portion is equal to the percentage rate which sets the minimum participation level of policyholders in the respective revenues under local statutory or contractual regulations. This participation is credited or debited to the position 'Provision for future policyholder participation ' through profit or loss. Similarly, the portion of unrealised gains or losses is recognised in the provisions without affecting profit or loss.
The remaining gains – either through profit or loss or with no impact on the results – that relate to contracts with a discretionary participation feature (i.e. every share for which no legal or contractual obligations exist) are recorded under 'Valuation reserves for contracts with participation features' within equity.
Premiums, insurance benefits and costs arising from life insurance contracts are booked at maturity. These income and expenses are accrued or deferred so that profit from the contracts is recognised in the appropriate period.
The direct business conveyed to reinsurance companies is called ceded reinsurance and contains cessions from direct life and non-life business. Premiums, unearned premium reserves and premium adjustments for ceded business are recognised and shown separately from primary business in the financial statements. The accounting rules used for primary insurance business apply to ceded business.
Indirect business accepted by another insurance company is called assumed reinsurance. As in primary insurance business, technical reserves are included in the respective actuarial items on the liabilities side, and are similarly estimated using mathematical-statistical models and the most up-todate information available. They also reflect uncertainties. Non-traditional insurance contracts are treated as financial instruments and are reported under 'Reinsurance assets' or 'Financial liabilities from insurance business' if no significant insurance risks have been transferred. Net commission is carried directly to the income statement.
Notes to the consolidated financial statements of Helvetia Group 2006 2.16 Accrued investment income
Cash amounts consist of cash on hand, demand deposits and short-term liquid investments with a maturity of 90 days or less from the date of acquisition.
Any current liabilities with a low probability of an outflow of assets or the extent of which cannot be reliably estimated are reported under contingent liabilities.
Employee benefits include short-term employee benefits, post-employment benefits, other long-term employee benefits and termination benefits.
Short-term employee benefits are due in full within 12 months after the end of the reporting period. They include salaries, social security contributions, holiday and sickness pay, bonuses and non-monetary benefits for active employees. Expected expenses for entitlements which can be accumulated, such as accrued holiday and overtime entitlements, are recognised as short-term liabilities at the balance sheet date.
Post-employment benefits pertain to defined contribution plans and defined benefit plans. The amount of the employers’ contributions for defined contribution plans depends on the employee services rendered during the reporting period and is charged directly to the income statement. For defined benefit plans, pension obligations and related expenses are calculated at each balance sheet date by a qualified actuary, using the projected unit credit method. The actuarial assumptions applied to the calculations consider the regulations of the respective countries and Group companies. Changes in the assumptions or differences between the expected and actual return from the plan’s assets are actuarial gains and losses. Actuarial gains and losses to be depreciated in the income statement are recorded for each individual plan using the 'corridor method', under which recognition is only required if the balance of the accumulated, unrecognised actuarial gains and losses exceeds the greater of ten per cent of the present value of the defined benefit obligations and ten per cent of the fair value of plan assets at the end of the previous reporting period. The portion of actuarial gains and losses outside the ten per cent corridor is recognised in the income statement over the expected average remaining working lives of the employees participating in the plans.
Share-based payment transactions include all compensation agreements under which employees receive shares, options or similar equity instruments or the granting Group company assumes obligations that depend on the price of its shares. All share-based payment transactions with employees are recognised at fair value.
The accounting policies that apply to the segment reporting are the same as those described in the summary of significant accounting policies. Intersegmental services and transfers of assets and liabilities are made on an arm’s length basis. Investments and investment and interest income from subsidiaries between the segments are eliminated within the respective segment. All other intersegmental relations and revenues within the Group are eliminated in full. Current and deferred income taxes are not components of segment result or segment assets or liabilities, and are therefore not allocated to the individual segments.
The assignment of individual Group entities to the various business and geographical segments is explained in Note 18 (beginning on page 172).
Interest and dividend income 464.5 447.6 95.0 93.0 Gains and losses on investments (net) 234.0 438.3 30.3 10.3 Income on investment property 123.7 170.4 7.3 –1.4 of which transactions between geographical segments 39.1 48.5 51.6 56.0
Claims incurred including claims handling costs (non-life) –325.3 –452.7 –355.6 –337.0 Claims and benefits paid (life) –1862.1 –1 925.7 –120.0 –109.9 Change in actuarial reserve –480.8 –495.9 –85.6 –71.4 Policyholder dividends and bonuses –142.8 –251.0 –29.4 –21.1 Reinsurers’ share of benefits and claims 19.8 138.2 43.9 40.3 Net insurance benefits and claims –2 791.2 –2 987.1 –546.7 –499.1 Acquisition costs –192.2 –183.3 –168.0 –172.9 Operating and administrative expenses –271.9 –254.9 –85.2 –83.1 Interest payable –34.1 –40.6 –3.9 –6.4 Other expenses 0.0 –42.8 –13.3 –16.0 Total operating expenses –3 289.4 –3 508.7 –817.1 –777.5
Cash flow from operating activities (net) 29.6 82.1 59.9 3.1 Cash flow from investing activities (net) –69.8 –96.1 –59.9 –2.4 Cash flow from financing activities (net) –10.1 23.9 –1.3 –0.7
Acquisition of owner-occupied property, equipment and intangible assets 81.3 47.1 7.5 3.8 Depreciation and amortisation of tangible and intangible assets –15.6 –16.0 –3.9 –4.1 Impairment of tangible and intangible assets affecting income – –1.3 – –2.6 Reversal of impairment losses on tangible and intangible assets affecting income – – – – Share-based payment transaction costs –0.8 –0.1 – –
– – – – – –0.1 – –4.0 – – – – – – – – – – – – – – –0.8 –0.1 3. Segment information 107
Interest and dividend income 568.0 541.3 124.0 120.3 Gains and losses on investments (net) 214.3 440.5 33.0 53.0 Income on investment property 123.4 166.8 59.9 22.1 of which transactions between business segments 0.5 0.0 – 0.8 – 0.2
