Baloise-Holding AG
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018 Baloise Group UnterkapitelBaloise Group Annual Report 2018 Contents BALOISE Baloise key figures ................................................................. 4 At a glance .............................................................................. 5 Letter to shareholders ............................................................ 6 Baloise shares ........................................................................ 8 Core activities ...................................................................... 10 Strategy ................................................................................ 11 Brand .................................................................................... 14 REVIEW OF OPERATING PERFORMANCE Group .................................................................................... 18 Switzerland .......................................................................... 22 Germany ............................................................................... 23 Belgium ................................................................................ 24 Luxembourg ......................................................................... 25 Asset management and banking .......................................... 26 Consolidated income statement .......................................... 27 Consolidated balance sheet ................................................. 29 Business volume, premiums and combined ratio ............... 30 Technical income statement ................................................ 32 Gross premiums by sector .................................................... 33 Banking activities ................................................................. 34 Investment performance ...................................................... 35 SUSTAINABLE BUSINESS MANAGEMENT Responsibility ....................................................................... 40 Human resources ................................................................. 47 The environment .................................................................. 54 Risk management ................................................................. 58 Commitment to art ............................................................... 62 CORPORATE GOVERNANCE Corporate Governance Report .............................................. 66 Appendix 1: Remuneration Report ....................................... 88 Appendix 2: Remuneration Report Report of the statutory auditor to the Annual General Meeting of Bâloise Holding Ltd, Basel ............................................. 114 FINANCIAL REPORT Consolidated balance sheet ............................................... 118 Consolidated income statement ........................................ 120 Consolidated statement of comprehensive income .......... 121 Consolidated cash flow statement ..................................... 122 Consolidated statement of changes in equity ................... 124 Notes to the consolidated annual financial statements .... 126 Notes to the consolidated balance sheet .......................... 202 Notes to the consolidated income statement .................... 245 Other disclosures ............................................................... 256 Report of the statutory auditor to the Annual General Meeting of Bâloise Holding Ltd, Basel ..... 268 BÂLOISE HOLDING LTD Income statement of Bâloise Holding Ltd .......................... 276 Balance sheet of Bâloise Holding Ltd ................................ 277 Notes to the financial statements of Bâloise Holding Ltd .. 278 Appropriation of distributable profit as proposed by the Board of Directors ................................................... 287 Report of the statutory auditor to the Annual General Meeting of Bâloise Holding Ltd, Basel ..... 288 GENERAL INFORMATION Glossary ............................................................................. 294 Addresses ........................................................................... 298 Information on the Baloise Group ...................................... 299 Financial calendar and contacts ........................................ 300 3 Baloise Group Annual Report 2018 Baloise Baloise key figures Baloise key figures CHF million Business volume Gross premiums written (non-life) Gross premiums written (life) Sub-total of IFRS gross premiums written 1 Investment-type premiums Total business volume Operating profit (loss) Profit / loss before borrowing costs and taxes Non-life Life 2 Banking Other activities Profit for the period Balance sheet Technical reserves Equity Ratios (per cent) Return on equity (RoE) Gross combined ratio (non-life) Net combined ratio (non-life) New business margin (life) Investment performance (insurance) 3 Embedded value of life insurance policies Embedded value (MCEV) Annual premium equivalent (APE) Value of new business Key figures on the Company’s shares Shares issued (units) Basic earnings per share 4 (CHF) Diluted earnings per share 4 (CHF) Equity per share 4 (CHF) Closing price (CHF) Market capitalisation (CHF million) Dividend per share 5 (CHF) 2017 2018 Change (%) 3,229.3 3,512.0 6,741.3 2,519.5 9,260.8 374.7 306.0 81.8 – 78.5 531.9 3,405.9 3,360.3 6,766.2 1,912.1 8,678.2 371.7 333.2 92.1 – 59.4 522.9 48,008.5 46,575.2 6,409.2 6,008.2 8.9 90.2 92.3 33.4 2.5 8.6 89.2 91.7 48.5 0.7 4,896.8 5,181.3 376.8 125.8 293.9 142.4 48,800,000 48,800,000 11.50 11.48 133.2 151.70 7,403.0 5.60 11.14 11.12 127.1 135.40 6,607.5 6.00 5.5 – 4.3 0.4 – 24.1 – 6.3 – 0.8 8.9 12.6 – 24.3 – 1.7 – 3.0 – 6.3 – – – – – 5.8 – 22.0 13.2 0.0 – 3.1 – 3.1 – 4.6 – 10.7 – 10.7 7.1 1 Premiums written and policy fees (gross). 2 Of which deferred gains / losses from other operating segments (31 December 2017: CHF 14.5 million; 31 December 2018: CHF 10.2 million). 3 Excluding investments for the account and at the risk of life insurance policyholders. 4 Calculation is based on the profit for the period attributable to shareholders and the equity attributable to shareholders. 5 2018 based on the proposal submitted to the Annual General Meeting. 4 Baloise Group Annual Report 2018 Baloise At a glance At a glance Equity of CHF 6,008.2 million Return on equity (RoE) of 8.6 % Profit for the period of CHF 522.9 million Profit (attributable to the shareholders) CHF 523.2 million Dividend of CHF 6.00 per share (will be proposed to the Annual General Meeting on 26 April 2019) – 24.1 % lower business volume with investment-type premiums Net investment yield of insurance assets 2.2 % Net combined ratio of New business margin of 91.7 % 48.5 % 5 Baloise Group Annual Report 2018 Baloise Letter to shareholders Dr Andreas Burckhardt, Chairman of the Board of Directors (on the left), and Gert De Winter, Group CEO (on the right), on site of the Baloise Park. DEAR SHAREHOLDERS The continuing success and strong positioning of Baloise underpin its five-year strategic phase, Simply Safe, which is intended to equip the Company to face the challenges of the future. We are now two years into the initiative and the progress made so far towards the strategic goals is extremely promising. The holding company has already received CHF 864 million in cash of the total target amount of CHF 2 billion, we have signed up 304,000 new customers (our target: 1 million) and we are among the top 23 per cent of the most attractive employers in our sector in Europe (our ambition: top 10 per cent). In 2018, Baloise’s profit for the period attributable to share- holders amounted to CHF 523.2 million (2017: CHF 548.0 million). In the non-life business, we achieved an improved net combined ratio of 91.7 per cent (2017: 92.3 per cent) while in the life business, stable interest rates and further portfolio reallocations led to an improved EBIT of CHF 333.2 million (2017: CHF 306.0 million). In Asset Management, we achieved a net investment yield on the insurance assets of 1.2 per cent (2017: 1.3 per cent). The change in corporate culture that began two years ago is being vigorously driven forward and we have achieved a balance between the core business that underpins our current business performance and the initiatives that are designed to secure our future. Sustainable value generation requires a strong focus on the core business, but at the same time it needs the core business to be expanded and new, modern, streamlined business models to be introduced. Only by balancing all these aspects can value be continuously created. Baloise also has a strong balance sheet and strong operational profitability, which has been optimised in terms of risk-bearing capacity and earnings opportunities. Ultimately, successful value management relies on having the right corporate culture and the ability to adapt. The value of Baloise is measured by the return on equities or total shareholder return. It is driven by four, equally important dimensions: profit, capital, cash and the value of optionalities. The last of these is reflected in the development opportunities created by Baloise. They influence the future value and therefore have to be taken into account in the value appraisal. Cash and profit reflect the current earnings power of the Baloise Group, while capital indicates the resilience of the Company’s financial position. The value of optionalities includes the effect of capital 6 Baloise Group Annual Report 2018 Baloise Letter to shareholders spending and initiatives that should generate additional income from existing and new areas of business in future. The Company has a dynamic process in place to ensure that these innovations bring the Baloise business model in line with the needs of the future. In the existing business model, Baloise is driving forward the adjustment and renewal of its core business with services such as a simplified digital claims handling process, property insurance and cyber insurance. When developing new areas of business, we have four approaches: we invest in young compa- nies, develop our own start-ups, acquire companies and enter into partnerships. For example, we are investing up to CHF 50 mil- lion in insurtech and fintech companies in partnership with the investment firm Anthemis. We are working to develop start-up companies with digital insurer FRIDAY in Germany and Mobly in Belgium, a platform for mobility services that focuses on the used car sector. But we are also buying companies such as the removals platform MOVU in Switzerland and Drivolution in Belgium, a company specialising in drive safety for fleets. Finally, we are entering into partnerships such as that with the Basel- bieter Kantonalbank and Bank Cler in Switzerland, which offer our insurance services in combination with new customer solutions via their sales channels. At the beginning of this phase, the focus is still not yet on profitability. However, it is important to get as many initiatives as possible from the growth phase onto the road to success. Over the past year, we have also implemented a number of organisational changes. The demands placed on IT systems at Baloise have always been immense, but are now skyrocketing due to the rapid pace of the innovation process and the new challenges of digitalisation. The Board of Directors of Baloise has therefore created a Group IT corporate division in order to simplify the IT landscape, leverage synergies and drive forward the change process and further digitalisation with the necessary speed and sense of purpose. Alexander Bockelmann has been appointed to the newly created post of Chief Technology Officer. The first two years of the new strategy have focused on Baloise’s objectives and strategic direction. The experience gathered during this period has been used to make necessary and useful adjustments, setting the course for the coming years. Agility in the implementation of this strategy will be crucial to our future success. With the support of our employees and a strong corporate culture to build on, we believe we are on the right track. Our shareholders should also be able to reap the benefit. As an indicator of the confidence we have in our targets, the Board of Directors will be asking the Annual General Meeting to increase the dividend by CHF 0.40 to CHF 6.00. “The course is set for the next stage of the strategic phase.” Basel, March 2019 Dr. Andreas Burckhardt Gert De Winter Chairman of the Board of Directors Group CEO The Baloise innovation cycle is a four-phase process. As well as launching new initiatives, it is important to have a system in place to halt those that are less successful while they are still in their early stages. The more phases an initiative goes through, the more resources and capital expenditure it consumes. The initial, exploratory phase requires little capital spending and generally lasts one to two weeks. Thanks to the strong entre- preneurial spirit that now exists within the Company, the pipeline is currently well stocked. If an idea makes it through the first couple of weeks, it enters a two to three month validation phase which culminates in a “minimal viable product”. This then passes to the third phase – incubation – which can last up to a year. The objective for the end of the incubation phase is to have a marketable product that can be used to invest in growth, i. e. to increase the number of customers and the level of revenue. Baloise can invest in such a phase itself or bring in third parties. 7 Baloise Group Annual Report 2018 Baloise Baloise shares A difficult year on the stock markets Geopolitical risks and concerns about a slowdown in global economic growth made 2018 a year of volatile stock markets and significant price falls. Baloise shares* were unable to escape these challenging market conditions and weakened broadly in line with the Swiss Market Index (SMI). Nevertheless, distributions to shareholders remain reliable and attractive – the dividend was raised by 7 per cent. After a very positive trading year in 2017, 2018 was characterised by high levels of volatility and falling prices. The turbulent market conditions were caused by concerns about inflation, fears that the central banks might normalise their monetary policy more quickly than expected, geopolitical risks and worries about a slowdown in the global economy. The market sentiment was primarly affected by protectionist measures in the US, the Brexit process and the new coalition government of two Eurosceptic parties in Italy and its budget dispute with the EU. The aforementioned events created turbulence in the finan- cial markets, despite a solid economic foundation supported by strong fundamentals. The US was a case in point – the tax reform and expansionary fiscal policy measures gave the country’s economy a significant boost. The global economic outlook remains positive overall, even though leading indicators have recently started to show signs of a slowdown in growth. The normalisation of the central banks’ monetary policy is also advancing. The European Central Bank terminated its asset purchase programme at the end of 2018 and announced that it was planning to start raising its key interest rate from September 2019. In the US, the Federal Reserve raised its base rate four times in 2018 to counteract rising levels of inflation. Its target rate band is now 2.25 – 2.50 per cent. In December, however, the Fed lowered the number of interest-rate hikes planned for 2019 from three to two in light of early indications of a slowdown in economic growth. Investors reacted with disappointment, as they had expected an even more cautious approach. Following their excellent performance in 2017, Baloise shares were adversely affected by the aforementioned factors in 2018. As at the end of the year, Baloise shares traded at CHF 135.40 and thus 10.7 per cent below the closing price of the prior year. The European insurance sector index (STOXX Europe 600 Insurance Index, SXIP) suffered similar losses and closed 10.3 per cent lower than in 2017. Two of Switzerland’s main share indices followed the same downward trend. The Swiss 8 Market Index and the Swiss Leader Index fell by 10.2 per cent and 14.6 per cent respectively for the year as a whole. DIVIDENDS PAID TO SHAREHOLDERS The Board of Directors of Bâloise Holding Ltd will propose to the Annual General Meeting on 26 April 2019 that a cash dividend of CHF 6.00 per share be paid for the 2018 financial year, an increase of CHF 0.40 compared with the dividend for 2017. This would represent an attractive dividend yield of 4.4 per cent of the year-end share price. As announced at the end of 2016, Baloise is planning to buy back up to 3,000,000 treasury shares over the period from April 2017 to April 2020. The shares will be bought back for the purpose of capital reduction, using a second trading line on the Swiss stock exchange, SIX Swiss Exchange AG. By the end of 2018, the programme had resulted in the purchase of 1,336,575 treasury shares, returning CHF 198.5 million to shareholders (number of shares bought back and aggregate value of buy-backs in 2018: 913,125 shares, worth CHF 135.1 million). Year (CHF million) 2014 2015 2016 2017 2018 Total Cash dividends Share buy-backs Total 250.0 250.0 260.0 273.3 292.81 1,326.1 – 59.1 54.8 63.3 135.1 312.3 250.0 309.1 314.8 336.6 427.9 1,638.4 All figures stated as at 31 December. 1 Proposal to the Annual General Meeting on 26 April 2019. * Baloise shares = shares of Bâloise Holding Ltd. Baloise Group Annual Report 2018 Baloise Baloise shares SHAREHOLDER STRUCTURE The shares in Bâloise Holding Ltd are widely held and their free float remains unchanged at 100 per cent. During the 2018 financial year, the following change (notifiable under Art. 120 [1] of the Swiss Financial Market Infrastructure Act) to the Baloise shareholder base took place: On 15  October 2018, several collective investments managed by Credit Suisse Funds AG, based in Zurich, together rose above the threshold of 3 per cent stipulated in the aforementioned Article. Further information on Baloise’s significant shareholders as at 31 December 2018 can be found in table 13 on page 285. STATISTICS ON BALOISE SHARES Price at year-end (CHF) High (CHF) Low (CHF) Market capitalisation (CHF million) Basic earnings per share (CHF) Diluted earnings per share (CHF) Price / earnings (p / e) ratio 1 Price / book (p / b) ratio 1 Number of shares issued (units) 31.12.2014 31.12.2015 31.12.2016 31.12.2017 31.12.2018 127.80 129.90 101.60 127.60 136.30 109.60 128.30 131.00 103.20 151.70 159.40 121.35 6,390.0 6,380.0 6,415.0 7,403.0 15.15 14.63 8.44 1.04 10.96 10.65 11.64 1.10 11.53 11.22 11.13 1.04 11.50 11.48 13.19 1.14 135.40 159.40 131.60 6,607.5 11.14 11.12 12.15 1.07 50,000,000 50,000,000 50,000,000 48,800,000 48,800,000 Minus the number of treasury shares (units) 3,048,791 3,464,540 2,499,945 1,327,993 2,218,134 Number of shares in circulation (units) Average number of shares outstanding 2 Dividend per share 3 (CHF) Dividend payout ratio 3 Dividend yield 3 46,951,209 46,535,460 47,500,055 47,472,007 46,581,866 46,921,282 46,721,219 46,381,359 47,641,577 46,979,421 5.00 33.0 3.9 5.00 45.6 3.9 5.20 45.1 4.1 5.60 48.7 3.7 6.00 53.9 4.4 1 Calculation is based on the profit for the period attributable to shareholders and the equity attributable to shareholders. 2 Relevant for calculation of earnings per share (see page 253 of the Financial Report). 3 2018 based on the proposal submitted to the Annual General Meeting. BALOISE SHARES Security symbol Nominal value Security number ISIN Exchange Security type INDEXED SHARE PRICE PERFORMANCE 1 BÂLOISE HOLDING REGISTERED SHARES 2013 – 2018 BALN CHF 0.10 1.241.051 CH0012410517 SIX Swiss Exchange 200 150 100 50 100 % registered shares 2013 2014 2015 2016 2017 2018 1 31 December 2012 = 100 Bâloise Holding registered shares (BALN) SWX SP Insurance Price Index (SMINNX) Swiss Market Index (SMI) 9 Baloise Group Annual Report 2018 Baloise Core activities Our core activities BELGIUM Hamburg Business volume (CHF million) Life: 166.1 Non-life: 1,099.6 Investment-type premiums: 456.6 Employees: 1,224 Net combined ratio: 92.3 % LUXEMBOURG Business volume (CHF million) Life: 80.5 Non-life: 134.5 Investment-type premiums: 1,116.0 Employees: 475 Net combined ratio: 89.9 % SWITZERLAND Antwerp Brussels Bad Homburg Luxembourg Business volume (CHF million) Life: 2,728.0 Non-life: 1,349.2 Investment-type premiums: 112.3 Employees: 3,782 Net combined ratio: 84.5 % Sales force assets under management: CHF 2,082 million Credit assets from the sales force: CHF 986 million Wealth & pensions advisory mandates: 2,193 Return on equity: 7.5 % Employees: 360 Business volume (CHF million) Total assets under management: 86,182 Assets under management third-party assets: 8,964 Insurance assets: 801 Employees: 147 Cost / Income ratio: 45.1 % 10 Basel Solothurn GERMANY Business volume (CHF million) Life: 385.7 Non-life: 803.1 Investment-type premiums: 227.1 Employees: 1,722 Net combined ratio: 95.8 % Life Investment-type premiums Non-life Baloise Group Annual Report 2018 Baloise Strategy The Simply Safe strategy is about more than just insurance Baloise is launching its new strategy and its targets up to 2021 under the banner of Simply Safe. Against a backdrop of changing conditions in the insurance sector, Baloise is thus evolving into an innovative provider of solutions that expand its core business and extend beyond traditional insurance. Customer focus is at the core of the new strategy. But it’s not just about covering and insuring risks; it’s about addressing the wider needs of customers in a changing society. In 2017, the Company was beginning its journey towards future growth with this clear perspective and with three simple yet ambitious objectives focused on employees, customers and shareholders. SUSTAINABLE BUSINESS MANAGEMENT The key success factors in the new strategy will be the strong core business and the unique corporate culture that exists among the around 7,200 Baloise employees in Switzerland, Belgium, Germany and Luxembourg. Baloise aims to establish an agile and entrepreneurial corporate culture in which its employees, on a daily basis, see the world through the eyes of the customer. The idea is to develop services and solutions that go beyond the traditional insurance business. The new strategy is in line with principles of corporate responsibility and sustainable business management, an approach that Baloise has pursued for a number of years now. The new focus on the customer goes beyond that of a traditional service provider. For this reason, greater importance needs to be attached to the society in which the customers – but also Baloise as a Company – exist. Baloise believes that this new strategy will bolster its efforts to make further improvements in the area of sustainable business management. CUSTOMERS Baloise is becoming the first choice for people who want to feel “simply safe”. An even stronger focus on customer needs, tailored omnichannel communication and innovative products and services in the areas of insurance, assistance and pensions will help Baloise to attract an additional 1 million customers by 2021. This would represent an increase of 30 per cent on 2016. EMPLOYEES The workforce is key to implementing the new corporate strategy. That is why Baloise wants to become an employer of choice in its industry. Progress will be measured by a performance indicator that shows how often Baloise is recommended as an employer. SHAREHOLDERS Thanks to sustained improvements in profitability in its life business and its banking business, as well as innovative products and services such as the mobile insurer, cash of CHF 2 billion will flow into Bâloise Holding between now and 2021. This benefits shareholders directly because Baloise will continue to pursue its attractive dividend policy and will repurchase three million treasury shares. Indirectly, shareholders will benefit from targeted capital investment in new strategic projects that will generate additional profits in existing and new areas of business. 11 Baloise Group Annual Report 2018 Baloise Strategy From strategic initiatives to ecosystems Acquire Partner 2018: + 186,000 Ambition 2021: + 1,000,000 2018: top 23 % Ambition 2021: top 10 % 2018: CHF 449 mn Ambition 2021: CHF 2 bn 12 Drivolution MOVU Good Drive FRI:DAY Mobly Cler Carhelper KASKO younGo Single item insurance TRANSPORT HOME EXTENDING BEYOND TRADITIONAL INSURANCE BUSINESS: ECOSYSTEMS REPRESENTING THE AREAS OF FUTURE SUCCESSBaloise’s strategic ambitions are based on its excellent track record over the past decade, with one of the most profitable non-life portfolios in Europe, a strong position in core markets, cutting- edge IT systems and digital processes, and for-ward-looking capital management and risk man-agement. Based on these strengths, Baloise is continuing to invest in the future. More than 50 initiatives have been launched since the start of Simply Safe and, in combination with a cultural transformation campaign, are injecting momentum into the new ecosystems: personal transport, home, life, pensions, health and business services.CUSTOMERSAmbition: 1 million additional customersPROGRESS MADE 2018 304,000: sum since the start of the Simply Safe strategy 864,000: sum since the start of the Simply Safe strategyEMPLOYEESAmbition: leading employer amongst European financialsSHAREHOLDERSAmbition: CHF 2 billion cash remittance to the holdingBaloise Group Annual Report 2018 Baloise Strategy Incubate Test Culture Optimisation & Extension of the Core Business Invest Ecosystems younGo Möbel Pfister E-Games Cler BLKB UPC MOVU KASKO Perspectiva Hypopotamus B-Tonic picsure Cyber (Retail) MONVISO Baloise Life Advice Real estate fund Fasoon Third-party asset management Cyber (Enterprise) HOME LIFE, PENSIONS & HEALTH BUSINESS SERVICES 13 Baloise Group Annual Report 2018 Baloise Brand The Baloise brand Feeling safe made simple. What is the ambition of the Baloise brand? ▸ Baloise wants to be the first choice for all those who wish to feel safer. Our customers should always have peace of mind and a sense of reassurance and safety. We want our customers to feel completely safe with Baloise at their side as a reliable partner. This means that we have to consistently align our services and products to the needs of our customers. What does the brand promise? ▸ The Baloise brand stands for safety, simplicity and partnership. Safety is the core promise and provides the foundation for every benefit, every service and every product. Simplicity expresses our ambition to offer an outstanding customer experience with simple products, easy processes and clear communication. Partnership is one of our biggest emotional strengths. It is based on appreciation and value creation. We nurture and strengthen our relationships with all our stakeholder groups. How does the brand want to be seen? ▸ Our brand personality defines how Baloise acts and communicates: reliable, easy to interact with and caring for you. We are competent and steadfast and act with quiet confidence and honesty. This makes us a reliable partner who is there for our customers when they need us. We communicate clearly and respond quickly to our stakeholder groups. We take a direct approach and always try to make things easier. As a committed partner we want to understand the needs of our customers and work to find suitable solutions. 14 Baloise Group Annual Report 2018 Baloise Brand “We make it simple to feel safe – as a reliable partner, who’s easy to interact with and truly cares.” Brand promise (what) Brand personality (how) Brand essence Brand benefit Safety Simplicity Partnership Feeling safe made simple. e l b a i l e r y s a e g n i r a c Appearance Communication Behaviour Products / Services Peace of mind A feeling of relief, reassurance and security. 15 Unterkapitel4 Baloise 16 Review of operating performance 38 Sustainable business management 64 Corporate Governance 116 Financial Report 274 Bâloise Holding Ltd 292 General information Review of operating performance GROUP ......................................................................... 18 Baloise on course for success after two years of Simply Safe .................................................................... 18 SWITZERLAND ............................................................ 22 Profitable non-life business and encouraging increase in new business .................................................................... 22 GERMANY ................................................................... 23 Growth in the target segments and stabilisation of the combined ratio .................................................................. 23 BELGIUM .................................................................... 24 Market growth outstripped; strong profitability and innovation .................................................................. 24 LUXEMBOURG ............................................................. 25 High profitability and strong growth in non-life business .... 25 ASSET MANAGEMENT AND BANKING ........................... 26 Encouraging rise in income ................................................ 26 FINANCIAL INFORMATION ............................................ 27 Consolidated income statement ........................................ 27 Consolidated balance sheet .............................................. 29 Business volume, premiums and combined ratio .............. 30 Technical income statement .............................................. 32 Gross premiums by sector ................................................. 33 Banking activities ............................................................. 34 Investment performance ................................................... 35 UnterkapitelBaloise Group Annual Report 2018 Review of operating performance Group Baloise on course for success after two years of Simply Safe Baloise can look back on a successful 2018. The results show that its chosen strategic direction is the right one. In the last few years, more than 50 initiatives have been launched that are driving the digital and cultural transformation. At the same time, Baloise’s operational success shows that its core business remains strong. The non-life business continues to grow in all markets and profitability remains high. The shift in the life portfolio towards life insurance products that tie up less capital is having a sustained positive effect. As a result, the contribution to EBIT from the life business again rose significantly in 2018. The non-life portfolio’s good profitability can be seen from the further improvement of the combined ratio, which was achieved despite the adverse impact of severe winter storms. OVERVIEW In 2018, Baloise’s profit attributable to shareholders was down slightly year on year at CHF 523.2 million (2017: CHF 548.0  million). The volume of business fell by 6.3 per cent to CHF 8,678.2 million (2017: CHF 9,260.8 million), primarily because of a sharp reduc- tion in investment-type premiums and the continuation of the strict underwriting policy in the traditional life business. There was an encouraging rise in earnings before interest and tax (EBIT), which climbed by 7.8 per cent to CHF 737.5 million (2017: CHF 684.1 million). In the second year of Simply Safe, significant progress was made on the strategic objectives to be achieved by 2021. The number of customers increased by 186,000. The total number of new customers therefore stands at 304,000. The cash upstream to Bâloise Holding is exceeding expectations and amounted to CHF 449 million in 2018. So far, CHF 864 million of the targeted CHF 2 billion has been achieved. Progress has also been made in terms of making it into the top 10 per cent of employers in the industry, with Baloise now in the top 23 per cent (2017: top 25 per cent). In view of the strong annual financial results for 2018 overall, the 2019 Annual General Meeting will be asked to raise the dividend by CHF 0.40 to CHF 6.00. The non-life business generated premium income reported under IFRS of CHF 3,405.9 million (2017: CHF 3,229.3 million), a year-on-year rise of 5.5 per cent. All business units contributed to this improvement. EBIT in the non-life business came to CHF 371.7 million and was thus on a par with the strong prior-year figure (2017: CHF 374.7 million). The net combined ratio improved to 91.7 per cent, which was 0.6 percentage points lower than the already very good figure reported a year ago. The volume of traditional life business amounted to CHF 3,360.3 million in 2018, a year-on-year fall of 4.3 per cent (2017: CHF 3,512.0 million). This further reduction was due to the underwriting policy, which remains restrictive in view of the negative interest- rate situation. EBIT in the life business rose once again in 2018, advancing by 8.9 per cent to CHF 333.2 million (2017: CHF 306.0 million). The reason for this improvement was the ongoing optimisation of the business mix and the reduced need to strengthen reserves. At CHF  1,912.1  million, the volume of investment-type premiums was down substantially compared with the prior year (2017: CHF 2,519.5 million) owing to the smaller underwriting volume in Luxembourg. Following strong growth in previous years, the main reasons for this decrease were volatility in the stock markets and postponement of sales due to the implemen- tation of new regulatory requirements. Gains on investments achieved for insurance assets amounted to CHF 1,250.7 million, which was lower than the figure for 2017 of CHF 1,621.6 million. This was due to the drop in realised gains compared with the prior year. The difficulties presented by the interest-rate environment were largely overcome by means of systematic reallocation among the asset classes. Current income decreased slightly, by CHF 17.9 million, to reach CHF 1,282.6 million. The gains on investments achieved for insurance assets equated to a net return of 2.2 per cent. The rate of return on insurance assets according to IFRS was 0.7 per cent, representing a decrease on the 2.5 per cent rate of return according to IFRS in 2017. 18 Baloise Group Annual Report 2018 Review of operating performance Group In operational terms, the EBIT generated by the banking business was encouraging at CHF 92.1 million (2017: CHF 81.8 million). This equated to a year-on-year rise of 12.6 per cent. Consolidated equity fell by 6.3 per cent year on year to reach CHF 6,008.2 million at the end of 2018 (31 December 2017: CHF  6,409.2  million). This decrease was due to the lower valuation of available-for-sale securities with characteristics of liabilities and equity and to the ongoing share buy-back. BUSINESS VOLUME IN 2018 (GROSS) BY STRATEGIC BUSINESS UNIT As a percentage Switzerland Germany Belgium Luxembourg 48.3 16.3 19.8 15.3 Baloise remains strongly capitalised, as confirmed when Standard & Poor’s raised the Company’s credit rating from “A” to “A +” in 2018. In the Swiss Solvency Test (SST), a ratio of over 200 per cent is expected as at 1 January 2019. 10.0 per cent. EBIT in the non-life business was only slightly lower than in the prior year, falling to CHF 371.7 million (2017: CHF  374.7  million). The net combined ratio improved to an excellent 91.7 per cent, which was 0.6 percentage points below the good ratio reported a year ago (2017: 92.3 per cent). The main reason for this improvement was a higher profit on claims reserves. The net combined ratio in the German business was also encouraging, as it stabilised at 95.8 per cent. FRIDAY, Germany’s leading digital insurance company, has received a “media for equity” investment in a volume of around CHF 43 million. SevenVentures – the investment arm of Pro- SiebenSat.1 Media SE – and media investor German Media Pool have acquired a stake in the start-up, which Baloise founded around two years ago when it announced its Simply Safe strategy. Following their investment, SevenVentures and German Media Pool now hold a combined 18.2 per cent stake in FRIDAY. With a stake of 81.8 per cent, Baloise remains the majority shareholder and is investing a further sum of around CHF 85 million as part of the ongoing development of this business. FRIDAY enjoyed another successful year in 2018. The Berlin-based firm doubled the number of new customers to around 30,000 (2017: 15,000). NET COMBINED RATIO As a percentage BUSINESS VOLUME CHF million Total business volume Life Non-life Investment-type premiums 2017 2018 + / – % 9,260.8 3,512.0 3,229.3 2,519.5 8,678.2 3,360.3 3,405.9 1,912.1 – 6.3 – 4.3 5.5 – 24.1 2018 2017 2016 2015 2014 91.7 92.3 92.2 93.3 93.6 NON-LIFE DIVISION: IMPROVED PROFITABILITY AND SUSTAINED GROWTH The non-life division saw a further rise in the volume of premiums (in Swiss francs). At CHF 3,405.9 million, it was up by 5.5 per cent compared with 2017. In local currency terms, the increase was 3.1 per cent. All of the strategic business units reported growth. While Switzerland’s growth was 1.9 per cent, Belgium achieved 10.1 per cent, Germany 5.4 per cent and Luxembourg LIFE DIVISION: FURTHER IMPROVEMENT IN THE EBIT CONTRIBUTION The ongoing improvements to the business mix in view of the extremely low level of interest rates and the sharp contraction of business involving investment-type premiums in Luxembourg were reflected in the decrease in the life business volume, which fell by 12.6 per cent to CHF 5,272.4 million. In the traditional life business, the volume of premiums decreased by 4.3 per cent to CHF 3,360.3 million (2017: CHF 3,512.0 million) in line with the strategy. The volume of investment-type premiums dropped 19 Baloise Group Annual Report 2018 Review of operating performance Group by a substantial 24.1 per cent to CHF 1,912.1 million (2017: CHF  2,519.5  million). This was primarily attributable to the performance of the business in Luxembourg. Following more than ten years of double-digit growth rates, with assets under management more than doubling to CHF 10 billion since 2012, the volume of premiums underwent a correction in 2018 because of reduced demand resulting from volatility and uncertainty in the capital markets last year and from the postponement of sales due to the implementation of new regulatory requirements. At CHF 456.6 million and CHF 112.3 million respectively, the volume of investment-type premiums in Belgium and Switzerland was on a par with the prior-year level. In Germany, investment- type premiums increased by an encouraging 9.7 per cent to CHF 227.1 million (2017: CHF 207.1 million). EBIT in the life business was even higher than in the prior year, with a further substantial rise of CHF 27.2 million or 8.9 per cent to CHF 333.2 million (2017: CHF 306.0 million). This increase was predominantly driven by the shift in the portfolio towards products that tie up less capital and by the overall reduced need to strengthen reserves thanks to the more stable interest-rate environment. Moreover, the risk result in Switzerland benefited from a non-recurring effect resulting from an adjustment to the biometric basis. The new business margin improved to 48.5 per cent thanks to the selective underwriting policy and the better business mix (2017: 33.4 per cent). The interest margin in the life business stood at 1.3 per cent (2017: 1.14 per cent). The positive operating income resulted in an increase in the embedded value of the life insurance business from CHF  4,896.8  million to CHF 5,181.3 million in 2018. The value of new business also rose, reaching CHF 142.4 million (2017: CHF 125.8 million). ASSET MANAGEMENT AND BANKING DIVISION: EARNINGS REMAIN STABLE In operational terms, the EBIT generated by the banking business was encouraging at CHF 92.1 million (2017: CHF 81.8 million). This equated to a year-on-year rise of 12.6 per cent. Baloise Bank SoBa and Baloise Asset Management played the biggest part in this division’s stable profit contribution. Net new assets in the business with third parties came to CHF  801  million, representing a significant increase compared with the prior-year figure of CHF 406 million. INVESTMENTS: SOLID RESULTS IN A QUIET MARKET ENVIRONMENT The gains on the investment of insurance assets amounted to CHF  1,250.7  million, which was below the 2017 level of CHF 1,621.6 million. The difficulties presented by the interest-rate environment were largely overcome by means of systematic reallocation. Current income decreased slightly, by CHF 17.9 million, to reach CHF 1,282.6 million. There was limited appeal in the reinvestment of maturing bonds denominated in Swiss francs. Baloise therefore avoided reinvesting them for the most part and instead opted for currency-hedged euro-denominated bonds. It continued to build up its portfolio of investment PROPRIETARY INVESTMENTS BY CATEGORY 1 INVESTMENT COMPONENTS IN 2018 31.12.2017 31.12.2018 + / – % CHF million Investment property Equities Alternative financial assets 7,480.3 3,633.6 1,112.6 7,904.0 2,834.6 1,153.6 Fixed-income securities 33,388.2 31,798.7 Mortgage assets 10,596.4 10,724.9 Policy loans and other loans 5,972.1 5,671.3 Derivatives 362.4 453.9 Cash and cash equivalents 2,133.2 2,543.5 Total 64,678.9 63,084.5 5.7 – 22.0 3.7 – 4.8 1.2 – 5.0 25.2 19.2 – 2.5 1 Excluding investments for the account and at the risk of life insurance policyholders and third parties. 20 As a percentage Fixed-income securities Mortgage assets Investment property Policy loans and other loans Equities Cash and cash equivalents Alternative financial assets Derivatives 50.4 17.0 12.5 9.0 4.5 4.0 1.8 0.7 Baloise Group Annual Report 2018 Review of operating performance Group ASSETS HELD BY BALOISE as at 31 December 2017 CHF million Non-life Life Banking Investments for own account and at own risk 9,605.9 48,141.2 7,397.8 Asset portfolio for the account and at risk of life insurance policyholders and third parties 1 14,543.8 Total recognised assets Third-party assets as at 31 December 2018 CHF million 9,605.9 62,685.0 7,397.8 Non-life Life Banking Investments for own account and at own risk 9,388.5 46,612.6 7,572.9 Asset portfolio for the account and at risk of life insurance policyholders and third parties 1 – Total recognised assets Third-party assets 9,388.5 46,612.6 7,572.9 1 Including CHF 54.1 million (2017: CHF 70.5 million) in other assets (precious metal holdings from investment-linked life insurance policies). Total for the Group 64,678.9 15,027.4 79,706.3 8,958.6 Total for the Group 63,084.5 14,133.7 77,218.2 8,963.6 EQUITY REMAINS ROBUST Consolidated equity fell by 6.3 per cent year on year to reach CHF 6,008.2 million at the end of 2018 (31 December 2017: CHF 6,409.2 million). This decrease was due to the lower valu- ation of available-for-sale securities with characteristics of liabilities and equity and to the ongoing share buy-back. Under the programme to buy back more than 3 million shares, which began in April 2017, a total of 1,336,575 shares had been repurchased by the end of 2018. This meant CHF 198.5 million was returned to the shareholders. Baloise remains strongly capitalised, as confirmed when Standard & Poor’s raised the Company’s credit rating from “A” to “A +” in 2018. In the Swiss Solvency Test (SST), a ratio of over 200 per cent is expected as at 1 January 2019. The SST ratio will be disclosed at the end of April 2019. property and mortgages with stable income, thereby slightly mitigating the effect of declining income. At CHF 386.6 million, the gains recognised in the income statement were down by CHF 180.9 million compared with the prior year. Significantly smaller gains were realised on bonds than in 2017. As a result of the strong correction in the stock markets in December 2018, gross impairment losses were CHF 66.7 million higher than in 2017, which had been an excep- tionally good year for the stock markets. The currency-related losses of CHF 192.3 million were attributable to currency hedging costs and to currency effects arising on unhedged currency exposures. The gains on investments achieved for insurance assets equated to a net return of 2.2 per cent, which was lower than the net return of 2.9 per cent achieved in 2017. This was primarily due to the reduction in realised gains. Unrealised gains fell by CHF 864.8 million on the back of the poor performance of equities and the widening of spreads. Consequently, the rate of return on insurance assets according to IFRS – which includes unrealised net gains and losses on investments but excludes gains and losses on held-to-maturity debt instruments – was 0.7 per cent, representing a decrease on the 2.5 per cent rate of return according to IFRS in 2017. 21 Baloise Group Annual Report 2018 Review of operating performance Switzerland Switzerland Profitable non-life business and encouraging increase in new business 2017, EBIT returned to a normal level. Basler Switzerland’s profit contribution in 2018 remained healthy at CHF  554.2  million (2017: CHF 618.4 million). The year-on-year increase in premiums in the non-life division was even higher than in 2017, with the volume climbing by 1.9 per cent to CHF 1,349.2 million in 2018. There was also an encouraging rise in new customers that was partly thanks to the YounGo product line. At the same time, EBIT in the non-life business advanced by 5.8 per cent to CHF 317.5 million. The net combined ratio stood at an outstanding 84.5 per cent, which was just 1.0 percentage point higher than the exceptionally good prior-year figure. The level of claims incurred in 2018 was higher than in the prior year, for example as a result of storm Burglind. Reflecting the strategy being pursued, the life division registered a decrease in premiums in 2018. Their volume declined by CHF 176.3 million, or 6.1 per cent, to CHF 2,728.0 million (2017: CHF 2,904.3 million). There was a fall in single premiums in the individual life insurance business but an increase in the net inflows generated for Baloise Bank SoBa. At CHF 382.3 mil- lion, periodic individual premiums were on a par with the prior year (2017: CHF 383.5 million). The partially autonomous col- lective foundation Perspectiva continued to generate strong growth, and the total number of companies signed up rose to 1,345 in 2018 (2017: 749). EBIT in the life business amounted to CHF 176.9 million (2017: CHF 264.8 million). The significant year-on-year difference was due to the reduction in net gains on investments on the back of market volatility in 2018 as well as lower realised gains on investments. The banking business of Baloise Bank SoBa (all figures reported according to local accounting standards) continues to perform well, which is testament to the success of the unique business model of banking and insurance in Switzerland. The number of asset management and investment advice mandates increased by 38 per cent to 2,193. EBIT came to CHF 29.1 million, which was slightly below the prior-year figure of CHF 30.7 million. This decrease was due to the acquisition costs that were incurred as a result of the higher number of mandates. Life: 65.1 % Non-life: 32.2 % Investment-type premiums: 2.7 % KEY FIGURES FOR SWITZERLAND CHF million Business volume Of which: life Of which: non-life Net combined ratio (per cent) Profit before borrowing costs and taxes 2017 2018 + / – % 4,340.6 3,015.9 1,324.6 83.5 618.4 4,189.5 2,840.3 1,349.2 84.5 554.2 – 3.5 – 5.8 1.9 1.0 – 10.4 BASLER VERSICHERUNGEN SWITZERLAND Basler Switzerland again reported an outstanding level of profit in 2018, albeit slightly below the record prior-year figure, which had been influenced by large non-recurring effects. Once again, the quality of the non-life portfolio in particular was demon- strated by the excellent combined ratio and exceptionally good technical result. These were achieved despite the increase in claims incurred as a result of winter storms and other factors. The overall volume of business contracted by 3.5 per cent to CHF 4,189.5 million. This decrease was exclusively attributable to the traditional life business, where – in line with the strategy – a very restrictive underwriting policy is being applied due to the interest-rate situation. The business model combining banking and insurance gained further momentum, with net inflows generated by the insurance sales force increasing to CHF 99.4 million at Baloise Bank SoBa. Following the exceptionally high figure reported in 22 BUSINESS VOLUMECHF million (as a percentage of the Group)4,189.5 (48.3 %)Baloise Group Annual Report 2018 Review of operating performance Germany Germany Growth in the target segments and stabilisation of the combined ratio The non-life division reported encouraging growth of 5.4 per cent with a volume of business of CHF  803.1  million (2017: CHF 762.0 million). Non-life business with retail customers is growing at a far stronger rate than the market, especially in the accident, general liability, motor vehicle and property insurance segments. Corporate customer business is declining, primarily a reflection of the planned restructuring being carried out in these segments. The optimisation of the business mix is paying off. The adjusted net combined ratio improved by 2.9 percentage points to 95.8 per cent (2017 adjusted: 98.7 per cent). In 2018, Basler Germany was therefore below its short- to medium-term target range of 96 to 98 per cent. Premiums in the life division increased by 1.7 per cent to CHF 385.5 million. In 2017, they had been adversely affected by the sale of a closed life insurance portfolio, whereas the volume in 2018 held steady year on year. Biometric products and business involving investment-type premiums performed well. These now account for around 90 per cent of new business. Investment-type premiums therefore increased by a substantial 9.7 per cent to CHF 227.1 million (2017: CHF 207.1 million). Life: 27.2 % Non-life: 56.7 % Investment-type premiums: 16.0 % KEY FIGURES FOR GERMANY CHF million Business volume Of which: life Of which: non-life Net combined ratio (per cent) Loss before borrowing costs and taxes 2017 (restated) 1 2018 + / – % 1,348.2 1,415.9 586.3 762.0 98.7 – 40.2 612.8 803.1 95.8 6.0 5.0 4.5 5.4 – 2.9 n. a. 1 Change of chief operating decision-maker for the medical malpractice portfolio from Germany to Group business. BASLER VERSICHERUNGEN IN GERMANY EBIT in the German business recovered to reach CHF 6.0 million in 2018 (2017 adjusted: loss of CHF 40.2 million). This was due to the transfer of a hospital liability portfolio to a run-off unit. Moreover, the level of large claims incurred was far lower than in 2017. The volume of business in the German company improved by 5.0 per cent to CHF 1,415.9 million thanks to expansion in the target segments (2017: CHF 1,348.2 million). 23 BUSINESS VOLUMECHF million (as a percentage of the Group)1,415.9 (16.3 %)Baloise Group Annual Report 2018 Review of operating performance Belgium Belgium Market growth outstripped; strong profitability and innovation Belgian non-life business again registered strong growth, expanding by 10.1 per cent to CHF  1,099.6  million (2017: CHF 999.0 million). This shows that Baloise Insurance Belgium was able to hold its own in a very competitive market. In fact, it outstripped the growth of the market as a whole. As a result of this growth, the Belgian market now accounts for 32.3 per cent of the Baloise Group’s total non-life premiums. In the life business, there was substantial growth in periodic and single premiums, both of which increased by more than 11 per cent. The volume of business therefore grew by 5.9 per cent to CHF 622.7 million. The traditional life business expanded by 11.6 per cent to CHF 166.1 million, mainly thanks to a rise in periodic premiums. Investment-type premiums were up by 3.9 per cent to CHF 456.6 million (2017: CHF 439.3 million). As well as performing well in its core business, Baloise Insurance Belgium is also highly innovative. The Baloise start-up Mobly has registered more than 30,000 downloads of its app for services in the second-hand car market and is looking to expand abroad. Baloise has also launched B-Tonic, a platform in the health and well-being ecosystem. The services offered on the platform are designed to motivate customers to get fitter and live more healthily. Life: 9.2 % Non-life: 63.8 % Investment-type premiums: 26.5 % KEY FIGURES FOR BELGIUM CHF million Business volume Of which: life Of which: non-life Net combined ratio (per cent) Profit before borrowing costs and taxes 2017 2018 + / – % 1,587.1 588.1 999.0 91.9 140.8 1,722.3 622.7 1,099.6 92.3 199.0 8.5 5.9 10.1 0.4 41.3 BALOISE INSURANCE BELGIUM Baloise Insurance in Belgium again delivered a very robust operating performance in 2018. The volume of business increased by a substantial 8.5 per cent to CHF  1,722.3  million (2017: CHF  1,587.1  million), which was primarily due to the strong growth of the life and non-life business. Profitability in the non-life business was maintained at the prior-year level. The net combined ratio was only slightly higher year on year at 92.3 per cent (2017: 91.9 per cent). EBIT rose by 41.3 per cent to CHF 199.0 million, partly due to the reversal of additional reserves in the life business that had been created in prior years because of the low-interest-rate environment but are now no longer required. 24 BUSINESS VOLUMECHF million (as a percentage of the Group)1,722.3 (19.8 %)Baloise Group Annual Report 2018 Review of operating performance Luxembourg Luxembourg High profitability and strong growth in non-life business The non-life business again saw stronger growth and also improved its profitability. In this segment, Bâloise Assurance’s growth is outstripping that of the market. Premiums in the non-life business increased by 10.0 per cent to CHF 134.5 million (2017: CHF 122.3 million). Profitability was even better than in 2017. The net combined ratio decreased by 1.6 percentage points to 89.9 per cent (2017: 91.5 per cent). Despite the smaller volume of business involving invest- ment-type premiums, the life business was a major driver of business performance. Investment-type premiums amounted to CHF  1,116.0  million in 2018 (2017: CHF  1,761.6  million). Products are largely sold through banks and brokers, while the main market for products from Liechtenstein is Italy and they are mainly sold by inhouse salespeople through contacts in banks and asset management companies. Assets under management stood at CHF 10.7 billion. They have thus doubled since 2012 thanks to robust premium growth and good port- folio management. Premiums amounted to CHF 80.5 million in the traditional life business (2017: CHF 79.6 million). This equated to a small year-on-year rise of 1.1 per cent. Life: 6.0 % Non-life: 10.1 % Investment-type premiums: 83.8 % KEY FIGURES FOR LUXEMBOURG CHF million Business volume Of which: life Of which: non-life Net combined ratio (per cent) Profit before borrowing costs and taxes 2017 2018 + / – % 1,963.5 1,841.2 122.3 91.5 27.5 1,331.0 1,196.5 134.5 89.9 24.7 – 32.2 – 35.0 10.0 – 1.6 – 10.2 BÂLOISE ASSURANCES LUXEMBOURG The business volume of the Luxembourg business unit contracted to CHF 1,331.0 million in 2018 (2017: CHF 1,963.5 million). This was attributable to the business involving investment-type premiums. Following more than ten years of double-digit growth, a correction has now taken place in this business. Moreover, new regulatory requirements and their implementation have resulted in the postponement of sales of specific products. The prevailing uncertainty in the capital markets also had an adverse effect. 25 BUSINESS VOLUMECHF million (as a percentage of the Group)1,331.0 (15.3 %)Baloise Group Annual Report 2018 Review of operating performance Baloise Asset Management Asset management and banking Encouraging rise in income Perspectiva, a partially autonomous occupational pension solution for SMEs of all sizes that uses our investment vehicles. The Perspectiva Relax investment vehicle grew by 43.6 per cent compared with 2017. Its volume as at the end of 2018 stood at CHF 448 million. Baloise Immobilien Management AG was granted a licence to operate as a fund management company by the Swiss Financial Market Supervisory Authority and launched the Baloise Swiss Property Fund, a real-estate fund for qualified investors. On 1 October 2018, a total of 35 properties with a value of CHF 352.3 million were transferred from the insurance investments to the real-estate fund, which was subscribed to by a broad range of customers. Baloise Life Ltd also participates in the fund. At the end of December, the property portfolio was expanded with an investment of CHF  86.5  million in Infracore  SA, a company specialising in Swiss real estate in the healthcare market. Baloise Immobilien Management  AG is coordinating the construction of the three new buildings at Baloise Park, the headquarters of the Baloise Group. The skeleton of the 24- storey skyscraper was completed in 2018. Baloise Park will be ready to welcome its first tenants in spring 2020. The choice of funds was also extended for retail investors last year. The focus was on investment funds with flexible equity exposures that can capture gains when equity markets rise and reduce the downside risk when they fall (e. g. BVG-Mix Dynamic Allocation 0-80). As an investor with a long-term horizon, Baloise Asset Management has integrated the Responsible Investment directives (RI) into its approach for investing insurance assets and signed up to the Principles for Responsible Investments (PRI). And for many years now, Baloise Asset Management has followed the recommendations of the Swiss Association for Responsible Investments (SVVK-ASIR). From 1 January 2019, its processes will take into account additional ESG criteria (envi- ronmental, social and corporate governance) for the first-time investment of insurance assets. Volatility returned to the capital markets in 2018, following the longest bull run in the history of the US stock market. Risk-prone asset classes experienced some sharp price falls. As at 31 December 2018, total assets under management stood at CHF 55,929 million, a decrease of 2.1 per cent on the prior year. Income amounted to CHF 129.2 million, a year-on-year rise of 25.2 per cent. This increase was predominantly attributable to the income of Baloise Immobilien Management AG, which commenced operations in the year under review. Baloise Asset Management primarily manages the assets of the Baloise Group, but also looks after third-party assets. Business with third parties was further expanded in 2018, partly due to the launch of investment funds specifically focused on the needs of external institutional customers. Net new assets in the business with third parties came to CHF 801 million (Baloise Group), representing a significant increase compared with the prior-year figure of CHF 406 million. Real estate accounted for CHF 318 million (39.7 per cent) of this total. The inflow of new funds can also be attributed to the collective foundation 26 TOTAL ASSETS UNDER MANAGEMENT INCL. BALOISE GROUPCHF million86,182ASSETS UNDER MANAGEMENT THIRD-PARTY ASSETSCHF million8,964NET NEW ASSETS THIRD-PARTIESCHF million801BALOISE ASSET MANAGEMENTTOTAL INCOME CHF 129.2 millionCOST / INCOME RATIO45.1 % NO. OF EMPLOYEES147Baloise Group Annual Report 2018 Review of operating performance Consolidated income statement Consolidated income statement FIVE-YEAR OVERVIEW CHF million Income Premiums earned and policy fees (gross) 1 Reinsurance premiums ceded Premiums earned and policy fees (net) Investment income Realised gains and losses on investments 2 For own account and at own risk For the account and at risk of life insurance policyholders and third parties Income from services rendered Share of profit (loss) of associates Other operating income Income Expense Claims and benefits paid (gross) Change in technical reserves (gross) Reinsurance share of claims incurred Acquisition costs Operating and administrative expenses for insurance business Investment management expenses Interest expenses on insurance liabilities Gains or losses on financial contracts Other operating expenses Expense 2014 2015 2016 2017 2018 7,168.1 – 163.6 7,004.5 6,832.4 – 148.6 6,683.7 6,680.6 – 168.2 6,512.4 6,726.4 – 183.4 6,542.9 6,737.0 – 209.0 6,528.0 1,701.9 1,521.8 1,476.6 1,392.5 1,376.0 775.1 587.4 110.7 8.1 185.2 379.1 7.1 112.6 36.8 136.6 303.1 364.1 110.1 7.1 136.8 427.8 696.5 116.9 5.5 235.0 96.1 – 1,087.8 130.4 6.2 227.6 10,372.8 8,877.9 8,910.2 9,417.1 7,276.6 – 5,666.4 – 5,352.4 – 5,664.2 – 5,726.5 – 5,904.4 – 1,469.5 – 1,241.9 146.6 – 569.6 – 866.5 – 66.9 – 42.6 – 462.6 – 446.8 97.9 – 472.4 – 761.3 – 60.4 – 34.1 – 0.9 – 333.1 – 669.1 108.2 – 502.9 – 763.9 – 60.3 – 30.5 – 342.9 – 300.9 – 535.0 80.8 – 482.1 – 765.8 – 77.2 – 21.9 – 613.4 – 591.8 412.4 83.3 – 535.8 – 810.8 – 82.2 – 19.2 801.2 – 483.6 – 9,444.3 – 8,158.6 – 8,226.6 – 8,733.0 – 6,539.1 Profit before borrowing costs and taxes 928.6 719.2 683.6 684.1 737.5 1 In line with the accounting principles applied by the Baloise Group, investment-type insurance premiums are not included in premiums earned and policy fees. 2 Including financial liabilities held for trading purposes (derivative financial instruments). 27 Baloise Group Annual Report 2018 Review of operating performance Consolidated income statement FIVE-YEAR OVERVIEW CHF million 2014 2015 2016 2017 2018 Profit before borrowing costs and taxes 928.6 719.2 683.6 684.1 737.5 Borrowing costs Profit before taxes Income taxes Profit for the period Attributable to Shareholders Non-controlling interests Earnings / loss per share Basic (CHF) Diluted (CHF) ADDITIONAL INFORMATION INSURANCE CHF million Gross premiums written and policy fees Investment-type premiums Total business volume – 43.5 885.1 – 173.2 711.9 710.7 1.3 15.15 14.63 – 40.0 679.3 – 168.2 511.1 512.1 – 1.0 10.96 10.65 – 38.0 645.6 – 111.7 533.9 534.8 – 0.9 11.53 11.22 – 34.3 649.8 – 117.9 531.9 548.0 – 16.1 11.50 11.48 – 39.9 697.6 – 174.7 522.9 523.2 – 0.3 11.14 11.12 2014 2015 2016 2017 2018 7,175.6 2,130.2 9,305.8 6,833.4 2,085.1 8,918.6 6,711.6 2,199.2 8,910.8 6,741.3 2,519.5 9,260.8 6,766.2 1,912.1 8,678.2 Investments for the account and at the risk of life insurance policyholders 10,904.2 10,873.2 12,001.0 14,543.8 13,640.8 Net combined ratio Funding ratio (non-life) (per cent) 93.6 182.9 93.3 192.4 92.2 188.5 92.3 193.3 91.7 179.4 28 Financial instruments with characteristics of equity 13,451.2 13,770.8 14,305.6 15,874.9 Financial instruments with characteristics of liabilities 34,461.6 33,248.4 33,766.5 35,360.1 Baloise Group Annual Report 2018 Review of operating performance Consolidated balance sheet Consolidated balance sheet FIVE-YEAR OVERVIEW as at 31.12. CHF million Assets Property, plant and equipment Intangible assets Investments in associates Investment property Mortgages and loans Derivative financial instruments Other assets / receivables Deferred tax assets Cash and cash equivalents Total assets as at 31.12. CHF million Equity and liabilities Equity Equity before non-controlling interests Non-controlling interests Total equity Liabilities Derivative financial instruments Other accounts payable Deferred tax liabilities Total liabilities 318.3 1,041.2 221.1 7,904.0 14,137.9 33,775.1 16,396.2 914.8 2,036.6 73.5 4,036.1 2014 2015 (restated) 2016 2017 2018 379.2 909.2 227.9 399.1 838.2 162.3 349.3 836.1 160.4 5,962.9 6,251.9 6,817.5 353.3 1,002.5 138.4 7,480.3 18,165.9 16,656.6 16,354.7 16,568.6 613.2 2,153.5 48.3 653.9 3,921.5 39.8 757.3 4,024.3 69.3 800.4 3,305.1 88.8 2,969.6 2,839.8 3,173.3 3,551.6 79,342.3 78,782.3 80,614.3 84,523.9 80,854.8 2014 2015 (restated) 2016 2017 2018 5,791.3 5,418.9 5,741.3 6,346.2 39.7 34.7 32.4 63.0 5,970.6 37.6 5,831.0 5,453.6 5,773.7 6,409.2 6,008.2 176.4 5,789.7 1,065.5 250.8 7,379.5 909.7 299.0 7,070.0 944.9 145.3 6,341.9 922.4 73,511.4 73,328.7 74,840.6 78,114.7 74,846.6 46,575.2 21,539.0 117.3 5,707.2 907.8 Gross technical reserves 48,738.9 45,776.6 46,209.0 48,008.5 Liabilities arising from banking business and financial contracts 17,740.8 19,012.0 20,317.7 22,696.5 Total equity and liabilities 79,342.3 78,782.3 80,614.3 84,523.9 80,854.8 29 Baloise Group Annual Report 2018 Review of operating performance Business volume, premiums and combined ratio Business volume, premiums and combined ratio BUSINESS VOLUME 2017 CHF million Non-life Life Sub-total of IFRS gross premiums written2 Investment-type premiums Total business volume 2018 CHF million Non-life Life Sub-total of IFRS gross premiums written 2 Investment-type premiums Total business volume Group Switzerland Germany (restated) 1 Belgium Luxembourg 3,229.3 3,512.0 6,741.3 2,519.5 9,260.8 1,324.6 2,904.3 4,228.9 111.6 4,340.6 762.0 379.2 1,141.2 207.1 1,348.2 999.0 148.8 1,147.8 439.3 1,587.1 122.3 79.6 201.9 1,761.6 1,963.5 Group Switzerland Germany Belgium Luxembourg 3,405.9 3,360.3 6,766.2 1,912.1 8,678.2 1,349.2 2,728.0 4,077.2 112.3 4,189.5 803.1 385.7 1,188.7 227.1 1,415.9 1,099.6 166.1 1,265.7 456.6 1,722.3 134.5 80.5 215.0 1,116.0 1,331.0 1 Change of chief operating decision-maker for the medical malpractice portfolio from Germany to Group business. 2 Premiums written and policy fees (gross). 30 Baloise Group Annual Report 2018 Review of operating performance Business volume, premiums and combined ratio NET COMBINED RATIO 2017 as a percentage of premiums earned Claims ratio 2 Expense ratio Combined ratio 2018 as a percentage of premiums earned Claims ratio 2 Expense ratio Combined ratio 1 Change of chief operating decision-maker for the medical malpractice portfolio from Germany to Group business. 2 Including the profit-sharing ratio. GROSS AND NET COMBINED RATIO as a percentage of premiums earned Claims ratio 1 Expense ratio Combined ratio 1 Including the profit-sharing ratio. FUNDING RATIO (NON-LIFE) CHF million Technical reserve for own account 1 Premiums written and policy fees for own account Funding ratio (per cent) 1 Not including capitalised settlement premiums. Group Switzerland Germany (restated) 1 Belgium Luxembourg 60.7 31.6 92.3 56.6 26.9 83.5 62.1 36.6 98.7 57.3 34.6 91.9 61.5 30.0 91.5 Group Switzerland Germany Belgium Luxembourg 59.9 31.8 91.7 57.5 27.0 84.5 2017 59.7 30.5 90.2 59.7 36.1 95.8 Gross 2018 58.6 30.6 89.2 57.9 34.4 92.3 2017 60.7 31.6 92.3 56.6 33.3 89.9 Net 2018 59.9 31.8 91.7 2017 2018 5,924.8 3,065.0 193.3 5,777.1 3,220.1 179.4 31 Baloise Group Annual Report 2018 Review of operating performance Technical income statement Technical income statement CHF million Gross Gross premiums written and policy fees Change in unearned premium reserves Premiums earned and policy fees (gross) Claims and benefits paid (gross) Change in technical reserves (gross) Change in claims reserve / actuarial reserves 1 Change in other technical reserves Technical expenses Total technical result (gross) Ceded to reinsurers Reinsurance premiums ceded Claims and benefits paid Reinsurers’ share of claims incurred Change in other technical reserves Technical expenses Total technical result of ceded business For own account Premiums earned and policy fees Claims and benefits paid Change in claims reserve / actuarial reserves 1 Change in other technical reserves Technical expenses Total technical result for own account Investment income (gross) Realised gains and losses on investments 2 Investment management expenses Other financial expenses and income Gains or losses on investments Profit before borrowing costs and taxes Borrowing costs Income taxes Profit for the period (segment result) Non-life 2017 2018 2017 Life 3 2018 3,229.3 – 14.9 3,214.4 3,405.9 – 29.2 3,376.7 3,512.0 3,360.3 – – 3,512.0 3,360.3 – 1,881.0 – 2,018.2 – 3,845.5 – 3,886.2 – 35.7 – 2.5 50.6 – 21.0 – 1,003.5 – 1,064.0 – 87.7 – 409.2 – 302.7 291.7 324.0 – 1,133.2 888.5 – 505.7 – 348.6 – 491.7 – 162.6 – 184.5 – 20.8 – 24.6 55.8 11.9 0.2 14.8 – 79.9 66.2 0.4 0.0 18.6 – 99.2 5.0 4.3 3.9 1.3 8.5 3.4 4.9 1.3 – 6.4 – 6.5 3,051.8 3,192.2 3,491.1 3,335.7 – 1,825.2 – 1,952.0 – 3,840.5 – 3,877.7 – 23.9 – 2.4 51.0 – 21.0 – 988.6 – 1,045.4 211.8 213.2 102.7 – 27.0 – 125.9 163.0 374.7 – – 100.2 274.5 224.8 198.7 35.3 – 30.1 – 57.1 146.9 371.7 – – 70.4 301.3 – 83.5 – 405.3 – 301.4 – 1,139.6 1,087.3 1,001.4 – 95.4 – 547.8 1,445.6 306.0 – 2.8 – 14.2 289.0 891.9 – 500.8 – 347.2 – 498.2 1,083.9 – 986.8 – 102.9 837.1 831.3 333.2 – 10.1 – 61.1 261.9 1 Including change in reserve for claims handling costs. 2 Including financial liabilities held for trading purposes (derivative financial instruments). 3 Of which deferred gains / losses from other operating segments (31 December 2017: CHF 14.5 million; 31 December 2018: CHF 10.2 million). 32 Baloise Group Annual Report 2018 Review of operating performance Gross premiums by sector Gross premiums by sector GROSS PREMIUMS BY SECTOR (NON-LIFE) CHF million Accident Health General liability Motor Property Marine Other Inward reinsurance Gross premiums written (non-life) GROSS PREMIUMS BY SECTOR (LIFE) CHF million Business volume generated by single premiums Business volume generated by periodic premiums Investment-type premiums Gross premiums written (life) 2017 2018 + / – % 374.9 130.9 343.2 1,062.3 1,025.9 187.3 78.6 26.3 396.9 146.6 341.0 1,115.2 1,084.5 196.3 86.4 38.8 3,229.3 3,405.9 5.9 12.0 – 0.6 5.0 5.7 4.8 9.9 47.5 5.5 2017 2018 + / – % 3,553.7 2,477.8 2,759.1 2,513.3 – 2,519.5 – 1,912.1 3,512.0 3,360.3 – 22.4 1.4 – 24.1 – 4.3 33 Baloise Group Annual Report 2018 Review of operating performance Banking activities Banking activities PROFIT OR LOSS FROM BANKING ACTIVITIES CHF million Net interest income Net fee and commission income Trading profit Other net income Total operating income Personnel expenses General and administrative expenses Total operating expenses Gross profit Net losses and impairment due to credit risk Depreciation, amortisation and impairment of property, plant and equipment and of intangible assets Profit before taxes Income taxes Profit for the period (segment result) ADDITIONAL INFORMATION CHF million Third-party assets ASSET ALLOCATION CHF million Investment property Equities Alternative financial assets Fixed-income securities Mortgage assets Policy loans and other loans Derivative financial instruments Cash and cash equivalents Total 34 2017 2018 85.6 76.3 0.7 1.4 82.1 101.9 0.7 2.6 164.0 187.3 – 60.1 – 14.8 – 75.0 89.0 0.6 – 7.8 81.8 – 15.8 66.0 – 67.5 – 21.1 – 88.6 98.7 0.6 – 7.2 92.1 – 18.3 73.8 31.12.2017 31.12.2018 8,958.6 8,963.6 31.12.2017 31.12.2018 – 11.9 – 172.7 6,227.2 186.4 12.6 787.1 – 11.5 – 160.1 6,253.6 181.1 7.6 959.0 7,397.8 7,572.9 Baloise Group Annual Report 2018 Review of operating performance Investment performance Investment performance 2017 1 CHF million Current income Realised gains and losses and impairment losses recognised in profit or loss (net) Change in unrealised gains and losses recognised directly in equity Investment management costs Operating profit Average investment portfolio Performance (per cent) 2 Fixed-income securities Equities Investment property Mortgage assets, policy loans and other loans Alternative financial assets, derivatives, cash and cash equivalents Total 697.3 375.3 121.8 138.2 263.2 111.1 294.0 25.8 16.3 – 222.6 1,392.5 427.8 – 497.1 184.8 – – 104.0 – 208.2 – 35.6 539.9 – 9.1 435.6 – 8.1 366.2 – 13.6 306.2 32,725.2 3,844.5 7,148.9 16,461.6 1.6 11.3 5.1 1.9 – 9.4 – 111.7 3,605.4 – 3.1 – 75.8 1,536.3 63,785.6 2.4 1 Excluding investments for the account and at the risk of life insurance policyholders and third parties. 2 The sale of the closed life insurance portfolio of Direktion für Deutschland resulted in a negative change in unrealised gains and losses recognised directly in equity of CHF 105.4 million. Adjusted for this effect, performance was 2.6 per cent. 2018 1 CHF million Current income Realised gains and losses and impairment losses recognised in profit or loss (net) Change in unrealised gains and losses recognised directly in equity Investment management costs Operating profit Average investment portfolio Performance (per cent) Fixed-income securities Equities Investment property Mortgage assets, policy loans and other loans Alternative financial assets, derivatives, cash and cash equivalents Total 686.4 – 91.7 128.0 61.4 276.6 106.5 266.9 64.3 18.1 – 44.4 1,376.0 96.1 – 541.8 – 363.1 – – 30.6 – 874.3 – 43.6 9.4 32,593.4 0.0 – 5.7 – 179.3 3,234.1 – 5.5 – 9.3 373.8 – 13.8 317.4 – 8.3 – 4.0 – 80.6 517.3 7,692.1 16,482.4 3,879.6 63,881.7 4.9 1.9 – 0.1 0.8 1 Excluding investments for the account and at the risk of life insurance policyholders and third parties. 35 Baloise Group Annual Report 2018 Review of operating performance Investment performance CURRENT INCOME FROM INSURANCE 1 CHF million Investment property Equities Alternative financial assets Fixed-income securities Mortgage assets Policy loans and other loans Cash and cash equivalents Total current income REALISED GAINS AND LOSSES IN INSURANCE1 CHF million Investment property Equities Alternative financial assets Fixed-income securities Mortgage assets Policy loans and other loans Derivative financial instruments Total capital gains and losses ASSET ALLOCATION IN INSURANCE1 as at 31.12. CHF million Investment property Equities Alternative financial assets Fixed-income securities Mortgage assets Policy loans and other loans Derivative financial instruments Cash and cash equivalents Total Non-life Life 39.6 40.9 2.7 99.6 7.0 23.7 – 0.3 222.3 80.3 15.1 591.1 71.3 108.2 – 1.0 2017 Total 261.9 121.3 17.8 690.7 78.3 131.8 – 1.3 Non-life Life 43.0 36.8 2.8 95.7 7.2 13.2 – 0.1 232.2 90.8 16.2 586.2 66.8 92.3 – 0.5 2018 Total 275.3 127.6 19.0 681.9 74.0 105.5 – 0.6 213.2 1,087.3 1,300.5 198.7 1,083.9 1,282.6 Non-life Life 33.2 45.6 9.3 47.4 – 1.0 77.9 92.6 63.9 327.1 2.0 35.0 2017 Total 111.1 138.2 73.2 374.5 2.0 35.9 – 33.8 102.7 – 259.2 – 293.0 339.3 442.0 Non-life Life 14.7 57.0 3.3 91.0 3.6 10.1 – 36.9 – 54.8 0.4 5.2 – 8.4 35.3 0.3 56.1 – 41.9 64.3 Non-life Life 2017 Total Non-life Life 952.4 1,076.4 312.5 6,502.5 2,543.9 800.0 7,454.9 3,620.3 1,112.6 1,001.9 771.0 325.6 6,876.4 2,050.5 828.1 2018 Total 105.7 60.6 13.3 – 91.7 0.7 61.2 – 50.3 99.6 2018 Total 7,878.3 2,821.5 1,153.6 5,247.3 27,967.3 33,214.7 4,926.4 26,702.4 31,628.8 442.4 1,084.6 28.5 461.7 3,926.8 5,384.5 317.8 698.3 4,369.2 6,469.1 346.4 1,160.0 483.5 1,438.8 32.3 408.9 3,987.8 4,731.4 413.2 4,471.3 6,170.2 445.5 1,022.8 1,431.7 9,605.9 48,141.2 57,747.2 9,388.5 46,612.6 56,001.1 1 Excluding investments for the account and at the risk of life insurance policyholders and third parties. 36 Baloise Group Annual Report 2018 Review of operating performance Investment performance This page has been left empty on purpose. 