Baloise-Holding AG
Annual Report 2003

Plain-text annual report

Bâloise-Holding Annual Report 2003 High aspirations, greater success: create value, foster relations, bring about change. The Baloise The essentials in brief Profile Headquartered in Basel (Switzerland) and with operations in continental Europe, the Baloise Group is a solution provider in the fields of insur- ance and provision for the future. The Group’s strategic focus is on sustainable, income- oriented growth. Core markets are Switzerland, Germany, Belgium, Austria and Luxembourg. The Baloise Group employs a staff of around 8,700. Bâloise-Holding registered shares are included in the Swiss Market Index (SMI) and are traded on virt-x under the symbol BALN. Our conduct guidelines Create value Value means nurturing and creating quality. We care for the value of relationships and the value to be found in change. We value ourselves and others. We focus on the requirements of our customers, our shareholders and our staff. We employ our time, money and human resources with great care. Creating and adding value are our targets. Foster relations We live in a networked world which links us to a lot of people. We care about these relationships. We talk to others and we are prepared to listen. We are honest, open and communicative. We are critical and able to accept criticism. We create unambiguous mutual expectations. We stand by our word. Together we are strong. Bring about change The world is changing fast. It is changing us. We change. The pressures of a changing world are a call for action. We analyze. We decide. We intervene and we implement. We deliver re- sults. Changing in order to innovate and to add value is our goal. The Baloise Group registered a clearly improved result for 2003 and is well positioned for the future. The net profit of CHF 91 million (2002: CHF - 634 million) underscores the success of the numerous measures the Baloise took in all its markets to enhance operational profitability. Non-life insurance posted a profit before tax and minority interests of CHF 91 million (2002: CHF -203 million). The gross combined ratio (claims paid and costs in relation to premiums) im- proved by 7.6 percentage points to 97.6%. The restructuring of various business portfolios in Switzerland, Germany and Belgium is well under way and will be pursued in 2004. Life insurance recorded a profit before tax and minority interests of CHF 69 million (2002: CHF - 359 million). The embedded value overall ad- vanced by 21.4% to CHF 1.98 billion. The value of new business attained CHF 15.5 million. The life sector has been successfully realigned to the significantly changed market circumstances. The banking sector achieved a profit before tax and minority interests of CHF 37 million (2002: CHF -100 million). The success is largely due to Baloise Bank SoBa. Investments achieved a performance of 4.6 % as against - 0.9 % in 2002. The net asset value was markedly reinforced: at the end of 2003, capital and reserves amount- ed to CHF 3.3 billion, up by 7.5% against 2002. The Baloise maintained its shareholder-friendly distribution policy with an increased dividend compared to the previous year. The most important figures at a glance Profit development 1999 – 2003 8 1 5 4 3 6 4 0 4 1 9 750 500 250 0 -250 -500 -750 in CHF m Income statement Total premium income (gross) Of which non-life Of which life Investment-type premiums Consolidated net profit / loss Balance sheet Investments Technical provisions Capital and reserves 2003 Change in percent 2002 7,274.5 2,657.6 4,633.2 253.0 634.5 - 7,374.7 3,088.8 4,301.1 261.0 91.4 50,061.4 56,307.7 38,058.1 42,328.7 3,088.1 3,319.8 1.4 16.2 - 7.2 3.2 – 12.5 11.2 7.5 4 3 6 - Assets under management 99 00 01 02 03 in CHF m Total assets under management 56,544.5 65,551.1 15.9 Indexed share price development1 1999 – 2003 without unrealized gains / losses Ratios Return on equity (ROE) 160 140 120 100 80 60 40 20 0 Combined ratio non-life (net) Combined ratio non-life (gross) Technical reserve ratio non-life in percent Embedded value life insurance Value of insurance portfolio Adjusted capital and reserves Solvency costs 99 00 01 02 03 Total – 110.9 105.2 181.1 2.9 103.2 97.6 177.4 855.4 1,192.4 1,236.1 1,008.7 - 417.0 - 264.0 1,630.8 1,980.2 Bâloise-Holding, registered2 Of which value new business – 15.5 Swiss Performance Index Insurance (SXIS) in CHF m Swiss Market Index 1 December 29, 1998 = 100 Key share data 2 adjusted after 1:10 split of July 24, 2001 Shares issued as at 12.31. in units 55,307,150 55,307,150 Distributions 1999 – 2003 Consolidated net profit/loss per share in CHF - Capital and reserves per share as at 12.31. in CHF Price at year-end in CHF Market capitalization as at 12.31. in CHF m Price-earnings ratio in percent Number of staff Total at 12.31.1 Of which Switzerland Of which other countries 1 adjusted for degree of employment 600 500 400 300 200 100 0 in CHF m 1 4 1 6 3 1 0 5 1 1 1 5 3 3 3 9 2 3 3 1 2 2 99 00 01 02 03 Dividends paid Nominal value repayments Share repurchases 55.84 11.56 55.0 3,042 n.s. 8,703 3,976 4,727 60.02 1.67 51.65 2,857 30.9 8,745 3,774 4,971 – 7.5 – - 6.1 – – 0.5 - 5.1 5.2 Annual Report 2003 Contents 3 7 9 11 13 15 17 18 20 22 23 24 25 26 29 41 49 51 53 57 63 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dear Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How We Do Business The Baloise approach Pension provision – we stand by the Swiss occupational pension system Operational excellence – we know our core business Risk management in demanding times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Year 2003 Group Switzerland Germany Benelux Other countries Capital investments Risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baloise Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management Information Management information (incl. embedded value) Five-year review 69 70 72 74 76 78 81 121 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Financial Statements of the Baloise Group Consolidated income statement Consolidated balance sheet Consolidated cash flow statement Consolidated capital and reserves Segment reporting by geographical segment Segment reporting by business segment Notes to the consolidated financial statements Report of the Group auditors 123 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements of Bâloise-Holding 2003/2004 Income statement Balance sheet Notes to the financial statements Proposed allocation of accumulated profit Report of the statutory auditors Bâloise-Holding Annual Report 2003 1 Rolf Schäuble, Chairman of the Board of Directors (on the left), and Frank Schnewlin, Chief Executive Officer Dear Shareholders Our declared target is profitable growth Things have been looking up for insurers and finan- cial service providers since mid-2003. The Baloise recorded a net profit of CHF 91 million in the 2003 business year. Rolf Schäuble, Chairman of the Board, and CEO Frank Schnewlin present their views here on the Baloise result, the market environment and the future. Rolf Schäuble: We set this priority very deliberately. Given the volatility of the financial markets, our prof- its will have to be generated primarily on the opera- tional side in future. Operational earning power is the essential prerequisite for sustainable growth. Our declared target is profitable growth. This is under- scored by the acquisition of Securitas in Germany. Are you satisfied with the results? Rolf Schäuble: We have fulfilled the promise given last September that we would return to the profit zone and have, in fact, exceeded expectations. Frank Schnewlin: For the moment we can be satis- fied. The success proves that we have taken the right measures. But we haven’t reached our target yet and will be striving to enhance our profitability and busi- ness volume over the coming years. How do you judge current market developments? Rolf Schäuble: Conditions improved noticeably last year. We are particularly pleased about the revival of the stock markets, though nobody can tell whether this upturn will prove sustainable. But there are still conditions that are causing headaches. I’m thinking of the increase in statutory regulations and the unre- solved problems of the social security systems par- ticularly in Switzerland and Germany. Frank Schnewlin: The stock market collapse made it clear to the entire industry that sustainability-minded insurers must base their activities primarily on solid, professional insurance craftsmanship. The phenom- enal investment income of the stock market boom years enabled many insurance companies to conceal their operational weaknesses and engage in a price battle. This is a thing of the past. Today, we all have to get a grip on risks and, wherever necessary, adjust our premiums. Many clients understand this, as a lot of them are themselves business people and know that a company needs profits to secure its future. The Baloise, too, is obliged to restructure contracts and raise prices. Unfortunately, our entire industry, in- cluding the Baloise, was rather late in acting. Our sometimes tough, but necessary measures did not always meet with understanding. In 2003 you focused on improving operational earn- ing power. What did you undertake in concrete terms and where do you stand today? Frank Schnewlin: In all our companies and business segments, we have restructured portfolios and re- duced costs. Our broad-ranging program has clearly proved successful. All segments are profitable, and the combined ratio in non-life insurance (claims paid and costs in relation to premiums) improved to 97.6% gross. At the end of 2002, the gross combined ratio was 105.2 %. The net figure also registered an ex- cellent improvement by 7.7 percentage points. Major progress was made in Switzerland with a combined ratio of 95.9 % gross, and much was achieved in Belgium, Germany, Austria, and Luxembourg too. On the life insurance side, guarantees and bonus pay- ments to policyholders were brought in line with market realities. New business is nowadays only concluded if it corresponds to our profitability expec- tations. New life insurance concluded now has a posi- tive profitability margin, as reflected in the embedded value figures. In order to use our capital as efficiently as possible, we have taken into account a reduction in premium income in the life sector. The Baloise re- mained a solid Group in 2003 with a strong solvency margin of 241% (including imputed banking assets). And I would like to add another aspect that is often underestimated: At a very early stage, we prompted a sense of urgency among our executives and staff, encouraging them to go about their business with the appropriate attitude. And finally, we strengthened the top management in Germany, Belgium, and at Basler Securitas in Germany. « Our broad-ranging optimization program has clearly proved successful.» The Benelux segment with Mercator as its main unit is the only one that still posted a loss. When will the turnaround come here? Frank Schnewlin: In Belgium, we were indeed forced to take some tough measures. Significant parts of the insurance portfolio were successfully streamlined by the end of 2003, with the combined ratio in non- life insurance down by an excellent 16.3 percentage points to 98.1 % gross and only profitable new busi- Bâloise-Holding Annual Report 2003 3 Dear Shareholders ness being written on the life side. The investment portfolio was also restructured as we continued to sell off participating interests of no strategic value to us. Mercator itself was thoroughly reorganized. A largely new management team is now in place to tackle the challenges of the future. In 2003, we managed to re- duce the loss by roughly two-thirds. And the opti- mization process is ongoing. We’re not there yet, but we are expecting further significant improvements in operational profitability in 2004. The banking business was redimensioned. What were the reasons behind this? Rolf Schäuble: Our financial service provider busi- ness model is functioning and remains applicable. In Switzerland in particular, our “mobile banking” mod- el, by which selected bank products are marketed by the insurance sales force, achieved results that were roughly 54 % above target. Yet a strategy must also be adaptable to changing market circumstances. Based on changes in the asset management environ- ment, we redimensioned our private banking sector in Switzerland in September 2003, closing the Zurich, St. Gallen and Lausanne branches. Frank Schnewlin: Banking operations developed fa- vorably with a profit before tax and minority inter- ests of CHF 37 million. Core business at Baloise Bank SoBa registered a gratifying 25 % increase in profits. Mercator Bank also posted a profit, and re- structuring measures are on track at Bausparkasse Deutscher Ring. You mentioned the stock market recovery. How have Baloise shares performed and how has the structure of share ownership developed? Rolf Schäuble: Over the year 2003, the Baloise share price receded by 6.1%. Naturally, this does not please us. The main reasons were the depressed stock markets and our poor 2002 result. From March on- wards, however, our share price rose rapidly on the back of positive assessments by the market and the Baloise’s healthy capital base. More telling and more suited to the role of stocks as a means of invest- ment is the long-term comparison over the past five years. From 1999 to 2003, Baloise shares registered the best performance of all primary insurers listed in the Swiss Market Index (SMI). The year 2004 beg- an with an encouraging performance of 8.1% (at March 26, 2004). This is a top figure in comparison with other listed insurance companies and is well above the Swiss Market Index (SMI), which came to 4 all of 1.8 % over the same period. Following shifts in the stakes of major shareholders, the Baloise is now a broadly based listed company, as envisaged by the Board of Directors, with a free float of 100 %. No one shareholder reaches the 5% mark in share capi- tal. The largest registered shareholder as at the end of March 2004 holds 4.0 %. This, together with the solid funding, adds to the stability of the Baloise. What dividend is the Board of Directors going to pro- pose to the General Meeting? Rolf Schäuble: The result allows us to propose to the General Meeting a cash dividend of CHF 0.60 per share, up by 50 % on last year. The Baloise pursues a distribution policy of regular dividend payments aimed at long-term investors. « We are striving for a return on equity of at least 10 %.» What are the mid-term strategic focal points? Rolf Schäuble: Our top priority is to become one of the most profitable financial service providers in conti- nental Europe and to continue to grow. Two strategic thrusts will enable us to do so. One is our aim to be the partner of choice for our customers and distri- bution partners and to gain their lasting loyalty and trust, the other our striving for the utmost profession- alism and efficiency in our core insurance and pen- sion business. Taken together, they make for an attractive investment outlook for investors and share- holders. Frank Schnewlin: Profitability for us is a clearly meas- urable factor. We are striving for a return on equity of at least 10 %. Regarding premium income, we have set ourselves the target of growing faster than the market in profitable segments. In non-life insurance, the target until 2007 is a sustainably lower combined ratio than the market average. It is with a convincing performance and attitude that we want to gain the loyalty of our customers and distribution partners. The attitude is “win-win,” in other words true partner- ship. We can convince our customers and distribution partners through professionalism and reliability, and they in turn enable us to make the requisite profits. And what are the priorities and targets for 2004? Rolf Schäuble: It is vital for us to have people with the proper skill set in all key positions. One focal point will no doubt be filling the vacancies on our Board of Directors. I would like to thank our long-serving Vice Chairman, Walter Frehner, for his loyalty to the Baloise and his highly competent and telling contribution to our company’s development. He will be stepping down from the Board as at this year’s General Meet- ing after reaching the age limit. As his successor, we will propose Hansjörg Frei to the General Meeting. Mr. Frei has a long track record as a proven insurance specialist. He was formerly a member of the Executive Board of Credit Suisse Financial Services and Chair- man of the Swiss Insurance Association (SVV). We were deeply shocked and saddened by the sudden death of our highly valued Board member Dietrich J.J. Forcart. We will remember him as a good colleague and a man of competence and integrity. « Our thoughts and actions are focused on adding value.» Frank Schnewlin: We made significant operational progress in 2003, but this was just one stage on our road to becoming one of the most profitable financial service providers. Our prime emphasis is still on im- proving the operating results in all our markets. In the non-life sector, we are expecting a gross com- bined ratio of 97 % for 2004, an ambitious target in view of the comparatively low-loss 2003 business year. As we want to further optimize the non-life busi- ness quality, we anticipate organic premium growth in line with the market average. In life insurance, the framework conditions are likely to improve only he- sitantly. We are counting on a slightly declining busi- ness volume and a further improvement in the IFRS result development. We remain cautiously optimistic about financial market developments. All in all, we are striving for a distinct improvement of the overall net result. What are your growth and expansion plans? Rolf Schäuble: We have already outlined our targets regarding profitability. Our thoughts and actions are focused on adding value. We want to grow in areas where this is realistically feasible. At present, the emphasis is on expansion in the non-life business sector. But we also see opportunities on the life side, which we continue to consider as attractive in view of its long-term growth potential. The growth we fore- see will be organic and by acquisition when appro- priate opportunities arise. A good example of the latter is the acquisition of Securitas in Germany, which operates primarily in the non-life field, and which we were able to purchase at a very attractive price. As far as our geographical reach is concerned, our focus is on expansion in the countries we already operate in. Progressing into new markets will only be considered if we pinpoint an excellent opportunity to generate added value for the company and thus for the shareholders. Bâloise-Holding Annual Report 2003 5 Change comes from the ability to discover the possibilities in a given environment. How We Do Business Founded on corporate values The insurance industry is undergoing fundamental change. When the stock market boom came to an end, the industry had to refocus sharply on its core business. The Baloise has actively assimilated this paradigm shift. As an insurance and pension spe- cialist, we have an important social responsibility to fulfill, for which we need to gain the long-term trust of our customers and distribution partners. We can achieve this by living and reflecting our corporate values: creating value, fostering relations with our stakeholders, and demonstrating our strength in implementation. The four short texts on the follow- ing pages are meant to give an impression of how we go about our business. Bâloise-Holding Annual Report 2003 7 Openness, courage and trust are the qualities with which relations are formed. How We Do Business The Baloise approach The insurance industry is undergoing fundamental change. Until recently, many insurance corporations pursued an aggressive policy of growth by acquisition in order to achieve market domination. Accumulation of assets was deemed the key to adding value and so insurers sought to expand their life business. Banc- assurance became the password to a golden future, and great hopes were pinned on alternative distribu- tion channels such as direct marketing, e-commerce and insurance sold through bank outlets. Enticed by soaring share prices and correspondingly high invest- ment income, companies pushed the equity alloca- tion of their capital investments to the limit. What got sidelined was the core craft of any insurer, the under- writing skills. Then came the stock market crash and with it the big disillusionment. Sheer size, which had been acquired at a sometimes exorbitant price, in many cases turned into a liability and contributed to the destruction of value. Life business for its part had passed its peak, with many a bancassurance concept failing to live up to its promise. And the great majority of customers simply did not warm to the alternative distribution channels on offer. Finally, the sharp downturn in investment income and the substantial reduction in capital and reserves showed up the limits of asset management as the key to running an insurance business. The Baloise has actively assimilated this paradigm shift. As an international, medium-sized corporation, we see our road to success in the consistency of our focus, the high degree of professionalism in our core business, and our ability to act and implement deci- sions swiftly. For the Baloise, focus means: (cid:2) The right choice of geographic markets and cus- tomer segments: Already since the 1990s, the Baloise has been concentrating on selected coun- tries in Continental Europe. Its customer range comprises private individuals and small and me- dium-sized enterprises. The Baloise seeks to ex- pand exclusively in existing markets and targeted customer segments. (cid:2) Positioning as partner of choice: The Baloise sees its greatest potential in the long-lasting relations based on trust with customers and distribution partners, in conjunction with its consulting and service expertise. Trust can only be built from per- son to person. The Baloise therefore puts the emphasis on personal sales services and aims to strengthen this distribution line and enhance its profile as a customer-focused company. (cid:2) Expansion of non-life business: To reinforce its profitability and to achieve a balance between the life and non-life sectors, the Baloise plans to expand its non-life operations. With this in mind, we acquired the Securitas insurance company in Germany in early 2003 and merged it with the Basler Deutschland to form what is now the Basler Securitas. (cid:2) Insurance and pension banking: Banking for the Baloise is a complementary line to its core business of insurance and pension provision. It is only pursued where the core business has reach- ed a critical mass and the banking operations prove profitable. In Switzerland, the distribution of banking products via the insurance sales ser- vice has expanded very encouragingly: Baloise Bank SoBa’s volume of loans, custody accounts, client assets and mortgages registered much stronger growth in 2003 than anticipated. (cid:2) Uncompromising focus on results: The Baloise aims to figure among the most profitable financial service providers in its core markets and is there- fore striving for a return on equity of at least 10%. In non-life business, the target is a combined ratio (claims paid and costs in relation to premiums) better than the market average. Further corner- stones are – depending on the market – cost lead- ership or ranking among the top 25 %. The target for investment income is outperformance of the relevant benchmarks. Marginal business activ- ities and those whose return does not cover the cost of capital in the medium term will be ter- minated. By high degree of professionalism in our core business we mean the constant optimization of cost and op- erating efficiency, in other words the enhancement of product, customer and distribution profitability. These are, when properly linked up, our most impor- tant profit drivers. We have launched both group- wide and market companyspecific projects whose goals range from the standardization of evaluation methods to the implementation of measures tailored to individual markets. Our third success factor is our implementation abil- ity, in other words the ability to act and on decisions swiftly and thoroughly, since results can only be achieved by turning words into action. We are there- by developing a culture of performance founded on our corporate values. Our style and system of leader- ship, performance management and the development of our skills are all strictly aligned to this culture. Bâloise-Holding Annual Report 2003 9 Values are not just there. We have to foster them. By concentration on the essentials, focus on core activities, and with joint efforts. How We Do Business Pension provision – we stand by the Swiss occupational pension system The Swiss national and occupational pension sys- tems are at a crossroads. The aging of society, the growing number of disability cases, adverse develop- ments on the financial markets, and hesitant statu- tory adjustments to the new financial and underwrit- ing realities together pose a daunting challenge. To date, this has led to reduced risk capabilities and substantial undercoverage at numerous pension funds. The excessive benefit obligations to customers required by law are jeopardizing the stability of these occupational benefit institutions. The insurance industry bears a heavy burden of re- sponsibility in the pension fund sector. Roughly 30% of Switzerland’s 3.2 million registered employees are insured with a private insurance company via col- lective foundations. Most of these employees work for small and medium-sized enterprises. There is a change in trend noticeable among the 9,000 occupa- tional benefit institutions to move from autonomy to semi-autonomy by hedging a part or all of their risks. An increasing number of small pension funds are affiliating themselves to collective foundations. Insurance companies for their part have reacted in different ways to the altered market landscape and the slow changes in statutory requirements. Some have withdrawn completely from the group insurance market, the remainder are adjusting their parameters. The Baloise takes its role as one of the country’s lead- ing life insurers seriously. However, the changing legal, demographic and economic circumstances are forcing us to adapt our occupational benefits (BVG) model. To retain the trust of our customers, we are taking great pains to effect these changes gradually and transparently. Already in 2002, we introduced a more restrictive underwriting policy – limiting the volume of new business and the duration of contracts – in order to protect existing customers and ensure profitability. In reaction to the steady increase in dis- ability cases, we have been gradually introducing scaled premium rates since 2001, as claims levels differ markedly from one business sector to the next. For life insurance providers, too, it is becoming in- creasingly important to know your customers, to tailor products to their specific needs and to set rates that are commensurate with the actual risks. In a second step, premium rates have been adapted to the altered market environment. As of January 1, 2004, this entailed an increase in premiums on exist- ing and new contracts by an average of 10 %. Of this figure, an average of 5% goes towards covering costs while 3 % covers the increased risk of disability. 1% each is needed to cover obligations resulting from the unreasonably high statutory conversion rate and the equally excessive minimum interest rate (both with regard to the extra-mandatory part of insurance cover). Having made these adjustments, we can con- tinue to provide reliable and comprehensive group insurance solutions. So that we can still give our customers the choice between comprehensive and partial insurance, we are considering the introduction of a semi-autonomous collective foundation as an option from January 1, 2005, by which investment risks and the risk of longevity could be outsourced. However, the comprehensive insurance model is also being maintained and developed in line with the changed framework conditions. The Swiss government has set the minimum interest rate at 2.25 % (previously 3.25 %) as of January 1, 2004. The Baloise for its part would like to see the introduction of clear criteria for the setting of this rate in future. The minimum rate should take into account the accrued obligations in the BVG sector and be based on a market-aligned model which makes changes foreseeable and readily comprehensible, which takes into account the return levels achievable in the financial markets, and which leads to economi- cally viable results. Mandatory BVG insurance still operates with a conversion rate of 7.2%, which is far too high in view of today’s market and demographic realities and places a considerable burden on provid- ers. The Baloise will only be able to lift its restric- tions on the acquisition of new customers once the re- gulatory conditions have been brought into line with these realities. The Baloise has also instituted cost-cutting measures to contend with the tight financial circumstances. Together with partner companies it has developed new software solutions for the administration of oc- cupational benefit contracts. These facilitate more efficient management of existing and new contracts and can be adapted to future changes in the regula- tory environment. On the strength of such measures, we are convinced that we can reinforce our position as an efficient and fair provider in the group insur- ance market. It is now up to Swiss legislators to set this market on a sustainable track. Bâloise-Holding Annual Report 2003 11 Relations thrive best at a round table, without chair person and fronts, in a spirit of solidarity. How We Do Business Operational excellence – we know our core business In times of persistently low returns on the financial markets, the core business of financial service pro- viders again moves sharply into focus. Operational excellence becomes the cornerstone for sustained profitability. And at the Baloise operational excellence was indeed established as one of the main thrusts of corporate strategy in 2003. Top-rate performance in our business operations is now essential if we want to become and remain the partner of choice of our customers in insurance and pension matters. Operational excellence means con- stantly striving to add strategic and economic value, to optimize processes and systems, and to simplify structures. In our opinion, three conditions need to be fulfilled to achieve this: a high degree of awareness of customers’ true requirements, a high level of business process awareness, and pronounced open- ness to change. create solutions that meet the customer’s specific needs. Existing products are regularly subject to scor- ing to assess their profitability, which enables im- provements to be implemented at an early stage. New products are only launched if required by law or if there is a convincing business case for their introduc- tion. With regard to the financial services provided by Baloise Bank SoBa, we are retaining our strategy of offering insurance and pension solutions from a single source. This pooling of services has been welcomed by many of our customers. Ultimately, op- erational excellence can only be achieved by a com- petent and committed workforce. We consider invest- ments in the training and development of our staff as vital investments in the future of our company. Only motivated employees with up-to-date know- ledge and skills are in a position to provide the kind of services that lead to customer satisfaction and loyalty. By improving our services, the ongoing optimization of our processes and structures raises the benefit level for customers, thereby enhancing our profit- ability. Through operational excellence, the Baloise aims to rank among the most profitable insurance and financial service providers in its target markets. Already now, the Baloise boasts a better cost ratio than any other player in its home market, Switzerland. Generally speaking, solidarity among the insured is on the decline. There are customers who call for in- dividualized rate setting and are less and less pre- pared to help shoulder the negative risk behavior of other insured parties. This has contributed to more precise customer segmentation in order to take the differences in requirements and risk behavior into account. A further important factor is the profitability of a client relationship. Profitable relationships are enhanced by continuous improvements to products and services and by the furthering of mutual trust. Unprofitable relationships, on the other hand, are carefully scrutinized. In many cases, a customer’s risk and loss situation can be improved substantially with the help of focused advice – for the benefit of all concerned. If these measures do not suffice, we have to implement premium or other adjustments to bring the premium / loss ratio back into balance. Based on our partnership approach, the prime distri- bution channels are our sales force and broker net- work. Yet these too are subject to change. The focus of the sales force is shifting increasingly to the ex- pansion of existing customer relations rather than the acquisition of new ones. Building on up-to-the- minute electronic consultancy tools, we can target each customer’s specific requirements and assemble solutions that are customized accordingly. Brokers for their part are especially interested in efficient pro- cesses. The Baloise’s processes and structures are therefore designed to provide the best possible sup- port for its distribution partners. Operational excellence also means building on a lim- ited number of products and product modules, stan- dardized as far as possible, that can be combined to Bâloise-Holding Annual Report 2003 13 Trust is the key. Living a relationship means looking life in the eye. How We Do Business Risk management in demanding times As an insurance company, the Baloise is a profession- al risk manager. We bear the risks of our insureds and thus shield millions of people from financial harm. In order to accomplish this mission, the Baloise assumes a large number of individual risks and man- ages them by utilizing diversification effects and a comprehensive system of limits. Assessing and pro- perly handling risks is of prime importance both on the underwriting and the capital investment side. The risks insurers are faced with have grown consid- erably. The costs of longevity, increasing strain on our physical and mental well-being and correspondingly higher risks of disability, ever more complex inter- dependences in the business world, an increasing population density and threats to the environment are some of the factors involved, all of which the Baloise takes into account in its risk management. In fact, risk management plays a part in every phase from product development and rate setting to initial customer contact. Our staff’s impressive technical know-how, underpinned by regular training, ensures competent risk advice for customers and professional risk assessment. Each of our regional business units is responsible for a comprehensive assessment and the ongoing monitoring of the specific risks it bears. At corporate level, we group the subsidiaries’ risk positions and manage them globally. This global system is based on various benchmarks and models that complement one another. A “surcharge factor” model – similar to the widespread rating models – enables us to swiftly evaluate the risk