Other disclosures: Assets by business segment as of 31.12. 25 423.7 24 244.7 5 833.7 5 724.0 Liabilities by business segment as of 31.12. 23 956.6 23 093.0 4 346.9 4 514.4
– – – – –738.0 –849.8 – – – – –166.7 –291.9
–6.0 –9.3 – – –6.0 –9.3 – – – – 1.8 –7.1
Notes to the consolidated financial statements of Helvetia Group 2006 4.1 Exchange rates
The euro, Swiss franc, British pound and US dollar are the functional currencies in the individual business units of Helvetia Group. The following exchange rates apply to the translation of these financial statements and foreign currency transactions: 4.2 Foreign exchange gains and losses
Reversal of impairment losses – – – – – – – – – – Disposals depreciation/impairment – – –0.6 0.0 –2.1 – 33.8 – – –2.7 –33.8
Other changes – – 0.0 – 0.0 – – – – –
Book value as of 1 January 5.4 5.4 376.7 372.7 21.1 20.2 22.9 23.7 426.1 422.0
Acquisition costs: Change in the scope of consolidation – – – – – –
The impairment test carried out in 2006 did not result in an impairment loss for the cash generating unit. The recoverable amount was determined by calculating the value in use. This calculation required management to make estimates on expected return. These free cash flows are usually considered for a period of two to five years and are based on the budget approved by management and the strategic planning. The calculations are based on the following growth and discount rates, assuming cash flows in perpetuity: Assumptions: Growth rate 1% Risk-adjusted interest rate after taxes 8.06%
Notes to the consolidated financial statements of Helvetia Group 2006 6. Goodwill and other intangible assets 114 6. Goodwill and other intangible assets
Notes to the consolidated financial statements of Helvetia Group 2006 7. Investments 7.1 Investment income 7.1.1 Interest and dividend income in CHF million
Interest on bonds 453.3 430.3 Dividends from shares, investment funds and alternative investments 56.0 52.9
Investment management expenses in the reporting period amounted to CHF 10.3 million (previous year: CHF 8.5 million) and are reported under 'Operating and administrative expenses' in the income statement. Interest and dividend income from investments at fair value through profit or loss stood at CHF 35.0 million (previous year: CHF 36.2 million).
Realised gains and losses on disposals of loans (LAR) including foreign currency gains and losses: Bonds – –
Money market instruments 0.5 0.5 Realised gains and losses on loans (LAR) incl. money market instruments 1.0 3.8
Realised gains and losses on disposals of held-to-maturity investments (HTM) including foreign currency gains and losses: Loans – – Realised gains and losses on HTM investments 15.3 2.7
Realised gains and losses on disposals of available-for-sale investments (AFS) including foreign currency gains and losses: Investment funds 0.7 3.2 Alternative investments 0.0 – Loans – – Realised gains and losses on AFS investments 184.1 164.9
Realised and book gains and losses on financial assets held for trading including foreign currency gains and losses: Bonds – –
Realised and book gains and losses on financial assets designated as at fair value through profit or loss including foreign currency gains and losses: Investment funds1 54.9 119.3 Alternative investments 29.6 107.1 Realised and book gains and losses on financial assets designated as at fair value through profit or loss 174.2 337.8
Impairment of financial assets of the period –4.6 – 3.3 Reversal of impairment losses on financial assets of the period 1.9 3.7
Reported gains and losses on investments classified as held-to-maturity are book gains and losses resulting from foreign currency translation. The change to impairment on financial assets includes impairments on receivables from investments.
Rental income 226.6 220.2 Realised and book gains and losses –40.2 – 31.1
Total income on investment property 186.4 189.1 ous year: CHF 1.1 million). Based on notice periods, the tenancies generated operating lease receivables for Helvetia Group of CHF 55.6 million (previous year: CHF 77.4 million) with a maturity of less than one year, CHF 138.9 million (previous year: CHF 127.5 million) with a maturity between one and five years, and CHF 50.8 million (previous year: CHF 82.0 million) with a maturity of more than five years.
Real estate held as investment properties generated CHF 61.2 million (previous year: CHF 54.8 million) in investment management expenses for the reporting period. This amount includes all maintenance and repair costs and is reported in the income statement under 'Operating and administrative expenses'. Operating expenses for investment property that did not generate rental income during the period stood at CHF 2.8 million (previ-
Balance as of 1 January 45.2 3.1 Change in the scope of consolidation – – Additions – 51.0 Disposals – –0.6 Unrealised gains and losses in equity 0.0 0.0 Share of profits for the year 1.5 0.4 Dividends paid –0.6 – 0.6 Impairment (net) – –7.7 Foreign currency translation differences 0.1 0.0 Other changes – –0.4
Impairment losses: Accumulated impairment losses as of 1 January 7.7 0.5 Impairment losses of the period – 7.7 Reversal of impairment losses of the period – – Disposals – – Foreign currency translation differences – 0.0 Other changes – –0.5
Notes to the consolidated financial statements of Helvetia Group 2006 7.2 Investments in associates
Investments in associates accounted for under the equity method are listed in the table in Note 18 (beginning on page 172).
Notes to the consolidated financial statements of Helvetia Group 2006 7.2.2 Aggregated financial data on associates The table below shows an aggregated balance sheet and income statement for the investments that are accounted for under the equity method.
Helvetia Group’s share in the liabilities of associates amounted to CHF 30.1 million. Associates have overall contingent liabilities of CHF 14.9 million.
Balance as of 1 January 3 883.8 3869.6 Change in the scope of consolidation – –
Total loans (LAR) incl. money market instruments 6 743.2 6 379.0 6 757.5 6 497.2 7.5 Held-to-maturity investments (HTM) in CHF million
Total held-to-maturity investments (HTM) 3 469.7 2 781.0 3 500.4 2 909.1
Total AFS investments after impairment 11 357.7 11 110.7 506.0 721.5 11 863.7 11 832.2
Investment funds – bonds – – – – Investment funds – equities – – – –
Financial assets designated as at fair value through profit or loss: Bonds 422.5 398.7 431.4 411.7
Investment funds for account and risk of life policyholders 770.0 795.0 888.0 876.0 Total financial assets designated as at fair value through profit or loss 2 330.2 2 444.9 2 631.4 2 608.7
The position 'Investment funds for account and risk of life policyholders' includes the value of units held by owners of unit-linked products.
Interest rate instruments: Forward rate agreements – – – – – – – Swaps – – – – – – –
At the reporting date, securities with a fair value of CHF 1,528.7 million (previous year: CHF 2,053.5 million) were committed to securities lending by the Group.