37 Unterkapitel4 Baloise 16 Review of operating performance 38 Sustainable business management 64 Corporate Governance 116 Financial Report 274 Bâloise Holding Ltd 292 General information Sustainable business management RESPONSIBILITY ......................................................... 40 How Baloise creates value ................................................ 40 HUMAN RESOURCES .................................................... 47 Establishing the culture of growth ..................................... 47 THE ENVIRONMENT ..................................................... 54 Environmental mission statement ..................................... 54 Protecting the environment over the long term .................. 55 RISK MANAGEMENT .................................................... 58 Baloise’s risk management is one of the main pillars of its business model ........................................................ 58 COMMITMENT TO ART .................................................. 62 The Baloise Group’s commitment to art ............................. 62 UnterkapitelBaloise Group Annual Report 2018 Sustainable business management Responsibility How Baloise creates value RESOURCES INVESTORS The shareholder base is broadly diversified. Most of the shares are held by institutional investors from Europe and the USA who have a long-term investment horizon. EMPLOYEES PARTNERS Using 21st century working models, we focus on employees with initiative and offer opportunities for internal mobility and development. ▸ Culture of growth and learning supported by initiative, dialogue and performance to equip the company for the future Values-based culture Equality-based working environment, and communication on equal terms Scope for personal initiative Focus on development Individual working models (remote working, part-time, job-sharing) and a modern work environment ▸ ▸ ▸ ▸ ▸ Baloise works with a wide network of distributors (agents, brokers and banks), service providers, advisors and start-ups in various markets. We work with our partners to optimise and expand our core business. ▸ Start-up fund: CHF 50 million for investment in European, UK and US-based start-ups Baloise’s own start-ups:e. g. FRIDAY, Mobly and Movu Selected partners such as TCS, Bank Cler, BLKB, Möbel Pfister and many others ▸ ▸ RELIABLE. The funding of risk protection for customers and of the return on equities for shareholders is balanced and robust. EFFECT ENGAGED. Inspired employees with a strong sense of personal responsibility deliver the right solutions for our customers. S E E Y O L P M E UALS R O ID F V S I N D O N I T I U E T L A O V S I R P CUSTOMER S & SOLUTIO BUSIN N S F E S O S R P A R T N E R S SIMPLY SAFE N ASSE T M A AND B A N K I N T N S E A G EME G S ERVIC L O H S H A R E D ERS Our shareholders expect a long-term attractive invest- ment. The high level of security comes from a strong balance sheet, a proactive approach to risk manage- ment and a conservative investment policy. Through our ambition of achieving a cash upstream of CHF 2 billion to Bâloise Holding by 2021, we are creating the financial basis for investment in future growth in order to continue our attractive and con- sistent distribution policy. ▸ ▸ ▸ ▸ ▸ ▸ Committed employees strengthen customer relation- ships and foster long-term customer loyalty. ▸ Among the top 10 % of employers in the insurance sector by 2021 Enhancing the employability of our employees through continuing professional development Competitive basic salaries, variable remunera- tion, and attractive profit-sharing and employee retention schemes Average length of service is 13 years Teamwork, individual responsibility Appreciative working environment Loyal and satisfied employees who make a difference to the customer experience The strength and innovation of the Baloise partner- ships ensure competitiveness and enable future growth. ▸ Fast pace of innovation through shortened pro- duct development time. Around 30 new products in 2018 Ability to respond quickly to customer needs and come up with new products in weeks rather than months Around 50 start-ups in the portfolio / funding initiatives for innovative solutions for tomorrow’s market ▸ ▸ INVESTORS EMPLOYEES PARTNERS 40 Baloise Group Annual Report 2018 Sustainable business management Responsibility CUSTOMERS SOCIETY ENVIRONMENT We have a strategy of seeking out customers who are cautious and careful, and to whom safety and security are as important as they are to Baloise. Our customer base includes private and corporate cus- tomers. We gained 186,000 new customers in 2018. We involve customers in our product design process through customer forums, panels and surveys because we want to do more than cover risks: we want to make customers feel more safe and secure in their everyday live. Baloise assumes responsibility as an employer, partner to its customers and member of society in a variety of ways, including ▸ ▸ ▸ ▸ sponsorship CSR activities in all countries art collection / art prize commitment to voluntary work Group Compliance is a key part of our corporate governance and deals with socially relevant matters such as privacy, money laundering and corruption. In addition, our code of conduct sets out rules for how we interact with our employees. Baloise is committed to the responsible use of natural resources in its day-to-day operations. ▸ First insurance company to sign up to the insurance declaration on sustainable development of the United Nations Environment Programme (UNEP) in 1995 Own environmental mission statement since 1999 Signed up to the Principles for Responsible Investment (PRI) in 2018 Supporter of the “environmental platform”, a business initiative of the Basel region ▸ ▸ ▸ S E E Y O L P M E UALS R O ID F S N O I V I D N I T U E T L A O V S I R P P A R T N E R S CUSTOMER S & SOLUTIO BUSIN N S F E S O S R T N S E A G EME G S ERVIC SIMPLY SAFE N ASSE T M A AND B A N K I N L O H S H A R E D ERS «Simply Safe» strengthens the focus on customer needs, supports tailored omnichannel communication and innovative products and services in the areas of insurance, assistance and pensions. ▸ Target is to attract 1,000,000 new customers between 2017 and 2021 (+ 30 %) Strong insurance collective Baloise does everything it can to make the lives of its customers safer and more secure ▸ ▸ SUSTAINABLE. Simple processes and good relationships shape the lifelong partnership with customers that share our values to create a sustainable future. INNOVATIVE. Employees and external partners operate a functioning innovation network that can respond quickly. ▸ ▸ ▸ ▸ Maintenance and expansion of the community sharing the risk At Baloise, we manage and coordinate this community, and we protect it in the interest of the various stakeholders Baloise’s actions have an impact on the relationship between business and the general public Helping to shape society and promote sustain- able development, both within and outside our own business Baloise is working to continuously reduce its direct environmental footprint and use of non-renewable resources by using economical, smart, energy-efficient buildings. It observes the same principles in the pro- curement and use of office equipment and materials. ▸ ▸ ▸ ▸ Energy-efficiency in buildings and IT Reducing CO2 emissions Use of 100 % hydroelectric power in Switzerland Training for employees to raise awareness of environmental impact Integration of ESG criteria into our investment universe ▸ CUSTOMERS SOCIETY ENVIRONMENT 41 Baloise Group Annual Report 2018 Sustainable business management Responsibility Responsibility TAKING RESPONSIBILITY Insurance companies grew out of the idea of risk sharing. The strength of the community sharing the risk is determined by the sum of the sense of responsibility of each individual member of the community. As insurers, we have always been aware of the importance of taking responsibility and of endeavouring to promote sustainable development in all of our activities. This basic tenet has remained unchanged since the foundation of Baloise in the 19th century. Insurance companies are still based on a community of policyholders. At Baloise, we manage and coordinate this community, and we protect it in the interest of the various stakeholders. Responsible and socially engaged behaviour is also part of Baloise’s current strategy, Simply Safe. Ultimately, our actions affect the relationship between business and the general public. The Swiss Federal Council regards responsible companies as a vital factor in the success of the Swiss economy and is helping to shape a framework for corporate social responsibility. It has published a position paper and an action plan on companies’ responsibility towards society and the environment. www.csr.admin.ch Baloise inherently supports these efforts and is adopting the position taken by the Federal Council to enable it to continually adapt to the prevailing social conditions and become a better corporate citizen. With its new strategy and new focus on cus- tomers, Baloise is emphasising that aspects of sustainable business management cannot be viewed in isolation from the commercial management of a company. The Company itself has a long tradition of embracing its corporate social responsibility. Every day, through its insurance and pension solutions, Baloise not only looks after individuals but also protects companies, economies and communities and helps them to function properly, which in turn boosts economic and social stability in the coun- tries where it and its customers operate. It must be able to offer the sort of long-term security that cannot be sustained by the pursuit of short-term profits alone. When it comes to life insur- ance, for example, Baloise thinks and acts on a long-term basis, examines risks – such as cyber risks – that may arise in the future and mitigates these in a thorough and professional manner. Baloise is realigning its sustainable business management with the Baloise value creation model (see pages 40and 41). It is based on the International Integrated Reporting Council (IIRC) model, but focuses specifically on the Baloise business model, the aspects that are important to the Company and its corporate values. Corporate social responsibility covers a broad range of activities and involves a broad range of stakeholders – from employees and shareholders to customers, partners and the wider public – as well as the environment around us. Baloise’s policies are based on the United Nations’ sustainable develop- ment goals (SDGs), in particular SDG 3 (good health and well- being), SDG 5 (gender equality), SDG 8 (decent work and economic growth), SDG 10 (reduced inequalities), SDG 11 (sustainable cities and communities), SDG 12 (responsible consumption and production) and SDG 13 (climate action). RESPONSIBILITY TO EMPLOYEES Baloise’s responsibility as an employer is manifested in the new strategy with a clear employee-oriented objective. The Company wants to position itself as one of the most attractive employers in its industry. To achieve this aim, it offers its staff the scope required to contribute to its success and to develop both per- sonally and professionally. This results in satisfied employees, helping Baloise to become an employer of choice in the insurance sector. This involves creating a working environment that is focused on the health and well-being of its staff (SDG 3) and where gender equality is paramount (SDG 5). By improving the employability of our employees, we aim to not only increase our attractiveness as an employer but also create opportunities for economic growth by producing well-trained employees (SDG 8). The Company’s appeal as an employer is measured regularly across the Group through “pulse checks”. Every three months, randomly selected employees are asked to score Baloise in terms of attractiveness. Baloise has worked hard over the years to develop and promote an employee-friendly corporate culture, building on the stable foundations put in place long ago. At Baloise in Switzerland, the concept of social partnership has a long tradi- tion. The Company’s employee commission (MAKO) was founded in 1970, i. e. long before 1993, when the Swiss federal govern- ment passed a co-determination act that gave employees the legal right to have a say in the workplace and to be given 42 Baloise Group Annual Report 2018 Sustainable business management Responsibility information on particular matters. To this day, the rights of the MAKO go well beyond the provisions of that legislation. There is also a code of conduct, which contains the essential ethical and legal regulations that govern employees’ behaviour. Baloise has always promoted an employee-focused corporate culture across the Group, involving employees at different levels in shaping the working environment (see also the chapter on human resources). In doing so, Baloise secures not only its own long- term viability but also the future employability of its staff in an increasingly competitive economic environment. By giving young people their first experience in the world of work – as trainees, interns and temporary student employees – Baloise is also WE TAKE RESPONSIBILITY SDG 3: good health and well-being ▸ ▸ Corporate health management at all national units Baloise Code (see chapter “Sustainable business management / Human resources”) SDG 5: gender equality ▸ ▸ Salaries that are in line with market rates; difference between the genders within a statistically insignificant range Baloise Code of Conduct on equal treatment and sexual harassment (www.baloise.com/code-of-conduct) SDG 8: decent work and economic growth ▸ ▸ Ongoing professional development for our employees Friendly Work Space quality seal (see chapter “Sustainable business management / Human resources”) SDG 10: reduced inequalities ▸ ▸ ▸ Action plan to promote diversity Yellow Equities gender-friendly life insurance (www.baloise.ch/yellowequities) Europaforum for regular dialogue among employee representatives from every national unit SDG 11: sustainable cities and communities ▸ ▸ ▸ Raising of employees’ awareness of environmental issues Promotion of use of public transport Application of the standards for sustainable construction in Switzerland (SNBS) at the new Baloise Park development SDG 12: responsible consumption and production ▸ Implementation of measures for sustainable business operations (see chapter “Sustainable business management / The environment”) Signing of and compliance with the Principles for Responsible Investment (PRI) ▸ SDG 13: climate action ▸ Member of the “environmental platform” initiative in the Basel region ▸ Reduction of our investment portfolio’s carbon footprint by investing responsibly in accordance with the PRI (www.unpri.org) 43 Baloise Group Annual Report 2018 Sustainable business management Responsibility making an investment in the future of the Company and the employment markets of the countries in which it operates. Every year, across the Group, Baloise trains over 200 people who are at the start of their careers, which represents a proportion of trainees in the workforce of just under 3 per cent. The value that this adds, both for these young employees and the Company, provides a solid basis for the future and enables Baloise to create new jobs and preserve existing ones. ▸ Chapter “Sustainable business management / Human Resources” Code of Conduct: www.baloise.com/code-of-conduct ▸ RESPONSIBILITY TO THE CUSTOMER Customer focus is central to the Company’s strategy. Baloise wants to be more than just an insurer and therefore needs to take account of the wider social environment in which its cus- tomers exist. New risks (e. g. cyber risks) are identified and made insurable, enabling Baloise to promote innovation and social development for corporate and retail clients. To foster the required proactive mindset, the Company encourages employees to ask themselves every day what they can do to make the customer feel “simply safe” – in line with the Baloise strategic maxim. One way to achieve this is to provide services that go beyond those offered by a traditional insurer. Everything that Baloise’s employees do is geared towards enhancing safety and security. But if something does go wrong, Baloise will be on hand to help. Baloise strengthens the insurance collective through its strategy of seeking out customers who are cautious and careful, and to whom safety and security are as important as they are to Baloise. But it is not just about providing security by covering a particular risk, it is also about giving customers everyday peace of mind. Baloise wants to do everything it can to help make customers’ broader environment safer. The cus- tomers themselves also get a say, through customer forums, panels and surveys. Prevention, safety and security have a long tradition at Baloise. In Switzerland, Basler Insurance operates the Baloise cloud seeder, a specially equipped light aircraft, to protect the population against hail damage. The three-year pilot programme was launched in 2018. 44 The collaboration with the Emilie Leus Foundation in Belgium illustrates how employees are thinking beyond the traditional parameters of insurance. The foundation was established to combat drink driving across Belgium as part of a broad-ranging campaign. Similarly, Baloise in Switzerland was involved in work to help prevent addiction among young people for a number of years, with employees visiting schools several times a year to talk about the subject. This task has now been taken over by our partner TCS. www.baloise.ch/de/ueber-uns/engagement/hagelflieger.html www.fondsemilieleus.be www.cktgmbh.ch/themen/sucht/modul.php RESPONSIBILITY TO THE SHAREHOLDER The capital that is made available to Baloise by its shareholders is invested efficiently and in their interests. Risk management, which forms an integral part of our strategic management policies, makes a significant contribution to the positioning of the Baloise Group. As a European insurer with Swiss roots, Baloise possesses a strong balance sheet and strong operational profitability, which have been optimised in terms of the risks capacity and the upside potential derived from the business. Baloise’s risk management approach involves managing both risk and value at the same time. Its risk model is based on innovative standards so that it can keep its promise to share- holders. This has enabled Baloise to pursue an attractive and sustainable dividend policy for a number of years now. Its very strong capital base was acknowledged by the ratings agency Standard & Poor’s last year when it raised the Company’s credit rating from “A” with a positive outlook to “A +” with a stable outlook. The new credit rating means Baloise has now attained a top position among the field of medium-sized European insurers. Standard & Poor’s awarded this credit rating in recog- nition of Baloise’s excellent capitalisation – which is comfort- ably above the AAA level according to the S&P capital model – as well as its high operational profitability, robust risk manage- ment and solid competitive position in its profitable core markets. www.baloise.com/rating ▸ Chapter “Sustainable business management / Risk management” Baloise Group Annual Report 2018 Sustainable business management Responsibility RESPONSIBILITY TO THE ENVIRONMENT As a signatory to the declaration for the insurance industry issued by the United Nations Environment Programme, Baloise is committed to reducing its impact on the environment. The Company’s environmental policies focus on responsible con- sumption and production (SDG 12) and climate action (SDG 13). The Company uses natural resources prudently and responsibly. This responsibility relates to its own energy requirements but also extends to its investments and the procurement of products and services. As we are an insurance company, we do not produce any goods. At our sites, we predominantly require energy for electricity and heating. We also monitor the impact of travel, both business trips during working hours and journeys to and from work. CO2 emissions have been continually reduced over a number of years. The Company’s focus on energy efficiency, particularly in its IT infrastructure and buildings, plays a key part in this. Employees are encouraged to use public transport wherever possible and to separate their waste for recycling. Baloise also endeavours to make a contribution to sustain- able cities and communities (SDG 11) by raising employees’ awareness and providing them with information on environmen- tal topics. They are encouraged to use public transport whenever possible. In Belgium, Baloise conducted a transport review in collaboration with the city of Antwerp, resulting in the develop- ment of a travel action plan and a business plan. Each employee’s commuting route was analysed to determine how it could be optimised and which mode of transport would be most appro- priate. In Switzerland, Baloise is a member of the “environmental platform” initiative in the Basel region (www.klimaplattform- basel.ch). This platform facilitates the sharing of knowledge among businesses and supports climate protection and sustain- able development in the local region. The three new buildings being erected at Baloise Park, the Company’s new headquarters in Basel, meet the standards for sustainable construction in Switzerland (SNBS) and sustainability specialists have been involved in their design from the outset. Baloise is committed to environmental protection and is continually stepping up its efforts by launching new initiatives. Baloise reports on the progress it is making in its annual group- wide environmental audit within the annual report. Chapter “Sustainable business management / ▸ The environment” www.klimaplattform-basel.ch RESPONSIBILITY IN SOCIETY Baloise believes it has a responsibility to society in its role as a corporate citizen and conducts its business activities pursuant to the applicable legal provisions and in compliance with the constitution of the Swiss Confederation. Anyone involved in the insurance sector or the financial markets is subject to an approval requirement which demands an assurance of proper business conduct. This stipulates that the Board of Directors and the Corporate Executive Committee must organise Baloise in such a way as to ensure it complies with all applicable laws, including constitutional human rights, at all times. The Swiss Financial Market Supervisory Authority (FINMA) continuously monitors compliance with this approval requirement. For many years, Baloise has also been a committed advocate of voluntary work. In April 2015, Baloise became a signatory to the declaration by economiesuisse (the umbrella organisation representing Swiss business) and the Swiss Employers’ Asso- ciation. The declaration requires companies to offer flexible working conditions and working time models that enable employees to participate in voluntary work. Baloise not only encourages its employees to engage in voluntary activities by holding annual inhouse events but it also meets its own respon- sibility to society as a commercial organisation. Five Baloise employees in Switzerland are currently members of cantonal parliaments, and many others are involved in politics at local level. Karin Keller-Sutter, a former member of the Baloise Board of Directors, was appointed President of the Council of States (upper chamber of the Swiss parliament) for 2018 before being elected to the Swiss Federal Council in December of last year. Furthermore, the Company creates and preserves jobs that add value and it pays taxes from its profits that help to fund the public sector. This enables Baloise to be an active partner in many areas of society. Baloise runs a number of projects and initiatives that benefit society in its various national subsidiaries (see also weblinks to the activities of the national companies). Since 2012, Baloise has given its employees in Switzerland the opportunity to do valuable voluntary work in the community and environmental sectors. Baloise is mainly involved with four institutions, the Entlebuch UNESCO biosphere reserve, the “just for smiles” foundation, the “beider Basel” animal shelter and the PluSport disabled sports day. In Belgium, employees from all sites get involved in events for the “Warmest Week Music for Life” initiative as part of the “Baloise For Life” week at the end 45 Baloise also promotes the cultural diversity of society through its sponsorship activities. The Company sponsors the arts and has funded the Baloise Art Prize for 20 years. Every year, this prestigious accolade is awarded to two talented young artists at the Art Basel fair. The winning works are acquired by Baloise and donated to two museums that each mount an exhibition devoted to one of the artists. These are currently the Hamburger Bahnhof museum in Berlin and the Musée d’Art Moderne (MUDAM) in Luxembourg. In addition, Baloise maintains a long- standing collection of artworks that can be seen not only by employees but also by the public at two exhibitions in the Art Forum at the Company’s headquarters. These exhibitions are changed each year. In Germany, Baloise opens its art collection to the public once a year as part of the “Kunst privat” initiative. Since 2013, Baloise has been the presenting sponsor of Baloise Session, a prestigious music festival in Basel with an intimate club-like setting in which the audience sit at tables. Baloise session is an important cultural event that enhances the repu- tation of the city of Basel. In Belgium, Baloise is a major sponsor of cycling. Sport Vlaanderen-Baloise is a professional cycling team that focuses on the Pro Tour competition’s Benelux races and the international calendar for professional continental cycling teams in Europe. It receives financial backing from Baloise. The team’s overriding objective is to provide professional support for talented young riders. Baloise Group Annual Report 2018 Sustainable business management Responsibility The Baloise companies outside Switzerland also play their part in social, sporting and cultural life in their regions by supporting numerous institutions and events. Some of the Baloise activities and initiatives that enrich socio- cultural life are listed here: WEBLINKS TO THE ACTIVITIES OF THE NATIONAL COMPANIES ▸ Baloise Group and Switzerland www.baloise.com/responsibility www.baloise.ch/de/ueber-uns/engagement.html Belgium https://www.baloise.be/nl/over-baloise-insurance/ voorstelling/sponsoring.html Germany www.basler.de/ueber-uns/unternehmen/ basler-versicherungen-stellen-sich-vor/ nachhaltigkeit.html Luxembourg www.baloise.lu/fr/assurance-baloise-luxembourg/ Qui-sommes-nous/engagements-sponsoring.html ▸ ▸ ▸ of December. All proceeds from these activities go to charity, represented by 24 non-profit organisations selected by employees. More than EUR 60,000 has been collected over the last few years. In Germany, a Christmas concert for all current and former employees, along with their families and friends, has been held in Hamburg for more than 30 years. The proceeds from this event support the operations of charitable initiatives in Hamburg. 46 Baloise Group Annual Report 2018 Sustainable business management Human resources Establishing the culture of growth Early success and the need for faster change Dedicated employees build up strong customer relationships that in turn help the Company to achieve its financial targets. This firmly held conviction is the basis for the Simply Safe strategy introduced in 2016. Many new aspects were implemented in 2017, thereby anchoring the “employee focus” element of the strategy. In 2018, mid-way to 2021, Baloise notched up some early success but also identified the need for further simplification and a faster pace of change if it is to achieve the objective of becoming a leading employer in the industry. managers worked together to prepare the implementation planning for the coming quarter. This type of agile planning resulted in greater transparency, a better understanding of interdependencies and, ultimately, more commitment from everyone involved. A NEW APPROACH TO LEADERSHIP IS KEY TO SUCCESS IN THE DIGITAL AGE In 2018, Baloise afforded even greater attention to digitalisation in the context of its growth strategy. To accelerate the process of encouraging people to show drive and initiative, to help shape the process of change, to try new things out and to strive for improvement at all levels, the Company formulated an approach to leadership for the digital age and integrated it into the tried- and-tested Group-wide Baloise Campus management develop- ment programme as well as similar local programmes. After all, Baloise firmly believes that the professional development of its managers is vital to the success of the digital transformation. Also in 2018, a dedicated digital leadership programme (DLP) for senior management was developed and piloted with support from investment and consultancy partner Anthemis. The DLP teaches senior managers about the paradigm shift that is required as a result of the digital transformation and explores subjects such as customers, digital strategy, organisation and leadership. KEY FIGURES ▸ ▸ ▸ ▸ ▸ ▸ 7, 203 (2017: 7,286) employees respectively 6,571 (2017: 6,655) full-time equivalents. 43.6 per cent of all employees are women (2017: 43.5 per cent). The Baloise Group employs 283 (2017: 245) apprentices, trainees and interns. 66.0 per cent of staff members working in our main market of Switzerland participated in our Share Participation Plan in 2018 (2017: 64.0 per cent). Baloise employees work at the Company for an average of 12.9 years. Staff turnover as at 31 December 2018 amounted to 5.9 per cent (end of 2017: 5.2 per cent). BALOISE’S EVOLUTION: SHARED JOURNEY FROM A PROUD PAST TO A SUCCESSFUL FUTURE For the past three years, Baloise has been pursuing a growth strategy that is based both on its strong core business and on its unique corporate culture. The transition to a culture of growth is clear to see, and many initiatives – such as those aimed at encouraging innovation, enablement and career development – made a positive impact in 2018. This was also reflected in the employee engagement survey conducted during the year under review. Alongside people development, another area of focus in 2018 was organisational development. There was a particular emphasis on supporting forms of agile collaboration. One stand- out example was the introduction of a big-Group planning event (PI planning) in the Swiss Group life and non-life businesses, at which around 200 experts, departmental representatives and 47 Baloise Group Annual Report 2018 Sustainable business management Human resources Baloise’s leadership approach The essence of our approach to leadership is aimed at facilitating three shifts: ▸ ▸ From expert to coach From “command and control” to “challenge and support” From “either / or” to “both” ▸ VIRAL CHANGE AND PERSONAL INITIATIVE: DRIVING CHANGE FROM THE BOTTOM UP The concept of viral change was introduced in 2017. In the reporting year, responsibility for the concept was handed to the “sparks”: highly engaged and well-connected employees who ensure that the Baloise Code remains in the spotlight and initi- atives such as the TopicTable are launched. This is speeding up the cultural transition, while the voluntary nature of the result- ing networks contributes to eliminating obstacles and makes interdepartmental collaboration easier. International focal topics will be introduced in 2019 that will build on these initial achievements and help to shift the emphasis away from indi- vidual initiatives to a multinational “social movement”. TopicTable The TopicTable was set up in line with two of the behaviours enshrined in the Baloise Code: “Appre- ciate colleagues: build personal connections” and “Share insights: collaborate beyond your role”. Every day, anyone who wishes can organise a “TopicTable” at lunchtime in the staff canteen on a particular issue or even their hobby. This gives employees from across the Company the chance to discuss such topics informally, both with like- minded people and with those offering a different perspective. 48 DIALOGUE AS THE BASIS FOR OUR SUCCESS; CONTINUOUS IMPROVEMENT Our three established formats for dialogue between managers and employees are the bedrock of the Baloise culture. All three focus on development for the future. However, this is a continuous process, rather than an annual event taking place on set dates. That is why the performance and talent development process was simplified in 2017. To emphasise the ongoing nature of the dialogue, the “feedback day” concept was introduced in 2018. In the individual development dialogue, an employee and 1. their manager talk specifically about the employee’s skill set and behaviour. The focus is on continuous learning at both professional and personal level, particularly in relation to the skills that are needed to achieve the envisioned growth. The meetings are structured around a talent assessment questionnaire that covers the skills relevant to growth. 3. 2. The managerial feedback session is aimed at continually improving the capabilities of managers. Every two years, all employees are given the opportunity to fill out a ques- tionnaire for their manager on the twelve growth-relevant management competencies of the Baloise Leadership Compass. Afterwards, the manager discusses the results with his or her team. In the years in between, the biennial employee engage- ment survey is conducted at departmental level in order to identify and discuss areas that have potential for improvement. Each quarter, “pulse checks” take place in which 30 per cent of employees are polled on whether they would recommend the Company as a good employer. These surveys provide a regular indication of whether Baloise is getting closer to its goal of becoming a leading employer in its industry. Baloise Group Annual Report 2018 Sustainable business management Human resources Baloise Code ▸ ▸ ▸ ▸ ▸ Keep promises: walk the talk. Ask questions: learn new things all the time. Speak up: every voice matters. Share insights: collaborate beyond your role. Understand the impact of your work: look for constant improvements. Appreciate colleagues: build personal connections. Bring in customer needs: take their perspective. ▸ ▸ ▸ Meet others with a smile! The Baloise Code was developed on the basis of the Company’s core strategies and in line with Baloise’s behavioural values “Put yourself in the other’s shoes!”, “Act authentically and earn trust!” and “Develop and engage – yourself and others!” The eight behaviours are designed to accelerate the change in culture that Baloise needs if it is to achieve its strategic objectives. Feedback day “Do you want to go for a walk with me and give me some feedback? Yes. No. Maybe.” In the spring, posters featuring this question were used to make Baloise employees more aware of the important issue of feedback and to prompt them to ask a colleague to go on a “feedback walk”. The initiative was designed to shine the spotlight on using feedback as part of a continuous improvement process. MID-TERM RESULT: TOP 23 PER CENT AFTER TWO YEARS; TARGET: TOP 10 PER CENT In autumn 2018, the Group-wide employee engagement survey was carried out again. The questionnaire is primarily aimed at gauging levels of engagement and enablement among employees. Responses to the question “Would you recommend Baloise as an employer?” are crucial to measuring achievement of the target of being in the top 10 per cent of European financial institutions. In the year under review, 76 per cent of the total workforce (around 4,700 employees) took part in the survey. The results from the 2016 survey put Baloise in the top 30 per cent. In 2018, the Company moved up into the top 23 per cent thanks to 82 per cent of respondents stating that they would recommend Baloise as an employer. This positive trend had already been apparent from the slight improvement in the results of the quarterly pulse checks. In terms of both engagement and enablement, Baloise improved on the already high level that it had reached in 2016. Overall, 78 per cent of employees rated their own engagement as positive (increase of 1 percentage point); the figure for enablement was 77 per cent (increase of 3 percentage points). Baloise thus stands head and shoulders above its European competitors. The biggest positive changes were in relation to innovation (increase of 8 percentage points to 77 per cent), development opportunities (increase of 7 percentage points to 72 per cent) and respect and appreciation (increase of 7 per- centage points to 76 per cent), i. e. precisely the areas in which Baloise has launched a number of initiatives since embarking on Simply Safe. The areas with potential for improvement that were identified in 2016 – achieving career goals, addressing behaviour that is out of step with our values and having sufficient resources to be able to work effectively – also scored better in 2018. These increases are proof positive of the benefits of feedback and of investing in projects such as the “change of perspective” initiative for career development. The task now is to maintain this positive trend and move up the final 13 percent- age points in order to reach the top 10 per cent by 2021. 49 Baloise Group Annual Report 2018 Sustainable business management Human resources Kununu ranking Baloise’s positive rating as an employer is also reflected in our Kununu ranking. Our score of 3.98 points (out of a possible five) puts us in a respect- able third place among all of the major Swiss insurers (including health insurance companies). The employer comparison site enables former and current employees to anonymously rate aspects such as working atmosphere, manager behaviour and work-life balance. CONTINUOUS IMPROVEMENT; INTERDEPARTMENTAL COLLABORATION; PERFORMANCE AND TALENT DEVELOPMENT PROCESSES Development is not an annual event. Performance is not due to the efforts of just one person. These statements are reflected in our performance and talent development process, which incorporates regular meetings between managers and employees to ensure continuous learning and clarity about common objec- tives. Since the start of 2018, there have also been overarching team objectives that are founded on the belief that good interaction within teams and between departments and divisions of the Group will lead to better performance. In the established annual process of talent development for well-qualified high-potential employees, Baloise is also continuing to identify talented young employees and key indi- viduals, find potential successors and agree targeted develop- ment activities for them. INDIVIDUAL WORKING MODELS: FLEXIBLE, FAMILY-FRIENDLY, MOBILE Employees are key to the achievement of our targets. This state- ment is underlined by the current corporate strategy, which puts the emphasis on our employees as one of three main focal points. To this end, Baloise has set itself the objective of offering every employee suitable working conditions in addition to encourag- ing their development, engaging in honest dialogue with them and giving them the opportunity to help shape the Company. This can be seen from our flexible working models, which include options to work part-time and from home, an inhouse crèche and an extensive corporate health management service. Baloise is also investing in employees’ individual development through the “change of perspective” initiative, which offers flexible placements of between one day and several months. Change of perspective Under the temporary job change initiative, employees perform a new role or work on Group- wide projects for a defined period of time, before returning to their original function. These tempo- rary vacancies arise when employees go on parental leave, for example, or when additional resources are needed for a particular project. In 2018, there were 81 such temporary job changes. Shadow for a day is the shorter version of the two “change of perspective” options. Under this scheme, an employee is given the chance to shadow a col- league for one day, ask them questions and take on board invaluable information and ideas for their own work. 50 Baloise Group Annual Report 2018 Sustainable business management Human resources BALOISE IN THE LABOUR MARKET – AUTHENTIC AND APPROACHABLE Baloise wants to become an employer of choice in the financial services sector. The way in which we present ourselves in the labour market has a direct impact on this objective, not least because competition for the best brains remains fierce due to demographic change. The analysis of target groups carried out in late 2017 / early 2018 confirmed our existing view that a particular focus is required on recruiting IT workers, insurance advisors and apprentices for commercial vocations. Various initiatives have been introduced to tackle this challenge, including a new employee referral scheme that emerged as the third biggest source of applicants and the most important hiring channel in 2018. Baloise also overhauled its employer brand as part of a  Group-wide project in 2018. The resulting unique selling propositions are designed to portray the Company in a targeted and concise manner in the job market. Implementation cam- paigns are planned for 2019. Baloise generally engages with potential candidates in various ways, including through our careers blog, through our profiles on social media and at university fairs. Concepts aimed at particular target groups, such as “bring a friend” events, have also been tested with success. All of these activities are aimed at conveying an authentic, attractive and unique image of Baloise that will enable it to attract sufficient and, above all, the right candidates. Baloise offers an appealing range of training opportunities. Around 283 young people currently work as apprentices, interns and temporary student workers under the established training scheme. The Company’s graduate trainee programme, now in its 26th year, gives participants a deep insight into various parts of the business and thus provides the ideal preparation for a management or specialist role. The alumni of the programme can be found in a wide range of roles, departments and manage- ment levels within the Company. Previously only available in Switzerland, the programme was rolled out to all other national units in 2018. Activities in 2018 – spreading the word about Baloise as an employer ▸ ▸ ▸ ▸ ▸ 6 graduate fairs 10 workshops and other events 2 WhatsApp taster days 105 blog articles 20 videos and podcasts SHARED GOALS; LOCAL FOCAL POINTS The activities of the country-specific HR units are aligned with the wider objectives of the Group but are also dictated by regional circumstances and the local legal system. The emphasis in Switzerland was again on the transition to a culture of growth. In 2018, the focus was on encouraging agile working methods and enhancing the working environment. Further managers rotated jobs in 2018, which helped to drive the “change of perspective” initiative at this level. Drawing on input from the previous year’s “Baloise wants to know” work- shops, which were initiated by the employee commission, Baloise made a number of changes to make it more attractive in the labour market. This included a clear commitment to part-time working models, for example a quota of “60 per cent” positions that should make Baloise more appealing to women returning to work. Furthermore, annual leave has been standardised at five weeks across the board and parental leave for expectant mothers has been simplified and expanded. Workshops are not the only forum for employees’ interests, however. The employee commission represents the interests of the workforce at monthly meetings with the Executive Committee and employees participate in various committees, such as the body responsible for assign- ing functions to pay categories. Another topic of particular focus in Switzerland was diversity. Networks, such as for the internal LGBTQ community, are now actively supported. In Germany too, everything centred on the cultural transition. A particular emphasis was the approach to leadership. The related activities included working on the results of the 2017 managerial feedback, holding regular meetings for divisional, departmental and team managers and providing development opportunities devised by the leadership working group. The Chief Executive Officer released a weekly video blog, thereby giving clear and direct insights into strategic matters and 51 Baloise Group Annual Report 2018 Sustainable business management Human resources Diversity at the Swiss offices ▸ ▸ 39 nationalities 100 per cent return rate after maternity leave (2015 / 2016) 20 per cent of employees work part-time (75 per cent women, 25 per cent men) 40 per cent of those promoted in 2017 were women ▸ ▸ decisions and prompting debate by addressing specific issues. Initiatives and formats relating to the digital transformation and agility became embedded and now cover a broad section of the workforce. The employee engagement survey in the year under review showed improved results following activities such as development dialogues and medium-term changes of perspec- tive. The target agreement process helped to give employees a better understanding of their part in the Company’s success and how they can make a meaningful contribution. Moreover, the works councils are invited to participate in the different formats for cooperation and involvement, enabling them to represent employees’ interests from the outset. In Belgium, the focus for 2018 was on support for innovation and on manager and employee development. An innovation competition was run for the second time, in which 30 teams submitted ideas on an area defined by the management team. Seven teams were selected to present their idea to the manage- ment team. As part of a new programme, manager development was concentrated on the topics of personal ambition and col- lective leadership and on the change in the management approach from expert to coach and from “command and control” to “challenge and support”. A new learning management system was introduced to drive employee development within the organisation and to promote new forms of learning. The action plan signed off in 2017 to promote diversity was rolled out. Related activities – such as reverse mentoring, where senior managers learn from millennials – were organised with the help of ambassadors. Monthly meetings with the works council and internal trade union representatives are another way in which employees’ interests are upheld. 52 A focal point in Luxembourg in 2018 was to encourage employees to be innovative by asking them to participate in activities such as an innovation project competition. The “sneak preview” training courses were continued with the aim of piquing employees’ interest in continuing professional development; the central topic for 2018 was customer focus. The broad-rang- ing training programme was further expanded, with a particular emphasis on English for everyone. The latter also had a positive impact on the results of the employee engagement survey in the reporting year. To raise its profile in the labour market, Baloise increased its attendance at recruitment and HR forums. BALOISE’S 7,203 EMPLOYEES IN 2018 BY COUNTRY Switzerland Germany Belgium Luxembourg Per cent Employees 52.5 23.9 17.0 6.6 3,782 1,722 1,224 475 Friendly Work Space Baloise was labelled a Friendly Work Space® for the first time back in 2010. This certification has to be renewed every three years, and Baloise was recer- tified in both 2013 and 2016. In fact, it achieved the highest score in 2016 and is the leading company in the financial services / insurance sector. Baloise Group Annual Report 2018 Sustainable business management Human resources FAIR PAY BASED ON PERFORMANCE AND TARGETS Baloise attaches great importance to rewarding its employees for their performance, including through monetary compensation. It therefore offers performance- and target-oriented remuneration packages that are based on fair principles and an updated framework of performance management. The total remuneration package consists of competitive base salaries, a range of variable remuneration components, fringe benefits and attractive employee incentives and loyalty bonuses. Overall, remuneration is regarded as a hygiene factor rather than a strategic selling point. It is determined by the following criteria: ▸ ▸ ▸ ▸ Competitiveness in the marketplace Individual performance and the Company’s success Fairness and transparency Sustainability With effect from 2018, the system of performance-related remuneration based solely on individual performance was abolished. Now, variable remuneration is systematically aligned to the attainment of overarching Company targets by means of the performance pool. The variable pay components are allocated on the basis of team performance and employees’ individual contribution to their team’s success, another factor being interdepartmental and international cooperation. This should motivate employees to work towards the success of areas beyond their own sphere of responsibility. To help secure long-term success, part of employees’ remuneration is paid in the form of restricted shares, with the senior management team receiving a comparatively high pro- portion of their pay in the form of shares. This form of remuner- ation strengthens loyalty to Baloise and gives employees the opportunity to share in the Company’s success. The packages also feature attractive fringe benefits that are awarded regard- less of function and seniority. In 2018, Baloise voluntarily conducted an internal wage equality analysis to ensure that it offers equal pay. To do so, it used the same tool (Logib) as when it participated in the official wage equality dialogue in 2013 / 2014. The analysis revealed that unexplainable differences between wages for men and women are still well below the tolerance limit of 5 per cent. So that this good statistic is maintained going forward, the Company will step up its efforts to ensure equal remuneration for men and women when it comes to hiring and pay rises. Further information on the remuneration system and the remuneration paid in the reporting year can be found in the remuneration report on pages 88 to 113. EMPLOYEE STORIES AND THE LATEST FROM THE COMPANY BALOISE GROUP HUMAN RESOURCES ON THE INTERNET Baloise maintains a presence on various media in order to reach potential employees and to convey an authentic picture of itself as an employer. The following platforms are used to present career stories, the corporate culture, employees and the latest news and events at Baloise. Careers website: www.baloise.com/careers Careers blog: www.baloise.com/karriereblog Facebook: www.facebook.com/baloisegroup YouTube: www.youtube.com/baloisegroup Instagram: www.instagram.com/baloisejobs Xing: www.xing.com/companies/baloisegroup LinkedIn: www.linkedin.com/company/baloisegroup Twitter: www.twitter.com/baloise_jobs 53 Baloise Group Annual Report 2018 Sustainable business management The environment Environmental mission statement In 1995, Baloise became one of the first insurers to sign the insurance industry declaration on sustainable development formulated by the United Nations Environment Programme (UNEP). It drew up its own environmental guidelines in 1999 in order to give concrete form to this general commitment. From the outset, it was deemed important to embed sustainability throughout the Company and in all day-to- day business activities. What are Baloise’s sustainability principles? Which issues take greatest priority? And what are the key principles? The sustainability guidelines adopted in 1999 provide a framework for action and form the basis of all environmental and social activities at Baloise. PRINCIPLE As a signatory to the UNEP declaration, Baloise strives for sus- tainable development from an ecological, economic and social point of view. As a primary insurer, Baloise is prepared to assume responsibility for the preservation of the natural environment. STAFF AND PUBLIC Baloise trains its employees with regard to environmental matters and raises their awareness of the relevant issues. Its employees are aware of the ecological targets and the most important initiatives for achieving them. They are kept regularly informed about the implementation of the environmental mission statement and encouraged to suggest measures of their own. Baloise works hand in hand with other companies, organisations and public authorities in finding solutions to environmental problems. It particularly encourages the sharing of information with other insurance companies, maintains an open dialogue with the public and regularly reports on environmental projects and what has been achieved. ENVIRONMENTAL FOOTPRINT Baloise continually reduces its direct impact on the environment by planning, building and operating its office buildings in a resource-saving and energy-efficient manner. It observes the same principles in the procurement and use of office equipment and materials. In doing so, it pays particular attention to its published energy mission statement and its environmental audit. PRODUCTS AND SERVICES Baloise strives to take environmental aspects into account when developing its products and services and fixing premiums and levels of coverage. Its underwriting policy takes account of its customers’ environmental management practices (ISO 14001 onwards) on the basis of identifiable operational and product- related factors. It also advises industrial clients on risk reduction and risk prevention. LONG-TERM FINANCIAL ASSETS Baloise’s investment policy is geared towards medium- to long- term earnings targets and consciously incorporates environ- mental criteria whenever possible, especially in the selection of securities and real estate. It also promotes appropriate, environmentally relevant proprietary and third-party financial products. When it comes to investment in real estate, Baloise pays particular attention to energy-saving and economical designs and service systems, as well as the use of environmen- tally friendly construction materials. The environmental audit takes the entire life cycle of the real estate into consideration. ORGANISATION The Corporate Executive Committee bears ultimate responsibility in environmental matters. Each Group company has a coordina- tion unit which implements the environmental mission statement. This working group is made up of representatives drawn from all key corporate functions. 54 Baloise Group Annual Report 2018 Sustainable business management The environment Protecting the environment over the long term Environmental protection at Baloise is focused on reducing CO2 emissions and promoting alternative energy sources. The Company’s initiatives are guided by recognised directives. It always pursues a pragmatic and practical approach and it helps the environment because it believes this is the right thing to do. Baloise has set itself an ongoing objective of making continual improvements in all areas. CONTINUOUS REDUCTION OF CO2 EMISSIONS SINCE 2000 Ever since the Kyoto conference in Japan put the issue of climate change firmly in the public spotlight in 1997, Baloise has been publishing key figures on energy and resource consumption, documenting sustainability measures in its annual report, and calculating its absolute and relative CO2 emissions in accordance with the directives issued by the Association for Environmental Management and Sustainability in Financial Institutions (VfU). The 2015 Paris Agreement, the successor to the Kyoto Protocol, has spurred the Company on in its ambition, and future measures will be based on the Paris objectives. Both absolute and relative CO2 emissions have been reduced massively at Baloise since the year 2000. Over an 18-year period, Baloise has cut absolute CO2 emissions from 53,580 tonnes to 14,772 tonnes. This is equivalent to a 72.4 per cent reduction in CO2 emissions, while emissions per employee fell by 30 per cent over the same period, from four tonnes to 2.8 tonnes. FOCUS ON OPTIMISED OPERATIONS IN 2018 Measures aimed at a lasting reduction in energy consumption in Switzerland and Germany focused on optimising how buildings are run. The periods during which the air conditioning system is on were adjusted, and default temperatures in office areas over winter and summer were modified to ensure a more sus- tainable use of energy. The introduction of a range of working models further increased the efficient use of space in all buildings. Following a review of employee catering at headquarters in Basel in 2015 TOTAL CO2 EMISSIONS IN TONNES CO2 EMISSIONS PER EMPLOYEE IN KILOGRAMME 42,000 36,000 30,000 24,000 18,000 12,000 6,000 0 4,800 4,400 4,000 3,600 3,200 2,800 2,400 2,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CO2 emissions for the Group CO2 emissions in Switzerland CO2 emissions in Switzerland CO2 emissions for the Group 55 Baloise Group Annual Report 2018 Sustainable business management The environment ENVIRONMENTAL AUDIT Employees Energy reference area Locations Electricity consumption Heating consumption Water consumption Paper consumption Paper types Copy paper consumption Amount of refuse Types of refuse Business travel Mode of transport 2016 absolute 2017 absolute 2018 absolute Relative Unit + / – % 5,290 137,151 15 18,236,089 10,380,219 47,128 m3 465 t 5,148 136,601 15 5,214 142,409 14 headcount ERA m2 number of buildings 19,137,677 18,314,747 3,513 kWh / employee 9,830,542 47,768 m3 413 t 8,269,769 45,421 m3 58 kWh / m2 35 l / employee / day 300 t 58 kg / employee 1.3 4.3 – 1 – 4.3 – 15.9 – 4.9 – 27.4 2.0 % recycled 89.0 % chlorine-free-bleached 9.0 % chlorine-bleached 76.0 million A4 sheets 811 t 72.4 million A4 sheets 1,009 t 66.1 million A4 sheets 12,679 A4 sheets / – 8.7 employee 843 t 162 kg / employee – 16.5 53.0 % paper / cardboard 7.0 % other materials 2.0 % special waste 38.0 % misc. waste / refuse 18.4 million km 22.5 million km 22.4 million km 4,290 km / employee – 0.4 23.1 % km by air 52.3 % km by road 24.6 % km by public transport CO2 emissions 14,257 t 15,579 t 14,773 t 2,833 kg / employee – 5.2 with a focus on regionality, seasonality and animal welfare, the Company embarked on the refurbishment of its employee cafeteria in 2018 with a view to improving energy efficiency and the use of space. By replacing several hundred lights with LED lighting and using LEDs in all new installations in its buildings, the Company switched to a technology that will save energy for years to come. FOCUS ON PERSONAL TRANSPORT IN BELGIUM AND LUXEMBOURG TO REDUCE TRAFFIC PROBLEMS Electric vehicles were purchased in Belgium and Luxembourg to provide emission-free modes of transport. The employees in Belgium have access to eight electric vehicles, while those in Luxembourg have access to two. This allows for the bulk of day-to-day business to be conducted with zero emissions. The CO2 emissions of the Belgian vehicle fleet were reduced to 111g / km in 2018. In Luxembourg, Basler joined the state-run car sharing platform (https://de.copilote.lu) as part of European Mobility Week. 56 Baloise Group Annual Report 2018 Sustainable business management The environment RIGHT AROUND THE WORLD WITH SWISS SOLAR POWER Since 2015, Baloise customers and employees have been able to charge their electric vehicles at Baloise’s company head- quarters using solar power. The facility, which does not cost anything to use, has proved very popular. During a very sunny 2018, enough solar-generated electricity was drawn from the “pumps” to power a total of almost 80,000 kilometres – equiv- alent to nearly two emission-free trips around the globe. Since 2016, customers and employees have also been able to charge their electric vehicles for free at the Zurich site. Among their number are the Company’s loss assessors, who use eco-friendly electric bikes to get to local incidents. This service has been maintained at a consistent level since its introduction. FRIDAY OFFERS CAR INSURANCE WITH BUILT-IN CLIMATE PROTECTION Since October 2018, FRIDAY customers have been able to make their own contribution to climate protection by offsetting the CO2 emitted by their cars. FRIDAY, the online car insurance pro- vider owned by Baloise in Germany, aims to reach customers who care about the environment but cannot do without a car, for example because they need it for work. The product was developed in cooperation with myclimate, a renowned climate protection organisation that – like FRIDAY – has its roots in Switzerland. The climate protection contribution is calculated based on the estimated annual mileage. Emissions that are offset include carbon dioxide (CO2), other harmful greenhouse gases such as methane (CH4) and nitrous oxide (N2O), and so-called “grey” emissions, which are generated during the production of the vehicle, the construction of the road infrastructure and the production, transport and processing of crude oil. This contribution is invested in climate protection projects, jointly chosen with myclimate, that meet the highest standards (Gold Standard, CDM, Plan Vivo) and are proven to reduce damaging CO2 emissions. BALOISE IS BUILDING SUSTAINABLE OFFICES THAT WILL APPEAL TO EMPLOYEES AS WELL AS A STATE-OF-THE- ART HOTEL In a project scheduled for completion in 2020, Baloise is erecting three new buildings at its headquarters in Basel. The buildings are to be the defining landmark of the train station district and reflect Baloise’s commitment to the city. The tower block being built on Aeschengraben, which will be around 90 metres in height, will mainly be occupied by a new hotel. The top seven floors will be rented out as office space. Baloise is basing its designs for the buildings on the standards for sustainable construction in Switzerland (SNBS), which means it will comfort- ably exceed the legal requirements in terms of energy efficiency. An efficient energy centre will provide power for all three buildings, which will be heated by 100 % renewable district heating. ENERGY EFFICIENCY AT BALOISE The total energy and resource consumption revealed by the environmental audit shows the amounts used by the Baloise Group’s large office buildings and its computer centres. The figures reported relate to the energy and resources used by 72.4 per cent of the 7,200 or so people working for the Baloise Group. Per-employee consumption of heating has been reduced by around 35 per cent and of electricity by 30 per cent over the last ten years. With the objectives of the Paris Agreement in mind, a wide range of energy-saving measures have been analysed which will be implemented in each country over the coming years. www.baloise.com/responsibility 57 Baloise Group Annual Report 2018 Sustainable business management Risk management Baloise’s risk management is one of the main pillars of its business model Risk management makes a significant contribution to the positioning of the Baloise Group and forms an integral part of its strategic management policies. As a European insurer with Swiss roots, Baloise possesses a strong balance sheet and strong operational profitability, which have been optimised in terms of the risks taken and the upside potential derived from the business. Baloise’s risk management approach involves managing both risk and value at the same time. Its risk model is based on innovative standards so that it can always keep its promise to its customers. The Company’s enterprise risk management was once again awarded Standard & Poor’s excellent “strong” rating in 2018. This puts it among the top 15 per cent of all European insurance companies. Risk management at Baloise is a standardised strategic and operational system that is applied throughout the Group and covers the following areas: ▸ Risk map: this forms the backbone of Baloise’s risk strategy and defines the fundamental risk issues, such as actuarial risk and market risk, as well as the opera- tional risk arising from business activities. Risk governance and risk culture: this involves encouraging risk awareness – how people perceive and respond to risk – and establishing this mindset throughout the organisation. Risk measurement: this is used to identify, quantify and model the risks inherent in all financial and business processes. Risk processes: the organisation of risk and its pertinent standards are key aspects of risk management and operate in tandem with reporting, management and evaluation processes. Strategic risk management: its purpose is to optimise the risks taken by the Baloise Group while maximising earnings potential. ▸ ▸ ▸ ▸ 58 BUSINESS RISKS Actuarial Risks Life ▸ ▸ Parameter Risks Catastrophe Risks Actuarial Risks Non-Life ▸ ▸ ▸ ▸ Premiums Claims Catastrophe Risks Reserving Reinsurance ▸ ▸ ▸ Premiums / Pricing Reinsurance Default Active Reinsurance INVESTMENT RISKS Market Risks Interest Rates ▸ Equities ▸ Currencies ▸ ▸ Real Estate ▸ Market Liquidity Derivatives ▸ Alternative Investments ▸ Credit Risks Baloise Group Annual Report 2018 Sustainable business management Risk management FINANCIAL STRUCTURE RISKS BUSINESS ENVIRONMENT RISKS Asset Liability Risks ▸ ▸ Interest Rate Change Risk (Re-)Financing, Liquidity Risk Concentration ▸ ▸ Accumulation Risks Cluster Risks Balance Sheet Structure and Capital Requirements ▸ ▸ Solvency Other Regulatory Requirements OPERATIONAL RISKS IT Risks ▸ ▸ ▸ ▸ IT Governance IT Architecture IT Operations Cyber Security HR Risks ▸ ▸ ▸ Skills / Capacities Availability of Knowledge Incentive System Legal Risks ▸ ▸ ▸ Contracts Liability and Litigations Tax Compliance Business Processes ▸ ▸ ▸ Process Risks Project Risks In- / Outsourcing Risk Analysis and Risk Reporting ▸ ▸ Risk Analysis and Risk Assessment Risk Reporting Change in Standards Competition Risks External Events Investors LEADERSHIP AND INFORMATION RISKS Organisational Structure Corporate Culture Business Strategy ▸ ▸ Business Portfolio Risk Steering Merger & Acquisitions External Communication ▸ ▸ External Reporting Reputation Management Financial Statements, Forecast, Planning Project Portfolio Internal Misinformation Business risk Investment risk Financial structure risk Business environment risk Operational risk Leadership and information risk. THE RISK MAP The risk map distinguishes between the following categories of risk to which Baloise is exposed: ▸ ▸ ▸ ▸ ▸ ▸ The risk map is firmly embedded in the organisational structure and responsibilities of the entire Baloise Group. Each risk is assigned to a risk owner (with overall responsibility) and to a separate risk controller (responsible for risk management and control). 59 Baloise Group Annual Report 2018 Sustainable business management Risk management RISK MEASUREMENT The Baloise risk model standardises the process of quantifying business risks and financial market risks across all strategic business units. It is consistent with the principles and calcula- tion methods applied by the Swiss Solvency Test and with the European Union’s Solvency II directives. As a groundbreaking risk management tool, it provides a firm foundation on which management can make strategic and operational decisions. The economic risk capital derived from Baloise’s models is currently the most advanced market standard. For this, risk metrics are used to calculate a target capital figure (required capital) – irrespective of any financial accounting treatment – to ensure that the Company remains solvent even in adverse circum- stances and can meet its obligations to policyholders at all times. This target capital figure is constantly compared with the capital currently available (the risk-bearing capital). In addition to this holistic risk model, Baloise uses the risk map to identify, describe and evaluate specific risks in terms of their likely impact on its operating profit or loss. Baloise’s corpo- rate database of specific risks – which contains a detailed description of the risks concerned, their classification on the risk map, and early-warning indicators – is generated from this standardised process. Baloise uses quantitative methods to supplement this description by measuring these risks’ probable financial impact on the Company’s balance sheet. Each risk is documented together with the measures needed to mitigate it. The database is updated every twelve months. This combination of a holistic risk model with analysis of specific risks ensures that Baloise maintains an adequate overview of the prevailing risk situation at all times. RISK PROCESSES Group-wide risk management standards place the risk process on a mandatory footing. These standards stipulate methods, rules and limits that must be applied throughout the Baloise Group. They determine how the various risk issues are evaluated, managed and reported. A number of risk limits act as early- warning indicators to mitigate the risks taken. RISK GOVERNANCE AND RISK CULTURE The development and expansion of risk governance and risk culture has a long tradition at Baloise. It is constantly working to enhance this culture across the entire organisation. Risk owners and risk controllers tasked with specific risk issues are as much a part of this culture as committees that meet regularly to discuss risks. At the same time, Baloise’s risk models and processes are continually refined. The internal control system (ICS) and the compliance function are further major pillars of this strategy. The most senior decision-making body in Baloise’s risk organisation is the Board of Directors of Bâloise Holding Ltd, while ultimate responsibility for risk control lies with the Board of Directors’ Audit and Risk Committee. The Chief Risk Officer for the Baloise Group reports regularly to both of these bodies. The Board of Directors is empowered to determine the risk strategy, which is derived from Baloise’s business strategy and objectives and addresses issues around the Company’s risk appetite and risk tolerance. The Group Risk Committee and the local risk committees in each business unit – which comprise members of the Corporate Executive Committee and of the local senior management teams respectively – decide how the risk strategy is developed and designed and how the pertinent policies are implemented in day- to-day business. Bodies specially set up to examine specific risk areas such as asset / liability management, compliance, IT risk and the use of reserves also compile submissions for the committees to facilitate their decision-making on these issues. The Group Risk Management team works closely with the local risk experts. This inclusive risk organisation approach provides Baloise with a platform for sharing and constantly refining best practice. ▸ Group Risk Management is responsible for: developing consistent, mandatory risk models for the entire Baloise Group; ▸ monitoring Group-wide standards; ▸ ▸ ▸ reporting risks; complying with risk processes and procedures; communicating with external partners such as auditors, corporate supervisory bodies and credit rating agencies. The business units are responsible for local implementation of the standards and requirements specified by the Baloise Group. Overall responsibility lies with the Baloise Group’s Chief Financial Officer, followed by its Chief Risk Officer. 60 Baloise Group Annual Report 2018 Sustainable business management Risk management The Baloise Group uses a system of limits in order to mitigate its risks holistically at an aggregate level. This system tracks the risk capital held by the Baloise Group and individual business units in a timely manner. Issue-specific risks are monitored individually by imposing limits, as illustrated by the following examples: ▸ Actuarial risk is determined by underwriting guidelines on which local underwriters base their decisions. Risk metrics analysis of the deductibles payable supplements the Company’s key reinsurance strategies. Appropriate reporting procedures are used to monitor market risk and financial-structure risk across all business units. In addition to upper limits on equity exposures, for example, there are clear and binding guidelines on bond ratings. The applicable “Basel” approach and advanced statistical methods are used to assess credit risk. In addi- tion, the overall solvency position is regularly monitored. Baloise captures business-environment risk, operational risk and strategic risk on both a standardised and indi- vidual basis, and assesses them in terms of their impact on its capital. ▸ ▸ The Own Risk and Solvency Assessment (ORSA), a risk report that has to be prepared annually, is discussed with the decision- makers so that suitable measures can be developed. The results of the ORSA are also reported to the regulatory authority. In addition, risk managers’ assessment of the risk situation is factored into the remuneration paid to executives. STRATEGIC RISK MANAGEMENT The risk model, which uses standard methods to quantify all business risks and financial market risks, forms the basis for strategic discussions about Baloise’s risk appetite. This process provides a comprehensive view of key strategic risks and how they are managed. Strategic risk management provides a clear picture of the risks involved in opening up new business lines and of how to optimise the risk / return profile of existing business. Profit targets for individual business units that factor in their specific risk situation are a major aspect of this risk manage- ment system. These targets form part of the overall objectives agreed with local management teams. OUR PROFESSIONAL RISK MANAGEMENT DEMONSTRATED ITS PROVEN STRENGTHS IN 2018 Baloise’s risk strategy principles are designed for the long term, as shown by the Company’s excellent risk positioning in 2018. This is underlined by the improvement in the credit rating from Standard & Poor’s, which was upgraded to A + with a stable outlook, and by the reconfirmed assessment of enterprise risk management as “strong”. Risk management approaches that have been tried and tested for many years were maintained in 2018: ▸ The Baloise Group’s investment strategy continues to focus on diversification and on the basic principle of only investing in assets that risk management can itself fully and accurately evaluate. Baloise continued to actively manage its credit risk and currency risk. ▸ ▸ With a net equity exposure of 5.6 per cent at 31 December ▸ ▸ ▸ 2018, Baloise’s equity investments in the reporting year lay comfortably within its risk-bearing capacity. The high quality of recurrent investment income generated by Baloise’s stable real-estate portfolio proved to be a valuable source of revenue. There is a particular focus on the management of interest- rate risk. Wherever possible, payment obligations to customers for future years are reconciled with the income earned from investments. Baloise’s real-estate portfolio has proved very helpful in this respect. Baloise also invests in safe long-term bonds denominated in either Swiss francs or euros and supplements this strategy by using derivative financial instruments such as swaptions. Baloise’s underwriting business has proved to be highly consistent, with the Baloise Group’s net combined ratio of 91.7 per cent demonstrating its excellent capabilities in underwriting and managing non-life risk. Risk management at Baloise will continue to evolve over the coming years, reaffirming its standing as a company with an outstanding risk strategy and risk positioning. Further information on risk management can be found in the 2018 Financial Report (section 5. Management of insurance risk and financial risk, pages 153 to 195). 