level of important risk positions. Furthermore, an internally designed, scenario-based model not only provides detailed insights into key risks involved, but also serves to optimize profitability. Finally, regulatory requirements are met by constantly monitoring solvency and coverage levels. Coverage in Switzerland is assured by the “Sicherungsfonds” (security fund), in Germany by the “Deckungsstock” (coverage reserve). Eventful business years such as 2003 require parti- cularly attentive risk management. We adopted a number of measures to keep business in line with changing circumstance. Premiums were raised selec- tively where required. Risk selection played an even bigger part in our product development, leading to rate adjustments. Like the rest of the insurance in- dustry, we had to cut back surplus allocations to life insurance policyholders due to capital market im- ponderables. To keep business profitable and give direction to our sales efforts, we focused sharply on segments where profitability is intact. Loss ceilings were reassessed in several places. In our German industrial business, for instance, this led to a reduction of underwriting limits. In the life sector, we introduced further Asset & Liability modules. These facilitate a finely tuned balancing of insurance-related obligations and in- vestments. We contributed to the growth on the operational side with market-aligned adjustments to our asset allo- cation, including a reduction in equity exposure. An important factor was the acquisition of Securitas Versicherungen in Germany, which operates predo- minantly in the non-life sector – an area we favor. Risks were further limited by continuously tracking volatility in the individual investment categories and applying appropriate hedging instruments. The for- eign exchange risk in connection with the US dollar was reduced by hedging at the beginning of the year. By partly re-classifying bonds from “Available for sale” to “Held to maturity” we greatly reduced the impact of fluctuating interest rates on the IFRS capital and reserves. In view of the increasingly complex regulatory envi- ronment, we instituted a compliance structure both at corporate level and at the individual business units as a basis for minimizing legal and reputational risks. All these numerous measures were necessary for us to master the challenges of the 2003 business year. They helped ensure that the Baloise was able to safe- guard its substance in turbulent times and retain the ability to grow profitably in future, too. Bâloise-Holding Annual Report 2003 15 Business Year 2003 A reinvigorated Baloise geared to the future With a net profit of CHF 91 million in the 2003 finan- cial year, the Baloise Group has demonstrated its ability to boost its performance. This success is a re- sult of consistent cost management, profit-oriented underwriting and premium policies, and the thorough restructuring of the business portfolio. Premium in- come in the non-life business rose by 14.0 % in local currencies, while falling by 8.1% in the life business. The Baloise has significantly enhanced its operation- al earning power. Further proof of this is the strong improvement in the gross combined ratio to 97.6 % and the positive embedded value in newly written life insurance. In 2003, premium income came to CHF 7.4 billion, of which non-life accounts for CHF 3.1 bil- lion and life for CHF 4.3 billion. Group solvency at the end of 2003 was 241% (including imputed bank- ing assets); capital and reserves rose by 7.5% to CHF 3.3 billion. This provides a solid foundation on which the Baloise can build profitable growth in the future. General market developments After stagnating for a long period, the economy staged a strong recovery in the second half of 2003. The USA and Asia provided the major stimuli, and the euro zone was also able to rise off its lows. Indicators of economic growth point to further improvement in 2004. The negative current account balance and the ballooning budget deficit in the USA, however, re- main a cause of concern for the global economy. The pronounced weakness in the US dollar vis-à-vis the euro and the Swiss franc is tangible evidence of this. In March 2003, global equity markets began to re- cover. This development has been supported by per- sistently expansive monetary policies on the part of the leading industrialized countries and the result- ing low interest rates. In the year under review, the European insurance in- dustry finally turned the corner. Companies took deci- sive measures to prepare the ground for a sustainable recovery. A number of these measures produced re- sults quickly; others will take longer to bear fruit. This development was supported by the rising financial markets. Stock markets performance January 1– December 31, 2003 7,000 7,500 6,000 5,500 5,000 4,500 4,000 200 175 150 125 100 75 50 SMI 1.1.2003 12.31.2003 MSCI SMI MSCI EMU MSCI ROW Development USD – CHF and EUR – CHF January 1– December 31, 2003 EUR: 11.0 Swiss cents USD: - 14.5 Swiss cents 1.6 1.55 1.5 1.45 1.4 1.35 1.3 1.25 1.2 1.15 1.1.2003 12.31.2003 Interest rate development January 1– December 31, 2003 6 5 4 3 2 1 0 1.1.2003 12.31.2003 Yield on 10-year government bonds Germany in EUR Yield on 10-year federal bonds Switzerland in CHF However, a number of factors remain unresolved: the trend in health care costs throughout Europe, the in- crease in the number of disability cases, and the sta- tutory framework governing state pension schemes. The insurance industry is willing to do its share in finding economically viable solutions. From a busi- ness point of view, the most important concerns were boosting the capital base and earning power and tightening the “nuts and bolts,” i.e. actuarial and underwriting techniques. In 2003, all companies reported an improvement in their non-life business. After years of cutthroat com- petition, more and more insurers are now in a position to set fair risk-aligned rates and charge realistic pre- miums. This process has been helped by the restruc- turing of unprofitable areas, as evidenced by the un- derwriting results of non-life insurance companies. At most insurance companies returns on investments have also started to improve. Bâloise-Holding Annual Report 2003 17 Business Year 2003 One burden facing the Swiss economy is the growing significance of the state sector and the correspond- ing tax increases that accompany this development. These and the high level of prices are constraining economic development. Once again, private con- sumption proved an important economic engine. Vari- ous insurers withdrew from group insurance; others are increasingly selective in the new business they will accept. Owing to the current unattractiveness of the individual life business, premium income declined. The German market has not yet benefited from the modest revival in demand for insurance products. The bureaucratic hurdles posed by the state-funded direct-contribution pension scheme (“Riester” pen- sion) and uncertainty about the tax treatment of life insurance have contributed to the reticence of poten- tial buyers of insurance. Despite the adverse econo- mic environment, the German insurance industry ex- pects premium growth of 3.9% in 2003, most of it on the non-life side. In Belgium, the insurance industry posted a marked increase in premium income, despite overall econo- mic stagnation. The non-life business accounted for most of this growth, owing mainly to rate adjustments to improve the underwriting result in all insurances classes. The most notable development in the life business was strong growth in group life insurance. Baloise Group business activities In the 2003 financial year, the Baloise Group regis- tered a net profit of CHF 91 million (2002: loss of CHF 634 million). There has been a huge improvement in all business lines and geographic markets. The posi- tive business result is the consequence of numer- ous measures adopted to strengthen operating earn- ing power, particularly in Switzerland, Germany and Belgium: a risk-aligned underwriting policy, consis- tent portfolio restructuring, and tight cost manage- ment. Other positive contributions were the favorable development in the exchange rate of the euro and the general absence of major losses. The sharply higher operating performance was manifested in particular in the combined ratio in non-life: compared with 2002, the gross value improved by 7.6 percentage points to 97.6 %. The positive embedded value of newly written life business documents the Baloise’s success in turning this segment around. Group sol- vency (also taking into account banking assets) of 241% and an increase of 7.5% in capital and reserves prove that the financial health of the Baloise is as sound as ever. We regard this achievement as a mile- stone and will continue to enhance our operating per- formance in the coming years. 18 In the 2003 financial year, the scope of consolidation was widened to include the Bremen-based Securitas Group. The integration of Securitas and Basler Deutschland to form the new “Basler Securitas” is proceeding successfully. A number of crucial steps in the integration process have already been complet- ed: company and management structures, the launch of the new brand, the new distribution organization, and the new product portfolio. Premium income (gross) by regional segment 2002 in percent Premium income (gross) by regional segment 2003 in percent Switzerland Germany Benelux Other countries (incl. elimination) Total in CHF m 1 in local currency 2002 4,653 1,755 713 153 7,274 2003 4,269 2,200 745 161 7,375 Change in percent1 - 8.2 20.9 0.7 2.5 - 0.1 Premium income amounted to CHF 7.4 billion as against CHF 7.3 billion in 2002; this represents growth of 1.4 % in CHF. The strong growth in non-life exceeded expectations. Premium volumes in the life sector on the other hand declined. Owing to unsatis- factory profitability, the Baloise – in keeping with the rest of the industry – was very selective in under- writing new life business. The breakdown of total premium volume shows a shift from life to non-life in 2003: non-life accounted for 42% (2002: 36%) and life for 58% (2002: 64%). This development is in keeping with the strategic focus on non-life in future business expansion. There was also a change in premium volumes by country: Switzerland generated 58 % (2002: 64 %), while Germany’s share rose to 30 % (2002: 24 %) on the back of the acquisition of Securitas; at 10 %, the Benelux countries were unchanged from the previous year, as were the other countries. This shift reflects the Baloise’s endeavors to increase diversification of premium income by region. Growth in non-life was greater than expected: pre- mium income of CHF 3.1 billion (2002: CHF 2.6 bil- lion) resulted in a rise of 14 .0 % in local currency. Organic growth in local currencies amounted to 3 %, the remaining growth coming from the acquisition of Securitas Versicherungs-Gesellschaft. Thanks to the consistent restructuring of portfolios, stringent cost discipline, and the favorable development in claims for major losses, this class posted a profit before tax and minority interests of CHF 91 million (2002: loss of CHF 203 million). The gross combined ratio of 97.6% as against 105.2% in the previous year under- lines the enormous progress made in operational efforts, in particular in Switzerland, Germany, and Belgium. The improvement in the corresponding net value of 7.7 percentage points is equally impressive. The actual restructuring of business areas, particu- larly in Germany and Belgium, has largely been com- pleted; however, measures to further improve op- erational efficiency will continue. The life business also posted a positive result, pro- ducing a profit before tax and minority interests of CHF 69 million (2002: loss of CHF 359 million). Pre- mium income in local currency declined by 8.1% to CHF 4.3 billion (2002: CHF 4.6 billion). Excluding acquisitions, premium income fell by 10.6 % in local currency. This reduction reflects the underwriting policy, which focuses strictly on profitability. In ad- dition, single premium policies recorded a decline due to the market situation. As all Group companies quickly adjusted conditions to changed market real- ities, new life policies have positive margins. Al- though general business conditions remain challeng- ing, the Baloise is convinced that the growth and earnings potential of the life business remains at- tractive in the long term; it will continue to pursue profit-oriented underwriting. The banking business produced a profit before tax and minority interests of CHF 37 million (2002: loss of CHF 100 million), largely owing to the Swiss Baloise Bank SoBa. Thanks to improvements in its core business the bank’s profit increased by 25%. Devel- opments at the banks in Belgium and Germany (Deutscher Ring Bausparkasse) were in line with ex- pectations. Components of Group result Non-life Life Banking Other activities Profit / loss before tax and minority interests Tax on income Minority interests Consolidated net profit / loss in CHF m 2002 - 203.3 - 358.7 - 100.1 - 52.2 - 714.3 82.7 - 2.9 - 634.5 2003 90.8 68.7 37.3 26.9 223.7 - 125.4 - 6.9 91.4 Owing to the realization of investments in spring 2003 aimed particularly at reducing the equity exposure, realized investment losses rose by CHF 738 million to CHF 1,862 million. Realized gains sank by CHF 59 million against the previous year to CHF 1,218 million. Current income overall increased slightly and amount- ed to CHF 2,105 million for the year under review. The realized net gains and losses (including write- back of impairments charged to income) amounted to CHF - 41 million (2002: loss of CHF 807 million). The Baloise Group’s capital and reserves on the cut- off date amounted to CHF 3.3 billion (2002: ap- proximately CHF 3.1 billion). The increase of 7.5 % is primarily attributable to changes in the value of capital investments, currency gains, and net profit. At the end of 2003, consolidated Group solvency in accordance with IFRS requirements was 241% (in- cluding banking assets) and 214 % excluding bank- ing assets. The embedded value of the life business rose from CHF 1,631 million to CHF 1,980 million in the year under review. Factoring in the planned introduction of the legal quote in the Swiss occupational bene- fits business (BVG) led to a CHF 303 reduction in the embedded value. Rate adjustments in group life in- surance engendered an increase in the value of the insurance portfolio of CHF 257 million. The financial markets had a positive effect in 2003. The investment income is likely to be lower in future, but this effect can be offset by a reduction in policyholder bonuses. The net effect is an increase in the embedded value by around CHF 140 million. Bâloise-Holding Annual Report 2003 19 Business Year 2003 Tax incurred in 2003 amounted to CHF 125.4 million (2002: tax yield of CHF 82.7 million). Current tax on income amounted to CHF 114.6 million (2002: CHF 33.7 million). The most influential factor – aside from the positive annual result – is the changes in tax laws for German life insurance companies. This makes it- self felt in significant nonrecurring expenditures un- related to the accounting period. Thus, the result of the life business in particular must be seen in the context of tax considerations. (cid:2) Segment reporting, page 78 Because of the rise in unrealized gains, deferred tax resulted in an expense of CHF 10.8 million (2002: tax yield of CHF 116.4 million). (cid:2) Notes to the consolidated financial statements, page 105 Management was significantly strengthened in the year under review. New Chief Executive Officers were appointed at Baloise Switzerland (Martin Strobel), Basler Securitas in Germany (Frank Grund) and Mer- cator in Belgium (Jan De Meulder). These appoint- ments mark an important step in the Baloise’s efforts to reinforce local market companies and, hence, the operations of the core insurance and pensions op- erations. We expect the economic recovery to continue in 2004, which should lead to an improvement in framework conditions. At the same time, we remain cautiously optimistic about developments in the financial mar- kets. We will focus primarily on further enhancing operational earnings power in all markets with a view to positioning ourselves for further growth. By the end of 2004, we expect a gross combined ratio in the non-life business of 97 %, which, given the ab- sence of major losses in 2003, we view as an ambi- tious target. As far as the development of our business volumes are concerned, we are sticking strictly to the principle of “profit before growth.” As we want to further opti- mize the non-life business quality, we anticipate or- ganic premium growth in line with the market aver- age. In the life business, the improvement in the overall situation is likely to be gradual. Here we ex- pect a slight reduction in premium volume accom- panied by further improvement in the IFRS result. All in all, we hope to post another strong increase in profits. 20 Switzerland Baloise Switzerland has recovered its earning power. The Baloise’s largest business unit produced a profit before tax and minority interests of CHF 62 million (2002: loss of CHF 245 million). Aside from develop- ments in the financial markets, this result can be at- tributed to the numerous measures adopted to im- prove the earning power of the insurance business: strict cost management, a profit-oriented underwrit- ing policy, and technically necessary adjustments to premiums. Baloise Bank SoBa also recorded a posi- tive development: it achieved a profit before tax of CHF 13.8 million, which represents an increase of 25 % year-on-year. In the 2003 financial year, Baloise Switzerland pro- duced a solid operational performance. Accounting for 58% of all premium income of the Baloise Group, it posted a profit before tax and minority interests of CHF 61.5 million (2002: loss of CHF 244.9 million). Both insurance classes and the banking side contri- buted to this marked improvement. Strict cost man- agement and risk-oriented underwriting bore fruit: the gross combined ratio improved noticeably to 95.9% (2002: 97.7%) and the gross cost ratio in non- life fell to an exceptional 23.8 % (2002: 26.0 %). To- tal premium volume amounted to CHF 4.3 billion (2002: CHF 4.7 billion). The decline of 8.2% precisely reflects management’s operating priorities. Pre- mium volumes in the non-life business grew by 5.3%. Because of insufficient investment income, we re- duced interest rate guarantees and bonuses to pol- icyholders on the life side. This step and the sub- stantially lower demand for single premium policies explain the sharp drop in premium income of 12.8%. At the same time, the Baloise managed to noticeably increase the profitability of its life business. Non-life Premium income for non-life came to CHF 1.24 bil- lion (2002: CHF 1.17 billion), which represents a 5.3 % increase on the previous year (2002: 3.5 %). This stems from the expansion of business and from premium adjustments in general liability, property and automobile insurance. The sales partnership with Touring-Club Switzerland (TCS) once again played a key part in the increase in premiums. By contrast, there was a slight decline in premium income in the transport, accident and health insurance segments. Transport insurance was affected by the weakness of the US dollar, and premiums for health insurance were depressed by essential restructuring measures and associated policy terminations. In 2003, Baloise Switzerland was spared any extra- ordinary losses attributable to natural causes. How- ever, there was a rise in obligations arising from per- sonal injury claims, particularly in the automobile and accident insurance segments. A significant de- crease in claims under group daily sickness allow- ance policies contrasted with a sharp rise in cases of long-term disability. Technical provisions in the non- life sector were maintained at the same high level as the previous year. Key figures Switzerland 2002 2003 Change in percent Gross premium income 4,652.8 4,269.3 - 8.2 Of which life 3,477.9 3,031.6 -12.8 Of which non-life 1,174.9 1,237.7 5.3 Combined ratio non-life (gross)1 97.7 Profit / loss before tax - 244.9 95.9 61.5 – Employees in CHF m 1 in percent 3,976.0 3,774.0 - 5.1 Life During the year under review, the life business was dominated by the public debate over the future of the occupational pensions system (BVG). Baloise Switzerland is taking various measures to address the continuing unfavorable market conditions and the regulatory framework in the BVG sector. Among other moves, premium rates for disability insurance have been adjusted, cost premiums have been in- creased and policyholder bonuses cut. In the extra- mandatory part, a supplementary premium is being levied to cover the excessively high conversion rate and the equally excessive high interest rate guaran- tee. One important instrument in the life business is the restrictive underwriting policy which is designed to ensure profitability. After a record year in 2002, individual life policies were back at the same level as in 2001. Premium income amounted to CHF 1.1 billion (2002: CHF 1.5 billion). This decline is explained by the fact that guaranteed interest rates and bonuses have been reduced in order to ensure profitability and by the generally difficult market environment. For Baloise Switzerland’s life business as a whole, the result was a premium volume of CHF 3 billion (2002: CHF 3.5 billion), which represents a decline of 12.8%. A sharp 45 % decrease in single premiums in the individual life segment contrasted with an increase in policies based on periodic payments. Numerous measures have secured the profitability of the life sector and the interest margin is positive both for existing and new business. Technical provisions have increased compared with the previous year. Baloise Bank SoBa Baloise Bank SoBa posted earnings before tax of CHF 13.8 million (2002: CHF 11 million). This represents a 25% increase, although the banking business was affected by keener competition and the sluggish trend on the financial markets. One successful area was Mobile Banking, i.e. sales of banking products by the sales force of the insurance company. Com- pared with 2002, Mobile Banking was 54 % above target, which is a clear sign that its offerings are be- coming more attractive as part of Baloise Switzer- land’s focused financial service provider strategy. Compared with 2002, net interest income decreased by 3.8 % to CHF 92.8 million. The main reason for this is the continuing switching of variable to fixed- interest mortgages and the extensive interest-rate hedging which this has made necessary. By contrast, income from commission business and services was increased by 0.5 % to CHF 20.8 million. Thanks to a prudent lending and risk policy, value adjustments on loans are following a favorable trend. In its core market, Baloise Bank SoBa is still represented by 14 branches. However, the private banking operation has undergone resizing, with the closure of the branches in Zurich and St. Gallen. The Lausanne branch has been downgraded to a representative office. This means a significant reduction in expenses related to the banking business. However, the cost- cutting measures will only have their full impact in 2004. At the same time, IT services have been signi- ficantly expanded. In 2004, the bank will begin op- erating its new e-banking platform and a new loan platform. Baloise Switzerland’s strategy as a focused financial service provider is reflected in the comprehensive fi- nancial advice it provides for insurance and banking customers, one example being the launch of the ad- visory platform BALOISEHYPO PLUS – focused on mortgage financing for home owners – and BALOISE- LIFE PLUS – a combined life insurance and savings product. These services met with a better-than-ex- pected reception from customers. Bâloise-Holding Annual Report 2003 21 Business Year 2003 Germany On the German insurance market, demand for occu- pational and private pension solutions was once again slack. The companies of the Baloise Group concen- trated on boosting their operating profitability. Ger- man business posted earnings before tax and minor- ity interests of CHF 77.1 million (2002: loss of CHF 25.6 million). Another key development was the in- tegration of the insurance portfolios of the Securitas Group and the Baloise branch to form the new Bad- Homburg-based Basler Securitas. The integration pro- cess is well on track. The German insurance year was dominated by the adverse economic environment, accompanied by cut- throat competition. Life insurers still had to cope with low returns on their investments, although the situation eased toward the end of the year. Germany’s social security system is facing some major chal- lenges. The uncertainty hanging over the state pen- sion insurance system will give added momentum to occupational and private pensions, although the expected new business has so far largely failed to materialize. As of January 1, 2004, the life insurers reduced their guaranteed interest rate from 3.25 % to 2.75 %. There were no major losses from natural causes of the type seen the previous year. For the Baloise Group, the central event was the integration of Securitas and its merging with the Baloise in Ger- many. Since October 23, 2003, the new company has been operating under the name “Basler Securitas” based in Bad Homburg; in fiscal 2003, it was con- solidated according to IFRS guidelines for the first time. The new company is very well received by cus- tomers and employees alike. The integration pro- cess is making solid headway under the new CEO Frank Grund. Key figures Germany 2002 2003 Gross premium income 1,755.1 2,199.9 Of which life Of which non-life Combined ratio non-life 970.4 1,077.6 784.7 1,122.3 Change in percent 25.3 11.0 43.0 (gross)1 116.7 Profit / loss before tax - 25.6 101.1 77.1 – Employees in CHF m 1 in percent 2,794.0 3,249.0 16.3 Through comprehensive restructuring measures and selective underwriting guidelines, the German com- panies of the Baloise Group were able to significantly increase their operating profitability and return to the 22 profit zone. Thanks mainly to the first-time consolida- tion of the Securitas Group, premium volume in lo- cal currency rose by 20.9 % to CHF 2.2 billion (2002: CHF 1.8 billion). In organic terms, the result was a 2.1 % decline in local currency terms. The segment posted earnings before tax and minority interests of CHF 77.1 million (2002: loss of CHF 25.6 million). Basler Securitas In fiscal 2003, the integrated Basler Securitas posted premiums amounting to CHF 1.1 billion. Acquisition- related effects mean that comparisons with the previ- ous year would be of little informative value. Securitas’ strategically insignificant legal protection business was sold retroactively as at January 1, 2003. The inte- gration of Securitas and the Baloise branch in Bad Homburg is at an advanced stage. The new brand “Basler Securitas” has been launched, the manage- ment and sales structure is in operation and the prod- uct portfolio has been aligned. Some of the cost sav- ings resulting from the integration will take effect in 2004 and 2005 to become fully effective in 2006. The property insurance segment accounts for pre- mium income totaling CHF 901.1 million. Thanks to a combination of measures taken to strengthen operat- ing profitability and significantly lower claims paid, the loss ratio was reduced from 99.6% to 69.3%. This means there has been a considerable improvement in the gross combined ratio which stands at 99.9 % (2002: 127.0 %). In the automobile insurance seg- ment, the premium rate adjustments from the begin- ning of 2003 and the restructuring of the insurance portfolio had a clear impact on the result. Further prog- ress was made in the successful reorganization of the commercial and industrial business, and the under- writing limit for major industrial risks was halved. Thanks to the acquisition of Securitas Gilde Lebens- versicherung and as a result of a reinforced sales drive, premium volume in the life business grew slightly. Just as in the market as a whole, the expected increase in occupational and private pension plans failed to materialize. The result is on the same level as the previous year. Deutscher Ring Deutscher Ring focused mainly on improving the pro- fitability of its portfolio and on new business. At the same time, it proved possible to significantly reduce costs, and further progress was made in the restruct- uring of Deutscher Ring Bausparkasse. The improve- ment in the capital markets supported the positive trend in the earnings situation. The year under review saw the total premium volume decline by 6.8 % in local currency to CHF 1 billion (2002: CHF 1.1 billion). This was due to the market- wide decline in single premium insurance. By con- trast, unit-linked life insurance made gains. Further cost savings were realized in 2003. The easing of the situation on the financial markets led to an im- provement in the financial result. dampened by the restructuring effects. In 2002, the restructuring process had led to a decline in premiums as expected. The restructuring of the automobile and fire insurance sectors showed a positive impact. The loss ratio decreased by 15 percentage points to 67.7 %. Further cost-cutting measures and targeted reduction of capacity resulted in a markedly improved gross combined ratio of 98.1% (2002: 114.4 %). In preparation for the future demand for occupational pension solutions, Deutscher Ring set up an inde- pendent pension fund. Direct property insurance busi- ness achieved a gross combined ratio of 103.1 %. Deutscher Ring Bausparkasse reported a very suc- cessful trend of new business. The restructuring is proceeding in line with our expectations. Thanks to cooperation with Diba – Allgemeine Deutsche Direkt- bank – the building loans business segment also experienced appreciable growth. The nonstrategic holding in Deutsche Pfand-Anstalt (DePfa) was sold off. Benelux The Flemish Mercator Group – the main component of the Benelux segment – made further significant operational progress. Most of the actuarial restruc- turing measures in the non-life sector were complet- ed, although work is still under way with a view to further optimizing the portfolio’s profitability. In the life sector, benefits were reduced to a level com- mensurate with returns on investments. The embed- ded value of new life business is positive. In 2003, Mercator’s investment losses continued to depress the segment result. The loss before tax and minority interests amounting to CHF 103.9 million represents a clear improvement against the previous year (2002: loss of CHF 373.0 million). Key figures Benelux Gross premium income Of which life Of which non-life Combined ratio non-life 2002 713.2 154.0 559.2 2003 744.6 161.2 583.4 Change in percent 4.4 4.7 4.3 (gross)1 114.1 98.3 Profit / loss before tax - 373.0 - 103.9 -72.1 Employees in CHF m 1 in percent 1,624.0 1,417.0 -12.7 In the non-life business, Mercator has introduced systematic risk selection, which enables it to address the general rise in the incidence of claims. In the sec- ond half of the year, the sector approached break- even level. Low interest rates and the fact that share prices only recently began to pick up were the princi- pal factors behind the renewed loss in life business, albeit on a significantly lower level. In new business, benefits were adjusted to an achievable level of re- turn on investment, and premiums were increased in line with the risk involved. This resulted in a posi- tive value for newly written life business. Mercator Bank ended fiscal 2003 with a profit. Oper- ating efficiency and the margin in interest operations are being improved on an ongoing basis. We expect 2004 to see further significant improve- ments in the operating profitability of the Mercator Group. Mercator, Belgium Because of the low interest rate levels, coupled with the fact that the stock markets have only recently begun to improve, Belgian life insurers are conti- nuing to suffer from excessively high guarantees under existing life policies. In new business, the in- dustry has adjusted its terms to market conditions. Bâloise Assurances, Luxembourg A slight improvement in the result for insurance operations contrasts with comparatively high real- ized losses in the equity portfolio, which led to a small loss overall. The market share was stabilized at a high level. Premium volume grew by 2.1% in local currency terms to CHF 70.2 million (2002: CHF 66.3 million). Against this background, Mercator Insurance posted premium income amounting to CHF 674.4 million (2002: CHF 646.9 million). This represents 0.6 % growth in local currency, a figure which has been Following the previous year’s substantial increase, premium growth in the non-life sector stood at around 2 %. As new business was not sufficient to Bâloise-Holding Annual Report 2003 23 On the life insurance side, there was a 3.8% decline in premiums in local currency – owing to a market- related sharp drop in single premium business. Suc- cess with pension products benefiting from state pro- motion measures was not sufficient to compensate for this decline. Basler Austria was furthermore suc- cessful in its insurance business with medical prac- titioners. Key figures other countries Gross premium income Of which life Of which non-life Combined ratio non-life (gross)1 Profit / loss before tax Employees in CHF m 1 in percent 2002 443.2 31.8 411.4 - 102.2 - 70.8 309.0 2003 441.0 30.8 410.2 72.4 189.0 305.0 Change in percent - 0.5 - 3.1 - 0.3 – - 1.3 Basler osiguranje, Croatia In Croatia, the Baloise works in conjunction with the local medical and dental association to offer non- life and life products to meet the specific needs of medical practitioners and associated professional groups. In the physicians’ segment, market share stands at over 50 % thanks to an active sales force and sales partnerships. The partnerships with banks are being further expanded. The loss ratio for fiscal 2003 stands at just under 55 %. Reinsurance, finance and participation companies and consolidated operations This sector includes reinsurance companies, special forms of investment, financing operations and parti- cipations, and consolidated operations. The positive result is due to three principal factors. Firstly, con- solidated business developed positively. Secondly, the reinsurance companies benefited exceptionally from the favorable situation as far as major claims are concerned, and thirdly the holding companies achieved currency gains. Business Year 2003 compensate for the effects of the restructuring meas- ures (particularly in the automobile fleet business), the overall result was growth below the market aver- age. Stable costs and a favorable loss experience meant that the gross combined ratio improved by 8.8 percentage points year-on-year to 100.5%. Prod- uct-related measures focused particularly on the automobile sector – which accounted for 60% of non- life premiums. In comprehensive vehicle insurance, a number of activities were launched to boost rev- enues. Further measures are planned for 2004. In parallel with this, the systematic implementation of the initiated efficiency-boosting measures for the sales force is continuing. Despite a difficult environment, the life sector is en- joying a robust development. Only risk insurance ex- perienced lower-than-average growth in premiums. The trend remains positive in the group insurance sector (second pillar), where Bâloise Assurances, Luxembourg, has established itself as one of the few local specialists in recent years. Cooperation with the new local banking partner ING Bank has got off to a good start and promises considerable potential. In 2004, we expect higher-than-average premium growth in Luxembourg, coupled with a further strengthening of operating profitability. Other countries Basler Austria Basler Austria again reduced its costs, improved the result of insurance operations and significantly en- hanced its sales capacity. The premium volume grew by 6.2% in local currency terms to CHF 105.0 million (2002: CHF 95.4 million). State promotion of private pensions, which has been introduced over a one-year period for the first time, had a positive impact on business. The restructuring of the policy portfolio through adjustments to pre- miums rates was accompanied by systematic risk selection. This made it possible to significantly im- prove the loss experience. Costs were lowered by re- ducing capacity in back-office services. At the same time, the Baloise expanded its sales force, which resulted in a higher volume of business. In non-life business, the higher premium income, differentiated underwriting policy and reduced costs led to a significant improvement in the combined ratio to 108.0 % (2002: 130.9 %). 