Notes to the consolidated financial statements of Helvetia Group 2006 8. Financial liabilities 8.1 Financial liabilities from financing activities in CHF million
8. Financial liabilities 127 8.2 Financial liabilities from insurance business in CHF million
Financial liabilities at fair value: Total financial liabilities at fair value 200.1 291.6 203.0 287.2 200.1 291.6
Total financial liabilities from insurance business 1 489.5 1 719.8 1 492.4 1 715.4 1 489.5 1 719.8
Financial liabilities at fair value equal the amount repayable on the due date. Financial liabilities from the insurance business of Helvetia Group do not include any financial covenants that will significantly change the conditions of the contract (e.g. maturity, interest rate, securities and currency).
Deposits for investment contracts contain deposits of policyholders owning investment contracts without discretionary participation features, predominantly from index and unit-linked products, without significant insurance risk, allowing the policyholder to directly participate in the development of an external fund or external index. Premiums paid into or from these deposits do not affect revenues and are not entered in the income statement, but are offset against the deposit. The features of these products are very similar to those of insurance contracts, apart from the fact that there is hardly any insurance risk. Insurance conditions and risks are described in Note 16 (beginning on page 150).
Interest rate instruments: Forward rate agreements – – – – – – –
Reinsurance deposit receivables include deposits with the ceding direct insurer for unearned premiums, future loss payments and actuarial reserves for assumed indirect business.
Further details on actuarial reserves for life and non-life business can be found in the following tables. A maturity analysis of the reserves for insurance contracts and investment contracts is given in Note 16.4.1 (page 160).
9.1 Reserves for insurance contracts and investment contracts with discretionary participation features in CHF million
Actuarial reserve for insurance contracts life 20 396.7 19 615.1 149.0 149.3 20 247.7 19 465.8 Actuarial reserve for investment contracts 622.3 531.2 – – 622.3 531.2
Provision for future Reserves for insurance contracts non-life (gross) Actuarial reserve policyholder participation
Balance as of 1 January 25.6 23.3 Change in the scope of consolidation – –
Release –2.9 –6.4 –11.6 – Used amounts –57.8 –30.2 –1.4 –3.9 Foreign currency translation differences 18.1 2.4 0.3 0.1
–116.1 –49.8 – – –147.5 –74.0 – – – – – –
The table above on claims development of non-life business shows: n Claims development is very stable. n All existing actuarial liabilities are covered at an early stage by sufficient reserves.
n The fluctuation of the annual claims incurred is small overall for the well-diversified portfolio even before reinsurance.
Year of loss occurrence before 2002 2002 2003 2004 2005 2006 Total
Increase of loss reserves based on LAT 15.0 Claims handling costs 124.1 Other technical reserves non-life 4.4 Loss reserves as of 31 December 3 066.3 Group reinsurance share –180.2
Actuarial methods derived from many years of claims experience that take account of uncertainties associated with claims estimates are applied to determine the required loss reserves. The assumptions applied to determine the required loss reserves did not change substantially in the reporting year. No acquisition costs are deferred in non-life business.
The Liability Adequacy Test (LAT) for non-life business resulted in an additional increase of CHF 15.0 million (previous year: CHF 17.2 million) in loss reserves as of 31.12.2006.
Balance as of 1 January 221.6 234.2 Change in the scope of consolidation – – Capitalised in the period 21.4 5.8 Amortised in the period –23.8 – 18.5 Impairment in the period – – Foreign currency translation differences 0.6 0.1
If the reserves prove to be insufficient, they have to be increased in most countries in a second step in their local financial statements. A reserve increase recognised as necessary may be spread over several years depending on local accounting principles and circumstances.
In a third step, the Liability Adequacy Test finally applies Group-wide uniform standards to test whether the actuarial reserves included in the local financial statements (including additional reserve increases but excluding deferred acquisition costs) are sufficient. Across the Group the Liability Adequacy Test required an allocation of additional actuarial reserves of CHF 26.7 million as of 31.12.2006 (previous year: CHF 28.1 million).
Insurance conditions and risks in life business are described in Note 16.3 (beginning on page 155). Sensitivities of actuarial reserves are outlined in Note 16.3.3 (beginning on page 158).
Helvetia Group defers acquisition costs only in individual life business and such deferrals follow local accounting regulations. Impairment of deferred acquisition costs is checked as part of the
Total income taxes 138.4 118.3 10.2 Change in deferred tax assets and liabilities (net) in CHF million
St. Gallen for 2007. The expected tax rate is derived from the weighted average of expected tax rates in the individual countries where the Group operates.
Tax assets from losses carried forward 10.5.1 1.0 1.7 – –
No deferred tax liabilities were recognised for withholding tax and other taxes that would be payable on the unremitted income from certain subsidiaries, as these amounts are retained.
10.5 Losses carried forward 10.5.1 Net tax assets from losses carried forward in CHF million
Expire within 1 year 0.1 2.6 Expire between 2 and 3 years 1.9 – Expire between 4 and 7 years – 3.3 Without expiration 1.0 1.3 Total recognised losses carried forward 3.0 7.2 Resulting tax assets 1.0 1.7
The granting of shares to Helvetia Group employees at favourable terms as part of the Helvetia employee share purchase plan resulted in a loss of CHF 0.6 million, which was charged to the capital reserve without affecting profit or loss. This amount represents the difference between the purchase price at market price and the reduced sale’s price granted to employees.
11.2.2 Retained earnings Accumulated non-distributed earnings of the Helvetia Group are recognised in the balance sheet item 'Retained earnings'. Besides freely disposable funds, they also comprise statutory reserves and reserves bound by the articles of association which are sustained by the net profit for the year and subject to restrictions on distributions.
11.2.4 Reserve for 'Unrealised gains and losses' The reserve for 'Unrealised gains and losses' includes fair value changes of available-for-sale investments (AFS), the portion of unrealised gains and losses of associates, as well as value changes resulting from the transfer of owner-occupied property. These gains are only recognised in the income statement when the asset is sold.