61 Baloise Group Annual Report 2018 Sustainable business management Commitment to art The Baloise Group’s commitment to art Art provides a space for reflection and a lens through which to view the world in a different way. It should stimulate discussion. Baloise’s art collection is an important part of its corporate culture. Baloise believes that the privilege of owning art comes with an obligation to make it accessible to the wider public. Its commitment also extends to providing recognition and support for contemporary artists. TAKING RESPONSIBILITY – AN IMPORTANT ASPECT OF CORPORATE CULTURE Corporate collecting is an important aspect of our culture at Baloise. Its primary objective is not to achieve monetary gain, but to integrate spiritual and creative values into our corporate culture. The foundations for this engagement were laid at a time when it was by no means typical for companies to collect art. Since it first began collecting in the immediate post-war period, the Company’s art works have always been accessible both to employees and visitors. The collection is on display in foyers, corridors, meeting rooms and offices, as well as in reception rooms that are open to the public. Baloise is of the opinion that works of art ought to be seen, to enrich lives, inspire reflection and also to provoke discussion. BALOISE ART PRIZE Baloise has a long-standing tradition of promoting talent. For many years, its training and development programmes have provided an entry into careers with substance. Around 245 young people currently work for Baloise as apprentices, interns and temporary student workers. The company’s established graduate trainee programme, meanwhile, gives participants a deep insight into various parts of the business and thus provides the ideal preparation for a management or specialist role. For these people, Baloise offers a launchpad for a long and successful future. Its commitment to sponsoring modern art – through acqui- sitions for its own collection and in the form of the Baloise Art Prize – also represents part of this approach. It is Baloise’s way of supporting the development of young and emerging artistic talent. For 20 years, the Baloise Group has been awarding the annual Baloise Art Prize at Art Basel, an international art fair. The challenging task of selecting 20 pieces for the Statements sector from a flood of applications, which are then presented to a global audience at the fair, falls to the Art Basel committee. On behalf of Baloise, a panel of judges consisting of international experts then selects two winners from this shortlist of 20, who each receive CHF 30,000 in prize money. After the announcement at the Art Basel media conference, both the winners and the galleries receive considerable attention at this globally significant event. Due to its prestige, the Baloise Art Prize has become a springboard for artists to embark on successful careers. The prize money enables the young recipients to continue their work. At the same time, the acquisition of their artworks, which are then donated to well-known museums, offers an ideal platform to present their talent. This combination of prize money, acqui- sition, donation and exhibition within one art prize is unique, and continues to make the Baloise Art Prize much sought-after and highly acclaimed. The 2018 Baloise Art Prize was awarded to Suki Seokyeong Kang and Lawrence Abu Hamdan. Kang’s award was for her installation, which plays with different materials, shapes and colours. The work is based on translation of these different media into a visual language of “jeongganbo”, a traditional Korean notation system. It organises squares into a grid system accord- ing to rules regarding pitch and length of musical notes. Lawrence Abu Hamdan’s video and sound installation “The Shouting Valley” is based on an actual event: the crossing of the border between Syria and Israel in the Golan Heights by a group of Palestinians on 15 May 2011. The acoustic phenom- enon of the wandering, intensifying voices produced by the topography of the valley invites us to draw parallels with the wider geopolitical context. 62 Baloise Group Annual Report 2018 Sustainable business management Commitment to art ART AT THE BALOISE PARK COMPLEX Many of the past winners of the Baloise Art Prize are now among the stars of the international art scene, including Karsten Födinger, who received the prize in 2012. His work visualises forces in the most basic sense: statics and movement, the diagonal and the horizontal, mass and emptiness. Getting an artist whose work resides somewhere between architecture and sculpture to design the “cornerstones” for Baloise Park seemed an obvious choice. Employees had the opportunity to engrave their wishes for the new Group headquarters on seven metres of copper cladding which is going to be attached to one of the building’s outside supports. The Group headquarters at Baloise Park will also provide space to display the Baloise collection. The publicly accessible Art Forum on the ground floor is going to present two exhibitions a year on different themes, although in keeping with the Baloise corporate philosophy, the upper floors will also display works from the collection in specially provided spaces. THE ART COLLECTION New acquisitions for the collection are made by the Baloise art commission, which comprises six art-loving employees from various parts of the Company and one external advisor. They will be focusing on acquiring works on paper by contemporary artists. The decisive factor for inclusion in the collection is the persuasive quality of the work and its emotional and intellectual connection to the hopes and fears of our time. This acquisition policy also allows the art commission to include the winners of the Baloise Art Prize in the collection, and thus to help shape the way in which it promotes art. The website www.baloise.com/art presents the themed exhibitions at the Baloise Art Forum, giving some initial insights into the collection. In this digital age, Baloise is not going to limit itself to putting on exhibitions, but rather aims to make its collection available to an even broader audience. An online platform that is currently being developed will soon give access to the entire collection. www.baloise.com/art www.baloiseartprize.com In the customer centre at the new headquarters in Basel: left, works by Thomas Ruff; right, a work by Alain Huck. Photo: André-Marc Räubig. 63 UnterkapitelCorporate Governance CORPORATE GOVERNANCE REPORT ............................ 66 1. Structure of the Baloise Group and shareholder base ... 66 2. Capital structure ........................................................ 67 3. Board of Directors ...................................................... 68 4. Corporate Executive Committee ................................. 79 5. Remuneration, shareholdings and loans .................... 84 6. Shareholder participation rights ................................ 84 7. Changes of control and poison-pill measures ............. 85 8. External auditors ....................................................... 85 9. Information policy ...................................................... 86 Appendix 1: Remuneration Report ..................................... 88 Appendix 2: Report of the external auditors ..................... 114 4 Baloise 16 Review of operating performance 38 Sustainable Business Management 64 Corporate Governance 116 Financial Report 274 Bâloise Holding Ltd 292 General information E C N A N R E V O G E T A R O P R O C Unterkapitel Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Transparent Corporate Governance Baloise is a company that adds value, and, as such, we attach great importance to practising sound, responsible corporate governance. Operating in line with the requirements of the Swiss Code of Best Practice and the SIX Corporate Governance Guidelines, Baloise strives to foster a corporate culture of high ethical standards that emphasises the integrity of the Company and its employees. Baloise is convinced that high-quality corporate governance has a positive impact on its long-term performance. This chapter reflects the structure of the SIX Corporate Governance Guidelines as amended on 20 March 2018 in order to enhance transparency and, consequently, improve compara- bility with previous years and other companies. It includes the requirements of economiesuisse’s Swiss Code of Best Practice for Corporate Governance and, in particular, Appendix 1 to the latter, which contains recommendations on the remuneration paid to the Board of Directors and the Executive Committee. In item 5 of its Corporate Governance Report, Baloise publishes the principles used to determine the content and scope of the dis- closures on remuneration in the Remuneration Report (Appen- dix 1 to the Corporate Governance Report, page 88 onwards). The information contained in the Corporate Governance Report refers to the situation on the balance sheet date (31 December 2018). Additional reference is made to material changes occurring between the balance sheet date and the print deadline for the Annual Report. This includes the appointment of Alexander Bockelmann to Corporate Division IT with effect from 1 February 2019. The corporate division is responsible for simplifying the Group’s IT landscape and, on the basis of the strategy, driving forward the Group’s transformation and digi- talisation. The organisational structure of Corporate Division IT will be established during the course of 2019. Sustainable business management has long played an important role at Baloise and is described in a dedicated section of the Annual Report from page 38 onwards. 66 ▸ 1. STRUCTURE OF THE BALOISE GROUP AND SHAREHOLDER BASE Structure of the Baloise Group Headquartered in Basel, Switzerland, Bâloise Holding is a public limited company that is incorporated under Swiss law and listed on the Swiss Exchange (SIX). The Baloise Group had a market capitalisation of CHF 6,608 million as at 31 December 2018. Information on Baloise shares can be found from page 8 ▸ onwards. Significant subsidiaries, joint ventures and associates as at 31 December 2018 can be found from page 264 onwards in the notes to the consolidated annual financial statements, which form part of the Financial Report. Segment reporting by region and operating segment can be found from page 197 onwards in the notes to the consolidated annual financial statements within the Financial Report section. The Baloise Group’s operational management structure is presented on page 82 onwards. ▸ ▸ Shareholder base As a public company with a broad shareholder base, Bâloise Holding is a member of the SMI Mid (SMIM) Index. Shareholder structure A total of 20,377 shareholders were registered in Bâloise Holding’s share register as at 31 December 2018. The number of registered shareholders had decreased by 2.00 per cent compared with the previous year. The “Significant shareholders” section on page 285 provides information on the structure of the Company’s shareholder base as at 31 December 2018. The reports that were submitted to the issuer and to SIX Swiss Exchange AG’s disclosure office during the reporting year in compliance with article 120 of the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FinfraG) and were published on the latter’s electronic reporting and publication platform in compliance with article 124 FinfraG can be viewed using the search function at www.six-exchange-regulation.com/en/home/publications/ significant-shareholders.html. Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Treasury shares Bâloise Holding held 1,640,025 treasury shares (3.36 per cent of the issued share capital) as at 31 December 2018. Bâloise Holding’s equity The table below shows the changes in equity during the last three reporting years. Cross-shareholdings There are no cross-shareholdings based on either capital owner- ship or voting rights. 2. CAPITAL STRUCTURE Dividend policy Bâloise Holding pursues a policy of paying consistent, earnings- related dividends. It uses other dividend instruments such as share buy-backs and options to supplement conventional cash dividends. Shareholders have received a total of CHF 1,638.4 million from cash dividends and share buy-backs over the last five years. Year (CHF million) 2014 2015 2016 2017 2018 Total Cash dividends Share buy-backs Total 250.0 250.0 260.0 273.3 292.81 1,326.1 – 59.1 54.8 63.3 135.1 312.3 250.0 309.1 314.8 336.6 427.9 1,638.4 All figures stated as at 31 December. 1 Proposal to the Annual General Meeting on 26 April 2019. CHANGES IN BÂLOISE HOLDING’S EQUIT Y (BEFORE APPROPRIATION OF PROFIT) 31.12.2016 31.12.2017 31.12.2018 5.0 11.7 2.3 573.9 289.6 – 156.6 725.9 4.9 11.7 6.1 472.4 367.9 – 71.8 791.2 4.9 11.7 6.4 566.1 412.6 – 206.7 795.0 CHF million Share capital General reserve Reserve for treasury shares Free reserves Distributable profit Treasury shares Equity attributa- ble to Bâloise Holding Since the capital reduction decided on 28 April 2017, the share capital of Bâloise Holding has totalled CHF 4.88 million and is divided into 48,800,000 dividend-bearing registered shares with a par value of CHF 0.10 each. Authorised and conditional capital; other financing instruments Authorised capital A resolution adopted by the Annual General Meeting on 28  April  2017 has authorised the Board of Directors until 28 April 2019 to increase the Company’s share capital by up to CHF 500,000 by issuing up to 5,000,000 fully paid-up regis- tered shares with a par value of CHF 0.10 each (see article 3 [4] of the Articles of Association). www.baloise.com/rules-regulations 67 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Conditional capital The 2004 Annual General Meeting created conditional capital. This capital enables the Company’s share capital to be increased by up to 5,530,715 registered shares with a par value of CHF 0.10 each (see article 3 [2] of the Articles of Association). This con- stitutes a nominal share capital increase of up to CHF 553,071.50. Conditional capital is used to cover any option rights or conversion rights granted in conjunction with bonds and similar securities. Shareholders’ pre-emption rights are disapplied. Holders of the pertinent option rights and conversion rights are entitled to subscribe for the new registered shares. The Board of Directors may restrict or disapply shareholders’ pre-emption rights when issuing warrant-linked bonds or convertible bonds in international capital markets (see article 3 [3] of the Articles of Association). www.baloise.com/rules-regulations Other equity instruments The Company has no profit-participation certificates. The Baloise Group’s consolidated equity The Baloise Group’s consolidated equity amounted to CHF 6,008.2 million on 31 December 2018. Details of changes in consolidated equity in 2017 and 2018 can be found in the consolidated statement of changes in equity on pages 124 and 125 in the Financial Report. All pertinent details relating to 2016 can be found in the consolidated statement of changes in equity on page 118 in the Financial Report within the 2017 Annual Report. Bonds outstanding Bâloise Holding and Baloise Life  Ltd (with Bâloise Holding acting as guarantor) have issued bonds publicly. As at the end of 2018, a total of eight public bonds were outstanding. On 28 January 2019, Bâloise Holding will issue an additional bond worth CHF 200 million, which will replace the Bâloise Holding bond that matures in 2019. Details of outstanding bonds can be found on pages 243 and 283 and on the website. www.baloise.com/bonds Credit rating On 27 June 2018, credit rating agency Standard & Poor’s upgraded the rating of the Swiss units Baloise Insurance Ltd and Baloise Life Ltd from “A with a positive outlook” to “A + with a stable outlook”. Standard & Poor’s awarded this credit rating in recog- nition of Baloise’s excellent capitalisation – which is comfort- ably above the AAA level according to the S&P capital model – as well as its high operational profitability, robust risk manage- ment and solid competitive position in its profitable core markets. Information about the ratings of Bâloise Holding Ltd, the Belgian subsidiary Baloise Belgium NV and the German subsidiary Basler Sachversicherungs-AG, which were also upgraded, can be found on the website. www.baloise.com/s&prating 3. BOARD OF DIRECTORS Election and term of appointment The Board of Directors consisted of ten members last year. Since 1 January 2019, it has had nine members because Karin Keller- Sutter stepped down from the Board of Directors with effect from 31 December 2018 after being elected to the Swiss Federal Council. Each member of the Board of Directors has been elected for a term of one year at a time. As at 31 December 2018, the average age on the Board of Directors was 58 years. Members of the Board of Directors All members of the Board of Directors – including the Chairman – are non-executives. They were not involved in the day-to-day management of any Baloise Group companies in any of the three financial years immediately preceding the reporting period, and they maintain no material business relationships with the Baloise Group. During the reporting year, Dr Andreas Beerli, Dr Georges- Antoine de Boccard, Dr Andreas Burckhardt, Christoph B. Gloor, Karin Keller-Sutter, Hugo Lasat, Dr Thomas von Planta, Thomas Pleines and Professor Dr Marie-Noëlle Venturi - Zen-Ruffinen were re-elected as members of the Board of Directors for a one- year term until the end of the next Annual General Meeting. Werner Kummer stepped down from the Board of Directors at the 2018 Annual General Meeting. Professor Dr Hans-Jörg Schmidt-Trenz was newly elected to the Board of Directors. 68 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Markus Neuhaus (born 1958, Switzerland) has been the Chairman of the Board of Directors of PricewaterhouseCoopers AG since July 2012 and served as its CEO for a period of nine years prior to that. His term on the Board of Directors of PwC will end in June 2019. Neuhaus, who has a law degree and is a certified tax expert, is also Vice-Chairman of the Board of trustees of Avenir Suisse, a member of economiesuisse’s Management Board and Finance and Taxation Commission, Vice-Chairman of the Man- agement Board of Zurich’s Chamber of Commerce and a member of the Committee of Expertsuisse (formerly Treuhand kammer). Both Christoph Mäder and Markus Neuhaus will be inde- pendent non-executive directors. Further information on the members of the Board of Directors can be found on the website. www.baloise.com/board-of-directors Karin Keller-Sutter, who had been a member of the Board of Directors and Remuneration Committee since 2013, stepped down from the Board of Directors with effect from 31 December 2018 because she had been elected to the Swiss Federal Council. Dr Georges-Antoine de Boccard is not standing for re-election at the Annual General Meeting in 2019. De Boccard (67) joined the Baloise Board of Directors in 2011 and is a  member of the Remuneration Committee and Investment Committee. All other members of the Board of Directors are standing for re-elec- tion in 2019. The Board of Directors of Bâloise Holding has decided to propose Christoph Mäder and Markus Neuhaus for election at the Annual General Meeting on 26 April 2019. Christoph Mäder (born 1959, Switzerland) is a qualified lawyer and, from 2000 to July 2018, was a member of the Syngenta International AG executive team with responsibility for legal and tax. He was a member of the Management Board of the Basel Chamber of Commerce until June 2018. From 2006 to May 2018, he sat on the Management Board of scienceindustries, serving as the asso- ciation’s president between 2008 and 2014. He sits on the Board of Directors of Lonza Group AG and EMS Chemie Holding AG and is a member of the Executive Committee of economiesuisse. MEMBERS Dr Andreas Burckhardt, Chairman (since 2011), Basel Dr Andreas Beerli, Vice-Chairman (since 2018), Oberwil-Lieli Dr Georges-Antoine de Boccard, Conches Christoph B. Gloor, Riehen Karin Keller-Sutter, Wil SG Hugo Lasat, Kessel-Lo (B) Dr Thomas von Planta, Zurich Thomas Pleines, Munich (D) Prof. Dr Hans-Jörg Schmidt-Trenz, Hamburg (D) Prof. Dr Marie-Noëlle Venturi - Zen-Ruffinen, Crans-Montana C: Chair, DC: Deputy Chair, M: Member Chairman’s Committee Audit and Risk Committee Remuneration Committee Investment Committee Nationality Born in Appointed in C DC M M C DC M M M DC C M C M DC M CH CH CH CH CH B CH D D CH 1951 1951 1951 1966 1963 1964 1961 1955 1959 1975 1999 2011 2011 2014 2013 2016 2017 2012 2018 2016 69 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report DIVERSITY ON THE BOARD OF DIRECTORS Per cent Professional background / experience / expertise * Nationality Insurance Banking Legal and governance Risk management CEO Term of appointment < 5 years 5 – 10 years > 10 years 60.0 30.0 10.0 Switzerland Germany Belgium 30.0 40.0 50.0 20.0 60.0 Gender Men Women 70.0 20.0 10.0 80.0 20.0 * More than one category may apply. Statutory rules concerning the number of permitted activities The Articles of Association contain a provision (article 33) concerning the maximum number of directorships that can be held outside the Company. Subsection 1 stipulates the principle that the number of external directorships held by members of the Board of Directors or Corporate Executive Committee must be compatible with the commitment, availability, capabilities and independence required of them in order to perform their duties as members of the Board of Directors or Corporate Executive Committee. Subsections 2 and 3 then specify numer- ical restrictions. Interlocking directorates There are no interlocking directorates. Internal organisation Functions and responsibilities of the Board of Directors Subject to the decision-making powers exercised by shareholders at the Annual General Meeting, the Board of Directors is the Company’s ultimate decision-making body. Decisions are taken by the Board of Directors unless authority has been delegated on the basis of the Organisational Regulations to the Chairman of the Board of Directors, its committees, the Chief Executive Officer or the Corporate Executive Committee. Article 716a of the Swiss Code of Obligations (OR) and clause A3 of the Organisational Regulations state that the Board of Directors’ main functions and responsibilities are to act as the Company’s ultimate managerial and supervisory body, to oversee the Company’s finances and to determine its organisational structures. www.baloise.com/rules-regulations 70 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Committees of the Board of Directors The Board of Directors has four committees, which support it in its activities. These committees report to the Board of Directors and submit the necessary proposals for their particular areas of responsibility. The Investment Committee and the Remuneration Committee have their own decision-making powers. The committees appointed by the Board of Directors gener- ally consist of four members, who are newly elected every year by the Board of Directors. Article 7 ERCO requires the members of the Remuneration Committee to be elected by the Annual General Meeting. The Chairman and Vice-Chairman of the Board of Directors are ex officio members of the Chairman’s Committee. The Chairman of the Board of Directors is not allowed to sit on the Audit and Risk Committee. The committees’ basic functions and responsibilities are specified in the Organisational Regu- lations. Additional specific regulations applicable to individual committees govern administrative and other aspects. www.baloise.com/rules-regulations Functions and responsibilities of the committees The Chairman’s Committee provides advice on key transactions, especially those involving important strategic or personnel- related decisions. The Chairman’s Committee also performs the function of a Nominations Committee and prepares personnel- related matters that fall within the remit of the Board of Directors. The Chairman’s Committee regularly discusses succession planning for the Board of Directors. It focuses on the skills, experience and specialisations of the members of the Board of Directors and the requirements of the insurance group. Potential candidates are internally identified or advisers are brought in to find them. They are then proposed to the Board of Directors for nomination. The Investment Committee’s main responsibilities are to oversee the Baloise Group’s investment activities, define the basic principles of its investment policy, specify the asset allocation strategy for all strategic business units and devise the relevant investment plan. The Remuneration Committee proposes to the Board of Directors – for subsequent approval by the Annual General Meeting – the structure and amount of remuneration paid to the members of the Board of Directors and of the salaries paid to the members of the Corporate Executive Committee. Under ERCO, the remu- neration paid to the Board of Directors and the Corporate Executive Committee has to be approved by the Annual General Meeting. The Remuneration Committee approves the target agreements and performance assessments that are applied to the Corporate Executive Committee members in order to deter- mine their variable remuneration. It also sanctions the remuner- ation policies applicable to the Corporate Executive Committee members and ensures that they are being correctly implemented. It approves the variable remuneration granted to individual members of the Corporate Executive Committee; this remuner- ation has to be within the maximum amount approved by the Annual General Meeting. Furthermore, it specifies the total amount available in the performance pool. The Audit and Risk Committee supports the Board of Directors in its non-delegable overarching supervisory and financial oversight functions (article 716a OR) by ascertaining whether the internal and external control systems, including risk management, are well organised and function properly, by assessing the situation with respect to compliance in the Company and by forming its own view of the Company’s separate and consolidated annual financial statements. It receives reg- ular reports on the work and findings of Group Internal Audit and on cooperation with the external auditors. Meetings of the Board of Directors and its committees The Organisational Regulations stipulate that the full Board of Directors must meet as often as business requires, but no fewer than four times a year. www.baloise.com/rules-regulations 71 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report The full Board of Directors of Bâloise Holding met on five occa- sions in 2018. All members of the relevant committee in each case attended every one of the additional 15 committee meetings. This means that the Board of Directors achieved an overall meeting attendance rate of 99.1 per cent. Meetings of the Board of Directors and its committees usually last half a working day each. The Chairman’s Committee convened six times in 2018, which included one two-day strategy meeting. The Investment Commit- tee met on three occasions. The Audit and Risk Committee held four meetings, and the Remuneration Committee convened twice. Meetings of the Board of Directors are regularly attended by members of the Corporate Executive Committee. Meetings of the Chairman’s Committee are usually attended by the Group CEO and the Chief Financial Officer. Those present at Audit and Risk Committee meetings are the Chief Financial Officer, the Head of Group Internal Audit and, occasionally, representatives of the external auditors, the Chief Risk Officer and the Group Compliance Officer. The main attendees at Remuneration Committee meetings are the Group CEO, the Head of the Corpo- rate Centre and the Head of Group Human Resources. Meetings of the Investment Committee are usually attended by the Group CEO, the Chief Investment Officer and the Heads of Investment Strategy and Investment Control, Baloise Asset Management and Real Estate. The Secretary to the Board of Directors attends the meetings of the full Board of Directors and those of its committees. 72 Self-evaluation Every two years, a comprehensive self-evaluation is carried out in the full Board of Directors, in the Investment Committee and in the Audit and Risk Committee. The results are then discussed in each body. Training and development In preparation for their new role, the members of the Board of Directors participate in a two-day introductory programme and then receive ongoing training (at least once a year) in half-day seminars on specific topics. In 2018, the Board of Directors held a seminar for the purpose of training its members on value management at Baloise. Succession planning Succession planning for the Board of Directors and the Corporate Executive Committee is the responsibility of the Chairman’s Committee. In appointing successors, care is taken to ensure that the composition of the Board of Directors is balanced in terms of the experience and knowledge of its members and their nationality, term of appointment and gender (see diversity charts on page 70). Any restrictions on availability and possible con- flicts of interest arising from other mandates are also taken into account. In 2018, the Board of Directors changed the Organisa- tional Regulations so that the term of appointment for members of the Board of Directors usually ends on the date of the Annual General Meeting that follows the member’s 70th birthday (age limit). There are changes to the Board of Directors on an ongoing basis. In recent years, two members retired from the Board of Directors after terms of 18 and 17 years respectively. The average term of office is 5.2 years. The Chairman is currently the longest-serving member of the Board of Directors, having been in office for 19 years. The appointment of Christoph Mäder and Markus Neuhaus, who have been nominated for the Board of Directors (see page 69), would further increase the Board of Directors’ experience with listed companies and in particular with industrial companies and auditing firms. Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Division of authorities, functions and responsibilities between the Board of Directors and the Corporate Executive Committee The division of authorities, functions and responsibilities between the Board of Directors and the Corporate Executive Committee is governed by law, the Articles of Association and the Organi- sational Regulations. The latter are reviewed on an ongoing basis and updated as changing circumstances require. www.baloise.com/rules-regulations Tools used to monitor and obtain information on the Corporate Executive Committee Group Internal Audit reports directly to the Chairman of the Board of Directors. Effective risk management is essential for any insurance group. This is why Baloise has devoted two entire chapters to the subject of financial risk management: from page 58 onwards and in the Financial Report starting on page 153. The members of the Board of Directors receive copies of the minutes of Corporate Executive Committee meetings for their information. The Chairman of the Board of Directors may attend meetings of the Corporate Executive Committee at any time. 73 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Andreas Burckhardt (1951, Switzerland, Dr iur., lawyer) has been a member of the Board of Directors since 1999 and its Chairman since 29 April 2011. He studied jurisprudence at the universities of Basel and Geneva. He worked in the legal department of Fides Treuhandgesell- schaft from 1982 to 1987 and served as Secretary General of the Baloise Group from 1988 to 1994. He was director and head of the Basel Chamber of Commerce from 1994 to April 2011. In this role he sat on various governing bodies of national and regional business organisations. From 1981 to 2011 he performed various political functions in the Basel civic municipality and in the canton of Basel-Stadt, and from 1997 to 2011 he served on the Great Council of the Canton of Basel-Stadt (as Chairman in 2006 and 2007). Dr Andreas Burckhardt is Chairman of the Board of Governors of the Swiss Tropical and Public Health Institute, Basel. He is also a member of the Executive Committee of economiesuisse and sits on the Executive Board of the Employers’ Federation for Basel. Dr Andreas Burckhardt performs a non-executive function as Chairman of Baloise’s Board of Directors. Andreas Beerli (1951, Switzerland, Dr iur.) has been a member of the Board of Directors since 2011. He studied law at the University of Basel. In 1979, he started working as an underwriter for the German market at Swiss Re. From 1985 to 1993, he performed various managerial roles at Baloise, with the main focus on supervising and supporting several foreign units. He then returned to Swiss Re, where he became a member of the Group Executive Committee in 2000, first in the United States as Head of Swiss Re Americas and, most recently, in Zurich as Chief Operating Officer for the entire Swiss Re Group. Since 2009, he has acted as an independent advisor on the boards of directors and advisory boards of companies and professional associations. He is a member of the Board of Directors at Ironshore Europe Inc., Dublin, and a member of the Advisory Board of Accenture Schweiz. Dr Andreas Beerli is an independent non-executive director. 74 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Georges-Antoine de Boccard (1951, Switzerland, Dr med.) has been a member of the Board of Directors since 2011. He studied medicine at the University of Geneva. He has been running his own urological surgery practice in Geneva since 1987. Dr Georges-Antoine de Boccard chairs the Board at Stellaria Holding SA and at the asset management companies of Citadel Finance SA and GPP-Gestion Patri- moniale Personnal isée SA. He sits on the Board of Directors at the Swiss International Prostate Center SA and CUGB (Centre d’Urologie Générale Beaulieu). From 2005 to 2006, he was Chairman of the Swiss Association of Urology. He is a member of the Swiss Association of Urology, the European Association of Urology and other professional bodies and associations. Dr Georges-Antoine de Boccard is an independent non- executive director. Christoph B. Gloor (1966, Switzerland, degree in business economics HWV) has been a member of the Board of Directors since 2014. He is the Deputy Head of Wealth Management at Bank Vontobel AG in Zurich. Before becoming a member of the Executive Committee and CEO of Notenstein La Roche Privatbank AG, St. Gallen, he was Chief Executive Officer of Basel- based private bank La Roche & Co AG. Prior to joining La Roche & Co AG in 1998, he worked for Swiss Bank Corporation (SBC) before moving to Vitra (Inter national). Christoph B. Gloor served as president of the Association of Swiss Private Banks from November 2013 to February 2015 and was a member of the Board of Directors of the Swiss Bankers Association from September 2013 to February 2015. He has been a mem- ber of the Board of Managing Directors of the Basel Banking Association since 2016. Christoph B. Gloor is an independent non-executive director. 75 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Karin Keller-Sutter (1963, Switzerland, university degree in translation and conference interpreting, postgraduate qualification in education) has been a member of the Board of Directors since 2013. In 1996, she was elected to St. Gallen’s cantonal parliament and became Chairwoman of the FDP (the Swiss Liberal Party) for the canton of St. Gallen before being elected to St. Gallen’s cantonal governing council in 2000. She was in charge of the security and justice department until May 2012 and chaired the governing council in 2006 / 2007 and again in 2011 / 2012. She has been a member of the Council of States – the upper chamber of the Swiss parliament – since the autumn of 2011 and was appointed as Chairwoman in November 2017, serving in that role for one year. On 5 December 2018, she was elected to the Swiss Federal Council, which resulted in her stepping down from the Board of Directors with effect from 31 December 2018. Until 31 December 2018, Karin Keller-Sutter sat on the boards of directors of the ASGA pension fund, Pensimo Fondsleitung AG and the Pensimo investment foundation, was Chair- woman of the Swiss Retail Federation and was a member of the executive committee of the Swiss Employers’ Federation. She is an independent non-executive director. Hugo Lasat (1964, Belgium, Master in Economic Sciences, Master in Finance) has sat on of the Board of Directors since 2016. He has been CEO of Brussels-based Degroof Petercam Asset Management (formerly Petercam Institutional Asset Management) since 2011. His managerial roles prior to that include CEO of Amonis Pension Fund and CEO of Candriam In vestors Group (previously known as Dexia Asset Management). He is a guest professor at KU Leuven (Brussels Campus) and VIVES University College and a member of the Financial Commission of the Belgian Red Cross. Hugo Lasat is an independent non-executive director. 76 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Thomas von Planta (1961, Switzerland, Dr iur., lawyer) has been a member of the Board of Directors since 2017. He is the founder and managing director of CorFinAd AG, a company specialising in consul- tancy for M&A transactions and capital market finance. He has sat on the Board of Directors of Bellevue Group AG since 2007 as well as Bank am Bellevue AG and Bellevue Asset Management AG since 2012, and has been Chairman of the Board of Directors of all three companies since March 2015. Dr Thomas von Planta will step down from the Board of Directors of the Bellevue companies in March 2019 and has been nominated for the Board of Directors of BB Biotech AG. Previously, he had worked for Goldman Sachs in Zurich, Frankfurt and London for around ten years and had been the interim Head of Investment Banking and Head of Corporate Finance for the Vontobel Group in Zurich between 2002 and 2006. Dr Thomas von Planta is an independent non-executive director. Thomas Pleines (1955, Germany, lawyer) has been a member of the Board of Directors since 2012. From 2003 to 2005, he was CEO and delegate of the Board of Directors at Allianz Suisse, Zurich, and from 2006 to 2010 he was CEO of Allianz Versicherungs-AG, Munich, and an executive director at Allianz Deutschland AG, Munich. Since 2011, he has chaired the presidential boards of DEKRA e. V., Stuttgart, and DEKRA e. V. Dresden, as well as the supervisory boards of DEKRA SE, Stuttgart, and SÜDVERS Holding GmbH & Co. KG, Au near Freiburg. Thomas Pleines is an independent non-executive director. 77 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Hans-Jörg Schmidt-Trenz (1959, Germany, Prof. Dr rer. pol.) has been a member of the Board of Directors since 2018. He has been a professor of economics at Saarland University since 2000 and at the University of Hamburg since 2008 and has been President of the HSBA Hamburg School of Business Administration since 2004. From 1996 to 2017, he was Chief Executive Officer of the Hamburg Chamber of Commerce. Professor Hans-Jörg Schmidt-Trenz is also Chairman of the European Chief Executive Officers working group (since 2000), a member of the board of trustees of HASPA Hamburger Sparkasse (since 1997), a member of the advisory board of HanseMerkur (since 2015), a member of the General Council and Executive Committee of the International Chamber of Commerce (since 2014), a member of the Board of Directors of HIP Hamburg Innovation Port (since 2017) and a representative and coun- sellor of the Hamburg Chamber of Commerce (since 2017). Professor Hans-Jörg Schmidt-Trenz is an independent non-executive director. Marie-Noëlle Venturi - Zen-Ruffinen (1975, Switzerland, Prof. Dr iur., lawyer) has been a member of the Board of Directors since 2016. She holds a PhD and master’s degree in law and a master’s degree in philosophy from the University of Fribourg. She is a lawyer and honorary professor at the School of Economics and Management at the University of Geneva, where she mainly lectures on corporate law. Professor Marie-Noëlle Venturi - Zen-Ruffinen was a partner in the Geneva law firm Tavernier Tschanz until 2012, and since that time has been of counsel for the firm. She is president of the Swiss Board Institute foundation, a member of the Board of Directors of Banco Santander (Suisse) SA and sits on the Board of Management of the Swiss Institute of Directors. Professor Marie-Noëlle Venturi - Zen-Ruffinen is an independent non-executive director. Secretary to the Board of Directors: Dr Philipp Jermann, Buus (BL) Head of Group Internal Audit: Rolf-Christian Andersen, Meilen (ZH) 78 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report 4. CORPORATE EXECUTIVE COMMITTEE Gert De Winter (1966, Belgium, MSc) studied applied economics at the University of Antwerp. From 1988 to 2004, he performed various roles at Accenture in Brussels for issues relating to IT and business transformation management in the financial sector. He was made a partner at the firm in the year 2000. In 2005, he joined the Baloise Group as Chief Information Officer (CIO) and Head of HR of the Mercator insurance company in Belgium. From 2009 to 2015, Gert De Winter was Chief Executive Officer of Baloise Insurance, which was formed in 2011 from the merger of the three insurance companies Mercator, Nateus and Avéro. He has been Group Chief Executive Officer since 1 January 2016. Since June 2016, he has been a member of the Management Board of the Basel Chamber of Commerce. Matthias Henny (1971, Switzerland, Dr phil.) completed his undergraduate and postgraduate studies in physics at the University of Basel. From 1998 to 2003, he was employed at McKinsey & Co., before switching to what was then the Winterthur Group, where he was Head of Financial Engineering in Asset Management until 2007. Subsequently, he was a member of the management team at AXA Winterthur, first as CIO (until 2010), then as CFO. In 2012, Dr Matthias Henny joined the Baloise Group. As CEO of Baloise Asset Management AG he was responsible for the administration of approximately CHF 50 billion in assets. Dr Matthias Henny became a member of the Corporate Executive Committee in May 2017. He manages the Corporate Division Asset Management with its units Investment Strategy and Investment Con- trolling, Sales and Marketing, Portfolio Management, Operations, Real Estate, Corporate Development and Compliance. 79 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Michael Müller (1971, Switzerland, lic. oec. publ.) graduated in economics from the University of Zurich, specialising in insurance and accounting / finance. He began his career with Basler Versiche rungen in 1997, starting as a management trainee, then working in Group Finance and eventually becoming Deputy Head and, in 2004, Head of Financial Accounting for the Baloise Group. In 2009, as Head of Finance and Risk, he became a member of the senior management team in Corporate Division Switzerland. He has been a member of the Corporate Executive Committee and CEO of Corporate Division Switzerland since March 2011, and as such has headed up the insurance and banking business in Switzerland. Michael Müller is Vice President of the Swiss Insurance Association (SVV) and a member of the Board of Foundation of Stiftung Finanzplatz Basel and the Executive Board of the Association of Basel Insurance Companies. He also sits on the board of the Promotion Society of the Institute of Insurance Economics at the University of St. Gallen. Thomas Sieber (1965, Switzerland, Dr iur., M.B.L., lawyer, SDM mediator) studied law at the University of St. Gallen. At the beginning of 1994, he qualified to practise as a lawyer in the Swiss canton of Zurich. From 1999 to 2002, he lec tured in corporate law at the University of St. Gallen. After brief spells working at Landis & Gyr and Siemens he joined the Baloise Group in 1997 as Deputy Head of Legal and Tax. He became Head of this division in 2001 and, in addition, was secretary to Bâloise Holding’s Board of Directors until April 2012. Since 6 December 2007, Dr Thomas Sieber has been a member of the Corporate Executive Committee and, as Head of the Corporate Centre, is responsible for Group Strategy and Digital Transformation, M & A, Group Human Re sources, Legal and Tax, Group Compliance, Run-Off Business and Group Procurement. Dr Thomas Sieber serves on the panel of experts for the SWIPRA Foundation and until the end of March 2018 sat on the Board of Directors at EuroAirport Basel-Mulhouse-Freiburg. 80 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Carsten Stolz (1968, Germany / Switzerland, Dr rer. pol.) studied business economics at Fribourg University where he also gained a doctorate specialising in financial management. After that he spent four years as an advisor for the Financial Services practice unit at Price- waterhouseCoopers in Zurich and Geneva, before joining the Baloise Group as Head of Financial Relations in 2002. From 2009 to 2011, Dr Carsten Stolz was the Baloise Group’s Head of Financial Account- ing & Corporate Finance. Between 2011 and 2017 he was Head of Finance and Risk, and thus a member of the Executive Committee, at Basler Versicherungen, Switzer land. Dr Carsten Stolz became a member of the Corporate Executive Committee in May 2017. He manages the Corporate Division Finance with its departments Group Accounting & Reporting, Financial Planning & Analysis, Group Risk Management, Corporate Communications & Investor Relations and Corporate IT (as of 1 February 2019, a standalone corporate division headed up by Dr Alexander Bockelmann) as well as the appointed actuary for Swiss business at Baloise and the Head of Regulatory Affairs. Dr Carsten Stolz is a member of the Finance and Regulation Committee of the Swiss Insurance Asso- ciation (SVV). With effect from 1 February 2019: Alexander Bockelmann (1974, Germany, Dr) will take charge of the newly created Corporate Division IT. He studied in Germany and the UK, before completing his doctorate at the University of Tübingen’s faculty of geosciences. Dr Alexander Bockelmann is a proven expert in digitalisation and transformation, and has many years of experience in the industry. He previously worked as an IT strategy and transformation consultant at the Boston Consulting Group and in various senior roles at Allianz SE in Germany and the USA. At the end of 2013, he moved to UNIQA Insurance Group AG in Austria in the role of Group CIO and ultimately became Chief Digital Officer on the Management Board. With the exception of the mandates listed above, no Corporate Executive Committee members serve on the Boards of Directors at companies outside the Baloise Group. There are no manage- ment agreements that assign executive functions to third parties. Further information on the members of the Corporate Executive Committee can be found on the website. www.baloise.com/corporate-executive-committee 81 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Management structure (as at: 31 December 2018) GROUP CEO Gert De Winter * HEAD OF GROUP CEO OFFICE Ruken Baysal FINANCE ASSET MANAGEMENT CORPORATE CENTRE IT 1 SWITZERLAND GERMANY BELGIUM LUXEMBOURG Carsten Stolz * Matthias Henny * Thomas Sieber * Alexander Bockelmann* (from 1/2/2019) Michael Müller * Jürg Schiltknecht Henk Janssen Romain Braas Group Accounting & Reporting Pierre Girard Financial Planning & Analysis Andreas Frick Group Risk Management Stefan Nölker Asset Strategy & Investment Controlling Marc Dünki Sales & Marketing Robert Antonietti Group Strategy & Digital Transformation Adrian Honegger Mergers & Acquisitions Philipp Hammel Portfolio Management Group Human Resources Stephan Kamps Stephan Ragg Corporate Communications & Investor Relations Marc Kaiser Operations Bernd Maier Group Legal & Tax Andreas Burki Product Management Corporate Clients Patric Olivier Zbinden Product Management Private Customers & Specialised Financial Services Life & Exclusive Distribution Risk, Compliance & Maximilian Beck Finance & Asset Management Operations & IT Daniel Frank Life & Finance Alain Nicolai Sales & Marketing Laurent Heiles Julia Wiens Non-Life Christoph Willi IT / Operations Ralf Stankat Corporate IT (from 1/2/2019: part of the new Corporate Division IT) Olaf Romer Real Estate / CEO BIM Group Compliance Dieter Kräuchi Peter Kalberer Corporate Development & Compliance Run-off Bruno Rappo Group Procurement Manfred Schneider Appointed Actuary Switzerland Fabian Kaderli Thomas Müller Regulatory Affairs Fabian Berger (from 1/3/2019: Gaby Lurie) 1 The organisational structure of the newly created Corporate Division IT will be established during the course of the 2019. * Member of the Corporate Executive Committee. 82 Wolfgang Prasser Sales &Marketing Bernard Dietrich Baloise Bank SoBa Jürg Ritz Operations & IT Clemens Markstein Finance & Risk Urs Bienz Claims Mathias Zingg Corporate Legal (from 1/1/2019: Risk, Compliance & Actuarial Function) Patrick Van De Sype (from 1/1/2019: Kathleen Vergote) Non-Life Retail Noël Pauwels Non-Life Corporate & Marine Joris Smeulders Joris Smeulders ICT Life Wim Kinnet Finance & Procurement Gert Vernaillen Human Resources & General Services Marc L’Ortye Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report GROUP CEO Gert De Winter * HEAD OF GROUP CEO OFFICE Ruken Baysal Group Accounting & Reporting Asset Strategy & Pierre Girard Financial Planning & Analysis Andreas Frick Group Risk Management Stefan Nölker Investment Controlling Marc Dünki Sales & Marketing Robert Antonietti Group Strategy & Digital Transformation Adrian Honegger Mergers & Acquisitions Philipp Hammel Portfolio Management Group Human Resources Stephan Kamps Stephan Ragg Corporate Communications & Investor Relations Marc Kaiser Operations Bernd Maier Group Legal & Tax Andreas Burki Corporate IT Real Estate / CEO BIM Group Compliance (from 1/2/2019: part of the new Corporate Division IT) Dieter Kräuchi Peter Kalberer Olaf Romer Corporate Development & Run-off Compliance Fabian Kaderli Bruno Rappo Group Procurement Manfred Schneider Appointed Actuary Switzerland Thomas Müller Regulatory Affairs Fabian Berger (from 1/3/2019: Gaby Lurie) FINANCE ASSET MANAGEMENT CORPORATE CENTRE IT 1 SWITZERLAND GERMANY BELGIUM LUXEMBOURG Carsten Stolz * Matthias Henny * Thomas Sieber * Michael Müller * Jürg Schiltknecht Henk Janssen Romain Braas Alexander Bockelmann* (from 1/2/2019) Operations & IT Daniel Frank Life & Finance Alain Nicolai Sales & Marketing Laurent Heiles Life & Exclusive Distribution Maximilian Beck Finance & Asset Management Julia Wiens Non-Life Christoph Willi IT / Operations Ralf Stankat Product Management Corporate Clients Patric Olivier Zbinden Product Management Private Customers & Specialised Financial Services Wolfgang Prasser Sales &Marketing Bernard Dietrich Baloise Bank SoBa Jürg Ritz Operations & IT Clemens Markstein Finance & Risk Urs Bienz Claims Mathias Zingg Risk, Compliance & Corporate Legal (from 1/1/2019: Risk, Compliance & Actuarial Function) Patrick Van De Sype (from 1/1/2019: Kathleen Vergote) Non-Life Retail Noël Pauwels Non-Life Corporate & Marine Joris Smeulders ICT Joris Smeulders Life Wim Kinnet Finance & Procurement Gert Vernaillen Human Resources & General Services Marc L’Ortye 83 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report 5. REMUNERATION, SHAREHOLDINGS AND LOANS The Remuneration Report in Appendix 1 to the Corporate Gov- ernance Report (page 88 onwards) describes the remuneration policies adopted and the remuneration systems in place and it contains in particular the remuneration paid and the loans granted to members of the Board of Directors and the Corporate Executive Committee for 2018 as well as the investments they hold. The content and scope of these disclosures are determined by articles 13 to 17 of the Ordinance Against Excessive Remu- neration in Listed Companies Limited by Shares (ERCO), article 663c (3) of the Swiss Code of Obligations (OR), the corporate governance information guidelines published by SIX Swiss Exchange AG (version as at 20 March 2018) and the Swiss Code of Best Practice for Corporate Governance. The report of the statutory auditors on the audit of the Remuneration Report can be found in Appendix 2 to the Corpo- rate Governance Report (page 114 onwards). 6. SHAREHOLDER PARTICIPATION RIGHTS Voting rights The share capital of Bâloise Holding consists solely of uniform registered shares. Each share confers the right to one vote. No shares carry preferential voting rights. To ensure a broad-based shareholder structure and to protect minority shareholders, no shareholder is registered as holding more than 2 per cent of voting rights, regardless of the size of their shareholding. The Board of Directors can approve exceptions to this provision if a majority of two-thirds of all its members is in favour (article 5 of the Articles of Association). There are currently no exceptions. Each shareholder can appoint a proxy in writing in order to authorise another shareholder or an independent proxy to exercise his or her voting rights. When exercising voting rights, no shareholder can accumulate more than one fifth of the voting shares at the Annual General Meeting directly or indirectly for his or her own votes or proxy votes (article 16 of the Articles of Association). Powers of attorney and voting instructions may also be given to an independent proxy electronically without requiring a qualifying electronic signature (article 16 [2] of the Articles of Association). 84 Statutory quorums The Annual General Meeting is quorate regardless of the number of shareholders present or proxy votes represented, subject to the mandatory cases stated by law (article 17 of the Articles of Association). The consent of at least three-quarters of the votes repre- sented at the Annual General Meeting is required to suspend statutory restrictions on voting rights. The votes must also represent at least one third of the total shares issued by the Company. This qualified majority also applies to the cases specified in article 17 (3)(a) to (h) of the Articles of Association. Otherwise, resolutions are adopted by a simple majority of the votes cast, subject to compulsory legal provisions (article 17 of the Articles of Association). Convening the Annual General Meeting The Annual General Meeting generally takes place in April, but must be held within six months of the end of the previous financial year. Bâloise Holding’s financial year ends on 31 December. The Annual General Meeting is convened at least 20 days before the date of the meeting. Each registered share- holder receives a personal invitation, which includes the agenda. The invitation and the agenda are published in the Swiss Official Gazette of Commerce, in various newspapers and on the website. The Annual General Meeting, the Board of Directors or the external auditors decide whether to convene extraordinary general meetings. Furthermore, legal provisions also require the Board of Directors to convene an extraordinary general meeting if requested by the shareholders (article 11 of the Articles of Association). Article 699 (3) of the Swiss Code of Obligations (OR) states such requests must be made by share- holders who represent at least 10 per cent of the share capital. Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Requesting agenda items Article 699 (3) OR states that one or more shareholders who together represent shares of at least CHF 100,000 can request items to be put on the agenda for debate. Such requests must be submitted in writing to the Board of Directors at least six weeks before the Annual General Meeting is held, giving details of the motions to be put to the AGM (article 14 of the Articles of Association). EXTERNAL AUDITORS 8. The external auditors are elected annually by the Annual General Meeting. Ernst & Young AG (EY), Basel, have been the external auditing firm for Bâloise Holding since 2016. Christian Fleig has held the post of auditor-in-charge since 2018. In accordance with article 730a (2) OR, the role of auditor-in-charge is rotated every seven years. EY is the external auditing firm for almost all Group companies. Entry in the share register Shareholders are entitled to vote at the Annual General Meeting provided they are registered in the share register as shareholders with voting rights on the cut-off date stated by the Board of Directors in the invitation. The cut-off date should be several days before the Annual General Meeting (article 16 of the Articles of Association). Article 5 of the Articles of Association determines whether nominee entries are permissible, taking into account any per- centage limits and entry requirements. The procedures and requirements for suspending and restricting transferability are set out in article 5 and article 17 of the Articles of Association. www.baloise.com/rules-regulations www.baloise.com/calendar 7. CHANGES OF CONTROL AND POISON-PILL MEASURES Shareholders or groups of shareholders acting together by agreement are required to issue a takeover bid to all other shareholders when they have acquired 33 per cent of all Baloise shares. Bâloise Holding has not made any use of the option to deviate from or waive this regulation. There is no statutory opting-out clause or opting-up clause as defined by the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FinfraG). The members of the Corporate Executive Committee have a notice period of twelve months. Bâloise has not agreed any arrangements in respect of changes of control or non-compete clauses with members of either the Board of Directors or the Corporate Executive Committee. EXTERNAL AUDITORS’ FEES CHF (including outlays and VAT) Audit fees Consulting fees Total 2017 2018 5,637,503 5,431,077 519,930 219,306 6,157,433 5,650,383 Audit fees paid to EY include fees for engagements with a direct or indirect connection to a particular audit engagement and fees for audit-related activities (namely, the MCEV Review, ISAE 3401 reports and statutory and regulatory special audits). In 2018, CHF 200,566 of the additional fees for consultancy services were attributable to tax consultancy and legal advice and CHF  18,740 to operational advice. The services were rendered in accordance with the relevant provisions on inde- pendence set forth in the Swiss Code of Obligations, the Swiss Audit Supervision Act and FINMA-Circular 2013 / 3 on “auditing” (as at 18  November 2016) published by the Swiss Financial Market Supervisory Authority (FINMA). At its four meetings, primarily at meetings about the annual and half-year financial statements, the Audit and Risk Committee receives detailed explanations and documents about the external auditors’ main findings from the auditors’ representatives. 85 Information events Baloise provides detailed information about its business activities as follows: ▸ Details about its financial performance, targets, strategies and operations are provided at press conferences covering its annual and half-year financial statements. Teleconferences for financial analysts and investors take place when the annual and half-year financial statements are published. The events can then be down- loaded as podcasts. Shareholders are informed about business during the year at the Annual General Meeting. Roadshows are regularly staged at various financial centres. At its regular Investor Days, the Company presents its corporate strategy and targets as well as any other matters relevant to its business. The documents used for this and the recording of the event are made publicly available on various media. Ongoing relationships are maintained with analysts, investors and the media. Full details of individual Baloise events can be accessed at www.baloise.com. ▸ ▸ ▸ ▸ ▸ Information about Baloise shares Information about Baloise shares begins on page 8. www.baloise.com/baloise-share Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report The performance of the external auditors and their inter action with Group Internal Audit, Risk Management and Compliance are assessed by the Audit and Risk Committee. The Audit and Risk Committee’s discussions with the external auditors focus on the audit work the latter have undertaken, their reports and the material findings and most important issues raised during the audit. The Audit and Risk Committee submits proposals to the Board of Directors regarding the external auditors to be elected by the Annual General Meeting and makes recommendations regarding their fees. Before the start of the annual audit, it reviews the scope of the audit and suggests areas that require special attention. The Audit and Risk Committee reviews the external auditors’ fees on an annual basis. INFORMATION POLICY 9. Information principles The Baloise Group provides (potential) shareholders, investors, employees, customers and the public with information on a regular, open and comprehensive basis. All registered share- holders each receive a summary of the Annual Report once a year and a letter to shareholders every six months, which provide a review of business. The full Annual Report is sent to share- holders on request. In addition, a presentation is created for every set of financial statements that summarises the financial year or period for financial analysts and investors. All publications are simultaneously available to the public. All market participants receive the same information. Baloise offers tele conferences, podcasts, videos and live streaming in order to make information generally and easily accessible. 86 Baloise Group Annual Report 2018 Corporate Governance Corporate Governance Report Financial calendar Important dates for investors are available at www.baloise.com. This is where the publication dates for the annual and half-year reports and the Q3 interim statement are listed and where the date of the Annual General Meeting, the AGM invitation, the closing date for the share register and any ex-dividend dates are published. www.baloise.com/calendar Availability of documents Annual and half-year reports, media releases, disclosures, recent announcements, presentations and other documents are available to the public at www.baloise.com. Please register for the latest corporate communications at www.baloise.com/ mailinglist. www.baloise.com/media Contact Corporate Governance Baloise Group Philipp Jermann Aeschengraben 21 4002 Basel, Switzerland Tel. + 41 (0)58 285 89 42 philipp.jermann@baloise.com Investor Relations Baloise Group Markus Holtz Aeschengraben 21 4002 Basel, Switzerland Tel. + 41 (0)58 285 81 81 markus.holtz@baloise.com 87 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report Appendix 1: Remuneration Report 1. OVERVIEW OF REMUNERATION REMUNERATION IN RELATION TO BUSINESS PERFORMANCE REMUNERATION GUIDELINE Basic salary ▸ ▸ Aim for a position around the market median Reflection of the responsibilities of the role and the individual’s long-term performance Short-term variable remuneration ▸ Influencing factors: the Company’s economic value added and the individual’s performance Designed to incentivise staff to achieve outstanding results ▸ Long-term variable remuneration ▸ ▸ Supports the Company’s long-term development Gives the top level of management a greater stake in the performance of the Company Fringe benefits ▸ Not dependent on either an individual’s function or performance or the Company’s performance Demonstration of Baloise’s close partnership with employees and its respect for them ▸ PERFORMANCE POOL Total performance pool 2 for Corporate Executive Committee (CHF million) Performance pool factor 2 (%) Profit vs performance pool factor2 2017 2.3 2018 2.0 120 % 100 % 750 625 500 375 250 125 0 2014 2015 2016 2017 2018 Profit (CHF million) As a percentage of the expected value 150 % 125 % 100 % 75 % 50 % 25 % 0 % APPROVED REMUNERATION VS. AMOUNT PAID OUT Total shareholder return (TSR) vs performance pool factor 2 Approved 2017 Paid out Approved 2018 Paid out 3.3 3.3 4.5 5.0 1 3.3 4.0 3.3 4.0 4.7 3.7 4.5 3.5 CHF million Fixed remuneration of Board of Directors Fixed remuneration of Corporate Executive Committee Variable remuneration of Corporate Executive Committee 62.5 % 50.0 % 37.5 % 25.0 % 12.5 % 0 % –12.5 % 150 % 125 % 100 % 75 % 50 % 0 % 1 Due to the changes to the Corporate Executive Committee, the sum paid exceeded the total amount originally requested, which is covered by the additional amount pursuant to article 30 of the Articles of Association of Bâloise Holding Ltd. 2 The performance pool (PP) is the component of short-term variable remuneration that depends on the Company’s performance: the Remuneration Committee of the Board of Directors assesses the Company’s performance and success during the past financial year. The performance pool factor is the ratio of the pool to its target value. 2014 2015 2016 2017 2018 TSR (%) (left axis) As a percentage of the expected value (right axis) 88 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report REMUNERATION OF THE CORPORATE EXECUTIVE COMMITTEE Gert De Winter Michael Müller Dr Thomas Sieber Dr Carsten Stolz 1 Dr Matthias Henny 1 German Egloff 2 Martin Wenk 2 52 % 55 % 52 % 56 % 55 % 57 % 60 % 58 % 60 % 57 % 84 % 85 % 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 19 % 18 % 29 % 27 % 15 % 18 % 17 % 17 % 33 % 27 % 28 % 26 % 31 % 9 % 25 % 17 % 28 % 12 % 26 % 17 % 16 % 15 % CHF 2.192 million CHF 2.095 million CHF 1.679 million CHF 1.579 million CHF 1.479 million CHF 1.442 million CHF 0.779 million CHF 1.195 million CHF 0.786 million CHF 1.175 million CHF 0.923 million CHF 0.997 million Fixed (comprising basic salary, non-cash remuneration and pension benefits) Short-term variable remuneration (comprising share-based and cash payments from the performance pool) Long-term variable remuneration (comprising allocations of share entitlements) 1 Since 1 Mai 2017 2 Until 30 October 2017 LONG-TERM VARIABLE REMUNERATION Performance share units (PSUs) Long-term variable remuneration for members of the Corporate Executive Committee Allocation ▸ Conversion ▸ ▸ ▸ p u o r g r e e P The total amount for the allocation of PSUs is determined by the Remuneration Committee The Remuneration Committee decides on the allocation of PSUs to each individual Corporate Executive Committee member Performance criterion: profit for shareholders relative to the peer group (STOXX Europe 600 Insurance) after three years PSUs are a performance instrument, enabling clear differentiation using a performance multiplier of between 0.0 and 2.0 Vesting period Peer group Upper quar tile Median Lower quar tile Performance multiplier 2.0 1.5 1.0 0.5 0.0 n o i s r e v n o c U S P 2018 plan (ended) Plan term 1 March 2015 – 28 February 2018 01.03.2015 28.02.2018 100 % 100 % 20 % 41 % 61 % Profit for shareholders 1 March 2015 – 28 February 2018 01.03.2015 28.02.2018 100 % 100 % 20 % 12 % 33 % Overview of ended and current plans (as at 31 December 2018) 2012 to 2018 plans 1 Mar 2012 – 28 Feb 2015 1 Mar 2013 – 29 Feb 2016 1 Mar 2014 – 28 Feb 2017 37 % 74 % 50 % 75 % 15 % 6 % 1 Mar 2015 – 28 Feb 2018 20 % 41 % 1 Mar 2016 – 28 Feb 2019 – 12 % 7 % 1 Mar 2017 – 29 Feb 2020 4 % 3 % 1 Mar 2018 – 28 Feb 2021 – 9 % – 13 % 111 % 125 % 21 % 61 % –4 % 6 % –22 % Share value at start of PSU programme Dividend payments Change in share value during programme term Performance multiplier 89 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report 2. REMUNERATION COMMITTEE OF THE BOARD OF DIRECTORS The Remuneration Committee set up by the Board of Directors in 2001 is consistent with the Swiss Code of Best Practice and is tasked with helping the Board of Directors to frame the Company’s remuneration policies. The Remuneration Committee has been vested with special decision-making powers and ensures, among other things, that: ▸ the remuneration offered by Baloise is in line with the going market rate and performance-related in order to attract and retain individuals with the necessary skills and character attributes; the remuneration paid is demonstrably dependent on the Company’s sustained success and individuals’ personal contributions and does not create any perverse incentives; the structure and amount of overall remuneration paid are consistent with Baloise’s risk policies and encourage risk awareness. ▸ ▸ The Remuneration Committee’s main functions and responsi- bilities are to: ▸ submit proposals to the Board of Directors on the structure of remuneration to be paid in the Baloise Group, especially the remuneration to be paid to the Chairman and members of the Board of Directors and to the members of the Corpo- rate Executive Committee; submit proposals to the Board of Directors – for approval by the Annual General Meeting – on the amount of remu- neration to be paid to the Chairman and members of the Board of Directors and to the members of the Corporate Executive Committee; approve the basic salaries and the variable remuneration paid to individual members of the Corporate Executive Committee (in compliance with the pay caps stipulated by the Annual General Meeting); specify the total amount available in the performance pool and the total amount set aside for the allocation of performance share units (PSUs); approve inducement payments and severance packages that are granted to the most senior managers and which in individual cases exceed CHF 100,000 (subject to the proviso that no severance packages may be granted to members of the Board of Directors or the Corporate Executive Committee). ▸ ▸ ▸ ▸ 90 The Remuneration Committee consists of at least three inde- pendent members of the Board of Directors, who are elected every year by the Annual General Meeting. Thomas Pleines (Chairman), Karin Keller-Sutter (Deputy Chairwoman), Dr Georges -Antoine de Boccard and Prof. Hans-Jörg Schmidt- Trenz were elected to the Remuneration Committee by the Annual General Meeting on 27 April 2018. The Remuneration Committee maintains a regular dialogue with senior management through- out the year and generally meets at least twice annually. In addition to the committee secretary being present, these meetings are usually also attended by the Group CEO, the Head of the Corporate Centre and the Head of Group Human Resources, who participate in an advisory capacity. The individual members of the Group Executive Committee leave the meeting if the Remuneration Committee is discussing or deciding on their personal remuneration. The Chairman of the Remuneration Committee reports to the Board of Directors at its next meeting on the committee’s activities. 3. REMUNERATION POLICIES Principles The Company’s success is largely dependent on the skills, capabilities and performance of its workforce. It is therefore essential to recruit, develop and retain suitably qualified, highly capable and highly motivated professionals and executives. The level of remuneration offered by Baloise is in line with the going market rate and is performance related. The clearly defined caps approved by the Annual General Meeting for the pay awarded to members of the Board of Directors and Corporate Executive Committee ensure that remuneration is not excessive. Remuneration Guideline and Remuneration Policy Responding to a request from the Remuneration Committee, in 2017 the Board of Directors formally adopted a Remuneration Guideline that formulates the remuneration principles and parameters applied across the Baloise Group. This Remuneration Guideline applies to all employees throughout the Baloise Group. It reflects the Company’s values and principles and can be summarised as follows: Baloise Group Annual Report 2018 Corporate Governance Remuneration Report ▸ ▸ ▸ ▸ Competitiveness in the marketplace: Baloise aims to pay basic salaries that are in line with the market – i. e. around the market median – and to offer variable remu- neration packages in excess of the going market rate to reward outstanding performance by the Company and individuals; Remuneration that reflects the performance of the Company as a whole and individual performance; Fairness and transparency: external market-based comparisons, fair pay and no discrimination; Sustainability: high correlation between the interests of managers and shareholders, long-term commitment and a high proportion of restricted shares. The Board of Directors used this Remuneration Guideline as the basis for the Remuneration Policy, which applies to all employees in Switzerland and, by analogy, to all members of staff through- out the Baloise Group. By adopting this Remuneration Guideline and Remuneration Policy, the Board of Directors has ensured that all aspects of remuneration policy are standardised for the entire group. This regulatory framework underpins a remuneration system that meets all the requirements of the Swiss Financial Market Supervisory Authority and, in particular, ensures that variable remuneration accurately reflects the value added by the Company. 