24 Capital investments: Turnaround on the financial markets Own capital investments by category 2002 The business year 2003 was characterized by a turn- around on the stock markets following the downslide in the first quarter. This trend reversal, coupled with a slight rise in bond yields, led to a shift in the invest- ment strategy of the Baloise Group. As a result, in- vestment performance was far better than in 2002. The Iraq war and fears that the SARS epidemic could spread pushed the stock market down at the begin- ning of the year. This was followed in the second quarter by the long-awaited rally as the tensions passed and economic data improved. The leading central banks retained their extremely expansive monetary policies. This held interest rates at a low level, although above the previous record lows. Price pressure looks set to rise in the medium term as the economy gains momentum, capacity utilization in- creases and unemployment drops back, and this should lift the yield curve. The United States were once again the driving force on the equity markets. Generous fiscal and monetary impetus did the trick in the US economy and also boosted the Asian and European economies through demand for imports. Moving in tandem with Wall Street, the Swiss Market Index (SMI) recovered from its March low and was up roughly 50 % by year-end. Year-on-year, it gained 18.5 %. The MSCI EMU – the index of euro-zone equity markets – posted a per- formance of 25.6 % while the Standard and Poor’s 500 index in the United States gained 26.4 %. In the first half of the year the bond markets were overshadowed by the deflationary fears triggered by the Chairman of the Federal Reserve Board, Alan Greenspan. As a consequence, yields dropped to new lows in June. However, better economic data subse- quently raised pressure both on the Swiss market and to a lesser extent elsewhere, leading to a sharp 25 to 35 basis point hike in yields. The foreign exchange markets were dominated by the massive weakening of the US dollar against the euro and the Swiss franc. Reasons included the widening budget and current account deficits in the United States and the resultant reversal of capital flows. The Swiss National Bank adopted a policy of extremely low interest rates to counter the initial upward pres- sure on the franc as a safe haven for investments. in percent Own capital investments by category 2003 in percent Fixed-interest securities Shares Investment property Mortgage loans Policy and other loans Alternative financial investments Other short-term capital investment, cash and cash equivalents Participating interests in associates < 1 percent Derivatives < 1 percent Own capital investments by category 2002 2003 Change in percent Fixed-interest securities 21,906.8 29,525.4 34.8 Shares Derivatives 5,752.4 3,475.9 -39.6 212.8 292.9 37.6 Investment property 5,305.7 5,653.4 Mortgage loans 10,532.0 11,002.4 6.6 4.5 Policy and other loans 1,520.4 1,456.6 - 4.2 Participating interests in associates 286.9 223.8 -22.0 Alternative financial investments 1,039.0 1,337.9 28.8 Other short-term capital investments, cash The drop in share prices at the start of the year and the subsequent turnaround on the financial markets were reflected in the Baloise Group’s investment and cash equivalents 3,505.4 3,339.4 - 4.7 Total in CHF m 50,061.4 56,307.7 12.5 Bâloise-Holding Annual Report 2003 25 Business Year 2003 strategy. Equity hedges were raised in the first quarter and the equity weighting was subsequently reduced further on risk grounds. At the same time, undesired foreign exchange risks, especially those resulting from investments in US dollars, were hedged, chiefly through foreign exchange derivatives. Proceeds from the sale of equities and new inflows of funds were initially “parked” in short-term investments and time deposits. Once yields had risen they were shifted into bonds. To minimize the impact of rising yields on capital and reserves as defined by the International Financial Reporting Standards (IFRS), a large proportion of bonds were transferred from “Available for sale” to “Held to maturity.” Although this means that they have to be held until they mature, they can be carried at amortized cost, which steadily moves towards their nominal value (100%) over time. Rising interest rates and falling market value would therefore have no ef- fect on capital and reserves. Largely unaffected by the volatility of the equity mar- kets, property investments once again made a stable contribution to total investment results, with a per- formance of around 4.8% in 2003 (2002: 4.9%). This was essentially attributable to the strategy of focus- ing on popular regions of Switzerland and the rental housing market. The mortgages and loans performance declined from 4.1% to 3.7 %, reflecting the persistently low inter- est rates and far more aggressive terms offered by Swiss banks. Given the widespread belief that inter- est rates will rise in the mid-term, there is a clear trend towards fixed-rate mortgages. The assets managed by the Baloise Group, including the investment funds, rose by 13.7 % to CHF 66 bil- lion. This was due to the improvement in investment performance, subscriptions to investment funds and new clients and to the first-time consolidation of Securitas. Thanks to the clear recovery on the equity markets, the value of all BFI equity and strategy funds rose considerably. The floor (guaranteed level) of the BFI Capital Protect (EUR) fund issued in early 2003 was raised six times during the year and the fund ended the year with an attractive “guaranteed” performance of 4 %. 26 Integrated risk management as basis for success In an environment of volatile financial markets and rising insurance risks, the significance of risk man- agement and risk control at the Baloise Group has in- creased noticeably. Findings in this area have become an important factor in the Group’s strategic decision- making process. Consequently, risk management processes and methods were again enhanced in the year under review. Risk management throughout the Baloise Group en- sures that a stable balance is maintained between risks borne and the available risk capital. Aspects taken into account include economic factors, legal and regulatory provisions and the demands of a va- riety of stakeholders. Thanks to this broadly based approach, various interests can be presented in a transparent fashion, raising the quality of the deci- sion-making process and thus benefiting the Group as a whole. The relevant risk indicators are compiled and monitored both at corporate and business unit level. The Group’s risk management is founded on three pillars: business risk analysis, analysis on the basis of rating-like models, and monitoring of regulatory guideline figures. Only when these three factors are properly combined can one speak of balanced and appropriate risk management. The following business risks are at the heart of the quantitative analysis: Insurance operations (cid:2) Natural hazards (cid:2) Major industrial risks (cid:2) Liability risks (cid:2) Personal risks Investments (cid:2) Market and price risks (cid:2) Interest rate risks (cid:2) Foreign exchange risks (cid:2) Credit and insolvency risks There are various instruments available to keep these risks under control. Some are direct and immediately effective, such as reinsurance or hedging, others in- direct and slower to take effect, such as a carefully focused underwriting policy, targeted Asset & Liability Management (ALM), or profit-oriented growth strat- egy in selected market areas. In fiscal 2003, the Baloise Group focused on a large number of risk management topics, giving greater weight to the corresponding tasks and projects. Prog- ress was made in the corporate governance field (cf. pages 29ff.) and further emphasis was placed on ALM in life insurance, the management of corporate investment risks, and further optimization of under- writing risks. Work in ALM field of the Life business was coordi- nated in a group-wide project. This joint approach, and the existence of a uniform Group platform, will generate synergies in the area of software develop- ment and operation as well as in analysis and in the management of assets and liabilities. By implementing specific measures, the Group was able to realign investment risks to the given market circumstances. The Group’s equity exposure was re- duced from 12.5 % to 7.1% on the eve of the Iraq war. Derivative hedging instruments were employed to keep risks under control. Foreign exchange risks in connection with the dollar were eliminated en- tirely by means of forward selling, and equity risks were reduced through put options until into the 4th quarter 2003. The reclassification of 35 % of the bonds from “Available for sale” to “Held to maturity” meant that the influence of interest rate fluctuations on the Group’s capital and reserves in accordance with IFRS was lowered by around 50 %. The implementation of rate adjustments, restructur- ing measures and revised underwriting guidelines have led to a sustainable improvement of the Group’s risk situation. The enhanced quality of the insurance portfolio will have a positive and lasting effect on the Group’s risk position and profitability. The follow- ing measures deserve special mention from the risk perspective: (cid:2) Underwriting limits in the German industrial business halved (cid:2) Enhanced risk selection with corresponding rate modifications (cid:2) Targeted premium adjustments (cid:2) Selective portfolio restructuring (cid:2) Reduction of bonus allocation to life insurance policyholders The measures are backed up by group-wide report- ing procedures on risk and the development of risk capital. Taken together, these measures led to an appreciable stabilization of the risk situation and strengthening of profitability. This is evident, for example, from the development of the Group’s consolidated solvency margin: having stood at 231 %1 at the end of 2002, this figure was boosted to 241%1 in 2003 despite the additional requirements in connection with the acquisition of Securitas Versicherung. Solvency and capitalization banks 12.31.02 12.31.03 Liabilities insurance (Group) Capital resources insurance (Group) 1,817 3,686 2,076 4,453 Solvency margin Including banking assets Excluding banking assets 231% 203 % 241 % 214 % 8% of risk weighted assets banks Capital resources banks Capital ratio Liabilities (Group) Capital resources (Group) in CHF m 437 555 127 % 2,513 5,008 1 including imputed banking assets Bâloise-Holding Annual Report 2003 27 Corporate Governance Corporate governance at the Baloise As a value-oriented company, the Baloise is com- mitted to good corporate governance. In keeping with the description of corporate governance in the Swiss Code of Best Practice, we are convinced that – while preserving management’s decision-taking competen- cies and efficiency – transparency and checks and balances are desirable goals that serve the interests of our shareholders. The first section of this chapter focuses on steps im- plemented in 2003. The second section follows the structure of the SWX guideline with the aim of increas- ing transparency and hence comparability with other companies. Important changes In 2003, the Baloise introduced a number of innova- tions with important consequences for its corporate governance. The investment regulations of the Baloise Group, which regulate the asset management and asset al- location, were revised. The purpose of the investment activities is to generate a risk-adjusted performance on the basis of wide diversification and clear rules of competence while fulfilling the provisions required of the insurance business. In 2003, the group-wide compliance function created into 2002 was expanded and consolidated. Creating a group-wide network of compliance officers has fa- cilitated the task of introducing and implementing compliance standards. On the basis of the analysis of the compliance situation in the individual Group companies, local concepts were drawn up in accor- dance with the requirements of the Baloise Group. A group-wide Code of Conduct was introduced in 2003 and distributed to all employees. It can be viewed on the Internet. The Code of Conduct lays down mini- mum standards of behavior for employees; additional internal directives define these norms more precisely. A practice-oriented concept has been drawn up to train employees on how apply the Code of Conduct and will be implemented on a group-wide basis in 2004. Using concrete conflict situations, employees will be trained to recognize sensitive situations and to apply the Code of Conduct. (cid:2) www.baloise.com / Profile / Sustainability / Corporate Culture The willingness to question current practice, to be open to new concepts and to develop solutions to- gether are fundamental prerequisites for sustainable change. In 2003, the Baloise made substantial in- vestments in developing an employee-oriented cul- ture of trust and efficiency. In line with the Group’s corporate values, “Create value,” “Foster relations” and “Bring about change,” all business units drew up measures aimed at improving competitiveness and sustaining it in the long term, thus securing the future success of the Baloise. At the beginning of 2003, the Baloise took another step in developing its existing environmental man- agement structures. The resulting sustainability net- work encompasses the sections corporate ecology, products/markets, capital investment, compliance, human resources, communications, investor rela- tions, and corporate development. The sustainability network is responsible for: the further development of the Baloise’s sustainability strategy, the internal linking of sustainability measures, and the coordina- tion of the company’s internal and external sustain- ability communication activities. (cid:2) Sustainability, page 51 1. Group structure and breakdown of shareholders Group structure The Baloise is organized as a joint-stock holding company under Swiss law. The company has its head office in Basel and is quoted on the SWX Swiss exchange. As at December 31, 2003, the Baloise Group had a market capitalization of CHF 2,856.6 mil- lion. Further information on Baloise shares will be found in the “Baloise Shares” section from page 53. A list of important Group companies and partici- pations as at December 31, 2003, can be found in the Notes from page 119. Apart from Bâloise-Holding, no Group companies have a stock exchange listing. Segment reporting by business segments and regions can be found from page 76 of the Annual Report. The Group’s operational management structure is presented on page 42. Breakdown of shareholders Changes in share ownership Owing to major shareholders’ disposal of shares, the distribution of shareholders and the trading liquidity of Baloise shares improved noticeably in the past year. As at June 17, the stake held by the BZ had fallen be- low the 5 % threshold. According to an announce- ment made on July 17, the Dutch firm Strategic Money Bâloise-Holding Annual Report 2003 29 Corporate Governance Management was back below the 5 % threshold and the shareholding of the Zurich Financial Services Group had risen to 27%, of which 21.48% were held in shares and 5.52 % through options. This share- holding was subsequently sold on the broad mar- ket, and the stake of Zurich Financial Services fell back below the 5 % threshold again as at November 5, 2003. As a widely held joint-stock company, the Baloise is included in the Swiss Market Index (SMI) and features in the SWX’s index calculations with a free float of 100 %. Breakdown of shareholders As at December 31, 2003, the most significant reg- istered shareholder (Deutsche Bank Nominee) held 3.8% of the company’s outstanding shares, of which 2% were voting shares. No shareholder held a stake in the company that was legally required to be dis- closed as at the end of the year. As at December 31, 2003, 15,027 shareholders were recorded in the Baloise’s share register. By comparison with the pre- vious year, the number of registered shareholders rose by 25.6 %. The “Baloise Shares” section from page 53 of the An- nual Report provides further information on the break- down of our shareholders as at March 31, 2004. Own shares As at December 31, 2003, the Baloise held 414,303 of its own shares. These shares are used for, inter alia, incentive and employee profit-sharing programs. Cross-shareholdings There are no cross-shareholdings either in terms of capital or voting rights. 2. Capital structure Distribution policy The capital changes in recent years were marked by a shareholder-friendly distribution policy. Since 1997 roughly CHF 1,875 million have been paid out to shareholders in the form of cash dividends, share buybacks and nominal value repayments. 30 Distributions to shareholders Dividend payments Share buybacks Nominal value repayments Year 1997 1998 1999 2000 2001 2002 2003 Total – 85.8 111.4 140.7 136.1 132.7 21.9 628.6 185.6 300.3 – 335.3 293.2 – – 81.8 – – – 49.8 – – Total 267.4 386.1 111.4 476.0 479.1 132.7 21.9 1,114.4 131.6 1,874.6 in CHF m always at March 31 Share splits in 1997 and 2001 considerably increas- ed the trading liquidity of Baloise shares. Details of all distributions and capital transactions in favor of shareholders and the Baloise’s distribution policy can be found on the Baloise website. (cid:2) www.baloise.com / Investor Relations/Shares Bâloise-Holding capital and reserves The share buybacks and nominal value repayments in 2000 and 2001 had a strong impact on the Bâloise- Holding’s capital and reserves. In the 1999 / 2000 and 2000 / 2001 reporting periods, share buybacks led to a reduction of share capital by CHF 1.9 million and CHF 1.4 million, respectively. The nominal value repayment to the amount of CHF 9 per share in 2001 lowered the share capital by CHF 49.8 million to CHF 5.5 million at the end of the 2001/ 2002 financial year. Changes in Bâloise-Holding capital and reserves Financial year Financial year Financial year 2003 / 2004 2002 / 2003 2001 / 2002 5.5 11.7 55.1 326.5 281.4 5.5 11.7 20.0 509.5 22.8 5.5 11.7 14.0 515.5 41.9 Share capital General reserve Reserve for treasury stock Free reserve Accumulated profit Bâloise-Holding capital and reserves 680.2 569.5 588.6 in CHF m always at March 31 Since the 1:10 split in 2001, the ordinary share capi- tal of Bâloise-Holding has consisted of 55,307,150 registered shares entitled to dividends with a nomi- nal value of CHF 0.10 each. Further information on Baloise shares can be found in the “Shareholders’ participation rights” section. (cid:2) Shareholders’ participation rights, page 37 Authorized and conditional capital, other financial instruments Bâloise-Holding does not have any authorized or con- ditional capital. Similarly, there are no participation certificates, dividend rights certificates or convertible bonds relating to participation rights of the com- pany or options issued by it. Further details can be found on page 125 of the Financial Statements and in the Notes. For full details on the development of the consoli- dated capital and reserves in fiscal years 2000–2002, please see the corresponding sections in the annual reports for these years (Annual Report 2000: page 47, Annual Report 2001: page 64, Annual Report 2002: page 56). For details on changes in the consolidated capital and reserves in 2003, please see the corresponding section on page 74. Consolidated capital and reserves of the Baloise At end-2000, consolidated capital and reserves came to CHF 7,372.8 million. The changes up to the end of 2002 primarily reflect the hectic situation on the capital markets. At the end of 2001, the Baloise Group had consolidated capital and reserves of CHF 5,384.8 million. Subsequent price falls resulted in a further decline to CHF 3,088.1 million by the end of 2002. Thanks to a more stable capital market situa- tion coupled with operational counter-measures, con- solidated capital and reserves rose to CHF 3,319.8 million by end-2003. Share capital stood at CHF 56.7 million at end-2000, but by end-2001 it had dropped back to CHF 5.5 mil- lion owing to nominal value repayments amounting to CHF 49.8 million and share buybacks totaling CHF 1.4 million. At the end of 2002, nominal capital was an unchanged CHF 5.5 million. Capital reserves changed only slightly in the period under review. At the end of 2000, capital reserves totaled CHF 81.2 million. During 2001, they rose by CHF 28.1 million to CHF 109.3 million owing to net sales of treasury stock (own shares) but then edged down again by CHF 0.4 million to CHF 108.9 million owing to net purchases of treasury stock. Accumulated profit decreased during 2001 from CHF 3,834 million (position as at December 31, 2000) to CHF 3,810.5 million net owing to dividends, net profit and the repurchase of shares. In 2002, the accumu- lated profit declined – owing to the dividend pay- ment and the net loss for the year – to CHF 3,043.3 million. In 2000, the Baloise Group posted a consolidated net profit of CHF 634.4 million, its best result so far. Owing to the weak equity markets, the net profit for the following year fell to CHF 404.4 million. With the financial markets remaining bearish, and owing to exchange rate losses and major claims payments in the core German and Austrian markets, the Group posted a loss of CHF 634.5 million in fiscal 2002. Outstanding bonds Bâloise-Holding and other companies in the Group have issued bonds on public markets. As at Decem- ber 31, 2003, five bonds floated by Bâloise-Holding and other Group companies on public markets were outstanding. Details about the outstanding bonds can be found in the Notes to the Financial Statements from page 103. 3. Board of Directors Members of the Board of Directors Name Nationality Age Board Expiry of term of office member since Rolf Schäuble, Chairman CH 60 1993 2005 Walter G. Frehner, Vice-Chairman CH 71 1989 2004 Christoph J.C. Albrecht CH 66 1985 2006 Andreas Burckhardt Dietrich J. J. Forcart † Gertrud Höhler Klaus Jenny Georg F. Krayer Werner Kummer Arend Oetker Jean-Marc Rapp Eveline Saupper CH 53 1999 2006 CH 68 1973 – D 63 1998 2004 CH 62 2003 2006 CH 61 1995 2004 CH 57 2000 2004 D 65 1996 2005 CH 53 1999 2004 CH 46 1999 2005 Only the Chairman of the Board of Directors has an executive function. All the other members of the Board of Directors are independent, nonexecutive members. None of them held executive responsibil- ities at any Group company in the past three financial years and have any other substantive business rela- tionships with the Group. In the year under review, Christoph J.C. Albrecht, Andreas Burckhardt and Dietrich J. J. Forcart † were elected for a further three-year term of office. Klaus Jenny, a noted financial expert, was elected as a new member of the Board for a three-year term of office. Bâloise-Holding Annual Report 2003 31 Corporate Governance Gaudenz I. Staehelin, a member of the Chairman’s Committee and Chairman of the Compensation Com- mittee, retired from the Board of Directors. Klaus Jenny took his seat in these two committees, while Georg F. Krayer assumed the chairmanship of the Compensation Committee. In conformity with the Ar- ticles of Incorporation, the Vice-Chairman of the Board of Directors, Walter G. Frehner, will resign from the Board in 2004. A proposal is being submitted to the 2004 Annual General Meeting to elect Hansjörg Frei, an experi- enced insurance industry expert, as a new Member of the Board of Directors. Mr. Frei (born 1941, CH, Dr. iur.) worked at Winterthur Insurance from 1982, latterly as member of the Executive Board with re- sponsibility for Swiss business; from 2000 until his retirement in mid-2003, he worked for Credit Suisse Financial Services as a member of this bank’s Execu- tive Board (Head of International Country Manage- ment). From 2000 to 2003, he was also the Chairman of the Swiss Insurance Association (SVV). Rolf Schäuble (born 1944, CH, Dr. oec., University of St. Gallen) has been a Member of the Board of Di- rectors since 1993 and Chairman since 1994. From 1996 to February 28, 2002, he was also Managing Director and CEO. He graduated in economics and obtained a doctorate from the University of St. Gallen. From 1975 to 1993, Rolf Schäuble held various po- sitions at the Zurich Insurance Group, Zurich, culmi- nating in a seat on the Corporate Executive Board. Walter G. Frehner (born 1933, CH) has been a Member of the Board of Directors since 1989 and Vice-Chairman since 1995. He graduated from commercial school and completed a bank apprenticeship. From 1987 to 1993 Walter G. Frehner was CEO and subsequently, until he reached retirement age in 1996, Chairman of the Board of Directors of Swiss Bank Corporation (today UBS AG). He was a Member of the Board of Di- rectors of Novartis AG, Basel. Walter G. Frehner is an independent, non-executive Member of the Board. Christoph J.C. Albrecht (born 1938, CH, Dr. iur.) has been a Member of the Board of Directors since 1985. He graduated from the University of Basel with a doc- torate in law. Today he works as an attorney at law and notary with Joerin Hopf, Basel. Christoph J.C. Albrecht is Chairman of the Board of Directors of Thüring AG, Basel, and a Member of the Board of Di- rectors of Interhaba AG, Basel. He is an independent, non-executive Member of the Board. studied law at the Universities of Basel and Geneva and obtained a doctorate. From 1982 to 1987 he worked for the Fides Treuhandgesellschaft and was General Secretary of the Baloise Group. He has been Director of the Chamber of Commerce of both Basel- Landschaft and Basel-Stadt since 1994. Andreas Burckhardt is an independent, non-executive Mem- ber of the Board. Dietrich J.J. Forcart †1 (born 1936, CH) was a Member of the Board of Directors from 1973. He was a partner in La Roche & Co Banquiers and Chairman of the Board of Directors of La Roche & Co AG, Bern. Dietrich J. J. Forcart was an independent, non-executive Member of the Board. Gertrud Höhler (born 1941, D, Prof. Dr. phil.) has been a Member of the Board of Directors since 1998. She is an economic and political consultant, and was a professor of literature and German studies at the University of Paderborn from 1976 to 1993. She stud- ied literature and art history in Bonn, Berlin, Zurich and Mannheim. From 1987 to 1990 Gertrud Höhler was a PR consultant for Deutsche Bank AG, and from 1992 to 1995 a non-executive Member of the Board of Grand Metropolitan PLC, London. She is a Member of the Board of Directors of Ciba Specialty Chemicals, AG, Basel, and Georg Fischer AG, Schaffhausen. She is an independent, non-executive Member of the Board. Klaus Jenny (born 1942, CH, Dr. oec., University of St.Gallen) has been a Member of the Board of Direc- tors since 2003. He graduated with a doctorate in economics from the University of St. Gallen. From 1987 Klaus Jenny was a member of the Executive Board of Credit Suisse (later the Credit Suisse Group). Before leaving the Credit Suisse Group, he was CEO of the Credit Suisse Private Banking Business Unit. Since 1999 he has worked as a financial advisor to companies and private individuals. He is a Member of the Board of Directors of Maus Frères SA and Huber & Suhner, Herisau and Pfäffikon. Klaus Jenny is an independent, non-executive Member of the Board. Georg F. Krayer (born 1943, CH, Dr. iur.) has been a Member of the Board of Directors since 1995. He studied and obtained the doctorate in law. He is Chairman of the Board of Directors of Bank Sarasin & Cie AG, Basel, a Member of the Board of Directors of Pirelli SpA, Milan, and was Chairman of the Swiss Bankers Association until 2003. He is an indepen- dent, non-executive Member of the Board. Andreas Burckhardt (born 1951, CH, Dr. iur.) has been a Member of the Board of Directors since 1999. He 1 We were deeply saddened by the death of Dietrich J. J. Forcart in January 2004. Mr. Forcart was a highly respected member of the Board of Directors, on which he served for many years. 32 Werner Kummer (born 1947, CH, Dipl.-Ing. ETH, MBA Insead) has been a Member of the Board of Direc- tors since 2000. From 1990 to 1994 he was CEO of Schindler Elevator Corporation and then until 1998 member of the Executive Committee of the same com- pany, responsible for the Asia Pacific region. From 1998 to March 2004 he was CEO of Forbo Holding AG / Forbo International S.A. Werner Kummer is a Member of the Board of Directors of WMH Walter Meier Holding AG. He is an independent, non-execu- tive Member of the Board. Arend Oetker (born 1939, D, Dr. rer. pol.) has been a Member of the Board of Directors since 1996. He studied business management and political science at the Universities of Hamburg, Berlin and Cologne, obtaining a doctorate in political science from the University of Cologne. He is Executive Partner of Dr. Arend Oetker GmbH & Co., Berlin. Arend Oetker is Chairman of the Supervisory Board of Schwartauer Werke GmbH & Co. KGaA, Bad Schwartau, Chairman of the Board of Directors of Hero AG, Lenzburg, mem- ber of the Supervisory Board of Degussa AG, Düssel- dorf, Member of the Supervisory Board and Board of Partners of Merck KGaA, Darmstadt, and Deputy Chairman of the Supervisory Board of KWS Saat AG, Einbeck. He is an independent, non-executive Mem- ber of the Board. Jean-Marc Rapp (born 1951, CH, Prof. Dr. iur.) has been a Member of the Board of Directors since 1999. He gained his doctorate in law at the University of Lausanne and obtained a postgraduate diploma in Berkeley, USA. He is an attorney-at-law and has been professor of commercial and contract law at the University of Lausanne since 1989 and Principal of the University of Lausanne since 1999. Jean-Marc Rapp is an independent, non-executive Member of the Board. Eveline Saupper (born 1958, CH, Dr. iur.) has been a Member of the Board of Directors since 1999. She studied law at the University of St. Gallen, where she obtained her doctorate. She is an attorney-at-law and a certified Swiss federal tax expert. From 1983 to 1985 she worked for Peat Marwick Mitchell (today KPMG Fides), Zurich, and from 1985 to 1992 for Baker & McKenzie, Zurich and Chicago. In 1992 she joined the firm Homburger Attorneys, Zurich, where she is a partner. Eveline Saupper is Chairman of the Board of Directors of BZ Bank AG, Freienbach, and Member of the Board of Directors of Intershop Holding AG, Winterthur. She is an independent, non-executive Member of the Board. Further information about the Members of the Board of Directors can be found on the Internet. (cid:2) www.baloise.com / Profile / Organization / Board of Directors Cross-shareholdings There are no cross-shareholdings. Elections and term of office As at December 31, 2003, the Board of Directors con- sisted of 12 members who are elected by the General Meeting for a term of three years. Each year, one-third of the members retire unless re-elected (staggered renewal). Under an age restriction, board mandates end at the latest at the General Meeting that follows the member’s 70th birthday. The average age is cur- rently about 60. Each Member of the Board of Direc- tors is elected – and, at the shareholders’ request, granted discharge – individually. Internal organization Functions of the Board of Directors Subject to the decision-making powers of the share- holders at the General Meeting, the Board of Directors is the highest decision-making body of the company. In principle, unless the organizational regulations de- legate powers to the Chairman of the Board of Direc- tors, the Board committees or the Corporate Execu- tive Committee, decisions are taken by the Board of Directors. Under Art. 716a of the Swiss Code of Obligations and Section 1 II of the organizational regulations, the main tasks of the Board of Directors are to oversee and supervise the company’s general and financial operations and to determine its organization. (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations Committees of the Board of Directors The Board of Directors has four committees to assist it in its work. The committees report to the Board of Directors and submit proposals; the Compensation Committee in particular has its own decision-making powers. (cid:2) Board of Directors and Management Structure, page 41 Bâloise-Holding Annual Report 2003 33 Corporate Governance Committees of the Board of Directors Invest- Chairman’s ment Committee Committee Committee Committee Compen- sation Audit C VC M M VC M M C C VC M M C VC M M Name Rolf Schäuble Walter G. Frehner Christoph J.C. Albrecht Andreas Burckhardt Dietrich J. J. Forcart † Gertrud Höhler Klaus Jenny Georg F. Krayer Werner Kummer Arend Oetker Jean-Marc Rapp Eveline Saupper C: Chairman; VC: Vice-Chairman; M: Member The committees appointed by the Board of Directors consist of at least four members reselected annually by the Board of Directors. Further points to bear in mind are that the Chairman and Vice-Chairman of the Board of Directors are ex officio members of the Chairman’s Committee and that the Chairman of the Board of Directors cannot be a member of the Audit Committee. The committees’ basic tasks are defined by the organizational regulations and the written re- gulations applicable to the committees. (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations The Chairman’s Committee is responsible for delib- erating on particularly important business, especially in connection with major decisions on strategy or personnel. The Chairman’s Committee also functions as the Nomination Committee and as the Investment Committee, which approves the Group’s investment policy and investments in real estate for the Group’s own use at Head Office. The Compensation Committee determines the struc- ture and amount of compensation for Board mem- bers and the salaries of the members of the Corpo- rate Executive Committee. In the incentive plan, it defines the overriding Group objectives and their at- tainment, and it approves the rules governing com- pensation for members of the Corporate Executive Committee and monitors their correct application. The Audit Committee assists the Board of Directors in tasks that cannot be delegated relating to super- vision and financial monitoring (Art. 716a Swiss Code of Obligations) by forming its own judgment on the organization and functioning of the internal and ex- ternal monitoring systems and on the annual and consolidated financial statements. Furthermore the 34 Audit Committee assesses the functioning of the in- ternal monitoring system for risk management and reviews the state of compliance. The Audit Committee discussed the Group financial statements for the 2003 financial year with the management and the external auditors. As a result, the Audit Committee recommended that these audited annual statements be incorporated into the Group’s Annual Report for the financial year ended on December 31, 2003, that is to be presented to the General Meeting. The Board of Directors accepted this recommendation. Meetings of the Board of Directors and the committees In accordance with the organizational regulations, the full Board of Directors meets as often as business requires, but at least four times a year. (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations In 2003, the full Board of Directors met four times. Members’ attendance at the meetings was 93.7% in 2002 and 95.8 % in 2003. (cid:2) www.baloise.com/Profile/Corporate Governance/ Organization/Board Attendance In 2003 – as in every year – a seminar was held for the Members of the Board of Directors. The subject this year was “Life,” with the focus on group life and individual life. Last year, the Chairman’s Committee and the Invest- ment Committee met eight times, the Audit Commit- tee and the Compensation Committee four times each. Meetings of the full Board of Directors are re- gularly attended by members of the Corporate Exe- cutive Committee, while meetings of the Audit Com- mittee are attended mainly by the Group CEO, the Group CFO, the Head of Group Internal Audit and rep- resentatives of the external auditors. Division of powers and duties between the Board of Directors and the Corporate Executive Committee The division of powers and duties between the Board of Directors and the Corporate Executive Committee is laid down primarily in the organizational and in- vestment regulations. Both documents are regularly reviewed to ensure their suitability and where neces- sary adapted to changed circumstances. As a conse- quence, the organizational regulations were revised in 2002; the revised investment regulations entered into force on July 1, 2003. (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations Auditing and monitoring the Corporate Executive Committee The ten internal Group auditors report directly to the Chairman of the Board. Their specialist knowledge covers the fields of underwriting, mathematics, fi- nance and IT. The significance of a well-functioning risk manage- ment at an insurance group cannot be emphasized enough, which is why this Report devotes a separ- ate chapter to the risk management at the Baloise (page 26). 