Available- Transfer of for-sale owner-occupied Total unrealised investments Associates property gains and losses
Revaluation gains on transfer of owner-occupied property – – – – 5.6 1.9 5.6 1.9 Gains reclassified to the income statement due to disposals –159.7 – 96.2 – – – – –159.7 – 96.2 Losses reclassified to the income statement due to disposals 11.4 2.6 – – – – 11.4 2.6 Impairment losses reclassified to the income statement 0.7 0.1 – – – – 0.7 0.1 Foreign currency translation less: Notes Obligations for contracts with participation features in 'Liabilities' –152.0 – 200.3 Valuation reserves for contracts with discretionary participation features in 'Equity' (gross) 11.2.5 –193.5 – 278.0 Minority interests –0.4 – 0.6 Deferred taxes on remaining portion –46.9 – 69.0
Retained earnings on contracts with participation features: Balance as of 1 January 379.0 309.2 Change in the scope of consolidation – – Share of profit for the year 84.5 70.3 Reclassifications 0.2 –0.5 Retained earnings as of 31 December 463.7 379.0
The Board of Directors will submit a proposal to the Shareholders’ Meeting of 4.5.2007 to pay a dividend per share of CHF 13.50 (previous year: CHF 9.00) with the total payout amounting to CHF 116.8 million (previous year: CHF 77.9 million). The proposed dividend will not be distributed before approved by the ordinary Shareholders’ Meeting. The dividend distribution is only recognised when approved by the Shareholders’ Meeting.
Dividend restrictions and solvency requirements The Swiss subsidiaries are subject to the restrictions of the Swiss Code of Obligations with regard to the dividends that may be distributed to the parent company. The Code requires 5% of profit to be allocated to the statutory reserve fund until its amount equals 20% of the paid-in share capital. Other countries where subsidiaries of Helvetia Group operate have similar rules, and company law restricts the dividend payment to the parent company.
In addition to the aforementioned regulations, the payment of dividends by subsidiaries of the Helvetia Group may be restricted by minimum capital or solvency requirements imposed by supervisory authorities.
All insurance units of the Helvetia Group must meet minimum solvency margins (so-called Solvency I), calculated in accordance with Article 24 et seq. of the Swiss Supervision Ordinance (AVO) for life insurance and Article 27 et seq. AVO for non-life insurance.
Balance as of 1 January 61.2 59.4 Change in the scope of consolidation – –
No significant new provisions were set up in the reporting year. At the balance sheet date, there were no provisions for restructuring expenses. The 'Non-actuarial provisions' position primarily consists of provisions for liabilities due to authorities arising from other tax obligations and liabilities due to agents. The share of provisions classified as current is CHF 48.9 million (previous year: CHF 45.9 million).
Social security costs 61.0 61.7 Pension costs – defined contribution plans 2.4 1.9 Pension costs – defined benefit plans 13.3.4 47.9 40.2 Other long-term employee benefit expenses 1.4 1.0 Termination benefits 1.2 6.1 Share-based payment transaction costs 0.8 0.1 Other personnel costs 30.6 25.4
Total personnel costs 662.2 638.1 13.2 Employee benefit receivables and obligations in CHF million
Kind of benefit: Other long-term employee benefits – – 14.2 13.3 Short-term employee benefits 1.4 1.3 53.4 44.7
The net liability consists of: Gross defined benefit liabilities 204.5 187.7
Present value of the defined benefit obligation as of 1 January 1379.0 1290.2 Service cost 47.0 43.0 Interest cost 43.4 42.0 Actuarial gains (–) or losses (+) –25.2 46.6 Benefits paid –75.3 – 68.0 Past service cost – –51.6 Change in the scope of consolidation – – Other amounts 21.1 75.3 Curtailments and settlements – 0.0 Foreign currency translation differences 5.7 1.5
Current service cost 47.0 43.0 Interest cost 43.4 42.0 Expected return on plan assets –42.4 –41.0 Actuarial gains and losses –107.4 –0.6 Employee contributions –13.4 –12.2 Change in amounts not recognised as assets 120.7 60.6 Past service cost – –51.6
Expected rate of return on plan assets 3.9 3.4 4.0 4.4 13.3.6 Actual plan asset allocation (weighted averages) in %
Equity instruments 26 24 Debt instruments 54 39 Real estate 19 20 Deposit administration contract 0 15 13. Employee benefits 145
The deposit administration contract concluded between the Swiss companies and the pension fund of Helvetia Versicherungen, St. Gallen, as part of the capital management activities was discharged in full in the 2006 reporting year. Interest of CHF 4.7 million was paid in the reporting year on capital transferred up until repayment.
Notes to the consolidated financial statements of Helvetia Group 2006 13.3.8 Multi-year overview of defined benefit plans in CHF million
The investment risk is monitored through the periodic review of the assets and liabilities as well as quarterly reviews of the investment portfolio.
Directors sets the number of shares offered to eligible employees, which is dependent on the individual’s respective function. All acquired shares are blocked for a period of three years. The shares are vested immediately at the grant date, so that the associated personnel costs for share-based payments of CHF 0.8 million were recognised in the income statement.
In the course of its ordinary business, the Helvetia Group effects various transactions with related parties. With the exception of Patria Genossenschaft (the Patria cooperative society), these transactions are not material for Helvetia Group either as a single transaction or overall.
Apart from Patria Genossenschaft, related parties of Helvetia Group include the other members of the shareholder pool, pension funds and all associates of the Group. The latter two are described in Note 13.3 'Defined benefit plans' (page 143) and Note 7.2 'Investments in associates' (page 118).
Members of the Board of Directors and Executive Management of Helvetia Group as well as their close family members (domestic partners and financially dependent children) are also regarded as related parties. No member of the Board of Directors and the Group Executive Management or their close family members personally have significant business relations with Helvetia Group.
Members of the Executive Management may take out insurance contracts, loans and services on the terms and conditions currently in effect for employees. At the reporting date, mortgage loans to five members of the Executive Management to the amount of CHF 4,339,023 (previous year: CHF 7,225,406) were outstanding. The change compared to the previous year arose from the repayment of CHF 2,886,383. During the reporting period, loans granted as variable or fixed-rate mortgages at regular interest rates bore interest at rates between 2.05% and 4.65%. No loans were granted to non-executive members of the Board of Directors or to close family members.