4. REMUNERATION SYSTEM Objectives The objectives of the remuneration system are to further increase the emphasis on performance at Baloise and to strengthen employees’ and executives’ loyalty and commitment to the organisation. The aim of Baloise’s remuneration policies is to pay basic salaries in line with the going market rate. In addition, the variable components of remuneration are structured in such a way that it is possible to grant payments above the market median for years in which individual performance and the Company’s profitability have been good; equally, it is possible to offer payments below the market median for years in which performance and profitability have been poor. As a performance- driven organisation, Baloise clearly and transparently aligns team targets and the contributions of individual employees with the Company’s targets, which are derived from its strategic priorities. The amount of the individually specified variable remuneration correlates with the individual contributions to the achievement of targets. The total remuneration package – which comprises basic salary and variable remuneration – offers a sophisticated way of linking the performance of the team and of individuals to Baloise’s success and recognising both accord- ingly, and it is designed to reward employees for outstanding achievement without creating an incentive for them to take inappropriate risks. Personal performance provides our talented individuals with the necessary platform for their development, advancement, career planning and promotion. Baloise attaches considerable importance to retaining high performers and managing its business sustainably. In addition to paying its staff in line with market rates and according to individual achievement, the Company encourages its executives to focus on the longer term and on its shareholders’ interests. Consequently, it pays a substantial proportion of variable remuneration in the form of shares that are restricted for three years. Furthermore, the three most senior management levels receive performance share units, which means that a further component of their salaries is paid out as prospective entitlements; these PSUs must be held for three years before being converted into shares as a form of deferred remuneration. As managers’ strategic responsibility and influence grow, the amount of their variable remuneration is largely determined by the Company’s profitability and eco- nomic value added (allowing for the level of risk taken). Variable remuneration as a percentage of total compensation as well as the proportion of remuneration paid in the form of restricted shares (in the sense of a deferred compensation) increase accordingly. 100 % 75 % 50 % 25 % 0 % Management level 3 Management level 2 Corporate Executive Committee Deferred and restricted variable remuneration Cash portion of short-term variable remuneration Basic salary 91 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report Performance management system In 2017, Baloise revised the performance management system for short-term variable remuneration that had been in place since 2011. The short-term variable remuneration is closely linked to achievement of the Company’s goals and is calculated solely on the basis of the performance pool – the individual perfor- mance-related pay element has been scrapped. The performance management system thus underpins the implementation of Baloise’s Simply Safe strategy, as it puts the focus on achieving the three strategic pillars: “cash upstream”, “customer growth” and “employees”. The performance management system applies to the members of the Corporate Executive Committee and to the most senior level of management and most other members of the management team throughout the Baloise Group. Market comparisons Baloise regularly compares the salaries paid to its senior exec- utives with those paid in the wider market. The Corporate Key Position Benchmark survey conducted by Willis Towers Watson (for the whole Baloise Group) and Kienbaum (for Luxembourg) uses function-specific peer groups. Each function being com- pared is assigned to one of three distinct peer groups. Assign- ment is based on which companies Baloise is competing against for the skill-sets and qualifications needed for each function (i. e. recruitment market) and which alternative employers – in theory, at least – meet a certain function profile (i. e. competitors). The first peer group replicates Baloise’s core market and comprises direct insurers in the respective country. This peer group is used for conventional insurance and sales functions and for the local CEOs, executive directors and senior manage- ment functions. The second peer group supplements the core- market group by including further companies from the banking and financial services sector in the respective country. This group is designed to compare functions that demand considerable financial expertise but do not necessarily require an insurance background. The third peer group consists of companies of a similar size and structure from various sectors and is used for interdisciplinary functions. Baloise regularly compares the salaries paid in its insurance- specific and insurance-related functions in Switzerland with those of its relevant competitors and takes part in the Club Survey that Kienbaum has been conducting since 1995. This benchmarking survey of the salaries paid in the Swiss insurance sector is constantly being optimised to ensure that it meets participants’ high professional standards and quality require- ments. The comparison mainly covers insurance-specific func- tions up to middle management level. It also examines insur- ance-related, managerial and specialist functions performed by senior executives. Functions not covered by the Kienbaum comparison are regularly reviewed using the Willis Towers Watson Financial Services Compensation Survey. The findings of these benchmarking surveys are fed into the Company’s regular review of its salary structures and presented to the Remuneration Committee. Baloise also regularly conducts market comparisons of its local functions in the countries outside Switzerland. 5. COMPONENTS OF REMUNERATION Baloise views its compensation packages in the round and therefore factors in not only the basic salary plus short- and long- term variable remuneration but also other benefits such as pension contributions, additional benefits and staff development. Basic salary The basic salary constitutes the level of remuneration that is commensurate with the functions and responsibilities of the position concerned as well as the employee skills and expertise required in order to achieve the relevant business targets and objectives. When determining the level of its basic salaries, Baloise aims to position itself around the market median, although the way in which this is done will vary depending on local operating and market requirements. This remuneration is paid by bank transfer. In order to ensure fairness and compli- ance with its code of conduct when determining the level of basic salaries, Baloise applies the internal fair-pay principle that people who do the same job and have the same qualifica- tions should be paid the same amount. The Company’s clearly defined and market-based salary structures (e. g. grade-based salary bands) help ensure fair pay both inside and outside the organisation. 92 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report Short-term variable remuneration The key factors determining the amount of short-term variable remuneration paid are the Company’s profitability and economic value added, the performance of the team and an employee’s individual contribution to the team’s performance. The resulting link between the Company’s profits and the performance of the team as well as the individual is designed to incentivise staff to achieve outstanding results and work towards the success of areas beyond their own sphere of responsibility. Measurement of the short-term variable remuneration paid to employees who perform control functions (risk management, compliance, Group Internal Audit) is structured in such a way that it is not determined directly by the profitability of the unit being monitored or by the profitability of individual products or transactions. The remuneration paid to the insurance sales force is, by its very nature, strongly performance-related in line with the system of commissions commonly used in the insurance industry as a whole. However, these commissions constitute selling expenses rather than being regarded as variable remuneration in the strict sense of the term. Consequently, they are not dis- cussed in this remuneration report. Short-term variable remuneration is paid together with the salary for March of the following year. Baloise attaches consid- erable importance to managing its business sustainably and ensuring a high correlation between the interests of its share- holders and executives. It therefore pays a substantial propor- tion of variable remuneration in the form of shares. Senior managers can choose what percentage of their remuneration is paid out and what proportion they receive in the form of shares. This choice is limited for the most senior managers, who are obliged to subscribe for shares on a sliding-scale basis: members of the Corporate Executive Committee must receive at least 50 per cent of their short-term variable remuneration in the form of shares, which account for at least 70 per cent of total variable remuneration if the long-term effect of performance share units is included (see page 91). The shares subscribed in this way are restricted for three years and during this period are exposed to market risk. This mandatory purchase of shares in particular ensures that as senior executives’ managerial responsibilities and total remuneration packages increase, a significant propor- tion of their compensation is paid in the form of deferred remu- neration. This system also raises employees’ risk awareness and encourages them to maintain sustainable business practices. Two plans are available to individuals who wish to subscribe for shares: the Share Subscription Plan and the Share Participation Plan (see “7. Share Subscription Plan and Share Participation Plan”). From 2018, short-term variable remuneration will be based exclusively on the performance pool. Performance pool The performance pool takes account of the entire Baloise Group’s performance; its amount is determined by the Remuneration Committee after the end of the financial year concerned, and it factors in the following indicators resulting from systematic analysis: ▸ Strategy implementation The indicators are the three strategic goals set by Baloise for the period 2017 to 2021, comprising a cash upstream of CHF 2 billion into Bâloise Holding, one million new customers and a rating as one of the best employers in the sector. Business performance The key metric for this criterion is the profit for the period, with the combined ratio, the interest margin and the busi- ness mix in the life insurance business as sub-criteria. Risks taken The indicators used to gauge the success of the Company’s business from a risk perspective are the Swiss Solvency Test (SST) ratio, economic profit, the credit rating awarded by Standard & Poor’s and assessments provided by the Chief Risk Officer and the Head of Group Compliance. Capital-markets perspective compared with competitors The main metric used to evaluate this criterion is the performance of Baloise’s share price including dividends paid compared with the 35 European insurance companies represented in the STOXX Europe 600 Insurance Index (the composition of this index is shown in the table on page 96). ▸ ▸ ▸ The evaluations by the Head of Group Human Resources and others of strategy requirements that cannot be precisely mea- sured and the assessments by the Chief Risk Officer and the Head of Group Compliance of the risks taken are also based on qualitative criteria and non-financial indicators such as the efforts made in respect of talent management and staff engage- 93 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report ment, senior managers’ risk behaviour, compliance with proce- dures and regulations and the practising of a genuine compliance culture, and the effectiveness of the internal control system. Performance pool payments are awarded to individuals at the discretion of the line manager concerned. The amount of these payments is mainly determined by a holistic assessment consist- ing of the achievement of targets (gauged by the extent to which the teams have achieved their targets and objectives and by the contributions of individual employees) as well as the conduct and behaviour of employees. The individual performance pool payment proposed by the respective line manager is discussed by the relevant management team, compared with other depart- ments and divisions, and adjusted where necessary. This process ensures that risk-relevant behavioural attributes are factored into the performance pool payments awarded to individuals. This chosen system is centred on senior managers’ overall assessment and the validation of individuals’ performance pool payments at round-table discussions. The aim here is to give due consideration to all aspects of an individual’s performance rather than using just a few parameters to make an assessment that may neglect other key factors. Those considered for performance pool payments are the most senior management level in the Baloise Group, the major- ity of senior managers in Switzerland and the corresponding functions abroad. However, there is no entitlement to receive payments from the performance pool. The Remuneration Committee decides on the performance pool payments awarded to the individual members of the Corporate Executive Committee. The average expected value amounts to 60 per cent of basic salary; the maximum amount that can be allocated per member of the Corporate Executive Committee is 90 per cent of the basic salary, or 150 per cent of the expected value. In addition to the individual targets, the awarding of per- formance pool payments takes into account the contribution of each individual member of the Corporate Executive Committee to the achievement of the Company targets. The assessment of target achievement and the allocation of the performance pool is based on the reporting and the proposals made to the Remu- neration Committee by the Chairman of the Board of Directors (for the CEO) and by the CEO (for the members of the Corporate Executive Committee). The Committee discusses each individual member, assessing their performance during the year under review and any changes compared to the prior year. For the 2018 financial year the Remuneration Committee decided, on the basis of a positive overall assessment, on a factor of 100 per cent of the normally expected value of per- formance pool payments. The same factor was agreed for the members of the Corporate Executive Committee and the Group. This decision was motivated by the following considerations: The Remuneration Committee conducts a detailed assess- ment of the Company’s performance once a year on the basis Strategy implementation How successfully were the strategic targets implemented? Cash upstream Customer growth Employees Baloise is on schedule with its Simply Safe strategic phase and making good progress in respect of all three targets. In terms of moving closer to achieving the strategic objectives, it surpassed the interim targets for 2018 both for cash and for new customers. The cash upstream for 2018 was CHF 449 million (target for 2021: CHF 2 billion). The number of new customers increased by 186,000 to 304,000 (target to be achieved by 2021: one million additional customers). Baloise narrowly missed its target for employee ratings in the last financial year, although it made a significant improvement from the top 25 per cent to the top 23 per cent (target to be achieved by 2021: top 10 per cent of employers in the industry). Neutral / Positive Main indicator Key question Sub-criteria Appraisal Rating 94 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report Main indicator Key question Sub-criteria Appraisal Rating Business performance What is the operating profit? Profit for the period (incl. combined ratio and interest margin in life insurance, as well as the business mix in life insurance) The Group’s profit for the period was in line with expectations. Reserve strengthening in respect of a hospital liability insurance portfolio had an adverse effect. The combined ratio was reduced in all national units, with Germany performing particularly well. The figures were bolstered by the interest margin in life insurance, which was well above target. Neutral Main indicator Key question Sub-criteria Appraisal Rating Risks taken How should the operating performance be assessed from a risk perspective? SST Economic Profit S&P rating Internal perspective Compliance Baloise remains strongly positioned in the market despite the persistently difficult interest rate situation, as evidenced by the very good SST ratio and the S&P rating of A + with a stable outlook. From a compliance perspective, events in 2018 were dominated by the introduction of the new European General Data Protection Regulation. All of the Company’s business units broadly met the legal and regulatory require- ments of the new legislation. No material compliance violations were identified in the year under review. Positive Main indicator Key question Sub-criteria Appraisal Rating Capital markets perspective How did Baloise perform relative to other companies on the stock market? Total shareholder return The total shareholder return (TSR) for 2018 is – 7.46 per cent, slightly outperforming the Swiss equities market (SPI). In its peer group of companies on the STOXX® Europe 600 Insurance Index, Baloise is just below the median. Neutral / Negative 95 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report of the various criteria mentioned above and adjusts the size of the performance pool accordingly. It consciously does not carry out any weighting of the four main indicators so as to avoid giving either too much or too little weight to either the qualitative or quantitative criteria. As the table below illustrates in the form of a comparison with the consolidated profit for the period, when the performance pool factor is set in this way, it goes up or down in line with the Company’s success, although it is not directly derived from this key figure alone: 2011 2012 2013 2014 2015 2016 2017 2018 Performance pool (as a percentage of the normal expected value) Consolidated profit for the period (CHF million) 70 % 100 % 120 % 137 % 100 % 107 % 120 % 100 % 61.3 485.2 455.4 711.9 511.1 533.9 531.9 522.9 Long-term variable remuneration: performance share units In addition, Baloise grants performance share units (PSUs) to the most senior managers as a form of long-term variable remu- neration. The PSU programme enables the top management level to benefit even more from the Company’s performance and helps Baloise to retain high performers in the long run. At the beginning of each vesting period, the participating employees are granted rights in the form of PSUs, which entitle them to receive a certain number of shares free of charge after the vesting period has elapsed. The Remuneration Committee specifies the grant date and applies its own discretion in deciding which of the most senior management team members are eligible to participate. It determines the total number of PSUs available and decides how many are to be awarded to each member of the Corporate Executive Committee. PSUs are granted to the other participating employees on the basis of the relevant line manager’s proposal, which must be approved by the line manager’s manager. The number of shares that can be subscribed after three years – i. e. at the end of the vesting period – depends on the performance of Baloise shares (total shareholder return or TSR) relative to a peer group. This comparative performance multiplier has been revised for allocations of PSUs from 2018 onward and can now be anywhere between 0.0 and 2.0. The aim of this change was to anchor the performance-related pay principle even more firmly within the long-term variable remuneration structure. The peer group comprises the 35 leading European insurance companies contained in the STOXX Europe 600 Insurance Index. One PSU generally confers the right to receive one share. This is the case if the Baloise TSR performs in line with the median of the peer group. In this case the performance multiplier would be 1.0. Participants receive more shares in exchange for their PSUs if the Baloise TSR for the vesting period is higher than the TSRs of the peer group. The multiplier reaches the maximum of 2.0 if Baloise has the highest TSR of all companies in the peer Companies in the STOXX Europe 600 Insurance Index (as at 31 December 2018) ADMIRAL GRP CNP ASSURANCES NN GROUP DIRECT LINE INSURANCE GROUP OLD MUTUAL STOREBRAND SWISS LIFE HLDG AEGON AGEAS ALLIANZ ASR NEDERLAND NV GJENSIDIGE FORSIKRING PHOENIX GROUP HDG. SWISS REINSURANCE COMPANY HANNOVER RUECK HELVETIA HLDG POSTE ITALIANE PRUDENTIAL PZU GROUP TRYG ZURICH INSURANCE GROUP ASSICURAZIONI GENERALI HISCOX AVIVA AXA BALOISE BEAZLEY JARDINE LLOYD THOMPSON RSA INSURANCE GRP LEGAL & GENERAL GRP MAPFRE SAMPO SCOR MUENCHENER RUECK ST. JAMES’S PLACE CAPITAL Source: http://www.stoxx.com/index-details?symbol=SXIP 96 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report group. The multiplier amounts to 0 if the Baloise TSR is in the bottom quartile of companies in the peer group. If this happens, no prospective entitlements will be converted into shares. Consequently, the performance multiplier increases on a linear basis from the bottom quartile from 0.5 to 2.0. The performance multiplier is defined for the entire vesting period ended, based on the closing stock market prices on the final trading day of the respective vesting period and taking the dividend payments for the period into account. Participants receive the pertinent number of shares once the vesting period has elapsed, which means that for the PSUs allocated in 2018 they receive their shares on 1 March 2021. If an individual’s employment contract is terminated during the vesting period, the PSUs expire without the person concerned receiving any consideration or compensation. This does not apply if the employment contract ends due to retirement, disability or death. It also does not apply if the contract is terminated but the participant does not join a rival company or is not personally at fault for the termination of the contract. In the latter two cases, some of the allocated PSUs will still expire. The number of PSUs expiring is proportional to the amount of time remaining until the end of the vesting period. In addition, the Remuneration Committee has the powers to claw back some or all of the PSUs allocated to an individual or to a group of participants if there are specific reasons for doing so. Such specific reasons include, for example, serious breaches of internal or external regulations, the taking of inappropriate risks that are within an individual’s control, and the type of conduct or behaviour that would increase the risks to Baloise. The shares needed to convert the PSUs are purchased in the market as and when required. Measurement of the PSUs at their issue date is based on a Monte Carlo simulation, which calculates a present value for the payout expected at the end of the vesting period. This measurement incorporates the following parameters: ▸ ▸ interest rate of 1 per cent; the volatilities of all shares in the peer group and their correlations with each other (measured over a three-year track record). The value of PSUs is exposed to market risk until the end of the vesting period and may, of course, fluctuate significantly, as shown in the table below: PERFORMANCE SHARE UNIT (PSU) PLAN 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 PSUs granted PSUs converted Change in value Date Price (CHF) 1 Date Multiplier Price (CHF) 1 Value (CHF) 2 01.03.2007 01.01.2008 01.01.2009 01.01.2010 01.01.2011 01.03.2012 01.03.2013 01.03.2014 01.03.2015 01.03.2016 01.03.2017 01.03.2018 125.80 109.50 82.40 86.05 91.00 71.20 84.50 113.40 124.00 126.00 130.70 149.20 01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.03.2015 01.03.2016 01.03.2017 01.03.2018 01.03.2019 01.03.2020 01.03.2021 1.182 1.24 0.64 0.58 0.77 1.21 1.50 1.05 1.34 0.894 1.034 0.864 86.05 91.00 64.40 78.50 113.60 124.00 126.00 130.70 149.20 135.404 135.404 135.404 101.71 112.84 41.22 45.53 87.47 150.04 189.00 137.24 199.93 120.764 138.964 116.444 3 – 19 % 3 % – 50 % – 47 % – 4 % 111 % 125 % 21 % 61 % – 4 %4 6 %4 – 22 %4 1 Price = price of Baloise shares at the PSU grant date or conversion date. 2 Value = value of one PSU at the conversion date (share price at the conversion date times the multiplier). 3 Change in value = difference between the value at the conversion date (multiplier times the share price at the conversion date) and the share price at the grant date, expressed as a percentage of the share price at the grant date; example of the PSU plan in 2007: ([{1.182  86.05} – 125.80] / 125.80) 100 = – 19 %. 4 Interim measurement as at 31 December 2018. 97 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report Fringe benefits Fringe benefits are generally defined as components of the total remuneration package that are not dependent on either an individual’s function or performance or the Company’s perfor- mance. By providing voluntary benefits in the form of retirement pensions, subsidies, concessions, and staff training and pro- fessional development, Baloise demonstrates the close part- nership that it maintains with its employees and the extent to which it values their contribution. Fringe benefits are granted on a country-by-country basis in line with prevailing local laws. 6. EMPLOYMENT CONTRACTS, CHANGE-OF-CONTROL CLAUSES, INDUCEMENT PAYMENTS AND SEVERANCE PACKAGES The employment contracts of senior managers in Switzerland and – in most cases – in other countries as well have been concluded for an indefinite period. They stipulate a notice period of six months. All members of the Corporate Executive Committee have a notice period of twelve months. The employment contract with the Chairman of the Board of Directors does not stipulate any notice period; its duration is determined by the term of appointment and by law. There are no change-of-control clauses. The Remuneration Policy adopted by the Board of Directors contains clear guidance on inducement payments and severance packages. Such remuneration may only be paid in justified cases. No severance packages may be awarded to members of either the Board of Directors or the Corporate Executive Committee, and any inducement payments granted to such persons – irre- spective of their amount – must be approved by the Remuner- ation Committee. Inducement payments and severance packages for the most senior managers must be approved by the Remu- neration Committee if they exceed CHF 100,000. Each individual case is assessed on a discretionary basis. 7. SHARE SUBSCRIPTION PLAN AND SHARE PARTICIPATION PLAN Two plans are available to individuals who wish to subscribe for shares as part of their short-term variable remuneration: the Share Subscription Plan and the Share Participation Plan. Share Subscription Plan Since January 2003, those who qualify as eligible persons at Baloise Group companies in Switzerland – and, since 2008, the members of the Executive Committees at companies outside Switzerland as well – have been able to subscribe for shares at a preferential price as part of their short-term variable remuner- ation. The subscription date is 1 March of each year; although title to the shares passes to the relevant employees on this date without any further vesting conditions having to be met, the shares cannot be sold for the duration of a three-year closed period. The parameters used to determine the subscription price are decided each year by the Remuneration Committee. The subscription price is based on the closing price before the first day of the subscription period, on which a discount of 10 per cent is granted (please refer to the accompanying table for details). Once it has been calculated using this method, the subscription price is published in advance on the intranet. The shares needed for the Share Subscription Plan are purchased in the market as and when required. Applicable closing quotation Subscription price from CHF CHF Share Subscription Plan for 2019 10.01.2019 143.80 129.42 (applies to variable remuneration awarded for the 2018 reporting period) Share Subscription Plan for 2018 10.01.2018 156.20 140.58 (applies to the variable remunera- tion granted for 2017 and to the shares subscribed by the Chairman and members of the Board of Directors in 2018) Share Participation Plan Since May 2001, it has been possible for most management team members working in Switzerland to receive part of their short-term variable remuneration in the form of shares from the Share Participation Plan instead of receiving cash. Within certain limits they are free to choose what proportion of their short-term variable remuneration they receive in the form of such shares. The most senior management team members are subject to upper limits; members of the Corporate Executive Committee – who are obliged to receive at least half of their short-term variable remuneration in the form of shares – are not allowed to receive 98 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report more than 40 per cent of their entitlement in the form of shares from the Share Participation Plan. The subscription date is 1 March of each year (the same as for the Share Subscription Plan); although title to the shares passes to the relevant employees on this date without any further vesting conditions having to be met, the shares cannot be sold during a three-year closed period. The parameters used to determine the subscription price are decided each year by the Remuneration Committee. The subscription price is based on the closing price before the first day of the subscription period, from which discounted dividend rights are deducted over a period of three years (please refer to the accompanying table for details). Once it has been calculated using this method, the subscription price is published in advance on the intranet. The shares needed for the Share Participation Plan are purchased in the market as and when required. Applicable closing quotation Subscription price from CHF CHF Share Participation Plan for 2019 10.01.2019 143.80 125.44 (applies to variable remuneration awarded for the 2018 reporting period) Share Participation Plan for 2018 10.01.2018 156.20 140.80 (applies to the variable remunera- tion granted for 2017 and to the shares subscribed by the Chairman of the Board of Directors in 2018) In order to increase the impact of this Share Participation Plan, employees are granted loans on which interest is charged at market rates, which enables them to subscribe for shares whose value constitutes a multiple of the capital invested; these shares are purchased at their fair value net of discounted dividend rights over a period of three years. Repayment of these loans after the three-year closed period has elapsed is hedged by put options, which are financed by the sale of offsetting call options. If the price of the shares is below the put options’ strike price when the closed period expires, programme participants can sell all their shares at this strike price, which ensures that they can repay their loans plus interest. In this event, however, they lose all the capital that they have invested. If, on the other hand, the price of the shares is above the call options’ strike price, pro- gramme participants must pay the commercial value of these options. Their upside profit potential is thus limited by the call options. If, when the three-year closed period elapses, the price of the shares is between the put options’ strike price and the call options’ strike price, once the loans plus accrued interest have been repaid the employees concerned receive the remain- ing shares to do with as they wish. 8. EMPLOYEE INCENTIVE PLAN The Baloise Foundation for Employee Participation set up in 1989 offers members of staff working for various Baloise Group companies in Switzerland the opportunity to purchase shares in Bâloise Holding – usually once a year – at a preferential price in compliance with the regulations adopted by the Board of Foundation. This encourages employees to maintain their commitment to the Company over the long term by becoming shareholders. The subscription price is fixed by the Board of Foundation at the beginning of the subscription period and is then published on the intranet. It equals half of the volume- weighted average share price calculated for the month of August EMPLOYEE INCENTIVE PLAN Number of shares subscribed Restricted until Subscription price per share (CHF) Value of shares subscribed (CHF million) Fair value of subscribed shares on subscription date (CHF million) Employees entitled to participate Participating employees Subscribed shares per participant (average) 2017 2018 176,252 186,489 31.08.2020 31.08.2021 77.00 13.6 26.9 3,146 2,007 87.8 76.00 14.2 27.8 3,254 2,130 87.6 99 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report in each subscription year. In 2018 the subscription price amounted to CHF 76.00 (2017: CHF 77.00) and a total of 186,489 shares were subscribed (2017: 176,252). Title to the subscribed shares passes to the relevant employees with effect from 1 September each year, and the shares are subject to a three-year closed period. are subject to the same terms and conditions as all other insured office-based members of staff. Neither the Chairman (since June 2016) nor the members of the Board of Directors are entitled to have contributions paid to the pension fund, nor have such contributions been paid to the Chairman or the members of the Board of Directors. The Foundation acquired the underlying stock of shares used in this plan from previous capital increases carried out by Bâloise Holding. It supplements these shareholdings by pur- chasing shares in the market. The existing shareholdings will enable the Foundation to continue the Employee Incentive Plan over the coming years. The Foundation is run by a Board of Foundation that is predominantly independent of the Corporate Executive Committee. The independent Board of Foundation members are Peter Schwager (Chairman) and Professor Heinrich Koller (lawyer); the third member of the Board of Foundation is Andreas Burki (Head of Legal & Tax at Baloise). 9. PENSION SCHEMES Baloise provides a range of pension solutions, which vary from country to country in line with local circumstances. In Switzer- land it offers different pension schemes for its insurance and banking employees. The Company provides its employees in Switzerland with an attractive occupational pension solution (Pillar 2) that meets the following objectives: ▸ It covers its insured employees’ needs in the event of old age, death or disability and mitigates the resultant finan- cial consequences by offering an occupational pension scheme based on the principle of social partnership. It enables its retirees to maintain the standard of living to which they are accustomed by providing them with a sufficiently high level of income replacement (combi- nation of Pillar 1 and Pillar 2 benefits) to compensate for their loss of earnings. The employer makes a disproportionately high contribu- tion to the funding of its occupational pension scheme. Its pension solutions are future-proof, robust, predicta- ble and properly costed. ▸ ▸ ▸ The members of the Corporate Executive Committee are insured under the pension scheme run by Baloise Insurance Ltd. They 100 10. RULES STIPULATED IN THE ARTICLES OF ASSOCIATION Certain rules governing remuneration are stipulated in the Articles of Association: ▸ Article 30 Additional amount for the remuneration paid to Corporate Executive Committee members appointed since the last Annual General Meeting Article 31 Annual General Meeting votes on remuneration Article 32 Principles of profit-related remuneration and the granting of equity instruments Article 34 Loans and advances granted to members of the Board of Directors and the Corporate Executive Committee ▸ ▸ ▸ www.baloise.com/rules-regulations 11. REMUNERATION PAID TO THE MEMBERS OF THE BOARD OF DIRECTORS Please refer to the tables on pages 104 and 105. The Chairman of the Board of Directors chairs the meetings of both the Board of Directors and the Chairman’s Committee. He also chairs the Investment Committee. He represents the Company externally and, acting in this capacity, maintains contact with government agencies, trade associations and other Baloise stakeholders. The Chairman of the Board of Directors liaises with the Group CEO in formulating proposals on Baloise’s long-term objectives and its strategic direction and development, and these proposals are then discussed and approved by the Board of Directors as a whole. He works closely with the Corpo- rate Executive Committee to ensure that the Board of Directors is provided with timely information on all matters of material importance to the decision-making and monitoring process at Baloise. The Chairman of the Board of Directors is entitled to attend meetings of the Corporate Executive Committee at any time. He takes part in these meetings when necessary in order to maintain a regular dialogue between himself and the Corpo- Baloise Group Annual Report 2018 Corporate Governance Remuneration Report rate Executive Committee and whenever matters of strategic or long-term importance are being discussed. The Chairman of the Board of Directors performs his various functions on a full-time basis, in return for which he is paid a fixed amount of remuneration. He is not entitled to any variable remuneration and, consequently, he receives no performance- related remuneration, no performance pool payments and no allocation of PSUs. He is paid roughly a quarter of his remuner- ation in the form of shares, although he is free to choose each year how many shares he receives under the Share Subscription Plan and how many under the Share Participation Plan. The shares that he receives under the Share Subscription Plan are subject to a closed period of five years (instead of the usual three years). The other members of the Board of Directors are paid a lump sum as remuneration for their work on the Board of Directors (CHF 125,000) and for additional functions that they perform on the Board of Directors’ committees (CHF  70,000 for the Chairman and CHF 50,000 for members). These amounts provide appropriate compensation for the responsibility and workload involved in their various functions and have remained unchanged since 2008. Since 2006 the members of the Board of Directors have received 25 per cent of their annual remuneration in the form of shares that are restricted for three years. Members of the Board of Directors receive a 10 per cent discount on the shares’ market price in line with the Share Subscription Plan available to senior executives. The members of the Board of Directors do not participate in any share ownership programmes that are predicated on the achievement of specific performance targets. No amounts receivable from current or previous members of the Board of Directors have been waived. No remuneration was paid to former members of the Board of Directors. 12. REMUNERATION PAID TO THE MEMBERS OF THE CORPORATE EXECUTIVE COMMITTEE Please refer to the tables on pages 106 to 109. The short-term variable remuneration paid to the members of the Corporate Executive Committee is allocated from the performance pool. The expected performance pool value amounts to 60 per cent of basic salary. Even in cases of outstanding individual performance and excellent performance by the Company as a whole, this payment cannot exceed 90 per cent of basic salary (cap of 150 per cent of the expected value). The Remuneration Committee decides on the performance pool payments awarded to the individual members of the Corporate Executive Committee, based on a proposal from the Chairman of the Board of Directors for the Group CEO and from the Group CEO for the other members of the Corporate Executive Commit- tee. Each proposal is discussed individually at the Remuneration Committee meeting. The allocation is based on (a) the individ- ual’s contribution to achieving the strategic targets and (b) the achievement of the individual targets, which are divided into three categories: ▸ Team target: Collaboration across business units and national subsidiaries, and across all functions and departments, is assessed. Individual target: The individual’s contribution to the team target is assessed; relevant key projects or focus topics for the member of the Corporate Executive Com- mittee concerned are examined. Development and conduct target: The professional and / or personal development of each member of the Corpo- rate Executive Committee is assessed, along with the extent to which they have set an example by putting the Baloise values into practice. ▸ ▸ The members of the Corporate Executive Committee receive performance share units (PSUs) as a form of long-term variable remuneration, which is expected to account for 40 per cent of basic salary. This system complies with Swiss legislation and meets the European standard, which stipulates that the ratio of fixed to variable remuneration should normally be one-to-one (Capital Requirements Directive IV). The structure of remuneration paid to the Corporate Exec- utive Committee is laid down in the Remuneration Policy. The actual level of remuneration paid is determined in accordance with the table below. The members of the Corporate Executive Committee must receive at least 50 per cent of their short-term variable remu- neration in the form of shares in order to ensure that their own interests are more strongly aligned with those of shareholders. This mandatory purchase of shares coupled with the shares allocated under the PSU programme ensures that, compared with the market as a whole, a significant proportion of their compensation is paid in the form of deferred remuneration. 101 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report T YPE OF REMUNERATION DECIDED BY Fixed remuneration Annual General Meeting Variable remuneration – cap Annual General Meeting – individual payment Remuneration Committee (in compliance with the cap set by the Annual General Meeting) APPLICABLE PERIOD Upcoming year Current year The Corporate Executive Committee members’ remuneration is disclosed on pages 106 to 109 in accordance with the accrual principle. The table includes all forms of remuneration awarded for performance in 2018 even if individual components are not paid until a later date. rate Executive Committee member), the total value of the shares granted in 2018 would have been CHF 2,682 million. The actual value of the shares granted was CHF 2,219 million. 13. LOANS AND CREDIT FACILITIES Please refer to the table on page 110. 14. SHARES AND OPTIONS HELD Please refer to the tables on pages 111 and 112. 15. AMOUNTS OF TOTAL REMUNERATION AND VARIABLE REMUNERATION Please refer to the table on page 113. As requested by circular 10 / 1 issued by the Swiss Financial Market Supervisory Authority on the subject of remuneration, Baloise has published in the table on page 113 the amounts of total remuneration and variable remuneration and has disclosed the total amounts of outstanding deferred remuneration and the inducement payments and severance packages granted. These figures include all forms of remuneration awarded for 2018 even if individual components are not paid until a later date. The total remuneration paid to the Corporate Executive Committee for 2018 was slightly lower overall than in the pre- vious year (sum total of basic salary plus variable remuneration down by 12.9 per cent). The change can be explained as follows: The additional costs arising from the changes to the ▸ Corporate Executive Committee in 2017 were not repeated in 2018. The basic salaries and, consequently, also the expected values for the variable remuneration of the new Corporate Executive Committee members are lower than those of the outgoing members. The performance pool factor, which is relevant for the short-term variable remuneration, is lower than in the prior year (100 per cent compared to 120 per cent), which means the total allocated variable remuneration is lower. ▸ ▸ The Annual General Meeting held on 28 April 2017 approved a maximum amount of CHF 4,043 million for the fixed remuner- ation (including pension contributions) payable to the Corporate Executive Committee for 2018. The amount paid out was CHF 3.994 million. The Annual General Meeting held on 27 April 2018 also approved a maximum amount of CHF 4,463 million for the var- iable remuneration (including pension contributions) payable for 2018. A total of CHF 3,473 million was paid out, meaning that only around four-fifths of the approved sum was used. On 1 March 2018, the performance share units allocated in 2015 were converted into shares. These PSUs had a value of CHF 1,626 million at the time of allocation. Excluding one-off items (forfeiture of rights following the resignation of a Corpo- 102 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report This page has been left empty on purpose. 103 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report REMUNERATION PAID TO THE MEMBERS OF THE BOARD OF DIRECTORS 2017 CHF Basic remuneration Remuneration for additional functions Total remuneration Pension benefits Total Of which: in shares Number of shares Dr Andreas Burckhardt 1,320,000 1,320,000 Chairman of the Board of Directors 0 Werner Kummer 125,000 295,000 Vice-Chairman of the Board of Directors Chairman’s Committee Chair of the Audit and Risk Committee Dr Michael Becker (until 28 April 2017) Audit and Risk Committee Dr Andreas Beerli Chairman’s Committee Audit and Risk Committee 62,500 125,000 Dr Georges-Antoine de Boccard 125,000 Investment Committee Remuneration Committee Christoph B. Gloor Investment Committee Audit and Risk Committee Karin Keller-Sutter Remuneration Committee Hugo Lasat Investment Committee 125,000 125,000 125,000 Dr Thomas von Planta (since 28 April 2017) 83,333 Audit and Risk Committee Thomas Pleines Chair of the Remuneration Committee Chairman’s Committee 125,000 Prof. Dr Marie-Noëlle Venturi - Zen-Ruffinen 125,000 Remuneration Committee 50,000 50,000 70,000 25,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 33,333 70,000 50,000 50,000 0 0 0 0 0 1,320,000 311,929 2,703 295,000 73,662 633 87,500 43,639 225,000 56,207 375 483 225,000 56,207 483 87,500 225,000 225,000 225,000 5,966 230,966 56,207 483 175,000 5,966 180,966 43,639 175,000 5,966 180,966 43,639 116,667 5,619 122,286 0 375 375 0 245,000 5,966 250,966 61,211 526 175,000 5,966 180,966 43,639 375 Total for the Board of Directors 2,465,833 798,333 3,264,167 35,449 3,299,616 789,977 6,811 Explanatory notes to the table Prior to 2012, newly elected members of the Board of Directors only received six months’ pay in the first calendar year; the first two months following election to the Board of Directors (May and June) were not remunerated. When members resigned from the Board of Directors, they received six months’ pay instead of four months’, thereby making up for the missing two months. Since 2012, newly elected members of the Board of Directors receive a fee for the full eight months of their first calendar year and in the year of their resignation they are paid for just four months. Mr Becker was elected before this change and therefore on the payment date in March 2017 received an additional two months’ remuneration on top of the four months’ remuneration he was due for 2017 (half each in shares and cash). Remuneration paid to former members and related parties No remuneration on a non-arm’s-length-basis was paid to individuals or companies who are related to members of the Board of Directors. Related parties are spouses, life partners, children under 18 years, companies owned or controlled by directors, and legal entities or individuals who act as trustees for them. No amounts receivable from these persons were waived. Shares 25 per cent of contractually agreed overall remuneration is paid in shares which remain restricted for three years. They are recognised at market value less 10 per cent (CHF 116.37, in line with the Share Subscription Plan). The Chairman of the Board of Directors received 1,340 shares in connection with the Share Subscription Plan (CHF 155,936, with a closed period of five years instead of the usual three years) and 1,363 shares under the Share Participation Plan (CHF 155,993). Pension contributions The information disclosed for 2017 includes the contributions that the employer is required by law to pay into the state-run social security schemes (up to the pensionable or insurable threshold in each case). Neither the Chairman (since June 2016) nor the members of the Board of Directors are entitled to have contributions paid to the pension fund, nor have such contributions been paid to the Chairman or the members of the Board of Directors. 104 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report REMUNERATION PAID TO THE MEMBERS OF THE BOARD OF DIRECTORS 2018 CHF Basic remuneration Remuneration for additional functions Total remuneration Pension benefits Total Of which: in shares Number of shares Dr Andreas Burckhardt 1,320,000 1,320,000 Chairman of the Board of Directors 0 Werner Kummer (until 27 April 2018) 62,500 139,167 0 0 1,320,000 311,895 2,217 139,167 69,447 494 Vice-Chairman of the Board of Directors Chairman’s Committee Chair of the Audit and Risk Committee Dr Andreas Beerli 125,000 Vice-Chairman of the Board of Directors (since 27 April 2018) Chairman’s Committee Audit and Risk Committee (until 27 April 2018) Chair of the Audit and Risk Committee (since 27 April 2018) 16,667 25,000 35,000 33,333 50,000 16,667 46,667 271,667 0 271,667 56,232 400 Dr Georges-Antoine de Boccard 125,000 225,000 0 225,000 56,232 400 Investment Committee Remuneration Committee Christoph B. Gloor Investment Committee Audit and Risk Committee Karin Keller-Sutter Remuneration Committee Hugo Lasat Investment Committee Dr Thomas von Planta Chairman’s Committee (since 27 April 2018) Audit and Risk Committee Thomas Pleines Chair of the Remuneration Committee Chairman’s Committee 125,000 125,000 125,000 125,000 125,000 Prof. Dr Hans-Jörg Schmidt-Trenz (since 27 April 2018) 83,333 Remuneration Committee Prof. Dr Marie-Noëlle Venturi - Zen-Ruffinen 125,000 Remuneration Committee (until 27 April 2018) Audit and Risk Committee (since 27 April 2018) 50,000 50,000 50,000 50,000 50,000 50,000 33,333 50,000 70,000 50,000 33,333 16,667 33,333 225,000 5,966 230,966 56,232 400 175,000 5,966 180,966 43,720 175,000 0 175,000 43,720 208,333 5,966 214,299 43,720 311 311 311 245,000 9,798 254,798 61,152 435 116,667 0 116,667 0 0 175,000 5,966 180,966 43,720 311 Total for the Board of Directors 2,465,833 810,000 3,275,833 33,662 3,309,495 786,071 5,590 Explanatory notes to the table Prior to 2012, newly elected members of the Board of Directors only received six months’ pay in the first calendar year; the first two months following election to the Board of Directors (May and June) were not remunerated. When members resigned from the Board of Directors, they received six months’ pay instead of four months’, thereby making up for the missing two months. Since 2012, newly elected members of the Board of Directors receive a fee for the full eight months of their first calendar year and in the year of their resignation they are paid for just four months. Mr Kummer was elected before this change and therefore on the payment date in March 2018 received an additional two months’ remuneration on top of the four months’ remuneration he was due for 2018 (half each in shares and cash). This does not include the fee for Mr Kummer’s service as Vice-Chairman of the Board of Directors, which was duly paid for the four-month period up to his resignation from the Board of Directors. Remuneration paid to former members and related parties No remuneration on a non-arm’s-length-basis was paid to individuals or companies who are related to members of the Board of Directors. Related parties are spouses, life partners, children under 18 years, companies owned or controlled by directors, and legal entities or individuals who act as trustees for them. No amounts receivable from these persons were waived. Shares 25 per cent of contractually agreed overall remuneration is paid in shares which remain restricted for three years. They are recognised at market value less 10 per cent (CHF 140.58, in line with the Share Subscription Plan). The Chairman of the Board of Directors received 1,109 shares in connection with the Share Subscription Plan (CHF 155,903, with a closed period of five years instead of the usual three years) and 1,108 shares under the Share Participation Plan (CHF 155,992). Pension contributions The information disclosed for 2018 includes the contributions that the employer is required by law to pay into the state-run social security schemes (up to the pensionable or insurable threshold in each case). Neither the Chairman (since June 2016) nor the members of the Board of Directors are entitled to have contributions paid to the pension fund, nor have such contributions been paid to the Chairman or the members of the Board of Directors. 105 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report REMUNERATION PAID TO THE MEMBERS OF THE CORPORATE EXECUTIVE COMMIT TEE Basic salary Cash payment (fixed) Cash payment Share Subscription Plan Share Participation Plan Performance share units (PSU) Total variable remuneration Variable remuneration remuneration of basic salary Non-cash benefits contributions tion Total basic salary Variable remunera- plus variable tion as percentage Pension Total remunera- 2017 Gert De Winter Group CEO Michael Müller Head of Corporate Division Switzerland CHF CHF Number of shares CHF Number of shares 950,000 313,507 2,230 313,493 700,000 163,904 2,718 382,096 0 0 CHF 0 0 Granted in 2017 Number of PSUs CHF Number of shares CHF CHF 3,003 420,120 2,230 1,047,120 1,997,120 110 % CHF 0 CHF CHF 194,871 2,191,990 1,809 253,079 2,718 799,079 1,499,079 114 % 5,121 174,338 1,678,538 Dr Thomas Sieber 621,000 164,038 874 122,867 873 122,955 1,776 248,462 1,747 658,322 1,279,322 106 % 5,121 194,871 1,479,314 Head of Corporate Division Corporate Centre Dr Carsten Stolz (since 1 May 2017) 333,334 120,085 853 119,915 0 0 66,686 853 306,686 640,019 92 % 5,121 133,700 778,841 Head of Corporate Division Finance Dr Matthias Henny (since 1 May 2017) 333,334 136 938 131,864 625 88,000 93,360 1,563 313,360 646,694 94 % 5,121 134,446 786,261 Head of Corporate Division Asset Management German Egloff (until 30 October 2017) 575,000 151,800 Departing Head of Corporate Division Finance Martin Wenk (until 30 October 2017) 575,000 151,800 Departing Head of Corporate Division Asset Management 0 0 0 0 0 0 0 0 0 0 0 0 151,800 726,800 26 % 5,121 191,300 923,221 151,800 726,800 26 % 64,621 205,836 997,257 477 667 0 0 Total for the Corporate Executive Committee 4,087,667 1,065,270 7,613 1,070,236 1,498 210,955 7,732 1,081,707 9,111 3,428,167 7,515,834 84 % 90,226 1,229,361 8,835,422 Explanatory notes to the table Remuneration is disclosed in accordance with the accrual principle. The table includes all forms of remuneration awarded for performance in 2017 even if individual components are not paid until a later date. Amounts are gross, before deduction of social security contributions etc. The basic salary of Matthias Henny and Carsten Stolz is recognised pro rata from 1 May 2017. German Egloff and Martin Wenk received their usual monthly salary until the end of their notice period on 31 October 2017; payments from the performance pool were made for the time served as members of the Corporate Executive Committee until 30 April 2017. Remuneration paid to former members and related parties No remuneration on a non-arm’s-length basis was paid to companies or individuals who are related to members of the Corporate Executive Committee. Related parties are spouses, life partners, children under 18 years, companies owned or controlled by directors, and legal entities or individuals who act as trustees for them. No amounts receivable from these persons were waived. German Egloff received CHF 30,013 and Martin Wenk received CHF 21,897 in remuneration payments for November and December 2017, for roles performed after the end of their notice period. Share Subscription Plan Proportion of variable remuneration received directly as shares, which are measured at market value less 10 per cent markdown. Subscription price = CHF 140.58. Share Participation Plan Proportion of variable remuneration received as shares (excluding loans to purchase shares), which are measured at market value less dividend rights discounted over three years. Subscription price = CHF 140.80. Performance share units (PSUs) These have been disclosed at their value of CHF 139.90 at the grant date and measured using a Monte Carlo simulation, which calculates a present value for the payout expected at the end of the vesting period. The PSUs allocated to Matthias Henny and Carsten Stolz on 1 March 2017 are based on the terms and conditions of their employment prior to joining the Corporate Executive Committee and have been recognised pro rata from 1 May 2017 for eight months. 106 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report (fixed) Cash payment Share Subscription Plan Share Participation Plan Performance share units (PSU) Total variable remuneration Granted in 2017 CHF CHF Number of shares CHF Number of shares CHF Number of PSUs CHF Number of shares CHF CHF 950,000 313,507 2,230 313,493 3,003 420,120 2,230 1,047,120 1,997,120 110 % CHF 0 CHF CHF 194,871 2,191,990 700,000 163,904 2,718 382,096 1,809 253,079 2,718 799,079 1,499,079 114 % 5,121 174,338 1,678,538 Variable remuneration Total basic salary plus variable remuneration Variable remunera- tion as percentage of basic salary Non-cash benefits Pension contributions Total remunera- tion Dr Thomas Sieber 621,000 164,038 874 122,867 873 122,955 1,776 248,462 1,747 658,322 1,279,322 106 % 5,121 194,871 1,479,314 477 667 0 0 66,686 853 306,686 640,019 92 % 5,121 133,700 778,841 93,360 1,563 313,360 646,694 94 % 5,121 134,446 786,261 0 0 0 0 151,800 726,800 26 % 5,121 191,300 923,221 151,800 726,800 26 % 64,621 205,836 997,257 Total for the Corporate Executive Committee 4,087,667 1,065,270 7,613 1,070,236 1,498 210,955 7,732 1,081,707 9,111 3,428,167 7,515,834 84 % 90,226 1,229,361 8,835,422 Non-cash benefits Based on all remuneration elements required to be declared on the Swiss salary certificate, including long-service awards, taxable benefits relating to shares received in connection with the Employee Incentive Plan (maximum of 100 shares per annum). In 2017, Martin Wenk received a loyalty bonus in cash for his service anniversary. Michael Müller, Thomas Sieber and Carsten Stolz opted for additional annual leave for their service anniversaries instead of a loyalty bonus in cash. Pension benefits These comprise the estimated employer contributions to the state-run social security schemes and the pension fund (up to the pensionable or insurable threshold in each case). REMUNERATION PAID TO THE MEMBERS OF THE CORPORATE EXECUTIVE COMMIT TEE Basic salary Cash payment 2017 Gert De Winter Group CEO Michael Müller Head of Corporate Division Switzerland Head of Corporate Division Corporate Centre Head of Corporate Division Finance 0 0 0 0 0 0 0 0 0 0 Dr Carsten Stolz (since 1 May 2017) 333,334 120,085 853 119,915 Dr Matthias Henny (since 1 May 2017) 333,334 136 938 131,864 625 88,000 Head of Corporate Division Asset Management German Egloff (until 30 October 2017) 575,000 151,800 Departing Head of Corporate Division Finance Martin Wenk (until 30 October 2017) 575,000 151,800 0 0 0 0 Departing Head of Corporate Division Asset Management Explanatory notes to the table Remuneration is disclosed in accordance with the accrual principle. The table includes all forms of remuneration awarded for performance in 2017 even if individual components are not paid until a later date. Amounts are gross, before deduction of social security contributions etc. The basic salary of Matthias Henny and Carsten Stolz is recognised pro rata from 1 May 2017. German Egloff and Martin Wenk received their usual monthly salary until the end of their notice period on 31 October 2017; payments from the performance pool were made for the time served as members of the Corporate Executive Committee until 30 April 2017. Remuneration paid to former members and related parties No remuneration on a non-arm’s-length basis was paid to companies or individuals who are related to members of the Corporate Executive Committee. Related parties are spouses, life partners, children under 18 years, companies owned or controlled by directors, and legal entities or individuals who act as trustees for them. No amounts receivable from these persons were waived. German Egloff received CHF 30,013 and Martin Wenk received CHF 21,897 in remuneration payments for November and December 2017, for roles performed after the end of their notice period. Share Subscription Plan Proportion of variable remuneration received directly as shares, which are measured at market value less 10 per cent markdown. Subscription price = CHF 140.58. Share Participation Plan Proportion of variable remuneration received as shares (excluding loans to purchase shares), which are measured at market value less dividend rights discounted over three years. Subscription price = CHF 140.80. Performance share units (PSUs) These have been disclosed at their value of CHF 139.90 at the grant date and measured using a Monte Carlo simulation, which calculates a present value for the payout expected at the end of the vesting period. The PSUs allocated to Matthias Henny and Carsten Stolz on 1 March 2017 are based on the terms and conditions of their employment prior to joining the Corporate Executive Committee and have been recognised pro rata from 1 May 2017 for eight months. 107 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report REMUNERATION PAID TO THE MEMBERS OF THE CORPORATE EXECUTIVE COMMIT TEE Basic salary Cash payment (fixed) Cash payment Share Subscription Plan Share Participation Plan Performance share units (PSUs) Total variable remuneration Variable remuneration Variable Total basic salary remuneration as plus variable remuneration percentage of basic salary Non-cash benefits Pension Total remunera- contributions tion 2018 Gert De Winter Group CEO Michael Müller Head of Corporate Division Switzerland CHF CHF Number of shares CHF Number of shares 950,000 285,017 2,202 284,983 700,000 84,026 2,596 335,974 0 0 CHF 0 0 Granted in 2018 Number of PSUs CHF Number of shares CHF CHF 2,539 380,088 2,202 950,088 1,900,088 100 % CHF 0 CHF CHF 194,871 2,094,959 1,871 280,089 2,596 700,089 1,400,089 100 % 4,910 174,338 1,579,337 Dr Thomas Sieber 621,000 67 1,727 223,508 1,188 149,025 1,660 248,502 2,915 621,102 1,242,102 100 % 4,910 194,871 1,441,883 Head of Corporate Division Corporate Centre Dr Carsten Stolz 500,000 150,072 695 89,947 478 59,981 1,337 200,149 1,173 500,149 1,000,150 100 % 4,910 189,966 1,195,026 Head of Corporate Division Finance Dr Matthias Henny 500,000 125 1,390 179,894 956 119,981 1,337 200,149 2,346 500,149 1,000,150 100 % 4,910 169,966 1,175,026 Head of Corporate Division Asset Management Total for the Corporate Executive Committee 3,271,001 519,307 8,610 1,114,306 2,623 328,987 8,744 1,308,977 11,233 3,271,577 6,542,578 100 % 19,640 924,011 7,486,229 Explanatory notes to the table Remuneration is disclosed in accordance with the accrual principle. The table includes all forms of remuneration awarded for performance in 2018 even if individual components are not paid until a later date. Amounts are gross, before deduction of social security contributions etc. Remuneration paid to former members and related parties No remuneration on a non-arm’s-length basis was paid to companies or individuals who are related to members of the Corporate Executive Committee. Related parties are spouses, life partners, children under 18 years, companies owned or controlled by directors, and legal entities or individuals who act as trustees for them. No amounts receivable from these persons were waived. Share Subscription Plan Proportion of variable remuneration received directly as shares, which are measured at market value less 10 per cent markdown. Subscription price = CHF 129.42. Share Participation Plan Proportion of variable remuneration received as shares (excluding loans to purchase shares), which are measured at market value less dividend rights discounted over three years. Subscription price = CHF 125.44. Performance share units (PSUs) These have been disclosed at their value of CHF 149.70 at the grant date and measured using a Monte Carlo simulation, which calculates a present value for the payout expected at the end of the vesting period. 108 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report REMUNERATION PAID TO THE MEMBERS OF THE CORPORATE EXECUTIVE COMMIT TEE Basic salary Cash payment 2018 Gert De Winter Group CEO Michael Müller Head of Corporate Division Switzerland Head of Corporate Division Corporate Centre Head of Corporate Division Finance Head of Corporate Division Asset Management (fixed) Cash payment Share Subscription Plan Share Participation Plan Performance share units (PSUs) Total variable remuneration Granted in 2018 CHF CHF Number of shares CHF Number of shares Number of PSUs CHF Number of shares CHF CHF 950,000 285,017 2,202 284,983 2,539 380,088 2,202 950,088 1,900,088 100 % CHF 0 CHF CHF 194,871 2,094,959 700,000 84,026 2,596 335,974 1,871 280,089 2,596 700,089 1,400,089 100 % 4,910 174,338 1,579,337 0 0 CHF 0 0 Variable remuneration Total basic salary plus variable remuneration Variable remuneration as percentage of basic salary Non-cash benefits Pension contributions Total remunera- tion Dr Thomas Sieber 621,000 67 1,727 223,508 1,188 149,025 1,660 248,502 2,915 621,102 1,242,102 100 % 4,910 194,871 1,441,883 Dr Carsten Stolz 500,000 150,072 695 89,947 478 59,981 1,337 200,149 1,173 500,149 1,000,150 100 % 4,910 189,966 1,195,026 Dr Matthias Henny 500,000 125 1,390 179,894 956 119,981 1,337 200,149 2,346 500,149 1,000,150 100 % 4,910 169,966 1,175,026 Total for the Corporate Executive Committee 3,271,001 519,307 8,610 1,114,306 2,623 328,987 8,744 1,308,977 11,233 3,271,577 6,542,578 100 % 19,640 924,011 7,486,229 Non-cash benefits Based on all remuneration elements required to be declared on the Swiss salary certificate, including long-service awards, taxable benefits relating to shares received in connection with the Employee Incentive Plan (maximum of 100 shares per annum). Pension benefits These comprise the estimated employer contributions to the state-run social security schemes and the pension fund (up to the pensionable or insurable threshold in each case). Explanatory notes to the table Remuneration is disclosed in accordance with the accrual principle. The table includes all forms of remuneration awarded for performance in 2018 even if individual components are not paid until a later date. Amounts are gross, before deduction of social security contributions etc. Remuneration paid to former members and related parties No remuneration on a non-arm’s-length basis was paid to companies or individuals who are related to members of the Corporate Executive Committee. Related parties are spouses, life partners, children under 18 years, companies owned or controlled by directors, and legal entities or individuals who act as trustees for them. No amounts receivable from these persons were waived. Share Subscription Plan Proportion of variable remuneration received directly as shares, which are measured at market value less 10 per cent markdown. Subscription price = CHF 129.42. Share Participation Plan Proportion of variable remuneration received as shares (excluding loans to purchase shares), which are measured at market value less dividend rights discounted over three years. Subscription price = CHF 125.44. the payout expected at the end of the vesting period. Performance share units (PSUs) These have been disclosed at their value of CHF 149.70 at the grant date and measured using a Monte Carlo simulation, which calculates a present value for 109 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report LOANS AND CREDIT FACILITIES GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND THE CORPORATE EXECUTIVE COMMIT TEE (AS AT 31 DECEMBER) Mortgages Loans pertaining to the Share Participation Plan Other loans 2017 2018 2017 2018 2017 2018 2017 Total 2018 CHF Dr Andreas Burckhardt Chairman Werner Kummer (until 27 April 2018) Vice-Chairman Dr Andreas Beerli Member Dr Georges-Antoine de Boccard Member Christoph B. Gloor Member Karin Keller-Sutter Member Hugo Lasat Member Dr Thomas von Planta Member Thomas Pleines Member Prof. Dr Hans-Jörg Schmidt- Trenz (since 27 April 2018) Member Prof. Dr Marie-Noëlle Venturi - Zen-Ruffinen Member Total for the Board of Directors Corporate Executive Committee member with the highest outstanding loan Dr Thomas Sieber Head of Corporate Division Corporate Centre Other members of the Corporate Executive Committee Total for the Corporate Executive Committee 0 0 0 0 0 0 0 0 0 – 0 0 0 – 0 0 0 0 0 0 0 0 0 0 2,623,673 2,623,451 0 0 0 0 0 0 0 0 – 0 – 0 0 0 0 0 0 0 0 0 2,623,673 2,623,451 660,000 660,000 1,690,895 1,793,515 2,200,000 1,500,000 3,145,165 1,826,741 2,860,000 2,160,000 4,836,060 3,620,256 0 0 0 0 0 0 0 0 0 – 0 0 0 0 0 0 – 0 0 0 0 0 0 0 0 0 0 0 0 2,623,673 2,623,451 0 0 0 0 0 0 0 0 – 0 – 0 0 0 0 0 0 0 0 0 2,623,673 2,623,451 2,350,895 2,453,515 5,345,165 3,326,741 0 7,696,060 5,780,256 Explanatory notes to the table Loans and credit facilities No loans or credit facilities were granted at non-market terms and conditions a) to former members of the Board of Directors or Corporate Executive Committee; b) to individuals or companies related to members of the Board of Directors or Corporate Executive Committee. Related parties are: spouses, life partners, children under 18 years, companies owned or controlled by directors, or legal entities or individuals who act as trustees for them. Mortgages Mortgages of up to CHF 1 million are granted to staff at the following terms and conditions: 1 per cent below the customer interest rate for variable-rate mortgages and at a preferential interest rate for fixed-rate mortgages. Loans associated with the Share Participation Plan Loans to increase the effect of the Share Participation Plan (see “7. Share Subscription Plan and Share Participation Plan”). Interest is charged on loans at a market rate (2018: 1 per cent), and they have a term of three years. Other loans There are no policy loans. 110 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report SHARES HELD BY MEMBERS OF THE BOARD OF DIRECTORS (AS AT 31 DECEMBER) Discretionary shares Restricted shares Total share ownership Percentage of issued share capital 2017 2018 2017 2018 2017 2018 2017 2018 Quantity Dr Andreas Burckhardt Chairman Werner Kummer (until 27 April 2018) Vice-Chairman Dr Andreas Beerli (until 28 April 2017) Member Dr Andreas Beerli Member Dr Georges-Antoine de Boccard Member Christoph B. Gloor Member Karin Keller-Sutter Member Hugo Lasat Member Dr Thomas von Planta Member Thomas Pleines Member Prof. Dr Hans-Jörg Schmidt- Trenz (since 27 April 2018) Member Prof. Dr Marie-Noëlle Venturi - Zen-Ruffinen Member Total for the Board of Directors Percentage of issued share capital 19,543 24,452 36,367 33,542 55,910 57,994 0.115 % 0.119 % 5,787 4,508 – – 2,949 1,379 – – 8,736 5,887 – – 0.018 % 0.012 % – – 1,808 2,298 2,487 2,397 4,295 4,695 0.009 % 0.010 % 1,686 3,176 2,487 2,397 4,173 5,573 0.009 % 0.011 % 7,312 7,693 2,264 2,283 9,576 9,976 0.020 % 0.020 % 425 806 2,156 2,086 2,581 2,892 0.005 % 0.006 % 0 0 1,375 1,686 1,375 1,686 0.003 % 0.003 % 111 439 1,000 1,311 1,111 1,750 0.002 % 0.004 % 1,141 1,631 2,530 2,475 3,671 4,106 0.008 % 0.008 % – 0 0 0 42,321 40,495 – 1,000 – 1,000 – 0.002 % 1,375 56,369 1,686 50,863 1,375 98,690 1,686 91,358 0.003 % 0.202 % 0.003 % 0.187 % 0.087 % 0.083 % 0.116 % 0.104 % 0.202 % 0.187 % Explanatory notes to the table Shareholdings Includes shares held by related parties (spouses, life partners, children under 18 years, companies owned or controlled by directors, and legal entities or individuals who act as trustees for them). Restricted shares received in connection with share-based remuneration programmes are subject to a restriction period of three years. The closed period for shares received by the Chairman of the Board of Directors in connection with the Share Subscription Plan is five years. Section 20 of the Articles of Association also requires all members of the Board of Directors to lodge 1,000 shares with the Company for the duration of their term of appointment (qualifying shares). Options Members of the Board of Directors do not hold any options on Baloise shares. 111 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report SHARES HELD BY MEMBERS OF THE CORPORATE EXECUTIVE COMMIT TEE (AS AT 31 DECEMBER) Quantity Gert De Winter Group CEO Michael Müller Discretionary shares Restricted shares Total share ownership Percentage of issued share capital Prospective entitlements (PSUs) 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 16,246 19,206 4,578 5,735 20,824 24,941 0.043 % 0.051 % 7,340 8,471 Head of Corporate Division Switzerland 16,816 18,863 7,585 8,154 24,401 27,017 0.050 % 0.055 % 5,847 5,630 Dr Thomas Sieber Head of Corporate Division Corporate Centre 6,100 8,167 21,435 20,601 27,535 28,768 0.056 % 0.059 % 5,741 5,351 Dr Carsten Stolz Head of Corporate Division Finance 1,500 3,293 1,870 2,314 3,370 5,607 0.007 % 0.011 % 2,351 2,862 Dr Matthias Henny Head of Corporate Division Asset Management German Egloff (until 30 October 2017) 9,264 7,247 22,928 21,236 32,192 28,483 0.066 % 0.058 % 3,236 3,417 Head of Corporate Division Finance 966 - - 18,349 8,915 – – 19,315 – 0.040 % 12,600 – 0.026 % – – 4,406 4,406 – – 3,685 54,577 56,776 85,660 58,040 140,237 114,816 0.287 % 0.235 % 33,327 25,731 Martin Wenk (until 30 October 2017) Head of Corporate Division Asset Management Total for the members of the Corporate Executive Committee Percentage of issued share capital 0.112 % 0.116 % 0.176 % 0.119 % 0.287 % 0.235 % Explanatory notes to the table Shareholdings Includes shares held by related parties (spouses, life partners, children under 18 years, companies owned or controlled by directors, and legal entities or individuals who act as trustees for them). Restricted shares Includes loan-financed shares connected with the Share Participation Plan. Shares received in connection with share-based remuneration programmes are subject to a closed period of three years. Options held in connection with the Share Participation Plan are not reported here because they were written to hedge loans and do not originate from a separate option plan. Each put option is also offset by a countervailing call option. Prospective entitlements (PSUs) Number of allocated performance share units (granted as at 1 March 2016, 1 March 2017 and 1 March 2018). 