4. Corporate Executive Committee The management structure of the Baloise Group can be found on page 42. Frank Schnewlin (born 1951, CH, Dr ès sc. écon., Master of Science LSE, MBA Harvard) studied business management at the University of St. Gallen and gra- duated with a degree in economics (lic. oec. HSG), majoring in insurance and risk management. After gaining an M.Sc. at the London School of Econo- mics, he took an MBA at Harvard Business School in Boston. While a Research Fellow of the Harvard Business School, Frank Schnewlin obtained his doc- torate in economics at the University of Lausanne. He worked at the Institut für Versicherungswirtschaft in St. Gallen and at Citibank N.A., New York. From 1983 to 2002, he was employed at Zurich Financial Services in various positions. In 1993 he was appointed a Member of the Group Management Board with re- sponsibility for the Business Division Southern Europe, Asia/Pacific, Latin America, Middle East and Africa. Since November 2000, he has been Head of Corporate Center and a Member of the Executive Committee of the Group Management Board. Since March 2002, Frank Schnewlin has been Chief Execu- tive Officer of the Baloise Group and Head of the International Corporate Division. Bruno Dallo (born 1957, CH, Dr. iur.) graduated from the University of Basel with a doctorate in law. He is an attorney-at-law. After a period in various law offices and in the legal department of a major bank, he joined the Baloise Group in 1986. From 1994 to 2001, he was General Counsel (Head of Legal and Taxes); from 1999 to 2001, he was also secretary to the Board of Direc- tors. He was in charge of various merger and acquisi- tion projects. He has been a member of the Corporate Executive Committee since 2001 (Head of Corporate Center), responsible for corporate development, human resources, legal, tax, compliance and runoff. Bruno Dallo is Chairman of the Board of Trustees of the Baloise Pension Foundation. Furthermore, he is a member of the Basel-Stadt tax appeals committee and the tax and finance committee of the Chamber of Commerce of Basel-Stadt and Basel-Landschaft. Wolfgang Drunk (born 1965, D, Dipl.-Phys., MBA In- sead) studied physics, mathematics and business management in the USA and Germany, and took an MBA at the Insead Institute at Fontainebleau. From 1991 to 1998, he worked for McKinsey & Company in different positions, initially as a management consultant for insurance companies, banks and car manufacturers in various European companies, and subsequently as Project Manager in a range of pro- jects for insurance companies. In this period he also completed a number of advanced training courses focusing on risk management, reinsurance, corporate finance, and strategy and organization. In 1998 he was appointed head of the risk management and reinsurance units at the Baloise Group, and in 2001 he became a member of the Corporate Executive Committee, responsible for financial relations, fi- nancial management and financial accounting. Martin Strobel (born 1966, D, Dr. rer. pol.) studied computer science, business management and business systems at the Universities of Kaiserslautern, Windsor (Canada), and Bamberg, where he obtained his doctorate. From 1993 to 1999, he worked for the Boston Consulting Group, Düsseldorf, in different po- sitions dealing with questions of strategic IT manage- ment in the banking and insurance sectors. He joined the Baloise Group at the beginning of 1999. He was Head of IT at Baloise Switzerland and responsible for large interdivisional projects in the fields of insurance and finance. Since 2003, he has been a member of the Corporate Executive Committee (Head of the Switzerland Corporate Division). Martin Strobel is a member of the Board of the Swiss Insurance Asso- ciation (SVV) and a member of the “Finance Forum” Advisory Committee. Martin Wenk (born 1957, CH) graduated in law from the University of Basel, before working for a large bank in different positions between 1982 and 1992. After initially working as an investment advisor to in- stitutional clients, he went on to head a private bank- ing group in New York and then became a sector head in securities sales, attending primarily to the needs of major institutionals. During this period, he com- pleted further training courses in Switzerland and the USA. From 1992 to 2000 he headed Portfolio Manage- ment Switzerland at the Baloise Group, with respon- sibility for managing the assets of various Baloise companies in Switzerland and of the Group, including Bâloise-Holding Annual Report 2003 35 Corporate Governance pension funds. In 2001 he was appointed a member of the Corporate Executive Committee, responsible for Corporate Division Asset Management comprising the units Baloise Asset Management, Real Estate and Mortgages, and Baloise Fund Invest. Further information about the members of the Corpo- rate Executive Committee and about other activities and interests can be found on the Internet. There are no management agreements in which management functions are transferred to third persons. (cid:2) www.baloise.com / Profile / Organization / Corporate Executive Committee 5. Compensation, shareholdings, loans This section is divided into three parts: (cid:2) the Members of the Board of Directors other than the Chairman, (cid:2) the Chairman of the Board of Directors and (cid:2) the Corporate Executive Committee. To facilitate assessment of the Baloise’s compensa- tion policy, gross compensation figures are used rather than tax figures. Loans2 Mortgages and loans against insurance policies CHF 650,000 1 see “Change of control and countermeasures” page 38 2 Mortgages are granted at conditions that apply to employees (1% below the interest rate paid by customers for variable-rate mortgages). There were no loans against insurance policies. The Chairman of the Board of Directors and the Corporate Executive Committee The nature and amount of the compensation paid to the Chairman of the Board of Directors and the mem- bers of the Corporate Executive Committee are de- termined by the Compensation Committee of the Board of Directors. It consists of a basic salary and an incentive based on achieving corporate objectives on the one hand and individual objectives on the other up to a maximum amount equal to two-thirds of the basic salary. 50% of the incentive must be taken in the form of shares or options. The corporate objectives for the coming year are determined in a multistage process and approved by the Compensa- tion Committee at the end of each year. Individual objectives are directly related to the respective res- ponsibilities of each member of the Corporate Ex- ecutive Committee; they are set in consultation with the superior and approved by the Compensation Committee. Members of the Board of Directors With the exception of the Chairman, the members of the Board of Directors receive flat-rate compensation in cash, which is determined by the Compensation Committee of the Board of Directors. As published in accordance with the Guidelines, com- pensation for the 11 nonexecutive Members of the Board of Directors in 2003 was as follows: In 2003, the company introduced the direct alloca- tion of shares at a preferential price for all persons entitled to incentives in all Group companies. The subscription price at any time is 10% lower than the market value at the time of subscription. Thus, shares may henceforth be subscribed either directly or, as in the past, linked to a loan on which interest strengthens the impact of the shares allocated (lev- erage effect). Compensation in the year under review Cash compensation CHF 1,490,000 Allocation in the form of shares Allocation in the form of options 0 0 Ownership of shares and options Share ownership Option ownership Number Year of allocation Term to maturity Subscription ratio Exercise price in CHF 113,390 registered shares Contractual option1 8,400 1999 5 years 1:10 CHF 125.80 The loan repayment after a three-year-blocking period is hedged with a put option financed by the sale of a corresponding call option. After expiry of the block- ing period, employees receive the shares remaining after repayment of the loan for their free disposal. Finally, under the options plan, the options, quoted on the stock market, are purchased by the Baloise Group from third parties at market value. Options subscribed may not be sold for two years. Given the choice of taking the mandatory part of the incentive in either shares or options, employees chose shares without exception in 2003 (either di- rectly or linked to a loan). In view of the imminent changes in the law, the options plan will not be of- fered as an incentive choice in 2004. 36 Chairman of the Board of Directors: Rolf Schäuble 6. Shareholders’ participation rights Compensation in the year under review Cash compensation Allocation in the form of shares Allocation in the form of options Additional fees and payments CHF 1,580,026 373,113 0 0 Maximum total compensation CHF 1,953,139 Ownership of shares and options Share ownership 20,286 registered shares BALIX BALUP option1 Contractual Number Year of allocation Term to maturity Subscription ratio Exercise price in CHF 444,557 2002 3 years 50:1 197.1 – – – – – – – – – – Loans2 Mortgages and loans against insurance policies CHF 500,000 1 see “Change of control and countermeasures” page 38 2 Mortgages are granted at conditions that apply to employees (1% below the interest rate paid by customers for variable-rate mortgages). There were no loans against insurance policies. Members of the Corporate Executive Committee The Corporate Executive Committee consists of five members. No severance payments were made in 2003. Compensation in the year under review Cash compensation Allocation in the form of shares Allocation in the form of options Additional fees and payments CHF 3,447,288 CHF 846,411 0 0 Total compensation CHF 4,293,699 Ownership of shares and options Share ownership 26,349 registered shares BALIX BALUP BALUP option1 Contractual Number 514,814 Year of allocation 2002 Term to maturity 3 years Subscription ratio 50:1 Exercise price in CHF 197.1 – – – – – – – – – – – – – – – Loans2 Mortgages and loans against insurance policies CHF 1,586,000 Voting rights The share capital of the Baloise consists exclusively of registered shares. There are no shares with prefer- ential voting rights. In order to ensure broad-based shareholding and to protect minority shareholders, no shareholder, regardless of the size of holding in- volved, is registered with more than 2 % of voting rights. The Board of Directors may approve exceptions to this rule by a majority of two-thirds of all members (Art. 5 of the Articles of Incorporation). There are no exceptions at present. Every share gives the right to one vote. In exercising voting rights, no shareholder may, either directly or indirectly by combining his own with proxy votes, hold more than one-fifth of the shares with voting rights at the General Meeting. Any shareholder may trans- fer his / her voting rights to another shareholder by written power of attorney (Art. 16 of the Articles of Incorporation). Any annulment of statutory restric- tions on voting, see the following section on statu- tory quorums. (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations Statutory quorums The General Meeting constitutes a quorum regardless of the number of shareholders and represented votes attending the Meeting unless there are compelling statutory requirements to the contrary (Art. 17 of the Articles of Incorporation). (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations Any annulment of statutory restrictions on voting rights will require the agreement of at least three quarters of the votes represented at the General Meeting, and at the same time at least one-third of all the shares issued by the company. This qualified majority is also required in the cases envisaged in Art. 17(3) a–h of the Articles of Incorporation. Other- wise, subject to any compelling statutory require- ments to the contrary, resolutions will be adopted by a simple majority of votes cast (Art. 17 of the Articles of Incorporation). (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations 1 see “Change of control and countermeasures” page 38 2 Mortgages are granted at conditions that apply to employees (1% below the interest rate paid by customers for variable-rate mortgages). There were no loans against insurance policies. Convening the General Meeting As a rule, the General Meeting takes place in May, and at the latest six months after the end of the financial year. Bâloise-Holding’s financial year ends on March Bâloise-Holding Annual Report 2003 37 Corporate Governance 31. Notice of the convening of the General Meeting must be given at least 20 days before the appointed date of the General Meeting. Each registered share- holder receives a personal invitation that includes the agenda of the Meeting. Invitation and agenda shall also be published in the Swiss Commercial Gazette (Schweizerisches Handelsamtsblatt), in various news- papers and on the Internet. Extraordinary General Meetings may be convened by decision of the General Meeting, the Board of Direc- tors or the external auditors. Furthermore, in accor- dance with the statutory provisions, the Board of Directors has to convene an extraordinary General Meeting if requested to do so by shareholders (Art. 11 of the Articles of Incorporation). According to Ar- ticle 699 (3) of the Swiss Code of Obligations, the request must represent at least 10 % of the com- pany’s share capital. (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations Including items on the agenda Shareholders’ requests pursuant to Article 699 (3) of the Swiss Code of Obligations for the inclusion of items on the agenda may be submitted by one or more shareholders representing at least 10 % of the share capital or shares with a nominal value of at least CHF 100,000. Such requests including the mo- tions to be put to the General Meeting must be sub- mitted to the Board of Directors in writing at least six weeks before the annual General Meeting (Art. 14 of the Articles of Incorporation). (cid:2) www.baloise.com/Profile/Corporate Governance/ 7. Change of control and countermeasures Shareholders, whether acting alone or as a group by agreement, that acquire 33 1/3% of all Baloise shares are obliged to submit a take-over bid to all remain- ing shareholders. The Baloise has never made use of the possibility to deviate from or waive this regulation. The Articles of Incorporation contain neither an opt- out nor an opt-in clause as defined in the Federal act on the stock exchanges and share trading (Stock Exchange Law). However, there are two different types of change of control clauses: Since 1999, agreements have been in force with the members of the Board of Directors and the Corporate Executive Committee that in the event of a change of control they will be compensated for the intrinsic value of their options (contractual options that expire in 2004), subject to a guaranteed minimum. This amounts to CHF 7.6 million for the Board of Directors and the Corporate Executive Committee together. Agreements also exist with the members of the Corpo- rate Executive Committee and other members of sen- ior management whereby severance payments will be triggered if the employee is given notice (or, under certain conditions, if the employee gives notice) within a specified period of time following the change of control. The amount of these payments will be in conformity with market practice. Articles of Incorporation and Regulations 8. Statutory auditors Registration of shares Shareholders entitled to vote at the General Meeting are those who, on the reference date specified in the invitation from the Board of Directors, a date a few days ahead of the General Meeting, are entered in the share register as shareholders with voting rights (Art. 16 of the Articles of Incorporation). (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations The admissibility of nominee registrations, including the relevant percentage clauses and conditions of registration, is dealt with in Article 5 of the Articles of Incorporation. The procedures and preconditions for canceling or restricting transferability are laid down in Articles 5 and 17 of the Articles of Incorporation. (cid:2) www.baloise.com/Profile/Corporate Governance/ Articles of Incorporation and Regulations PricewaterhouseCoopers (PwC) and its predecessor, Schweizerische Treuhandgesellschaft / STG Coopers & Lybrand, have been the statutory auditors of the Baloise since 1962. The statutory auditors are chosen by the General Meeting each year. The lead auditor, Mr. Peter Lüssi, who assumed this office in 2002, has worked on the Baloise audit since 1999. The following fees were charged by Pricewaterhouse- Coopers in the year under review; the figures refer to its groupwide activities. Fees of PricewaterhouseCoopers 2002 2003 Auditors’ fees 1,338,625 1,469,625 Fee for audit-related activities Consultancy fee Total in CHF 165,432 307,802 358,573 552,302 1,811,859 2,379,875 38 The Baloise has an Audit Committee made up of in- dependent members qualified in finance and ac- counting. The Audit Committee monitors the coordi- nation of the internal audit, risk management, and compliance with the external auditors. It also verifies the independence of the external auditors. 9. Information policy Information policy The Baloise Group informs shareholders, potential investors, employees, customers and the general public as comprehensively, openly and regularly as possible. This enables the Baloise to foster an under- standing of its objectives, strategy and business ac- tivities. The Baloise is actively involved in committees and bodies working towards the conception and imple- mentation of accounting standards and drawing up of concepts specifically for the insurance industry. Information events The Baloise provides detailed information on its business activities in (cid:2) Annual and Semi-Annual Reports (cid:2) Annual and semi-annual media conferences (cid:2) Meetings with financial analysts and investors, and (cid:2) the Annual General Meeting. Media releases on important projects and initia- tives are a further important form of communication. At special events and roadshows the Baloise en- gages in dialogue with investors and media repre- sentatives. Information about Baloise shares Information about Baloise shares can be found from page 53. Financial calendar Investors will find the most important dates for inves- tors on the Internet, including the publication dates of the Annual and Semi-Annual Reports. In connec- tion with the General Meeting, the calendar contains the date of the invitation to the General Meeting, the closing of shareholder registration, and, if appli- cable, the ex-dividend date. (cid:2) www.baloise.com / Investor Relations / Calendar Availability of documents Shareholders can access media releases, disclosure reports, presentations, addresses and Annual and Semi-Annual Reports on the Internet. In 2004, the Baloise published, for the first time, a Sustainability Report that informs readers about the sustainable business approach of the Baloise. All documents can be obtained through Investor Re- lations (see below) or ordered on the Internet. (cid:2) www.baloise.com / Investor Relations / Presentations Contacts Investor Relations Carsten Stolz Head of Financial Relations Aeschengraben 21 4002 Basel Phone + 41 61 285 83 65 Fax + 41 61 285 75 62 E-mail carsten.stolz @ baloise.com Corporate Governance Thomas Sieber Secretary of the Board of Directors / Head of Legal and Taxes Aeschengraben 21 4002 Basel Phone +41 61 285 86 48 Fax + 41 61 285 91 90 E-mail thomas.sieber @ baloise.com www.baloise.com Bâloise-Holding Annual Report 2003 39 Organization Board of Directors and management structure Board of Directors Board committees Rolf Schäuble, Chairman, Lenzburg Walter G. Frehner, Vice Chairman, Riehen Christoph J.C. Albrecht, Basel Andreas Burckhardt, Basel Dietrich J. J. Forcart †1, Riehen Gertrud Höhler, Berlin Georg F. Krayer, Basel Werner Kummer, Küsnacht Arend Oetker, Berlin Jean-Marc Rapp, Lausanne Eveline Saupper, Pfäffikon SZ Klaus Jenny, Zurich Secretary of the Board of Directors Thomas Sieber, Rheinfelden Internal audit Erich Bernischke, Basel Auditors PricewaterhouseCoopers AG, Basel Chairman’s Committee Audit Committee Compensation Committee Investment Committee Board committees and their members Chairman’s Committee Rolf Schäuble, Chairman Walter G. Frehner, Vice-Chairman Georg F. Krayer Klaus Jenny Audit Committee Walter G. Frehner, Chairman Christoph J.C. Albrecht, Vice-Chairman Dietrich J. J. Forcart †1 Werner Kummer Compensation Committee Georg F. Krayer, Chairman Walter G. Frehner, Vice-Chairman Klaus Jenny Gertrud Höhler Investment Committee Rolf Schäuble, Chairman Walter G. Frehner, Vice-Chairman Georg F. Krayer Klaus Jenny 1 died in January 2004 Bâloise-Holding Annual Report 2003 41 Organization Management structure on April 1, 2004 CEO Frank Schnewlin* Group / Regional Performance Management Annemarie D’Hulster Group Secretariat / Corporate Communications Thomas Kähr Switzerland International Finance Asset Management Corporate Center Martin Strobel* Frank Schnewlin* Wolfgang Drunk* Martin Wenk* Bruno Dallo* Individual Customers Franz Josef Kaltenbach Germany, Financial Relations Baloise Asset Corporate Basler Securitas Carsten Stolz Management Development Frank Grund Reto Diezi Thomas Wodrich Financial Germany, Management Real Estate / Human Resources Baloise Bank SoBa Deutscher Ring Annemarie D’Hulster Mortgages Frank Sigl Alois Müller Wolfgang Fauter Urs Degen Financial Accounting Legal and Taxes Michael Müller Baloise Fund Invest Thomas Sieber Robert Antonietti Compliance Peter Kalberer Runoff Bruno Rappo Sales Management Daniel Fluri Belgium, Mercator Jan De Meulder Information Systems and Logistics Luxembourg, René Güttinger Bâloise Accounting / Controlling Urs Bienz André Bredimus Austria, Basler Lothar Mayrhofer * Member of the Corporate Executive Committee 42 “What is true of our inner, personal values also applies to the values of our company. They drive our actions and must be clearly reflected in what we do. The more consistently I act in accordance with our values, the more intensively and convincingly I live them, the less I need to talk about them. I can be measured by my actions. Last year, I initiated a focus program with five key factors by which we can improve our value creation. My vision is to transform the Baloise into a gem in its field for customers, employees and shareholders. As CEO I am responsible for the im- plementation of this vision. The past year showed that we are on the right track. We made good progress, and I know we can improve further. I am optimistic, and hopefully my optimism will inspire everyone at the Baloise.” Frank Schnewlin CEO Bâloise-Holding Annual Report 2003 43 Organization “Playing a part in designing integration processes and new structures, motivating managers on our road to a common future, communicating the culture of our company and establishing new partnerships are key tasks for me. Setting up Basler Securitas in 2003 was a case in point where we realized these targets in the German market. We grow with such tasks. In this context, the Baloise corporate values serve as a com- pass for me.” Bruno Dallo Corporate Center 44 “Creating, measuring and optimizing value are part of the day-to-day business of a performance-oriented finance division. Value creation owes a lot to a com- pany’s ability to relate and to change. We have there- fore very consciously intensified our dialogue with customers, employees and the sales force, as well as our cooperation with investors and their represen- tatives. For they all, like us, need value not as words, but in the form of action and results. This is what we are committed to.” Wolfgang Drunk Finance Bâloise-Holding Annual Report 2003 45 Organization “Within the framework of our high-earning power strat- egy, our focusing on value has effected real change. We have boosted value-adding activities and, after thorough evaluation, put an end to value-reducing ones. The earning-focused approach to all our activi- ties was discussed and implemented at all levels. We also put our ‘foster relations’ principle into action, for instance by organizing customer events, which were very well received owing to the clear and open infor- mation we provided. Transparency makes for trust. This also holds true for our in-house activities. A dia- logue culture was fostered at staff events, departmen- tal visits, the general agents’ tour and the Manage- ment Summer School; a culture that has helped gear the Baloise up for the challenges of the future.” Martin Strobel Switzerland 46 “Capital investment is basically about creating and enhancing value for the benefit of customers, staff and shareholders. Even if we primarily think of ma- terial values, the past years have shown that sustain- able success is only possible if higher and long-term values serve as guidelines. That is why the introduc- tion of the corporate values has met with such inter- est at the Baloise. After analyzing the first surveys, we immediately began with the implementation. At various events we developed special measures and activities with the aim of deliberately shaping our re- lations and the change we are subject to. A beginning has thus been made; the conditions for creating new values are there. The program is being continued.” Martin Wenk Asset Management Bâloise-Holding Annual Report 2003 47 Human Resources Clear management structures and targeted skills development It is our employees who make the most vital contri- bution to the success of the Baloise. To support them in their daily work and in the achievement of our exacting common objectives, the Group continued to invest heavily in the enhancement of corporate culture, management structure and personnel skills development in the year under review. The Baloise’s corporate values, encapsulated as “Create value,” “Foster relations” and “Bring about change,” served as overall guidelines. Create value: The Baloise strives for sustainable value creation, which also involves long-term planning of its personnel requirements. With the integration of the German Securitas companies (which added around 540 people to our workforce as of January 2003) and the ensuing setup of Basler Securitas (counting a total staff of around 1,100), we registered signifi- cant growth in Germany. However, the ongoing opti- mization of structures and processes had repercus- sions on the staff count in certain business areas, in Switzerland particularly in the sales force and the private banking sector. By means of a hiring freeze, the internal filling of vacancies, natural fluctuations and early retirement, the number of redundancies was kept at a minimum. In Belgium, the workforce had to be reduced by close to 200 employees from all sectors of the business. By providing early retire- ment solutions, which Belgian law allows from age 52, cases of hardship were largely avoided here, too. The number of people employed at the Baloise Group as at December 31, 2003, came to 8,745 (2002: 8,703). Our staff are entitled to participate in the value of the company. A well-endowed system of social and fringe benefits is in force, and performance-related remu- neration as part of the pay package serves as incen- tive in particular at middle and senior management level. 480 staff members were included in the in- centive program. Performance-related pay made up around 4.7 % of the overall wage costs. Foster relations: The success of our company is built on the performance of our staff. Their motivation, dedication and job satisfaction are therefore prime success factors, and these are closely linked to clear management structures and a people-oriented cul- ture of trust. In-house surveys show that what our staff value most are interesting and challenging tasks, sufficient creative freedom, and good and open re- lations with colleagues and line managers. Bring about change: The unwavering implementation of our corporate strategy and the changes this often necessitates places high demands on staff and man- agement alike. In the annual objective-setting pro- cess, the line manager formulates his / her expecta- tions – ultimately derived from the corporate strategy – and agrees with the individual staff members what they are expected to contribute. Thus expectations are clearly and transparently expressed. Reporting lines between Head Office and the strategic business units were also clarified and were actively developed in several areas in 2003. To become more competitive, it is essential that we develop our staff’s skills in line with our strategic re- quirements. A key skill to be fostered is the ability to implement, i.e. the ability to attain operational ex- cellence in all relevant fields. Both in Switzerland and Germany, the Baloise maintains its own personnel training and management development centers. In addition, a large number of staff members make use of external training opportunities, the costs of which are usually borne by the company. In all, the Group invested nearly CHF 13 million in personnel training and development in 2003. Thanks to its well-estab- lished and comprehensive management training prog- rams, the Baloise was again able to recruit managers at all levels from its own ranks – people who have gained the technical knowledge, interpersonal skills and high customer awareness necessary to make a difference to the success of the company. Finally, 420 positions offered to apprentices, trainees and interns throughout the Group prove that the Baloise also takes its social responsibility for the education and training of young people very seriously indeed. Employees 2003 in percent Switzerland Germany Benelux Other countries Total 2002 3,976 2,794 1,624 309 8,703 2003 3,7741 3,249 1,417 305 8,745 Change -202 455 -207 - 4 42 Number of employees at December 31, 2003 1 of which 240 Group Bâloise-Holding Annual Report 2003 49 Sustainability Sustainability through professionalism in insurance operations In early 2004, the Baloise became the first Swiss pri- mary insurer to publish a Sustainability Report. It de- monstrates how professionally conducted insurance business and a sustainable corporate focus can com- plement one another perfectly. Insurance and financial services business is geared towards long-term action. It is concerned with man- aging the present and future risks to individuals, soci- ety and the environment, and it focuses on safeguard- ing the fundamentals of life. Successful insurance and financial services business thus makes a major contribution to a sustainable development of the economic, social and ecological spheres of our life. Following on from the first environmental audit in 2001, the Baloise Group has now produced a Sustain- ability Report. In it, we examine our core business from the point of view of sustainability, for example commenting on the future of the European pension systems or the role of the insurer in providing risk advice to business customers. Members of the Cor- porate Executive Committee and the Board of Direc- tors answer questions in interviews and explain what sustainability means for the Baloise in concrete terms. Professor E. A. Brugger, one of Switzerland’s leading experts on sustainability, sets out future challenges facing the insurance industry from a sustainability standpoint. Analysts, employees, customers and sup- pliers of the Baloise explain what they want in the long term from the Baloise. Pointers for the further development of the Baloise’s own sustainability man- agement come from external rating agencies such as the Sustainable Asset Management Group (SAM), which credits the Baloise with very good overall sus- tainability performance compared to the sector as a whole (see chart). As regards economic criteria, the company has excellent corporate governance and strong performance in risk management and crisis management, placing it above the industry average. The Baloise recorded a significant improvement in environmental performance as compared with the previous year. The Group is also above average when it comes to social criteria. The Baloise’s commitment to sustainability also meant that, in the year under re- view, Baloise shares were included in the major sus- tainability indices and funds, such as the Dow Jones Sustainability Index and the FTSE4good index. The Sustainability Report can be obtained from the Baloise. (cid:2) Contacts, inside cover flat Further information about our activities in connection with sustainability can be found on our website. (cid:2) www.baloise.com / Profile / Sustainability Bâloise’s sustainability performance Economic Codes of conduct / Compliance / Corruption and Bribery Environmental Environmental Reporting 0 Economic Corporate Governance 0 Economic Risk and Crisis Management 0 Economic Sustainability Expertise 0 50 50 50 50 100 0 50 Environmental Climate Change (Products and Services) 100 0 Social Human Capital