Salaries and other short-term employee benefits 4 594 227 4 559 478 Post-employment benefits 507 571 538 757 Other long-term benefits 0 0 Termination benefits 0 0
Persons whose corporate function ceases do not normally receive severance pay. The share-based payments to members of the Executive Management included a discount of 16.038%, which was granted to all employees who obtained shares as part of the employee share purchase plan during the year under review (amounting to CHF 48,193), as well as a special bonus totalling 700 shares at a market price of CHF 528 on 27.3.2007 amounting to CHF 369,600 (previous year: CHF 217,998) granted as a result of the good 2006 results. Shares are blocked for a period of three years.
In the year under review, the Chairman and CEO received CHF 250,000 in his function as Chairman of the Board of Directors. As CEO, he is entitled to the salary specified in his employment contract. In the year under review, he received fixed and variable components amounting to a total of CHF 940,138 as well as a special bonus totalling 200 shares at the market price of CHF 528. In addition, the employer contributed a total amount of CHF 112,262 toward pension plans.
In the year under review, no members of an executive body or persons close to them billed the company for fees or remuneration relating to the provision of additional services. In the year under review, a total of CHF 33,494 was paid to former members of executive bodies for supervisory board mandates and special duties.
The immediate objective of Helvetia Group’s risk management is to systematically identify, analyse and monitor all significant risks as well as manage them efficiently through risk management procedures and hedging policy. The risk transparency required for this is created by integrating risk reporting into the management process.
n The Risk Report supports the Risk Committee and Risk Owners by providing them with detailed information.
Life and non-life risks are the traditional insurance risks of an insurance company, with reinsurance protection playing a significant role in managing these risks (see Notes 16.2 and 16.3). Financial market risk also includes the interest rate and foreign exchange risks associated with liabilities.
(b) Operational risks Helvetia Group defines operational risks as the risk of losses resulting from the inappropriateness or failure of internal procedures, people and systems, or from external events. Reputational risks are included in this term as an impacting dimension. Management of operational risks is carried out primarily on a decentralised basis, but is becoming increasingly centralised where necessary. As part of a project initiated in autumn 2006, uniform standards for the identification, analysis, management and monitoring of operational risks at Group level were established. The management of compliance risks has already been centralised: the central Group Compliance unit directly reports to the Board of Directors and its committees.
(c) Strategic risks Strategic risks include the risk that the company’s business activities are not adjusted to the changes in the insurance industry and on the insurance market and that fundamental business decisions may jeopardise the long-term success of the Group. This risk is countered by constant observation of developments on the market and among the competitors. The management of strategic risks is carried out as part of the annually repeated strategy check and is an integral component of the strategy process.
Notes to the consolidated financial statements of Helvetia Group 2006 16. Risk management 153
Helvetia Group’s consistent focus on a geographically well-diversified portfolio of mainly small risks (private customers and SMEs) encourages risk equalisation and reduces the risk that the cost of claims that are covered by existing contracts but have not yet occurred will be higher than expected (prospective risks). For example, a change in the net claims ratio by ±5 percentage points would result in a decrease or increase of CHF 108.5 million in the income statement. Insured events that have already occurred harbour the risk that the amount of existing liabilities might exceed expectations and that the reserves set aside will be insufficient to cover future claim payments (retrospective risks). The Group responds to prospective and retrospective risks with actuarial control measures, by setting up reserves designed to meet requirements, and by diversification. Risk balancing through diversification, however, does not totally eliminate the occurrence of isolated risk clusters (for example in the form of individual large risks) or cumulative risks (such as those resulting from multi-portfolio exposure to natural disasters). This risk potential is monitored Group-wide and hedged through reinsurance in a coordinated way.
16.2.1 Casualty insurance The Helvetia Group underwrites liability cover for individual customers, motor vehicles and companies. Liability claims result from action or neglect leading to bodily injury and/or property damage to third parties. Collision cover is also underwritten within the motor insurance sector. The volume of accident insurance business at Group level is small.
(a) Terms of the contract, guarantees and underwriting practices The Helvetia Group controls the insurance risks to which it is exposed through risk-appropriate rates, selective underwriting, pro-active claims settlement and a prudent reinsurance policy. The underwriting process ensures that the assumed risks in terms of type, exposure, customer segment and location meet the necessary quality criteria. One example is the decrease in employer’s liability claims as a result of the Group’s stricter underwriting policy since 1999.
(a) Terms of the contract, guarantees and underwriting practices The property insurance portfolios are largely reinsured by Group Reinsurance. The reinsurance contracts set out the general conditions under which the newly underwritten risks will be covered by the specific reinsurance contract. Individual large risks which are not covered by the corresponding treaty reinsurance are reinsured on an optional basis. Large risks are generally not underwritten unless appropriate reinsurance cover can be purchased. This approach allows for comprehensive risk control. Risk-oriented underwriting of large risks provides additional risk control.
16.2.4 Assumed reinsurance By tradition, Helvetia Group owns a small assumed reinsurance portfolio which is limited in size in compliance with the business strategy. Assumed reinsurance is run by Helvetia Schweizerische Versicherungsgesellschaft AG, based in St. Gallen. The portfolio was dominated by property reinsurance until the mid-1990s, but has diversified in recent years. The business philosophy positions assumed reinsurance as a 'follower' with typically only small shares in individual reinsurance contracts. This policy of small shares, combined with broad diversification by geographical and business segment, creates a well-diversified reinsurance portfolio without major risk clusters.
Helvetia Group offers a comprehensive range of life insurance products. These include risk and pension solutions and are aimed at private individuals (individual life insurance) and companies (group life insurance). The risks associated with these products are explained in detail in the following notes. There is also a small assumed reinsurance portfolio that is no longer included in the following description due to its lack of size. Life insurance is mostly operated from Switzerland, where 78.3% (previous year: 77.9%) of the Group’s gross premium volume in the life insurance sector is generated. The following table shows the distribution of gross premium income by business line and region. In total, 1.5% (previous year: 1.3%) of the life premiums written was ceded to reinsurers in 2006.
Gross premiums by business line and region in the life business in CHF million 2006 Switzerland Germany Italy Spain Other Total 2005 Switzerland Germany Italy Spain Other Total
(a) Terms of the contract, guarantees and profit participation Rate guarantees do not apply to the risk premiums for death and disability and to the expense loadings for most of these products. These premiums may therefore be adjusted annually by Helvetia
Group. After a loss has occurred, the benefits that fall due are either guaranteed until the agreed expiry date or for life.