112 Baloise Group Annual Report 2018 Corporate Governance Remuneration Report TOTAL AND VARIABLE REMUNERATION IN THE BALOISE GROUP 2017 In cash In shares Prospective entitlements Total In cash In shares Prospective entitlements 2018 Total Total remuneration CHF million Total variable remuneration (total pool) CHF million Number of beneficiaries Of which commission paid to insurance sales force 735.7 5.6 4.7 746.0 726.9 5.2 5.0 737.1 155.3 5,237 5.6 138 4.7 65 165.6 146.8 4,931 5.2 184 5.0 67 157.0 CHF million 105.5 0.0 0.0 105.5 104.8 0.0 0.0 104.8 Of which other forms of variable remuneration CHF million 47.3 5.6 4.7 57.6 40.0 5.2 5.0 50.3 Total outstanding deferred remuneration CHF million Debits / credits for remuneration for previous reporting periods recognised in profit or loss 0.0 103.5 14.6 118.1 0.0 92.7 14.7 107.4 CHF million – 0.2 0.0 0.0 – 0.2 – 0.2 0.0 0.0 – 0.2 Total inducement payments made CHF million Number of beneficiaries Total severance payments made CHF million Number of beneficiaries 0.2 5 2.3 52 0.0 0 0.0 0 0.0 0 0.0 0 0.2 2.3 0.0 6 5.4 44 0.0 0 0.0 0 0.0 0 0.0 0 0.0 5.4 Explanatory notes to the table The table includes all forms of remuneration awarded for each year even if individual components are not paid until a later date. Total remuneration All taxable benefits that the financial institution provides to persons directly or indirectly for the work they have performed for it in connection with their employment or directorship. They include cash payments, non-cash benefits, expenditure that creates or increases entitlements to pension benefits, pensions, allotment of shareholdings, conversion rights and warrants, and debt waivers. Variable remuneration Part of total remuneration, the amount or payment of which is at the discretion of the financial institution or which depends on the occurrence of agreed conditions. It includes performance-related and profit-based remuneration such as fees and commissions. Inducement and severance payments also fall under the definition of variable remuneration. Total pool All the variable remuneration that a financial institution allocates for a year regardless of its form, any contractual undertaking in respect of grant dates or payout dates and any terms and conditions attached. Inducement and severance payments made in the relevant year should be included in the total pool. Inducement payment One-off payment agreed when an employment contract is signed. Payments to compensate for lost entitlement to remuneration from a former employer also count as inducement pay. Severance payment Remuneration agreed in connection with the termination of an employment contract. Severance packages are paid only in individual justified cases and are granted only to management team members and to employees, but not to members of either the Board of Directors or the Corporate Executive Committee. 113 Baloise Group Annual Report 2018 Corporate Governance Report of the statutory auditor Ernst & Young Ltd Aeschengraben 9 P.O. Box CH-4002 Basle Phone Fax www.ey.com/ch +41 58 286 86 86 +41 58 286 86 00 To the General Meeting of Bâloise Holding AG, Basel Basel, 22 March 2019 Report of the statutory auditor on the remuneration report We have audited the accompanying remuneration report of Bâloise Holding AG for the year ended 31 December 2018. Board of Directors’ responsibility The Board of Directors is responsible for the preparation and overall fair presentation of the remuneration report in accordance with Swiss law and the Ordinance. The Board of Directors is also responsible for designing the remuneration system and defining individual remuneration packages. Auditor’s responsibility Our responsibility is to express an opinion on the accompanying remuneration report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the remuneration report complies with Swiss law and articles 14–16 of the Ordinance. An audit involves performing procedures to obtain audit evidence on the disclosures made in the remuneration report with regard to compensation, loans and credits in accordance with articles 14–16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the remuneration report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of remuneration, as well as assessing the overall presentation of the remuneration report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 114114 Baloise Group Annual Report 2018 Corporate Governance Report of the statutory auditor Opinion In our opinion, the remuneration report for the year ended 31 December 2018 of Bâloise Holding AG complies with Swiss law and articles 14–16 of the Ordinance. Ernst & Young Ltd Christian Fleig Licensed audit expert (Auditor in charge) Patrick Schwaller Licensed audit expert 115115 Unterkapitel4 Baloise 16 Review of operating performance 38 Sustainable business management 64 corporate Governance 116 Financial Report 274 Bâloise Holding ltd 292 General information Financial Report consolidated balance sheet ............................................. 118 consolidated income statement ...................................... 120 consolidated statement of comprehensive income ......... 121 consolidated cash flow statement .................................. 122 consolidated statement of changes in equity .................. 124 NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS .............................. 126 1. Basis of preparation ................................................. 126 2. application of new financial reporting standards ...... 126 3. consolidation principles and accounting policies ..... 130 4. Key accounting judgements, estimates and assumptions ..................................... 150 5. Management of insurance risk and financial risk ....... 153 6. Basis of consolidation .............................................. 196 7. information on operating segments (segment reporting) ................................................. 197 NOTES TO THE CONSOLIDATED BALANCE SHEET ........ 202 8. property, plant and equipment ................................. 202 9. intangible assets ..................................................... 204 10. investments in associates ........................................ 207 11. investment property ................................................ 209 12. Financial assets ....................................................... 209 13. Mortgages and loans ................................................ 214 14. Derivative financial instruments ............................... 215 15. Receivables .............................................................. 217 16. Reinsurance assets ................................................... 217 17. Receivables from reinsurers ..................................... 218 18. employee benefits ................................................... 219 19. Deferred income taxes ............................................. 228 20. other assets ............................................................ 230 21. non-current assets and disposal groups classified as held for sale ......................................... 231 22. Share capital ........................................................... 232 23. technical reserves (gross) ....................................... 233 24. liabilities arising from banking business and financial contracts ............................................. 242 25. Financial liabilities ................................................... 243 26. non-technical provisions ......................................... 244 27. insurance liabilities ................................................. 244 NOTES TO THE CONSOLIDATED INCOME STATEMENT .................................................. 245 28. premiums earned and policy fees .............................. 245 29. income from investments for own account and at own risk ..................................... 245 30. Realised gains and losses on investments ............... 246 31. income from services rendered ................................ 249 32. other operating income ........................................... 249 33. classification of expenses ....................................... 250 34. personnel expenses ................................................. 250 35. Gains or losses on financial contracts ....................... 251 36. income taxes ............................................................ 252 37. earnings per share ................................................... 253 38. other comprehensive income ................................... 254 OTHER DISCLOSURES ............................................... 256 39. acquisition and disposal of companies .................... 256 40. Related party transactions ....................................... 258 41. Remuneration paid to the Board of Directors and the corporate executive committee ................... 258 42. contingent and future liabilities ................................ 259 43. operating leases ...................................................... 262 44. claim payments received from non-Group insurers .................................................. 263 45. Significant subsidiaries, joint ventures and associates ......................................................... 264 46. changes to shareholdings ........................................ 266 47. Structured entities ................................................... 266 48. Joint arrangements .................................................. 266 49. events after the balance sheet date .......................... 266 REPORT OF THE STATUTORY AUDITOR TO THE ANNUAL GENERAL MEETING OF BÂLOISE HOLDING LTD, BASEL .................................. 268 t R o p e R l a i c n a n i F Unterkapitel Baloise Group annual Report 2018 Financial Report consolidated balance sheet Consolidated balance sheet cHF million Assets property, plant and equipment intangible assets investments in associates investment property Financial instruments with characteristics of equity available for sale Recognised at fair value through profit or loss Financial instruments with characteristics of liabilities Held to maturity available for sale Recognised at fair value through profit or loss Mortgages and loans carried at cost Recognised at fair value through profit or loss Derivative financial instruments Receivables from financial contracts carried at cost Reinsurance assets Receivables from reinsurers insurance receivables Receivables from employee benefits other receivables Receivables from investments Deferred tax assets current income tax assets other assets carried at cost Recognised at fair value through profit or loss cash and cash equivalents non-current assets and disposal groups classified as held for sale Total assets 118 Note 31.12.2017 31.12.2018 8 9 10 11 12 12 13 14 15 16 17 18 15 15 19 20 21 353.3 1,002.5 138.4 7,480.3 318.3 1,041.2 221.1 7,904.0 4,402.9 3,657.0 11,472.0 10,481.0 8,488.9 8,002.5 24,870.1 23,771.4 2,001.1 2,001.2 15,791.7 15,470.5 776.8 800.4 3.0 468.3 38.2 444.1 3.3 403.1 440.9 88.8 43.6 925.8 914.8 – 457.2 41.9 433.3 7.3 325.7 406.9 73.5 61.1 349.1 70.5 3,551.6 1,041.1 248.9 54.1 4,036.1 – 84,523.9 80,854.8 Baloise Group annual Report 2018 Financial Report consolidated balance sheet cHF million Equity and liabilities Equity Share capital capital reserves treasury shares Unrealised gains and losses (net) Retained earnings Equity before non-controlling interests non-controlling interests Total equity Liabilities technical reserves (gross) liabilities arising from banking business and financial contracts With discretionary participation features Measured at amortised cost Recognised at fair value through profit or loss Financial liabilities non-technical provisions Derivative financial instruments insurance liabilities liabilities arising from employee benefits other accounts payable Deferred tax liabilities current income tax liabilities other liabilities liabilities included in non-current assets and disposal groups classified as held for sale Total liabilities Total equity and liabilities Note 31.12.2017 31.12.2018 22 23 24 25 26 14 27 18 19 21 4.9 346.2 – 152.3 – 4.3 6,151.7 6,346.2 63.0 4.9 352.3 – 291.8 – 515.4 6,420.5 5,970.6 37.6 6,409.2 6,008.2 48,008.5 46,575.2 2,814.2 7,628.8 2,924.7 6,997.5 12,253.6 11,616.9 1,742.9 1,744.5 49.0 145.3 1,706.3 1,394.4 593.1 922.4 81.5 131.1 643.6 63.7 117.3 1,829.8 1,220.7 675.9 907.8 67.4 105.1 – 78,114.7 74,846.6 84,523.9 80,854.8 119 Baloise Group annual Report 2018 Financial Report consolidated income statement Consolidated income statement cHF million Income premiums earned and policy fees (gross) Reinsurance premiums ceded premiums earned and policy fees (net) investment income Realised gains and losses on investments For own account and at own risk For the account and at risk of life insurance policyholders and third parties income from services rendered Share of profit (loss) of associates other operating income Income Expense claims and benefits paid (gross) change in technical reserves (gross) Reinsurers’ share of claims incurred acquisition costs operating and administrative expenses for insurance business investment management expenses interest expenses on insurance liabilities Gains or losses on financial contracts other operating expenses Expense Profit before borrowing costs and taxes Borrowing costs Profit before taxes income taxes Profit for the period attributable to: Shareholders non-controlling interests earnings / loss per share Basic (cHF) Diluted (cHF) 120 Note 2017 2018 28 28 28 29 30 30 31 32 33 33 33 35 33 25 36 37 6,726.4 – 183.4 6,542.9 6,737.0 – 209.0 6,528.0 1,392.5 1,376.0 427.8 696.5 116.9 5.5 235.0 96.1 – 1,087.8 130.4 6.2 227.6 9,417.1 7,276.6 – 5,726.5 – 5,904.4 – 535.0 80.8 – 482.1 – 765.8 – 77.2 – 21.9 – 613.4 – 591.8 412.4 83.3 – 535.8 – 810.8 – 82.2 – 19.2 801.2 – 483.6 – 8,733.0 – 6,539.1 684.1 737.5 – 34.3 649.8 – 39.9 697.6 – 117.9 531.9 – 174.7 522.9 548.0 – 16.1 11.50 11.48 523.2 – 0.3 11.14 11.12 Baloise Group annual Report 2018 Financial Report consolidated statement of comprehensive income Consolidated statement of comprehensive income cHF million Profit for the period Items not to be reclassified to the income statement change in reserves arising from reclassification of investment property other items not to be reclassified to the income statement change in reserves arising from assets and liabilities of post-employment benefits (defined benefit plans) change arising from shadow accounting Deferred income taxes Total items not to be reclassified to the income statement Items to be reclassified to the income statement 2017 2018 531.9 522.9 – 0.7 1.3 72.4 9.9 – 21.4 61.6 4.6 9.6 118.5 – 7.7 – 26.7 98.3 change in unrealised gains and losses on available-for-sale financial assets – 182.5 – 909.1 change in unrealised gains and losses on associates change in hedging reserves for derivative financial instruments held as hedges of a net investment in a foreign operation change in reserves arising from reclassification of held-to-maturity financial assets change arising from shadow accounting exchange differences Deferred income taxes Total items to be reclassified to the income statement Other comprehensive income Comprehensive income attributable to: Shareholders non-controlling interests 7.5 78.1 – 2.5 197.0 119.3 38.1 255.1 – 3.8 – 7.7 – 0.7 271.0 – 52.5 116.2 – 586.6 316.6 – 488.3 848.5 34.7 863.4 – 14.9 21.8 12.9 121 Baloise Group annual Report 2018 Financial Report consolidated cash flow statement Consolidated cash flow statement cHF million Cash flow from operating activities profit before taxes Adjustments for Note 2017 2018 649.8 697.6 Depreciation, amortisation and impairment of property, plant and equipment and of intangible assets 8 / 9 Realised gains and losses on property, plant and equipment and on intangible assets income from investments in associates Realised gains and losses on financial assets, investment property and associates amortised cost valuation of financial instruments Change in assets and liabilities from operating acitivities Deferred acquisition costs technical reserves Reinsurers’ share of technical reserves Receivables and liabilities arising from banking business and financial contracts Receivables from investments Receivables and liabilities arising from insurance business and from reinsurers change in other assets and other liabilities from operating acitivities 9 82.7 – 6.4 – 5.5 – 1,087.2 7.9 – 81.7 405.2 – 17.9 1,872.4 27.8 72.0 102.0 67.1 – 0.9 – 6.2 981.0 6.4 – 25.8 – 501.4 – 5.0 – 744.7 26.5 140.4 581.9 11 11 – 567.2 157.7 – 407.5 69.6 – 3,562.6 – 3,720.8 3,739.0 3,883.7 – 6,538.7 – 6,160.9 5,969.7 6,541.7 – 2,972.1 – 2,446.7 2,768.5 – 453.4 62.4 34.3 – 90.1 568.6 2,499.2 – 376.5 130.6 39.9 – 136.5 1,132.6 25 Change in operating assets and liabilities purchase of investment property Sale of investment property purchase of financial assets of an equity nature Sale of financial assets of an equity nature purchase of financial assets of a debt nature Sale of financial assets of a debt nature addition of mortgages and loans Disposal of mortgages and loans addition of derivative financial instruments Disposal of derivative financial instruments Borrowing costs taxes paid Cash flow from operating activities 122 Baloise Group annual Report 2018 Financial Report consolidated cash flow statement cHF million Cash flow from investing activities purchase of property, plant and equipment Sale of property, plant and equipment purchase of intangible assets Sale of intangible assets acquisition of companies, net of cash and cash equivalents Disposal of companies, net of cash and cash equivalents purchase of investments in associates Sale of investments in associates Dividends from associates Cash flow from investing activities Cash flow from financing activities additions to financial liabilities Disposals of financial liabilities Borrowing costs paid purchase of treasury shares Sale of treasury shares cash flow attributable to non-controlling interests Dividends paid Cash flow from financing activities Total cash flow Cash and cash equivalents Balance as at 1 January change during the financial year Reclassification to non-current assets and disposal groups classified as held for sale effect of changes in exchange rates on cash and cash equivalents Balance as at 31 December Breakdown of cash and cash equivalents at the balance sheet date cash and bank balances cash equivalents cash and cash equivalents for the account and at the risk of life insurance policyholders Balance as at 31 December of which: restricted cash and cash equivalents Supplemental disclosures on cash flow from operating activities interest received Dividends received interest paid Note 2017 2018 8 9 39 39 25 25 25 – 21.7 8.4 – 27.6 0.1 – 250.4 37.7 – – 5.5 – 32.3 5.8 – 51.1 1.9 – 0.5 15.0 – 87.8 – 6.5 – 247.9 – 142.4 496.5 – 225.0 – 30.9 – 101.9 91.9 – 0.3 – 248.5 – 18.2 – – – 35.9 – 192.0 58.5 – 8.3 – 264.0 – 441.7 302.5 548.4 3,173.3 302.5 – 48.7 124.5 3,551.6 3,551.6 548.4 – – 63.9 4,036.1 2,133.2 2,543.5 0.1 1,418.3 3,551.6 77.1 749.7 98.4 – 40.5 0.0 1,492.6 4,036.1 184.8 705.2 93.2 – 27.5 123 Baloise Group annual Report 2018 Financial Report consolidated statement of changes in equity Consolidated statement of changes in equity 2017 cHF million Balance as at 1 January profit for the period other comprehensive income Comprehensive income Other changes in equity Dividend capital increase / repayment purchase of treasury shares Sale of treasury shares cancellation of (treasury) shares increase / decrease in non-controlling interests due to change in the scope of consolidation increase / decrease in non-controlling interests due to change in the percentage of shareholding Note Share capital Capital reserves Treasury shares Other changes in equity Retained earnings Equity before non- controlling interests Non- controlling interests Total equity 5.0 317.3 – 248.1 – 318.4 5,985.5 5,741.3 32.4 5,773.7 – – – – – – – – 0.1 – – – – – – – – 1.3 30.3 – – – – – – – – – 100.6 61.7 134.8 – – 38 22 39 6 – 548.0 314.1 314.1 1.3 549.3 548.0 315.4 863.4 – 16.1 1.3 – 14.9 531.9 316.6 848.5 – – – – – – – – 248.5 – 248.5 – 0.3 – 248.7 – – – – – 101.9 91.9 – 134.7 – – – – – – – – – 45.7 – – 101.9 91.9 – 45.7 – – Balance as at 31 December 4.9 346.2 – 152.3 – 4.3 6,151.7 6,346.2 63.0 6,409.2 124 Baloise Group annual Report 2018 Financial Report consolidated statement of changes in equity 2018 cHF million Balance as at 1 January profit for the period other comprehensive income Comprehensive income Other changes in equity Dividend capital increase / repayment purchase of treasury shares Sale of treasury shares cancellation of (treasury) shares increase / decrease in non-controlling interests due to change in the scope of consolidation increase / decrease in non-controlling interests due to change in the percentage of shareholding Note Share capital Capital reserves Treasury shares Other changes in equity Retained earnings Equity before non- controlling interests Non- controlling interests 4.9 346.2 – 152.3 – 4.3 6,151.7 6,346.2 – 523.2 523.2 – 511.0 – 511.0 9.6 – 501.4 532.9 21.8 Total equity 6,409.2 522.9 – 488.3 34.7 63.0 – 0.3 13.1 12.9 38 22 39 6 – – – – – – – – – – – – – – – – – – – – – 14.1 – 177.9 20.1 38.4 – – – – – – – – – – – – – – 264.0 – 264.0 – 8.3 – 272.4 – – – – – – – – 192.0 58.5 – – – – – – – – – 192.0 58.5 – – 29.4 – 29.4 – 0.5 – 0.5 Balance as at 31 December 4.9 352.3 – 291.8 – 515.4 6,420.5 5,970.6 37.6 6,008.2 125 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Notes to the consolidated annual financial statements Basis of presentation 1. BASIS OF PREPARATION the Baloise Group is a european direct insurer comprising ten different insurance companies that operate in virtually every segment of the life and non-life insurance business. its holding company is Bâloise Holding ltd, a Swiss corporation based in Basel whose shares are listed in the Regulatory Standard for equity Securities (Sub-Standard: international Reporting) of the SiX Swiss exchange. its subsidiaries are active in the direct insurance markets in Switzerland, liechtenstein, Germany, Belgium, luxembourg, Slovakia and the czech Republic. its banking business is conducted by subsidiaries in Switzerland. in addition, the Baloise Group has several fund management companies in luxembourg. the Baloise Group’s consolidated annual financial statements are based on the historical cost principle and recognise adjustments resulting from the regular fair value measurement of investment property and of financial assets and financial liabilities that are classified as available for sale or recognised at fair value through profit or loss. these consolidated annual financial statements have been prepared in accordance with international Financial Reporting Standards (iFRS), which comply with Swiss law. iFRS 4 deals with the recognition and disclosure of insurance and reinsurance contracts. the measurement of these contracts is based on local financial reporting standards. all amounts shown in these consolidated annual financial statements are stated in millions of Swiss francs (cHF million) and have been rounded to one decimal place. consequently, the sum total of amounts that have been rounded may in isolated cases differ from the rounded total shown in this report. at its meeting on 22 March 2019 the Bâloise Holding ltd Board of Directors approved the annual financial statements and the Financial Report and authorised them for issue. the financial statements have yet to be approved by the annual General Meeting of Bâloise Holding ltd. 2. APPLICATION OF NEW FINANCIAL REPORTING STANDARDS AND RESTATEMENTS 2.1 Newly applied IFRSs and interpretations IFRS 15 Revenue from Contracts with Customers iFRS 15 replaces iaS 18 (Revenue), iaS 11 (construction contracts) and a number of other revenue-related interpretations for annual periods from 2018 on. application of iFRS 15 is mandatory for all iFRS users and governs almost all contracts with customers. the main exemptions concern leases, financial instruments and insurance contracts. For those customer contracts that are not covered by the aforementioned exemptions, this new standard provides a single, principles-based five-step model to be applied to the relevant contracts with customers. the modified retrospective method was used for first-time adoption, which means no prior-period figures have to be restated. Due to the exemptions for insurance contracts and financial instruments, there is no material effect on the consolidated financial statements. IFRS 9 Financial Instruments (deferral approach selected until 31 December 2021) the Baloise Group is utilising the temporary exemption from iFRS 9 in connection with the amendments to iFRS 4 insurance contracts. it qualifies for a temporary exemption from iFRS 9 because liabilities relating to the insurance business constituted 87 per cent of the total carrying amount of all liabilities as at 31 December 2015 (cHF 63.7 billion of totally cHF 73.3 billion). there have been no changes to business activities since then, so 31 December 2015 continues to be the relevant date for calculating the proportion of liabilities relating to the insurance business. the qualitative factors within the meaning of iFRS 4.20 F b) are, firstly, Baloise’s assignment to the StoXX europe 600 insurance index under stock-market law and, secondly, Bâloise Holding aG’s regulatory categorisation by FinMa as an insurance group. By opting to apply the temporary exemption, the Baloise Group is adopting the deferral approach, which enables it to adopt iFRS 9 and iFRS 17 simultaneously with effect from 1 January 2022. Until these standards are adopted, there will be no effect on profit for the period or on balance sheet line items. 126 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FINANCIAL ASSETS FOR OWN ACCOUNT AND AT OWN RISK 31.12. cHF million Financial instruments with characteristics of equity equities equity funds Mixed funds Bond funds Real estate funds private equity Hedge funds Financial instruments with characteristics of liabilities public corporations industrial enterprises Financial institutions other Mortgages and loans Mortgages promissory notes and registered bonds time deposits employee loans Reverse repurchase agreements other loans Derivative financial instruments interest rate instruments equity instruments Foreign currency instruments Receivables Receivables from financial contracts other receivables Receivables from investments cash and cash equivalents Voluntarily measured at amortised cost or fair value through other comprehensive income under IFRS 9 Mandatorily measured at fair value through profit or loss under IFRS 9 Carrying amount Fair value Change in fair value balance compared with Carrying amount Fair value Change in fair value balance compared with 2018 2018 2017 2018 2018 2017 – – – – – – – – – – – – – – – – – – – – – 18,423.1 19,700.0 – 541.1 6,549.2 6,635.7 10.0 6,549.3 6,709.0 10.8 – 1,275.1 – 24.1 – 0.1 10,724.9 11,127.8 4,318.0 4,644.8 114.0 – 402.2 952.0 28.2 – 218.7 – – – – 952.0 28.7 – 226.6 – – – – 325.7 406.9 327.9 406.9 2,543.5 2,543.5 11.2 1.5 – 20.7 – – – – 3.0 – 75.6 – 33.9 410.3 1,700.2 1,700.2 – 927.3 104.0 323.6 95.4 611.4 783.0 370.6 15.0 106.3 59.5 – – 4.5 – – – 104.0 323.6 95.4 611.4 783.0 370.6 15.0 106.3 59.5 – – 4.6 – – – 14.9 40.6 – 28.2 101.1 63.6 – 22.5 – 1.9 85.9 – 11.4 – 0.2 – – 24.8 – – – 17.7 16.8 – 14.1 284.7 61.8 107.4 – – – – 284.7 61.8 107.4 – – – – 41.0 10.8 39.7 – – – – 127 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements CREDIT RATINGS OF FINANCIAL ASSETS FOR OWN ACCOUNT AND AT OWN RISK AT AMORTISED COST OR FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME UNDER IFRS 9 as at 31.12.2018 cHF million Financial assets of a debt nature public corporations industrial enterprises Financial institutions other Mortgages and loans Mortgages promissory notes and registered bonds time deposits employee loans Reverse repurchase agreements other loans other receivables Receivables from financial contracts other receivables Receivables from investments AAA AA A Lower than BBB or no rating BBB Carrying amount Impairment Fair Value lower than BBB or no rating 6,362.4 181.1 4,823.6 – 115.6 1,951.8 – – – 5.0 – 2.2 120.5 9,257.2 763.9 456.0 10.0 909.3 2,079.8 25.9 – – 1,579.9 2,617.5 867.7 – 8,777.5 61.1 – – – 941.9 1,624.2 233.9 – 813.9 62.1 67.5 – – 281.7 18,423.1 1,362.5 254.5 – 108.6 163.2 858.5 28.2 – 6,549.2 6,635.7 10.0 10,724.9 4,318.0 952.0 28.2 – – – 1.2 – 0.7 – – 18.8 – – 0.0 – 281.7 1,362.5 254.5 – 118.5 170.1 858.6 28.7 – 25.4 122.4 22.7 43.2 218.7 – 0.9 44.8 – 19.8 97.9 – 104.7 36.5 – 18.3 25.0 41.8 – – 180.7 127.1 325.7 406.9 – – 1.3 – 1.2 – 180.7 127.1 531.8 2,543.5 – 531.8 cash and cash equivalents 970.9 422.4 576.5 the carrying amount of the financial asset before impairment pursuant to iFRS 4.39 G a) is obtained by adding together the carrying amounts and impairment losses shown in the table above. IFRSs and interpretations not yet applied 2.2 the following new standards and interpretations relevant to the Baloise Group have been published by the iaSB but have not yet come into effect and, therefore, have not been applied in the 2018 consolidated annual financial statements: Standard / Interpretation iFRS 16 iFRS 9 iFRS 17 Content leases Financial instruments insurance contracts Applicable to annual periods beginning on or after 1.1.2019 1.1.20221 1.1.20221 1 Decision by the iaSB on 14 november 2018 to postpone introduction by one year. the decision to take the deferral approach means that iFRS 9 will be adopted for the first time simultaneously with iFRS 17 on 1 January 2022. 128 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements IFRS 16 Leases iFRS 16 applies to all leases (including sub-leases), although certain exceptions are possible. iFRS 16 governs the recognition, measurement, reporting and disclosure requirements in respect of leases. the standard provides a single accounting treatment model for lessees. this model requires lessees to recognise all lease assets and lease liabilities on the balance sheet, unless the term of the lease is twelve months or less or an asset is of low value. long-term leases on real estate are covered by the definitions in iFRS 16 and, in future, will have to be recognised with a right of use. the Baloise Group plans to apply this standard from 1 January 2019. the modified retrospective method is being used for first-time adoption. application of the standard will lead to a slight increase in the size of the balance sheet because the usage rights have to be recognised as assets while, on the other side, the lease liabilities are reported as liabilities. equity is not affected by the application of this standard. there will also be immaterial changes to the presentation of the income statement and cash flow statement because borrowing costs and depreciation, amortisation and impairment will be affected. no material effect on the profit for the period is expected. IFRS 9 Financial Instruments iFRS 9 introduces new requirements for the classification and measurement of financial instruments. classification of financial assets is based on the entity’s business model and on the contractual cash flow characteristics of the financial assets concerned. iFRS 9 introduces a new impairment model and shifts the focus to providing for expected credit losses by recognising loss allowances. iFRS 9 specifies three steps that determine the amount of expected losses and interest revenue to be recognised in future. credit losses already expected at the time of initial recognition are measured at the present value of the twelve-month expected credit losses (step 1). the loss allowance is increased to an amount equal to full lifetime expected credit losses if the credit risk of a financial liability has grown significantly since initial recognition (step 2). Where there is objective evidence of impairment, the recognition of interest revenue is based on its net carrying amount (step 3). on 12 September 2016, the iaSB issued applying iFRS 9 “Financial instruments” with iFRS 4 “insurance contracts” (amend- ments to iFRS 4). the amendments address concerns arising from implementing the new financial instruments Standard iFRS 9 before implementing the Standard iFRS 17 insurance contracts. it is not yet possible to fully assess what impact the amendments to iFRS 9 will have on the Baloise Group’s balance sheet and income statement from 2022. IFRS 17 Insurance Contracts iFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts that are within the scope of this standard. the objective of iFRS 17 is to ensure that reporting entities provide relevant information that faithfully represents their insurance contracts. this information provides a basis for users of financial statements to assess the effect that insurance contracts have on an entity’s financial position, financial performance and cash flows. iFRS 17 was published in May 2017 and is required to be applied for annual periods beginning on or after 1 January 2022. Rather than changing the business model of insurers, iFRS 17 affects their reporting. the most important changes relate to the methodology for measuring contracts. Until now, they have been measured primarily in accordance with past developments and on the basis of data that was available at the start of the contracts. analysis will now have a stronger focus on the future, with assessments based on potential cash flows. life insurance contracts, which may have a term of several decades, will be particu- larly affected. the Baloise Group has initiated a groupwide project to fully examine the effects of implementing iFRS 17. it is too early to comment on the potential impact on the consolidated financial statements. 129 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3. CONSOLIDATION PRINCIPLES AND ACCOUNTING POLICIES 3.1 Method of consolidation 3.1.1 Subsidiaries the consolidated annual financial statements comprise the financial statements of Bâloise Holding ltd and its subsidiaries, including any structured entities. a subsidiary is consolidated if the Baloise Group controls it either directly or indirectly. as a rule, this is the case if the Baloise Group has exposure or rights to variable profit components as a result of its involvement with the investee and, because of legal positions, has the ability to influence the investee’s business activities that are critical to its financial success and, therefore, to affect the amount of the variable profit components. companies acquired during the reporting period are included in the consolidated annual financial statements from the date on which control is effectively assumed, while all companies sold remain consolidated until the date on which control is ceded. acquisitions of entities are accounted for under the acquisition method (previously known as the “purchase method”). transaction costs are charged to the income statement as an expense. the identifiable assets and liabilities of the entity concerned are measured at fair value as at the date of first-time consolidation. non-controlling interests arising from business combinations are measured either at their fair value or according to their share of the acquiree’s identifiable net assets. the Baloise Group decides which measurement method to apply to each individual business combination. the acquisition cost corresponds to the fair value of the consideration paid to the previous owners on the date of the acquisition. if investments in the form of financial instruments or associates were already held before control was acquired, these investments are remeasured and any difference is recognised in profit or loss. any contingent consideration recognised as part of the consideration paid for the acquiree is measured at fair value on the transaction date. any subsequent changes in the fair value of a contingent consideration are recognised in the income statement. if the acquisition cost exceeds the fair value of assets and liabilities plus non-controlling interests, the difference is recognised as goodwill. conversely, if the identified net assets exceed the acquisition cost then the difference is recognised directly through profit or loss as other operating income. all intercompany transactions and the resultant gains and losses are eliminated. the consolidation of subsidiaries ends on the date on which control is ceded. if only some of the shares in a subsidiary are sold, the retained interest is measured at fair value on the date that control is lost. Gains or losses on the disposal of (some of) the subsidiary’s shares are recognised in the income statement as either other operating income or other operating expenses. the acquisition of additional investments in subsidiaries after assuming control and the disposal of investments in subsidiaries without ceding control are both recognised directly in equity as transactions with owners. 3.1.2 Structured entities Structured entities are consolidated provided the conditions of iFRS 10 are met. 130 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Joint arrangements 3.1.3 Joint arrangements are contractual agreements over which two or more parties have joint control. a joint arrangement is classified as either a joint operation or a joint venture. in a joint operation, the involved parties have direct rights and obligations in respect of the assets and liabilities and the income and expenses. By contrast, the parties involved in a joint venture do not have a direct entitlement to the assets and liabilities and, instead, have rights in respect of the net assets of the joint venture owing to their position as investors. Joint ventures are accounted for using the equity method, i. e. the Baloise Group initially recognises the joint ventures at cost (fair value at the date of acquisition) and thereafter recognises them under the equity method (the Baloise Group’s share of the entity’s net assets and profit or loss for the period). in the case of joint operations, the Baloise Group includes directly in its consolidated financial statements the share of the assets, liabilities, income and expenses of the joint operation that is attributable to the Baloise Group. 3.1.4 Associates associates are initially carried at cost (fair value at the date of acquisition) and thereafter are measured under the equity method (the Baloise Group’s share of the entity’s profit or loss for the period and other comprehensive income) in cases where the Baloise Group can exert a significant influence over the management of the entity concerned. changes in the fair value of associates are generally recognised in profit or loss and take account of any dividend flows. if the Baloise Group’s share of the losses exceeds the value of the associate, no further losses are recognised. Goodwill paid for associates is included in the carrying amount of the investment. Functional currency and reporting currency 3.2 Currency translation 3.2.1 each subsidiary prepares its annual financial statements in its functional currency, which is the currency of its primary economic environment. the consolidated Financial Report is presented in cHF millions, which is the Baloise Group’s reporting currency. 3.2.2 Translation of transaction currency into functional currency at Group companies income and expenses denominated in foreign currency are translated either at the exchange rate prevailing on the transaction date or at the average exchange rate. Monetary and non-monetary balance sheet items measured at fair value and arising from foreign currency transactions conducted by Group companies are translated at the closing rate. non-monetary items measured at historical cost are translated at the historical rate. any resultant exchange differences are recognised in profit or loss. this does not include exchange differences that form part of cash flow hedges and are recognised directly in hedging reserves or are used as hedges of a net investment in a foreign operation. exchange differences arising on non-monetary financial instruments recognised at fair value through profit or loss are reported as realised gains or losses on these instruments. exchange differences on available-for-sale non-monetary financial instruments are recognised in other comprehensive income. exchange differences arising on available-for-sale monetary financial instruments are recognised in profit or loss. 131 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.2.3 Translation of functional currency into reporting currency the annual financial statements of all entities that have not been prepared in Swiss francs are translated as follows when the consolidated financial statements are being prepared: ▸ ▸ assets and liabilities at the closing rate income and expenses at the average rate for the year. the resultant exchange differences are aggregated and recognised directly in equity. When foreign subsidiaries are sold, the exchange differences arising on the disposal are recognised in the income statement as a transaction gain or loss. 3.2.4 Key exchange rates CURRENCY cHF 1 eUR (euro) 1 USD (US dollar) Balance sheet Income statement 31.12.17 31.12.18 Ø 2017 Ø 2018 1.17 0.97 1.13 0.98 1.11 0.98 1.16 0.98 3.3 Property, plant and equipment items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. the acquisition cost of property, plant and equipment includes all directly attributable costs. Subsequent acquisition costs are only capitalised if future economic benefits associated with the property, plant and equipment will flow to the entity concerned and these costs can be measured reliably. all other repairs and maintenance costs are expensed as incurred. land is not depreciated. other items of property, plant and equipment are depreciated on a straight-line basis over the owner-occupied buildings: 25 to 50 years office furniture, equipment, fixtures and fittings: 5 to 10 years following estimated useful lives: ▸ ▸ ▸ Machinery, furniture and vehicles: 4 to 10 years ▸ computer hardware: 3 to 5 years at each balance sheet date the Baloise Group tests all items of property, plant and equipment for impairment and reviews the suitability of their useful lives. an impairment loss is immediately recognised on items of property, plant and equipment if their recoverable amount is lower than their carrying amount. Gains or losses on the sale of property, plant and equipment are immediately taken to the income statement as either other operating income or other operating expenses. 132 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Leases The Baloise Group as a lessee 3.4 3.4.1 Finance leases: leases on real estate, office furniture, equipment, fixtures, fittings and other tangible assets are classified and treated as finance leases if they transfer to the Baloise Group substantially all the risks and rewards incidental to ownership. the fair value of the leased property or, if lower, the present value of the lease payments is recognised as an asset at the inception of the lease. all lease payments are apportioned between the finance charge and the reduction of the outstanding liability. the finance charge is allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability; this is reported on the Baloise Group’s balance sheet as liabilities arising from banking business and financial contracts. assets held under finance leases are fully depreciated over the shorter of the lease term and their useful life. operating leases: all other leases are classified as operating leases. lease payments under operating leases are expensed in the income statement on a straight-line basis over the term of the lease. 3.4.2 The Baloise Group as a lessor investment property let on operating leases is reported as investment property on the consolidated balance sheet. Intangible assets 3.5 3.5.1 Goodwill Goodwill represents the excess of an acquiree’s acquisition cost over the fair value of its assets and liabilities plus the acquisition-date amount of any non-controlling interests in the acquiree and the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree. Goodwill is reported as an intangible asset. Goodwill is tested for impairment in the second half of each year. an impairment test may also be conducted in the first half of the year if there are objective indications that goodwill may be permanently impaired. When a new investment is acquired, the date for conducting future impairment tests is fixed and these tests are subsequently carried out at the same time each year. When entities are sold, their share of goodwill is recognised in their profit or loss. Goodwill is allocated to cash-generating units (cGUs) for the purposes of impairment testing. 3.5.2 Present value of future profits (PVFP) on insurance contracts acquired the present value of future profits on insurance contracts acquired arises from the purchase of life insurance companies or life insurance portfolios. it is initially measured in accordance with actuarial principles and is amortised on a straight-line basis. it is regularly tested for impairment as part of a liability adequacy test (see section 3.19.2 for further details). 3.5.3 Deferred acquisition costs (DACs) costs directly incurred by the conclusion of insurance contracts or financial contracts with discretionary participation features (DpFs) – such as commissions – are capitalised and amortised over the term of these contracts or, if shorter, over the premium payment period. Deferred acquisition costs are tested for impairment at each balance sheet date (see section 3.19.3 for further details). 133 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.5.4 Other intangible assets and internally developed assets other intangible assets essentially comprise software (incl. internally developed assets), external it consulting (in connection with software that has been developed) and assets identified during the acquisition of entities (such as brands and customer relationships). these assets are recognised at cost and are amortised on a straight-line basis over their useful lives. intangible assets with indefinite useful lives are not amortised and are carried at cost less accumulated impairment losses. all financing for intangible assets is generally obtained from the Baloise Group’s own financial resources. if funding from external sources is required, interest accrued during the assets’ development is capitalised as incurred. Investment property 3.6 investment property comprises land and / or buildings held to earn rental income or for capital appreciation (or both). if mixed-use properties cannot be broken down into owner-occupied property and property used by third parties, the entire property is classified according to the purpose for which most of its floor space is used. if, owing to a change of use, an investment property held by the Baloise Group becomes the latter’s owner-occupied property, it is reclassified as property, plant and equipment. any such reclassification is based on the property’s fair value at the reclassification date. By contrast, if one of the Baloise Group’s owner- occupied properties becomes an investment property owing to reclassification, then, on the date this change of use takes effect, the difference between the property’s carrying amount and its fair value is recognised in profit or loss in the event of an impairment; or, if the property’s fair value exceeds its carrying amount, then the difference is recognised directly in equity as other compre- hensive income. if an investment property that was reclassified in a previous period is sold, the amount recognised directly in equity is reclassified to retained earnings. investment property is measured at fair value under the discounted cash flow (DcF) method. the current fair value of a property determined under the DcF method equals the sum total of all net income expected in future and discounted to its present value (before interest payments, taxes, depreciation and amortisation) and includes capital expenditure and renovation costs. the net income is determined individually for each property, depending on the opportunities and risks associated with it, and is discounted in line with market rates and on a risk-adjusted basis. the measurement is carried out internally each year by experts using market-based assumptions that have been verified by respected consultancies. in addition, the properties are assessed by external valuation specialists at regular intervals; roughly 10 per cent of the fair value of the real estate portfolio is subject to such assessments each year. changes in fair value are taken to income as realised accounting gains or losses in the period in which they occur. Financial assets 3.7 the term “investments” (Kapitalanlagen in German) is used in some places and headings in the Financial Report for clarity’s sake. the term “investments” as used in the Financial Report covers financial assets, mortgages and loans, derivative financial instruments, cash, cash equivalents and investment property. the asset classes covered by the term financial instruments with characteristics of equity are equities, share certificates, units held in equity, bond and real estate funds; and alternative financial assets such as private equity investments and hedge funds. Financial instruments with characteristics of equity are generally more frequently exposed to price volatility than financial instruments with characteristics of liabilities. the term financial instruments with characteristics of liabilities covers securities such as bonds and other fixed-income securities. they are usually interest-bearing and are issued for a fixed or determinable amount. the Baloise Group classifies its financial instruments with characteristics of equity and its financial instruments with char- acteristics of liabilities as either “recognised at fair value through profit or loss”, “held to maturity” or “available for sale”. the classification of the financial instruments concerned is determined by the purpose for which they have been acquired. Mortgages and loans are generally carried at cost. in pursuing its strategy of using natural hedges, however, the Baloise Group applies the fair value option to designate parts of its portfolio as “recognised at fair value through profit or loss”. appropriately designated derivative financial instruments are used to hedge these parts of the portfolio. 134 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Financial assets recognised at fair value through profit or loss 3.7.1 this category consists of two sub-categories: held-for-trading financial assets (trading portfolio) and financial assets that are designated to this category. Financial instruments are classified in this category if they have principally been acquired with the intention of selling them in the short term, or if they form part of a portfolio for which there have recently been indications that a gain could be realised in the short term, or if they have been designated to this category. Derivative financial instruments are classified as “held for trading” (trading portfolio) with the exception of derivatives that have been designated for hedge accounting purposes. also designated to this category are structured products, i. e. equity instruments and debt instruments which, in addition to the host contract, contain embedded derivatives that are not bifurcated and measured separately. Financial assets held under investment-linked life insurance contracts are also designated as “recognised at fair value through profit or loss”. 3.7.2 Held-to-maturity financial assets Held-to-maturity financial assets are non-derivative financial instruments involving fixed or determinable payments. However, they do not include mortgages, loans (section 3.8) or receivables (section 3.9) that the Baloise Group can – and intends to – hold until maturity. 3.7.3 Available-for-sale financial assets available-for-sale financial assets are non-derivative financial instruments that have been classified as “available for sale” or have not been designated to any of the above-mentioned categories and are not classified as mortgages, loans or receivables. alternative financial assets – such as private equity investments and hedge funds – are mainly classified as “available for sale”. 3.7.4 Recognition, measurement and derecognition all customary purchases of financial assets are recognised on the trade date. Financial assets are initially measured at fair value. transaction costs form part of the acquisition cost (with the exception of financial assets recognised at fair value through profit or loss). Financial assets are derecognised if the rights pertaining to the cash flows from the financial instrument have expired or if the financial instrument has been sold and substantially all the associated risks and rewards have been transferred. cash outflows from reverse repurchase (repo) transactions are offset by corresponding receivables. the financial assets received as collateral security from the transaction are not recognised. the relevant transaction is recognised on the balance sheet on the settlement date. the financial assets transferred as collateral security under repurchase agreements continue to be recognised as financial assets. the pertinent cash flows are offset by corresponding liabilities. in its stock lending operations the Baloise Group only engages in securities lending. the borrowed financial instruments continue to be recognised as financial assets. the securities provided as cover for repos, reverse repos and securities lending transactions are measured daily at their current fair value. available-for-sale financial assets and financial assets recognised at fair value through profit or loss are measured at fair value. Held-to-maturity financial assets are measured at amortised cost using the effective interest method. Realised and unrealised gains and losses on financial assets recognised at fair value through profit or loss are taken to income. Unrealised gains and losses on available-for-sale financial assets are recognised directly in equity. if available-for-sale financial assets are sold or impaired, the cumulative amount recognised directly in equity is recognised in the income statement as a realised gain or loss on financial assets. changes in the fair value of financial assets’ risks that are covered by fair value hedges are recognised in the income statement for the duration of these hedges irrespective of the financial assets’ classification. 135 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements the fair value of listed financial assets is based on prices in active markets as at the balance sheet date. if no such prices are available, fair value is estimated using generally accepted methods (such as the present-value method), independent assessments based on comparisons with the market prices of similar instruments or the prevailing market situation. Derivative financial instruments are measured using models or on the basis of publicly quoted prices. if no publicly quoted prices are available for private equity investments, they are measured on the basis of their net asset value using non-public information from independent external providers. these providers use various methods for their estimates (e. g. analysis of discounted cash flows and reference to similar, fairly recent arm’s-length transactions between knowledgeable, willing parties). if the fair value of hedge funds cannot be determined on the basis of publicly quoted prices, then prices quoted by independent external parties are used for measurement purposes. if such estimates do not enable financial assets to be reliably measured, the assets are recognised at cost (less allowance) and disclosed accordingly. 3.8 Mortgages and loans Mortgages and loans (including policy loans) are financial instruments involving fixed or determinable payments that are not traded in an active market. Mortgages and loans classified as “carried at cost” are measured at amortised cost using the effective interest method. they are regularly tested for impairment. Mortgages and loans held as part of fair value hedges (natural hedges) are designated as “at fair value through profit or loss”. present-value models are used to measure these portfolios. 3.9 Receivables other receivables are recognised at amortised cost less any impairment losses recognised for non-performing receivables. amortised cost is usually the same as the nominal amount of the receivables. 3.10 Permanent impairment 3.10.1 Financial assets measured under the amortised-cost method (mortgages, loans, receivables and held-to-maturity financial assets) the Baloise Group determines at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets may be permanently impaired. a financial asset or a group of financial assets is only impaired if, as a result of one or more events, there is objective evidence of impairment that has an impact on the expected future cash flows from the financial asset that can be reliably estimated. objective evidence of a financial asset’s impairment includes observable data on the following cases: ▸ ▸ ▸ ▸ Serious financial difficulties on the part of the borrower Breaches of contract, such as a borrower in default or arrears with the payment of principal and / or interest Greater probability that the borrower will file for bankruptcy or undergo some other form of restructuring observable data that indicates a measurable reduction in the expected future cash flows from a group of financial assets since their initial recognition 136 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements analysts’ reports from banks and evaluations by credit rating agencies are also used to assess the need for impairment losses. if there is objective evidence that loans and receivables or held-to-maturity financial assets may be permanently impaired, the impairment loss represents the difference between the asset’s carrying amount and the present value of future cash flows, which are discounted using the financial asset’s relevant effective interest rate. if the amount of the impairment loss decreases in a subsequent reporting period and if this decrease can be attributed to an event that has objectively occurred since the impairment was recognised, the previously recognised impairment loss is reversed. the mortgage portfolio is regularly tested for impairment. if there is objective evidence that the full amount owed under the original contractual terms and conditions or the relevant proceeds of a receivable cannot be recovered, an impairment loss is recognised. loan exposures are individually evaluated based on the nature of the borrower concerned, its financial position, its credit history, the existence of any guarantors and the realisable value of any collateral security. 3.10.2 Financial assets measured at fair value the Baloise Group determines at each balance sheet date whether there is any objective evidence that available-for-sale financial assets may be permanently impaired. this category includes financial instruments with characteristics of equity. an impairment loss must be recognised on financial instruments with characteristics of equity whose fair value at the balance sheet date is more than 50 per cent below their acquisition cost or whose fair value is consistently below their acquisition cost throughout the twelve-month period preceding the balance sheet date. the need for an impairment loss is examined and, where necessary, such a loss is recognised on securities whose fair value at the balance sheet date is between 20 per cent and 50 per cent below their acquisition cost. if an impairment loss is recognised, the cumulative net loss recognised directly in equity is taken to the income statement. impairment losses on available-for-sale financial instruments with characteristics of equity that have been recognised in profit or loss cannot be reversed and taken to income. any further reduction in the fair value of financial instruments with char- acteristics of equity on which impairment losses were recognised in previous periods must be charged directly to the income statement. an impairment loss is recognised on available-for-sale financial instruments with characteristics of liabilities if their fair value is significantly impaired by default risk. if the fair value of an available-for-sale financial instrument with characteristics of liabilities rises in a subsequent reporting period and this increase can be objectively attributed to an event that has occurred since an impairment loss was recognised in profit or loss, the impairment loss is reversed and taken to income. 3.10.3 Impairment losses on non-financial assets Goodwill and any assets with indefinite useful lives are tested for impairment at the same time each year or whenever there is objective evidence of impairment. Goodwill is allocated to cash-generating units (cGUs) for the purposes of impairment testing. insurance companies that sell both life and non-life products (so-called composite insurers) test goodwill for impairment at this level. When impairment tests are performed, a cGU’s value in use is determined on the basis of the maximum discounted future cash flows (usually dividends) that could potentially be returned to the parent company. this process takes appropriate account of legal requirements and internally specified capital adequacy limits. the long-term financial planning approved by management forms the basis for this calculation of the value in use for a period of at least three years and no more than five years. these values are extrapolated for the subsequent period using an annual growth rate. the growth rate is based on the expected inflation rates of the individual countries. the discount rates include the risk mark-ups for the individual operating segments. permanent impairment losses are recognised in the income statement as other operating expenses. all other non-financial assets are tested for impairment whenever there is objective evidence of such impairment. 137 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements impairment losses recognised in previous reporting periods on assets with finite useful lives are reversed if the estimates used to determine the recoverable amount have changed since the most recent impairment loss was recognised. this increase constitutes a reversal of impairment losses. impairment losses recognised in previous reporting periods on goodwill are not reversed. impairment losses recognised in previous reporting periods on assets with indefinite useful lives are reversed and taken to income; however, the amount to which they are reversed must be no more than the amount recognised prior to the impairment losses less depreciation or amortisation. 3.11 Derivative financial instruments Derivative financial instruments include swaps, futures, forward contracts and options whose value is primarily derived from the underlying interest rates, exchange rates, commodity prices or share prices. the acquisition cost of derivatives is usually either very low or non-existent. these instruments are carried at fair value on the balance sheet. at the time they are purchased they are classified as either fair value hedges, cash flow hedges, hedges of a net investment in a foreign operation or trading instruments. Derivative financial instruments that do not qualify as hedges under iFRS criteria despite performing a hedging function as part of the Baloise Group’s risk management procedures are treated as trading instruments. the Baloise Group’s hedge accounting system documents the effectiveness of hedges as well as the objectives and strategies pursued with each hedge. Hedge effectiveness is constantly monitored from the time the pertinent derivative financial instruments are purchased. Derivatives that no longer qualify as hedges are reclassified as trading instruments. 3.11.1 Structured products Structured products are equity instruments or debt instruments that contain embedded derivatives in addition to the host contract. provided that the economic characteristics and risks of the embedded derivative differ from those of the host contract and that this derivative qualifies as a derivative financial instrument, the embedded derivative is bifurcated from the host contract and is separately recognised, measured and disclosed. if the derivative and the host contract are not bifurcated, the structured product is designated as a host contract that is recognised at fair value through profit or loss. 3.11.2 Fair value hedges When the effective portion of hedges is being accounted for, changes in the fair value of derivative financial instruments classified as fair value hedges – plus the hedged portion of the fair value of the asset or liability concerned – are reported in the income statement. the ineffective portion of hedges is recognised separately in profit or loss. 3.11.3 Cash flow hedges When the effective portion of hedges is being accounted for, changes in the fair value of derivative financial instruments classified as cash flow hedges are recognised directly in equity. the amounts reported in equity as “other comprehensive income” are taken to the income statement at a later date in line with the hedged cash flows. the ineffective portion of hedges is recognised in profit or loss. if a hedging instrument is sold, terminated or exercised or it no longer qualifies as a hedge, the cumulative gains and losses continue to be recognised directly in equity until the forecasted transaction materialises. if the forecasted transaction is no longer expected to materialise, the cumulative gains and losses recognised in equity are taken to income. 138 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.11.4 Hedges of a net investment in a foreign operation Hedges of a net investment in a foreign operation are treated as cash flow hedges. When the effective portion of hedges is being accounted for, gains or losses on hedging instruments are recognised directly in equity. the ineffective portion of hedges is recognised in profit or loss. if the foreign operation – or part thereof – is sold, the gain or loss recognised directly in equity is taken to the income statement. 3.11.5 Derivative financial instruments that do not qualify as hedges changes in the fair value of derivative financial instruments that do not qualify as hedges are recognised in the income statement as “realised gains and losses on investments”. 3.12 Netting of receivables and liabilities Receivables and liabilities are offset against each other and shown as a net figure on the balance sheet provided that an offsetting option is available and the Baloise Group intends to realise these assets and liabilities simultaneously. 3.13 Non-current assets and disposal groups classified as held for sale non-current assets (or disposal groups) held for sale that meet the criteria stipulated in iFRS 5 “non-current assets Held for Sale and Discontinued operations” are shown separately on the balance sheet. those assets described in the standard are measured at the lower of their carrying amount and fair value less costs to sell. any resultant impairment losses are taken to income. any depreciation or amortisation is discontinued from the reclassification date. Details of discontinued operations – if applicable – are disclosed in chapter 21. 3.14 Other assets 3.14.1 Other assets carried at cost Development projects earmarked for subsequent sale (such as apartments in blocks of apartments owned by different people) are recognised at the lower of investment cost and recoverable value pursuant to iaS 2 inventories. the revenue is recognised under other income at the time of the transfer of title (transfer of benefits and risk). 3.14.2 Other assets recognised at fair value through profit or loss precious metals are recognised at fair value through profit or loss if they are traded in a price-efficient and liquid market. 3.15 Cash and cash equivalents cash and cash equivalents essentially consist of cash, demand deposits and cash equivalents. cash equivalents are predominantly short-term liquid investments with residual terms of no more than three months. 139 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.16 Equity equity instruments are classified as equity unless the Baloise Group is contractually obliged to repay them or to cede other financial assets. transaction costs relating to equity transactions are deducted and all associated income tax assets are recognised as deductions from equity. 3.16.1 Share capital the share capital shown on the balance sheet represents the subscribed share capital of Bâloise Holding ltd, Basel. this share capital consists solely of registered shares. no shares carry preferential voting rights. 3.16.2 Capital reserves capital reserves include the paid-up share capital in excess of par value (share premium), Bâloise Holding ltd share options, gains and losses on the purchase and sale of treasury shares and embedded options in Bâloise Holding ltd convertible bonds. 3.16.3 Treasury shares treasury shares held either by Bâloise Holding ltd or by subsidiaries are shown in the consolidated financial statements at their acquisition cost (including transaction costs) as a deduction from equity. their carrying amount is not constantly restated to reflect their fair value. if the shares are resold, the difference between their acquisition cost and their sale price is recognised as a change in the capital reserves. only Bâloise Holding ltd shares are classified as treasury shares. 3.16.4 Unrealised gains and losses (net) this item includes changes in the fair value of available-for-sale financial instruments, the net effect of cash flow hedges, the net effect of hedges of a net investment in a foreign operation, exchange differences and gains on the reclassification of the Baloise Group’s owner-occupied property as investment property. Deductions from these unrealised gains and losses include the pertinent deferred taxes and, in the case of life insurance companies, also the funds that will be used in future to amortise acquisition costs and to finance policyholders’ dividends (shadow accounting). any non-controlling interests are also deducted from these items. 3.16.5 Retained earnings Retained earnings include the Baloise Group’s undistributed earnings and its profit for the period. Dividends paid to the shareholders of Bâloise Holding ltd are only recognised once they have been approved by the annual General Meeting. 3.16.6 Non-controlling interests non-controlling interests constitute the proportion of Group companies’ equity attributable to third parties outside the Baloise Group on the basis of their respective shareholdings. 140 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.17 Insurance contracts an insurance contract is defined as a contract under which one party (the insurer) accepts a significant insurance risk from another party (the policyholder) to pay compensation, should a specified contingent future event (the insured event) adversely affect the policyholder. an insurance risk is any directly insured or reinsured risk that is not a financial risk. the significance of insurance risk is assessed according to the amount of additional benefits to be paid by the insurer if the insured event occurs. contracts that pose no significant insurance risk are financial contracts. Such financial contracts may include a discretionary participation feature (DpF), which determines the accounting policies to be applied. the effective interest method is generally used to calculate receivables and liabilities arising from financial contracts (DpF included). the effective interest rate is determined as the internal rate of return based on the estimated amounts and timing of the expected payments. if the amounts or timing of the actual payments differ from those expected or if expectations change, the effective interest rate must be re-determined. the deposit account balance is then remeasured as if this new effective interest rate had applied from the outset, and the change in the value of the deposit account is recognised as interest income or interest expense. otherwise, the insurance cover financed from the deposit account is amortised over the expected term of the deposit account. the Baloise Group considers an insurance risk to be significant if, during the term of the contract and under a plausible scenario, the payment triggered by the occurrence of the insured event is 5 per cent higher than the contractual benefits payable if the insured event does not occur. a discretionary participation feature (DpF) exists if the policyholder is contractually or legally entitled to receive benefits over and above the benefits guaranteed and if ▸ ▸ the benefits received are likely to account for a significant proportion of the total benefits payable under the contract, the timing or amount of the benefits payable is contractually at the discretion of the insurer, and the benefits received are contractually contingent on the performance of either a specified portfolio of contracts or a specified type of contract, on the realised and / or unrealised capital gains on a specified portfolio of investments held by the insurer, or on the profit or loss reported by the insurer. captive insurance policies are derecognised from the annual financial statements. this also applies to contracts involving proprietary pension plans, provided that the employees covered by these plans work for the Baloise Group. in addition, iFRS 4 makes exceptions for the treatment of embedded derivatives that form part of insurance contracts or financial contracts with discretionary participation features. if such embedded derivatives themselves qualify as insurance contracts, they do not have to be either separately measured or disclosed. in the case of the Baloise Group this affects, among other things, certain guarantees provided for annuity conversion rates and further special exceptions such as specific guaranteed cash surrender values for traditional policies. 