Development 100 0 Social Stakeholder Engagement 100 0 Environmental Environmental Policy Management Social Labor Practice Indicators 0 50 100 0 Environmental Environmental Performance (Eco-Efficiency) Social Talent Attraction and Retention 0 50 100 0 50 50 50 50 50 100 100 100 100 100 100 Insurance industry average on a global basis Bâloise-Holding Above the industry average for eleven out of twelve criteria: assessment of the Baloise’s sustainability performance by SAM Research Inc. in percent /© 2003 SAM Research Inc. Bâloise-Holding Annual Report 2003 51 Baloise Shares Price recovery and markedly improved trading liquidity Baloise shares registered a marked recovery in 2003 following the worldwide slump that had stock markets in its grip until mid-March. Reductions in the stakes of some major shareholders led to a broader spread of share ownership and a distinct improvement in trading liquidity. Stock markets went through two phases in 2003: The first quarter, which was overshadowed by the war in Iraq, saw a massive price collapse on stock markets around the globe. In the further course of the year, markets recorded a substantial recovery. The Swiss Market Index (SMI) closed 2003 with a year-on-year performance of 18.5 %. The insurance industry also recovered, as reflected in the Swiss Performance Index Insurance (SXIS) figure of +13.4 %, yet underper- formed the market as a whole. The Baloise shares’ -6.1% performance year-on-year reflects the plunge in the first quarter followed by a vigorous recovery since. In the first quarter, the share price plummeted by 42.6% amidst the general stock market collapse. The low-water mark was reached in mid-March. After that, towards the end of the Iraq war and boosted by the Baloise’s strong capital base and a positive assessment by the market, the share price picked up significantly. It closed the second quarter up 39.4 %, the third- best quarterly performance of a Swiss insurance com- pany. The trend continued in the third quarter, in which the share price advanced by 11.6 %. The de- velopment was again positive in the fourth quarter, though the gain of 5.1 % was still somewhat below the Swiss market average. The Baloise Group main- tained its policy of consistent distributions and paid a dividend of CHF 0.40 per share. The spread of share ownership and trading liquidity increased substantially over the year following a re- duction in the stake of some major shareholders. BZ Group’s holdings dropped under the 5 % threshold as at June 17. Strategic Money Management B.V. from the Netherlands fell below the 5 % mark as at July 17 after selling its stake to Zurich Financial Ser- vices. Following that transaction, Zurich Financial Services for a while held 27 % of the Baloise – 21.48% in shares and 5.52% in options. The majority of this stake was then placed across a broad range of investors, leaving Zurich Financial Services below the 5% threshold as of November 5, 2003. The table on page 54 will inform you on the principal Baloise shareholders and their respective stakes as at March 31, 2004. The Baloise is a publicly traded company with broad- ly spread shareholdings and a 100 % free float. The number of registered shareholders rose by 25.6 % year-on-year to 15,027 (2002: 11,974). Indexed share price development1 Bâloise-Holding, registered, 1999 – 2003 160 140 120 100 80 60 40 20 0 99 00 01 02 03 Bâloise-Holding, registered2 Swiss Performance Index Insurance (SXIS) Swiss Market Index (SMI) 1 December 29, 1998 = 100 2 adjusted after 1: 10 split of July 24, 2001 In line with the company’s long-standing policy of regular, profit-linked distributions and in view of the positive result of fiscal 2003, the Board of Directors is proposing a cash dividend, up on the previous year, of CHF 0.60 per stock. The proposal for this year’s dividend will be submitted to shareholders for ap- proval at the General Meeting on May 14, 2004. Registration as Bâloise-Holding shareholder There are no restrictions on the acquisition of Bâloise- Holding shares. Shareholders who have purchased shares under their own name and for their own ac- count are entered in the share register with voting rights up to a maximum of 2 % of all shares issued. This also applies to shares held by nominee compa- nies, provided the beneficial owner has been made known to us (Art. 5 of the Articles of Incorporation). Bâloise-Holding, registered Ticker symbol: Tk, B: BALN; R: BALZn Nominal value: CHF 0.10 Security no.: 1.241.051 ISIN: CH0012410517 Listing: virt-x Bâloise-Holding Annual Report 2003 53 Baloise Shares Significant shareholders at March 31, 2004 Chase Nominees Fidelity Group Deutsche Bank Nominees Rolex Group Boston Safe Deposit & Trust Morgan Nominees Landesbank Baden-Württemberg Strategic Money Management B.V. BZ Group in percent Total holding Share of voting rights 4.0 2.5 2.3 2.0 < 2.0 < 2.0 < 2.0 < 5.0* < 5.0* 2.0 2.0 2.0 2.0 – – < 2.0 – – * pursuant to notification according to article 20, SESTA Bonds issued Issuer CHF m Interest rate Issue Redemption Baloise Finance (Jersey) Ltd. Bâloise-Holding Bâloise-Holding 200 300 600 1.00 % 1998 4.7.2006 3.25 % 1998 4.7.2008 4.25 % 2000 9.28.2005 Baloise Bank SoBa 175 3.625 % 2002 6.12.2007 Bâloise-Holding 250 3.375 % 2003 12.15.2009 Contacts Investor Relations Carsten Stolz Aeschengraben 21 CH-4002 Basel Phone +41 61 285 83 65 Fax +41 61 285 75 62 E-mail investor.relations@baloise.com www.baloise.com 54 Share statistics Net profit per share1 in CHF Consolidated capital and reserves per share2 in CHF Dividend per share in CHF 19995 9.1 127.6 2.4 20005 11.2 130.0 2.4 20015 7.3 97.4 2.4 20025 - 11.6 55.8 0.4 20035 1.7 60.0 0.64 Total shares issued in units 58,620,000 56,704,000 55,307,150 55,307,150 55,307,150 Number of shares entitled to dividend in units 58,620,000 56,704,000 55,307,150 55,307,150 55,307,150 Time-weighted number of shares entitled to dividend in units 58,620,000 57,824,280 56,087,855 55,307,150 55,307,150 23.0 11,016 24.5 8,988 15.4 9,725 1,761,750 830,000 560,000 Daily volume traded shares in CHF m Number of shareholders Treasury stock in shares Price at year-end in CHF High in CHF Low in CHF Market capitalization in CHF m Consolidated capital and reserves in CHF m Ratio, market capitalization / consolidated capital and reserves Ratio, market capitalization / gross premium in percent Return on equity (ROE) ROE on capital and reserves as shown in the balance sheet3 in percent ROE on capital and reserves minus unrealized gains and losses3 in percent Dividend yield in percent Price-earnings ratio in percent Pay-out ratio in percent All figures as per calendar year, at December 31 Figures rounded up / down; calculations based on precise figures. 1 see Notes to the Consolidated Financial Statements, section 25 5 adjusted due to share split 2 number of shares ranking for dividend at December 31 6 additional free put options 3 average of beginning and year-end values 7 not significant 4 to be proposed to the Annual General Meeting 125.3 146.0 109.4 7,345.1 7,477.6 98.2 120.7 7.4 17.2 1.9 14.2 27.1 178.0 186.0 123.4 10,093.3 7,372.8 136.9 150.6 8.5 19.0 1.3 15.9 29.566 21.4 11,974 702,540 55.0 155.5 46.3 3,041.9 3,088.1 98.5 41.8 23.6 15,027 414,303 51.65 63.2 25.45 2,856.6 3,319.8 86.0 38.7 153.0 182.6 110.0 8,461.9 5,384.8 157.2 127.6 6.3 - 15.0 2.9 10.5 1.6 20.1 32.8 - 18.3 0.7 n.s.7 n.s.7 2.9 1.24 30.9 36.3 Bâloise-Holding Annual Report 2003 55 Management Information The same consolidation rules are applied for the man- agement information as for the segment reports. This means that, in line with IFRS requirements, group- internal transactions between the segments are not eliminated. Combined ratio: non-life Loss ratio Expense ratio Surplus sharing ratio Combined ratio as a percentage of premiums earned 2002 74.8 30.0 0.4 105.2 Gross 2003 67.3 29.9 0.4 97.6 2002 78.8 31.7 0.4 Net 2003 71.2 31.6 0.4 110.9 103.2 Combined ratio (gross) Switzerland Germany Benelux Other countries by geographical segment 2002 2003 Loss ratio Expense ratio Surplus sharing ratio Combined ratio as a percentage of premiums earned 70.9 26.0 0.8 97.7 71.3 23.8 0.8 95.9 2002 81.6 35.0 0.1 2003 64.9 36.1 0.1 2002 81.7 32.4 0.0 2003 67.1 31.2 – 2002 78.2 24.0 0.0 116.7 101.1 114.1 98.3 102.2 2003 53.8 18.4 0.2 72.4 Reserve ratio: non-life Technical provision for own account Premiums written and policy fees for own account Reserve ratio in percent in CHF m 2002 2003 4,486.4 5,097.6 2,477.5 2,873.4 181.1 177.4 Bâloise-Holding Annual Report 2003 57 2002 4,633.2 – Life 2003 4,301.1 – 4,633.2 4,301.1 - 2,962.5 - 2,240.6 - 5,203.1 39.7 - 512.6 - 1,042.8 - - 39.8 32.8 – 5.0 2.0 4,593.4 - 5,170.3 39.7 - 507.6 - 1,044.8 1,359.9 - 498.9 - 41.0 - 133.9 686.1 - 358.7 31.5 0.0 - 327.2 - 3,600.1 - 1,096.6 - 4,696.7 - 428.1 - 301.6 - 1,125.3 - 53.0 49.0 – 4.3 0.3 4,248.1 - 4,647.7 - 428.1 - 297.3 - 1,125.0 1,491.2 - - 90.4 45.2 - 161.9 1,193.7 - 68.7 41.7 0.0 27.0 Management Information Technical income statement Gross Gross premiums written and policy fees Change in unearned premiums reserves Premiums earned and policy fees Claims and benefits paid Change in loss reserves / actuarial reserve Claims and benefits paid Policyholder bonuses paid Technical costs Total underwriting result (gross) 2002 2,657.6 - 26.2 2,631.4 - 2,082.2 114.5 - 1,967.7 - 10.6 - 788.9 - 135.8 Non-life 2003 3,088.8 - 4.0 3,084.8 - 1,969.2 - 108.4 - 2,077.6 - 12.7 - 921.8 72.7 Reinsurance ceded Premiums earned and policy fees - 179.4 - 218.6 Claims and benefits paid Policyholder bonuses paid Technical costs 36.6 0.0 12.1 38.5 0.3 15.7 Total underwriting result of business ceded - 130.7 - 164.1 2,452.0 - 1,931.1 - 10.6 - 776.8 - 266.5 267.4 - 195.7 - 18.0 9.5 63.2 - 203.3 29.7 0.0 - 173.6 2,866.2 - 2,039.1 - 12.4 - 906.1 - - - - - 91.4 262.5 47.1 18.9 14.3 182.2 90.8 43.3 0.0 47.5 Net Premiums earned and policy fees Claims and benefits paid Policyholder bonuses paid Technical costs Total underwriting result for own account Investment income (gross) Realized gains and losses on investments (net) Investment expenses Other non-technical income and expenses Non-technical result Profit / loss before tax and minority interests Tax on income Minority interests Profit / loss after tax before minority interests in CHF m The reported technical costs comprise costs arising from insurance operations which have been charged in the fiscal year, including the change in the figure for deferred acquisition costs. Claims processing costs which relate to claims and benefits paid and to loss reserves are not included; neither are other costs of the Baloise Group (especially costs incurred by Asset Management). 58 Embedded Value The embedded value of life insurance business com- prises three elements: the adjusted capital and re- serves for life insurance activities and the value of insurance in force at the end of the period under re- view, minus the solvency expenses. Embedded value does not take into account any new business that will be concluded in the future. The adjusted capital and reserves are based on mar- ket value for investments and statutory value for lia- bilities from insurance operations. The sums of un- realized investment gains and losses, which can be subject to strong movements, represent the most significant capital and reserves component. Declared capital and reserves only are considered for the embedded value in the case of the Baloise Group’s business from Luxembourg, Austria and Croatia. The value of insurance in force is understood to be the earnings generated from this insurance in future, established by discounting all the anticipated cash flow. A large number of assumptions need to be made to calculate this value, the most important of which are listed in the table below. Assumptions Risk discount rate Bond yields Share returns Return of investment property Tax rate in percent 2002 7.7 4.0 7.2 5.3 20.7 2003 7.6 3.5 – 3.9 7.2 5.1 23.7 Bâloise-Holding Annual Report 2003 59 2003 1,630.8 855.4 1,192.4 - 417.0 275.7 20.5 26.8 26.4 1,980.2 1,236.1 1,008.1 - 264.0 - - 22.8 7.1 1,630.8 855.4 1,192.4 - 417.0 2002 – – – – – 2002 – – – 2003 1,980.2 - 7.2 /+ 8.4 + 4.3 / - 4.8 + 4.6 / - 7.6 + 17.5 / - 17.6 2003 15.5 306.5 5.0 Management Information Development of embedded value Embedded value at January 1 Of which value of insurance in force Of which adjusted capital and reserves Of which solvency expenses Operating income from insurance in force, adjusted capital and reserves, and earnings from new business 2002 3,792.5 1,341.4 2,992.4 - 541.3 164.5 Economic changes, especially changes in unrealized gains and losses on investments - 2,296.3 Dividends and capital movements Differences arising from currency translation Embedded value at December 31 Of which value of insurance in force Of which adjusted capital and reserves Of which solvency expenses in CHF m, all figures “after tax” Sensitivities Base value in CHF m +/- 1% change in discount rate +/- 10 % change in market value of shares +/- 10 % change in market value of property +/- 0.5 % change in money market interest in percent New business Value new business in CHF m APE1 in CHF m Ratio of new business to APE in percent 1 Annual Premium Equivalent = 100 % annual premium of new business + 10 % single premium External Review: Deloitte has reviewed the choice of methodology together with the assumption and calculations made by Baloise Group in the calculation of the embedded value results of its Life Business at December 31, 2003. Deloitte have reported to Baloise that they consider that the methodology is appropriate, Baloise’s assumptions are reasonable and that the embedded value results as published above have been properly compiled on the basis of methodology and assumptions chosen. For the purpose of this report, Deloitte have performed certain checks on data provided by Baloise, but have not verified and have relied on financial information underlying Baloise’s financial statements. 60 Investment performance in 2002 Current investment income Realized gains Realized losses Change in unrealized gains and losses taken to capital and reserves Impairment in value charged to income (net) Investment management costs Operating profit Average level of investments Performance in percent in CHF m Investment performance in 2003 Current investment income Realized gains Realized losses Change in unrealized gains and losses taken to capital and reserves Impairment in value charged to income (net) Investment management costs Operating profit Average level of investments Performance in percent in CHF m Fixed-interest securities - - - 987.0 172.0 297.7 724.3 26.9 26.1 1,532.6 21,238.1 7.2 Fixed-interest securities 1,163.5 513.1 60.8 307.3 10.0 30.8 - - - 1,287.7 26,389.8 4.9 Mortgage loans, policy loans and other loans Alternative financial assets, derivatives and other Shares 173.7 832.8 - 599.8 - Investment property 249.3 50.8 34.7 – – - 11.3 254.1 - 2,240.4 - 813.7 - 11.7 - 2,659.1 7,876.6 - 33.8 557.1 0.2 66.3 – 16.2 6.3 500.9 - - 5,173.9 12,108.0 4.9 4.1 124.2 221.0 Total 2,091.3 1,276.8 - 126.0 - 1,124.5 - 162.9 - 1,679.0 - 134.4 - - - 11.8 89.9 4,026.5 2.2 - - - - 958.8 67.2 461.4 50,423.1 0.9 Shares 95.0 462.4 Investment property 259.9 44.1 - 1,426.2 - 28.3 642.4 607.6 – – - 8.7 - 9.8 Mortgage loans policy loans and other loans 505.8 21.0 79.8 – 18.4 10.2 - - 372.5 4,642.6 8.0 265.9 5,510.4 4.8 455.2 12,398.7 3.7 Alternative financial assets, derivatives and other 81.0 177.6 Total 2,105.2 1,218.2 - 267.1 - 1,862.2 180.2 33.3 16.4 - - 122.0 5,127.9 2.4 515.3 602.7 75.9 - 2,503.3 54,069.4 4.6 Bâloise-Holding Annual Report 2003 61 Management Information Results from banking business Interest income Due from banks Loans to customers Investments Other Total interest income Interest payable Due to banks Due to customers Medium-term fixed-rate notes, bonds and mortgage bonds Other Total interest payable Net interest income Result from commission business and services Realized gains and losses on investments Other income Total income from banking business Expenses related to banking business Staff costs Operating expenses Total expenses related to banking business Gross profit / loss Losses and provisions relating to credit risks Amortization of intangible assets and depreciation of tangible non-current assets Profit / loss before tax and minority interests Tax on income Minority interests Net profit / loss in CHF m Realized profits and losses on investments in busi- ness year 2002 include a loss on structured invest- ments in bonds at Mercator Banque S.A. amounting to CHF 71.9 million. Assets under management Own investments Investments for account and risk of life insurance policyholders Assets managed for third parties Total in CHF m Other sales Sales other than premium-type, in particular sale of fund units for unit-linked life insurance in CHF m 62 2002 3.7 300.8 138.5 3.1 446.1 - 48.3 - 102.9 - 98.3 - 33.7 - 283.2 162.9 13.8 - 71.2 13.8 119.3 - 92.3 - 94.3 - 186.6 - 67.3 - 22.9 - 9.9 - 100.1 22.1 0.7 - 77.3 2003 1.9 261.6 128.8 1.0 393.3 - 23.0 - 84.9 - 99.5 - 27.7 - 235.1 158.2 8.3 55.6 8.8 230.9 - 93.9 - 73.5 - 167.4 63.5 - 16.6 - 9.6 37.3 - 15.0 0.0 22.3 2002 2003 50,061.4 56,307.7 550.5 5,932.6 798.2 8,445.2 56,544.5 65,551.1 2002 2003 451.0 541.8 Management Information Five-year review Consolidated income statement Income Gross premiums written and policy fees1 Reinsurance premiums ceded Premiums written and policy fees for own account Change in unearned premiums reserves for own account Premiums earned and policy fees for own account Investment income (net) Realized gains and losses on investments (net) Income from other services Other income Total income Expenses Note 6 18 7.1 7.3 1999 6,085.3 - 239.5 5,845.8 - 20.6 5,825.2 2000 6,701.2 - 230.8 6,470.4 14.3 6,484.7 2001 6,632.7 - 207.4 6,425.3 8.1 6,433.4 1,941.8 2,154.4 2,081.2 628.5 200.5 82.5 826.7 265.5 108.7 149.4 271.8 154.1 2002 7,274.5 - 203.6 7,070.9 - 24.9 7,046.0 2,024.1 - 806.5 249.4 183.7 - - - 2003 7,374.7 253.2 7,121.5 6.8 7,114.7 2,029.3 41.3 254.7 147.2 8,678.5 9,840.0 9,089.9 8,696.7 9,504.6 Claims incurred including processing costs (non-life) Claims and benefits paid (life) Change in actuarial reserve (life) Surplus and profit allocations to policyholders Acquisition costs Administrative and other operating expenses Interest payable Amortization of intangible assets and depreciation 15 16 17 14 27 - 1,675.4 - 2,515.0 - 1,407.9 - 731.4 - 382.1 - 984.4 - 274.2 - 1,727.9 - 2,756.5 - 1,680.3 - 870.9 - 311.3 - 1,267.3 - 380.0 - 1,785.0 - 2,896.6 - 1,449.4 - 177.6 - 367.8 - 1,238.6 - 498.6 - 1,920.8 - 2,946.5 - 2,235.0 29.2 - 461.7 - 1,226.5 - 464.9 of tangible non-current asset Total expenses 12 /13 - 61.8 - 8,032.2 - 113.7 - 9,107.9 - 153.3 - 8,566.9 - 184.8 - 9,411.0 Profit / loss before tax and minority interests Tax on income Minority interests Consolidated net profit / loss in CHF m 21 26 646.3 - 125.4 - 2.6 518.3 - - 732.1 94.6 3.1 634.4 523.0 - 714.3 - 116.9 - 1.7 82.7 2.9 - 404.4 - 634.5 - 2,031.1 - 3,704.2 - - - 952.2 440.5 277.1 - 1,318.4 - - 405.1 152.3 - 9,280.9 - - 223.7 125.4 6.9 91.4 1 Additional information Gross premiums written and policy fees Investment-type premiums Gross premiums, policy fees and investment-type premiums 6,085.3 137.1 6,222.4 6,701.2 176.4 6,877.6 6,632.7 248.4 6,881.1 7,274.5 253.0 7,527.5 7,374.7 261.0 7,635.7 in CHF m Combined ratio (gross) Reserve ratio non-life in percent In accordance with the accounting policies of the Baloise Group, investment-type premiums are not included in gross premiums and policy fees. 108.6 185.6 104.7 186.0 105.7 184.3 105.2 181.1 97.6 177.4 Bâloise-Holding Annual Report 2003 63 Management Information Consolidated balance sheet Assets Investments Fixed-interest securities Shares Alternative financial assets Derivatives Investment property Mortgage loans Policy and other loans Participating interests in associates Other short-term investments Cash and cash equivalents Total investments Investments for account and risk of life insurance policyholders Goodwill / badwill Deferred tax Other assets Total assets Liabilities and capital and reserves Capital and reserves Minority interests Liabilities Unearned premiums reserves (gross) Loss reserves (gross) Actuarial reserve life (gross) Policyholder bonuses credited and provision for future policyholder bonuses Technical provisions for account and risk of life insurance policyholders Payables arising from insurance operations Deposit fund liabilities arising from reinsurance Liabilities from banking business and loans Derivatives Non-technical provisions Benefits due to employees Deferred tax Other liabilities and deferred income Total liabilities Total liabilities and capital and reserves in CHF m 64 Note 12.31.1999 12.31.2000 12.31.2001 12.31.2002 12.31.2003 10 8 9 29 6 11 12 21 26 15 16 17 19 10 20 23 21 14,810.9 16,377.5 – 12.0 4,661.5 5,412.7 1,907.8 311.8 577.2 726.4 19,908.1 13,330.4 920.9 85.9 4,965.8 10,438.7 1,856.7 316.3 631.2 759.9 20,569.3 10,000.8 1,117.2 19.3 5,042.2 10,500.4 1,663.1 289.1 695.1 888.3 21,906.8 29,525.4 5,752.4 1,039.0 212.8 5,305.7 3,475.9 1,337.9 292.9 5,653.4 10,532.0 11,002.4 1,520.4 286.9 2,829.6 675.8 1,456.6 223.8 2,647.4 692.0 44,797.8 53,213.9 50,784.8 50,061.4 56,307.7 251.1 119.1 565.2 362.4 129.6 447.2 512.4 105.6 567.6 550.5 35.4 529.9 - 798.2 42.1 905.9 3,949.6 49,682.8 5,130.9 59,284.0 5,524.4 57,494.8 5,736.6 56,913.8 6,331.1 64,300.8 7,477.6 157.2 7,372.8 46.2 5,384.8 41.5 3,088.1 28.1 3,319.8 40.7 650.9 3,994.5 629.9 4,021.5 380.9 4,182.0 419.3 4,196.1 493.3 4,786.3 25,165.3 26,314.5 27,558.9 29,757.7 32,985.7 3,426.3 4,768.6 4,197.7 3,685.0 4,063.4 238.9 2,616.2 322.3 1,548.3 44.5 86.1 504.8 2,188.5 1,261.4 42,048.0 49,682.8 356.7 1,349.7 281.7 10,048.9 84.2 127.5 563.6 1,946.8 1,371.4 51,865.0 59,284.0 513.7 1,521.2 269.0 9,697.2 59.9 112.6 559.6 1,640.9 1,374.9 52,068.5 57,494.8 554.6 1,682.5 205.1 9,659.2 87.0 131.7 596.6 1,211.5 1,611.3 53,797.6 56,913.8 798.1 1,620.7 451.5 11,411.7 252.4 118.9 680.0 1,640.8 1,637.5 60,940.3 64,300.8 Bâloise-Holding Annual Report 2003 65 Financial Report 2003 Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Financial Statements of the Baloise Group Consolidated income statement Consolidated balance sheet Consolidated cash flow statement Consolidated capital and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment reporting by geographical segment Segment reporting by business segment 69 70 72 74 76 78 81 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to the consolidated financial statements Report of the Group auditors 123 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements of Bâloise-Holding 2003/2004 Income statement Balance sheet Notes to the financial statements Proposed allocation of accumulated profit Report of the statutory auditors 1 2 3 4 Bâloise-Holding Annual Report 2003 67 Financial Report 2003 Consolidated income statement Income Gross premiums written and policy fees1 Reinsurance premiums ceded Premiums written and policy fees for own account Change in unearned premiums reserves for own account Premiums earned and policy fees for own account Investment income (net) Realized gains and losses on investments (net) Income from other services Other income Total income Expenses Claims incurred including processing costs (non-life) Claims and benefits paid (life) Change in actuarial reserve (life) Surplus and profit allocations to policyholders Acquisition costs Administrative and other operating expenses Interest payable Amortization of intangible assets and depreciation of tangible non-current assets Total expenses Profit / loss before tax and minority interests Tax on income Minority interests Consolidated net profit / loss in CHF m 1 Note 6 18 7.1 7.3 2002 7,274.5 - 203.6 7,070.9 - 24.9 7,046.0 2,024.1 - 806.5 249.4 183.7 2003 7,374.7 - 253.2 7,121.5 - - 6.8 7,114.7 2,029.3 41.3 254.7 147.2 8,696.7 9,504.6 15 16 17 14 27 - 1,920.8 - 2,946.5 - 2,235.0 29.2 - 461.7 - 1,226.5 - 464.9 - 2,031.1 - 3,704.2 - 952.2 - 440.5 - 277.1 - 1,318.4 - 405.1 12 /13 - 184.8 - 9,411.0 - 152.3 - 9,280.9 21 26 - 714.3 82.7 2.9 - - 634.5 223.7 - 125.4 - 6.9 91.4 Earnings / loss per share (identical values for “basic” and “diluted”) 25 - 11.56 1.67 in CHF 1 Additional information Gross premiums written and policy fees Investment-type premiums Gross premiums, policy fees and investment-type premiums in CHF m In accordance with the accounting policies of the Baloise Group, investment-type premiums are not included in gross premiums and policy fees. 7,274.5 253.0 7,527.5 7,374.7 261.0 7,635.7 Bâloise-Holding Annual Report 2003 69 Financial Report 2003 Consolidated balance sheet 1 Assets Investments Fixed-interest securities Held for trading Held to maturity Available for sale Shares Held for trading Available for sale Alternative financial assets Derivatives Investment property Mortgage loans Policy and other loans Participating interests in associates Other short-term investments Held for trading Held to maturity Available for sale Cash and cash equivalents Total investments Total investments for account and risk of life insurance policyholders Other assets Reinsurance assets Receivables arising out of insurance operations Receivables relating to employee benefits Other receivables Accrued investment income Deferred acquisition costs Goodwill / badwill Other intangible asset Property, plant and equipment for own use Other non tangible non-current assets Deferred tax Other assets Total other assets Total assets in CHF m Note 12.31.2002 12.31.2003 462.6 158.5 21,285.7 159.9 5,592.5 1,039.0 212.8 5,305.7 334.3 10,348.6 18,842.5 200.6 3,275.3 1,337.9 292.9 5,653.4 10,532.0 11,002.4 1,520.4 286.9 1,456.6 223.8 0.7 1.2 2,390.5 1,840.7 438.8 675.8 805.5 692.0 50,061.4 56,307.7 550.5 798.2 425.0 1,487.5 53.0 1,138.7 662.5 810.5 35.4 127.5 618.7 86.8 529.9 326.4 737.1 1,289.0 41.2 1,385.6 798.2 985.9 42.1 164.4 605.3 91.4 905.9 233.0 - 6,301.9 56,913.8 7,194.9 64,300.8 10 8 9 29 6 11 18 23 14 12 12 13 13 21 70 Liabilities and capital and reserves 1 Capital and reserves Share capital Capital reserves Less treasury stock Unrealized gains and losses Accumulated profit Total capital and reserves Minority interests Liabilities Unearned premiums reserves (gross) Loss reserves (gross) Actuarial reserve life (gross) Policyholder bonuses credited and provision for future policyholder bonuses Technical provisions for account and risk of life insurance policyholders Payables arising from insurance operations Deposit fund liabilities arising from reinsurance Liabilities from banking business and loans Derivatives Non-technical provisions Benefits due to employees Deferred tax Other liabilities and deferred income Total liabilities Total liabilities and capital and reserves in CHF m Note 12.31.2002 12.31.2003 24 7 26 15 16 17 19 10 20 23 21 - 5.5 108.9 84.8 15.2 3,043.3 3,088.1 28.1 5.5 90.3 49.7 - 161.1 3,112.6 3,319.8 40.7 419.3 4,196.1 493.3 4,786.3 29,757.7 32,985.7 3,685.0 554.6 1,682.5 205.1 9,659.2 87.0 131.7 596.6 1,211.5 1,611.3 53,797.6 56,913.8 4,063.4 798.1 1,620.7 451.5 11,411.7 252.4 118.9 680.0 1,640.8 1,637.5 60,940.3 64,300.8 Bâloise-Holding Annual Report 2003 71 Financial Report 2003 Consolidated cash flow statement 1 Cash flow from operating activities Net profit / loss for the year before tax Note 2002 - 714.3 2003 223.7 41.3 41.6 0.2 10.1 152.3 19.2 125.5 218.2 8.1 82.9 1,068.6 4.3 62.4 1,229.2 26.3 1,202.9 16.3 - - - - - - - - - - - - - - 806.5 70.0 3.4 12.7 184.8 46.9 148.9 1.2 44.2 51.5 2,416.4 2.9 229.2 2,578.5 126.5 2,452.0 24.8 - 12,784.9 -19,007.7 11,797.0 13,976.1 - 8,383.0 - 5,094.2 - 9,719.6 373.6 102.5 7,890.9 - 462.8 305.3 - 4,105.0 - 9,735.6 - - - - 1,521.6 94.1 5.9 6.5 9.3 – 73.8 8.9 - - 9,256.2 138.8 47.8 – 115.1 37.5 94.4 9.1 - 2,674.7 - 2,936.9 - 29.5 28.3 Adjustments for Realized gains and losses on the sale of investments 7 Income from participating interests in associates Interest income on security deposits Policy fees on investment-type products Amortization of intangible assets and depreciation of tangible non-current assets Foreign exchange gains and losses Movements in operating assets and liabilities Assets from reinsurance business Deferred acquisition costs Unearned premiums reserves Loss reserves Actuarial reserve (life) Technical provisions for account and risk of insurance policyholders Other movements in operating assets and liabilities Cash flow from operating activities (gross) Tax paid Cash flow from operating activities (net) Of which from joint ventures Cash flow from investing activities Purchase of fixed-interest securities and similar Disposal of fixed-interest securities and similar Purchase of shares Disposal of shares Purchase of investment property Disposal of investment property Purchase of other investments Disposal of other investments Acquisition of intangible assets and tangible non-current assets Disposal of intangible assets and tangible non-current assets Cash flow from increase in share of investments held Acquisition of subsidiaries where there is no effect on cash and cash equivalents Disposal of subsidiaries where there is no effect on cash and cash equivalents 5 5 Acquisition of participating interests in associates (net) Dividends received from associates Cash flow from investing activities (net) Of which from joint ventures in CHF m 72 Cash flow from financing activities Note 2002 2003 1 Capital increases Capital reductions Cash inflow from investment-type products Cash outflow from investment-type products Increases in liabilities from banking business and loans Decreases in liabilities from banking business and loans Cash flow from own shares Dividends paid Cash flow from financing activities (net) Of which from joint ventures Effect of foreign exchange rate changes on cash and cash equivalents Total movement in cash and cash equivalents Cash and cash equivalents As at January 1 Movement during year As at December 31 in CHF m Additional information on cash flow from operating activities Other interest received Dividends received Interest paid in CHF m – – 107.1 - 60.7 1,352.2 - 1,210.3 - 18.1 - 132.7 37.5 4.9 27.3 - - - 212.5 888.3 - 212.5 675.8 – – 354.5 - 138.2 1,806.4 - 289.5 - - 16.5 22.1 1,727.6 4.2 22.6 16.2 675.8 16.2 692.0 1,675.3 215.6 1,244.8 47.6 - 478.8 - 350.0 Bâloise-Holding Annual Report 2003 73 Financial Report 2003 Consolidated capital and reserves 1 Balance at December 31, 2001 Movement on unrealized gains and losses on investments (gross) Less movement on Policyholder surplus Deferred acquisition costs charged to capital and reserves Deferred tax Foreign exchange differences Minority interests Movement on unrealized gains and losses on investments (net) Dividends Consolidated loss for the year Purchase / sale of treasury stock Balance at December 31, 2002 in CHF m Share capital Capital reserves Less treasury stock 5.5 109.3 - 67.1 – – – – – – – – – – 5.5 – – – – – – – – – – – – – – – – – – - 0.4 108.9 - 17.7 - 84.8 Unrealized gains and losses (net) 1,526.6 - 1,679.0 - 23.8 97.7 270.3 - 180.3 3.7 - 1,511.4 Accumulated profit 3,810.5 – – – – – – – – – – - 132.7 - 634.5 – 15.2 3,043.3 Total capital and reserves 5,384.8 - 1,679.0 - 23.8 97.7 270.3 - 180.3 3.7 - 1,511.4 - 132.7 - 634.5 - 18.1 3,088.1 74 Continued Balance at December 31, 2002 Movement on unrealized gains and losses on investments (gross) Less movement on Policyholder surplus Deferred acquisition costs charged to capital and reserves Deferred tax Foreign exchange differences Minority interests Movement on unrealized gains and losses on investments (net) Dividends Consolidated net profit for the year Purchase / sale of treasury stock Balance at December 31, 2003 in CHF m Share capital Capital reserves Less treasury stock 5.5 108.9 - 84.8 – – – – – – – – – – 5.5 – – – – – – – – – – – – – – – – – – - 18.6 90.3 35.1 - 49.7 Unrealized gains and losses (net) 15.2 515.3 - 141.2 - 99.1 - 13.6 - 115.3 - 0.2 145.9 Accumulated profit 3,043.3 Total capital and reserves 3,088.1 1 – – – – – – – 515.3 - 141.2 - - 99.1 13.6 - 115.3 - - 0.2 145.9 22.1 91.4 16.5 – – – - 22.1 91.4 – 161.1 3,112.6 3,319.8 Bâloise-Holding Annual Report 2003 75 Financial Report 2003 Segment reporting by geographical segment Income Gross premiums written and policy fees Reinsurance premiums ceded Premiums written and policy fees for own account Change in unearned premiums reserves for own account Premiums earned and policy fees for own account Investment income (net) Realized gains and losses on investments (net) Income from other services 2 Other income Total income Of which between geographical segments Of which income from associates Expenses Claims incurred including processing costs (non-life) Claims and benefits paid (life) Change in actuarial reserve (life) Surplus and profit allocations to policyholders Acquisition costs Administrative and other operating expenses Interest payable Amortization of intangible assets and depreciation of tangible non-current asset Total expenses Profit / loss before tax and minority interests Tax on income Minority interests Net profit / loss by region Additional information Assets by geographical segment Of which investments Of which participating interests Liabilities by geographical segment Of which technical provisions Cash flow from operating activities (net) Cash flow from investing activities (net) Cash flow from financing activities (net) Acquisition of real estate, equipment and furnishings and intangible assets for own use Impairment of value charged to income Reinstatement of original value charged to income in CHF m 76 2002 4,652.8 - 160.5 4,492.3 1.0 4,493.3 1,002.2 - 205.1 25.9 36.1 5,352.4 64.5 – - 802.9 - 2,014.2 - 1,993.2 42.8 145.1 482.5 160.1 42.1 - - - - Switzerland 2003 4,269.3 169.2 4,100.1 5.9 4,094.2 939.5 38.3 27.3 28.2 5,050.9 75.4 0.1 - - - - - 836.7 - 2,372.1 - - - - - - 962.5 126.8 83.0 483.9 75.8 48.6 2002 1,755.1 247.2 1,507.9 17.3 1,490.6 688.1 320.8 92.8 24.8 Germany 2003 2,199.9 - 269.6 1,930.3 10.6 1,940.9 - 769.0 82.1 96.8 46.6 1,975.5 2,771.2 208.0 68.1 373.3 825.4 136.5 12.5 177.9 324.0 112.0 39.5 179.6 48.9 - 606.4 - 1,096.1 6.7 346.9 30.8 470.0 114.7 35.9 - - - - - - - - - - - - - - - - - 5,597.3 - 4,989.4 - 2,001.1 - 2,694.1 - - 244.9 12.6 – 232.3 33,041.2 28,815.1 0.1 30,221.7 22,845.7 2,309.7 - 2,209.7 - - 434.7 4.1 612.8 130.4 61.5 0.6 – 62.1 34,481.6 30,055.1 0.1 31,287.8 23,847.2 722.2 - 1,161.8 114.0 - 33.0 57.1 502.7 - - - - - - - 25.6 12.9 2.9 15.6 14,347.6 12,090.7 120.5 14,097.1 11,958.6 74.2 36.6 26.7 0.6 238.0 55.0 - - - - - 77.1 87.4 6.8 17.1 18,193.9 15,255.7 118.7 17,691.2 14,883.5 132.7 182.5 90.7 17.9 73.2 219.8 2002 713.2 41.9 671.3 32.0 639.3 - - 273.6 - 259.1 108.9 45.9 808.6 13.2 1.9 - 415.4 - - 77.8 90.0 1.1 - 119.7 - 288.5 - 164.0 - 27.3 - 1,181.6 - 373.0 39.8 0.2 - 333.0 8,142.1 6,371.4 166.3 7,873.9 2,496.0 125.4 - 340.3 229.3 23.7 - 251.4 2.2 Benelux Other countries 2003 744.6 56.7 687.9 4.3 683.6 268.9 46.3 102.8 48.1 1,057.1 13.5 7.2 386.8 204.5 15.0 36.6 141.4 256.1 181.4 42.4 - - - - - - - - - - 2002 443.2 - 43.8 399.4 22.7 422.1 71.9 21.5 21.8 93.4 587.7 - 2003 441.0 37.8 403.2 7.6 - - - 395.6 57.1 125.4 27.8 33.7 639.6 - 313.2 0.0 - 282.7 0.0 - 339.4 - 209.2 - - - - - - - 18.6 14.8 1.8 83.2 67.9 56.9 75.9 - - - - - - - 23.6 10.6 3.4 56.2 74.5 47.7 25.4 - 1,161.0 - 658.5 - 450.6 - - - 103.9 18.2 0.2 121.9 10,100.6 7,753.6 104.8 9,891.4 2,829.3 53.2 - 1,039.4 1,054.2 32.9 - 119.9 135.4 - - - - 70.8 17.4 0.2 53.6 3,516.2 3,088.1 0.0 3,739.0 1,060.0 57.3 96.6 84.9 7.8 - 44.2 – - - 189.0 20.4 0.3 168.3 3,473.3 3,327.6 0.2 4,018.5 1,107.8 299.5 - 328.2 239.0 - - 48.9 13.4 8.4 2002 - 289.8 289.8 Elimination 2003 - 280.1 280.1 - - - - - - - – 0.7 0.7 11.7 – – 16.5 27.5 27.5 – 10.2 10.5 0.5 0.4 64.2 63.6 28.1 – 27.5 – – – 0.0 - 2,133.3 - 303.9 – - 2,134.1 - 302.2 0.0 - 202.8 202.8 – – – - - - - - - – 0.4 0.4 5.2 – – 9.4 14.2 14.2 – 8.0 7.9 0.8 0.0 34.3 33.9 14.5 – 14.2 – – – 0.0 - 1,948.6 - 84.3 – - 1,948.6 - 339.1 - 4.7 - 225.0 229.7 – – – - - - 2002 7,274.5 203.6 7,070.9 24.9 7,046.0 2,024.1 806.5 249.4 183.7 Total 2003 7,374.7 253.2 7,121.5 6.8 7,114.7 2,029.3 41.3 254.7 147.2 - - - 2 8,696.7 9,504.6 – 70.0 – 41.6 - 1,920.8 - 2,946.5 - 2,235.0 29.2 - 461.7 - 1,226.5 - - 464.9 184.8 - 2,031.1 - 3,704.2 - - - 952.2 440.5 277.1 - 1,318.4 - - 405.1 152.3 - 9,411.0 - 9,280.9 - - - 714.3 82.7 2.9 634.5 56,913.8 50,061.4 286.9 53,797.6 38,058.1 2,452.0 - 2,692.8 55.6 35.0 - 1,146.4 - 187.6 - - 223.7 125.4 6.9 91.4 64,300.8 56,307.7 223.8 60,940.3 42,328.7 1,202.9 - 2,936.9 1,727.6 34.9 263.6 866.3 Bâloise-Holding Annual Report 2003 77 Financial Report 2003 Segment reporting by business segment Income Gross premiums written and policy fees Reinsurance premiums ceded Premiums written and policy fees for own account Change in unearned premiums reserves for own account Premiums earned and policy fees for own account Investment income (net) Realized gains and losses on investments (net) 2 Income from other services Other income Total income Of which between business segments Of which income from associates 2002 2,657.6 - 180.1 2,477.5 - 25.5 2,452.0 249.4 - 195.7 0.2 81.2 2,587.1 - 35.4 1.6 Non-life 2003 3,088.8 215.4 2,873.4 7.2 2,866.2 243.6 47.1 0.0 54.5 2002 4,633.2 - 39.8 4,593.4 – 4,593.4 1,318.9 - 498.9 0.2 55.0 3,117.2 5,468.6 32.5 5.3 - 30.1 0.2 - - - - Expenses Claims incurred including processing costs (non-life) - 1,931.1 - 2,039.1 Life 2003 4,301.1 - 53.0 4,248.1 – 4,248.1 - - 1,446.0 90.4 0.8 28.2 5,632.7 25.1 28.0 – - 3,696.3 - - - - - 951.4 428.1 64.4 353.2 145.9 53.5 – – - 10.5 - 309.5 - 476.4 - - 15.9 47.0 – – 12.4 342.2 564.7 9.4 58.6 - - - - - – - 2,935.8 - 2,234.5 39.7 153.1 340.5 163.6 39.5 - - - - - 2,790.4 - 3,026.4 - 5,827.3 - 5,564.0 - 203.3 29.7 0.0 - 173.6 - 90.8 43.3 0.0 47.5 - - 358.7 31.5 0.0 327.2 - 68.7 41.7 0.0 27.0 9,247.2 7,208.2 10,280.3 7,996.1 38,408.0 37,225.4 42,787.8 41,684.5 4.3 32.8 5.6 15.1 Claims and benefits paid (life) Change in actuarial reserve (life) Surplus and profit allocations to policyholders Acquisition costs Administrative and other operating expenses Interest payable Amortization of intangible assets and depreciation of tangible non-current asset Total expenses Profit / loss before tax and minority interests Tax on income Minority interests Net profit / loss by business segment Additional information Assets by business segment Liabilities by segment Acquisition of real estate, equipment and furnishings and intangible assets for own use in CHF m 78 Banking 2003 Other activities and Group business 2002 2003 – – – – – 345.2 39.0 8.3 56.9 449.4 13.4 0.3 – – – – – 167.4 235.1 9.6 412.1 37.3 15.0 – 22.3 - - - - - – – – – – 109.8 - 17.7 235.2 12.5 339.8 - 19.9 68.2 – – – – – - 222.3 - 81.3 - 88.4 - 392.0 - - - - 52.2 0.6 3.6 56.4 – – – – – 41.3 57.2 245.6 23.6 367.7 - 18.2 8.0 – – – – – - 232.7 - - 77.5 30.6 - 340.8 26.9 25.4 6.9 5.4 - - - 2002 – – – – – 399.5 94.2 13.8 60.5 379.6 7.0 0.0 – – – – – 186.6 283.2 9.9 479.7 100.1 22.1 0.7 77.3 - - - - - - - - - - - - - - - 2002 16.3 16.3 0.0 0.6 0.6 53.5 – – 25.5 78.4 78.4 – 10.3 10.7 0.5 – 0.9 0.7 79.1 – 78.4 – – – – Elimination - - - - - - - 2003 15.2 15.2 – 0.4 0.4 46.8 – – 16.0 62.4 62.4 – 8.0 7.9 0.8 – 0.7 0.4 62.8 – 62.4 – – – – - - - 2002 7,274.5 203.6 7,070.9 24.9 7,046.0 2,024.1 806.5 249.4 183.7 Total 2003 7,374.7 253.2 7,121.5 6.8 7,114.7 2,029.3 41.3 254.7 147.2 - - - 2 8,696.7 9,504.6 – 70.0 – 41.6 - 1,920.8 - 2,946.5 - 2,235.0 29.2 - 461.7 - 1,226.5 - - 464.9 184.8 - 2,031.1 - 3,704.2 - - - 952.2 440.5 277.1 - 1,318.4 - - 405.1 152.3 - 9,411.0 - 9,280.9 - - - 714.3 82.7 2.9 634.5 - - 223.7 125.4 6.9 91.4 11,239.8 10,587.7 13,059.4 12,282.8 1,689.2 2,446.7 1,591.1 2,394.7 - 3,670.4 - 3,670.4 - 3,417.8 - 3,417.8 56,913.8 53,797.6 64,300.8 60,940.3 3.8 4.5 21.3 - 17.5 – – 35.0 34.9 Bâloise-Holding Annual Report 2003 79 Financial Report 2003 Notes to the consolidated financial statements 1. Basis of accounting The Baloise Group operates solely in Europe. It com- prises 14 insurance companies, which provide almost all types of life and non-life insurance. The holding company is Bâloise-Holding, a Swiss stock corpora- tion (Aktiengesellschaft) which has its registered office in Basel, Switzerland. The shares of Bâloise- Holding are quoted on SWX Swiss Exchange. Its subsidiaries operate in the insurance markets of Switzerland, Germany, Belgium, Austria, Luxembourg and Croatia. The banking business is carried out by subsidiaries in Switzerland, Germany and Belgium. The Baloise Group also has an investment fund structure in Luxembourg. The consolidated financial statements of the Baloise Group are prepared on a historical cost basis, taking into account adjustments resulting from regular re- assessments of the fair market value of certain in- vestments, and are established in accordance with the International Financial Reporting Standards (IFRS). They comply with Swiss legal requirements. As the International Financial Reporting Standards do not currently contain any insurance-specific guidelines, insurance business has been valued in accordance with the Generally Accepted Accounting Principles in the United States (US GAAP). 