On retirement, a policyholder may choose to have the retirement capital paid out as a lump sum or converted into a retirement pension. The conversion of the mandatory savings capital follows the BVG-conversion rate set by the government, while Helvetia Group determines the conversion rate for the extra-mandatory capital. After conversion, retirement pensions and any survivors’ benefits are guaranteed for life.
Large risks for insured individuals are ceded to various reinsurers through excess-of-loss reinsurance as for individual insurance. Reinsurance for disaster events also covers group life insurance.
16.3.3 Risks arising from trend changes and sensitivity analysis Helvetia Group employs a wide range of actuarial methods to monitor existing and new products with regard to underwriting policy, setting necessary reserves and risk-appropriate pricing. Retrospective methods compare original expectations with actual developments. Prospective methods allow early recognition and analysis of the impact of new trends. Most of those calculations use parameter sensitivities to monitor the impact of unfavourable developments in investment returns, mortality, lapse rates and other parameters. All tools combined allow the Group to respond early and actively to adverse trends. If a certain risk takes a worse than expected course, the profit participation is usually the first to be reduced in most of the products. If a product shows evidence of an insufficient security margin, the premiums are adjusted, either for new business only or, if permissible, also for the existing portfolio.
If assumptions are changed, the reserve reinforcements are either increased or decreased accordingly. A decrease in reserves flows largely back to the policyholders as a result of the discretionary participation feature. Policyholder dividends are reduced in a first step to compensate for a required increase in reserves, with shareholders bearing the remaining increase. In the local statutory balance sheet, reserve reinforcements recognised as necessary may be spread over several years and, if possible, compensated by gradually lessening the allocation to the provisions for future profit participation or by the release of undisclosed reserves on investments. In the consolidated financial statements, however, required reinforcement of reserves must be immediately recognised in profit or loss, while offsetting against differences in valuation to the local balance sheet (especially for investments) is allowed in the consolidated financial statements before the deferred profit participation is determined for contracts with discretionary profit participation.
Therefore, a 10% increase in mortality in the LAT of all companies of Helvetia Group would have no impact on the reserves. This is because the margins are sufficient, even after the increase of mortality. Accordingly, the impact on the income statement and equity is marginal. A reduction in mortality by 10% would only have an impact on the reserves for annuity insurance in Switzerland. This scenario would lead to a reserve reinforcement that will burden the income statement by CHF 29.1 million and will have a marginal impact on equity not recognised through profit or loss. The impact on equity and the income would be less than CHF 5 million if net new capital inflow should fall by 50 basis points. However, it should be noted that these sensitivities are usually non-linear, so extrapolation is not possible.
(a) Mortality risk If the death rate exceeds expectations, shareholders may suffer losses once the buffer of profit participation has been exhausted. Analysis shows this risk to be very low for both individual and group life sectors. Helvetia Group sees no necessity for reserve reinforcements for this particular risk.
(c) Disability risk Losses may occur for shareholders if the number of active policyholders becoming disabled exceeds expectations or if fewer disabled policyholders than expected recover and the profit participation system is insufficient to cushion the impact of these variances. As disability benefit policies are almost exclusively taken out in Switzerland and premiums in the group life sector and individual life business may be adjusted for disability benefit contracts sold after mid-1997, the risk in Switzerland is limited to disability benefit policies sold before mid1997. Here, the portfolio losses that are expected to occur are covered in full by local reserve reinforcements. These reserves are sensitive to the assumed expected loss burden in particular.
Long-term interest guarantees on reserves for current benefits are in place in group life business. The BVG minimum interest rate on the mandatory accrued savings assets of insured is reviewed annually by the Swiss Federal Council. Since 1.1.2005, this minimum interest rate has been unchanged at 2.5%. Rising rates may lead to higher lapse rates in the group life segment and thus cause losses. Since 2004, no deductions can be made from nominally defined surrender values that reflect the fact that the fair value of the corresponding fixed-income securities may be below the (local) book value for contracts that have been in Helvetia Group’s portfolio for more than five years.
(f) Summary To sum up, there is a wide range of various and product-specific risks in life insurance, which Helvetia Group monitors using a number of actuarial methods and then offsets where necessary with an appropriate increase in reserves. In compliance with IFRS 4, Helvetia Group also has free reserves at its disposal for future policyholder dividends. These reserves can also be used to cover insurance risks.
Provision for future policyholder participation 122.2 18.0 – – 602.0 742.2
Unearned premium reserve (gross) 890.5 – – – – 890.5 Total reserves for insurance and investment
Total reserves for insurance and investment contracts (net) 4 012.0 7 741.7 4 962.1 7 775.9 602.9 25 094.6 as of 31.12.2005 more than without up to 1 year 1–5 years 5–10 years 10 years maturity Total
Provision for future policyholder participation 72.0 18.5 – – 597.8 688.3
Financial liabilities at fair value: Deposits for investment contracts 291.6 – – – – 291.6 Total financial liabilities at fair value 291.6 – – – – 291.6
Financial liabilities at amortised cost: Deposit liabilities for credited policyholder profit participation 883.7 – – – – 883.7 Deposit liabilities from reinsurance contracts 17.3 287.6 18.4 13.4 69.0 405.7 Total financial liabilities at amortised cost 901.0 287.6 18.4 13.4 69.0 1289.4
Financial liabilities at fair value: Deposits for investment contracts 200.1 – – – – 200.1 Total financial liabilities at fair value 200.1 – – – – 200.1
Notes to the consolidated financial statements of Helvetia Group 2006 16.4.2 Interest rate risk Helvetia Group’s results are affected by changes in interest rates. A prolonged period of low interest rates reduces the return on fixed-income investments such as bonds and mortgages. On the other hand, return increases with rising interest rates. Information on current investment returns can be found in Note 7.1 (page 115).
As with most investments, the value of Helvetia Group’s liabilities depends on interest rate levels. Generally speaking, the higher the interest rate, the lower the present value of assets and liabilities. The extent of this change in values depends, among other things, on the time pattern of cash flows. To manage the volatility of net positions (assets – net liabilities, i.e. AL mismatch) the Group compares the maturities of cash flows arising from liabilities with those resulting from assets, and analyses them for maturity matching. The derived risk is administered as part of the asset & liability management process. Risk capacity, on one side, and the capacity to finance guaranteed benefits or to generate surpluses, on the other side, are balanced.