141 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.18 Non-life insurance contracts all standardised non-life products contain sufficient insurance risk to be classified as insurance contracts under iFRS 4. the non-life business conducted by the Baloise Group is broken down into seven main segments: ▸ accident all standard product lines typical of each relevant market are available in the accident insurance business. the Belgian market and Switzerland in particular also offer specific government-regulated occupational accident products that differ from the other products usually available. Health the Baloise Group writes health insurance business in Switzerland and Belgium only. the benefits paid by the products in this segment cover the usual cost of treatment and also include a daily sickness allowance; they are available to individuals as well as small and medium-sized businesses in the form of so-called group insurance. General liability in addition to conventional personal liability insurance the Baloise Group also sells third-party indemnity policies for certain professions. in Switzerland and Germany it offers policies – especially combined products – for small and medium-sized enterprises and for industrial partners that include features such as product liability. ▸ ▸ ▸ Motor the two standardised products common in the market – comprehensive and third-party liability insurance – are sold in this segment. in some countries there are also products that have been specially designed for collaborations with motoring organisations and individual automotive companies. Fire and other property insurance in addition to conventional home contents insurance this segment offers an extensive range of property policies that include fire insurance, buildings insurance and water damage insurance in all the varieties commonly available. ▸ ▸ Marine Marine insurance is mainly sold in Switzerland, Germany and Belgium. these products may include a third-party liability component in addition to the usual cargo insurance. ▸ Miscellaneous this category generally comprises small segments such as credit protection insurance and legal expenses insurance. provided that financial guarantees qualify as insurance contracts, they are treated as credit protection insurance policies. 3.18.1 Premiums the gross premiums written are the premiums that have fallen due during the reporting period. they include the amount needed to cover the insurance risk plus all surcharges. premium contributions that are attributable to future reporting periods are deferred by contract and – together with health insurance reserves for old age and any deferred unearned premiums – constitute the unearned premium reserves shown on the balance sheet. owing to the specific nature of marine insurance, premiums are deferred not by contract but on the basis of estimates. premiums that are actually attributable to the reporting period are recognised as premiums earned. their calculation is based on the premiums written and the change in unearned premium reserves. 142 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.18.2 Claims reserves at the end of each financial year the Baloise Group attaches great importance to setting aside sufficient reserves for all claims that have occurred by this date. in addition to the reserves that it recognises in respect of the payments to be made for claims that have occurred, it also sets aside reserves to cover the costs incurred during the claims settlement process. in order to calculate these reserves as realistically as possible, the Baloise Group uses the claims history of recent years, generally accepted mathematical-statistical methods and all the information available to it at the time – especially knowledge about the expertise of those entrusted with the handling of claims. the total claims reserve consists of three components. Reserves calculated using actuarial methods form the basis of the total claims reserve. the second component comprises reserves for those complex special cases and events that do not lend themselves to purely statistical evaluation. these are generally rare claims that are fairly atypical of the sector concerned – usually sizeable claims whose costs have to be estimated by experts on a case-by-case basis. neither of these components is subject to discounting. the third component consists of reserves for annuities that are discounted using basic actuarial principles such as mortality and the technical interest rate and are largely derived from claims in the motor, liability and accident insurance businesses. actuarial methods are used to calculate by far the largest proportion of claims reserves. to this end, the Baloise Group selects actuarial forecasting methods that are appropriate for each sector, insurance product and existing claims history. additional market data and assumptions obtained from insurance rates are used if the claims history available on a customer is inadequate. the Baloise Group mainly applies the chain-ladder method, which is the most widely used, tried-and-tested procedure. this method involves estimating the number and amounts of claims incurred over time and the proportion of claims that are reported to the insurer either with a time lag or after the balance sheet date. the proportion of these so-called incurred-but-not-reported (iBnR) claims is exceptionally important, especially in operating segments involving third-party liability insurance. these estimates naturally factor in emerging claims trends as well as recoveries. the mean ratio of costs incurred to claims actually paid is essentially used to calculate reserves for claims handling costs. the forecasting methods used cannot eliminate all the uncertainties inherent in making predictions about future developments and trends. nonetheless, systematic monitoring of the reserves recognised in a given financial year enables the Baloise Group to spot discrepancies as soon as possible and, consequently, to adjust the level of reserves and modify the forecasting method where necessary. this analysis is based on the so-called “run-off triangles” presented in aggregated form in section 5.4.5. the relevant calculations for typical property policies such as storm and tempest insurance or home contents insurance are usually based on the payments made over the past ten years. larger amounts of data and, consequently, claims triangles that go further back in time and are based on both payments and expenses (payments plus reserves) are, of course, used for insurance segments with longer run-off periods, such as third-party liability. to supplement the Baloise Group’s various internal control mechanisms, its reserves – and the methods used to calculate them – are regularly reviewed by external specialists. Mention should be made here of the liability adequacy test described in detail in section 3.18.4. the Baloise Group takes great care to ensure that it complies with the pertinent financial reporting standard by performing the regularly required profitability analysis and examining whether, at the balance sheet date, it can actually meet all the liabilities that it has taken on as an insurer. it immediately offsets any shortfall in its reserves that it identifies. 143 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.18.3 Policyholders’ dividends and participation in profits insurance contracts can provide customers with a share of the surpluses and profits generated by their policies (especially those arising from their claims history). the expenses incurred by policyholders’ dividends and participation in profits are derived from the dividends paid plus the changes in the pertinent reserves. 3.18.4 Liability adequacy test (LAT) a lat is carried out at each balance sheet date to ascertain whether – taking all known developments and trends into consideration – the Baloise Group’s existing reserves are adequate. to this end, all existing reserves – both claims reserves (including reserves for claims handling costs) and annuity reserves in the non-life segment – are first analysed and, if a shortfall is identified, the relevant reserves are then strengthened accordingly. this analysis explicitly includes iBnR claims, thereby ensuring that adequate reserves are available for all claims that have already occurred. the liability adequacy test required by iFRS must also examine whether the Baloise Group has incurred any further liabilities for subsequent periods (future business) besides all its existing contracts maintained during the reporting period. Such business arises, for example, when contracts are automatically extended at the end of the year on the same terms and conditions. taking account of all the latest data and trends, Baloise conducts a profitability analysis of its insurance business during the reporting year in order to check whether an adequate level of premiums has been charged and, implicitly, whether these liabilities are therefore covered. this amounts to an analysis of unearned premium reserves and an impairment test of deferred acquisition costs at the same time. if a loss is expected to be incurred (also applies to other loss-making insurance contracts in existence at the balance sheet date), the deferred acquisition costs are initially reduced by the respective amount. if the total amount of deferred acquisition costs is insufficient or if the resultant liability cannot be covered in full, a separate provision for impending losses equivalent to the residual amount is recognised under other technical reserves. 3.19 Life insurance contracts and financial contracts with discretionary participation features the following life insurance products offered by the Baloise Group contain sufficient insurance risk to be classified as insurance contracts under iFRS 4: ▸ ▸ ▸ ▸ ▸ ▸ endowment policies (both conventional and unit-linked life insurance) Swiss group life business (BVG) term insurance immediate annuities Deferred annuities with annuity conversion rates that are guaranteed at the time the policy is purchased all policy riders such as premium waiver, accidental death and disability. 144 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements the accounting policies applied by the Baloise Group are described below. 3.19.1 General accounting policies the accounting policies applied to traditional life insurance vary according to the type of profit participation agreed. premiums are recognised as income and benefits are recognised as expense at the time they fall due. the amount of reserves set aside in each case is determined by actuarial principles or by the net premium principle, which ensures that the level of reserves generated from premiums remains consistent over time. the actuarial assumptions used to calculate reserves at the time that contracts are signed either constitute best estimates with explicit safety margins for specific business lines or they are determined in accordance with local loss reserving practice and thus also factor in safety margins. the assumptions used are locked in throughout the term of the contract unless a liability adequacy test reveals that the resultant reserves need to be strengthened after the deferred acquisition costs (Dacs) and the present value of future profits (pVFp) on acquired insurance contracts have been deducted. Unearned premium reserves, reserves for final dividend payments and certain unearned revenue reserves (URRs) are also recognised as components of the actuarial reserve. a liability adequacy test is performed on all life insurance business at each balance sheet date. this involves calculating a reserve at the measurement date that factors in all future cash flows (such as insurance benefits, surpluses and contract-related administrative expenses) based on the best estimates available for the assumptions used at the time. if the minimum reserve calculated in this way for individual business lines exceeds the reserve available at the time, any existing deferred acquisition cost or present value of future profits is reduced and, if this is not enough, the reserve is immediately increased to the minimum level and this increase is recognised in profit or loss. 3.19.2 Present value of future profits (PVFP) on insurance contracts acquired the present value of future profits on insurance contracts acquired constitutes an identifiable intangible asset that arises from the purchase of a life insurance company or life insurance portfolio. it is initially measured in accordance with actuarial principles and is amortised on a straight-line basis. it is regularly tested for impairment as part of a liability adequacy test. 3.19.3 Deferral of acquisition costs acquisition costs are deferred. they are amortised either over the premium payment period or over the term of the insurance policy, depending on the type of contract involved. they are tested for impairment as part of a liability adequacy test. 3.19.4 Unearned revenue reserve (URR) the unearned revenue reserve comprises premiums that are charged for services rendered in future periods. these premiums are deferred and amortised in the same way as deferred acquisition costs. 145 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.19.5 Policyholders’ dividends a large proportion of life insurance contracts confer on policyholders the right to receive dividends. Surpluses are reimbursed in the form of increased benefits, reduced premiums or final policyholders’ dividends or are accrued at interest to a surplus account. Surpluses already distributed and accrued at interest are reported as policyholders’ dividends credited and reserves for future policyholders’ dividends (chapter 23). the relevant interest expense is reported as interest expenses on insurance liabilities. Surpluses that have been used to finance an increase in insurance benefits are recognised in actuarial reserves. all investment income derived from unit-linked life insurance contracts is credited to the policyholder. iFRS 4 introduces the concept of a discretionary participation feature (DpF), which is of relevance not only for the classification of contracts but also for the disclosure of surplus reserves according to policyholders’ share of the unrealised gains and losses recognised directly in equity under iFRS and their share of the increases and decreases recognised in profit or loss in the consolidated financial statements compared with the financial statements prepared in accordance with local accounting standards. iFRS 4 states here that the portion of an insurance contract’s liability that is attributable to a discretionary participation feature (“DpF component”) must be reported separately. this standard does not provide any clear guidance as to how this DpF component should be measured and disclosed. When accounting for contracts that contain discretionary participation features, the Baloise Group treats measurement differences that are attributable to such contracts and are credited to policyholders according to a legal or contractual minimum quota as a DpF component. Distributable retained earnings and eligible unrealised gains and losses of fully consolidated subsidiaries are allocated pro rata to the DpF components of the life insurance company concerned. the DpF component calculated in this way is reported as part of the reserves for future policyholders’ dividends (section 23). these reserves include policyholders’ dividends that are unallocated and have been set aside as a reserve under local accounting standards. if no legal or contractual minimum quota has been stipulated, the Baloise Group defines a discretionary participation feature as the currently available reserve for premium refunds after allowing for final policyholders’ dividends. Unless a minimum quota has been stipulated, all other measurement differences between the local and iFRS financial statements are recognised directly in equity. the applicable minimum quotas prescribed by law, contract or Baloise’s articles of association vary from country to country. life insurance companies operating in Germany and in some areas of Swiss group life business are required by law to distribute a minimum proportion of their profits to policyholders in the form of dividends. policyholders in Germany must receive a share of the profits generated. any losses incurred are borne by shareholders. policyholders are entitled to 90 per cent of investment income (minus the technical interest rate), 75 per cent of the net profit on risk exposures and 50 per cent of other surpluses. the articles of association of Basler lebensversicherungs-aG, Germany, additionally stipulate a minimum quota of 95 per cent for part of its insurance portfolio. Minimum quotas are also applied to some of the Baloise Group’s Swiss occupational pensions (BVG) business, which is subject to the legal quotas of 100 per cent for changes in liabilities and 90 per cent for changes in assets. 146 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.20 Reinsurance Reinsurance contracts are insurance contracts between insurance companies and / or reinsurance companies. there must be a transfer of risk for a transaction to be recognised as reinsurance; otherwise the transaction is treated as a financial contract. inward reinsurance is recognised in the same period as the initial risk. the relevant technical reserves are reported as gross unearned premium reserves or gross claims reserves for non-life insurance and as gross actuarial reserves for life insurance. in non-life insurance they are estimated as realistically as possible based on empirical values and the latest information available, while in life insurance they are recognised as a reserve to cover the original transaction. outward reinsurance is the business ceded to insurance companies outside the Baloise Group and includes transactions ceded from direct life and non-life business and from inward insurance. assets arising from outward reinsurance are calculated over the same periods and on the same basis as the original trans- action and are reported as reinsurance assets (section 16). impairment losses are recognised in profit or loss for assets deemed to be at risk owing to the impending threat of insolvency. 3.21 Liabilities arising from banking business and financial contracts 3.21.1 With discretionary participation features Financial contracts with discretionary participation features are capital accumulated by customers that entitles them to receive policyholders’ dividends. the accounting principles applied to these financial contracts are the same as those for life insurance contracts; the accounting policies for life insurance are described in section 3.19. 3.21.2 Measured at amortised cost liabilities measured at amortised cost include savings deposits, medium-term bonds, mortgage-backed bonds, other liabilities and financial guarantees that do not qualify as insurance contracts. they are initially measured at their acquisition cost (fair value). the difference between acquisition cost and redemption value is recognised in profit or loss over the term of the liability as “gains or losses on financial contracts” under the amortised-cost method and the effective interest method. 3.21.3 Recognised at fair value through profit or loss this item includes financial contracts for which the holder bears the entire investment risk as well as banking liabilities that are designated as “at fair value through profit or loss” as part of the Baloise Group’s strategy of using natural hedges. 3.22 Financial liabilities the financial liabilities reported under this line item comprise the bonds issued in the capital markets. Financial liabilities are initially measured at their acquisition cost (fair value). acquisition cost includes transaction costs. the difference between acquisition cost and redemption value is recognised in profit or loss over the term of the liability as borrowing costs under the amortised-cost method and the effective interest method. 147 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.23 Employee benefits the benefits that the Baloise Group grants to its employees comprise all forms of remuneration that is paid in return for work performed or in special circumstances. the benefits available include short-term benefits (such as wages and salaries), long-term benefits (such as long-service bonuses), termination benefits (such as severance pay and social compensation plan benefits) and post-employment benefits. the benefits described below may be especially significant owing to their scale and scope. 3.23.1 Post-employment benefits the main post-employment benefits provided are retirement pensions, employer contributions to mortgage payments and certain insurance benefits. although these benefits are paid after employees have ceased to work for the Baloise Group, they are funded while the staff members concerned are still actively employed. all the pension benefits currently provided by the Baloise Group are defined benefit plans. the projected unit credit method is used to calculate the pertinent pension liabilities. assets corresponding to these liabilities are only recognised if they are ceded to an entity other than the employer (such as a foundation). Such assets are measured at fair value. changes to assumptions, discrepancies between the planned and actual returns on plan assets, and differences between the benefit entitlements effectively received and those calculated using actuarial assumptions give rise to actuarial gains and losses that must be recognised directly in other comprehensive income. the Baloise Group’s pension plan agreements are tailored to local conditions in terms of enrolment and the range of benefits offered. 3.23.2 Share-based payments the Baloise Group offers its employees and senior executives the chance to participate in various plans under which shares are granted as part of their overall remuneration packages. the employee incentive plan, Share Subscription plan, Share participation plan and performance Share Units (pSUs) are measured and disclosed in compliance with iFRS 2 Share-based payment. plans that are paid in Bâloise Holding ltd shares are measured at fair value on the grant date, charged as personnel expenses during the vesting period and recognised directly in equity. 3.24 Non-technical provisions non-technical provisions for restructuring or legal claims are recognised for present legal or constructive obligations when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations and a reliable estimate can be made of the amounts of the obligations. the amount recognised as a provision is the best estimate of the expenditure expected to be required to settle the obligation. if the amount of the obligation cannot be estimated with sufficient reliability, it is reported as a contingent liability. 148 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 3.25 Taxes provisions for deferred income taxes are recognised under the liability method, which means that they are based either on the current tax rate or on the rate expected in future. Deferred income taxes reflect the tax-related impact of temporary differences between the assets and liabilities reported in the iFRS financial statements and those reported for tax purposes. When deferred income taxes are calculated, tax loss carryforwards are only recognised to the extent that sufficient taxable profit is likely to be earned in future. Deferred tax assets and liabilities are offset against each other and shown as a net figure in cases where the criteria for such offsetting have been met. this is usually the case if the tax jurisdiction, the taxable entity and the type of taxation are identical. 3.26 Revenue recognition Revenue and income are recognised at the fair value of the consideration received or receivable. intercompany transactions and the resultant gains and losses are eliminated. Recognition of revenue and income is described below. 3.26.1 Income from services rendered income from services rendered is recognised over a particular period of time, because the customer receives the benefit of the service provided by the Baloise Group while he or she is using it. 3.26.2 Interest income interest income from financial instruments that are not recognised at fair value through profit or loss is recognised under the effective interest method. if a receivable is impaired, it is written down to its recoverable amount, which corresponds to the present value of estimated future cash flows discounted at the contract’s original interest rate. 3.26.3 Dividend income Dividend income from financial assets is recognised as soon as a legal entitlement to receive payment arises. 149 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 4. KEY ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS the Baloise Group’s consolidated annual financial statements contain assumptions and estimates that can impact on the annual financial statements for the following financial year. estimates and the exercise of discretion by management are kept under constant review and are based on empirical values and other factors – including expectations about future events – that are deemed to be appropriate on the date that the balance sheet is prepared. Fair value of various balance sheet line items 4.1 Where available, prices in active markets are used to determine fair value. if no publicly quoted prices are available or if the market is judged to be inactive, fair value is either estimated based on the present value or is determined using measurement methods. these methods are influenced to a large extent by the assumptions used, which include discount rates and estimates of future cash flows. the Baloise Group primarily uses fair values; if no such values are available, it applies its own models. Detailed information about fair value measurement can be found in chapter 5.10. the following asset classes are measured at fair value: ▸ ▸ investment property the DcF method is used to determine the fair value of investment property. the assumptions and estimates used for this purpose are described in section 3.6. Financial instruments with characteristics of equity and financial instruments with characteristics of liabilities (available for sale or recognised at fair value through profit or loss) Fair value is based on prices in active markets. if no quoted market prices are available, fair value is estimated using generally accepted methods (such as the present-value method), independent assessments based on comparisons with the market prices of similar instruments or the prevailing market situation. Derivative financial instruments are measured using models or on the basis of quoted market prices. if no publicly quoted prices are available for private equity investments, they are measured on the basis of their net asset value using non-public information from independent external providers. these providers use various methods for their estimates (e. g. analysis of discounted cash flows and reference to similar, fairly recent arm’s-length transactions between knowledgeable, willing parties). if such estimates do not enable financial assets to be reliably measured, the assets are recognised at cost and disclosed accordingly. publicly quoted prices are used to determine the fair value of hedge funds. if no such prices are available, prices quoted by independent third parties are used to determine fair value. ▸ Mortgages and loans (recognised at fair value through profit or loss) Mortgages and loans are designated as “at fair value through profit or loss” as part of the Baloise Group’s strategy of using natural hedges. Yield curves are used to measure these portfolios. the following financial liabilities are measured at fair value: ▸ liabilities arising from banking business and financial contracts (recognised at fair value through profit or loss) liabilities arising from investment-linked life insurance contracts involving little or no transfer of risk are measured at fair value based on the capitalised investments underlying these liabilities. Derivative financial instruments Models or quoted market prices are used to determine the fair value of derivative financial instruments. ▸ 150 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Financial instruments with characteristics of liabilities (held to maturity) 4.2 the Baloise Group applies the provisions of iaS  39 when classifying non-derivative financial instruments with fixed or determinable payments as “held to maturity”. to this end, it assesses its intention and ability to hold these financial instruments to maturity. if – contrary to its original intention – these financial instruments are not held to maturity (with the exception of specific circumstances such as the disposal of minor investments), the Baloise Group must reclassify all held-to-maturity financial instruments as “available for sale” and measure them at fair value. chapter 12 contains information on the fair values of the financial instruments with characteristics of liabilities that are classified as “held to maturity”. Impairment 4.3 the Baloise Group determines at each balance sheet date whether there is any objective evidence that financial assets may be permanently impaired. ▸ Financial instruments with characteristics of equity (available for sale) an impairment loss must be recognised on available-for-sale financial instruments with characteristics of equity whose fair value at the balance sheet date is more than 50 per cent below their acquisition cost or whose fair value is consistently below their acquisition cost throughout the twelve-month period preceding the balance sheet date. the Baloise Group examines whether it needs to recognise impairment losses on securities whose fair value at the balance sheet date is between 20 per cent and 50 per cent below their acquisition cost. Such assessments of the need to recognise impairment losses consider various factors such as the volatility of the securities concerned, credit ratings, analysts’ reports, economic conditions and sectoral prospects. Financial instruments with characteristics of liabilities (available for sale or held to maturity) objective evidence of a financial asset’s impairment includes observable data on the following cases: – Serious financial difficulties on the part of the borrower – Breaches of contract, such as a borrower in default or arrears with the payment of principal and / or interest – Greater probability that the borrower will file for bankruptcy or undergo some other form of restructuring – observable data that indicates a measurable reduction in the expected future cash flows from a group of financial ▸ assets since their initial recognition analysts’ reports from banks and evaluations by credit rating agencies are also used to assess the need for impairment losses ▸ Mortgages and loans (carried at cost) the mortgage portfolio is regularly tested for impairment. the methods and assumptions used in these tests are also regularly reviewed in order to minimise any discrepancies between the actual and expected probabilities of default. 151 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 4.4 Deferred income taxes Unused tax loss carryforwards and other deferred tax assets are recognised if it is more likely than not that they will be realised. to this end, the Baloise Group makes assumptions about the recoverability of these tax assets; these assumptions are based on the financial track record and future income of the taxable entity concerned. Estimate uncertainties specific to insurance 4.5 estimate uncertainties pertaining to actuarial risk are discussed from chapter 5.4 onwards. 4.6 Non-technical provisions the measurement of non-technical provisions requires assumptions to be made about the probability, timing and amount of any outflows of resources embodying economic benefits. a provision is recognised if such an outflow of resources is probable and can be reliably estimated. Employee benefits 4.7 in calculating its defined benefit obligations towards its employees, the Baloise Group makes assumptions about the expected return on plan assets, the economic benefits embodied in assets, future increases in salaries and pension benefits, the discount rate applicable and other parameters. the most important assumptions are derived from past experience of making estimates. the assumptions factored into these calculations are discussed in chapter 18.2.7. 4.8 Goodwill impairment Goodwill is tested for impairment in the second half of each year or whenever there is objective evidence of impairment. Such impairment tests involve calculating a value in use that is largely based on estimates such as the financial planning approved by management and the discount rates and growth rates mentioned in chapter 9.1. this does not apply to impairment tests for start-ups, for which a multiples-based market approach is used. 152 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 5. MANAGEMENT OF INSURANCE RISK AND FINANCIAL RISK the companies in the Baloise Group offer their customers non-life insurance, life insurance and banking products (the latter in Switzerland). consequently, the Baloise Group is exposed to a range of risks. the main risks in the non-life insurance sector are natural disasters, major industrial risks, third-party liability and personal injury. the insurance business as a whole is examined regularly by means of extensive analytical studies. the results of this analysis are taken into account when setting aside reserves, fixing insurance rates and structuring insurance products and reinsurance contracts. in the non-life sector, studies focusing on the risks arising from natural disasters have been carried out in recent years. on some of them we worked with reinsurance companies and brokers to determine the level of exposure to these risks and the extent of risk transfer required. the predominant risks in the life insurance sector are the following biometric risks: longevity risk (annuities and pure endowment policies), ▸ ▸ mortality risk (whole-life and endowment life insurance), ▸ disability risk (in the sense of the risk of premiums proving insufficient due to an adverse disability claims history). Because the Group issues interest rate guarantees, it is also exposed to interest rate risk. there are also implicit financial guarantees and options which also affect liquidity, investment planning and the income generated by Group companies; they include guaranteed surrender prices when policyholders cancel and guaranteed annuity factors on commencement of the payout phase of annuities. longevity, mortality and disability rates are risks specific to life insurance and are monitored on an ongoing basis. the companies in the Baloise Group review and analyse mortality rates among their local customer bases, along with the frequency with which policies are cancelled, invalidated and reactivated. For this analysis, they generally use standard market statistics that are compiled by actuaries and include adequate safety margins. the information they gather is used for ensuring that rates are adequate and also for setting aside sufficient reserves to meet future insurance liabilities. Because rates are required by law to be calculated conservatively, and the statistical base is relatively good, the risks in this area are manageable. in the field of annuities, there is an additional trend risk in the form of a steady rise in life expectancy which is resulting in ever longer annuity payout periods. this risk is addressed by the addition of suitable factors to the basis for calculation. Managing participating insurance contracts is an additional method of mitigating risk. For example, bringing policyholders’ dividends into line with altered circumstances as far as permitted by local regulations is one option that could be taken if the risk situation were to change. However, the allocation of surpluses between policyholders and the company is not only subject to local law, it is also governed by market expectations. the main risk categories to which the Banking division of the Baloise Group is exposed are credit risk, interest rate risk and liquidity risk. these risks are identified and managed locally by the bank. the loan portfolio is reviewed and analysed on an ongoing basis. a range of tools is used for this purpose, including standardised credit regulations and procedures, scoring and rating procedures, focusing on low-risk markets and the use of an automated arrears system. the information obtained is incorporated into credit decisions. Balance sheet risks (interest rate and liquidity risks) are managed by the bank’s asset and liability management (alM) committee. the data and key figures required are determined and calculated using a specialist it application. 153 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 5.1 Organisation of risk management in the Baloise Group the Baloise Group’s insurance and banking activities in various european countries, as well as its global investments, expose it to market risks such as currency risk, credit risk, interest rate risk and liquidity risk. the Baloise Group has implemented a comprehensive, Group-wide risk management system in all of its insurance and banking organisation and responsibilities entities. its Group-wide Risk Management Standards focus on the following areas: ▸ ▸ Methods, regulations and limits ▸ Risk control an overall set of rules governs all activities directly connected with risk management and ensures that they are compatible with one another. at the highest level, internal and external risk bands restrict and manage the overall risks incurred by the Group and the individual business units. at the level exposed to financial and business risk, various limits and regulations restrict the individual risks that have been identified to a level that is acceptable for the Group, or eliminate them completely. Within the Group and within each business unit, a risk owner is responsible for each individual risk that has been identified. Risk owners are allocated according to a hierarchy of responsibility. the Group’s overall risk owner is the chief executive officer of the Baloise Group. alongside the risk owners, defined risk controllers are responsible for systematic risk control and risk reporting. When selecting risk controllers, particular care is taken to ensure that their role is independent of the risk they control. Risk control within the Baloise Group focuses on investment risk, business risk (actuarial and banking risks), risks to the Group’s financial structure and operational risks including compliance. the Group’s overall risk controller is the chief executive officer of the Baloise Group. the Baloise Group’s risk map is a categorisation of the risks it has identified. the risks are divided into three levels: category of risk Sub-category of risk type of risk ▸ ▸ ▸ 154 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements the business-risk, investment-risk and financial-structure-risk categories relate directly to the Baloise Group’s core businesses. these risks are deliberately incurred, managed and optimised by the management team and various risk committees. analysis of these risks is model-based and it ultimately results in an aggregate overview. Business-environment risk, operational risk and management and information risk arise as direct or indirect results of the business operations, business environment or strategic activities of each company. Risks of this type are also quantified, assessed and managed. Because all risks are quantified, it is possible to analyse the relevance of each risk to the overall risk situation of the Baloise Group and / or the individual companies. the Baloise Group’s central risk management team forms part of corporate Division Finance and reports to the Group chief Risk officer, who in turn reports to the Group cFo. it coordinates intra-Group policies, risk reporting and the technical development of suitable risk management processes and tools. every month, it tracks developments in the financial markets and their impact on the risk portfolio and the individual risk capacity of all the business units and the Group as a whole. the relevant risk owners and risk controllers verify the figures that have been computed and incorporate them into their management decisions. an annual reporting is undertaken for each identified risk category. to this end, each business unit compiles an oRSa (own Risk and Solvency assessment) report. Key figures for the financial and actuarial risks incurred by the Group and each strategic business unit are reported on a monthly basis using a risk control application. Life and non-life underwriting strategies 5.2 the Baloise Group primarily underwrites insurance risk for private individuals and small and medium-sized enterprises in selected countries in mainland europe. industrial insurance in the property and third-party liability, marine and technical insurance sectors is largely provided by Baloise insurance in Basel and in Bad Homburg (Germany) and by our Belgian business unit Baloise insurance Belgium. in this particularly high-risk segment, central management of industrial insurance ensures consistent quality and a high degree of transparency for the business underwritten. every business unit in the Baloise Group issues regulations regarding underwriting and risk review. they include clear author- isation levels and underwriting limits for each sector. Underwriting limits are approved by a business unit’s highest decision- making body, and the corporate executive committee is notified of them. in the industrial insurance unit, the maximum net underwriting limit for property insurance amounts to cHF 150 million for Switzerland and eUR 100 million for Germany and Belgium. the only other comparable underwriting limits in the Group are for marine and liability insurance. tools for setting the basic premium and for risk-based management of the total portfolio are also used to manage industrial insurance risk. For its exposure to natural hazards the Baloise Group has purchased reinsurance cover for the whole Group amounting to cHF 250 million and cover for earthquakes amounting to cHF 450 million. 155 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements RISK MAP Business Risks Investment Risks Financial Structure Risks Business Environment Risks Operational Risks Leadership and Information Risks actuarial Risks life ▸ parameter Risks ▸ catastrophe Risks actuarial Risks non-life ▸ premiums ▸ claims Market Risks ▸ interest rates ▸ equities ▸ currencies ▸ Real estate ▸ Market liquidity ▸ Derivatives ▸ catastrophe Risks ▸ alternative investments ▸ Reserving Reinsurance ▸ premiums / pricing ▸ Reinsurance Default ▸ active Reinsurance credit Risks asset-liability Risks ▸ interest Rate change Risk ▸ (Re)Financing, liquidity Risk concentration ▸ accumulation Risks ▸ cluster Risks Balance Sheet Structure and capital Requirements ▸ Solvency ▸ other Regulatory Requirements 156 change in Standards it Risks organizational Structure competition Risks external events investors ▸ it Governance ▸ it architecture ▸ it operations ▸ cyber Security HR Risks ▸ Skills / capacities ▸ incentive System legal Risks ▸ contracts ▸ liability and litigations corporate culture Business Strategy ▸ Business portfolio ▸ Risk Steering external communication ▸ external Reporting ▸ Reputation Management ▸ availability of Knowledge Merger and acquisitions ▸ tax Financial Statements, Forecast, planning compliance project portfolio Business processes internal Misinformation ▸ process Risks ▸ project Risks ▸ in- / outsourcing Risk analysis and Risk Reporting ▸ Risk analysis and Risk assessment ▸ Risk Reporting RISK MAP actuarial Risks life ▸ parameter Risks ▸ catastrophe Risks actuarial Risks non-life ▸ premiums ▸ claims ▸ Reserving Reinsurance ▸ premiums / pricing ▸ Reinsurance Default ▸ active Reinsurance ▸ catastrophe Risks ▸ alternative investments Market Risks ▸ interest rates ▸ equities ▸ currencies ▸ Real estate ▸ Market liquidity ▸ Derivatives credit Risks asset-liability Risks ▸ interest Rate change Risk ▸ (Re)Financing, liquidity Risk concentration ▸ accumulation Risks ▸ cluster Risks Balance Sheet Structure and capital Requirements ▸ Solvency ▸ other Regulatory Requirements Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Business Risks Investment Risks Financial Structure Risks Business Environment Risks Operational Risks Leadership and Information Risks change in Standards it Risks organizational Structure competition Risks external events investors ▸ it Governance ▸ it architecture ▸ it operations ▸ cyber Security HR Risks ▸ Skills / capacities corporate culture Business Strategy ▸ Business portfolio ▸ Risk Steering ▸ availability of Knowledge Merger and acquisitions ▸ incentive System legal Risks ▸ contracts ▸ liability and litigations external communication ▸ external Reporting ▸ Reputation Management ▸ tax Financial Statements, Forecast, planning compliance project portfolio Business processes internal Misinformation ▸ process Risks ▸ project Risks ▸ in- / outsourcing Risk analysis and Risk Reporting ▸ Risk analysis and Risk assessment ▸ Risk Reporting 157 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Life and non-life reinsurance strategies 5.3 the Baloise Group’s non-life treaty reinsurance for all business units in the Group is structured and placed in the market by Group Reinsurance, part of corporate Division Finance. When structuring the programme, Group Reinsurance focuses on the risk-bearing capacity of the Group as a whole. to date, the Group has only placed non-proportional reinsurance programmes. the Group’s maximum retention for cumulative claims is cHF 20 million. the retentions for individual claims are cHF 16 million for property claims, cHF 15 million for marine claims and cHF 13.7 million on a non-indexed basis for third-party liability claims. the local Baloise Group business units also use additional facultative reinsurance cover on a case-by-case basis. this type of reinsurance is extremely dependent on the individual risk in each case and it is therefore placed by the business units themselves. Reinsurance contracts may only be entered into with counterparties that have been authorised in advance by corporate Division Finance. Reinsurers must generally have a minimum rating of a – from Standard & poor’s, but in exceptional cases – and in specific circumstances – a BBB + rating or a comparable rating from another recognised rating agency is permitted. However, these reinsurance contracts are only used for property insurance business that can be settled quickly. this rule does not apply to captives and pools that are active reinsurance companies because they do not generally have ratings. Reinsurer credit risk is reviewed on a regular basis. a watch list is kept of reinsurers that are bankrupt or in financial difficulties. the list contains details of all relationships the Group has with these reinsurers, receivables due to the Group that are outstanding or have been written off and provisions the Group has recognised. the watch list is updated periodically. the same requirements for reinsurers apply to life insurance as to non-life insurance, although reinsurance is a less important instrument for ceding risk in life insurance business. 5.4 Non-Life 5.4.1 Actuarial risk the Baloise Group primarily underwrites insurance risk for private individuals and small and medium-sized enterprises in selected countries in mainland europe. Business with industrial clients is also conducted in Switzerland and Germany. Underwriting risk is limited by monitoring and adjusting rates and maintaining underwriting policies and limits appropriate to the size of each portfolio and the country in which it is located. 158 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 5.4.2 Assumptions ▸ claims reserves and claims settlement the portfolios on the Group’s books must be structured in such a way that the data available is sufficiently homogeneous to enable the use of certain analytical actuarial processes to determine the claims reserves required. one of the assumptions made is that extrapolation of the typical claims settlement pattern of recent years is meaningful. only cases such as extreme anomalies in settlement behaviour require additional assumptions to be made on a case-by-case basis. claims handling costs the ratio of the average claims handling costs incurred in recent years to the payouts made in the same period is used to calculate the level of claims handling reserves to be recognised based on current claims reserves. annuities the factors on which annuity calculations are based (mortality tables, interest rates, etc.) are normally specified or approved by the authorities in each country. However, because certain parameters can change relatively quickly, the adequacy of these annuity reserves is reviewed every year (by conducting a liability adequacy test or lat) and, if there is a shortfall, the reserves are strengthened accordingly. ▸ ▸ 5.4.3 Changes to assumptions the assumptions on which claims reserves are based generally remain constant, but the factors on which annuity calculations are based are adjusted from time to time over the years, particularly with regard to the latest longevity data. 5.4.4 Sensitivity analysis as well as the natural volatility inherent in insurance business, there are parameters for determining technical reserves that can significantly impact on the annual earnings and equity of an insurance company. in the non-life sector, sensitivity analysis has been used to investigate the effect on consolidated annual earnings and consolidated equity exerted by errors in estimating claims reserves – including claims incurred but not reported (iBnR) – and reserves for run-off business. at the end of 2018, the Baloise Group’s total reserves calculated using actuarial methods or recognised separately for special claims (including large claims but not run-off or actuarial reserves for annuities) amounted to cHF 4,164.1 million (2017: cHF 4,600.2 million). a variation of 10 per cent in either direction in the requirement for these reserves would result in a rise or fall of around cHF 317.5 million (2017: cHF 349.3 million) in claims payments (after taxes) before reinsurance. in 2018, Baloise’s run-off portfolio consisted of two subportfolios: an older portfolio with reserves, the majority of which comprise obligations that the Baloise Group entered into up to the start of the 1990s in the london market, and a new portfolio formed in 2018 for the hospital liability business in Germany. the sensitivities of the two portfolios are analysed separately. the “london market” portfolio is mainly affected by liability claims relating to asbestos and environmental damage. Because of the long settlement period, there is a high degree of uncertainty associated with the calculation of these claims reserves. Both the timing at which cases of this type are identified and their potential loss level are much less certain than any other established claims patterns. Some reserves were calculated using external actuaries’ reports in which best-case and worst-case scenarios were analysed. the Baloise Group’s minimum reserves policy is based on the average of these two scenarios. it is particularly difficult to assess the level of reserves required for iBnR claims, so further fluctuations cannot be ruled out. according to expert estimates, fluctuations of around 10 per cent can be expected, which is equivalent to around cHF 5.9 million after taxes and before reinsurance (2017: cHF 6.0 million) for this reserve. 159 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements the hospital liability business in Germany was discontinued in 2018 and transferred to the Group’s run-off portfolio. in the calculation of claims reserves for this portfolio, Baloise is guided by the relevant study from 2017 published by the German insurance association (GDV) because it has insufficient claims data of its own. the current gross claims reserves amount to cHF 301.5 million. the constantly changing level of claims in this sector makes it extremely difficult to estimate the total expense. However, assuming variation of 10 per cent (as used for the other part of the run-off), the effect would be around cHF 20.9 million after taxes and before reinsurance. 5.4.5 Claims settlement Analysis of gross claims settlement (before reinsurance) broken down by strategic business unit the proportion reinsured was low and would not affect the information given in the claims settlement tables below. ESTIMATED CUMULATIVE CLAIMS INCURRED IN SWITZERLAND 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Year in which the claims occurred 690.7 723.1 777.9 732.2 768.5 733.6 707.8 704.8 729.5 759.4 cHF million at the end of the year in which the claims occurred one year later two years later three years later Four years later Five years later Six years later Seven years later eight years later nine years later estimated claims incurred 670.6 657.4 641.0 634.4 638.6 632.8 617.2 615.0 608.5 608.5 685.4 675.1 666.9 659.6 653.0 650.4 641.8 629.5 – 736.5 731.0 729.1 722.7 717.3 701.6 701.2 – – 751.1 736.9 726.3 717.0 710.5 705.9 – – – 768.2 764.1 764.7 756.3 752.1 – – – – 715.7 701.2 695.9 688.5 – – – – – 667.8 657.6 650.9 – – – – – – 689.5 675.0 – – – – – – – 728.9 – – – – – – – – – – – – – – – – – 629.5 701.2 705.9 752.1 688.5 650.9 675.0 728.9 759.4 6,899.9 – – – – – – – – – – claims paid – 567.0 – 581.0 – 627.3 – 640.0 – 678.3 – 613.5 – 577.4 – 591.4 – 580.6 – 397.4 – 5,854.0 Gross claims reserves 41.5 48.5 73.9 65.9 73.8 75.0 73.5 83.6 148.3 362.0 1,046.0 Gross claims reserves prior to 2009 (including large claims and assumed business) Gross provision for annuities (non-life, including iBnR) Reinsurers’ share Net claims reserves 160 400.7 745.1 – 46.8 2,145.0 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements For greater clarity, the following analysis of claims trends is shown in euros. ESTIMATED CUMULATIVE CLAIMS INCURRED IN GERMANY 2009 2010 2011 2012 2013* 2014* 2015* 2016* 2017* 2018* Total Year in which the claims occurred 288.0 302.5 290.8 297.4 367.7 306.0 303.2 318.6 340.5 345.5 eUR million at the end of the year in which the claims occurred one year later two years later three years later Four years later Five years later Six years later Seven years later eight years later nine years later estimated claims incurred 286.4 289.0 294.6 294.8 295.1 297.1 296.2 296.7 297.6 297.6 299.7 305.6 305.8 306.0 307.9 305.2 304.9 304.7 – 297.6 300.9 306.6 309.8 311.7 311.3 310.1 – – 298.4 302.5 304.3 302.6 303.2 302.9 – – – 370.3 371.0 379.3 379.8 380.8 – – – – 316.1 319.9 320.4 314.5 – – – – – 304.9 304.5 301.4 – – – – – – 314.3 313.6 – – – – – – – 331.2 – – – – – – – – – – – – – – – – – 304.7 310.1 302.9 380.8 314.5 301.4 313.6 331.2 345.5 3,202.3 – – – – – – – – – – claims paid – 291.0 – 298.0 – 300.6 – 293.8 – 366.5 – 294.9 – 279.6 – 272.1 – 256.1 – 158.8 – 2,811.4 Gross claims reserves 6.6 6.7 9.5 9.1 14.3 19.6 21.8 41.5 75.1 186.7 Gross claims reserves prior to 2009 (including large claims and assumed business) Gross provision for annuities (non-life, including iBnR) Reinsurers’ share Net claims reserves 390.9 236.7 148.1 – 189.8 585.9 * the underwriting of hospital liability business was ended in 2018, and the entire portfolio has been transferred to the Group’s run-off business. the expenses for this business were therefore removed from the expense triangle for Germany. the claims incurred for the years before 2013 were low, and they were included only as lump sums or as one-off or large claims. consequently, they do not result in any changes to the expense triangle. 161 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements ESTIMATED CUMULATIVE CLAIMS INCURRED IN BELGIUM 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Year in which the claims occurred eUR million at the end of the year in which the claims ccurred one year later two years later three years later Four years later Five years later Six years later Seven years later eight years later nine years later estimated claims incurred 248.5 252.2 1264.5 2254.0 250.7 252.5 248.5 245.8 243.4 243.4 228.0 235.1 308.7 1412.4 2403.6 483.7 459.9 470.3 446.8 495.0 287.1 1308.0 2304.0 308.1 306.0 306.0 306.6 300.5 – 1395.1 2392.2 387.9 392.5 388.6 387.1 374.4 – – 2426.5 421.9 412.9 410.7 416.9 417.5 – – – 402.5 398.0 396.7 394.4 388.2 – – – – 494.3 488.7 483.4 479.1 – – – – – 476.0 480.7 478.9 – – – – – – 478.9 470.5 – – – – – – – 483.9 – – – – – – – – – – – – – – – – – 300.5 374.4 417.5 388.2 479.1 478.9 470.5 483.9 495.0 4,131.4 – – – – – – – – – – claims paid – 217.0 – 265.2 – 330.8 – 364.9 – 348.5 – 425.8 – 378.4 – 383.1 – 341.9 – 241.5 – 3,297.1 Gross claims reserves 26.4 35.3 43.6 52.6 39.7 53.3 100.5 87.4 142.0 253.5 Gross claims reserves prior to 2009 (including large claims and assumed business) Gross provision for annuities (non-life, including iBnR) Reinsurers’ share Net claims reserves 1 the increase in the total estimated claims incurred is primarily due to the addition of avéro Schadevezekering Benelux nV. 2 the increase in the total estimated claims incurred is primarily due to the addition of nateus nV and audi nV. 834.3 327.0 154.6 – 295.3 1,020.6 162 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements ESTIMATED CUMULATIVE CLAIMS INCURRED IN LUXEMBOURG 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Year in which the claims occurred eUR million at the end of the year in which the claims occurred one year later two years later three years later Four years later Five years later Six years later Seven years later eight years later nine years later estimated claims incurred claims paid 17.5 125.0 123.6 24.0 23.6 236.8 343.8 49.8 49.6 50.3 16.9 121.5 21.3 21.1 236.2 342.0 41.7 42.5 42.6 42.6 122.0 21.8 21.7 237.0 341.9 41.6 42.5 42.4 – 42.4 22.7 22.6 235.3 339.7 39.2 39.8 39.7 – – 24.5 236.5 339.9 39.3 39.9 40.1 – – – 237.8 341.2 40.5 40.7 40.6 – – – – 340.8 40.5 40.8 40.5 – – – – – 44.0 44.3 43.9 – – – – – – 47.2 46.3 – – – – – – – 46.3 – – – – – – – – – – – – – – – – – 39.7 40.1 40.6 40.5 43.9 46.3 46.3 50.3 432.7 – – – – – – – – – – – 42.3 – 42.0 – 39.2 – 39.4 – 39.6 – 39.3 – 41.8 – 43.1 – 41.3 – 32.4 – 400.4 Gross claims reserves 0.3 0.4 0.6 0.7 1.0 1.2 2.1 3.2 5.0 17.9 Gross claims reserves prior to 2009 (including large claims and assumed business) Gross provision for annuities (non-life, including iBnR) Reinsurers’ share Net claims reserves 32.4 51.6 – – 17.7 66.3 1 the increase in the total estimated claims incurred is primarily due to the addition of Bâloise assurances luxembourg S.a. 2 the increase in the total estimated claims incurred is primarily due to the addition of p & V assurances. 3 the increase in the total estimated claims incurred is primarily due to the addition of HDi Gerling assurances S.a. in the course of harmonization and integration of aquired portfolios the data base was improved. thus causing adjustments in the diagonals of the incurred values for the years 2016 and 2017 as well as the concurrent payments. these adjustments had neither an effect on the gross claims reserves in the closing balance nor on the result. Analysis of claims settlement for the “Other units” segment a large proportion of the reserves relating to this segment is attributable to run-off business. Due to the special nature of this business, it is difficult to conduct meaningful analysis on the basis of our own claims data alone, so the reserves recognised for it are subject to significant uncertainty. the survival ratio – the ratio of reserves to the average claims paid in the past three years – is a commonly used measure for comparing the adequacy of reserves for asbestos and environmental claims. the ratio shows the number of years for which the reserves will cover claims payments. at the end of the year under review the survival ratio was 97.6 years (2017: 85.7 years). 163 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Life 5.5 5.5.1 Actuarial risk traditional life insurance is called fixed-sum insurance because payments are not made for losses. instead, a fixed sum is paid on occurrence of an insured event, which can be survival or death. in the case of term insurance, capital and / or pension benefits are insured against premature death (whole-life insurance) or disability (disability insurance), while capital redemption insurance focuses on savings for old age. endowment life insurance combines risk protection with savings. AVERAGE TECHNICAL INTEREST RATE 31.12.2017 cHF million Switzerland individual life Switzerland group life Germany Belgium Luxembourg technical reserves without guaranteed returns technical reserves with 0 % guaranteed returns technical reserves with guaranteed positive returns average technical interest rate of guaranteed positive returns 763.2 579.8 2,330.2 632.5 6,817.6 15,709.3 2.5 % 1.3 % 3,854.8 106.7 6,741.9 3.1 % 129.0 103.8 3,092.7 3.3 % 276.3 25.4 526.3 2.5 % 31.12.2018 cHF million Switzerland individual life Switzerland group life Germany Belgium Luxembourg technical reserves without guaranteed returns technical reserves with 0 % guaranteed returns technical reserves with guaranteed positive returns average technical interest rate of guaranteed positive returns 691.2 539.2 2,395.7 605.9 6,604.4 15,659.1 2.5 % 1.3 % 3,538.8 112.8 6,312.8 3.0 % 21.7 119.2 3,032.7 3.1 % 254.8 19.6 509.9 2.3 % the guaranteed technical interest rate is one of the risks inherent in traditional life insurance and group life business. if interest rates rise, there is the risk that more policies will be cancelled, and the payment of surrender values could cause liquidity problems. this risk can be reduced by imposing surrender charges. in the past, no significant correlation has been observed between rises in interest rates and the number of major policies cancelled. When interest rates fall, there is the risk that investment income may no longer be sufficient to fund the technical interest rate. this risk can be mitigated by means of asset and liability management (alM) and, in some cases, by adjusting policyholders’ dividends. Unit-linked life insurance generally involves endowment life insurance or a deferred annuity in which the policyholder has more flexibility regarding the investment process. During the deferment period, unit-linked annuities behave in a similar way to endowment life insurance, but during the payout period the policy converts into a traditional annuity. if the policyholder dies, the beneficiary receives the sum insured or the fund assets, if the latter exceed the sum insured. a risk premium is periodically charged to the fund to finance the death benefit cover if there is capital at risk (i. e. the positive difference between the sum insured and the fund assets). Depending on the product, the fund underlying the savings process is selected from a range of funds that match the policy- holder’s investment profile. the policyholder usually bears the entire investment risk and may benefit from a positive return. 164 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements neither the cash surrender value nor the maturity value of unit-linked life insurance is guaranteed, but the maturity value is partly secured by the choice of fund. the funds are typically those with the type of investment strategy (e. g. the proportion of equities falls if share prices fall) that guarantees the maturity value for a specific policy term. this type of business is offered in Switzerland and Germany. the guaranteed maturity value of these specific life insurance policies may differ somewhat from the fund value because of the way the policies are structured. this risk has been factored into actuarial calculations. in Switzerland, there is a closed sub-portfolio with a guaranteed interest rate. the guarantee was issued as part of the statutory pension scheme (pillar 3a). on the endowment date, the policyholder receives the value of the fund units or the net investment premium plus accrued interest at the technical interest rate (3.25 per cent), whichever is the greater. the funds approved for these policies have a low equity ratio and are therefore not exposed to high volatility. a corresponding actuarial reserve has been recognised for the guarantee. Some closed-end funds in Belgium and Switzerland also offer a guaranteed maturity value. the funds are managed and the guarantees are provided by banks outside the Baloise Group. in Switzerland there is also a closed-end Baloise fund with a  guaranteed maturity value which is hedged via investments in bonds issued by banks outside the Group. the Baloise Group has a number of variable annuities products including unit-linked and, in some cases, guaranteed whole-life annuities in its units in Switzerland and in luxembourg / liechtenstein. Financial hedges are provided using external reinsurance. as at 31.12. cHF million actuarial reserves from unit-linked life insurance contracts Switzerland Germany Belgium Luxembourg 2017 2018 2017 2018 2017 2018 2017 2018 687.9 671.0 2,145.3 1,916.4 22.4 21.8 252.5 224.3 the major risks accruing from term insurance include epidemics and terrorist attacks but also changes in lifestyle such as lack of exercise. endowment policies incur significant risks arising from the increase in life expectancy, which is likely to continue due to medical advances and rising living standards. the risks listed above do not vary greatly within this area of activity. our group life business in Switzerland and Belgium focuses on the provision of occupational pensions which, like individual life insurance, covers the risks of death, disability and survival. the distinctive feature of group life business is the influence of political decisions. in Switzerland, the government sets the minimum rate of interest to be paid on savings, and the conversion rate at which accumulated capital is converted into an annuity to provide a pension. However, these regulations only apply to the minimum portion of accumulated capital that is required to provide initial finance for an annuity. For the remaining portion, actuarially appropriate annuity conversion rates are used but any change to the minimum interest rate would also affect the existing statutory portfolio, not just new business, which would normally be the case for individual life business. the technical interest rate for Belgian group life business – unlike individual life business – is also set by the government. However, it is the companies – and not their insurers – that are obliged to guarantee this technical interest rate. Baloise insurance in Belgium offers group life insurance policies with interest rates that are lower than the rate stipulated by the government. 165 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Disability insurance relates to policy riders, i. e. premiums being waived if holders of life insurance policies that require periodic payments of premiums become disabled, and to separate disability insurance. Measured against total actuarial reserves, disa- bility risk represents around 5 per cent of our business. traditional insurance longevity risk Mortality risk Disability risk BVG retirement assets Sub-total Unit-linked longevity risk Mortality risk Sub-total Total Actuarial reserves 31.12.2017 Actuarial reserves 31.12.2018 CHF million Share (%) CHF million Share (%) 11,212.2 9,989.9 1,784.5 11,341.6 34,328.1 1,695.2 1,412.9 3,108.1 30.0 26.7 4.8 30.3 91.7 4.5 3.8 8.3 11,036.9 9,403.7 1,728.5 11,203.8 33,372.9 1,545.7 1,287.8 2,833.5 30.5 26.0 4.8 30.9 92.2 4.3 3.6 7.8 37,436.2 100.0 36,206.4 100.0 actuarial reserves were allocated to the categories above by product, i. e. each product was assigned a risk category and actuarial reserves were not split into different risks within one product. allocation to a category was generally determined by the mortality table used in each case. 5.5.2 Assumptions actuarial reserves are calculated in accordance with the factors that applied on the date a policy was signed. When setting rates for life insurance products, safety margins are built into these factors to anticipate any adverse trends in the future, principally with regard to technical interest rates and mortality tables. these built-in safety margins, combined with counter-selection effects, explain why annuity tables differ from mortality tables. cancellations are not factored in when recognising reserves. the principles applied are reviewed on an ongoing basis by conducting liability adequacy tests (lats) which ensure that sufficient reserves have been set aside. the underlying assumptions for conducting these tests are best estimates. the two main assumptions for these tests are expected future investment income and mortality rates. expected future investment income is calculated using the current investment portfolio and the target investment portfolio (strategic asset allocation). the returns on new money invested are based on capital-market interest rates. Depending on the size of the portfolio, mortality rates are based on publicly available tables adjusted to reflect our own experience or on mortality tables produced inhouse. cancellations are factored into lats using assumptions based on the experience of our companies. changes in assumptions regarding cancellations usually have a negligible impact on lats. 166 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 5.5.3 Sensitivities Sensitivity analysis shows the consequences of realistic changes in risk parameters to which the Baloise Group is exposed at the balance sheet date. these consequences impact on its consolidated equity and its profit for the period. When sensitivities were investigated, only the assumption being tested was varied. the other parameters were kept constant. one exception to this rule was policyholders’ dividends, which were adjusted accordingly. in general, sensitivities do not behave in a linear fashion, so it is not possible to extrapolate from them because they relate to a specific balance sheet date. to identify sensitivities, we investigated the effect of changes in assumptions on profit for the period and on equity, after shadow accounting, deferred gains / losses and deferred taxes (excluding reinsurance effects which were immaterial) had been taken into account. the assumptions on which liability adequacy testing is based were changed for each calculation. ▸ ▸ ▸ ▸ ▸ ▸ ▸ the following scenarios were run: 10 per cent increase in mortality 10 per cent fall in mortality (i. e. increase in longevity) 50 basis-point increase in receipts of new money 50 basis-point fall in receipts of new money 10 per cent increase in mortality a mortality increase of 10 per cent had only a marginal effect in Germany, Belgium and luxembourg and at Baloise life (liechtenstein) aG. this was true of the impact on both the income statement and on equity. in the Swiss life insurance business, an increase in mortality caused a lower amount to be allocated to strengthen annuity reserves. this effect improved profitability by around cHF 34 million (2017: cHF 33 million). the effect on equity in Switzerland was minor. 10 per cent fall in mortality Similar to the aforementioned scenario of an increase in mortality, the effects of a reduction in mortality were marginal for the life insurance companies in Germany, Belgium and luxembourg and for Baloise life (liechtenstein) aG. this was true of the impact on both the income statement and on equity. a reduction in mortality in the Swiss life insurance business – with policyholders’ dividends adjusted accordingly – had a negative impact of approximately cHF 80 million (2017: cHF 76 million) on the income statement. the effect on equity is minor. 50 basis-point increase in receipts of new money this scenario was based on the assumption that receipts of new money (including amounts reinvested) rose by 50 basis points. When applied to the German units, this scenario only had a marginal effect. on balance there was a marginal effect from the German units’ profitability in the reporting year (2017: marginal effect). the negative impact on equity amounted to approximately cHF 4 million (2017: cHF 5 million). in Belgium, this scenario resulted in a increase in Dacs. in prior years, this scenario had also led to a smaller provision for impending losses, which has no longer been needed since 2018. the positive impact on the income statement therefore fell to around cHF 1 million (2017: cHF 12 million). the negative effect on unrealised gains amounted to cHF 117 million (2017: cHF 119 million). in luxembourg, this scenario produced a marginal positive impact on the income statement and an adverse effect of roughly cHF 14 million (2017: cHF 16 million) on the unrealised gains and losses recognised in equity. the resultant impact on the profitability and equity of Baloise life (liechtenstein) aG was negligible. in Switzerland, this scenario resulted in a reversal of Dac write-downs and a reduction in technical reserves. as a result of the elimination of swaptions, the offsetting effect of interest-rate hedges was not repeated in 2018. this meant that the overall effect rose to cHF 16 million (2017: cHF 10 million). the adverse impact on equity amounted to approximately cHF 162 mil- lion (2017: cHF 186 million). 167 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements ▸ 50 basis-point fall in receipts of new money this scenario was based on the assumption that receipts of new money (including amounts reinvested) fell by 50 basis points. When applied to the German units, this scenario resulted in changes in Dac write-downs, changes in the financing of final policyholders’ dividends, and the recognition of a provision for impending losses. these adverse effects were partially compensated for by the increase in the fair value of interest rate derivatives. the overall impact was mitigated by the prevailing legal requirements governing the distribution of surpluses. on balance there was a negative effect from the German units’ profitability in the reporting year of approximately cHF 1 million (2017: cHF 3 million). the positive impact on their equity amounted to approximately cHF 4 million (2017: cHF 5 million). in Belgium, this scenario resulted in an additional Dac write-down. in prior years, this scenario had also led to a larger provision for impending losses, which has no longer been needed since 2018. the negative effect on the income statement therefore fell to around cHF 1.0 million (2017: cHF 24 million). the positive effect on unrealised gains amounted to cHF 131 million (2017: cHF 135 million). in luxembourg, this scenario produced a marginal negative impact on the income statement (2017: marginal negative impact) and a positive effect of roughly cHF 16  million (2017: cHF 14 million) on the unrealised gains and losses recognised in equity. the resultant impact on the profitability and equity of Baloise life (liechtenstein) aG was negligible. in Switzerland, this scenario resulted in a higher Dac write-down and an increase in technical reserves. as a result of the elimination of swaptions, the offsetting effect of interest-rate hedges was not repeated in 2018. this meant that the overall negative effect rose to cHF 25 million (2017: cHF 10 million). the positive impact on equity amounted to approximately cHF 168 million (2017: cHF 185 million). 