2. Application of new accounting standards In fiscal 2002 and 2003 In fiscal 2002 and 2003, no new IFRS or US GAAP standards affecting the Baloise Group were intro- duced, nor were any existing ones changed. 3. Accounting policies 3.1 Method of consolidation The consolidated financial statements consist of the financial statements of Bâloise-Holding and of its subsidiaries. A subsidiary is consolidated where the Baloise Group has over 50 % of the voting rights, whether directly or indirectly, or exercises control over it. All intragroup transactions or profits and losses arising therefrom are eliminated. Companies acquired in the course of the year under review are included in the consolidation from the date when effective control was acquired, while all companies disposed of during the year are included in the consolidation until the date of disposal. Com- panies which are acquired for the purpose of resale are held and accounted for as investments. A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. Deutscher Ring Beteiligungsholding is a joint venture in which the Baloise Group has a direct 65% interest. The remain- ing 35 % are held by Deutscher Ring Krankenversi- cherungsverein, a mutual insurance company. The contractual arrangements are such that the majority shareholder does not have overall control. These com- panies are consolidated on a proportionate basis, therefore the Baloise Group reports only its share of assets, liabilities, income and expenses. Participating interests in associates are accounted for under the equity method if the Baloise Group has significant influence on the management of the company and the company is not being held exclu- sively with a view to its disposal in the near future. 3.2 Foreign currency translation The financial statements of the Baloise Group are stated in Swiss francs (CHF). Foreign currency translation: The financial statements of all business units which were not originally pre- pared in CHF have been translated at year-end rates (for balance sheet figures excluding goodwill) or at average rates for the year (for the income statement). The total exchange differences arising are taken di- rectly to capital and reserves. Assets and liabilities in foreign currencies in the ac- counts of the individual companies are translated at year-end rates. Income and expenses are translated at the rate applicable on the transaction date or at the average rate for the year. The resulting exchange differences are taken to the income statement. 3.3 Investments 3.3.1 Financial assets The business activities of the Baloise Group include the issuing of insurance policies, as a result of which the Group incurs financial liabilities and assumes guarantees. To ensure that it is in a position to meet its financial liabilities, the Baloise Group acquires financial instruments which correspond as closely as possible in type and maturity period to the expect- ed level of claims and benefits paid. The composi- tion of the investment portfolio is therefore deter- mined mainly by the expected investment return for Bâloise-Holding Annual Report 2003 81 3 3 Financial Report 2003 each type of investment by the type of liabilities aris- ing from insurance business and by the availability of risk capital, which is used to even out fluctuations in the price of investments. The following criteria are used to classify financial assets: Financial assets which were acquired with the purpose of realizing a short-term gain by taking advantage of fluctuations in market price are shown under the Held for trading heading. Financial assets which are held for an indefinite period of time and may be sold at any time to improve liquidity or to react to changes in market conditions are shown as Avail- able for sale. Financial assets with a fixed maturity date are shown under the heading Held to maturity, provid- ed the Baloise Group has the opportunity and inten- tion of holding them until their maturity date. There is also the possibility of classifying investments as Originated by the Group. Investments are classified under one of these headings when they are first re- corded in the books. The classification is then re- viewed at year-end to ensure that it is still appropriate. Alternative financial assets such as private equity in- vestments and hedge funds are held as Available for sale. Loans, policy loans and similar financial assets is- sued by the Baloise Group are shown under the head- ing Originated by the Group. Financial assets under the headings Held for trading and Available for sale are recorded in the balance sheet at fair market value. Financial assets under the headings Held to maturity or Originated by the Group are valued at amortized cost, less any necessary adjustments for permanent diminution in value (impairment). The effective in- terest method is used to amortize or write back the difference between cost and the redemption value. An adjustment is made for impairment if the present value of expected future cash flows discounted at the financial instrument’s original effective interest rate, including the effect of any hedging transac- tions, is lower than the book value and this situation is not expected to be temporary. All purchases and sales of financial assets are record- ed at the trade date. Changes in the value of financial assets under Held for trading are recognized as realized book profits / losses in the income statement in the period in which they arise. Financial assets under Available for sale are revalued at their market value, and unrealized 82 gains and losses are taken to capital and reserves. In the case of monetary assets classified as Available for sale, any foreign currency revaluation is credited to income. Monetary assets include primarily fixed- interest securities. Shares do not count as monetary assets. For life insurance companies, deductions are made from the unrealized gains and losses in view of those amounts which will be used in future to amortize acquisition costs and to pay bonuses and dividends to policyholders (shadow accounting). When financial assets are disposed of, any unrealized gains or losses are transferred from capital and re- serves to the income statement. The same applies where an investment has suffered a permanent dimi- nution in value (become impaired). Changes to the fair values of financial assets which are the subject of a fair value hedge are recognized, regardless of classification, in the income statement over the period of the hedge. Interest income from fixed-interest investments which have been written down is recognized when it is received. 3.3.2 Investment property Investment property is shown at fair market value. This is determined each year by a valuation based on prevailing market conditions and carried out by in- house specialists. The fair value of holdings is derived principally from future cash flows, using mathemati- cal calculations based on similar transactions. Exter- nal valuation reports are obtained at regular intervals. Scheduled depreciation is not charged on investment property. Changes in value are immediately recog- nized in the income statement, in the period of occur- rence, as realized book gains / losses. 3.4 Permanent diminution in value (impairment) The carrying values of assets are reviewed on a reg- ular basis for recoverability. A permanent diminution in value (impairment) loss arises if the recoverable amount of an asset is less than its carrying amount. The recoverable amount is the higher of an asset’s net selling price (the estimated amount obtainable from the sale of an asset less incremental costs di- rectly attributable to the disposal of the asset) and an asset’s value in use (the present value of esti- mated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life). The estimated future cash flows are based on reason- able assumptions about the economic conditions that will exist over the remaining useful life of the 3 asset and on cash flow projections and budgets/fore- casts approved by the Corporate Executive Commit- tee. Permanent diminutions in value are recognized in the income statement. The Baloise Group determines any impairment of fi- nancial assets according to the following rules: If the market value is more than 50 % below the pur- chase value, an impairment entry must be booked in any case. Provided the market value is more than 20 % but less than 50 % below purchase value, im- pairment is to be considered and an entry made where applicable. The impairment will be assessed on the basis of reports by bank analysts and ratings by ratings agencies. Dividend developments, under- lying capital and other factors will also be taken into account. The prime yardstick for the formation of the impairment is, however, the appraisal by the asset manager responsible. In forming the impair- ment, the accumulated net loss recorded in the capi- tal and reserves will be transferred to the income statement. 3.5 Derivatives The main tool for the management of investment risk and return on the asset side of the balance sheet is the strategic allocation of investments to the various investment categories (asset allocation). Derivative instruments are used to underpin this asset alloca- tion. They are particularly useful for hedging invest- ments, when preparing to purchase or sell invest- ments, or to slightly increase investment income. However, no trading or speculative business is under- taken in derivatives. Derivative transactions are un- dertaken only with counterparties who have at least an A credit rating from Standard & Poor’s. All derivatives are recorded in the balance sheet at their market value. When the contract is concluded, the derivative is classified either as a hedging instru- ment against the market value of an asset or a liabi- lity (fair value hedge), as a hedge against future trans- actions (cash flow hedge) or as a trading instrument. Derivatives which do not fulfill IFRS requirements for hedging transactions are treated as trading instru- ments, even if they have a hedging function accord- ing to the Baloise Group’s own risk management re- gulations. Changes in the market value of derivatives which have been classified as fair value hedging instru- ments are shown in the income statement net, to- gether with changes in the market value of the hedged asset or liability. Changes in the market value of derivatives which have been classified as cash flow hedging instru- ments are taken directly to capital and reserves. The amounts accounted for in capital and reserves will be recorded at a later date in the income statement together with the hedged cash flows. Changes in the market value of derivatives which are classified as trading instruments or do not fulfill the requirements of a hedging transaction are shown in the income statement. The Baloise Group keeps records of hedge effective- ness and the aims and strategies pursued for each hedging transaction. Hedge effectiveness is closely monitored from the date the contract begins. Deriv- atives which no longer meet the requirements for a hedging instrument are reclassified as trading in- struments. Structured products are financial instruments, either assets or liabilities, which consist of a host contract and embedded derivatives. In the majority of cases, the embedded derivatives are not separated from the host contract and are classified in the trading portfolio of the host business, with the effect that unrealized gains and losses are recorded directly in the income statement. Some derivatives are sepa- rated from the host contract and are separately re- corded, valued and disclosed. For this to be the case, the following conditions must apply: that the eco- nomic characteristics and risks of the embedded derivative are not closely related to those of the host contract and that the embedded derivative itself would meet the definition of a derivative financial instrument. 3.6 Intangible assets Company acquisitions are accounted for using the pur- chase method. Under this method, the purchase price is compared on the date of acquisition with the fair values of the assets and liabilities acquired, and the balance is accounted for as goodwill. Goodwill relat- ing to subsidiaries which do not prepare their financial statements in Swiss francs is translated at the ex- change rate applicable on the date of the acquisition. Capitalized goodwill is amortized on a straight-line basis over its expected useful life, which may not ex- ceed 20 years. The period over which the goodwill is to be amortized is determined mainly by the future economic benefits expected to flow from the com- pany acquired. These depend, among other things, on the type of business acquired, the lifespan of the insurance contracts, relationships with clients and Bâloise-Holding Annual Report 2003 83 3 Financial Report 2003 sales channels. The value of the capitalized goodwill is reviewed annually. If the book value of the good- will is greater than the recoverable amount, the dif- ference will be amortized via the income statement. Badwill is offset against positive goodwill. Badwill written of is credited to the income statement (offset against the amortization expense) on a systematic basis over the remaining average useful life of the acquired, non-monetary assets, at most, however, over 20 years. The present value of profits from insurance contracts acquired is amortized over the underlying period of premium payments taken to income. The value of the profits is reviewed on an annual basis. Other intan- gible assets consist mainly of software and are writ- ten off on a straight line basis over their estimated useful life. 3.7 Tangible non-current assets Tangible non-current assets are shown at cost less accumulated depreciation. Depreciation is calculat- ed on a straight line basis over the estimated useful life of the asset, as follows: buildings for own use 25 to 50 years, equipment and furnishings 5 to 10 years, computer hardware 3 to 5 years. Land is shown at cost less any necessary provisions for impairment. Repairs and maintenance are always charged to the income statement. 3.8 Leasing Lease agreements relating to real estate, fixtures, fit- tings and other tangible non-current assets, whereby basically all the risks and rewards relating to owner- ship of the asset are transferred to the Baloise Group, are defined and treated as finance leases. The fair value of the leased property, or the cash value of the leasing payments if lower, is disclosed as a tangible non-current asset at the inception of the lease. Each lease payment comprises a depreciation expense for the asset and interest payment. The depreciation expense is deducted from the liability for the leased asset, which is shown under Liabilities from banking business and loans. The value of the leased item is reviewed on the balance sheet reference date. If the cash value of the leasing payments is lower than the book value of the leased item, the value will be corrected via the income statement. Other lease agreements are classified as operating leases. Lease payments under an operating lease are recognized as an expense in the income statement on a straight line basis over the lease term. 84 3.9 Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits and short-term highly liquid in- vestments with maturity periods of up to 24 hours. Cash and cash equivalents are stated at their nominal value. Term deposits are entered under Other short- term investments. 3.10 Receivables Receivables arising out of insurance operations and other receivables are recognized and stated at amor- tized cost. This generally corresponds to the nomi- nal value of the amount receivable. Permanent dim- inutions in value (impairment losses) are charged directly to the income statement. 3.11 Life insurance Premiums are accounted for as income when due. Claims and benefits paid and costs are accounted for so as to ensure that the profit from the contracts is allocated equally over the anticipated term of the policies. Premiums and services relating to invest- ment-type products are accounted for as follows: the risk and cost element is taken to the income state- ment, while the savings element is directly credited to or deducted from the policyholder’s deposit. The actuarial reserve is calculated on the basis of actuarial principles from the cash value of future claims and benefits paid less the cash value of pre- miums not yet paid. The calculation is made in ac- cordance with the following Financial Accounting Standards: FAS 60, FAS 97 or FAS 120. The accounting principles (e.g. in respect of interest or mortality) vary depending on the country, product and year of acqui- sition and take country-specific empirical values into consideration. Unearned premiums, unearned rev- enue reserves and provisions for final policyholder bonuses are included in the actuarial reserve. Amounts for future surplus shares to policyholders are fixed on the basis of local statutory and contrac- tual regulations and are allocated to a separate pro- vision. This provision also includes policyholders’ share of the unrealized gains and losses covered by the IFRS shareholders’ equity and their share of the higher or lower values recorded in the consolidated financial statement – as compared with the statement based on commercial law – and taken to income. Statutory regulations and the rules set out in con- tracts and company articles of incorporation are authoritative in determining the share of future poli- cyholder bonuses. Where there are no such statu- tory regulations or rules set out in contracts and 3 company articles of incorporation – as in the case of Belgium, Luxembourg and Switzerland – an alloca- tion to policyholder bonuses will not apply. Policyholder bonuses credited: Bonuses already al- located which have been accrued on an interest-bear- ing basis are included in Policyholder bonuses credit- ed and provision for future policyholder bonuses. This provision comprises the following (cid:2) Sums irrevocably set aside for future policy- holder bonuses, (cid:2) Policyholders’ shares of the reported result, (cid:2) Policyholders’ shares of unrealized profits and losses on investments. Investments and technical provisions relating to unit- linked life policies: These amounts relate to invest- ment-type products. With these products, it is the policyholder who bears the investment risk in accor- dance with specific investment aims. Current invest- ment income and market price fluctuations are di- rectly debited or credited to the policyholders. The investments are held separately and are not available to meet claims arising from other business activities of the Baloise Group. Investments and liabilities are stated at market value. Administrative and redemp- tion costs charged to policyholders are recognized as policy fee income. 3.12 Non-life insurance The term gross is added to technical account head- ings where these refer to business concluded by the Baloise itself. The terms net or for own account are used after deducting any reinsurance element. Gross premiums written are recognized in the fiscal year in which they fall due. They include an amount required to cover the insurance risk and any loading. Any part of the premium which relates to future fiscal years is deferred under the contract and is included in the unearned premiums reserves in the balance sheet, together with any provisions for premium shortfalls relating to the fiscal year. Premiums which do relate to the fiscal year are referred to as premiums earned. This figure comprises premiums written and the change in the unearned premiums reserves. Loss reserves and provisions for the associated claims processing costs are set up for all losses which have occurred before the end of the fiscal year, whether or not these have been notified to the Baloise Group. These provisions represent a projection of all future payments to be made in respect of these losses. Loss reserves are calculated on the basis of prior year ex- perience and expected developments in the future. The process involves the application of mathemati- cal, statistical methods and the expertise of claims- handling specialists. The aim is to establish provi- sions for outstanding claims and for claims processing costs which are as realistic as possible. An additio- nal provision is set for claims processing costs. The combined loss reserves have three components. The provisions calculated according to actuarial methods form the basis of the combined provision; a second component is provisions for those complex special cases and events which do not lend them- selves to purely mathematical calculations. These two components are determined without discounting. The third component is annuities, which are capita- lized on the basis of technical principles such as mortality rates, technical interest rates, etc. The whole process of projecting the future can never entirely eliminate the uncertainties inherent in future developments. Therefore, future developments may well be different to those projected. The provisions established in a particular year are systematically re- viewed, which means that variances can be control- led. On the basis of such reviews, the projection pro- cess can be adjusted if necessary. Surplus and profit allocations to policyholders: insurance contracts may provide for surplus sharing with a client arising from the surplus on his contracts. Payments made during the fiscal year and the change in the relevant provisions combine to give the figure referred to in the income statement as surplus and profit allocations to policyholders. 3.13 Deferred acquisition costs Costs which are directly associated with the acqui- sition of insurance contracts (e.g. commissions) are deferred and written off over the period of the con- tract, or over the premium payment period, if shorter. Deferred acquisition costs are reviewed when the contract is acquired and thereafter on an annual basis for recoverability. 3.14 Reinsurance Reinsurance contracts are insurance contracts be- tween insurance companies. If a transaction is to be recognized as a reinsurance transaction, there must be a transfer of risk as defined the US-GAAP, other- wise the contract would be dealt with outside the income statement as deposit accounting. Bâloise-Holding Annual Report 2003 85 3 Financial Report 2003 Reinsurance assumed is recognized in the same ac- counting period as the initial risk. The technical pro- visions are included in liabilities under the headings Unearned premiums reserves (gross) and Loss re- serves (gross). These provisions are as realistic as possible and are based on empirical values and the most up-to-date information available. Reinsurance ceded is business which has been ceded to insurance companies outside the Group and com- prises amounts which relate to direct life and non- life business and reinsurance assumed which is to be ceded. Assets from reinsurance ceded are calculated on the same basis and for the same period as the original transaction and shown in assets from reinsurance. Where deposits are at risk due to insolvency, appro- priate write-downs are made in the income state- ment. Receivables and payables from deposit accounting contracts are recognized mainly using the interest method. The effective interest rate is calculated on the basis of cash flows which have already occurred or are expected in the future. Otherwise, the insur- ance coverage financed by the deposit is amortized over the expected term of the deposit. Liabilities are included in Deposit fund liabilities arising from reinsurance. 3.15 Own shares Own shares (treasury stock) held by Bâloise-Holding or by its subsidiaries are shown at cost in the con- solidated financial statements as a deduction from Capital and reserves. The shares are not restated at their current market value. When the shares are sold, the difference between cost and selling price is ad- justed under Capital and reserves. Only Bâloise- Holding shares are counted as own shares. 3.16 Liabilities from banking business and loans Liabilities from banking business and loans are stated at amortized cost. The effective interest rate method is used to amortize or write back the difference be- tween cost and redemption value. The cost figure also includes transaction costs. The convertible loan issued by Baloise Finance Jersey, which confers the right to subscribe for shares in a non-group company, consists of a liability and an embedded option. When the loan was issued, the market value of the embedded option was deter- mined and shown separately as a derivative financial 86 instrument. The cost of the liability component is the present value of future cash flows, which was calcu- lated when the issue was made. The discount factor applied is the market interest rate for similar loans without conversion or option rights. 3.17 Financial provisions Financial (non-technical) provisions are recognized when the Baloise has a present obligation (legal or de facto), when it is probable that an outflow of re- sources will be required to settle the obligation and when a reliable estimate can be made of the amount of the obligation. The amount of the provision is based on the best estimate of possible outcomes. If no re- liable estimate can be made of the liability, it is dis- closed as a contingent liability. 3.18 Tax The provision for deferred tax in the consolidated fi- nancial statements is calculated under the liability method, i.e. based on current or future expected tax rates. Deferred tax takes into account the income tax effects of temporary differences between the assets and liabilities carried in the consolidated balance sheet and their fiscal base. When deferred tax is cal- culated, unused tax losses are only carried forward to the extent that it is probable that future taxable profit will be available against which the tax losses can be utilized. 3.19 Benefits due to employees Amounts due from the Baloise Group to employees include all types of employee benefits given in ex- change for services rendered by employees or in spe- cial circumstances. The following amounts need to be established: short- term benefits (such as wages), benefits due in the long term (such as anniversary payments) and ben- efits upon termination of employment (such as sever- ance pay and benefits from redundancy schemes). Because of the amounts involved, the following ben- efits can be particularly significant: Postemployment benefits: The main retirement ben- efits are pensions and insurance contributions as- sumed by the employer. The benefits are paid when the employee ceases to be employed and are fi- nanced during the period in which the employee is working. The retirement pensions in the Baloise Group are predominantly defined benefit plans. The present value of the defined benefit obligation is discounted 3 using the Projected Unit Credit Method (accrued ben- efit method prorated on service). Plan assets which match the benefits payable are only recognized if they are brought into an entity which is legally separate from the employer, e.g. a foundation. The plan assets are stated at market value. If a difference arises be- tween the assets and liabilities when IAS 19 is used, this is shown as an asset or liability in the consoli- dated balance sheet. An asset is only recognized to the extent that the Baloise controls a resource which may be used to reduce future contributions or improve future benefits, but this resource cannot be returned to the employer. Pension plans of the Baloise Group are tailor-made for local circumstances as regards enrolment and the extent of benefits. Benefits in the narrow sense are pension benefits. Other plan benefits may be subsidized premiums or contributions to health insurance and are of minor significance. Payments are made mainly by the employer and in some coun- tries also by the employees. Pension plans are some- times implemented within companies and some- times in entities which are legally separate from the employer. Equity benefits: Employee shares, share participation schemes, shares subscribed directly and shares subscribed through options are equity benefits. Employee shares: The Baloise Employee Trust set up in 1989 gives the employees of various Group com- panies the opportunity, subject to the rules issued by the Trust’s Board, to acquire shares in Bâloise- Holding, usually on an annual basis, at a preferential subscription price. The Trust acquired the shares set aside for this purpose from previous increases in the share capital of Bâloise-Holding. Due to the low acquisition cost of the shares held by the Trust and the number of shares held, Bâloise-Holding will be able to continue with this profit-sharing initiative in the years to come. The Trust is managed by a Trust Board which is independent of the Corporate Execu- tive Committee, reports to the cantonal fund authority of the city of Basel and is not consolidated. Share participation scheme: Since May 2001, most middle and senior managers working in Switzerland can opt to have a freely determinable part of their performance-related earnings (incentive) remitted as shares instead of cash. To boost the effectiveness of the share participation scheme, employees receive a loan at a market rate of interest, enabling them to purchase a far greater number of shares than pro- vided by the incentive scheme. The loan repayment after a three-year blocking period is hedged with a put option that is financed by the sale of a corre- sponding call option. After expiry of the three-year blocking period, employees receive the shares re- maining after repayment of the loan for their free dis- posal. The Baloise does not incur any additional costs by this share participation scheme. Shares subscribed directly: Since January 2003, em- ployees of all Group companies who are eligible for incentives have been able to subscribe shares at a preferential price as part of their variable, perform- ance-related pay component (incentive). The sub- scription price is always 10 % lower than the market value at the time of subscription. The shares are com- mitted to safe custody for a blocking period of three years. Option rights: The members of the Corporate Execu- tive Committee and of the Executive Boards of the subsidiaries, and other employees in key positions, are granted options to purchase shares in Bâloise- Holding as part of their remuneration. These options are purchased from third parties by the Baloise Group at market value and are quoted on the stock market. The conditions which apply to the option rights are specified at the beginning of the fiscal year. The number of options alloted by the end of the financial year depends on whether the parties concerned have met their personal performace objectives. The allot- ed share options may not be sold for two years. The associated costs are already included in personnel expenses. 