Maturity schedule of financial assets in CHF million as of 31.12.2006 more than without up to 1 year 1–5 years 5–10 years 10 years maturity Total
Loans (LAR) incl. money market instruments 2 420.2 2 289.6 1 180.6 750.6 102.2 6 743.2 Held-to-maturity investments (HTM) 367.8 977.6 927.6 1 196.7 – 3 469.7 Available-for-sale investments (AFS) 514.8 4 280.4 3 448.1 1 987.9 1 632.5 11 863.7 Financial assets at fair value through profit or loss 59.5 230.5 78.3 69.1 2 477.5 2 914.9 as of 31.12.2005 more than without up to 1 year 1–5 years 5–10 years 10 years maturity Total
Loans (LAR) incl. money market instruments 1 859.4 2 703.9 1 057.1 658.6 100.0 6 379.0 Held-to-maturity investments (HTM) 300.4 997.8 765.6 717.2 – 2 781.0 Available-for-sale investments (AFS) 594.0 4 635.2 3 476.4 1 865.6 1 261.0 11 832.2 Financial assets at fair value through profit or loss 64.2 236.1 80.6 31.4 2 449.7 2 862.0
The interest guarantees range from 1% to 6%. Less than 1% of the Helvetia Group’s actuarial reserves carry an interest guarantee of more than 4%.
16.4.4 Foreign exchange risk Most of the Group’s assets, including its investments, and most of its liabilities are denominated in Swiss francs and euros. With the exception of the Swiss business, most liabilities are hedged through investments in matching currencies. In the Swiss business, investments to hedge liabilities in Swiss francs are held in both Swiss francs and euros for reasons of return and liquidity. The resulting currency risks are hedged to a great extent.
Loans (LAR) incl. money market instruments 4 742.8 1 997.5 2.9 – 6 743.2 Held-to-maturity investments (HTM) 2 795.8 673.9 – – 3 469.7 Available-for-sale investments (AFS) 6 667.3 5 087.7 44.0 64.7 11 863.7 Financial assets at fair value through profit or loss 891.8 1 488.6 394.3 140.2 2 914.9
Financial liabilities from financing activities 199.1 – – – 199.1 Financial liabilities from insurance business 872.9 615.2 1.4 0.0 1 489.5 Other financial liabilities 29.3 7.9 – – 37.2
Current income tax liabilities 40.9 75.0 – – 115.9 Other liabilities and accruals 90.4 97.0 –1.6 1.0 186.8
Assets in CHF million as of 31.12. CHF EUR USD Others Total
Property and equipment 235.7 190.4 – – 426.1 Goodwill and other intangible assets 22.2 40.2 – – 62.4 Investments in associates 43.0 2.2 – – 45.2
Deferred tax assets 0.1 38.9 – – 39.0 Current income tax assets 2.9 – – – 2.9
Liabilities in CHF million as of 31.12. CHF EUR USD Others Total
Financial liabilities from financing activities 198.8 0.0 – – 198.8 Financial liabilities from insurance business 1 000.3 717.9 1.6 – 1 719.8
Counterparty risk includes risks of default and changes in value. The risk of default refers to the possibility of the counterparty becoming insolvent, while the risk of changes in value is related to the possibility of a financial loss due to a change in the counterparty’s credit rating or a change in credit spreads in general. The risk of counterparties failing to meet their obligations is continuously monitored. Helvetia Versicherungen works with various counterparties with good credit ratings in order to minimise counterparty risk.
n Counterparty risk from granted loans and mortgages: the largest positions in the loans asset class consist of borrower’s note loans and policy loans. Policy loans are hedged through life insurance policies. Most mortgages are also hedged through a pledged life insurance policy in addition to the real estate lien. All these measures lead to good collateralisation and a correspondingly low loss rate.
n Counterparty risks from insurance business: the default of other counterparties (policyholders, agents and brokers, insurance companies) can lead to the loss of receivables from insurance business. On the balance sheet, the maximum gross exposure would correspond to the positions shown in Note 9 'Receivables due from policyholders, agents and brokers and insurance companies (without receivables due from reinsurance companies recognised under credit risk exposure from ceded reinsurance)'.
n Counterparty risks from financial guarantees and credit approval: detailed information on contingent liabilities can be found in Note 12.
Rating of interest rate instruments, loans and derivative financial assets in CHF million as of 31.12. AAA AA A BBB BB and lower Not rated Total 2006 Total 2005
Both ceded actuarial provisions and receivables from reinsurance are recognised under credit risk exposure from ceded reinsurance.
Notes to the consolidated financial statements of Helvetia Group 2006 as of 31.12.2006 Issuer rating Fair value
The largest counterparties in bonds, money market instruments and borrowers’ note loans with a fair value of >10% of consolidated shareholders’ equity in CHF million as of 31.12.2005 Issuer rating Fair value
16.5.2 Risk clusters or accumulations The Group monitors counterparty risk on a regular basis, and diversifies and avoids this risk as much as possible. Credit risk is well diversified and distributed among a wide range of commercial clients. The largest individual positions in bonds, money market instruments and borrowers’ note loans are government bonds with prime credit ratings.
The following events in the reporting period led to changes in the scope of consolidation of Helvetia Group: The Helvetia Group did not make any acquisitions during the period under review. Ecenter Solutions AG, which is based in Zurich and included in the scope of consolidation for the first time, was founded for the purpose of consultation and the development and distribution of software. In the segment reporting, the company is assigned to the region 'Switzerland' and the business segment 'Other'.
The special funds Helvetia I Fonds North America, Great Britain and Europe were established in the reporting period with the aim of optimising the management of securities. As with the Group’s other special funds, the funds are distributed to the segments proportionally, according to the ownership structure.
The investment in Helvetia Compañía Suiza, Seville, was increased from 98.87% to 98.91% through successive share purchases during the reporting year.
The following other companies were liquidated in the reporting year: ANKER Business Service GmbH, Vienna, Mathematica Versicherungsmathematische Beratungs-GmbH, Vienna, and V.N.
In 2006, the share capital of Helvetia Vermögens - und Grundstücksverwaltung GmbH & Co. KG, Frankfurt am Main, was increased by EUR 2.4 million.