5.5.4 Changes to assumptions expected future investment income is constantly adjusted in line with market circumstances. it has fallen across all units. other assumptions, such as cancellation rates and mortality rates, are updated on an ongoing basis. 168 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 5.6 Management of market risk Market risk is reflected by losses that arise from changes or fluctuations in market prices that may result in impairment of the value of assets held. the degree of risk depends on the extent to which market prices fluctuate and on the level of exposure. as part of their life insurance business, the companies in the Baloise Group also provide investment-linked life insurance contracts for the account of and at the risk of policyholders. the financial liabilities generated in this connection are backed by assets – generally investment fund units – arising from these policies. Because the market risk attaching to the assets underlying these contracts is borne by the policyholder, they are shown separately in the notes to the consolidated annual financial statements. the following sections specifically address the interest rate risk, currency risk, credit risk, liquidity risk and equity price risk that are relevant to assets held by the Group. Interest rate risk 5.6.1 interest rate risk is the risk that a company’s interest margin, and therefore its income, may be reduced by fluctuations in money- market and capital-market interest rates (income effect), or that the fair value of a portfolio of interest-rate-sensitive products may decline (asset-price effect). as well as the financial risk generated by holding assets and liabilities with non-matching maturities, variations in accounting policy may result in accounting risk. consequently, the impact of a movement in interest rates or in the interest rate curve may be a significant deterioration in terms and conditions if funding has to be rolled over. Benchmark-based maturity management is practised in the non-life units, while maturity management in the life units is driven by liabilities. as part of the Baloise Group-wide Risk Management Standards, investment planning and appropriate asset and liability management ensure that any divergence in maturities and the interest rate risk incurred are managed within the risk-bearing ability available. Stress tests are also designed and run for this purpose. they act as an early-warning system and their impact can be simulated for all areas of the Group and their performance. the effect of stress-testing key financial figures is measured on a monthly basis. the underlying stress scenario (potential loss arising from a risk) is reviewed regularly and modified as necessary. the life insurance companies in the Baloise Group manage their risk associated with changes in interest rates directly, by means of appropriate strategic asset allocation. Specific factors such as risk-bearing capacity and the ability to fund guarantees are taken into account when allocating assets. the decision-making process also incorporates the asset managers’ expectations regarding the development of capital markets and customers’ expectations regarding life insurance. the Baloise Group’s chief investment officer (cio) reviews the strategic asset allocation undertaken by all business units twice a year. the bank also use an appropriate asset and liability management system to monitor and manage interest rate risk. interest rate risk is incurred only in proportion to business volume and business activities. interest rate risk is measured using software based on gap, duration and interest rate sensitivity methods. the asset and liability mismatch at Baloise Bank SoBa is also actively managed by the use of appropriate interest rate derivatives, generally fair value hedges. 169 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements if all interest rates had fallen by 50 basis points on the balance sheet date but all other variables had remained constant, the profit for the period (after deferred gains / losses and deferred taxes) would have been lower by cHF 27 million (2017: cHF 36 million). including the impact on profit for the period, equity (after shadow accounting, deferred gains / losses and deferred taxes) would have risen by cHF 219 million (2017: cHF 211 million). if all interest rates had risen by 50 basis points on the balance sheet date but all other variables had remained constant, the profit for the period (after deferred gains / losses and deferred taxes) would have been higher by cHF 16 million (2017: cHF 21 million). including the impact on profit for the period, equity (after shadow accounting, deferred gains / losses and deferred taxes) would have fallen by cHF 233 million (2017: cHF 238 million). 5.6.2 Currency risk currency risk describes the potential financial loss generated by changes in the exchange rates between currencies. the extent of the effective currency risk depends on: ▸ ▸ ▸ net foreign exchange exposure, i. e. the net position between assets and liabilities denominated in foreign currencies, the volatility of the currencies involved and the correlation of currencies with other risk parameters in a portfolio. Because the Baloise Group invests in foreign currency bonds (particularly those denominated in euros and US dollars) for invest- ment or diversification purposes, there may be currency effects in the income statement for both realised and unrealised positions. to ensure compliance with the risk budget set for currency effects recognised in the income statement, the foreign exchange management team first calculates adequate target hedge ratios, then implements the necessary hedging strategies taking into account these target hedge ratios and the discretionary ranges allowed. it also takes advantage of phases when exchange rates are overreacting by deliberately underweighting or overweighting the hedge ratios in relation to the defined benchmark. these hedging strategies are implemented using forward FX contracts and FX options or combinations of options in which the selection of the instruments to be used in each case depends on factors such as volatility and expected exchange rate movements. the currency effect of foreign currency bonds or insurance-related foreign currency liabilities and changes in the fair value of derivative financial instruments held for hedging purposes are always recognised in the income statement. the Group-wide Risk Management Standards require currency risk and the effectiveness of the currency derivatives transacted to be monitored on a continuous basis. the currency risk incurred must be proportionate to the potential superior return generated by the diversification effect achieved in the portfolio. the Swiss franc and the euro are used almost exclusively for the Baloise Group’s insurance activities, with the result that technical reserves are also mainly in these currencies. there are also small technical liabilities in US dollars. these reserves are generally covered by investments in the same currencies (natural hedges). assuming that all other variables remain constant, fluctuations between transactional currencies and the functional currency in financial balance sheet items (after deferred gains / losses and deferred taxes) in the amount of + / – cHF 0.01 (1 centime) would have resulted in a change of + / – cHF 2.6 million (2017: + / – cHF 1.4 million) in the profit for the period; a positive (+) change of cHF 0.01 would have generated a currency gain and a negative (–) change of cHF 0.01 would have generated a currency loss. 170 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Derivative financial instruments used as currency hedges of a net investment in a foreign operation the Group’s own companies, Baloise alternative investment Strategies (luxembourg) ScS, Baloise private equity (luxembourg) ScS and Baloise alternative invest S.a. Sica V-RaiF, manage the substantial investments in alternative financial assets such as hedge funds, private equity and senior secured loans. the Baloise Group’s FX managers enter into currency hedging transactions in the form of forward contracts to limit the currency risk exposure of its net investment in these three foreign entities whose reporting currency is the US dollar. Restricting the implementation of hedging strategies to forward contracts makes it easier to demonstrate the efficiency of the hedges and to show that hedge accounting is being used. Because hedge accounting is applied, the change in the fair value of these derivatives is aggregated into a separate item under equity and only derecognised via the income statement, together with the accrued currency effects on the net investment in these foreign entities, when the relevant underlying asset is sold. as at 31.12. cHF million Forward contracts Swaps otc options other traded options traded futures Total cHF million amount recognised directly in equity Hedge ineffectiveness reclassified to the income statement Fair value assets Fair value liabilities 2017 2018 2017 2018 14.3 14.5 2.3 0.5 – – – – – – – – – – – – – – – – – – – – 14.3 14.5 2.3 0.5 2017 2018 72.7 – – 7.7 – Because equity investments are actively managed, additions to and deductions from equity are carried out on a regular basis during the year. consequently, the year-on-year effects underlying hedge accounting and the recognition of cash flows in profit or loss are recognised on a pro-rata basis. For international diversification (risk-spreading), to enhance returns and because there is greater liquidity in certain foreign financial markets, as at 31  December  2018 the Group’s Swiss companies did hold a net position in euros equivalent to cHF 1,096.7  million (2017: 837.1 million) and a net position in US dollars equivalent to cHF 277.0 million (2017: cHF 243.1 million). the remaining foreign exchange positions, both assets and liabilities, were negligible. During the year, the overall aggregated hedge ratio for the net foreign exchange exposure in US dollars ranged from 85 per cent to 95 per cent and in euros ranged from 95 per cent to 100 per cent. the foreign entities in the Baloise Group had not a significant foreign currency exposure. 171 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 5.7 Credit risk credit risk relating to assets held by insurance companies refers to the total potential downside risk arising from a deterioration in the credit quality of a borrower or issuer, or from impairment in the value of collateral. credit risk is managed by monitoring the credit quality of each individual counterparty and relying heavily on credit ratings. credit risk increases when counterparties become concentrated in a single sector or geographic region. economic trends that affect whole sectors or regions can jeopardise an entire group of otherwise unrelated counterparties. For this reason, the Baloise Group tracks counterparty exposure at all times and monitors credit risk on a Group-wide basis. the regional expertise of our business units is also incorporated into decisions about securities selection or changes to the existing credit portfolio. Because the credit risk incurred by the Baloise Group is spread across sectors and geographic regions and among a large number of counterparties and customers, the Baloise Group is not exposed to material credit risk arising from a single counterparty or a specific sector or geographic region. in order to restrict the credit / accumulation risk in the Baloise Group, the proportion that may be invested by Group companies in a single issuer or borrower is strictly limited in the Group-wide Risk Management Standards. the relevant rules are explicitly defined in the Group investment policy. investments in interest-bearing securities or loans must have an investment-grade issue rating or be backed by a corresponding third-party guarantee or mortgage. a total limit of 15 per cent of all interest-bearing securities and loans is set for investments with a rating of less than “a –” and investments with no rating. Sub-investment-grade investments are not permitted. if any financial instrument in the portfolio becomes sub-investment grade due to a ratings downgrade, it must be sold within twelve months. approval is required for any exceptions. Financial derivatives are only permitted to be transacted with issuers holding a rating of at least “a –” or with whom there is a special collateral agreement. investments in pfandbriefs are backed by mortgages. the vast majority of investments in promissory notes and registered bonds are secured by guarantees or covered by the deposit protection fund. these investments carry a reimbursement guarantee from financial institutions. Mortgage loans are secured by property; there are limits on loan-to-value ratios. please refer to the table of secured financial instruments with characteristics of liabilities in chapter 12. 172 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FINANCIAL ASSETS EXCEEDING 10 % OF CONSOLIDATED EQUIT Y cHF million Swiss confederation Kingdom of Belgium Federal Republic of Germany pfandbriefbank schweizerischer Hypothekarinstitute aG Republic of France pfandbriefzentrale der schweizerischen Kantonalbanken aG Kingdom of the netherlands european investment Bank, luxembourg FINANCIAL ASSETS EXCEEDING 10 % OF CONSOLIDATED EQUIT Y cHF million Swiss confederation Kingdom of Belgium Federal Republic of Germany pfandbriefbank schweizerischer Hypothekarinstitute aG Republic of France pfandbriefzentrale der schweizerischen Kantonalbanken aG Kingdom of the netherlands european investment Bank, luxembourg canton of Zurich 31.12.2017 3,448.8 2,806.0 1,998.3 1,574.9 1,538.0 1,011.0 936.3 774.9 31.12.2018 3,489.3 2,672.6 1,895.0 1,560.8 1,513.1 1,055.2 961.1 696.5 678.6 173 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements MA XIMUM DEFAULT RISK OF FINANCIAL ASSETS cHF million Financial assets of a debt nature public corporations industrial enterprises Financial institutions other Mortgages and loans Mortgages policy loans promissory notes and registered bonds time deposits employee loans Reverse repurchase agreements other loans Derivative financial instruments Receivables from financial contracts Reinsurance assets Receivables from reinsurers insurance receivables other receivables Receivables from investments cash and cash equivalents 31.12.2017 31.12.2018 18,822.3 18,438.0 7,844.4 6,711.3 10.2 6,655.4 6,695.2 10.0 10,746.9 10,982.3 139.6 4,638.1 132.3 4,322.5 939.7 26.8 – 228.1 362.4 3.0 468.3 38.2 444.1 432.9 440.9 952.0 28.2 – 236.3 453.9 – 457.2 41.9 433.3 347.0 406.9 2,133.2 2,543.5 if no contractually irrevocable future loan commitments have been agreed, the maximum default risk of financial assets corresponds to the carrying amount of the assets for own account and at own risk. in addition, guarantees and collateral for the benefit of third parties totalled cHF 524.7 million (2017: cHF 560.5 million). 174 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements the management and control of credit risk arising from mortgage business are set out in instructions and written procedures in which mandatory lending regulations are specified. these lending regulations lay down strict procedures for the immediate identification, accurate assessment, proper authorisation and continuous monitoring of credit risk. Standard credit documentation is used to record and review loan applications, which are all logged and managed centrally. the relevant credit documentation reflects or incorporates all evaluation criteria and policies. Because a running total of mortgage transactions is kept, it is possible to monitor compliance with credit policy, and corrective action can be taken if necessary. all mortgages are also managed by periodically auditing exposure, including records of overdue interest. procedures and audit intervals are set out in a separate directive. Senior management regularly receive detailed risk reports on the composition of the mortgage portfolio and risk trends. policies, directives and authorisation levels set out the terms and conditions for granting mortgages, which consist of the amount, the credit quality of the counterparty, collateral and the term of the transaction as well as the specialist qualifications of the mortgage expert. there are special instructions for valuing collateral and calculating loan-to-value ratios. the purpose of these provisions is to ensure that a standard procedure is used to determine the applicable value of collateral when assessing mortgages. the calculation of fair value and the loan-to-value ratio of real estate is of key importance, particularly with regard to mortgage business. one of the objectives of the active management of mortgages is the early identification of potential downside risk. the mortgage portfolio comprises loans to individuals and to legal entities. the type and degree of risk that may be incurred, together with collateralisation and quality requirements, are set out in directives and authorisation levels. to mitigate risk, the portfolio is as geographically diverse as possible. 175 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements CREDIT RATINGS OF FINANCIAL ASSETS THAT WERE NEITHER OVERDUE NOR IMPAIRED promissory notes and registered bonds 2,048.3 2,290.1 AAA AA A Lower than BBB or no rating BBB Total 6,626.2 207.9 4,449.8 0.2 98.2 – 9,324.2 998.4 566.9 10.0 1,411.6 3,308.5 1,045.5 – 1,117.8 1,880.2 347.9 – 878.7 8,530.1 830.5 – 4.1 – – 4.7 88.6 – – – 0.0 66.9 127.5 776.7 77.0 – – 25.2 11.3 – 88.3 6.6 6.1 17.3 104.3 382.2 – 47.5 12.2 – – 125.7 185.9 – 322.8 17.5 7.4 97.0 43.4 625.3 – 78.9 29.8 – – 25.4 14.5 – 0.0 – 0.2 16.3 29.5 25.5 342.5 18,822.3 1,449.4 301.1 – 129.4 139.6 173.3 816.6 26.8 – 34.8 62.1 3.0 53.1 14.1 282.6 203.0 118.9 323.5 7,844.4 6,711.3 10.2 10,466.8 139.6 4,638.1 939.7 26.8 – 215.7 362.4 3.0 464.2 38.2 296.4 400.5 423.6 2,133.2 14,499.0 14,786.4 15,780.5 4,396.7 4,473.7 53,936.2 as at 31.12.2017 cHF million Financial assets of a debt nature public corporations industrial enterprises Financial institutions other Mortgages and loans Mortgages policy loans time deposits employee loans Reverse repurchase agreements other loans Derivative financial instruments Receivables from financial contracts Reinsurance assets Receivables from reinsurers insurance receivables other receivables Receivables from investments cash and cash equivalents Total 176 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements CREDIT RATINGS OF FINANCIAL ASSETS THAT WERE NEITHER OVERDUE NOR IMPAIRED promissory notes and registered bonds 1,951.8 2,079.8 as at 31.12.2018 cHF million Financial assets of a debt nature public corporations industrial enterprises Financial institutions other Mortgages and loans Mortgages policy loans time deposits employee loans Reverse repurchase agreements other loans Derivative financial instruments Receivables from financial contracts Reinsurance assets Receivables from reinsurers insurance receivables other receivables Receivables from investments cash and cash equivalents Total AAA AA A Lower than BBB or no rating BBB Total 6,362.4 181.1 4,828.6 – 115.6 – 9,257.2 763.9 456.6 10.0 1,579.9 2,618.3 885.8 – 941.9 1,629.7 236.9 – 909.3 8,677.3 798.2 – – – – 5.0 143.9 – 0.1 – 0.0 2.2 120.5 970.9 25.9 – – 25.4 3.8 – 65.4 7.6 5.6 19.8 97.9 422.4 – 61.1 – – – 122.4 174.3 – 318.6 14.2 3.7 104.7 36.5 576.5 – 62.1 67.5 – – 22.7 9.8 – 8.3 0.5 0.3 18.3 25.0 41.8 296.7 18,438.0 1,462.5 287.3 – 108.5 132.3 167.7 858.5 28.2 – 59.1 122.1 – 56.6 19.5 282.4 179.7 105.2 531.8 6,655.4 6,695.2 10.0 10,608.9 132.3 4,322.5 952.0 28.2 – 234.6 453.9 – 449.0 41.9 292.0 324.7 385.0 2,543.5 14,682.0 14,150.6 15,173.4 3,863.0 4,698.2 52,567.1 Standard & poor’s and Moody’s ratings are generally used to assess the credit quality of securities. the lower of the two is used for disclosure. Because the two agencies do not cover the entire Swiss financial market, the SBi composite rating is applied as and when necessary. this consists of ratings issued by the two rating agencies and the following four Swiss banks: credit Suisse, UBS, Bank Vontobel and Zürcher Kantonalbank. the credit quality of mortgage assets arising from Swiss insurance business is reviewed using risk management processes. credit ratings are assigned on this basis. Mortgage assets that show no signs of impaired credit quality receive an a rating. those that show signs of impaired credit quality are rated lower than BBB or are not rated at all. in 2018, financial assets amounting to cHF 1.8 million (2017: cHF 1.9 million) and cash and cash equivalents of 0.1 million (2017: 0.1 million) from collateral received were used. 177 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FINANCIAL ASSETS IMPAIRED as at 31.12. cHF million Financial assets of a debt nature public corporations industrial enterprises Financial institutions other Mortgages and loans Mortgages policy loans promissory notes and registered bonds time deposits employee loans Reverse repurchase agreements other loans Receivables from financial contracts Reinsurance assets Receivables from reinsurers insurance receivables other receivables Receivables from investments Total Gross amount Impairment Carrying amount Gross amount Impairment Carrying amount 2017 2018 – 2.9 0.8 – – – 2.9 – 0.8 – – – – – – 1.2 0.7 – – – 1.2 – 0.7 – – – – – 135.1 – 20.4 114.7 128.3 – 18.8 109.5 – – – 0.0 – 24.8 – – 0.1 134.5 3.3 18.7 320.3 – – – 0.0 – – – – – – – 12.4 12.4 – – – 0.1 – 35.7 – 0.7 – 1.5 – 74.5 – – 0.0 98.8 2.6 17.2 245.8 – – – 0.0 – 10.4 – – 0.3 134.7 2.2 23.2 301.0 – – – 0.0 – – 8.7 – – – 0.1 – 37.3 – 1.3 – 1.2 – 69.4 – – – 0.0 – 1.8 – – 0.1 97.4 1.0 21.9 231.7 178 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FINANCIAL ASSETS OVERDUE BUT NOT IMPAIRED as at 31.12.2017 cHF million Financial assets of a debt nature public corporations industrial enterprises Financial institutions other Mortgages and loans Mortgages policy loans promissory notes and registered bonds time deposits employee loans Reverse repurchase agreements other loans Receivables from financial contracts Reinsurance assets Receivables from reinsurers insurance receivables other receivables Receivables from investments Total < 3 months 3 – 6 months 7 – 12 months > 12 months Total – – – – – – – – – – – – – – – – – – – – – – – – – – – – 16.9 0.0 – 16.9 11.5 – 0.0 11.5 – – – – 14.8 – – – – – – – – – 13.9 0.0 – 28.7 – – – – – – – – – – – – 4.1 – 6.6 – – 10.7 – – – – 14.8 – – – – – – – 4.1 – 48.9 0.0 0.0 67.8 179 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FINANCIAL ASSETS OVERDUE BUT NOT IMPAIRED as at 31.12.2018 cHF million Financial assets of a debt nature public corporations industrial enterprises Financial institutions other Mortgages and loans Mortgages policy loans promissory notes and registered bonds time deposits employee loans Reverse repurchase agreements other loans Receivables from financial contracts Reinsurance assets Receivables from reinsurers insurance receivables other receivables Receivables from investments Total < 3 months 3 – 6 months 7 – 12 months > 12 months Total – – – – – – – – – – – – – – – – – – – – – – – – – – – – 15.9 0.0 – 15.9 10.5 0.0 – 10.5 – – – – 6.5 – – – – – – – – – 10.4 0.0 – 16.9 – – – – – – – – – – – – 8.2 – 7.1 0.0 – 15.3 – – – – 6.5 – – – – – – – 8.2 – 43.9 0.0 – 58.6 Liquidity risk 5.8 Banks as well as insurance companies incur latent liquidity risk. this refers to the risk of rapid outflows of large volumes of liquidity that cannot be offset by asset sales or for which alternative funding cannot be implemented quickly enough. in extreme cases, a lack of liquidity can result in insolvency. legal provisions apply and the Group-wide Risk Management Standards require each business unit to plan its liquidity centrally. this is carried out with the close collaboration of the investment, actuarial, underwriting and finance departments of each business unit. 180 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements liquidity management must take account of the maturity structure of liabilities as follows: Total 15,657.9 2,103.8 8,941.7 2,269.5 28,972.8 MATURITIES OF FINANCIAL LIABILITIES 1 Liquidity risk as at 31.12.2017 cHF million liabilities arising from banking business and financial contracts With discretionary participation features Measured at amortised cost Recognised at fair value through profit or loss Financial liabilities non-technical provisions Derivative financial instruments insurance liabilities other liabilities contingent liabilities and capital commitments MATURITIES OF FINANCIAL LIABILITIES 1 Liquidity risk as at 31.12.2018 cHF million liabilities arising from banking business and financial contracts With discretionary participation features Measured at amortised cost Recognised at fair value through profit or loss Financial liabilities non-technical provisions Derivative financial instruments insurance liabilities other liabilities contingent liabilities and capital commitments ‹ 1 year 2 1 – 3 years 4 – 5 years > 5 years Total Carrying amount 2,706.7 6,262.3 3,895.9 38.3 28.6 101.5 1,073.9 627.0 923.5 1.0 106.0 42.4 547.7 9.3 4.3 631.7 32.2 729.1 1.5 540.9 7,839.2 444.1 2.0 21.0 0.1 4.1 88.9 105.0 719.6 476.1 914.0 9.1 18.5 0.6 20.3 6.4 2,814.2 7,628.8 2,814.2 7,628.8 12,253.6 12,253.6 1,944.1 1,742.9 49.0 145.3 1,706.3 683.6 1,747.9 49.0 145.3 1,706.3 724.2 – – ‹ 1 year 2 1 – 3 years 4 – 5 years > 5 years Total Carrying amount 2,819.5 5,552.0 3,614.9 213.3 43.9 70.8 1,137.3 734.9 1,031.8 1.6 91.2 – 610.2 10.9 5.5 691.9 22.9 716.4 1.8 683.1 7,518.7 708.6 0.9 20.5 0.1 3.8 15.9 101.8 671.2 483.3 373.7 8.0 20.5 0.4 17.7 17.6 2,924.7 6,997.5 2,924.7 6,997.5 11,616.9 11,616.9 1,905.8 1,744.5 63.7 117.3 1,829.8 779.3 1,781.6 Total 15,218.5 2,150.6 8,953.4 1,694.1 28,016.6 1 Based on undiscounted contractual cash flows. 2 all demand deposits are included in the first maturity band. please refer to the tables in chapter 23 for the residual terms and maturities of technical reserves. 63.7 117.3 1,829.8 781.0 – – 181 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements in accordance with the Group-wide Risk Management Standards, asset and liability management committees have been introduced in all strategic business units in the Baloise Group. these asset and liability management committees analyse maturity schedules and the income generated by assets or required for liabilities. as part of tactical and strategic investment planning, care is taken when allocating the assets held by the individual life and non-life insurance units in the Baloise Group to ensure that sufficient liquidity is available to carry out investment activity and for the operational settlement of all business processes. the level of liquidity required is determined on the basis of the maturity structure of investments versus the payout schedule for insurance-related liabilities. the average historical pattern of incoming and outgoing cash management payments over the previous five years is also taken into account. investment planning explicitly includes exceptionally large incoming or outgoing payments that are known in advance. Maintenance of liquidity levels and access to further liquidity via the repo market ensure sufficiently high reserves for payments needed at short notice, such as large claim settlements, until such as time as the reinsurer assumes the costs. cash pooling among the Baloise Group’s Swiss companies also ensures that excess liquidity in one unit can be used to offset a temporary liquidity squeeze at another unit via an intra-Group interest-bearing overdraft facility. if these precautions fail to meet the need for liquidity, the Baloise Group holds financial assets that can be sold at short notice without significant price losses. they include all equities (excluding long-term equity investments). Because the Group holds a substantial portfolio of government and quasi-government bonds, it is possible to sell relatively large holdings of available-for-sale bonds even in crisis situations. Mortgages and loans are generally held to maturity; early redemption is not considered at present. in terms of alternative financial assets, 60 per cent of hedge funds can be sold within three months. private-equity investments have to be considered illiquid in this context, and it is not possible to sell investment property to generate immediate liquidity. Equity price risk 5.9 the Baloise Group is exposed to equity price risk because it holds financial instruments with characteristics of equity classed as “recognised at fair value through profit or loss” and “available for sale”. equity price risk is significantly reduced by means of international diversification, i. e. by spreading risk across sectors, countries and currencies. active overlay management using derivatives also mitigates equity price risk. Most financial instruments with characteristics of equity are publicly listed. if the market price of all financial instruments with characteristics of equity were to move by + / – 10 per cent on the balance sheet date, the following impact would be observed – after shadow accounting, deferred gains / losses, deferred taxes, derivative hedges and the effect of the impairment rules mentioned in section 3.10.2: Impact on profit for the period Impact on equity (including profit for the period) 2017 2018 2017 2018 9.4 – 20.2 25.3 – 51.2 234.0 – 236.7 200.0 – 192.9 cHF million Market price plus 10 % Market price minus 10 % 182 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Because these impairment criteria produce different effects due to assumed changes in market prices if there is a rise compared with an analogous fall, these effects are divergent. the compensatory effects of hedging using derivatives behave in a similar manner. adjustments in the fair value of financial instruments with characteristics of equity that are classed as “recognised at fair value through profit or loss” have an impact on the profit for the period. Unrealised gains and losses vary due to changes in the fair value of financial instruments with characteristics of equity which are classed as “available for sale”. in a life insurance company, policyholders participate in the firm’s profits, depending on their policy and local circumstances (see section 3.19.5.). the table above takes account of this profit-sharing scheme. 5.10 Fair value measurement Where available, quoted market prices are used to determine the fair value of assets and liabilities. they are defined as available if quoted prices can be obtained easily and frequently on an exchange, from a dealer, broker, trade association, pricing service or regulatory authority, provided these prices are current, in sufficient volume and represent regularly occurring arm’s-length transactions in the market. if no quoted market prices are available (e. g. because a market is inactive), the fair value is determined using a market-based measurement process. Market-based means that the measurement method is based on a significant quantity of observable market data (as available). ▸ ▸ ▸ Fair value measurement is divided into the following three hierarchy levels: Fair value determined by publicly quoted prices (level 1) Fair value is based on prices in active markets on the balance sheet date and it is not adjusted or compiled in any other way. Fair value determined by using observable market data (level 2) Fair value is estimated using generally recognised methods (discounted cash flow, etc.). in this case, measurement incorporates a significant quantity of observable market data (interest rates, index performance, etc.). Fair value determined without the use of observable market data (level 3) Fair value is estimated using generally recognised methods (discounted cash flow, etc.), although it is measured without reference to any observable market data (or only to a very minor degree), either because this data is not available or because it does not permit any reliable conclusions to be drawn with regard to fair value. Detailed information about measurement principles and the measurement methods used can be found in chapters 3 and 4. 183 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Details of the methods used to measure level 2 and level 3 assets and liabilities the table below gives an overview of the measurement methods that the Baloise Group uses to determine the fair value of balance sheet line items classified as level 2 or level 3. the table shows the individual measurement methods, the key input factors used for measurement purposes and – where practicable – the range within which these input factors vary. Balance sheet line item Measurement method Key input factors used for measurement purposes Range of input factors Level 2 Financial instruments with characteristics of equity available for sale at fair value through profit or loss Financial instruments with characteristics of liabilities internal measurement methods price of underlying instrument, liquidity discount, balance sheet and income statement figures net asset value net asset value n. a. n. a. available for sale present-value model at fair value through profit or loss present-value model net asset value Yield curve, swap rates, default risk interest rate, credit spread, market price n. a. Mortgages and loans carried at cost at fair value through profit or loss Derivative financial instruments liabilities arising from banking business and financial contracts at fair value through profit or loss Level 3 Financial instruments with characteristics of equity present-value model interest rate, credit spread present-value model Black-Scholes option pricing model liBoR, swap rates Money market interest rate, volatility, price of underlying instrument, exchange rates Black-76 Volatility, forward interest rate Stochastic present-value model present-value model investment fund prices, interest rates, cancellation rate liBoR, swap rates net asset value n. a. Financial instruments with characteristics of liabilities present-value model interest rate, credit spread – – – – – – – – – – n. a. – investment property DcF method Discount rate 1 2.72 % – 5.57 % 3 Rental income 2 290 – 310 cHF million 3 Vacancy costs 1 13 – 19 cHF million 3 Running costs 1 25 – 31 cHF million 3 Maintenance costs 1 28 – 34 cHF million 3 capital expenditure 2 40 – 60 cHF million 3 inflation rate 2 0 % – 2 % 3 1 the lower these key input factors are, the higher the fair value of the investment property is. 2 the higher these key input factors are, the lower the fair value of the investment property is. 3 the input factor ranges shown essentially relate to the real estate portfolios held by the Baloise Group’s Swiss entities. 184 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Determining the fair value of assets and liabilities classified as level 3 the Baloise Group organises its operating activities into strategic business units, which are generally combined under a single management team for each region. the financial and management information needed for all relevant executive decisions is held by these strategic business units. this organisational structure is also used to delegate authority and responsibility for proper imple- mentation of, and compliance with, financial reporting standards within the Baloise Group to the individual strategic business units. the organisation of these individual units varies in terms of how they determine the fair value of financial instruments classified as level 3. this process essentially involves the regular discussion of measurement methods, measurement inconsistencies and classification issues by formal or informal committees at each reporting date. appropriate adjustments are made where necessary. Financial instruments with characteristics of equity classed as “available for sale” or “recognised at fair value through profit or loss” and classified as level 3 are primarily private-equity investments and alternative investments held by the Baloise Group as well as non-controlling interests in real estate companies. the fair value of such investments is usually determined by fund managers (external providers) based on their net asset value (naV). these external providers generally use non-public information to calculate the individual investments’ naV. Financial instruments with characteristics of liabilities that are assigned to level 3 are predominantly corporate bonds originating from private placements and for which third-party prices are not available. a present-value model is used to measure their fair value. the measurement of investment property classified as level 3 is carried out internally each year by experts using market-based assumptions that have been verified by respected external consultancies. this property is also assessed by external valuation specialists at regular intervals. 185 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FAIR VALUE OF ASSETS AND LIABILITIES FOR OWN ACCOUNT AND AT OWN RISK 31.12.2017 cHF million Assets measured on a recurring basis Financial instruments with characteristics of equity available for sale Recognised at fair value through profit or loss Financial instruments with characteristics of liabilities Held to maturity available for sale Recognised at fair value through profit or loss Mortgages and loans carried at cost Recognised at fair value through profit or loss Derivative financial instruments Receivables from financial contracts carried at cost other receivables carried at cost Receivables from investments carried at cost investment property Total carrying amount Total fair value Level 1 Level 2 Level 3 4,402.9 4,402.9 343.3 343.3 2,695.1 343.3 8,488.9 10,018.7 24,870.1 24,870.1 29.2 29.2 10,018.7 23,501.3 29.2 15,791.7 16,668.5 776.8 362.4 776.8 362.4 3.0 3.0 403.1 403.5 – – 23.3 – – 440.9 440.9 7,480.3 7,480.3 321.7 – 501.3 1,206.5 – – 1,368.8 – – – – – 10,237.2 6,431.3 776.8 339.1 – – 20.4 – – – 3.0 403.5 98.7 7,480.3 Liabilities measured on a recurring basis liabilities arising from banking business and financial contracts Measured at amortised cost Recognised at fair value through profit or loss Derivative financial instruments Financial liabilities 7,628.8 7,738.9 518.5 145.3 518.5 145.3 – – 7.1 1,742.9 1,852.9 1,852.9 7,667.8 71.1 518.5 138.2 – – – – in 2017, Baloise used a revised methodology for classifying the hierarchy levels. the changes mainly relate to mortgages carried at cost, the majority of which can be allocated to level 2 on the basis of observable discount factors (interest rates). 186 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FAIR VALUE OF ASSETS AND LIABILITIES FOR OWN ACCOUNT AND AT OWN RISK 31.12.2018 cHF million Assets measured on a recurring basis Financial instruments with characteristics of equity available for sale Recognised at fair value through profit or loss Financial instruments with characteristics of liabilities Held to maturity available for sale Total carrying amount Total fair value Level 1 Level 2 Level 3 3,657.0 3,657.0 331.3 331.3 1,861.1 298.8 473.2 32.5 8,002.5 9,353.8 9,353.8 – 23,771.4 23,771.4 22,371.4 1,400.0 1,322.7 – – – – Recognised at fair value through profit or loss 24.8 24.8 24.8 – Mortgages and loans carried at cost Recognised at fair value through profit or loss Derivative financial instruments Receivables from financial contracts carried at cost other receivables carried at cost Receivables from investments carried at cost investment property Liabilities measured on a recurring basis liabilities arising from banking business and financial contracts Measured at amortised cost Recognised at fair value through profit or loss Derivative financial instruments Financial liabilities 15,470.5 16,216.3 925.8 453.9 925.8 453.9 – – 325.7 327.9 – – 11.8 – – 406.9 406.9 294.5 7,904.0 7,904.0 6,997.5 7,082.6 524.5 116.7 524.5 116.7 – – – 12.4 1,744.5 1,822.1 1,822.1 10,202.2 6,014.1 925.8 442.1 – – 19.9 – – – – 327.9 92.6 7,904.0 7,008.2 74.4 524.5 104.3 – – – – 187 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FAIR VALUE OF ASSETS AND LIABILITIES FOR THE ACCOUNT AND AT THE RISK OF LIFE INSURANCE POLICYHOLDERS AND THIRD PARTIES 31.12.2017 cHF million Assets measured on a recurring basis Financial instruments with characteristics of equity Total carrying amount Total fair value Level 1 Level 2 Level 3 Recognised at fair value through profit or loss 11,128.7 11,128.7 10,908.6 – 220.1 Financial instruments with characteristics of liabilities Recognised at fair value through profit or loss 1,971.9 1,971.9 1,804.2 95.2 72.6 Mortgages and loans Recognised at fair value through profit or loss Derivative financial instruments other assets – 438.0 – 438.0 – 194.5 – 243.5 Recognised at fair value through profit or loss 70.5 70.5 70.5 – Liabilities measured on a recurring basis liabilities arising from banking business and financial contracts Recognised at fair value through profit or loss 11,735.1 11,735.1 11,639.9 Derivative financial instruments – – – 95.2 – – – – – – 188 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FAIR VALUE OF ASSETS AND LIABILITIES FOR THE ACCOUNT AND AT THE RISK OF LIFE INSURANCE POLICYHOLDERS AND THIRD PARTIES 31.12.2018 cHF million Assets measured on a recurring basis Financial instruments with characteristics of equity Total carrying amount Total fair value Level 1 Level 2 Level 3 Recognised at fair value through profit or loss 10,149.7 10,149.7 9,923.4 – 226.3 Financial instruments with characteristics of liabilities Recognised at fair value through profit or loss 1,976.4 1,976.4 1,753.6 110.0 112.8 Mortgages and loans Recognised at fair value through profit or loss Derivative financial instruments other assets – 460.9 – 460.9 – 196.5 – 264.3 Recognised at fair value through profit or loss 54.1 54.1 54.1 – Liabilities measured on a recurring basis liabilities arising from banking business and financial contracts Recognised at fair value through profit or loss 11,092.4 11,092.4 10,982.4 Derivative financial instruments 0.7 0.7 – 110.0 0.7 – – – – – 189 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS FOR OWN ACCOUNT AND AT OWN RISK AND CLASSIFIED AS LEVEL 3 2017 cHF million Assets and liabilities measured on a recurring basis Balance as at 1 January additions additions arising from change in the scope of consolidation additions arising from change in the percentage of shareholding Disposals Disposals arising from change in the scope of consolidation Disposals arising from change in the percentage of shareholding Reclassified to level 3 Reclassified from level 3 Reclassification to non-current assets classified as held for sale changes in fair value recognised in profit or loss1 changes in fair value not recognised in profit or loss2 exchange differences Balance as at 31 December Changes in fair value of financial instruments held at the balance sheet date and recognised in profit or loss Financial instruments with characteristics of equity Available for sale Investment property Recognised at fair value through profit or loss Total 964.0 279.0 0.0 – 6,817.5 7,781.5 567.2 384.5 – 846.2 384.5 – – 103.5 – 157.7 – 261.2 – – – – – – 10.4 30.0 47.4 – – – – – – – – – 336.8 111.1 – 94.6 – 336.8 100.7 30.0 141.9 1,206.5 7,480.3 8,686.8 – 10.4 99.5 89.1 1 changes in fair value recognised in profit or loss arise from realised gains and losses on investments, impairment losses or the reversal of impairment losses. 2 changes in fair value not recognised in profit or loss arise from unrealised gains and losses on investments. 190 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS FOR OWN ACCOUNT AND AT OWN RISK AND CLASSIFIED AS LEVEL 3 2018 cHF million Assets and liabilities measured on a recurring basis Balance as at 1 January additions additions arising from change in the scope of consolidation additions arising from change in the percentage of shareholding Disposals Disposals arising from change in the scope of consolidation Disposals arising from change in the percentage of shareholding Reclassified to level 3 Reclassified from level 3 Reclassification to non-current assets classified as held for sale changes in fair value recognised in profit or loss1 changes in fair value not recognised in profit or loss2 exchange differences Balance as at 31 December Changes in fair value of financial instruments held at the balance sheet date and recognised in profit or loss Financial instruments with characteristics of equity Available for sale Investment property Recognised at fair value through profit or loss Total 1,206.5 225.0 7,480.3 407.5 8,686.8 632.5 – – – – – – – 144.8 – 69.6 – 214.4 – – – – – – 1.9 64.4 – 26.6 1,322.7 – – – – 23.3 23.3 – – 106.5 5.2 – 49.3 – – 104.6 69.6 – 75.8 7,904.0 9,226.7 1.0 94.2 95.1 1 changes in fair value recognised in profit or loss arise from realised gains and losses on investments, impairment losses or the reversal of impairment losses. 2 changes in fair value not recognised in profit or loss arise from unrealised gains and losses on investments. 191 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS FOR THE ACCOUNT AND AT THE RISK OF LIFE INSURANCE POLICYHOLDERS AND THIRD PARTIES AND CLASSIFIED AS LEVEL 3 Financial instruments with characteristics of equity Financial instruments with characteristics of liabilities Derivative financial instruments (assets) Recognised at fair value through profit or loss Recognised at fair value through profit or loss Recognised at fair value through profit or loss 2017 cHF million Assets and liabilities measured on a recurring basis Balance as at 1 January additions additions arising from change in the scope of consolidation additions arising from change in the percentage of shareholding 44.7 100.3 – – 42.2 19.6 – – Disposals – 0.8 – 30.4 Disposals arising from change in the scope of consolidation Disposals arising from change in the percentage of shareholding Reclassified to level 3 Reclassified from level 3 changes in fair value recognised in profit or loss1 exchange differences Balance as at 31 December Changes in fair value of financial instruments held at the balance sheet date and recognised in profit or loss – – 83.5 – 20.4 1.2 11.6 220.1 0.8 – – 41.3 – 4.4 – 0.8 5.1 72.6 – 0.3 0.8 – – – – – – – – 0.8 – 0.0 – – 1 changes in fair value recognised in profit or loss arise from realised gains and losses on investments, impairment losses or the reversal of impairment losses. 192 Total 87.7 119.9 – – – 31.2 – – 124.7 – 25.5 0.4 16.7 292.7 0.5 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS FOR THE ACCOUNT AND AT THE RISK OF LIFE INSURANCE POLICYHOLDERS AND THIRD PARTIES AND CLASSIFIED AS LEVEL 3 2018 cHF million Assets and liabilities measured on a recurring basis Balance as at 1 January additions additions arising from change in the scope of consolidation additions arising from change in the percentage of shareholding Financial instruments with characteristics of equity Financial instruments with characteristics of liabilities Derivative financial instruments (assets) Recognised at fair value through profit or loss Recognised at fair value through profit or loss Recognised at fair value through profit or loss 220.1 15.8 – – 72.6 63.5 – – Disposals – 29.4 – 16.8 Disposals arising from change in the scope of consolidation Disposals arising from change in the percentage of shareholding Reclassified to level 3 Reclassified from level 3 changes in fair value recognised in profit or loss1 exchange differences Balance as at 31 December – – 0.1 – 28.4 – 8.7 226.3 – – 1.8 – 7.5 3.2 – 3.9 112.8 Changes in fair value of financial instruments held at the balance sheet date and recognised in profit or loss 28.3 3.1 1 changes in fair value recognised in profit or loss arise from realised gains and losses on investments, impairment losses or the reversal of impairment losses. – – – – – – – – – – – – – Total 292.7 79.3 – – – 46.2 – – 1.8 – 7.5 31.6 – 12.5 339.1 31.5 193 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Reclassification of assets and liabilities from level 1 to level 2 and vice versa assets and liabilities measured at fair value are generally reclassified from level 1 to level 2 if there is no longer deemed to be an active market in these instruments owing to their low daily trading volumes or lack of liquidity or if the instruments concerned have been de-listed. Financial instruments are reclassified from level 2 to level 1 for the exact opposite reasons. no significant amounts of assets or liabilities measured at fair value were reclassified from level 1 to level 2 or vice versa during the reporting period or in 2017. Reclassification of assets and liabilities to and from level 3 in the reporting period, a small volume of financial assets were reclassified owing to changed market activity and new knowledge concerning the composition of investments. Discrepancy between a non-financial asset’s highest and best use and its current use the fair value of investment property is determined on the basis of its highest and best use. this periodic analysis – which was based on criteria such as the potential to increase a property’s market value by converting it into apartments, the repurposing of some or all of an existing property, the availability of a significant amount of land for further building and development, and the unlocking of added value by demolishing an existing property and building a new one revealed for the reporting period that the highest and best use of only individual investment properties in the Swiss portfolio differed from their current use. 5.11 Capital management the general parameters regarding the amount of capital employed are set by regulatory requirements and internal risk management policies. While the aim of regulatory requirements is primarily the protection of policyholders, internal policies are largely derived from the risk-based management of operating activities. 5.11.1 Solvency I ratio at Group level calculation of the Solvency i ratio at Group level was discontinued when the results of the Swiss Solvency test were published for the first time in the financial condition report on 30 april 2018. 194 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 5.11.2 Swiss Solvency Test the Swiss Solvency test (SSt) came into force as a new statutory requirement on 1 January 2011. in this context, the Baloise Group defines its risk-bearing capital and target capital (capital required) for the SSt using a model approved by FinMa. Risk-bearing capital is calculated on the basis of a consolidated balance sheet measured using market values. the difference between the assets and liabilities measured at market value gives the risk-bearing capital after any capital deductions and including any eligible supplementary capital. as a result, all capital items that can be deployed to cover losses in the event of adverse business developments are taken into consideration. Risk-bearing capital is compared with target capital. the capital requirement covers actuarial risk, market risk, credit risk and other risks. the capital requirement is determined by means of a correlation-based expected shortfall method. the actuarial capital requirement is a measurement of the operational funding required to cover actuarial risk. the claims risk is modelled using distributions of normal and large claims, including the prevailing reinsurance structure. at the same time, the investment required to smooth fluctuations in investment value and returns for a given probability is also calculated. analysis of these risks is based on quantitative models that use statistical methods to evaluate historical data and place it in the context of current exposure. Various extreme scenarios are also evaluated, and their potential impact on risk-bearing capacity is analysed. the SSt ratio (ratio of risk-bearing capital to target capital, after deduction of the market value margin in both cases) is calculated for the strategic business units and the Group. the Group’s target capital is not determined by simply adding together individual risk positions; it also takes into account diversification effects. the current ratios of risk- bearing capital to risk-adjusted capital are set with reference to the global risk management limits laid down in the Group-wide Risk Management Standards. these limits are monitored on an ongoing basis. the results of the Swiss Solvency test for the Baloise Group are disclosed annually in the financial condition report, which is published at the end of april. 5.11.3 Requirements under local legislation individual Group companies are also subject to regulation under local legislation (in particular the Swiss Solvency text and Solvency ii). the ability of the business units, and therefore also of the parent company, to pay dividends is closely linked to the priority placed on meeting these local requirements. compliance with local solvency requirements is monitored on an ongoing basis. appropriate action is taken if solvency falls short of these regulations. the relevant requirements for the banking operations of Baloise Bank SoBa are defined by Basel iii regulations. 5.11.4 Monitoring the solvency situation the risk owner and risk controller responsible for each business unit and for the Group as a whole participate in a regular reporting process. Key figures relating to Solvency i, Solvency ii and key figures relating to banking operations are reported on a monthly basis, which enables the solvency situation to be monitored in a timely manner, providing the basis for risk-based management decisions within the whole organisation. it also enables the Baloise Group to meet external reporting requirements at all times. 195 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 6. BASIS OF CONSOLIDATION 6.1 2017 financial year 6.1.1 Acquisitions and foundations on 11 January 2017, a controlling interest in Drivolution nV was acquired in Belgium. in Germany, a start-up named FRiDaY was founded as a mobile insurer in Berlin. FRiDaY was entered in the commercial register on 15 February 2017 as a German branch of Basler Versicherungen luxemburg a.G. in luxembourg, this start-up was entered in the trade and company register under the name “FRiDaY tech” on 19 December 2017. FRiDaY’s business is to be transferred to this company during 2018 and the digital insurance business is to be relaunched and expanded as a separate legal entity. on 28 February 2017, anthemis Baloise Strategic Ventures llp was founded in london as part of a fintech investment partner ship with the UK-based anthemis Group. approximately a 71 per cent shareholding in the listed company pax anlage aG was purchased in Basel, Switzerland, on 31 March 2017. this stake was increased to 84.1 per cent in the second quarter of 2017 as a result of a public purchase order followed by additional share purchases. Further purchases were made in the second half of 2017, and the percentage of shareholding according to the share register was 84.9 per cent as at 31 December 2017. pax Wohnbauten aG, a wholly owned subsidiary of pax anlage aG, was included in the purchase. it was renamed Baloise Wohnbauten aG on 3 July 2017. in Switzerland, 82.6 per cent of the shares in Movu aG, which operates an online platform for home-moving services, were acquired on 13 July 2017. a call option exists on the remaining shares, which Baloise can exercise up to the end of 2021. there is a strong intention to exercise this option, which is why the company has been fully consolidated. in Belgium, a company named MoBlY was founded on 6 october 2017 that operates an online platform for services relating to second-hand cars. on 22 november 2017, the real-estate company Vac De Meander was acquired in Belgium. it contains just one property, the newly built Herman teirlinck office block in Brussels, which is occupied by the Flemish civil service on a long-term lease. according to the criteria defined in iFRS 3 Business combinations, this purchase constitutes the acquisition of assets. the two luxembourg companies Baloise alternative investments partner S.à.r.l. and Baloise private equity partner S.à.r.l. were founded at the start of December 2017. this was done to aid the planned transfer of parts of the investment business to luxembourg that are currently still conducted by firms in Jersey. 6.1.2 Disposals the two German companies assekuranz Herrmann GmbH and Wilhelm Herrmann assekuranz Makler GmbH were sold to the artus Group in January 2017. the German branch of Baloise life ltd in Bad Homburg was sold to the Frankfurter leben Group on 3 February 2017. 6.1.3 Other changes in the group of consolidated companies no companies were merged or liquidated in 2017. 196 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 6.2 2018 financial year 6.2.1 Acquisitions no companies were acquired or founded in the year under review. 6.2.2 Disposals the shares in Deutscher Ring Bausparkasse aG were sold to the BaWaG Group on 4 September 2018. also in Germany, the shares in RolanD Rechtsschutz Beteiligung GmbH were sold in october 2018. 6.2.3 Other changes in the group of consolidated companies the buyout of 0.16 per cent of the shares in artires aG (formerly pax anlage aG) caused non-controlling interests to fall by cHF 0.5 million. INFORMATION ON OPERATING SEGMENTS (SEGMENT REPORTING) 7. the Baloise Group organises its operating activities into strategic business units, which are generally combined under a single management team for each region. the financial and management information needed for all relevant executive decisions is held by these strategic business units. this is also the organisational level at which the chief operating decision-makers are situated. Regardless of where they are headquartered, all Baloise Group entities are therefore assigned to one of the reportable segments ▸ ▸ ▸ ▸ Switzerland Germany Belgium luxembourg the “Germany” segment also includes the regional branches of Basler Sachversicherungs-aG and Basler lebensversicherungs-aG in the czech Republic and Slovakia. the “luxembourg” segment also includes the Baloise life liechtenstein unit. the “Group business” segment comprises the units engaged in intercompany reinsurance and financing, Group it, the holding companies and the run-off portfolios for the london market and the German hospital liability business. the revenue generated by the Baloise Group is broken down into the non-life, life, Banking (including asset management) and other activities operating segments. the non-life segment offers accident and health insurance as well as products relating to liability, motor, property and marine insurance. these products are tailored to the specific needs of our customers – primarily retail clients – and the core competences of the relevant companies in the Baloise Group. the life segment provides individuals and companies with a wide range of endowment policies, term insurance, investment-linked products and private placement life insurance. the Banking segment essentially comprises Baloise Bank SoBa, which acts as a universal bank in Switzerland, and Deutscher Ring Bausparkasse, which operates in Germany mainly as a conventional building society and was sold in 2018. the “other activities” operating segment includes equity investment companies, real estate firms and financing companies. the accounting policies applied to the presentation of the operating segments (segment reporting) are those used throughout the rest of the Financial Report. no intersegment relationships recognised either on the balance sheet or in the income statement – with the exception of income from long-term equity investments – are offset against each other. Due to the change of chief operating decision maker for the hospital liability business in Germany in 2018, this business is now reported within the Group business segment. the figures for the prior year have been restated accordingly. in 2018, the Belgium segment and the life insurance segment both benefited from the reversal, recognised in profit or loss, of additional reserves that are no longer needed. 197 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 7.1 Segment reporting by strategic business unit cHF million Income premiums earned and policy fees (gross) Reinsurance premiums ceded premiums earned and policy fees (net) Switzerland Germany Belgium Luxembourg Sub-total Group business Eliminated 2017 2018 2017 (restated) 2018 2017 2018 2017 2018 2017 (restated) 2018 2017 (restated) 2018 2017 (restated) 2018 2017 4,231.7 – 83.7 4,148.0 4,073.9 – 89.9 3,984.1 1,143.0 – 91.4 1,051.7 1,191.7 – 105.2 1,086.5 1,133.5 – 98.0 1,035.6 1,250.8 – 114.7 1,136.0 202.4 – 18.9 183.6 214.6 – 18.7 195.9 6,710.7 – 292.0 6,418.8 6,731.0 – 328.6 6,402.4 124.7 – 0.5 124.2 125.9 – 0.4 125.5 – 109.1 – 119.9 109.1 0.0 119.9 0.0 6,726.4 – 183.4 6,542.9 6,737.0 – 209.0 6,528.0 investment income 867.4 871.0 260.9 246.5 241.9 240.5 20.1 22.5 1,390.3 1,380.4 4.3 4.1 – 2.0 – 8.5 1,392.5 1,376.0 Realised gains and losses on investments For own account and at own risk For the account and at the risk of life insurance policyholders and third parties income from services rendered Share of profit (loss) of associates other operating income Income intersegment income income from associates Expense claims and benefits paid (gross) change in technical reserves (gross) Reinsurers’ share of claims incurred acquisition costs operating and administrative expenses for insurance business investment management expenses interest expenses on insurance liabilities Gains or losses on financial contracts other operating expenses Expense 155.3 43.1 40.8 0.0 179.2 5,433.9 – 29.5 0.0 – 10.4 – 43.9 60.4 0.0 144.9 5,005.9 – 43.0 0.0 208.3 102.7 28.7 5.5 42.1 138.1 – 167.7 22.9 6.2 46.8 42.5 18.3 2.9 – 16.5 – 17.1 – 38.4 3.5 – 41.0 1,699.9 1,379.2 1,357.6 1,365.5 39.9 5.5 45.7 6.2 35.7 – 37.8 – – 3,829.7 – 3,876.6 – 1,035.0 – 1,062.9 – 722.8 – 804.0 – 143.6 – 5,701.6 – 5,887.1 – 5,726.5 – 5,904.4 – 148.4 38.7 – 55.7 227.5 33.6 – 47.3 – 428.2 – 457.1 – 51.4 – 0.7 – 18.3 – 52.9 – 0.3 – 0.4 – 192.1 45.0 – 156.8 – 179.0 – 30.2 – 21.3 – 26.6 179.2 52.3 – 201.6 – 173.3 – 26.4 – 19.0 – 14.9 – 321.8 – 278.3 – 144.1 – 106.5 – 68.9 51.4 – 247.0 – 107.2 – 13.5 – 0.1 – 66.2 – 42.6 41.9 54.1 – 263.6 – 119.8 – 15.5 – 0.1 – 11.1 – 48.4 – 4,815.5 – 4,451.7 – 1,740.0 – 1,373.2 – 1,216.8 – 1,166.5 – 8,490.9 – 6,425.8 – 8,733.0 – 6,539.1 Profit / loss before borrowing costs and taxes 618.4 554.2 – 40.2 Borrowing costs Profit / loss before taxes income taxes Profit / loss for the period (segment result) – 2.8 615.5 – 94.7 520.8 – 10.1 544.1 – 88.4 455.6 – – 40.2 12.7 – 27.5 6.0 – 6.0 – 17.9 – 11.9 140.8 199.0 27.5 24.7 746.5 784.0 – 62.4 – 46.5 684.1 737.5 – 140.8 – 12.4 128.5 – 199.0 – 49.5 149.5 Segment assets as at 31.12. 46,200.1 45,409.1 14,364.9 12,792.3 10,828.4 10,591.9 12,652.5 11,956.7 84,046.0 80,750.1 1,854.3 2,036.5 – 1,376.4 – 1,931.8 84,523.9 80,854.8 198 – 541.0 9,237.4 7,209.7 9,417.1 7,276.6 108.0 – 1,051.2 23.4 34.3 – 11.9 – 36.7 160.4 170.4 – 135.0 – 151.5 – 242.4 – 267.9 – 56.6 – 193.6 193.6 – 63.6 – 223.6 223.6 – 1.7 498.0 19.1 – 27.0 746.0 2.8 – – 114.2 – 61.6 6.9 – 20.1 – 48.9 – 1.6 0.0 – 468.8 – 10.3 – 718.6 – 27.5 – 2.4 25.1 – 2.5 – 801.0 24.7 – 19.5 3.9 – 10.3 9.3 – 21.8 – 57.1 – 1.7 0.0 790.9 – 20.7 565.6 – 24.7 – 4.3 20.4 404.4 662.2 91.5 5.5 264.8 48.8 5.5 – 471.1 142.0 – 479.5 – 763.3 – 96.7 – 22.1 – 579.8 – 518.7 111.5 6.2 252.3 44.3 6.2 458.8 149.4 – 534.4 – 807.3 – 96.5 – 19.4 764.6 – 453.8 26.8 373.3 – – – 86.1 – 70.3 6.4 – 3.4 – 1.7 – 8.4 – – 37.6 – 234.4 – 435.7 – 2.8 743.7 – 96.8 646.8 – 10.1 773.8 – 31.4 – 93.9 – 160.2 613.7 – 21.1 – 114.9 39.0 290.5 – – – 84.9 – 47.0 2.1 – 2.8 – 2.1 – 7.4 – 28.1 – 222.9 – 336.9 – 29.7 – 76.2 – 14.5 – 90.7 – – – – – – – – – 61.2 6.4 – 67.6 0.9 – 0.9 28.0 0.2 4.0 161.4 193.6 – – – – – – – – – 67.6 0.6 – 68.2 1.4 – 1.4 21.7 0.2 8.6 193.1 223.6 427.8 696.5 116.9 5.5 235.0 – 5.5 – 535.0 80.8 – 482.1 – 765.8 – 77.2 – 21.9 – 613.4 – 591.8 – 34.3 649.8 – 117.9 531.9 Total 2018 96.1 – 1,087.8 130.4 6.2 227.6 – 6.2 412.4 83.3 – 535.8 – 810.8 – 82.2 – 19.2 801.2 – 483.6 – 39.9 697.6 – 174.7 522.9 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Switzerland Germany Belgium Luxembourg Sub-total Group business Eliminated 2017 2018 2018 2017 2018 2017 (restated) 2017 2018 2017 (restated) 2018 2017 (restated) 2018 2017 (restated) 2018 2017 Total 2018 4,231.7 – 83.7 4,148.0 4,073.9 – 89.9 3,984.1 1,143.0 – 91.4 1,051.7 1,191.7 – 105.2 1,086.5 1,133.5 – 98.0 1,035.6 1,250.8 – 114.7 1,136.0 202.4 – 18.9 183.6 214.6 – 18.7 195.9 6,710.7 – 292.0 6,418.8 6,731.0 – 328.6 6,402.4 124.7 – 0.5 124.2 125.9 – 0.4 125.5 – 109.1 – 119.9 109.1 0.0 119.9 0.0 6,726.4 – 183.4 6,542.9 6,737.0 – 209.0 6,528.0 investment income 867.4 871.0 260.9 246.5 241.9 240.5 20.1 22.5 1,390.3 1,380.4 4.3 4.1 – 2.0 – 8.5 1,392.5 1,376.0 – 1.7 498.0 19.1 – 27.0 746.0 2.8 – – 114.2 – 61.6 6.9 – 20.1 – 48.9 – 1.6 0.0 – 468.8 – 10.3 – 718.6 – 2.5 – 801.0 24.7 – 19.5 404.4 662.2 91.5 5.5 264.8 108.0 – 1,051.2 111.5 6.2 252.3 – 541.0 9,237.4 7,209.7 23.4 34.3 160.4 – 26.8 373.3 – 39.0 290.5 3.9 – 48.8 5.5 44.3 6.2 – 242.4 – 267.9 – – – 143.6 – 5,701.6 – 5,887.1 10.3 9.3 – 21.8 – 57.1 – 1.7 0.0 790.9 – 20.7 565.6 – 471.1 142.0 – 479.5 – 763.3 – 96.7 – 22.1 – 579.8 – 518.7 458.8 149.4 – 534.4 – 807.3 – 96.5 – 19.4 764.6 – 453.8 – 8,490.9 – 6,425.8 – 86.1 – 70.3 6.4 – 3.4 – 1.7 – 8.4 – – 37.6 – 234.4 – 435.7 – 84.9 – 47.0 2.1 – 2.8 – 2.1 – 7.4 – 28.1 – 222.9 – 336.9 – 11.9 – 36.7 – – – – 170.4 – 135.0 – 151.5 427.8 696.5 116.9 5.5 235.0 96.1 – 1,087.8 130.4 6.2 227.6 9,417.1 7,276.6 – 5.5 – 6.2 – 5,726.5 – 5,904.4 – 535.0 80.8 – 482.1 – 765.8 – 77.2 – 21.9 – 613.4 – 591.8 412.4 83.3 – 535.8 – 810.8 – 82.2 – 19.2 801.2 – 483.6 – 8,733.0 – 6,539.1 684.1 737.5 – 34.3 649.8 – 117.9 531.9 – 39.9 697.6 – 174.7 522.9 – – 56.6 – 193.6 193.6 – 61.2 6.4 – 67.6 0.9 – 0.9 28.0 0.2 4.0 161.4 193.6 – – – – – – – 63.6 – 223.6 223.6 – 67.6 0.6 – 68.2 1.4 – 1.4 21.7 0.2 8.6 193.1 223.6 – – – – – Profit / loss before borrowing costs and taxes 618.4 554.2 – 40.2 140.8 199.0 27.5 24.7 746.5 784.0 – 62.4 – 46.5 – 27.5 – 2.4 25.1 – 24.7 – 4.3 20.4 – 2.8 743.7 – 96.8 646.8 – 10.1 773.8 – 31.4 – 93.9 – 160.2 613.7 – 21.1 – 114.9 – 29.7 – 76.2 – 14.5 – 90.7 7.1 Segment reporting by strategic business unit cHF million Income premiums earned and policy fees (gross) Reinsurance premiums ceded premiums earned and policy fees (net) Realised gains and losses on investments For own account and at own risk For the account and at the risk of life insurance policyholders and third parties income from services rendered Share of profit (loss) of associates other operating income Income intersegment income income from associates Expense claims and benefits paid (gross) change in technical reserves (gross) Reinsurers’ share of claims incurred acquisition costs for insurance business investment management expenses interest expenses on insurance liabilities Gains or losses on financial contracts other operating expenses Expense Borrowing costs Profit / loss before taxes income taxes Profit / loss for the period (segment result) operating and administrative expenses – 428.2 – 457.1 1,699.9 1,379.2 1,357.6 1,365.5 – 3,829.7 – 3,876.6 – 1,035.0 – 1,062.9 – 722.8 – 804.0 155.3 43.1 40.8 0.0 179.2 5,433.9 – 29.5 0.0 – 148.4 38.7 – 55.7 – 51.4 – 0.7 – 18.3 – 2.8 615.5 – 94.7 520.8 – 10.4 – 43.9 60.4 0.0 144.9 5,005.9 – 43.0 0.0 227.5 33.6 – 47.3 – 52.9 – 0.3 – 0.4 – 10.1 544.1 – 88.4 455.6 208.3 102.7 138.1 – 167.7 28.7 5.5 42.1 39.9 5.5 – 192.1 45.0 – 156.8 – 179.0 – 30.2 – 21.3 – 26.6 – – 40.2 12.7 – 27.5 22.9 6.2 46.8 45.7 6.2 179.2 52.3 – 201.6 – 173.3 – 26.4 – 19.0 – 14.9 6.0 – 6.0 – 17.9 – 11.9 42.5 18.3 2.9 – 16.5 35.7 – – 68.9 51.4 – 247.0 – 107.2 – 13.5 – 0.1 – 66.2 – 42.6 – 140.8 – 12.4 128.5 – 17.1 – 38.4 3.5 – 41.0 37.8 – 41.9 54.1 – 263.6 – 119.8 – 15.5 – 0.1 – 11.1 – 48.4 – 199.0 – 49.5 149.5 – 321.8 – 278.3 – 144.1 – 106.5 – 4,815.5 – 4,451.7 – 1,740.0 – 1,373.2 – 1,216.8 – 1,166.5 Segment assets as at 31.12. 46,200.1 45,409.1 14,364.9 12,792.3 10,828.4 10,591.9 12,652.5 11,956.7 84,046.0 80,750.1 1,854.3 2,036.5 – 1,376.4 – 1,931.8 84,523.9 80,854.8 199 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 7.2 Segment reporting by operating segment cHF million Income premiums earned and policy fees (gross) Reinsurance premiums ceded premiums earned and policy fees (net) investment income Realised gains and losses on investments For own account and at own risk For the account and at the risk of life insurance policyholders and third parties income from services rendered Share of profit (loss) of associates other operating income Income intersegment income income from associates Expense claims and benefits paid (gross) change in technical reserves (gross) Reinsurers’ share of claims incurred acquisition costs operating and administrative expenses for insurance business investment management expenses interest expenses on insurance liabilities Gains or losses on financial contracts other operating expenses Expense 2017 3,214.4 – 162.6 3,051.8 Non-Life 2018 3,376.7 – 184.5 3,192.2 2017 3,512.0 – 20.8 3,491.1 Life 2018 3,360.3 – 24.6 3,335.7 213.2 198.7 1,087.3 1,083.9 113.1 101.2 3.1 – 23.5 – 10.9 1,392.5 1,376.0 102.7 – 23.5 0.0 57.3 3,448.5 – 52.9 0.0 35.3 – 31.1 – 81.9 3,539.3 – 48.6 – – 1,881.0 – 2,018.2 – 38.1 67.7 – 468.4 – 490.6 – 27.0 – 0.2 – 0.8 29.6 66.6 – 481.6 – 530.6 – 30.1 – 0.2 0.1 – 235.5 – 3,073.7 – 203.2 – 3,167.7 339.3 662.2 21.8 1.7 218.9 5,822.2 – 45.3 1.7 – 3,845.5 – 496.9 13.1 – 13.7 – 275.3 – 95.4 – 21.8 – 560.9 – 219.7 – 5,516.2 64.3 – 1,051.2 27.6 1.9 185.2 3,647.5 – 43.0 1.9 – 3,886.2 382.8 16.7 – 54.2 – 280.2 – 102.9 – 19.0 795.0 – 166.4 – 3,314.3 Profit / loss before borrowing costs and taxes 374.7 371.7 306.0 333.2 – 78.5 – 59.4 684.1 737.5 Borrowing costs Profit / loss before taxes income taxes Profit / loss for the period (segment result) – 374.7 – 100.2 274.5 – 371.7 – 70.4 301.3 – 2.8 303.2 – 14.2 289.0 – 10.1 323.0 – 61.1 261.9 200 2017 2017 2018 2017 2018 2017 Other activities Eliminated Banking 2018 – 2.0 – 164.7 – 5.3 269.2 – 87.0 – – – – – – – – – – – 31.5 – 113.5 – 177.2 92.1 – 92.1 – 18.3 73.8 – 15.8 – 137.4 – 4.4 239.2 – 65.4 – – – – – – – – – – – 31.0 – 100.3 – 157.4 81.8 – 81.8 – 15.8 66.0 – – – 2.4 1.6 34.3 159.9 3.8 15.9 218.0 – 147.1 3.8 – – – – – – – 45.4 – 248.0 – 296.5 – 31.4 – 109.9 12.3 – 97.6 – – – – – – – – – – 1.5 – 36.7 168.1 4.3 17.4 154.8 – 155.6 4.3 26.6 – 239.3 – 214.2 – 29.7 – 89.1 – 24.9 – 114.0 – 225.8 – 261.0 – 61.4 – 310.7 310.7 – 62.3 – 334.2 334.2 9,417.1 7,276.6 – 5,726.5 – 5,904.4 Total 2018 6,737.0 – 209.0 6,528.0 96.1 – 1,087.8 130.4 6.2 227.6 – 6.2 412.4 83.3 – 535.8 – 810.8 – 82.2 – 19.2 801.2 – 483.6 – 6,539.1 – 39.9 697.6 – 174.7 522.9 – – – – – – – – – – – – – – – – – – 6,726.4 – 183.4 6,542.9 427.8 696.5 116.9 5.5 235.0 – 5.5 – 535.0 80.8 – 482.1 – 765.8 – 77.2 – 21.9 – 613.4 – 591.8 – 8,733.0 – 34.3 649.8 – 117.9 531.9 – – – – – – – – – – – – – – – – – – – 26.0 – 32.2 – 3.1 – 1.4 74.4 84.3 24.6 211.8 310.7 11.1 238.8 334.2 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 7.2 Segment reporting by operating segment cHF million Income premiums earned and policy fees (gross) Reinsurance premiums ceded premiums earned and policy fees (net) investment income Realised gains and losses on investments For own account and at own risk For the account and at the risk of life insurance policyholders and third parties income from services rendered Share of profit (loss) of associates other operating income Income intersegment income income from associates Expense claims and benefits paid (gross) change in technical reserves (gross) Reinsurers’ share of claims incurred acquisition costs investment management expenses interest expenses on insurance liabilities Gains or losses on financial contracts other operating expenses Expense Borrowing costs Profit / loss before taxes income taxes Profit / loss for the period (segment result) operating and administrative expenses for insurance business 2017 2017 Non-Life 2018 3,376.7 – 184.5 3,192.2 35.3 31.1 – – – 81.9 3,539.3 – 48.6 29.6 66.6 – 481.6 – 530.6 – 30.1 – 0.2 0.1 – 371.7 – 70.4 301.3 3,512.0 – 20.8 3,491.1 339.3 662.2 21.8 1.7 218.9 5,822.2 – 45.3 1.7 – 3,845.5 – 496.9 13.1 – 13.7 – 275.3 – 95.4 – 21.8 – 560.9 – 219.7 – 5,516.2 – 2.8 303.2 – 14.2 289.0 Life 2018 3,360.3 – 24.6 3,335.7 64.3 – 1,051.2 27.6 1.9 185.2 3,647.5 – 43.0 1.9 – 3,886.2 382.8 16.7 – 54.2 – 280.2 – 102.9 – 19.0 795.0 – 166.4 – 3,314.3 – 10.1 323.0 – 61.1 261.9 3,214.4 – 162.6 3,051.8 102.7 – 23.5 0.0 57.3 3,448.5 – 52.9 0.0 – 38.1 67.7 – 468.4 – 490.6 – 27.0 – 0.2 – 0.8 – 374.7 – 100.2 274.5 – 1,881.0 – 2,018.2 – 235.5 – 3,073.7 – 203.2 – 3,167.7 Profit / loss before borrowing costs and taxes 374.7 371.7 306.0 333.2 2017 – – – Banking 2018 – – – 213.2 198.7 1,087.3 1,083.9 113.1 101.2 – 15.8 – 137.4 – 4.4 239.2 – 65.4 – – – – – – – 26.0 – – 31.0 – 100.3 – 157.4 81.8 – 81.8 – 15.8 66.0 – 2.0 – 164.7 – 5.3 269.2 – 87.0 – – – – – – – 32.2 – – 31.5 – 113.5 – 177.2 92.1 – 92.1 – 18.3 73.8 – – – 2.4 1.6 34.3 159.9 3.8 15.9 218.0 – 147.1 3.8 – – – – – – 3.1 – – 45.4 – 248.0 – 296.5 – 1.5 – 36.7 168.1 4.3 17.4 154.8 – 155.6 4.3 – – – – – – 1.4 – 26.6 – 239.3 – 214.2 – 78.5 – 59.4 – 31.4 – 109.9 12.3 – 97.6 – 29.7 – 89.1 – 24.9 – 114.0 Other activities Eliminated 2017 2018 2017 2018 2017 – – – – – – – – – 6,726.4 – 183.4 6,542.9 3.1 – 23.5 – 10.9 1,392.5 1,376.0 Total 2018 6,737.0 – 209.0 6,528.0 – – – 225.8 – – 61.4 – 310.7 310.7 – – – – – – 74.4 – 24.6 211.8 310.7 – – – – – – – – 261.0 – – 62.3 – 334.2 334.2 – – – – – – 84.3 – 11.1 238.8 334.2 – – – – – 427.8 696.5 116.9 5.5 235.0 96.1 – 1,087.8 130.4 6.2 227.6 9,417.1 7,276.6 – 5.5 – 6.2 – 5,726.5 – 5,904.4 – 535.0 80.8 – 482.1 – 765.8 – 77.2 – 21.9 – 613.4 – 591.8 – 8,733.0 412.4 83.3 – 535.8 – 810.8 – 82.2 – 19.2 801.2 – 483.6 – 6,539.1 684.1 737.5 – 34.3 649.8 – 117.9 531.9 – 39.9 697.6 – 174.7 522.9 201 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Notes to the consolidated balance sheet 8. PROPERTY, PLANT AND EQUIPMENT 2017 cHF million Balance as at 1 January additions additions arising from change in the scope of consolidation Disposals Disposals arising from change in the scope of consolidation Reclassification Reclassification to non-current assets classified as held for sale Depreciation and impairment Depreciation impairment losses recognised in profit or loss Reversal of impairment losses recognised in profit or loss exchange differences Balance as at 31 December acquisition costs accumulated depreciation and impairment Balance as at 31 December of which: assets held under finance leases Depreciation and impairment form part of other operating expenses. Land Buildings Operating equipment Machinery, furniture and vehicles IT equipment Total 64.4 0.0 – – 1.6 – – – – – – 1.8 64.5 66.9 – 2.4 64.5 – 204.1 1.3 – – – – – 37.7 3.5 – – – 0.0 0.0 23.8 6.0 0.3 – 0.4 – 0.2 0.0 0.0 19.4 10.9 0.0 0.0 0.0 0.0 – 0.3 349.3 21.7 0.3 – 2.0 – 0.2 0.0 – 0.3 – 8.3 – 7.2 – 6.2 – 10.5 – 32.3 – – 13.0 210.1 491.4 – 281.3 210.1 – – – 0.4 34.3 121.5 – 87.2 34.3 – – – 1.4 24.5 73.6 – 49.0 24.5 – – – 0.3 19.8 87.8 – 68.0 19.8 – – – 16.9 353.3 841.2 – 487.9 353.3 – 202 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 2018 cHF million Balance as at 1 January additions additions arising from change in the scope of consolidation Disposals Disposals arising from change in the scope of consolidation Reclassification Land Buildings Operating equipment Machinery, furniture and vehicles IT equipment Total 64.5 1.6 – – 1.9 – 210.1 9.1 – – 2.2 – – 7.5 – 15.7 – 34.3 4.9 – – – – 0.1 – 24.5 4.8 – – 0.4 – – – 19.8 11.8 – 0.0 – 0.0 – Reclassification to non-current assets classified as held for sale Depreciation and impairment Depreciation impairment losses recognised in profit or loss Reversal of impairment losses recognised in profit or loss exchange differences Balance as at 31 December acquisition costs accumulated depreciation and impairment Balance as at 31 December of which: assets held under finance leases Depreciation and impairment form part of other operating expenses. – – – 0.1 – – 0.6 56.0 57.4 – 1.5 56.0 – – 8.1 – 7.0 – 7.3 – 9.8 – – – 5.6 187.6 468.5 – 281.0 187.6 – – – – 0.2 32.1 112.7 – 80.6 32.1 – – – – 0.6 21.2 74.3 – 53.2 21.2 – – – – 0.2 21.5 88.7 – 67.1 21.5 – 353.3 32.3 – – 4.5 – – 23.3 – – 32.2 – 0.1 – – 7.2 318.3 801.6 – 483.3 318.3 – 203 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 9. INTANGIBLE ASSETS 2017 cHF million Balance as at 1 January additions arising from change in the scope of consolidation additions capitalisation of acquisition costs Disposals Disposals arising from change in the scope of consolidation Reclassification Reclassification to non-current assets classified as held for sale amortisation and impairment amortisation Write-ups impairment losses recognised in profit or loss Reversal of impairment losses recognised in profit or loss changes due to impending losses change due to unrealised gains and losses on financial instruments (shadow accounting) exchange differences Balance as at 31 December acquisition costs accumulated amortisation and impairment Balance as at 31 December1 Segment as at 31 December 2017 Switzerland Germany Belgium luxembourg Group business Total for geographic regions Goodwill 66.3 23.0 – – – – – – – – – 19.6 – – – 11.5 81.1 246.3 – 165.1 81.1 21.8 17.0 17.6 24.8 – 81.1 – 259.0 – 29.9 – 0.1 – 302.3 Present value of gains on insurance contracts acquired Deferred acquisition cost (life) Deferred acquisition cost (non-life) Other intangible assets Internally developed intangible assets 7.0 485.6 149.9 – – – – 89.1 266.4 – – – – – – – – 0.8 – – – – – 0.6 6.7 – – 6.7 – 6.7 – – – – – – – – 12.4 2.0 – – – 10.4 41.1 615.8 – – – – – – – – – – 4.4 – 8.8 161.7 – – 615.8 161.7 89.7 507.4 9.3 9.4 – 55.7 40.0 61.4 4.5 0.1 127.2 5.1 27.6 – – 0.1 – 1.1 0.0 – 0.4 0.2 – – – – – – – Total 836.1 28.1 27.6 355.5 – 0.1 – 1.1 0.0 – 0.4 – – – – – 8.6 137.0 514.7 – 377.6 137.0 29.7 0.6 81.0 16.8 8.9 – – – – – – 0.1 10.0 – 9.9 0.1 – – – – 0.1 0.1 2.0 – 19.6 – – 4.4 10.4 70.6 1,002.5 – – 1,002.5 196.9 571.6 169.3 55.6 9.1 1,002.5 6.7 615.8 161.7 137.0 1 With the possible exception of goodwill, the Baloise Group has no intangible assets with indefinite useful lives. 