3.20 Other liabilities Other liabilities are recognized and stated at amortized cost, which is generally the same as nominal value. 3.21 Fair value of financial assets and liabilities The fair value of financial instruments is based on quoted market values or on estimates (present value method, etc.) and on the following assumptions: Cash, cash equivalents and short-term investments: The amounts shown in the balance sheet are stated at market value (fair value). Fixed-interest securities: The fair value is generally based on quoted prices. If quoted prices are not avail- able, the price is determined by independent valua- tions or by comparing the market prices of similar fi- nancial instruments. Shares: Fair value is the quoted share price. If this is not available, the fair value is estimated using gen- Bâloise-Holding Annual Report 2003 87 3 Financial Report 2003 erally recognized methods and in light of the current state of the market. If the value cannot be estimated reliably, stocks are reported at acquisition value. Mortgage loans, policy loans and other loans: The fair values are determined by discounting the cash flows, using the current interest rate applied by the Baloise Group to similar loans. Derivatives are stated at market prices as supplied by independent brokers or in accordance with market practice. Other financial assets: The fair value is generally a quoted market price. If no market prices are available, the market value is estimated. If the value cannot be estimated reliably, financial assets are reported at acquisition value. Deposits and other amounts due to policyholders: The fair values are determined by discounting the cash flows, using the current interest rate applied by the Baloise Group to similar financial instruments with similar time remaining to maturity. Liabilities from banking business and loans: The fair values are determined by discounting the cash flows, using the current interest rate payable by the Baloise Group for similar financial instruments with similar periods of time to maturity. Other financial liabilities: The fair value is generally a quoted market price. If no market prices are avail- able, the market value is estimated. If the value can- not be estimated reliably, financial liabilities will be reported at acquisition value. 3.22 Offsetting assets and liabilities Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and the Baloise Group intends to realize the asset and settle the liability simultaneously. 3.23 Use of accounting estimates In order to prepare annual financial statements in accordance with IFRS, it is necessary for the Corporate Executive Committee to make assumptions and esti- mates which have an effect on the amounts disclosed in the balance sheet and income statement for the current fiscal year. Therefore, it is possible that the actual figures may differ from the estimates. 88 4. Foreign currency translation 4.1 Rates of exchange Balance Income statement / cash flow statement Currency EUR (Euro) USD (US Dollar) GBP (Pound Sterling) in CHF 2002 2003 2002 2003 1.45 1.38 2.23 1.56 1.24 2.21 1.47 1.56 2.33 1.52 1.34 2.20 4.2 Foreign exchange differences Exchange differences arising from transactions in foreign currencies included in the consolidated in- come statement resulted in a gain of CHF 47.0 million in fiscal 2003 (2002: loss of CHF 122.4 million). This also comprises a foreign exchange gain of CHF 135.6 million resulting from monetary investments classi- fied as Available for sale. 5. Acquisitions and disposals of subsidiaries and other business units 5.1 Acquisitions and disposals of subsidiaries and other business units in 2002 During the course of 2002, all 2.2% outstanding mi- nority interests in Deutscher Ring Leben were pur- chased for CHF 6.1 million. Deutscher Ring Leben is now wholly owned by the Baloise Group. No other significant acquisitions or disposals were effected. 5.2 Acquisitions and disposals of subsidiaries and other business units in 2003 The purchase of the German insurance group Securitas was formally and substantively completed as of January 7, 2003. The Group was therefore con- solidated at this time and is included in the present statement figures. During the course of fiscal 2003 Securitas was merged with parts of the German branch of the Baloise, Insurance Company Limited, Basel, to form Basler Securitas Versicherungs-Aktien- gesellschaft. Gilde Lebensversicherungs AG which forms part of the Securitas Group was acquired by the German branch of the Baloise Life Insurance Company Ltd, Basel. DePfa Beteiligungs-Holding II GmbH, Düsseldorf, valued at equity, sold its participating interest to DePfa Bank PLC, Dublin, through the stock market in the second half of 2003. During the year under review, the fully consolidated real estate company Rubens 2000 N.V., Antwerp, was sold for CHF 37.5 million. The other activities and Group business segment in- clude in particular investment and real estate com- panies. The accounting principles applied to the segment re- porting are the same as apply to the entire financial report. Transactions between business segments and geographical segments within the Baloise Group are conducted on the same terms as transactions with third parties. Information analyzed by geographical and business segments is given in the segment re- ports, in the Management Information section and in the following tables. 3 No other significant acquisitions or disposals were effected in fiscal 2003. Investments Other assets Securitas Group 1,919.6 343.6 Technical provisions - 1,854.7 Other 21.2 – – Total 1,940.8 343.6 - 1,854.7 Other liabilities - 257.8 - 6.9 - 264.7 Net assets acquired 150.7 14.3 165.0 Cost 107.3 21.7 129.0 Goodwill / badwill - 43.4 7.4 - 36.0 Cost Cash and cash 107.3 21.7 129.0 equivalents aquired - 13.1 - 0.8 - 13.9 Cash and cash equivalents used to make the acquisitions 94.2 20.9 115.1 in CHF m 6. Information about geographical and business segments The Baloise Group has strategic operations in the fol- lowing regions: Switzerland (including the Principality of Liechtenstein), Germany, the Benelux and Other countries. The business segments are non-life insurance, life insurance, banking (including asset management and investment funds) and other activities and Group business. Non-life insurance includes accident in- surance, health insurance and products for liability, automobile, property and transport lines of business. The products are geared to the requirements of our clients – mainly private clients – and the core com- petencies of the companies in the Baloise Group. On the life insurance side, a broad range of asset- forming insurance, pure risk coverage and unit-linked products is provided for private individuals and com- panies. The banking segment comprises Baloise Bank SoBa, an all-purpose bank operating in Switzerland, Mercator Bank in Belgium, which is involved in all types of savings business, principally financing real estate and small and medium-sized enterprises, and Deutscher Ring Bausparkasse in Germany, pre- dominantly active in traditional real estate financing. Bâloise-Holding Annual Report 2003 89 Life Elimination 3,477.9 970.4 154.0 31.8 0.9 4,633.2 - – – – – - 16.3 - 16.3 Life Elimination 3,031.6 1,077.6 161.2 30.8 0.1 - 4,301.1 – – – – - 15.2 - 15.2 2002 17.1 1.9 - 1.0 - 21.4 10.0 Total 4,652.8 1,755.1 713.2 443.2 - 289.8 7,274.5 Total 4,269.3 2,199.9 744.6 441.0 - 280.1 7,374.7 Total 2003 - 8.2 20.9 0.7 2.5 - 0.1 Financial Report 2003 6.1 Gross premiums by geographical and business segments 6.1.1 Gross premiums by geographical and business segments 2002 Switzerland Germany Benelux Other countries Elimination Total in CHF m 6.1.2 Gross premiums by geographical and business segments 2003 Switzerland Germany Benelux Other countries Elimination Total in CHF m 3 Non-life 1,174.9 784.7 559.2 411.4 - 272.6 2,657.6 Non-life 1,237.7 1,122.3 583.4 410.2 - 264.8 3,088.8 6.2 Change in gross premiums by geographical and business segments 2003 2002 3.5 10.2 0.2 - 22.2 3.1 Non-life 2003 5.3 38.0 0.6 4.1 14.0 2002 22.6 - 3.9 - 5.1 - 18.0 14.4 Life 2003 - 12.8 7.1 1.0 - 3.8 - 8.1 Switzerland Germany Benelux Other countries Total in percent of original currency 90 6.3 Gross premiums by line of business Non-life Accident Health General liability Automobile Transport Property Other Reinsurance assumed Total Life Single premiums Recurring premiums Premiums for investment-type products Total in CHF m 2002 430.3 121.9 249.2 866.3 116.4 733.4 38.5 101.6 2003 448.1 122.5 317.2 979.5 164.5 914.3 39.6 103.1 2,657.6 3,088.8 2,464.2 2,422.0 - 253.0 4,633.2 1,932.4 2,629.7 - 261.0 4,301.1 Change in percent 4.1 0.5 27.3 13.1 41.3 24.7 2.9 1.5 16.2 - 21.6 8.6 3.2 - 7.2 6.4 Investments by business segments 2002 3 Fixed-interest securities Shares Alternative financial assets Derivatives Investment property Mortgage loans Policy and other loans Participating interests in associates Other short-term investments Cash and cash equivalents Total in CHF m Non-life 3,158.0 1,381.9 78.0 13.7 967.4 422.2 72.2 77.5 42.7 182.0 6,395.6 Life 15,745.6 4,089.9 145.8 163.5 3,950.2 4,635.2 1,168.4 83.4 2,510.8 135.9 Other 3,003.2 280.6 815.2 35.6 388.1 Total 21,906.8 5,752.4 1,039.0 212.8 5,305.7 5,474.6 10,532.0 279.8 126.0 276.1 357.9 1,520.4 286.9 2,829.6 675.8 32,628.7 11,037.1 50,061.4 Bâloise-Holding Annual Report 2003 91 Non-life 4,579.0 634.6 60.7 47.7 1,025.9 396.6 62.5 29.4 526.8 244.4 Life 20,914.2 2,587.7 75.8 166.9 4,077.7 4,818.7 1,088.0 153.4 1,874.7 145.9 Other 4,032.2 253.6 1,201.4 78.3 549.8 Total 29,525.4 3,475.9 1,337.9 292.9 5,653.4 5,787.1 11,002.4 306.1 41.0 245.9 301.7 1,456.6 223.8 2,647.4 692.0 7,607.6 35,903.0 12,797.1 56,307.7 2002 987.0 173.7 8.4 – 249.3 480.3 76.8 70.0 45.8 2003 1,163.5 95.0 7.5 – 259.9 431.8 74.0 41.6 31.9 2,091.3 2,105.2 - 67.2 2,024.1 - 75.9 2,029.3 70.0 41.6 3 Financial Report 2003 6.5 Investments by business segments 2003 Fixed-interest securities Shares Alternative financial assets Derivatives Investment property Mortgage loans Policy and other loans Participating interests in associates Other short-term investments Cash and cash equivalents Total in CHF m 7. Profits arising from investments 7.1 Investment income Fixed-interest securities Shares Alternative financial assets Derivatives Investment property Mortgage loans Policy and other loans Participating interests in associates Other short-term investments, cash and cash equivalents Total (gross) Investment management costs Total (net) Of which from associates in CHF m Investment income of CHF 58.1 million (2002: CHF 65.2 million) from value-adjusted mortgage loans and policy and other loans has accrued as at Decem- ber 31, 2003, but has not been recognized in the in- come statement. 92 7.2 Realized gains and losses: 2002 Realized gains on disposal and book gains Held for trading Available for sale Held to maturity Originated by the Group Subtotal Realized losses on disposal and book losses Held for trading Available for sale Held to maturity Originated by the Group Subtotal Impairment of value charged income Available for sale Held to maturity Reinstatement of original value charged to income1 Available for sale Held to maturity Total Fixed-interest securities 26.6 145.4 – – Shares 1.3 831.5 – – Investment property – 50.8 – – Other 175.1 45.9 – 0.2 Total 203.0 1,073.3 – 0.2 172.0 832.8 50.8 221.2 1,276.8 - 10.2 - 287.5 0.0 – - 38.3 - 561.5 – – – - 34.7 – – - 297.7 - 599.8 - 34.7 - 112.6 - 13.5 – - 66.2 - 192.3 - 161.1 - 897.2 0.0 - 66.2 -1,124.5 - 29.2 - 914.9 0.0 2.3 – - 152.6 – 101.2 – - 580.7 – – – – - 134.6 - 67.7 -1,078.7 - 67.7 0.3 83.8 103.8 83.8 16.1 - 89.3 - 806.5 3 Cumulative impairment of value charged to income (net) 30.1 942.6 – 511.0 1,483.7 in CHF m 7.3 Realized gains and losses: 2003 Realized gains on disposal and book gains Held for trading Available for sale Held to maturity Originated by the Group Subtotal Realized losses on disposal and book losses Held for trading Available for sale Held to maturity Originated by the Group Subtotal Fixed-interest securities 22.9 490.2 – – Shares 40.4 422.0 – – 513.1 462.4 - 29.4 - 31.4 – – - 3.3 - 1,422.9 – – Investment property – 44.1 – – 44.1 – - 28.3 – – - 60.8 - 1,426.2 - 28.3 Impairment of value charged income Available for sale Held to maturity Reinstatement of original value charged to income1 - 3.6 - 128.9 – – Available for sale Held to maturity Total 13.6 0.0 462.3 736.5 – – – – – - 356.2 15.8 - 163.2 - Cumulative impairment of value charged to income (net) 22.1 356.9 – 545.3 924.3 in CHF m 1 Upon disposal of financial instruments, any impairment in value charged to the income statements of former periods is registered as reinstatement of original value in the income statement. The difference between the original purchase value and the income from sale is recorded as profit or loss. Bâloise-Holding Annual Report 2003 93 Other 81.6 96.0 – 20.9 198.5 - 217.5 - 49.5 – - 79.8 - 346.8 Total 144.9 1,052.3 – 20.9 1,218.1 - 250.2 -1,532.1 – - 79.8 -1,862.1 - 63.5 - 67.6 - 196.0 - 67.6 30.2 86.0 780.3 86.0 41.3 Financial Report 2003 7.4 Unrealized gains and losses (included in capital and reserves) Fixed-interest securities Shares Alternative financial assets Derivatives held for cash flow hedges Investment property Mortgage loans Policy and other loans Participating interests in associates Other short-term investments Subtotal (gross) Less amounts relating to Deferred acquisition costs (life) Surplus shares to policyholders (life) Minority interests Deferred tax Foreign exchange differences Total (net) in CHF m 3 12.31.2002 12.31.2003 Movement in business year 997.9 - 321.0 105.8 10.6 – – – - 11.0 - 0.8 781.5 - 140.2 - 134.6 0.3 - 115.5 - 376.3 15.2 690.6 321.4 138.4 96.6 – – – 50.0 0.2 - 1,296.8 - 239.3 - 275.8 0.1 - 129.1 - 491.6 161.1 - 307.3 642.4 32.6 86.0 – – – 61.0 0.6 515.3 - 99.1 - 141.2 - 0.2 - 13.6 - 115.3 145.9 In fiscal 2003, some fixed-interest securities classi- fied as Available for sale were reclassified as Held to maturity. At the time of the reclassification, the un- realized gains and losses on the relevant securities position amounted to CHF 262.6 million. As of December 31, 2003, the fixed-interest securities classified as Available for sale do not include any se- curities valued at purchase value (2002: CHF 38,836). During the year 2003, no fixed-interest securities without market value were sold. The change in book value is due to the reclassification of securities for which, in the meantime, reliable market values have become available. Shares not stated at market value to the amount of CHF 89.2 million (2002: CHF 66.7 million) are includ- ed in the financial statements at December 31, 2003. It was not possible to establish a market price or make a reliable estimate of the value of these shares. They have been entered at purchase value, or lower if there are justifiable reasons for this. 7.5 Movement in unrealized gains and losses (included in capital and reserves) Balance at January 1 (gross) Movement in unrealized gains and losses on financial assets available for sale Movement on unrealized gains and losses on associates Movement on hedging reserve relating to derivatives held for cash flow hedges Balance at December 31 (gross) in CHF m 2002 2,460.5 - 1,603.7 - 90.5 15.2 781.5 2003 781.5 368.3 61.0 86.0 1,296.8 94 8. Investment property Balance at January 1 Additions Additions due to changes in composition of consolidated Group Disposals Disposals due to changes in composition of consolidated Group Reclassification Change in market value Foreign exchange differences Balance at December 31 in CHF m As a result of various restructuring measures in Germany and Belgium, vacated properties for the company’s own use were converted to investment properties (see also table 13.2., Property, plant and equipment for own use). Most of the investment pro- perty is located in Switzerland. 9. Participating interests in associates 2002 5,042.2 373.4 0.2 2003 5,305.7 464.9 84.5 - 100.3 - 288.2 - - 0.3 – 9.9 19.4 5,305.7 - - 28.6 29.1 6.2 92.2 5,653.4 3 DePfa Beteiligungs-Holding II GmbH, Düsseldorf Brinvest N.V., Antwerp Rec-Hold, Brussels Roland Rechtsschutz Versicherungs-AG, Cologne Other Total in CHF m 2002 94.9 54.0 44.3 18.9 74.8 286.9 Book value Share of profit 2003 89.9 61.4 – 20.3 52.2 2002 59.2 1.1 0.0 1.5 8.2 223.8 70.0 2003 39.8 - 4.8 – 1.5 5.1 41.6 2002 40.0 % 31.2 % 30.7 % 25.0 % – Holding 2003 40.0 % 31.2 % – 25.0 % – There are no significant amounts due from or to as- sociates. In fiscal 2003, the stake in Rec-Hold, Brussels, was exchanged for stocks of the exchange-listed N.V. Recticel SA, Brussels, and is hence classified as Available for sale. In connection with the business restructuring, undis- closed reserves at DePfa Beteiligungs-Holding II GmbH were realized and to the greatest extent paid to the parent company in 2002. The distributed amount of CHF 59.2 million was repaid to the share premium account of DePfa Beteiligungs-Holding II GmbH in the course of the same year. Further information about associates is given in Note 34, Significant subsidiaries and participating interests at December 31, 2003. Bâloise-Holding Annual Report 2003 95 Contract values Fair value: assets Fair value: liabilities 2002 – 3,716.9 – – – – 2003 – 3,539.7 582.0 – 0.2 – 2002 – 35.8 – – – – 2003 – 135.3 10.0 – – – 2002 – 24.4 – – – – 2003 – 125.2 – – 0.0 – 3,716.9 4,121.9 35.8 145.3 24.4 125.2 – – 4,641.2 1,281.3 5.8 – 1.4 – 4,647.0 1,282.7 49.5 41.9 642.5 – – 222.7 22.6 4,635.9 – – 733.9 9,097.8 4,881.2 10,285.8 – 170.4 0.0 – 170.4 0.4 – 6.2 – – 6.6 212.8 – 3.7 0.0 – 3.7 32.8 – 111.1 – – 143.9 292.9 – 56.9 0.5 – 57.4 0.4 2.6 2.2 – – 5.2 87.0 2002 101.0 384.3 61.7 3.5 550.5 – 31.2 0.1 – 31.3 36.8 1.3 57.8 – – 95.9 252.4 2003 101.3 599.9 93.1 3.9 798.2 Financial Report 2003 10. Derivatives Interest rate instruments Forward transactions Swaps OTC options Other Traded options Traded futures Subtotal Equity instruments Forward transactions OTC options Traded options Traded futures Subtotal Foreign exchange instruments Forward transactions Swaps OTC options Traded options Traded futures Subtotal Total in CHF m 3 11. Investments for account and risk of life insurance policyholders Fixed-interest securities Shares Other short-term investments Cash and cash equivalents Total in CHF m For technical reasons, it is possible that there may be slight differences between the investments for ac- count and risk of life insurance policyholders and the corresponding liabilities. 96 12. Intangible assets 12.1 Intangible assets 2002 Book value at January 1 Additions arising from changes in composition of consolidated Group Additions arising from changes in share of investments held Additions from internal development Disposals Disposals arising from changes in composition of consolidated Group Subsequent goodwill adjustment Amortization / write-backs Impairment of value charged to income Reinstatement of original value charged to income Deferred interest Foreign exchange differences Book value at December 31 Cost Accumulated amortization and write-downs Balance at December 31 (net) in CHF m 12.2 Intangible assets 2003 Book value at January 1 Additions arising from changes in composition Goodwill 143.4 7.5 6.1 – – - 1.0 – - 89.9 – – – – Badwill - 37.8 – - 4.5 – – – – 11.6 – – – – 66.1 - 30.7 587.5 - 521.4 66.1 - 103.2 72.5 - 30.7 Present value of profits from insurance contracts acquired – – – – – – – – – – – – – – – – Further intangible assets 117.5 – – 49.1 - 3.6 – – Total 223.1 7.5 1.6 49.1 3.6 1.0 – - - - 33.5 - 111.8 - - 0.7 – – 1.3 127.5 279.3 - 151.8 127.5 Goodwill 66.1 Badwill - 30.7 Present value of profits from insurance contracts acquired Further intangible assets – 127.5 3 - - 0.7 – – 1.3 162.9 763.6 - 600.7 162.9 Total 162.9 - 7.6 – 58.6 of consolidated Group 7.4 - 43.4 28.3 Additions arising from changes in share of investments held Additions from internal development Disposals Disposals arising from changes in composition of consolidated Group Subsequent goodwill adjustment Amortization / write-backs Impairment of value charged to income Reinstatement of original value charged to income Deferred interest Foreign exchange differences Book value at December 31 Cost Accumulated amortization and write-downs Balance at December 31 (net) in CHF m – – – - 3.9 – - 15.3 - 37.6 – – – – – – – – – – – – – 15.3 - 1.8 – – – – – – – – 16.7 - 58.8 26.5 591.0 - 574.3 16.7 - 146.6 87.8 - 58.8 28.3 - 1.8 26.5 0.1 – 58.6 - 15.0 - 15.0 – – - 37.5 - 0.7 – – 4.9 137.9 327.9 - 190.0 137.9 - 3.9 – - 39.3 - 38.3 – – 4.9 122.3 800.6 - 678.3 122.3 On the basis of impairment testing, a further CHF 20.0 million have been written down to zero in ad- dition to the planned amortization of goodwill from the participation in Mercator Verzekeringen N.V. in the business year 2003. During the year under review, goodwill arising from various smaller shareholdings was the subject of unscheduled write-downs amounting to CHF 17.6 million based on impairment tests. Bâloise-Holding Annual Report 2003 97 Financial Report 2003 13. Tangible non-current assets 13.1 Property, plant and equipment for own use: 2002 Cost Accumulated depreciation and write-downs Balance at December 31 (net) Land 93.2 – 93.2 Buildings 753.2 - 268.1 485.1 Plant and equipment 93.5 - 53.1 40.4 Total 939.9 - 321.2 618.7 Of which assets under finance leases – 133.2 – 133.2 in CHF m 13.2 Property, plant and equipment for own use: 2003 Book value at January 1 Additions Additions arising from changes in composition of consolidated Group Disposals Disposals arising from changes in composition 3 of consolidated Group Reclassification Depreciation Impairment of value charged to income Reinstatement of original value charged to income Foreign exchange differences Book value at December 31 Cost Accumulated depreciation and write-downs Balance at December 31 (net) Land 93.2 1.3 4.1 - 2.7 – - 0.7 – – – 1.4 96.6 96.6 – 96.6 Buildings 485.1 6.9 21.6 - 12.8 – - 28.4 - 24.3 – – 23.5 471.6 764.0 - 292.4 471.6 Plant and equipment 40.4 7.7 – - 2.4 – – - 10.8 – – 2.2 37.1 101.0 - 63.9 37.1 Total 618.7 15.9 25.7 - 17.9 – - 29.1 - 35.1 – – 27.1 605.3 961.6 - 356.3 605.3 Of which assets under finance leases – 139.8 – 139.8 in CHF m 98 13.3 Other tangible non-current assets: 2002 Cost Accumulated depreciation and write-downs Balance at December 31 (net) Machinery / furniture / motor vehicles 102.2 - 54.5 47.7 IT equipment 121.1 - 82.0 39.1 Total 223.3 - 136.5 86.8 Of which assets under finance leases 0.1 5.5 5.6 in CHF m 13.4 Other tangible non-current assets: 2003 Book value at January 1 Additions Additions arising from changes in composition of consolidated Group Disposals Disposals arising from changes in composition of consolidated Group Machinery / furniture / motor vehicles IT equipment 47.7 28.2 2.1 5.9 – - 39.1 16.1 1.7 1.5 – - Total 86.8 44.3 3.8 7.4 – - Depreciation - 15.4 - 24.2 - 39.6 Impairment of value charged to income Reinstatement of original value charged to income Foreign exchange differences Book value at December 31 Cost Accumulated depreciation and write-downs Balance at December 31 (net) – – 2.0 58.7 128.6 - 69.9 58.7 – – 1.5 32.7 138.9 - 106.2 32.7 – – 3.5 91.4 267.5 - 176.1 91.4 3 Of which assets under finance leases 0.1 0.7 0.8 in CHF m 14. Deferred acquisition costs Balance at January 1 Deferred during the year under review Written off in the year under review Written off in the year under review due to anticipated loss Change as a result of unrealized gains and losses on investment (shadow accounting) Disposals arising from changes in composition of the consolidated Group Foreign exchange differences Balance at December 31 in CHF m 2002 135.5 251.7 - 229.6 - 2.4 – – - 1.3 153.9 Non-life 2003 153.9 266.5 - 249.3 - 2.3 – – 5.7 174.5 2002 588.6 134.3 - 152.9 – Life 2003 656.6 135.4 71.4 – 2002 724.1 386.0 - 382.5 - 2.4 Total 2003 810.5 401.9 - 177.9 - 2.3 95.9 - 89.6 95.9 - 89.6 – - 9.3 656.6 – 37.6 811.4 – - 10.6 810.5 – 43.3 985.9 Bâloise-Holding Annual Report 2003 99 2002 4,182.0 - 353.7 3,828.3 2003 4,196.1 - 280.8 3,915.3 1,900.8 20.0 1,920.8 2,017.2 13.9 2,031.1 - 933.8 - 808.3 - 1,742.1 - 996.7 - 885.6 - 1,882.3 – 91.7 91.7 - - 239.7 129.4 369.1 3,915.3 4,433.2 3,915.3 280.8 4,196.1 4,433.2 353.1 4,786.3 Financial Report 2003 15. Loss reserves including claims processing costs Balance at January 1 (gross) Amount attributable to reinsurers Loss reserves for own account Claims incurred (including claims processing costs) For current year For prior years Total Payments made for loss and claims processing costs For current year For prior years Total Other movements Changes in composition of consolidated Group Exchange differences Total Balance at December 31 (net) 3 Loss reserves for own account Amount attributable to reinsurers Loss reserves at December 31 (gross) in CHF m Particular attention is paid to environmental claims relating to disposal sites, waste, asbestos material and, in general, substances which are harmful to hu- mans and to the environment. Ascertaining when such cases might arise and determining the potential extent of such claims involves much greater uncer- tainty than in all traditionally used claims models. Therefore, the provisions set up for these claims are surrounded by a higher level of uncertainty. At the end of 2002, these gross provisions, which are in- cluded in the total provision, amounted to CHF 353.9 million, and they stood at CHF 320.1 million at the end of 2003. The decline by 33.8 million is due to claims processing amounting to CHF 12.3 million and currency effects amounting to CHF 21.5 million, as a large part of the provisions are held in foreign cur- rencies. 100 16. Actuarial reserve: life Long-term contracts Contracts with surplus sharing Contracts without surplus sharing Total in CHF m 17. Policyholder bonuses credited and provision for future policyholder bonuses Policyholder bonuses credited Provision for future policyholder bonuses Total in CHF m 18. Reinsurance 18.1 Technical provisions and assets from reinsurance 2002 2003 29,618.1 32,847.5 139.6 138.2 29,757.7 32,985.7 2002 3,238.9 446.1 3,685.0 2003 3,214.1 849.3 4,063.4 3 Unearned premiums reserves Loss reserves Actuarial reserve (life) Policyholder bonuses credited and provision for future policyholder bonuses Total technical provisions Deposits and assets from reinsurance Impairment of value accounted for in income statement Total reinsurance assets in CHF m 2002 419.3 4,196.1 29,757.7 Gross 2003 493.3 4,786.3 32,985.7 3,685.0 38,058.1 4,063.4 42,328.7 – – – – – – Reinsurance assets 2003 4.3 353.1 294.7 0.0 652.1 85.0 – 737.1 2002 6.4 280.8 136.7 0.0 423.9 1.1 – 425.0 2002 412.9 3,915.3 29,621.0 Net 2003 489.0 4,433.2 32,691.0 3,685.0 37,634.2 4,063.4 41,676.6 – – – – – – No single reinsurer or reinsurance contract is so ma- terial to the Group that its loss would have a signifi- cant effect on consolidated net profit. In 2003, 3.7 % of gross premiums and policy fees were ceded to external reinsurers (2002: 3.0%). 69% (2002: 67 %) of reinsurance is ceded to reinsurers rated AA (Standard & Poor’s) or better. Bâloise-Holding Annual Report 2003 101 Life Elimination Non-life 2,531.3 100.2 2,631.5 4,633.1 – 4,633.1 - 179.5 2,452.0 - 39.7 4,593.4 Life Elimination Non-life 2,982.7 102.1 3,084.8 4,301.1 – 4,301.1 - 218.7 2,866.1 - 52.9 4,248.2 0.0 - 15.6 - 15.6 16.2 0.6 0.0 - 14.8 - 14.8 15.2 0.4 2002 8.8 - 0.1 8.7 3.1 - 11.7 0.0 0.1 0.3 - 0.2 Total 7,164.4 84.6 7,249.0 - 203.0 7,046.0 Total 7,283.8 87.3 7,371.1 - 256.4 7,114.7 2003 0.3 - 0.2 0.1 41.0 - 0.2 1.1 42.0 54.3 - 12.3 Financial Report 2003 18.2 Premiums earned and policy fees 18.2.1 Premiums earned and policy fees: 2002 Direct gross premiums earned Indirect gross premiums earned Total gross premiums earned Reinsurance ceded Total net premiums earned in CHF m 18.2.2 Premiums earned and policy fees: 2003 Direct gross premiums earned Indirect gross premiums earned Total gross premiums earned Reinsurance ceded Total net premiums earned in CHF m 18.3 Deposit assets and liabilities from deposit accounting Deposit assets Deposit liabilities Balance at January 1 Increases in deposits Redemptions Foreign exchange differences Balance at December 31 Of which deposit assets Of which deposit liabilities in CHF m 3 102 19. Liabilities from banking business and bonds 19.1 Liabilities from banking business and financing operations Amounts due to banks Fixed-term deposits payable Loans Mortgages Savings and bank customer deposits Medium-term fixed-rate notes Mortgage bonds Bonds Liabilities under finance leases Total in CHF m Of these, CHF 106.3 million (2002: CHF 96.2 million) relate to subordinated liabilities as at December 31, 2003. 19.2 Bonds Balance at January 1 Initial offer price of newly issued bonds Embedded derivative Deferred tax portion Additions (subtotal) Disposals / redemptions Interest expense Nominal interest Accrued interest (subtotal) Balance at December 31 in CHF m 2002 802.1 96.2 81.8 0.4 4,698.2 1,936.1 614.2 1,266.0 164.2 9,659.2 2003 1,313.8 106.3 14.1 0.4 5,513.9 2,064.1 709.0 1,519.9 170.2 11,411.7 2002 1,088.1 175.2 – – 175.2 – - 43.4 40.7 2.7 2003 1,266.0 251.1 – – 251.1 – - 42.2 39.4 2.8 1,266.0 1,519.9 3 Bâloise-Holding Annual Report 2003 103 Financial Report 2003 19.3 Terms applicable to the bonds outstanding Nominal value in CHF m Interest rate Effective interest rate Advance redemption date Redemption amount Conversion rights Year of issue Redemption date Security number Baloise Finance (Jersey) Ltd. Bâloise-Holding Bâloise-Holding Baloise Bank SoBa Bâloise-Holding 200 1.0 % 3.2 % – 100 % in UBS shares 1998 300 3.25 % 3.25 % – 100 % no 1998 600 4.25 % 4.25 % – 100 % no 2000 175 3.625 % 3.625 % – 100 % no 2002 250 3.375 % 3.375 % – 100 % no 2003 4.7.2006 4.7.2008 9.28.2005 6.12.2007 12.15.2009 SWX 858858 SWX 858851 SWX 1123532 SWX 1422292 SWX 1726032 19.4 Reconciliation between minimum lease and their present value for financial leasing Lease period < 1 year 1 – 5 years > 5 years Total minimum lease payments Future finance expenses Total present value in CHF m 3 20. Financial provisions for the year 2003 Balance at January 1 Addition due to changes in composition of consolidated Group Currency translation Additional provisions charged to income Unused amounts reversed and released to income Amounts used not charged to income Increase owing to mark-up for interest Balance at December 31 in CHF m Restructuring 40.1 – 0.8 0.8 - 6.2 - 12.8 – 22.7 2002 13.9 40.0 193.1 247.0 - 82.8 164.2 Other 91.6 17.9 5.1 15.4 - 26.7 - 7.1 – 96.2 2003 10.2 45.3 195.4 250.9 - 80.7 170.2 Total 131.7 17.9 5.9 16.2 - 32.9 - 19.9 – 118.9 104 21. Tax on income 21.1 Current and deferred tax on income Switzerland Current tax Deferred tax Subtotal Germany Current tax Deferred tax Subtotal Benelux Current tax Deferred tax Subtotal Other countries Current tax Deferred tax Subtotal Total: all countries Current tax Deferred tax Total in CHF m 2002 2003 21.3 - 33.9 - 12.6 - 0.5 - 12.4 - 12.9 4.6 - 44.3 - 39.7 8.3 - 25.8 - 17.5 33.7 - 116.4 - 82.7 18.8 - 19.3 - 0.6 71.0 16.4 87.4 3.3 14.9 18.2 21.5 - 1.2 20.3 114.6 10.8 125.4 3 Bâloise-Holding Annual Report 2003 105 2002 - 166.8 - 7.2 – 88.3 - 0.3 7.6 7.8 – 2.5 - 82.7 2003 39.9 - 5.1 - 1.7 43.5 – - 3.4 59.1 – - 6.9 125.4 Financial Report 2003 21.2 Expected and actual tax on income Expected tax on income Increase / decrease due to Tax-exempt interest and dividend credits Tax-exempt gains from shares and participating interests Non-deductible losses from shares and participating interests Withholding tax for dividends Change in interest rates Tax elements unrelated to accounting period Disposal of enterprises Other factors Actual tax on income in CHF m The expected average tax rate of the Baloise Group came to 23.3% in 2002 and to 17.8% in 2003. These rates correspond to the weighted average of the tax rates of those countries in which the Baloise Group operates. The decrease in the average tax rate is at- tributable to the differences in different regions’ contributions to the result – in comparison with the preceding years. The non-deductible losses from shares and partici- pating interests amounting to CHF 43.5 million (2002: CHF 88.3 million) were mainly incurred by the Belgian companies. The tax elements unrelated to the accounting period amounting to CHF 59.1 million are essentially attri- butable to changes in tax legislation affecting life in- surance companies in Germany. 3 106 21.3 Deferred tax assets and liabilities Reasons for deferred tax assets Unearned premiums reserves Loss reserves Actuarial reserve (life) Unrealized losses on investments Losses carried forward Other Total Reasons for deferred tax liabilities Deferred acquisition costs Unearned premiums reserves Loss reserves Actuarial reserve (life) Unrealized gains on financial investments Depreciable assets Other intangible assets Other Total Total (net) in CHF m The tax on income payable at the end of 2002 and 2003, which is included in the balance sheet under Other liabilities and deferred income, amounted to CHF 29.6 million and 108.5 million respectively. At December 31, 2003, the Baloise Group capitalized losses brought forward that can be offset against tax amounting to CHF 143.4 million (subject to statu- tory regulations; 2002: CHF 151.8 million). All expire after five years or more. As at December 31, 2003 no tax assets were capita- lized on losses carried forward amounting to CHF 584.3 million (2002: CHF 411.2 million). Of these, CHF 20.8 million expire after one year, a further CHF 0.8 million expire after two to four years and CHF 562.7 million expire after five or more years. 2002 19.9 3.9 146.9 0.5 52.2 306.5 529.9 191.8 28.0 132.5 103.2 120.8 36.5 1.7 2003 24.7 8.5 362.5 0.4 45.9 463.9 905.9 404.2 29.3 183.3 132.1 134.3 67.3 2.4 597.0 1,211.5 681.6 687.9 1,640.8 734.9 3 Bâloise-Holding Annual Report 2003 107 Financial Report 2003 22. Number of employees and personnel costs The Baloise Group had 8,745 employees on Decem- ber 31, 2003; on December 31, 2002, the number of employees was 8,703. Total personnel costs for the fiscal year 2003 amounted to CHF 1,100.6 million, compared with CHF 1,105.1 million in the previous year. 23. Benefits due to employees The most significant part of total personnel costs consists of actual direct benefits provided to employ- ees. These are divided into the following categories: short-term and long-term benefits, postemployment benefits, termination benefits and equity benefits. 23.1 Assets and liabilities relating to employee benefits 3 Assets relating to Short-term benefits Postemployment benefits: defined contribution plans Postemployment benefits: defined benefit plans Other long-term benefits Termination benefits Equity benefits Total in CHF m Assets relating to employee benefits Liabilities relating to employee benefits 2003 8.6 – 30.2 – 2.4 – 41.2 2002 158.2 2.1 387.6 20.5 28.2 – 596.6 2003 110.4 2.8 491.9 23.6 51.3 – 680.0 2002 11.8 – 39.0 – 2.2 – 53.0 23.2 Benefits from occupational benefit plans Benefits from occupational benefit plans comprise all amounts provided for current employees and pen- sioners. The following table aggregates pension plans under Pensions and shows other benefits (such as subsidized mortgages) under Other benefits. 