Segment Holding Method Currency Company’s in per cent of consoli- capital as of 31.12.2006 dation in millions
Segment Holding Method Currency Company’s in per cent of consoli- capital dation in millions Germany Helvetia Schweizerische Versicherungsgesellschaft AG, Direktion für Deutschland, Frankfurt a.M.* non-life 100.00 full EUR – HELVETIA INTERNATIONAL Versicherungs-AG, Frankfurt a.M. non-life 100.00 full EUR 8.0 HELVETIA Schweizerische Lebensversicherungs-AG, Frankfurt a.M. life 100.00 full EUR 6.5 Der ANKER Vermögensverwaltung GmbH, Frankfurt a.M. other 100.00 full EUR 0.0 Helvetia Vermögens- und Grundstücksverwaltung GmbH & Co. KG, Frankfurt a.M. other 100.00 full EUR 10.7 Helvetia Grundstücksverwaltung GmbH, Frankfurt a.M. other 100.00 full EUR 0.0 Hamburger Assekuranz GmbH, Frankfurt a.M. other 100.00 full EUR 3.1 helvetia-e.com GmbH, Frankfurt a.M. other 100.00 full EUR 0.0 Helvetia Versicherungs- u. Finanzdienstleistungsvermittlung GmbH, Frankfurt a.M. other 100.00 full EUR 0.0 DeAM Fonds DFD 1 (Europa) non-life 100.00 full EUR – Italy Helvetia Compagnia Svizzera d’Assicurazioni S.A. – Rappresentanza Generale e Direzione per l’Italia, Milan* non-life 100.00 full EUR – Helvetia Vita – Compagnia Italo Svizzera di Assicurazioni sulla Vita S.p.A., Milan life 100.00 full EUR 13.4 GE.SI.ASS Società Consortile a R.L., Milan other 55.00 full EUR 0.0 Spain Helvetia Holding Suizo, S.A., Madrid other 100.00 full EUR 90.3 Helvetia Compañía Suiza, Sociedad Anónima de Seguros y Reaseguros, Seville life and non-life 98.91 full EUR 21.4 Previcia S.A., Sociedad de Inversion Mobiliaria, Seville other 99.95 full EUR 2.4 Previsur Agencia de Seguros S.L., Seville other 100.00 full EUR 0.0 Gesnorte S.A., S.G.I.I.C., Madrid 31.73 equity EUR Gesnorte de Pensiones, S.A., Entidad Gestora de Fondos de Pensiones, Madrid 24.00 equity EUR Gesnorte de Servicios, S.A., Madrid 28.00 equity EUR Other Austria Helvetia Schweizerische Versicherungsgesellschaft AG, Direktion für Österreich, Vienna* non-life 100.00 full EUR – Helvetia Versicherungen AG, Vienna life and non-life 100.00 full EUR 12.7 Römertor Versicherungsmakler, Immobilien und Bau GmbH, Vienna other 100.00 full EUR 0.0 Marc Aurel Liegenschaftsverwaltung GmbH, Vienna other 100.00 full EUR 0.0 Helvetia Financial Services AG, Vienna other 100.00 full EUR 0.6 ZSG Kfz-Zulassungsservice GmbH, Vienna 33.33 equity EUR France Helvetia Compagnie Suisse d’Assurances S.A., Direction pour la France, Paris* non-life 100.00 full EUR – England Helvetia Finance Ltd., Jersey other 100.00 full CHF 0.1 Luxembourg Helvetia Europe S.A., Luxembourg other 100.00 full EUR 11.5 Helvetia Fund SICAV Euro Bonds life and non-life 100.00 full EUR – Helvetia Fund SICAV European Equity life and non-life 100.00 full EUR – Helvetia Fund SICAV International Equity life and non-life 100.00 full EUR – Worldwide Helvetia Schweizerische Versicherungsgesellschaft AG, Rückversicherung, life and St.Gallen* non-life 100.00 full CHF –
As Group Auditors, we have audited the consolidated financial statements (consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity, consolidated cash flow statement and notes to the consolidated financial statements) of Helvetia Holding AG for the year ended 31 December 2006 as presented on pages 81 to 173 of the Annual Report 2006.
Our audit was conducted in accordance with Swiss Auditing Standards and with the International Standards on Auditing (ISA), which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free of 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.
Dividend income 199.2 74.3 Services to/from related parties 0.0 0.1 Loan interest expenses –6.0 –6.6 Loan interest income 5.7 6.8 Trademark expenses –2.3 0.0 Extraordinary income 0.0 0.1 Profit for the period before tax 196.6 74.7 163.2% Taxes –0.3 –0.5 Profit for the period 196.3 74.2 164.6%
Assets: Loans to Group companies 150.1 200.0 Intangible assets 9.0 0.0 Non-current assets 904.2 895.0 1.0% Cash and cash equivalents 0.4 0.5 Balances receivable from Group companies 199.2 90.1
Liabilities and shareholders’ equity: Share capital 86.5 86.5 Reserve for treasury shares 17.1 24.4 Other statutory reserves 596.7 589.4 Profit carried forward 3.1 6.8 Profit for the period 196.3 74.2
Helvetia Schweizerische Versicherungsgesellschaft AG, St.Gallen 77.5 100.00% 75.30% Helvetia Schweizerische Lebensversicherungsgesellschaft AG, Basel 50.0 100.00% 100.00%
2. Investments On the balance sheet date, Helvetia Holding AG owned the following direct investments: The reported share capital of the companies in which Helvetia has an investment did not change compared to 31.12.2005.
The Federal Office of Private Insurance positively acknowledged the pricing and course of action in its letter of 22.5.2006.
4. Bond The 3% bond 2004 – 2010 of Helvetia Holding AG has a nominal value of CHF 200,000,000 and was issued on 5.5.2004. It must be repaid at nominal value on 5.5.2010. The bond has a coupon rate of 3% p.a., which is paid annually on 5 May. Nominal value and bond terms did not change compared to the previous year.
Report of the Statutory Auditors to the General Meeting of Helvetia Holding AG, St.Gallen
As Statutory Auditors, we have audited the accounting records and the financial statements (balance sheet, income statement and notes) of Helvetia Holding AG for the year ended 31 December 2006.
Our audit was conducted in accordance with Swiss Auditing Standards, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement. We have examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.