108 23.2.1 Liabilities relating to defined benefit plan Present value of funded obligations Fair value of plan assets Funding surplus / shortfall Present value of unfunded obligations Unrecognized actuarial gains or losses Net pension obligation Liabilities relating to other benefits Net liabilities relating to defined benefit plans Of which disclosed as liabilities Of which disclosed as assets Of which not disclosed as assets in CHF m In countries in which pension plans are effected by means of separate funds into which contributions are made, it is possible that funding surpluses or short- falls may arise, as evidenced in the table above. Such surpluses are only capitalized and recognized as assets to the extent that they represent future cost savings to the Baloise Group. 23.2.2 Expenses relating to defined benefit plans Current service costs Interest costs Expected return on plan assets Redemption of actuarial losses or gains Effect of any changes and use restrictions Employees’ contributions Total expense for pension benefits Expense for other benefits Total expense relating to defined benefit plans in CHF m 23.2.3 Income from plan assets Expected return on plan assets Gains or losses on plan assets Total income from plan assets in CHF m 2002 - 1,759.5 1,706.8 - 52.7 - 365.8 211.7 - 206.8 - 20.8 - 227.6 2003 - 1,785.1 1,716.0 - 69.1 - 458.5 200.9 - 326.7 - 37.6 - 364.3 - 387.6 - 491.9 39.0 121.0 30.2 97.4 The plan assets include shares in Bâloise-Holding which had a market value of CHF 55.1 million at De- cember 2002 and CHF 38.4 million at December 2003. The plan assets do not include property leased to the Baloise Group. 3 2002 62.1 84.9 - 73.1 - 1.5 2.8 - 12.7 62.5 1.5 64.0 2002 - 73.1 170.8 97.7 2003 66.1 90.3 - 50.7 2.6 - 20.5 - 13.0 74.8 18.4 93.2 2003 - 50.7 - 2.3 - 53.0 Bâloise-Holding Annual Report 2003 109 Financial Report 2003 23.2.4 Net obligations in respect of pension benefits Balance at January 1 Foreign exchange differences Addition due to changes in composition of consolidated Group Disposal due to changes in composition of consolidated Group Amount recognized in income statement Payments by employer Balance at December 31 in CHF m 23.2.5 Actuarial assumptions Discount rate Expected rate of return on plan assets Expected increases in wages and salaries Expected increases in pension benefits in percent 2002 323.5 - 7.2 – – 62.5 - 51.0 327.8 2003 327.8 29.0 49.4 - 0.5 74.8 - 56.4 424.1 2002 2003 4.1 4.0 2.2 1.2 4.1 3.0 2.2 1.2 3 Actuarial and other assumptions are used in calcu- lating expenditure and obligations relating to defined benefit plans, by company and by country. The as- sumptions set out above are weighted averages. CHF 23.6 million (2002: CHF 20.5 million). No plan assets were deducted for long-term benefits. Other long-term employee benefits amounting to CHF 3.0 million (2002: CHF 2.2 million) are included in the income statement. 23.3 Other long-term employee benefits Benefits payable to current employees twelve months or more after the end of the fiscal year are disclosed separately in accordance with specific requirements. The requirements are similar to those applying to pension obligations. Most of the benefits are em- ployee service anniversary benefits. At December 31, 2003, the present value of the obligation was 23.4 Equity benefits: employee shares During the year under review, 212,744 shares (2002: 80,491 shares) were purchased through the Baloise Employee Trust set up in 1989 at a price of CHF 23.10 (2002: CHF 42.50). The fair market value of the shares subscribed amounted to CHF 45.90 (2002: CHF 78.75). 23.5 Equity benefits: share participation scheme Number of shares subscribed to Blocked until Subscription price per share in CHF Value of shares subscribed to in CHF m Market value of subscribed shares at time of subscription in CHF m 2002 2003 106,760 382,601 5.31.2005 5.31.2006 123.31 13.2 14.0 38.98 14.9 16.4 110 23.6 Equity benefits: share participation sheme Number of shares subscribed to Blocked until Subscription price per share Value of shares subscribed to in CHF m Market value of subscribed shares at time of subscription in CHF m 23.7 Equity benefits: share option sheme Stock exchange designation for options Number of options issued Blocked until Number of underlying Bâloise-Holding shares Exercise price in CHF Expiry date Expenses of the Baloise Group in CHF m Given the choice of taking the mandatory part of the incentive in either shares or options, employees chose shares without exception in 2003 (either direct- ly or linked to a loan). 24. Capital and reserves 24.1 Share capital Balance at December 31, 2002 Balance at December 31, 2003 in CHF m The Bâloise-Holding registered shares are fully paid up and have a nominal value of CHF 0.1 (2002: CHF 0.1). A total of 702,540 shares at December 31, 2002 and 414,303 shares at December 31, 2003 were held by Group companies. Entry in the share register is limited to 2 % of voting rights for individuals and bodies corporate. In the course of its normal invest- ment business, the Baloise Group purchases and sells its own shares. Capitalization regulations: Under supervisory law, minimum capital regulations (solvency regulations) apply to subsidiaries which carry out insurance busi- ness. At December 31, 2002 and December 31, 2003, the subsidiaries complied with all relevant super- visory regulations in respect of capitalization. 2003 45,613 5.31.2006 36.63 1.7 2.0 2001 BALUP 2002 BALIX 6,666,040 2,088,103 6.1.2003 6.1.2004 66,660 167.8 41,762 197.1 6.15.2005 6.15.2005 1.6 1.3 3 Number of shares Share capital 55,307,150 55,307,150 5.5 5.5 Bâloise-Holding Annual Report 2003 111 Financial Report 2003 24.2 Dividends Dividends proposed are not paid until they have been approved by the Annual General Meeting. At the An- nual General Meeting on May 14, 2004, a dividend of CHF 0.60 per share (2002: CHF 0.40) will be pro- posed for the 2003 fiscal year, a total figure of CHF 33.2 million (2002: CHF 22.1 million). The proposed dividend has not been included in the consolidated financial statements for the 2003 fiscal year. It will be charged to accumulated profit following the adop- tion of the resolution at the 2004 Annual General Meeting. Restrictions on dividend payments by subsidiaries: Subsidiaries of the Baloise Group which carry out in- surance business are subject to certain supervisory restrictions relating to dividend payments. 25. Earnings / loss per share Consolidated net profit / loss in CHF m Average number of outstanding shares Earnings / loss per share in CHF 2002 - 634.5 2003 91.4 54,837,865 54,794,476 - 11.56 1.67 3 The diluted net earnings coincide with the basic earn- ings per share because no option rights exist (either for capital market transactions or for employee share schemes) that could raise the current number of out- standing shares. 26. Minority interests Balance at January 1 Share of consolidated net profit Change in share of unrealized gains and losses in capital and reserves Addition / disposal due to changes in share of investment held Addition / disposal due to changes in composition of consolidated Group Foreign exchange differences Balance at December 31 in CHF m 27. Interest payable Interest on policyholder bonuses credited Savings and customer deposits Medium-term fixed-rate notes Mortgage bonds Bonds Other interest Total in CHF m 112 2002 41.5 2.9 3.7 - 21.5 – 1.5 28.1 2002 103.9 151.2 91.9 6.4 43.5 68.0 2003 28.1 6.9 - 0.2 3.8 – 2.1 40.7 2003 84.3 107.9 90.3 9.2 42.2 71.2 464.9 405.1 28. Related-party transactions 30. Market risk relating to financial instruments The Baloise Group conducts insurance business in various European countries and holds investments worldwide and is therefore exposed to financial risks, such as currency risk, credit risk, interest rate risk, liquidity risk and market risk. In 1998, the Baloise Group implemented compre- hensive, group-wide risk management at all levels to control these risks. This involves both the active operational management of individual and portfolio risks on the finance and insurance side, and the de- velopment of general risk-based business manage- ment systems. Not only does this provide security for shareholders and clients; it also leads to a posi- tive rating on the capital market. By benchmarking all activities based on their contribution to value added (measured by the return on risk-adjusted ca- pital), it is possible to focus on the most profitable segments. Decentralized risk management units track economic market developments on a monthly basis and the effects of these on the risk portfolio and individual risk capacity. In addition, they ensure that limits are being adhered to and market-derived benchmarks monitored, thus ensuring that financial risk is restrict- ed to market risk that cannot be dealt with by diver- sification. Stochastic and other methods (value at risk for operational short-term management, extreme value methods for long-term management) and ex- tensive scenario analyses are used to manage the remaining market risk. By applying this risk manage- ment concept, the Baloise Group is in a position to react quickly to changes in the market environment and to optimize its strategic long-term-position profit- ably. In the course of its ordinary business activities, the Baloise Group conducts transactions with associated companies and with members of the Board of Di- rectors and the Corporate Executive Committee of Bâloise-Holding. Deutscher Ring Krankenversiche- rung, a mutual insurance company, is not included in the consolidation of the Baloise Group, yet is linked with Deutscher Ring Lebensversicherung and Deutscher Ring Sachversicherung through an orga- nization agreement and is therefore considered to be a related party. These transactions are not material to the Baloise Group either individually or in aggre- gate and are conducted at market conditions. Included in balance sheet and income statement Mortgage loans Policy and other loans Receivables arising out of insurance operations Other receivables Other liabilities Gross premiums written and policy fees Investment income Other income in CHF m 2002 6.7 4.1 4.3 0.5 33.3 0.1 3.0 0.3 2003 2.7 7.7 1.2 0.2 – 0.1 3.5 0.4 Remuneration remitted to the members of the Board of Directors and the Corporate Executive Committee amounted to CHF 7.7 million in the year under re- view (2002: CHF 6.8 million). 29. Supplemental cash flow disclosure Cash and bank balances Cash equivalents Total in CHF m 2002 662.6 13.2 675.8 2003 691.9 0.1 692.0 3 Bâloise-Holding Annual Report 2003 113 Financial Report 2003 30.1 Derivatives: fair value hedges Interest rate instruments Forward transactions Swaps OTC options Other Traded options Traded futures Total in CHF m 30.2 Derivatives: cash flow hedges Interest rate instruments Forward transactions Swaps OTC options Other Traded options Traded futures Subtotal Foreign exchange instruments Forward transactions Swaps OTC options Other Traded options Traded futures Subtotal Total in CHF m Contract values Fair value: assets Fair value: liabilities 2002 – – – – – – – 2003 – 201.6 582.0 – – – 783.6 2002 – – – – – – – 2003 – 6.5 10.1 – – – 16.6 2002 2003 – – – – – – – – – – – – – – Contract values Fair value: assets Fair value: liabilities 2002 – 2003 – 3,032.3 2,748.8 – – – – – – – – 2002 – 34.0 – – – – 2003 – 28.8 – – – – 2002 – 0.2 – – – – 2003 – 14.3 – – – – 3,032.3 2,748.8 34.0 28.8 0.2 14.3 – – – – – – – – – 1,313.3 – – – 1,313.3 – – – – – – – – – 110.9 – – – 110.9 – – – – – – – – – – – – – – 3,032.3 4,062.1 34.0 139.7 0.2 14.3 3 114 30.3 Currency risk The insurance activities of the Baloise Group are con- ducted almost entirely in Swiss francs and in euro, and therefore the technical provisions are also in these two currencies. Most of the provisions are cur- rency-matched by investments. In order to increase income, the Swiss companies hold a net euro posi- tion of CHF 4,119.7 million (2002: CHF 3,255.6 mil- lion), a net US dollar position of CHF 237.6 million (2002: 2,142.5 million) and a net Japanese yen po- sition of CHF 11.0 million (2002: CHF 81.4 million). The remaining currency excess positions are of little significance. For risk reasons, USD foreign currency exposure was almost fully hedged and EUR exposure hedged to around one third. 30.4 Credit risk Credit risk is defined as the risk that one party or counterparty to a financial instrument will fail to dis- charge an obligation. The risk is managed by review- ing the creditworthiness of each individual counter- party, setting high standards as regards their rating. As the credit risk of the Baloise Group is spread over a large number of counterparties, clients, etc., the Baloise Group has no significant credit risk with a single counterparty. Credit risk grows as the concentration of counter- parties in a single line of business or geographical area increases. Economic developments which affect entire lines of business or geographical areas can put at risk the debt-paying ability of a whole group of otherwise independent counterparties. For this rea- son, the Baloise Group permanently reviews its port- folios of counterparties on a group-wide basis. 3 2002 680.7 1,429.3 1,737.6 515.0 408.0 250.1 243.9 437.2 497.5 – 247.9 2003 2,714.8 1,507.4 1,105.9 745.5 560.6 506.4 497.2 491.6 398.3 371.7 334.0 30.5 Concentration of credit risks Shares and fixed-interest investments > 10% of consolidated capital and reserves Kingdom of Belgium Federation of Switzerland UBS AG, Zurich / Basel Federal Republic of Germany Landesbank Baden-Württemberg, Stuttgart Eurohypo AG, Frankfurt a. M. Republic of Italy Republic of Austria CS Group, Zurich WestLB AG, Düsseldorf /Münster Pfandbriefzentrale der schweiz. Kantonalbanken in CHF m Time deposits make up CHF 668.0 million of the total amount placed with UBS AG, Zurich / Basel (2002: CHF 1,252.0 million). 30.6 Interest rate risk of financial instruments Interest rate risk refers to the potential fluctuations in the market value of assets and liabilities as a re- sult of changes in market interest rates. In the Baloise Group, the interest rate risk for fixed-interest securi- ties is controlled by regular, active, benchmark-orien- ted reviews of maturity dates. Bâloise-Holding Annual Report 2003 115 Due in: < 1 year 13,551.6 – Due in: Due in: 1– 5 years 15,618.6 – > 5 years 11,962.5 – Total 41,132.7 15,781.1 - 9,145.8 - 2,540.7 - 2,282.4 - 13,968.9 – – – - 39,828.7 4,405.8 13,077.9 9,680.1 3,116.2 Due in: < 1 year 3,341.7 4,588.9 436.0 2,582.7 4,438.5 – Due in: 1– 5 years 13,728.3 4,731.1 471.3 64.7 0.5 – Due in: > 5 years 12,455.4 1,682.4 549.3 – – – 15,387.8 18,995.9 14,687.1 Total 29,525.4 11,002.4 1,456.6 2,647.4 4,439.0 15,230.0 64,300.8 - 5,196.1 - 2,109.6 - 1,743.4 – - 2,276.2 - 3,939.4 - 11,411.7 - - 4.1 55.8 – - - 0.3 - 2,114.0 518.3 - 2,317.5 – - 45,097.1 - 9,049.1 - 2,336.1 - 4,458.0 - 60,940.3 6,338.7 16,659.8 10,229.1 3,360.5 Book value Market value 2002 158.5 10,532.0 1,520.4 9,659.2 2003 10,348.7 11,002.4 1,456.6 11,411.7 2002 165.7 10,846.7 1,536.7 9,896.6 2003 10,371.0 11,376.7 1,509.7 11,548.8 Financial Report 2003 30.7 Liquidity risks 30.7.1 Liquidity risk at December 31, 2002 Assets with due date Assets without fixed due date Liabilities with due date Liabilities without fixed due date Net liquidity risk in CHF m 30.7.2 Liquidity risk at December 31, 2003 Fixed-interest securities Mortgage loans Policy and other loans Other investments Other assets Assets without fixed due date 3 Total Liabilities from banking business and loans Payables arising out of insurance operations Other liabilities Liabilities without fixed due date Total Net liquidity risk in CHF m 30.8 Market value of financial assets and liabilities and market risks Fixed-interest securities held to maturity Mortgage loans Policy and other loans Liabilities from banking business and loans in CHF m The foregoing table contains information on the book and market values of significant financial assets and liabilities which are not shown in the balance sheet at market or fair value. 116 31. Companies consolidated on a proportionate basis Included in balance sheet and income statement Investments Intangible assets and tangible non-current assets Liabilities Capital and reserves Income Expenses in CHF m 32. Contingent liabilities and commitments 32.1 Legal disputes The Baloise Group and its subsidiaries are constant- ly faced with legal disputes, claims and complaints which in most cases stem from normal insurance operations. No new facts in this respect have been reported to the Corporate Executive Committee since the last balance sheet date that could have a signifi- cant impact on the consolidated annual accounts 2003. 32.2 Capital commitments Commitments entered into for the future purchase of Investments Tangible non-current assets Intangible assets Total commitments entered into Of which relating to joint ventures Of which own share of joint venture capital commitments in CHF m 32.3 Warranties and guaranties for the benefit of third parties The Baloise Group has issued warranties and incurred obligations to third parties, associates, partnerships and joint ventures. These include obligations under contracts to pay capital contributions or contributions to capital and reserves or to allocate funds to cover redemptions or interest payments due. The Baloise Group is not aware of any cases of default which could have an effect on warranties. 2002 756.4 10.5 718.6 113.4 200.8 140.2 2003 768.9 31.7 758.0 158.8 149.5 131.6 2002 616.8 – – 2003 469.5 – – 616.8 469.5 – – – – 3 Bâloise-Holding Annual Report 2003 117 Financial Report 2003 32.4 Warranties and guaranties for the benefit of third parties Warranties Guaranties Total warranties and guaranties for the benefit of third parties Of which for the benefit of partners in joint ventures Of which from joint ventures Of which for the benefit of joint ventures in CHF m 32.5 Assets assigned or pledged and securities lending Investments Tangible non-current assets Intangible assets Other assets Total in CHF m 3 32.6 Obligations under operating leases 2004 2005 2006 2007 2008 and later Total in CHF m 33. Events after the balance sheet date Up to the completion of the present consolidated fi- nancial statements on March 24, 2004, we were not aware of any events that would have a significant effect on the financial statements as a whole. 2002 837.4 5.7 843.1 – – – 2003 634.3 328.3 962.6 – – – 2002 3,325.2 – – – Assets 2003 4,030.6 – – – Amount of hedged obligation 2002 1,208.9 2003 1,665.6 – – – – – – 3,325.2 4,030.6 1,208.9 1,665.6 5.6 1.9 1.3 0.4 0.3 9.5 118 34. Significant subsidiaries and participating interests at December 31, 2003 Switzerland Bâloise-Holding, Basel Baloise Insurance Company, Basel Baloise Life Insurance Company, Basel Baloise Bank SoBa, Solothurn Haakon AG, Basel Prevo-System AG, Basel Principal activity Holding Non-life Life Banking Other Other Baloise Asset Management Switzerland AG, Basel Asset management Baloise Asset Management International AG, Basel Investment advice Germany Basler Versicherung Beteiligungsgesellschaft mbH, Hamburg Baloise Beteiligungs-Holding GmbH, Bad Homburg Deutscher Ring Lebensversicherungs-AG, Hamburg Securitas-Gilde Lebensversicherungs AG, Bremen Deutscher Ring Sachversicherungs-AG, Hamburg Basler Securitas Versicherungs-Aktiengesellschaft, Bad Homburg Deutscher Ring Bausparkasse AG, Hamburg Deutscher Ring Beteiligungsholding GmbH, Hamburg DePfa Beteiligungs-Holding II GmbH, Düsseldorf Deutscher Ring Financial Services GmbH, Hamburg Grocon Erste Grundstücksgesellschaft mbH, Hamburg Grocon Zweite Grundstücksgesellschaft mbH, Hamburg OVB Vermögensberatung AG, Cologne Roland Rechtsschutz Beteiligungs GmbH, Cologne Roland Rechtsschutz Versicherungs-AG, Cologne Zeus Vermittlungsgesellschaft mbH, Hamburg Holding Holding Life Life Non-life Non-life Banking Other Other Other Other Other Other Other Other Other Belgium Mercator Verzekeringen N.V., Ghent/Antwerp Life and non-life Amazon Insurance N.V., Antwerp Mercator, Re N.V., Antwerp Euromex N.V., Antwerp Mercator Banque S.A., Antwerp Corluy en C° Beurvennootschap N.V., Antwerp Amid N.V., Ghent Antwerp Real Estate N.V., Antwerp Automobielcenter Gent N.V., Ledeberg Belcar N.V., Aartselaar Brinvest N.V., Antwerp Hondius N.V., Antwerp Mercarios N.V., Antwerp Merno-Immo N.V., Ghent Plastic Investment Company, Kortrijk Sogaplim N.V., Ghent Non-life Reinsurance Non-life Banking Banking Other Other Other Other Other Other Other Other Other Other 1 F: fully consolidated, P: consolidated on a proportionate basis, E: stated at equity valuation Holding in percent Holding 100.00 100.00 100.00 74.75 26.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 65.00 40.00 100.00 100.00 100.00 57.70 60.00 25.02 90.10 100.00 100.00 100.00 100.00 100.00 37.50 97.16 84.00 97.38 75.00 31.19 100.00 50.00 99.75 29.00 50.00 Method of inclusion1 Share/ company capital in millions Currency Total assets in millions 1,852.2 Gross premiums / policy fees in millions – 5,414.9 1,237.7 25,088.1 3,031.6 5,203.8 44.4 – 9.4 4.4 249.4 95.5 7,939.6 959.4 587.0 890.2 609.8 327.6 – 6.6 19.6 16.3 62.6 22.6 – 20.7 – – – – – – – 550.7 78.0 168.8 486.1 3 – – – – – – – – – – 5.5 75.0 50.0 50.0 0.2 – 1.5 1.5 20.5 0.0 22.0 4.1 50.0 15.1 12.8 12.8 – 0.1 0.7 1.5 12.4 0.1 – 0.5 105.0 2,545.7 409.4 3.7 1.2 2.5 19.3 5.1 48.3 14.7 0.0 19.3 37.0 3,700.1 – 0.5 1.2 0.3 0.1 – 2.5 0.1 14.5 – 4.2 – 2.9 4.3 4.4 15.3 – 13.8 2.4 19.5 – 26.3 – – – – – – – – – – – – F F F F F E F F F F F F F F / P F / P F / P E F / P F F / P F / P F / P E F / P F F F F F E F F F F E F P F E P CHF CHF CHF CHF CHF CHF CHF CHF EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR Bâloise-Holding Annual Report 2003 119 Method of inclusion1 Share / company capital in millions Currency Total assets in millions 873.5 116.1 285.8 3.3 Gross premiums / policy fees in millions – 25.6 20.6 – 313.0 7.5 12.5 0.1 CHF EUR EUR EUR EUR HRK HRK EUR F F F F F F F F F F F F F F 5.1 18.0 15.0 14.5 436.3 43.4 27.3 47.9 66.3 15.6 5.3 – CHF 31.2 381.6 CHF USD CHF USD EUR 5.0 0.0 1.4 0.0 18.0 491.5 857.6 512.6 265.3 17.5 – – – – – – Financial Report 2003 Continued Luxembourg Bâloise (Luxembourg) Holding S.A., Luxembourg Bâloise Assurances Luxembourg S.A., Luxembourg Bâloise Vie Luxembourg S.A., Luxembourg Principal activity Holding Non-life Life Baloise Fund Invest Advico, Luxembourg Investment advice Holding in percent 100.00 100.00 100.00 100.00 Austria Basler Versicherungs-Aktiengesellschaft in Österreich, Vienna Basler Osiguranje d.d., Zagreb Basler Zivotno Osiguranje d.d., Zagreb Basler Immobilien GmbH, Vienna Life and non-life 100.00 Non-life Life 97.00 97.00 Other 100.00 Other countries Baloise Insurance Co. (I.O. M.) Ltd., Douglas / Isle of Man/British Isles Baloise Insurance Company (Bermuda) Ltd., Reinsurance 100.00 Hamilton / Bermuda Reinsurance 100.00 3 Baloise Alternative Investment Strategies Ltd., Grand Cayman, Cayman Islands Asset management 100.00 Baloise Finance (Jersey) Ltd., St. Helier / Jersey / Channel Islands Other Baloise Private Equity Ltd., Cayman Islands Asset management Bâloise (España) S.A., Madrid Other 1 F: fully consolidated, P: consolidated on a proportionate basis, E: stated at equity valuation 100.00 100.00 100.00 120 Financial Report 2003 Report of the Group auditors Report of the Group auditors to the General Meeting of Bâloise-Holding, Basel As auditors of the Group, we have audited the con- solidated financial statements (income statement, balance sheet, cash flow statement, statement of changes in capital and reserves, and notes to the fi- nancial statements, pages 69 to 120)1 of the Baloise Group for the year ended December 31, 2003. These consolidated financial statements are the re- sponsibility of the Board of Directors. Our responsi- bility is to express an opinion on these consolidated financial statements based on our audit. We confirm that we meet the legal requirements concerning pro- fessional qualification and independence. Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession and with the International Standards on Auditing, which require that an audit be planned and performed to obtain reasonable assurance about whether the con- solidated financial statements are free from material misstatement. We have examined on a test basis evi- dence 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 finan- cial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position, re- sults of operations and the cash flows in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. We recommend that the consolidated financial state- ments submitted to you be approved. PricewaterhouseCoopers AG Edgar Fluri Peter Lüssi Basel, March 24, 2004 1 The German version of the Financial Report is binding. Bâloise-Holding Annual Report 2003 121 3 Financial Report 2003 Income statement: Bâloise-Holding Income Income from participating interests Interest on loans to Group companies Interest on loans to Group companies Other interest receivable Realized gains on investments Other income Total income Expenses Administrative expenses Interest payable Amortization of / losses from capital investments Other expenses Total expenses Overall result Total income Total expenses Total profit before tax Tax on income and capital Net profit in CHF 2002 / 2003 2003 / 2004 136,822,483 169,615,616 6,369,215 6,563,784 1,854,630 53,340,146 37,101,262 2,798,352 5,357,325 612,677 19,710,756 3,480,670 242,051,520 201,575,396 - 2,647,419 - 5,347,099 - 48,498,465 - 40,391,024 - 166,393,960 - 114,499,511 - 2,249,356 - 38 - 219,789,200 - 160,237,672 242,051,520 201,575,396 - 219,789,200 - 160,237,672 22,262,320 41,337,724 - 292,460 - 119,795 21,969,860 41,217,929 4 Bâloise-Holding Annual Report 2003 123 Financial Report 2003 Balance sheet: Bâloise-Holding Assets Bank balances Receivables from Group companies Other receivables Accruals deferrals Current assets Participating interests Loans to Group companies Other investments Non-current assets Total assets Liabilities and capital and reserves Short-term liabilities Payables to Group companies Long-term liabilities Bonds Provisions Accruals deferrals Liabilities Share capital General reserve Reserve for own shares Free reserve Accumulated profit Capital and reserves Total liabilities and capital and reserves 4 in CHF Note 3.31.2003 3.31.2004 2,716 6,523 58,821,404 183,956,724 1,174,651 661,920 1,804,309 589,920 60,660,691 186,357,476 2 1,325,502,411 1,418,884,115 220,000,000 – 173,404,517 162,625,973 1,718,906,928 1,581,510,088 1,779,567,619 1,767,867,564 66,492 214,336,587 70,000,000 12,769 3,051,111 – 1 900,000,000 1,150,000,000 321,850 73,200 25,325,732 26,118,457 1,210,050,661 1,179,255,537 5 5,530,715 11,724,001 20,045,540 5,530,715 11,724,001 14,005,321 509,457,702 515,497,921 22,759,000 41,854,069 569,516,958 588,612,027 1,779,567,619 1,767,867,564 124 Financial Report 2003 Notes to the financial statements of Bâloise-Holding 1. Bonds outstanding Amount CHF 300 million CHF 600 million CHF 250 million 2. Participating interests Company Baloise Insurance Company, Basel Baloise Life Insurance Company, Basel Baloise Bank SoBa, Solothurn Baloise Asset Management Switzerland AG, Basel Baloise Asset Management International AG, Basel Haakon AG, Basel Basler Versicherung Beteiligungsges. mbH, Hamburg Baloise Beteiligungs-Holding GmbH, Bad Homburg Bâloise (Luxembourg) Holding S.A., Luxembourg Globinvest AG, Luxembourg Baloise Fund Invest Advico, Luxembourg Baloise Insurance Co. (I.O.M.) Ltd., Isle of Man Baloise Insurance Company (Bermuda) Ltd., Bermuda Baloise Finance (Jersey) Ltd., Jersey The holdings have been rounded to the nearest per- cent. Additional information about the participating interests of Bâloise-Holding is given on pages 119 to 120. Interest rate Issued Maturity date 3.25 % 4.25 % 3.375 % 1998 2000 2003 4.7.2008 9.28.2005 12.15.2009 Holding at 3.31.2003 in percent Holding at 3.31.2004 in percent Share / company capital at 3.31.2004 in millions Currency 100 100 100 100 100 75 100 100 100 100 100 100 100 100 100 100 100 100 100 75 100 100 100 – 100 100 100 100 CHF CHF CHF CHF CHF CHF EUR EUR CHF – EUR CHF CHF CHF 75.0 50.0 50.0 1.5 1.5 0.2 20.5 0.0 360.4 – 0.1 31.2 5.0 1.4 4 Bâloise-Holding Annual Report 2003 125 Financial Report 2003 3. Significant shareholders Owing to major shareholders’ disposal of shares, the distribution of shareholders and the trading liquidity of Baloise shares improved noticeably in the past year. BZ Group’s holdings dropped under the 5% threshold as at June 17. Strategic Money Management B.V. from the Netherlands fell below the 5 % mark as at July 17 after selling its stake to Zurich Financial Ser- vices. Following that transaction, Zurich Financial Services for a while held 27% of the Baloise – 21.48% in shares and 5.52 % in options. The majority of this stake was then placed across a broad range of in- vestors, leaving Zurich Financial Services below the 5% threshold as of November 5, 2003. As a widely held joint stock company, the Baloise is Index (SMI) and included in the Swiss Market features in the SWX’s index calculations with a free float of 100 %. The following table provides a current breakdown of shareholders as at March 31, 2004. Shareholders Chase Nominees Fidelity Group Deutsche Bank Nominees Rolex Group Boston Safe Deposit & Trust Morgan Nominees Landesbank Baden-Württemberg Strategic Money Management B.V. BZ Group in percent * pursuant to notification according to article 20, SESTA Total holding at 3.31.2003 Share of voting rights 3.31.2003 Total holding at 3.31.2004 Share of voting rights 3.31.2004 3.4 < 2.0 < 2.0 < 2.0 4.0 3.7 2.7 21.0* 8.2* 0.8 < 2.0 < 2.0 < 2.0 – – 2.0 – – 4.0 2.5 2.3 2.0 < 2.0 < 2.0 < 2.0 < 5.0* < 5.0* 2.0 2.0 2.0 2.0 – – < 2.0 – – 4. Contingent liabilities 5. Own shares 4 At March 31, 2004, warranty obligations amounted to CHF 435.8 million (prior year: CHF 443.6 million). Of these, CHF 204.0 million relate to the warranty in respect of the convertible bond issued by Baloise Finance (Jersey) Ltd. The securities needed for hedg- ing are recognized as other investments. The companies in the Baloise Group bought a total of 502,214 shares at an average price of CHF 40 per share during the year under review, and sold 476,396 shares at an average price of CHF 41. At March 31, 2004, they together held a total of 179,458 Bâloise- Holding shares. Bâloise-Holding is jointly and severally liable for value-added tax payable with all the companies in the tax group set up by the Baloise Insurance Company. At March 31, 2004, an amount of CHF 6.0 million was transferred from the reserve for own shares to the free reserve of Bâloise-Holding. 6. Personnel expenses Administrative costs include CHF 1.1 million relat- ing to personnel expenses in the year under review (2002: CHF 1.1 million). 126 Financial Report 2003 Proposed allocation of accumulated profit Included in balance sheet and income statement Net profit for the year Retained profit carried forward Accumulated profit Dividend distribution required by Articles of Incorporation Available for distribution by the shareholders at General Meeting Proposed by the Board of Directors Allocation to free reserve Additional dividend distribution Retained profit carried forward in CHF The above distribution is in accordance with the pro- visions of Article 30 of the Articles of Incorporation and results in a distribution of CHF 0.60 gross per share (CHF 0.39 after deduction of withholding tax). 2002 / 2003 21,969,860 789,140 22,759,000 - 276,536 22,482,464 2003 / 2004 41,217,929 636,140 41,854,069 - 276,536 41,577,533 – -21,846,324 636,140 - 8,000,000 -32,907,754 669,779 4 Bâloise-Holding Annual Report 2003 127 Financial Report 2003 Report of the statutory auditors Report of the statutory auditors to the General Meet- ing of Bâloise-Holding, Basel As statutory auditors, we have audited the accounting records and the financial statements (income state- ment, balance sheet and notes to the financial state- ments, pages 123 to 126)1 of Bâloise-Holding for the financial year ended March 31, 2004. These financial statements are the responsibility of the Board of Directors. Our responsibility is to ex- press an opinion on these financial statements based on our audit. We confirm that we meet the legal re- quirements concerning professional qualification and independence. Our audit was conducted in accordance with audit- ing standards promulgated by the Swiss profession, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstate- ment. We have examined on a test basis evidence supporting the amounts and disclosures in the fi- nancial statements. We have also assessed the ac- counting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accounting records and financial statements and the proposed appropriation of the accumulated profit comply with Swiss law and the Company’s Articles of Incorporation. We recommend that the financial statements submit- ted to you be approved. PricewaterhouseCoopers AG Edgar Fluri Peter Lüssi Basel, April 2, 2004 1 The German version of the Financial Report is binding. 128 4 Belgium Mercator Verzekeringen Desguinlei 100 B-2018 Antwerp Phone +32 3 247 21 11 Fax +32 3 247 27 77 E-mail info@mercator.be www.mercator.be Mercator Bank Desguinlei 102 B-2018 Antwerp Phone +32 3 247 52 11 Fax +32 3 247 53 99 E-mail communicatie@mercator.be www.mercator.be Luxembourg Bâloise Assurances 1, rue Emile Bian L-1235 Luxembourg Phone +352 290 190 1 Fax +352 290 591 E-mail info@baloise.lu www.baloise.lu Croatia Basler osiguranje Trg bana Josipa Jelacˇic´a 4 HR-10000 Zagreb Phone +385 1 48 17 808 Fax +385 1 48 16 932 E-mail info@basler.hr www.basler.hr Addresses Switzerland Basler Versicherungen Aeschengraben 21 CH-4002 Basel Phone +41 61 285 85 85 Fax +41 61 285 70 70 E-mail insurance@baloise.ch www.baloise.ch Baloise Bank SoBa Amthausplatz 4 CH-4502 Solothurn Phone +41 32 626 02 02 Fax +41 32 623 36 92 E-mail bank@baloise.ch www.baloise.ch Germany Basler Securitas Versicherungen Basler Strasse 4, Postfach 1145 D-61281 Bad Homburg Phone +49 61 7213 0 Fax +49 61 7213 200 E-mail info@basec.de www.basler-securitas.de Deutscher Ring Versicherungsunternehmen Ludwig-Erhard-Strasse 22 D-20459 Hamburg Phone +49 40 3599 0 Fax +49 40 3599 2500 E-mail Service@DeutscherRing.de www.DeutscherRing.de Austria Basler Versicherungen Brigittenauer Lände 50 –54 A-1203 Vienna Phone +43 1 33 160 0 Fax +43 1 33 160 200 E-mail office@basler.co.at www.basler.co.at Publishing details Bâloise-Holding Annual Report 2003 Published by Baloise, Corporate Communications Concept, design Ramstein Ehinger Associates, Basel Text Baloise, Corporate Communications Ivo Cathomen / Illux, Birrwil Photographs Markus Bühler / LOOKAT Getty Images, Prisma, Zefa Blueplanet Lithography Blue Horizon AG, Zurich Printing Werner Druck AG, Basel Paper Environmentally friendly, wood-free offset paper, bleached without chlorine © 2004 Bâloise-Holding, CH-4002 Basel This Annual Report ist also available in German and French. The German version is binding. The Annual Report can be found under www.baloise.com Key dates and contacts 5.14.2004 Annual General Meeting Bâloise-Holding 9.9.2004 Publication of Semi-Annual Report 2004 9.9.2004 Half-Year Media Conference 9.9.2004 Meeting of Financial Analysts 4.6.2005 Annual Media Conference 4.6.2005 Meeting of Financial Analysts 5.18.2005 Annual General Meeting Bâloise-Holding Investor Relations Carsten Stolz Aeschengraben 21 CH-4002 Basel Phone +41 61 285 83 65 Fax +41 61 285 75 62 E-mail investor.relations @ baloise.com Media Relations Philipp Senn Aeschengraben 21 CH-4002 Basel Phone +41 61 285 84 67 Fax +41 61 285 90 06 E-mail media.relations @ baloise.com www.baloise.com Bâloise-Holding Aeschengraben 21 CH-4002 Basel www.baloise.com 

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