204 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Present value of gains on insurance contracts acquired Goodwill Deferred acquisition cost (life) Deferred acquisition cost (non-life) Other intangible assets Internally developed intangible assets 81.1 6.7 615.8 161.7 – – – – 95.9 245.8 137.0 – 51.0 – – 2.3 0.0 0.0 – 0.1 – 0.1 – – – – – Total 1,002.5 – 51.1 341.7 – 2.3 0.0 0.0 – – 253.9 – 33.9 – 0.1 – 341.3 2018 cHF million Balance as at 1 January additions arising from change in the scope of consolidation additions capitalisation of acquisition costs Disposals Disposals arising from change in the scope of consolidation Reclassification Reclassification to non-current assets classified as held for sale amortisation and impairment amortisation Write-ups impairment losses recognised in profit or loss Reversal of impairment losses recognised in profit or loss changes due to impending losses change due to unrealised gains and losses on financial instruments (shadow accounting) exchange differences Balance as at 31 December acquisition costs – – – – 0.0 – – – – – – – – – 2.3 78.9 244.0 accumulated amortisation and impairment – 165.1 Balance as at 31 December1 Segment as at 31 December 2018 Switzerland Germany Belgium luxembourg Group business Total for geographic regions 78.9 21.8 16.3 16.9 23.9 0.0 78.9 – – – – – – – – 0.9 – – – – – – 0.2 5.6 – – 5.6 – 5.6 – – – – – – – – 52.6 1.9 – – – 21.5 – 21.4 661.1 – – – – – – – – – – 1.7 – – 4.1 147.8 – – 661.1 147.8 110.0 523.7 19.9 7.5 – 44.2 38.3 60.5 4.4 0.3 – – – – – – 4.1 147.8 542.2 – 394.4 147.8 33.2 0.4 76.6 17.6 20.0 1 With the possible exception of goodwill, the Baloise Group has no intangible assets with indefinite useful lives. 5.6 661.1 147.8 147.8 – – – – – – 0.1 1.1 – 1.0 0.1 – – – – 0.1 0.1 1.9 – – – 1.7 21.5 – 32.1 1,041.2 – – 1,041.2 209.2 584.4 173.9 53.4 20.4 1,041.2 205 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 9.1 Assumptions used to test the impairment of significant goodwill items assumptions used to forecast future business developments and trends have been reviewed by the local management teams and take account of macroeconomic conditions. the input factors are described in note 3.10.3 (impairment losses on non-financial assets). Movu aG Basler Financial Services GmbH Bâloise Vie luxembourg S.a. Bâloise assurances luxembourg S.a. Baloise Belgium nV Goodwill as at 31.12. CHF million Discount rate per cent Growth rate per cent 2017 21.8 14.8 7.4 16.8 16.2 2018 21.8 14.3 7.1 16.2 15.6 2017 n. a. 7.2 7.0 7.0 7.0 2018 7.8 7.1 7.0 7.0 7.0 2017 n. a. 1.0 2.5 2.5 2.6 2018 1.5 1.0 2.5 2.5 2.6 the impairment test in 2018 did not reveal any need to recognise impairment losses. the management is of the opinion that a possible change in the assumptions based on the exercise of appropriate discretion would not have led, either in 2018 or in 2017, to the carrying amount of an entity being significantly higher than its recoverable value. 206 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 10. INVESTMENTS IN ASSOCIATES 10.1 Significant investments in associates oVB Holding ltd is a european sales company for risk cover, retirement pension and health care products as well as wealth- building products. it also brokers Basler Versicherungen products. the company is strategically important because it constitutes a significant distribution channel. the financial information reflects the amounts reported in the financial statements of the associate rather than the share of those amounts that is attributable to the Baloise Group. the associate’s financial statements are prepared in accordance with iFRS. oVB Holding ltd is included in the Baloise Group’s consolidated annual financial statements under the equity method. Because the publicly traded oVB Holding ltd’s relevant financial year-end closing information, which is used for measurement purposes, had not been published by the time the Financial Report was being prepared, measurement has been based in each case on the financial closing data for the period ended 30 September of the reporting year. SIGNIFICANT INVESTMENTS IN ASSOCIATES cHF million Assets non-current assets current assets Total assets Equity and liabilities equity non-current liabilities current liabilities Total assets Profit for the period income expense Profit for the period comprehensive income (balance sheet) comprehensive income (income statement) Comprehensive income Dividends paid to the Baloise Group Baloise Group’s interest (per cent) Carrying amount as at 30 September Fair value as at 30 September OVB Holding Ltd 2017 2018 30.9. 26.9 175.5 202.4 30.9. 99.5 1.1 101.8 202.4 1. – 9. 188.6 30.9. 25.1 179.1 204.2 30.9. 97.8 1.6 104.8 204.2 1. – 9. 205.4 – 179.9 – 198.9 8.7 0.0 – 0.5 8.3 6.5 0.0 – 0.2 6.4 3.8 3.9 32.6 % 32.6 % 71.5 101.7 68.4 91.4 207 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 10.2 Non-significant investments in associates the Baloise Group holds investments in a number of non-significant associates. 2017 cHF million Total 2018 cHF million Total Carrying amount Baloise’s share of profit or loss for the period from continuing operations profit or loss for the period from disposal groups held for sale other comprehensive income comprehensive income 66.9 1.7 2.0 4.7 8.4 Carrying amount Baloise’s share of profit or loss for the period from continuing operations profit or loss for the period from disposal groups held for sale other comprehensive income comprehensive income 152.7 1.9 – 0.6 2.5 in Switzerland, a 20 per cent stake in infracore Sa, which operates in the healthcare property market, was purchased in the year under review. there were no contingent liabilities arising from investments in associates and no substantial unrecognised shares of the losses of associates as at either 31 December 2018 or 31 December 2017. as at 31 December 2018, the Baloise Group held more than 20 per cent of the capital of further companies but does not have any influence over these companies’ management. as a result, they are not reported as associates. 208 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 11. INVESTMENT PROPERTY cHF million Balance as at 1 January additions additions arising from change in scope of consolidation Disposals Disposals arising from change in scope of consolidation Reclassification Reclassification to non-current assets classified as held for sale change in fair value exchange differences Balance as at 31 December operating expenses arising from investment property that generates rental income operating expenses arising from investment property that does not generate rental income 2017 2018 6,817.5 567.2 384.5 – 157.7 – – – 336.8 111.1 94.6 7,480.3 407.5 – – 69.6 – 23.3 – 111.7 – 49.3 7,480.3 7,904.0 86.7 0.1 95.8 – the increase in the portfolio during the reporting year was largely attributable to real estate acquired by Baloise’s Swiss entities. 12. FINANCIAL ASSETS cHF million Financial assets of an equity nature available for sale Recognised at fair value through profit or loss Financial assets of a debt nature Held to maturity available for sale Recognised at fair value through profit or loss Financial assets for own account and at own risk Financial assets for the account and at the risk of life insurance policyholders and third parties Recognised at fair value through profit or loss1 Financial assets as reported on the balance sheet 31.12.2017 31.12.2018 4,402.9 343.3 3,657.0 331.3 8,488.9 8,002.5 24,870.1 23,771.4 29.2 24.8 38,134.4 35,786.9 13,100.6 51,235.0 12,126.1 47,913.0 1 of which financial assets totalling cHF 207.1 million (2017: cHF 184.3 million) involved insurance policies that had not been fully reviewed by the balance sheet date. 209 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FINANCIAL ASSETS FOR OWN ACCOUNT AND AT OWN RISK as at 31.12. cHF million Financial assets of an equity nature publicly listed not publicly listed Total Financial assets of a debt nature publicly listed, fixed-interest rate publicly listed, variable interest rate not publicly listed, fixed-interest rate not publicly listed, variable interest rate Total Held to maturity Available for sale Recognised at fair value through profit or loss Total Trading portfolio Designated 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 – – – – – – 8,488.9 8,002.5 24,852.3 23,656.3 – – – – – – 8,488.9 8,002.5 24,870.1 23,771.4 24.8 33,388.2 31,798.7 2,695.1 1,707.8 4,402.9 1,861.1 1,795.9 3,657.0 17.8 – – 15.1 100.0 – – – – – – – – – – – – – – – – – 343.3 0.0 343.3 0.1 29.1 – – 29.2 298.8 32.5 331.3 0.1 24.7 – – 3,038.4 1,707.8 4,746.2 2,159.9 1,828.4 3,988.2 33,341.3 31,658.9 46.9 – – 39.8 100.0 – no impairment losses had to be recognised on held-to-maturity financial instruments with characteristics of liabilities, during either the reporting year or the prior year. 210 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FINANCIAL ASSETS FOR OWN ACCOUNT AND AT OWN RISK Financial assets of an equity nature as at 31.12. cHF million publicly listed not publicly listed Total Financial assets of a debt nature publicly listed, fixed-interest rate publicly listed, variable interest rate not publicly listed, fixed-interest rate not publicly listed, variable interest rate Total Held to maturity Available for sale Recognised at fair value through profit or loss Total Trading portfolio Designated 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 – – – – – – – – – – – – 2,695.1 1,707.8 4,402.9 1,861.1 1,795.9 3,657.0 8,488.9 8,002.5 24,852.3 23,656.3 17.8 – – 15.1 100.0 – 8,488.9 8,002.5 24,870.1 23,771.4 – – – – – – – – – – – – – – – – 343.3 0.0 343.3 0.1 29.1 – – 29.2 298.8 32.5 331.3 0.1 24.7 – – 3,038.4 1,707.8 4,746.2 2,159.9 1,828.4 3,988.2 33,341.3 31,658.9 46.9 – – 39.8 100.0 – 24.8 33,388.2 31,798.7 211 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements FINANCIAL ASSETS FOR OWN ACCOUNT AND AT OWN RISK as at 31.12. cHF million Type of financial asset equities equity funds Mixed funds Bond funds Real estate funds private equity Hedge funds Financial assets of an equity nature public corporations industrial enterprises Financial institutions other Held to maturity Available for sale Recognised at fair value through profit or loss Total Trading portfolio Designated 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 – – – – – – – – – – – – – – – – 7,514.2 7,079.9 8.0 956.6 10.0 8.0 904.6 10.0 Financial assets of a debt nature 8,488.9 8,002.5 24,870.1 23,771.4 Total 8,488.9 8,002.5 29,273.0 27,428.4 372.5 356.0 38,134.4 35,786.9 Secured financial assets of a debt nature public corporations industrial enterprises Financial institutions other Total 11.7 – 901.9 – 913.6 11.3 – 857.0 – 868.2 Secured financial instruments with characteristics of liabilities are fixed-income securities for which a mortgage or a government bond has been securitised as collateral. 4,402.9 3,657.0 343.3 331.3 4,746.2 3,988.2 2,627.5 1,700.2 2,627.5 1,700.2 69.8 24.7 57.9 510.4 719.4 393.1 75.0 27.8 88.9 611.4 783.0 370.6 11,290.8 7,836.4 5,742.7 0.2 11,343.1 6,647.4 5,780.9 – 247.2 1,375.7 3,684.4 0.2 5,307.5 354.7 1,311.3 4,162.3 – 5,828.4 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 19.3 258.2 65.8 0.0 17.2 12.0 29.2 – – – – – – – – – – 29.0 295.8 6.5 0.0 – – 15.0 9.7 – – 24.8 – – – – – 89.1 283.0 123.7 510.4 719.4 393.1 104.0 323.6 95.4 611.4 783.0 370.6 18,822.3 18,438.0 7,844.4 6,711.3 10.2 6,655.4 6,695.2 10.0 33,388.2 31,798.7 258.9 1,375.7 4,586.4 0.2 6,221.2 366.0 1,311.3 5,019.3 – 6,696.6 212 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Held to maturity Available for sale Recognised at fair value through profit or loss Total Trading portfolio Designated 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2,627.5 1,700.2 69.8 24.7 57.9 510.4 719.4 393.1 75.0 27.8 88.9 611.4 783.0 370.6 4,402.9 3,657.0 11,290.8 7,836.4 5,742.7 0.2 11,343.1 6,647.4 5,780.9 – Financial assets of a debt nature 8,488.9 8,002.5 24,870.1 23,771.4 8,488.9 8,002.5 29,273.0 27,428.4 247.2 1,375.7 3,684.4 0.2 5,307.5 354.7 1,311.3 4,162.3 – 5,828.4 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 19.3 258.2 65.8 0.0 – – – 29.0 295.8 6.5 0.0 – – 2,627.5 1,700.2 89.1 283.0 123.7 510.4 719.4 393.1 104.0 323.6 95.4 611.4 783.0 370.6 343.3 331.3 4,746.2 3,988.2 17.2 – 12.0 – 29.2 15.0 – 9.7 – 24.8 18,822.3 18,438.0 7,844.4 6,711.3 10.2 6,655.4 6,695.2 10.0 33,388.2 31,798.7 372.5 356.0 38,134.4 35,786.9 – – – – – – – – – – 258.9 1,375.7 4,586.4 0.2 6,221.2 366.0 1,311.3 5,019.3 – 6,696.6 Secured financial instruments with characteristics of liabilities are fixed-income securities for which a mortgage or a government bond has been securitised as collateral. FAIR VALUE OF FINANCIAL ASSETS CLASSIFIED AS HELD TO MATURIT Y FINANCIAL ASSETS FOR OWN ACCOUNT AND AT OWN RISK Type of financial asset as at 31.12. cHF million equities equity funds Mixed funds Bond funds Real estate funds private equity Hedge funds public corporations industrial enterprises Financial institutions Financial assets of an equity nature other Total other Total Secured financial assets of a debt nature public corporations industrial enterprises Financial institutions – – – – – – – – – – – – – – – – – – – – 7,514.2 7,079.9 8.0 956.6 10.0 8.0 904.6 10.0 11.7 11.3 901.9 857.0 913.6 868.2 as at 31.12. cHF million public corporations industrial enterprises Financial institutions other Total Carrying amount Fair value 2017 2018 2017 2018 7,514.2 7,079.9 8,950.0 8,356.9 8.0 956.6 10.0 8.0 904.6 10.0 8.4 1,049.4 10.9 8.2 978.0 10.8 8,488.9 8,002.5 10,018.7 9,353.8 213 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 13. MORTGAGES AND LOANS as at 31.12. cHF million Mortgages and loans carried at cost Mortgages policy loans promissory notes and registered bonds time deposits employee loans Reverse repurchase agreements other loans Sub-total Mortgages and loans recognised at fair value through profit or loss Mortgages policy loans Sub-total Gross amount Impairment Carrying amount Fair value 2017 2018 2017 2018 2017 2018 2017 2018 9,840.2 139.4 4,638.1 939.7 26.8 – 9,818.1 132.2 4,322.5 952.0 28.2 – – 20.4 – 18.8 – – – 0.0 – – – – 0.0 – 9,819.8 139.4 4,638.1 939.7 26.8 – 9,799.3 10,237.2 10,202.2 132.2 4,322.5 150.0 5,076.4 140.5 4,649.4 952.0 28.2 – 940.9 27.3 – 952.0 28.7 – 240.5 245.0 15,824.6 15,498.0 – 12.4 – 32.9 – 8.7 – 27.5 228.1 236.3 236.8 243.4 15,791.7 15,470.5 16,668.5 16,216.3 776.6 0.2 776.8 925.7 0.1 925.8 – – – – – – 776.6 0.2 776.8 925.7 0.1 925.8 776.6 0.2 776.8 925.7 0.1 925.8 Mortgages and loans 16,601.4 16,423.8 – 32.9 – 27.5 16,568.6 16,396.2 17,445.3 17,142.1 214 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements IMPAIRMENT OF MORTGAGES AND LOANS cHF million Balance as at 1 January Usage not recognised in profit or loss Unused provisions reversed through profit or loss increases and additional provisions recognised in profit or loss Disposal arising from change in scope of consolidation Reclassification Reclassification to non-current assets classified as held for sale currency translation Balance as at 31 December 14. DERIVATIVE FINANCIAL INSTRUMENTS as at 31.12. cHF million Derivative financial instruments for own account and at own risk Derivative financial instruments for the account and at the risk of life insurance policyholders and third parties 2017 2018 – 41.7 – 32.9 7.9 1.4 – 1.5 – – 2.2 – 1.2 – 32.9 5.4 2.9 – 3.3 – – – 0.4 – 27.5 Fair value assets Fair value liabilities 2017 2018 2017 2018 362.4 438.0 453.9 460.9 145.3 – 116.7 0.7 Derivative financial instruments as reported on the balance sheet 800.4 914.8 145.3 117.3 215 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements as at 31.12. cHF million Interest rate instruments Forward contracts Swaps otc options other traded options traded futures Sub-total Equity instruments Forward contracts otc options traded options traded futures Sub-total Foreign currency instruments Forward contracts Swaps otc options traded options traded futures Sub-total Total of which: designated as fair value hedges of which: designated as cash flow hedges of which: designated as hedges of a net investment in a foreign operation Contract value Fair value assets Fair value liabilities 2017 2018 2017 2018 2017 2018 – – 1,094.9 1,254.8 208.5 1.6 – – 56.3 1.6 – – – 50.2 27.8 – 58.8 20.4 165.7 205.5 – – – – – 60.9 – 20.0 – – – 71.2 – 29.7 – – 1,305.1 1,312.7 243.7 284.7 80.9 100.9 – 2,127.4 777.6 – – 1,518.1 521.7 – 2,905.0 2,039.8 9,022.4 8,197.4 – 1,242.3 – – – 871.4 – – – 38.7 12.3 – 51.0 57.2 – 10.5 – – – 50.7 11.1 – 61.8 105.1 – 2.3 – – – 2.6 6.9 – 9.5 43.5 – 11.4 – – 10,264.6 9,068.8 67.7 107.4 54.9 – – 7.7 – 7.7 5.7 – 2.3 – – 8.1 14,474.7 12,421.3 362.4 453.9 145.3 116.7 – – – – – – – – 1,751.7 1,764.3 14.3 14.5 – – 2.3 – – 0.5 the contract value or notional amount is used for derivative financial instruments whose principal may be swapped at maturity (options, futures and currency swaps) and for instruments whose principal is only nominally lent or borrowed (interest rate swaps). the contract value or notional amount is disclosed in order to express the aggregate amount of derivative transactions in which the Baloise Group is involved. 216 Gross amount Impairment Carrying amount Fair value 2017 2018 2017 2018 2017 2018 2017 2018 3.0 – 403.8 442.3 327.0 408.2 849.1 735.2 – – 0.7 – 1.5 – 2.2 – 3.0 – 3.0 – – 1.3 – 1.2 403.1 440.9 325.7 406.9 403.5 440.9 327.9 406.9 – 2.5 846.9 732.7 847.3 734.8 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 15. RECEIVABLES as at 31.12. cHF million Receivables carried at cost Receivables from financial contracts other receivables Receivables from investments Receivables IMPAIRMENT OF RECEIVABLES cHF million Balance as at 1 January Usage not recognised in profit or loss Unused provisions reversed through profit or loss increases and additional provisions recognised in profit or loss Disposal arising from change in scope of consolidation Reclassification to non-current assets classified as held for sale currency translation Balance as at 31 December 16. REINSURANCE ASSETS cHF million Reinsurers’ share of technical reserves as at 1 January change in unearned premium reserves Benefits paid interest on and change in liability additions / disposals arising from change in scope of consolidation impairment Reclassification to non-current assets classified as held for sale exchange differences Reinsurers’ share of technical reserves as at 31 December 2017 2018 – 3.4 0.2 1.1 – 1.1 – 1.2 – 0.1 – 2.2 – 2.2 0.2 1.0 – 1.5 – – 0.0 – 2.5 2017 2018 415.2 1.7 – 60.8 76.9 – – – 35.2 468.3 468.3 1.4 – 74.7 78.5 – – – – 16.2 457.2 217 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 17. RECEIVABLES FROM REINSURERS cHF million Reinsurance deposits as at 1 January additions Disposals additions / disposals arising from change in scope of consolidation Reclassification to non-current assets and disposal groups classified as held for sale exchange differences Reinsurance deposits as at 31 December Other reinsurance receivables as at 1 January additions Disposals additions / disposals arising from change in scope of consolidation Reclassification to non-current assets classified as held for sale exchange differences Other reinsurance receivables as at 31 December Impairment of receivables from reinsurers as at 1 January Usage not recognised in profit or loss Unused provisions reversed through profit or loss increases and additional provisions recognised in profit or loss Disposal arising from change in scope of consolidation Reclassification to non-current assets classified as held for sale currency translation Impairment of receivables from reinsurers as at 31 December 2017 2018 8.7 1.4 0.3 – – 0.9 11.3 38.9 105.5 11.3 1.0 – 0.3 – – – 0.5 11.6 27.0 151.3 – 118.8 – 147.5 – – 1.4 27.0 – 0.1 – 0.0 0.0 – – – – 0.1 – – – 0.4 30.5 – 0.1 – 0.1 – 0.1 – – 0.0 – 0.1 Receivables from reinsurers as at 31 December 38.2 41.9 218 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 18. EMPLOYEE BENEFITS 18.1 Receivables and liabilities arising from employee benefits as at 31.12. cHF million Type of benefit Short-term employee benefits post-employment benefits – defined contribution plans post-employment benefits – defined benefit plans other long-term employee benefits termination benefits Total Receivables from employee benefits Liabilities arising from employee benefits 2017 2018 2017 2018 3.3 7.3 – – – – – – – – 115.0 – 87.9 – 1,242.7 1,099.7 28.5 8.2 27.8 5.3 3.3 7.3 1,394.4 1,220.7 18.2 Post-employment benefits – defined benefit plans the Baloise Group provides a range of pension benefits, which vary from country to country in line with local circumstances. the funded – or partially funded – liabilities relate to the occupational pension provision offered in Switzerland and partially in Belgium. Switzerland has the largest plans. the employer and employee each contribute to these plans; the contributions are used to cover benefits paid in the event of death or invalidity as well as being saved up to fund a pension. the employee has the option of receiving all or part of the accumulated capital as a one-off payment. Some of the benefits granted in this way are governed by binding statutory regulations that are applicable to all Swiss employers and, in particular, stipulate certain minimum benefits. the pensions are the responsibility of separate legal entities (foundations) that are run by a committee consisting of employer and employee representatives. in other countries, the benefits are either granted by the employer directly or covered by an insurance policy that, as a rule, is funded by the employer. Directly granted benefits are particularly relevant in Germany, where benefits are agreed between the employer and the employee representatives. the pension benefits on offer also comprise special benefits that the Baloise Group grants to retirees (especially those in Switzerland). these benefits include subsidised mortgages. these benefits and concessions are classified as defined benefit pension obligations under iaS 19. 219 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 18.2.1 Fair value of plan assets cHF million Balance as at 1 January interest rate effect Return on plan assets employees’ savings and purchases exchange differences employer contribution employee contribution Benefits paid cash flow between Baloise Group and plan assets (excl. benefits paid to employees and employer contribution) additions / disposals arising from change in scope of consolidation Reclassification to non-current assets classified as held for sale Gains and losses on plan settlements Balance as at 31 December 18.2.2 Partially funded liabilities under defined benefit plans cHF million Balance as at 1 January current service cost interest rate effect employees’ savings and purchases actuarial gains / losses on defined benefit obligations arising from changes in financial assumptions changes in demographic assumptions experience adjustments exchange differences Unrecognised past service cost Benefits paid additions / disposals arising from change in scope of consolidation Reclassification to non-current assets classified as held for sale Gains and losses on plan settlements Balance as at 31 December 220 2017 2018 2,374.8 2,538.4 15.2 110.3 37.9 1.1 79.9 30.9 12.7 – 4.6 33.1 – 0.5 62.9 39.5 – 111.7 – 167.4 – – – – – – – – 2,538.4 2,514.3 2017 2018 – 2,848.5 – 2,929.0 – 87.6 – 17.9 – 37.9 – 53.6 19.7 12.6 – 1.7 – 25.9 111.7 – – – – 89.9 – 14.5 – 33.1 113.6 – – 36.8 0.7 – 167.4 – – – – 2,929.0 – 2,821.6 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 18.2.3 Unfunded liabilities under defined benefit plans cHF million Balance as at 1 January current service cost interest rate effect employees’ savings and purchases actuarial gains / losses on defined benefit obligations arising from changes in financial assumptions changes in demographic assumptions experience adjustments exchange differences Unrecognised past service cost Benefits paid additions / disposals arising from change in scope of consolidation Reclassification to non-current assets classified as held for sale Gains and losses on plan settlements Balance as at 31 December 18.2.4 Net actuarial liabilities under defined benefit plans cHF million Fair value of plan assets present value of (partially) funded liabilities present value of unfunded liabilities effect of the asset ceiling Net actuarial liabilities under defined benefit plans 2017 2018 – 843.2 – 852.1 – 17.0 – 11.5 – 14.6 – 3.0 – 3.6 – 68.1 – 33.8 0.6 45.4 – – 16.4 – 11.6 – 15.5 – 5.2 15.2 30.3 – 0.1 32.4 – 0.4 – – – 852.1 – 792.4 31.12.2017 31.12.2018 2,538.4 2,514.3 – 2,929.0 – 2,821.6 – 852.1 – 792.4 – – – 1,242.7 – 1,099.7 221 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 18.2.5 Asset Allocation cHF million cash and cash equivalents Real estate equities and investment funds publicly listed not publicly listed Fixed-interest assets publicly listed not publicly listed Mortgages and loans Derivatives publicly listed not publicly listed other Fair value of plan assets of which: Bâloise Holding ltd shares (fair value) and convertible bonds (fair value) of which: real estate leased to the Baloise Group the investment funds are mainly fixed-income funds. 18.2.6 Expenses for defined benefit plans recognised in the income statement cHF million current service cost Regular employee contribution net interest cost Unrecognised past service cost Gains and losses on plan settlements expected return on reimbursement rights 31.12.2017 31.12.2018 62.3 481.5 36.7 529.1 1,359.0 179.7 1,309.3 187.7 100.2 – 338.7 – – 8.1 25.2 95.5 – 358.3 0.0 – 2.7 0.3 2,538.4 2,514.3 35.6 – 34.5 – 2017 2018 – 104.6 – 106.2 31.7 – 14.2 – 25.9 – – 40.2 – 13.4 – 0.1 – – Total expenses for defined benefit plans recognised in the income statement – 113.0 – 79.5 222 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 18.2.7 Actuarial assumptions per cent Discount rate expected wage and salary increases expected increase in pension benefits Weighted annuity option take-up rate Years average life expectancy of a 65-year-old woman average life expectancy of a 65-year-old man 2017 2018 0.7 1.4 0.3 77.0 24.3 21.7 0.9 1.4 0.3 77.0 24.4 21.9 When calculating liabilities and expenses for defined benefit plans, the Baloise Group is required to make actuarial and other assumptions that are determined on a company-by-company and country-by-country basis. the assumptions shown above are weighted averages. 18.2.8 Sensitivity analysis for liabilities under defined benefit plans cHF million total defined benefit obligation as shown Discount rate plus 0.5 % age points Discount rate minus 0.5 % age points expected wage and salary increases plus 0.5 % age points expected wage and salary increases minus 0.5 % age points expected pension benefits increases plus 0.5 % age points expected pension benefits increases minus 0.5 % age points Mortality probabilities for 65-year-olds plus 10.0 % age points Mortality probabilities for 65-year-olds minus 10.0 % age points Weighted share of annuity option plus 10.0 % age points 31.12.2017 31.12.2018 3,781.1 3,614.0 – 277.0 – 261.0 300.8 30.5 – 40.2 202.2 – 41.7 – 99.9 97.3 13.3 283.3 28.3 – 36.7 188.0 – 38.6 – 93.0 91.5 10.4 the Baloise Group determines the sensitivities of liabilities under defined benefit plans by recalculating them using the same models as used for the calculation of the effective value. in this calculation, only one parameter of the base scenario is changed. possible interaction between individual parameters is not taken into consideration. the effect resulting from various parameters occurring simultaneously may vary from the sum total of individually determined differences. the sensitivity is only calculated for the liability. a possible simultaneous impact on plan assets is not investigated. 223 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 18.2.9 Funding of plan benefits the plan assets of the Swiss plans are funded jointly by the employer and employee. the amount of individual contributions depends largely on an employee’s remuneration and age. Statutory regulations require employers to contribute a minimum of 50 per cent of the total contributions for part of the insured benefits. 18.2.10 Estimated employer contribution the employer’s contribution for the following year can only be predicted with a limited degree of certainty. the Baloise Group expects to pay employer contributions of approximately cHF 69.0 million for the 2019 financial year. 18.2.11 Maturity profile the maturity profile of liabilities under pension plans differs depending on whether benefits are prospective or current entitlements. For prospective benefit entitlements, the average expected remaining service period is 9.9 years; the average present value factor for current benefit entitlements under pension commitments is 15.6 years. 18.3 Other long-term employee benefits Benefits granted to current employees that are payable twelve months or more after the end of the financial year are accounted for separately and according to specific rules. the accounting policies applied are similar to those used for pension liabilities, except that actuarial gains and losses are recognised in profit or loss. long-service bonuses constitute the principal benefit paid. the present value of liabilities as at 31 December 2018 totalled cHF 27.8 million (2017: cHF 28.5 million). there were no disposals of plan assets for long-term employee benefits. Benefits paid out amounted to cHF 3.1 million (2017: cHF 3.6 million). 224 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 18.4 Share-based payment plans For some time now, the Baloise Group has offered employees and management team members the chance to participate in various plans under which shares are granted as part of their overall remuneration packages: the employee incentive plan, the Share Subscription plan and the Share participation plan as well as performance share units (pSU). all these plans are equity-settled remuneration programmes. in 2018, a sum of cHF 24.0 million (2017: cHF 24.4 million) was recognised as an expense in profit or loss in connection with the following share-based payment plans. the textual explanations of the individual compensation programs are contained in chapters 5, 7 and 8 of the compensation Report. the most important quantitative information is listed in tabular form below. 18.4.1 Employee Incentive Plan EMPLOYEE INCENTIVE PLAN number of shares subscribed Restricted until Subscription price per share (cHF) Value of shares subscribed (cHF million) Fair value of subscribed shares on subscription date (cHF million) employees entitled to participate participating employees Subscribed shares per participant (average) 18.4.2 Share Subscription Plan SHARE SUBSCRIPTION PLAN (SSP) number of shares subscribed Restricted until 1 Subscription price per share (cHF) Value of shares subscribed (cHF million) Fair value of subscribed shares on subscription date (cHF million) employees entitled to participate participating employees SSp portion of variable remuneration 2017 2018 176,252 186,489 31.08.2020 31.08.2021 77.00 13.6 26.9 3,146 2,007 87.8 76.00 14.2 27.8 3,254 2,130 87.6 2017 34,738 2018 27,886 29.02.2020 28.02.2021 116.37 140.58 4.0 4.5 917 116 15 % 3.9 4.2 960 109 16 % 1 the closed period during which shares are allocated to the chairman of the Board of Directors is five years instead of three. this means that the shares are restricted until 28 February 2021 and 28 February 2022 respectively. 225 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 18.4.3 Share Participation Plan SHARE PARTICIPATION PLAN (SPP) number of shares subscribed 1 Restricted until Subscription price per share 2 (cHF) Value of shares subscribed 2 (cHF million) Fair value of subscribed shares on subscription date (cHF million) employees entitled to participate participating employees Spp portion of variable remuneration 1 including shares financed by loans. 2 net of the discounted dividend right over three years. 2017 95,009 2018 76,442 29.02.2020 28.02.2021 114.49 140.80 10.9 12.4 889 96 6 % 10.8 11.4 931 93 7 % 18.4.4 Performance share units the value of pSUs is exposed to market risk until the end of the vesting period and may, of course, fluctuate significantly, as shown in the table below: PERFORMANCE SHARE UNIT (PSU) PLAN 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 PSUs granted PSUs converted Change in value Date Price (CHF) 1 Date Multiplier Price (CHF) 1 Value (CHF) 2 01.03.2007 01.01.2008 01.01.2009 01.01.2010 01.01.2011 01.03.2012 01.03.2013 01.03.2014 01.03.2015 01.03.2016 01.03.2017 01.03.2018 125.80 109.50 82.40 86.05 91.00 71.20 84.50 113.40 124.00 126.00 130.70 149.20 01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.03.2015 01.03.2016 01.03.2017 01.03.2018 01.03.2019 01.03.2020 01.03.2021 1.182 1.24 0.64 0.58 0.77 1.21 1.50 1.05 1.34 0.89 4 1.03 4 0.86 4 86.05 91.00 64.40 78.50 113.60 124.00 126.00 130.70 149.20 135.40 4 135.40 4 135.40 4 101.71 112.84 41.22 45.53 87.47 150.04 189.00 137.24 199.93 120.76 4 138.96 4 116.44 4 3 – 19 % 3 % – 50 % – 47 % – 4 % 111 % 125 % 21 % 61 % – 4 % 4 6 % 4 – 22 % 4 1 price = price of Baloise shares at the pSU grant date or conversion date. 2 Value = value of one pSU at the conversion date (share price at the conversion date times the multiplier). 3 change in value = difference between the value at the conversion date (multiplier times the share price at the conversion date) and the share price at the grant date, expressed as a percentage of the share price at the grant date; example of the pSU plan in 2007: ([{1.182  86.05} – 125.80] / 125.80) 100 = – 19 %. 4 interim measurement as at 31 December 2018. 226 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Measurement of the pSU at their issue date is based on a Monte carlo simulation, which calculates a present value for the payout expected at the end of the vesting period. this measurement incorporates the following parameters: ▸ ▸ ▸ ▸ interest rate of 1 per cent; the volatilities of all shares in the peer group and their correlations with each other (measured over a three-year track record); the expected dividend yields; empirical data on how long eligible programme participants remain with the company. PERFORMANCE SHARE UNITS (PSU) employees entitled to participate at launch of programme number of allocated pSU of which: expired (departures in 2016) number of active pSUs as at 31 December 2016 of which: expired (departures in 2017) number of active pSUs as at 31 December 2017 of which: expired (departures in 2018) number of active pSUs as at 31 December 2018 Value of allocated pSUs on issue date (cHF million) pSU expense incurred by the Baloise Group for 2016 (cHF million) pSU expense incurred by the Baloise Group for 2017 (cHF million) pSU expense incurred by the Baloise Group for 2018 (cHF million) Plan 2016 Plan 2017 Plan 2018 69 40,748 – 604 40,144 – 413 39,731 – 272 39,459 5.3 1.3 1.9 1.7 65 67 33,698 33,237 – – – 263 33,435 – 303 33,132 4.7 1.1 1.6 – – – – 0 33,237 5.0 1.2 227 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 19. DEFERRED INCOME TAXES 19.1 Deferred tax assets and liabilities DEFERRED TA X ASSETS 2017 cHF million Financial assets other investments other comprehensive income tax credits and losses carried forward insurance receivables technical reserves insurance liabilities liabilities arising from banking business and financial contracts liabilities arising from employee benefits other Total 2018 cHF million Financial assets other investments other comprehensive income tax credits and losses carried forward insurance receivables technical reserves insurance liabilities liabilities arising from banking business and financial contracts liabilities arising from employee benefits other Total 228 Balance as at 1 January Change recognised in profit or loss Change recognised directly in equity Change in the scope of consolidation Reclassifi- cation in accordance with IFRS 5 Exchange differences Balance as at 31 December 31.5 16.5 145.6 74.3 5.9 458.7 773.5 133.0 67.5 46.3 – 1.6 11.2 – 17.0 – 1.8 – 6.5 – 136.4 – 8.0 – 13.2 – 7.6 – – – 32.2 – – – – – – – 1,752.8 – 147.0 – 32.2 – – – – – – – – – – – – 0.1 – 4.0 – 4.5 0.0 – – – – – 0.0 – 8.7 2.6 0.2 3.4 2.3 0.1 28.1 61.3 7.7 4.9 0.9 32.4 23.9 112.3 93.7 4.3 480.2 698.4 132.7 59.2 39.7 111.7 1,676.7 Balance as at 1 January Change recognised in profit or loss Change recognised directly in equity Change in the scope of consolidation Reclassifi- cation in accordance with IFRS 5 Exchange differences Balance as at 31 December 32.4 23.9 112.3 93.7 4.3 480.2 698.4 132.7 59.2 39.7 1,676.7 3.6 1.4 – – 24.0 2.4 101.6 55.1 3.6 – 1.2 – 2.0 140.5 – – – 16.9 – – – – – – – – 16.9 – – – – – – – – – – – – – – – – – – – – – – – 1.3 – 0.1 – 1.4 – 1.3 – 0.1 – 13.9 – 27.5 – 3.4 – 2.0 – 0.4 34.7 25.2 94.1 68.4 6.6 568.0 726.0 132.9 55.9 37.3 – 51.2 1,749.1 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements DEFERRED TA X LIABILITIES 2017 cHF million Depreciable assets other intangible assets Deferred acquisition costs long-term equity investments investment property Financial assets other investments other comprehensive income insurance receivables technical reserves other Total 2018 cHF million Depreciable assets other intangible assets Deferred acquisition costs long-term equity investments investment property Financial assets other investments other comprehensive income insurance receivables technical reserves other Total Balance as at 1 January Change recognised in profit or loss Change recognised directly in equity Change in the scope of consolidation Reclassifi- cation IFRS 5 Exchange differences Balance as at 31 December 3.5 3.3 201.0 39.6 361.7 117.8 95.1 322.0 1.7 – 0.1 1.3 10.9 9.9 2.8 – 38.8 – 20.5 – – 0.5 1,410.4 – 122.4 72.4 – 5.9 – – – – – – – – 61.8 – – – 2,628.4 – 163.2 – 61.8 – 0.9 – – 2.4 – – – – – 4.0 7.3 – – – – – 23.0 – – 4.0 – 4.5 – – – 0.4 – 31.9 0.3 0.4 15.6 0.6 5.0 0.6 4.8 16.3 0.1 87.3 0.4 3.8 5.9 227.4 50.2 348.9 79.6 75.4 271.9 1.3 1,375.3 70.6 131.5 2,510.3 Balance as at 1 January Change recognised in profit or loss Change recognised directly in equity Change in the scope of consolidation Reclassifi- cation IFRS 5 Exchange differences Balance as at 31 December 3.8 5.9 227.4 50.2 348.9 79.6 75.4 271.9 1.3 1,375.3 70.6 2,510.3 – 0.9 0.3 10.5 9.4 – 2.6 2.0 – 4.8 – 0.1 206.3 – 9.1 211.2 – – – – – – – – 102.6 – – – – – – – 23.0 – – – – – – – 102.6 23.0 – – – – – – – – – – – – – 0.1 – 0.2 – 7.7 – 0.4 – 2.2 – 0.1 – 2.0 – 5.2 – 0.1 – 40.3 – 0.1 – 58.3 2.7 6.0 230.3 59.1 367.0 81.4 68.6 164.2 1.4 1,541.4 61.4 2,583.5 the Baloise Group reports its deferred taxes on a net basis. Deferred tax assets and liabilities are offset against each other in cases where the criteria for such offsetting have been met. this is usually the case if the tax jurisdiction, the taxable entity and the type of taxation are identical. 229 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements the Baloise Group had recognised deferred tax assets on tax loss carryforwards totalling cHF 228.6 million as at 31 December 2018 (2017: cHF 272.6 million). of this total, cHF 0.1 million will expire after one year, 0.0 million after two to four years and cHF 228.5 million will expire after five years or more. the Baloise Group has offsettable tax assets of cHF 69.6 million as at 31 December 2018 (2017: cHF 134.7 million), which it can use until the end of 2025. in 2018, an impairment loss cHF 69.6 million was recognised on the tax credit. no deferred tax assets had been recognised on tax loss carryforwards amounting to cHF 170.3 million as at 31 December 2018 (2017: cHF 261.7 million) because the relevant offsetting criteria had not been met. of this total, cHF 0.6 million will expire after one year, a further cHF 17.4 million will expire after two to four years and cHF 152.3 million will expire after five years or more. 19.2 Deferred income taxes cHF million Deferred tax assets Deferred tax liabilities Total (net) of which: recognised as deferred tax assets of which: recognised as deferred tax liabilities 20. OTHER ASSETS cHF million liabilities to brokers and agents tax credits indirect taxes (withholding tax etc.) prepaid insurance benefits Development properties other assets impairments Sub-total Other assets recognised at fair value through profit or loss precious metals for the account and at risk of life insurance policyholders and third parties Sub-total Other assets 31.12.2017 31.12.2018 1,676.7 1,749.1 – 2,510.3 – 2,583.5 – 833.6 88.8 – 922.4 – 834.4 73.5 – 907.8 31.12.2017 31.12.2018 84.2 37.2 56.3 144.7 32.0 – 5.3 349.1 70.5 70.5 34.0 27.7 52.8 97.0 43.9 – 6.5 248.9 54.1 54.1 419.6 303.0 numerous development projects in Switzerland were taken on as part of the acquisition of Baloise Wohnbauten aG. Most of them are new properties in blocks of apartments owned by different people and will be sold upon completion. 230 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 21. NON-CURRENT ASSETS AND DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE as at 31.12. cHF million property, plant and equipment intangible assets investment property Financial assets other investments Receivables other assets Total assets technical reserves liabilities arising from banking business and financial contracts other financial obligations other liabilities Total equity and liabilities Unrealised losses directly associated with non-current assets and disposal groups classified as held for sale Disposal groups Non-current assets 2017 2018 2017 2018 0.3 0.4 336.8 653.5 41.3 8.3 0.5 1,041.1 – 540.5 79.4 23.7 643.6 – 19.9 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – on 14 December 2017, it was publicly announced that Basler lebensversicherungs-aG, based in Hamburg, and Basler Sach- versicherungs-aG, based in Bad Homburg, in collaboration with SiGnal iDUna Krankenversicherung a.G., Dortmund, was selling its long-term equity investment in Deutscher Ring Bausparkasse aG to the BaWaG p.S.K. in Vienna. the reclassification of assets and liabilities affects the Banking segment in Germany. an agreement was signed on 18 December 2017, under which Basler Beteiligungsholding GmbH is selling its long-term equity investment in RolanD Rechtsschutz Beteiligung GmbH. this reclassification affects the other activities operating segment. the launch, announced in 2017, of a real-estate fund in Switzerland for institutional investors was completed in the year under review. to this end, investment properties held by Baloise life ltd and Basler Versicherung aG were transferred to this new real-estate portfolio. this affects the life and non-life segments in Switzerland. also the transactions relating to Deutscher Ring Bausparkasse aG and RolanD Rechtsschutz Beteiligung GmbH announced in 2017 were completed in 2018. in the year under review, no material events took place that satisfy the criteria for iFRS 5. 231 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 22. SHARE CAPITAL 2017 Balance as at 1 January purchase / sale of treasury shares capital increases Share buy-back and cancellation Balance as at 31 December 2018 Balance as at 1 January purchase / sale of treasury shares capital increases Share buy-back and cancellation Balance as at 31 December Number of treasury shares Number of shares in circulation Number of shares issued Share capital (CHF million) 2,499,945 47,500,055 50,000,000 28,048 – 28,048 – – 1,200,000 – – – – – 1,200,000 1,327,993 47,472,007 48,800,000 5.0 – – – 0.1 4.9 Number of treasury shares Number of shares in circulation Number of shares issued Share capital (CHF million) 1,327,993 47,472,007 48,800,000 890,141 – 890,141 – – – – – – – 2,218,134 46,581,866 48,800,000 4.9 – – – 4.9 the share capital of Bâloise Holding ltd totals cHF 4.88 million and is divided into 48,800,000 registered, fully paid-up registered shares with a par value of cHF 0.10 each (2017: cHF 0.10). as far as individuals, legal entities and partnerships are concerned, entry in the share register with voting rights is limited to 2 per cent of the registered share capital entered in the commercial register. the Baloise Group buys and sells its own shares as part of its ordinary investing activities and for employee share ownership programmes. the annual General Meeting held on 27 april 2018 voted to pay a gross dividend of cHF 5.60 per share for the 2017 financial year. this amounted to a total dividend distribution of cHF 273.3 million. excluding the treasury shares held by Bâloise Holding ltd at the time that the dividend was paid, the total distribution effectively amounted to cHF 264.0 million. as at the balance sheet date (31 December 2018), a cumulative total of 1,336,575 shares in Bâloise Holding ltd had been repurchased for a total amount of cHF 198.5 million under the share buy-back programme that had been announced on 4 april 2017. the buy-back programme is planned for a maximum of three years. 232 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 23. TECHNICAL RESERVES (GROSS) cHF million Unearned premium reserves (gross) claims reserve (gross) other technical reserves Technical reserves (non-life) actuarial reserves (gross) policyholders’ dividends credited and provisions for future policyholders’ dividends (gross) 31.12.2017 31.12.2018 649.1 5,595.0 74.7 657.0 5,426.0 74.5 6,318.8 6,157.5 38,008.1 36,740.2 3,681.5 3,677.5 41,689.7 40,417.7 48,008.5 46,575.2 Technical reserves (life) Technical reserves (gross) 23.1 Technical reserves (non-life) cHF million Unearned premium reserves claims reserve provision for claims handling costs Claims reserve Other technical reserves Gross Reinsurance assets Net Gross Reinsurance assets 31.12.2017 Net 31.12.2018 649.1 5,082.5 512.5 0.1 649.3 – – – – 657.0 4,955.0 471.0 – 1.2 655.9 – – – – 5,595.0 – 438.3 5,156.7 5,426.0 – 423.6 5,002.4 74.7 – 74.7 74.5 – 74.5 Total technical reserves (non-life) 6,318.8 – 438.2 5,880.7 6,157.5 – 424.8 5,732.7 233 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 23.1.1 Maturity structure of technical reserves cHF million Unearned premium reserves Up to 1 year More than 1 year no determinable residual term Total unearned premium reserves Claims reserve Up to 1 year More than 1 year no determinable residual term Total claims reserve Gross Reinsurance assets Net Gross Reinsurance assets 31.12.2017 613.3 8.8 27.0 649.1 0.1 0.1 – 0.1 0.1 613.3 9.0 27.0 649.3 622.5 8.5 26.0 657.0 – 1.5 0.3 – – 1.2 879.0 3,508.7 1,207.2 5,595.0 – 50.4 – 99.1 – 288.8 – 438.3 828.6 3,409.6 918.4 5,156.7 849.7 3,422.4 1,153.9 5,426.0 – 51.0 – 106.0 – 266.6 – 423.6 Net 31.12.2018 621.0 8.8 26.0 655.9 798.7 3,316.3 887.3 5,002.4 all figures relating to maturities are based on best estimates. the line item “no determinable residual term” mainly comprises old-age health insurance reserves and annuity reserve funds. 23.1.2 Unearned premium reserves cHF million Balance as at 1 January netted premiums Gross Reinsurance assets Gross Reinsurance assets Net 2017 589.0 1.8 590.8 649.1 0.1 3,229.3 – 164.3 3,065.0 3,405.9 – 185.8 Net 2018 649.3 3,220.1 less: premiums earned during the reporting period – 3,214.4 162.6 – 3,051.8 – 3,376.7 184.5 – 3,192.2 additions arising from acquisition of policy portfolios and insurance companies Disposals arising from sale of policy portfolios and insurance companies Reclassification to non-current assets classified as held for sale exchange differences Balance as at 31 December – – – 45.2 649.1 – – – 0.1 0.1 – – – – – – – – – – – – 45.2 649.3 – 21.3 657.0 0.0 – 1.2 – 21.2 655.9 apart from the actual unearned premium reserves, this item includes health insurance reserves for old age and deferred unearned premiums. 234 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 23.1.3 Other technical reserves cHF million Balance as at 1 January less: expenditures during the reporting period additional provisions recognised and unused provisions reversed through profit or loss additions arising from acquisition of policy portfolios and insurance companies Disposals arising from sale of policy portfolios and insurance companies Reclassification to non-current assets classified as held for sale exchange differences Balance as at 31 December Gross Reinsurance assets 89.6 – 19.1 2.5 – – – 1.7 74.7 – 0.2 – 0.2 – – – – – Gross Reinsurance assets Net 2017 89.6 – 18.9 2.4 – – – 74.7 – 20.5 21.0 – – – 1.7 74.7 – 0.8 74.5 – 0.0 0.0 – – – – – Net 2018 74.7 – 20.5 21.0 – – – – 0.8 74.5 235 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 23.1.4 Claims reserve (including claims handling costs) cHF million Balance as at 1 January (gross) Reinsurers’ share Balance as at 1 January (net) Claims incurred (including claims handling costs) For the reporting period For previous years Total Payments for claims and claims handling costs For the reporting period For previous years Total Other changes additions / disposals arising from changes in scope of consolidation Reclassification to non-current assets classified as held for sale exchange differences Total Balance as at 31 December (net) Reinsurers’ share Balance as at 31 December (gross) 2017 2018 5,307.8 – 393.2 4,914.7 5,595.0 – 438.3 5,156.7 1,936.3 – 87.3 1,849.0 2,036.9 – 135.8 1,901.1 – 913.3 – 911.9 – 991.8 – 960.3 – 1,825.2 – 1,952.0 – – 218.1 218.1 – – – 103.3 – 103.3 5,156.7 5,002.4 438.3 423.6 5,595.0 5,426.0 the Baloise Group pays particular attention to cases of environmental pollution involving landfill sites, refuse, asbestos or any other materials harmful to human beings or the environment. the relevant net reserves included in the total amounted to cHF 70.7 million at the end of 2018 (2017: cHF 74.2 million). the decrease was attributable to commutations of reserves and currency effects. the net reserves for the hospital liability business in Germany amount to cHF 238.8 million and are also included in the total. 236 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 23.2 Technical reserves (life) cHF million actuarial reserves from non-unit-linked life insurance contracts 1 actuarial reserves from unit-linked life insurance contracts Reserves for final policyholders’ dividends Unearned revenue reserve Structure of actuarial reserves (life) policyholders’ dividends credited and provisions for future policyholders’ dividends Total technical reserves (life) 1 the actuarial reserves include unearned premium reserves and claims reserves. 31.12.2017 31.12.2018 34,328.1 33,372.9 3,108.1 2,833.5 181.3 390.7 164.5 369.3 38,008.1 36,740.2 3,681.5 3,677.5 41,689.7 40,417.7 237 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 23.2.1 Maturity structure of technical reserves cHF million Actuarial reserves from non-unit-linked life insurance contracts Up to 1 year 1 to 5 years 5 to 10 years More than 10 years no determinable residual term Business from Swiss occupational pension plans 1 Total actuarial reserves from non-unit-linked life insurance contracts Actuarial reserves from unit-linked life insurance contracts Up to 1 year 1 to 5 years 5 to 10 years More than 10 years no determinable residual term Total actuarial reserves from unit-linked life insurance contracts Policyholders’ dividends credited Up to 1 year 1 to 5 years 5 to 10 years More than 10 years no determinable residual term Total policyholders’ dividends credited Provisions for future policyholders’ dividends Up to 1 year no determinable residual term Total provisions for future policyholders’ dividends 31.12.2017 31.12.2018 1,256.3 3,123.1 3,314.7 6,062.6 9,229.9 1,119.7 3,072.2 3,253.7 5,813.0 8,910.5 11,341.6 11,203.8 34,328.1 33,372.9 84.8 341.1 365.8 416.7 1,899.7 3,108.1 86.6 252.4 214.4 296.7 182.9 1,032.9 96.3 261.3 350.8 394.0 1,731.1 2,833.5 76.1 218.4 197.9 259.9 161.2 913.5 88.9 2,559.7 2,648.6 102.2 2,661.7 2,764.0 1 the Swiss pensions business is disclosed separately owing to its specific features. it comprises group contracts which may be cancelled annually by either party, whereas the coverage period for the individuals enrolled is significantly longer. all figures relating to maturities are based on the residual terms of contracts. the line item “no determinable residual term” mainly comprises deferred and current annuities. 238 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 23.2.2 Actuarial reserves from non-unit-linked life insurance contracts cHF million Balance as at 1 January change in actuarial reserves additions arising from acquisition of policy portfolios and insurance companies Disposals arising from sale of policy portfolios and insurance companies Reclassification to non-current assets classified as held for sale exchange differences Balance as at 31 December 2017 2018 33,553.2 34,328.1 – 55.3 – 576.7 – – – – – – 830.2 – 378.5 34,328.1 33,372.9 the actuarial reserves include unearned premium reserves and claims reserves. the actuarial reserves for DpF business as at 31 December 2018 amounted to cHF 33,092.1 million (31 December 2017: cHF 34,046.7 million), while for non-DpF business they totalled cHF 280.9 million (31 December 2017: cHF 281.4 million). the actuarial reserves for assumed business (inward reinsurance) as at 31 December 2018 came to cHF 10.9 million (31 December 2017: cHF 10.5 million). 23.2.3 Actuarial reserves from unit-linked life insurance contracts cHF million Balance as at 1 January additions Disposals Fees interest on and change in liabilities additions arising from acquisition of policy portfolios and insurance companies Disposals arising from sale of policy portfolios and insurance companies Reclassification to non-current assets classified as held for sale exchange differences Balance as at 31 December 2017 2018 2,727.3 255.4 – 236.9 – 5.8 175.6 – – – 3,108.1 276.3 – 200.3 – 6.3 – 257.8 – – – 192.7 – 86.4 3,108.1 2,833.5 239 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 23.2.4 Reserve for final policyholders’ dividends cHF million Balance as at 1 January adjustment arising from unrealised gains and losses as at 1 January (shadow accounting) interest on and change in liability Final policyholders’ dividends paid additions arising from acquisition of policy portfolios and insurance companies Disposals arising from sale of policy portfolios and insurance companies Reclassification to non-current assets classified as held for sale adjustment arising from unrealised gains and losses as at 31 December (shadow accounting) exchange differences Balance as at 31 December 2017 2018 185.1 – 7.0 6.2 – 20.8 – – – 6.8 11.0 181.3 181.3 – 6.8 10.7 – 19.6 – – – 3.4 – 4.6 164.5 Final policyholders’ dividends, which are only paid upon contract expiry, are funded and accrued over the duration of the policy in proportion to the profits attributable to the contract. 23.2.5 Unearned revenue reserve cHF million Balance as at 1 January Reserved during the reporting period change in balance change due to unrealised gains and losses on investments (shadow accounting) additions arising from acquisition of policy portfolios and insurance companies Disposals arising from sale of policy portfolios and insurance companies Reclassification to non-current assets classified as held for sale exchange differences Balance as at 31 December 2017 2018 347.6 19.2 – 8.0 0.1 – – – 390.7 18.6 – 25.9 0.4 – – – 31.7 390.7 – 14.5 369.3 240 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 23.2.6 Policyholders’ dividends credited and reserves for future policyholders’ dividends cHF million Policyholders’ dividends credited as at 1 January Dividends credited to policyholders during the reporting period policyholders’ dividends paid additions arising from acquisition of policy portfolios and insurance companies Disposals arising from sale of policy portfolios and insurance companies Reclassification to non-current assets and disposal groups classified as held for sale exchange differences Balance as at 31 December Provisions for future policyholders’ dividends as at 1 January adjustment arising from unrealised gains and losses as at 1 January additions Withdrawals change in measurement differences between iFRS and national accounting standards recognised in profit or loss adjustment arising from unrealised gains and losses as at 31 December (shadow accounting) additions arising from acquisition of policy portfolios and insurance companies Disposals arising from sale of policy portfolios and insurance companies Reclassification to non-current assets classified as held for sale exchange differences Balance as at 31 December 2017 2018 1,033.1 1,032.9 45.4 40.1 – 108.6 – 132.9 – – – 63.1 1,032.9 2,376.3 – 771.4 115.3 – 103.8 290.0 663.0 – – – – – – – 26.7 913.5 2,648.6 – 663.0 164.3 – 106.3 336.8 426.1 – – – 79.3 – 42.7 2,648.6 2,764.0 Policyholders’ dividends credited and provisions for future policyholders’ dividends as at 31 December 3,681.5 3,677.5 241 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 24. LIABILITIES ARISING FROM BANKING BUSINESS AND FINANCIAL CONTRACTS as at 31.12. cHF million With discretionary participation features (DPFs) Financial contracts with discretionary participation features (DpFs) 1 Sub-total Measured at amortised cost liabilities to banks Repurchase agreements liabilities arising from time deposits loans Mortgages Savings and customer deposits Medium-term bonds Mortgage-backed bonds Bonds liability for future financial lease payments (present value) other financial contracts Sub-total Recognised at fair value through profit or loss (designated) other financial contracts Sub-total Carrying amount Fair value 2017 2018 2017 2018 2,814.2 2,814.2 2,924.7 2,924.7 – – – – 225.1 820.0 – 8.9 36.8 5,107.8 104.2 1,300.6 – 0.0 25.4 135.2 – – 8.3 34.5 5,324.5 90.4 1,372.9 – 0.0 31.6 225.0 820.0 – 8.9 36.8 5,144.1 107.3 1,371.4 – 0.0 25.4 135.2 – – 8.3 34.5 5,354.2 93.1 1,425.8 – 0.0 31.6 7,628.8 6,997.5 7,738.9 7,082.6 12,253.6 11,616.9 12,253.6 12,253.6 11,616.9 12,253.6 11,616.9 11,616.9 Total liabilities arising from banking business and financial contracts 22,696.5 21,539.0 – – 1 there are currently no internationally accepted mathematical methods available for determining the fair value of financial contracts with discretionary participation features (DpFs). Savings deposits and customer deposits essentially consist of savings accounts, business accounts and deposit accounts held by Swiss banking clients. the mortgage-backed bonds reported have all been issued by pfandbriefbank schweizerischer Hypothekarinstitute aG. the other financial contracts designated as at fair value through profit or loss largely relate to the life insurance liability arising from investment-linked life insurance contracts involving little or no transfer of risk. the year-on-year change in this liability consists entirely of the funds flowing into and out of the pertinent investment portfolio, the latter’s market-related price fluctuations and exchange-rate movements. 242 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 25. FINANCIAL LIABILITIES SENIOR DEBT cHF million Balance as at 1 January issue price of newly issued bonds embedded derivative Additions (sub-total) Disposals / repayments / conversions interest expenses Borrowing costs paid accrued borrowing costs Interest costs (sub-total) Balance as at 31 December 2017 2018 1,470.4 496.5 – 496.5 – 225.0 34.3 – 30.9 – 2.2 1.1 1,742.9 – – – – 39.9 – 35.9 – 2.4 1.5 1,742.9 1,744.5 no new bonds were issued in the year under review and no bonds were redeemed. on 28 January 2019, Bâloise Holding ltd issued a bond totalling cHF 200 million (0.5 per cent, 2019 – 2025, iSin cH0458097976) as part of its refinancing of the bond maturing on 1 March 2019. TERMS & CONDITIONS GOVERNING DEBT OUTSTANDING (BONDS BÂLOISE HOLDING LTD AND BALOISE LIFE LTD) issuer Face value (cHF million) interest rate Bâloise Holding ltd Bâloise Holding ltd Bâloise Holding ltd Bâloise Holding ltd Bâloise Holding ltd Bâloise Holding ltd 300 250 175 150 225 150 Baloise life ltd 300 Baloise life ltd 200 2.875 % 3.000 % 2.250 % 2.000 % 1.750 % 1.125 % 1.750 % 2.200 % Redemption value Year of issue 100 % 2010 100 % 2011 100 % 2012 100 % 2012 100 % 2013 100 % 2014 100 % 2017 100 % 2017 Repayment date 14.10.2020 07.07.2021 01.03.2019 12.10.2022 26.04.2023 19.12.2024 perpetual 19.06.2048 iSin cH0117683794 cH0131804616 cH0148295014 cH0194695083 cH0200044821 cH0261399064 cH0379610998 cH0379611004 243 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 26. NON-TECHNICAL PROVISIONS cHF million Balance as at 1 January addition arising from change in scope of consolidation Disposal arising from change in scope of consolidation Reclassification to non-current assets classified as held for sale increases and additional provisions recognised in profit or loss Unused provisions reversed through profit or loss Usage not recognised in profit or loss Unwinding of discount exchange differences Balance as at 31 December Restructuring Other Total Restructuring Other Total 2018 2017 80.0 0.6 – 68.7 0.6 – – 25.6 – 25.6 11.3 – – – 5.8 43.2 49.0 – – – – – – – – – 0.2 15.7 15.9 21.5 12.5 34.0 – 0.8 – 5.6 – 0.7 5.8 – 15.2 – 2.5 – 1.6 43.2 – 16.0 – 8.1 – 2.2 49.0 – 0.7 – 2.6 – – 0.7 23.4 – 11.0 – 4.1 – – 0.3 40.3 – 11.7 – 6.7 – – 1.0 63.7 the balance shown for other non-technical provisions includes typical amounts for legal advice and litigation risks. the recognition of restructuring provisions in profit or loss and their usage not recognised in profit or loss primarily relate to the German entities. the recognition of other non-technical provisions in profit or loss and their usage recognised or not recognised in profit or loss primarily relate to the German and Swiss entities. 31.12.2017 31.12.2018 1,350.3 1,486.1 147.9 186.7 21.3 134.5 189.0 20.2 1,706.3 1,829.8 27. INSURANCE LIABILITIES cHF million liabilities to policyholders liabilities to brokers and agents liabilities to insurance companies other insurance liabilities Total insurance liabilities 244 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Notes to the consolidated income statement 28. PREMIUMS EARNED AND POLICY FEES cHF million Gross premiums written and policy fees change in unearned premium reserves Premiums earned and policy fees (gross) Reinsurance premiums ceded Reinsurers’ share of change in unearned premium reserves Non-Life Life 3,229.3 – 14.9 3,214.4 – 164.3 1.7 3,512.0 – 3,512.0 – 20.8 – Total 2017 6,741.3 – 14.9 6,726.4 – 185.1 1.7 Non-Life Life 3,405.9 – 29.2 3,376.7 – 185.8 1.4 3,360.3 – 3,360.3 – 24.6 – Total 2018 6,766.2 – 29.2 6,737.0 – 210.4 1.4 Total premiums earned and policy fees (net) 3,051.8 3,491.1 6,542.9 3,192.2 3,335.7 6,528.0 29. INCOME FROM INVESTMENTS FOR OWN ACCOUNT AND AT OWN RISK cHF million investment property Financial assets of an equity nature available for sale Recognised at fair value through profit or loss Financial assets of a debt nature Held to maturity available for sale Recognised at fair value through profit or loss Mortgages and loans carried at cost Recognised at fair value through profit or loss cash and cash equivalents Total investment income for own account and at own risk 2017 2018 263.2 276.6 126.5 13.1 214.5 480.9 1.9 280.9 13.1 – 1.6 145.6 1.4 206.9 477.7 1.8 254.9 12.0 – 0.9 1,392.5 1,376.0 income from investment property consists mainly of rental income. income from financial instruments with characteristics of equity primarily comprises dividend income, while income from financial instruments with characteristics of liabilities essentially contains interest income and net income from the recognition and reversal of impairment losses owing to application of the effective interest method. income from mortgages and loans and from cash and cash equivalents is mainly derived from the interest paid on these assets. interest income of cHF 2.4 million had been recognised on impaired investments at the balance sheet date (2017: cHF 2.8  million). 245 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 30. REALISED GAINS AND LOSSES ON INVESTMENTS 30.1 Realised gains and losses on investments for own account and at own risk 2017 cHF million Realised gains on sales and book profits investment property Held to maturity 1 available for sale Recognised at fair value through profit or loss carried at cost Sub-total Realised losses on sales and book losses investment property Held to maturity1 available for sale Recognised at fair value through profit or loss carried at cost Sub-total Impairment losses recognised in profit or loss Held to maturity available for sale carried at cost Reversal of impairment losses recognised in profit or loss Held to maturity available for sale carried at cost Sub-total Investment property Financial assets of an equity nature Financial assets of a debt nature Mortgages and loans Derivative financial instruments 244.9 – – – – 244.9 – 133.8 – – – – – – 284.6 25.0 – 309.7 – – – 47.6 – 23.3 – – 141.2 467.8 2.6 – 611.6 – – 0.5 – 234.6 – 1.1 – – 133.8 – 70.9 – 236.3 – – – – – – – – – 27.3 – – – – – 27.3 – – – – – – – – – – 0.0 38.6 38.6 – – – – 12.6 – 0.1 – 12.7 – – – 1.5 – – 1.4 – 0.1 Total 244.9 141.2 752.4 485.5 38.6 – – – 457.9 – 457.9 1,662.6 – – – – 753.7 – – 133.8 – 0.5 – 282.2 – 790.8 – 0.1 – 753.7 – 1,207.4 – – – – – – – – – 27.3 – 1.5 – – 1.4 – 27.5 Total realised gains and losses on investments 111.1 211.4 375.3 25.8 – 295.8 427.8 1 currency effects relating to held-to-maturity financial assets of a debt nature are reported as realised book profits and / or realised book losses. 246 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 30.2 Realised gains and losses on investments for own account and at own risk 2018 cHF million Realised gains on sales and book profits investment property Held to maturity 1 available for sale Recognised at fair value through profit or loss carried at cost Sub-total Realised losses on sales and book losses investment property Held to maturity 1 available for sale Recognised at fair value through profit or loss carried at cost Sub-total Impairment losses recognised in profit or loss Held to maturity available for sale carried at cost Reversal of impairment losses recognised in profit or loss Held to maturity available for sale carried at cost Sub-total Investment property Financial assets of an equity nature Financial assets of a debt nature Mortgages and loans Derivative financial instruments 264.5 – – – – – – – 0.3 309.5 198.0 6.1 – – – 264.5 315.6 198.3 – 157.9 – – – – – – – 126.8 – 20.2 – – – 62.0 – 224.6 – 3.4 – – 157.9 – 147.0 – 290.0 – – – – – – – – – 93.8 – – – – – 93.8 – – – – – – – – – – 5.6 65.8 71.4 – – – – 4.1 – 2.8 – 6.8 – – – 3.3 – – 3.1 – 0.3 Total 264.5 0.3 507.5 513.6 65.8 – – – 502.0 – 502.0 1,351.7 – – – – 559.7 – – 157.9 – 62.0 – 351.4 – 587.4 – 2.8 – 559.7 – 1,161.5 – – – – – – – – – 93.8 – 3.3 – – 3.1 – 94.1 Total realised gains and losses on investments 106.5 74.7 – 91.7 64.3 – 57.7 96.1 1 currency effects relating to held-to-maturity financial assets of a debt nature are reported as realised book profits and / or realised book losses. 247 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 30.3 Impairment losses on financial assets recognised in profit or loss cHF million Impairment losses on financial assets of an equity nature recognised in profit or loss equities equity funds Mixed funds Bond funds Real estate funds private equity Hedge funds Sub-total Impairment losses on financial assets of a debt nature recognised in profit or loss public corporations industrial enterprises Financial institutions other Sub-total Impairment losses on mortgages and loans recognised in profit or loss Mortgages policy loans promissory notes and registered bonds time deposits employee loans Reverse repurchase agreements other loans Sub-total 2017 2018 – 14.4 – 80.0 – – – – 0.1 – 10.3 – 2.5 – 27.3 – – – – – – 0.0 0.0 – – 10.3 – 3.6 – 93.8 – – – – – – 1.5 – 2.8 – – – 0.0 – 0.0 – 1.5 – – – – – – 0.6 – 3.3 Total impairment losses on financial assets recognised in profit or loss – 28.8 – 97.2 30.4 Currency gains and losses excluding exchange-rate losses on transactions involving financial instruments that are recognised at fair value through profit or loss, a currency loss of cHF 129.5 million was reported for 2018 (2017: gain of cHF 98.0 million). a gross currency loss of cHF 65.1 million was recognised directly in equity for the reporting year (2017: gain of cHF 116.6  million). allowing for hedges of a net investment in a foreign operation (hedge accounting), a net loss of cHF 72.8 million was recognised for 2018 (2017: net gain of cHF 194.8 million). 248 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 31. INCOME FROM SERVICES RENDERED cHF million asset management Services Banking services investment management Income from services rendered 32. OTHER OPERATING INCOME cHF million interest income from insurance and reinsurance receivables other interest income Gains on the sale of property, plant and equipment Badwill 1 currency gains on assets and liabilities Reversal of impairment losses recognised on receivables external income from owner-occupied property income from development properties other income Other operating income 1 opposite negative effect on earnings of cHF – 8.8 million in 2017 as a result of applying the deferred gains / losses for policyholders’ dividends. 2017 2018 45.4 15.3 48.1 8.1 52.1 25.0 41.2 12.2 116.9 130.4 2017 2018 19.9 0.8 6.6 10.3 9.5 5.5 6.9 101.2 74.4 235.0 14.6 0.5 1.4 0.0 50.0 4.1 6.4 65.3 85.3 227.6 249 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 33. CLASSIFICATION OF EXPENSES cHF million personnel expenses (excluding loss adjustment expenses) Marketing and advertising Depreciation and impairment of property, plant and equipment amortisation and impairment of intangible assets it and other equipment expenses for rent, maintenance and repairs losses arising from exchange differences in respect of assets and liabilities commission and selling expenses Fees and commission for financial assets and liabilities not recognised at fair value Fees and commission expenses for assets managed for third parties expenses arising from non-current assets classified as held for sale expenses from development properties other 1 Total 1 this includes changes in deferred acquisition costs recognised in profit or loss, as shown in table 9. 34. PERSONNEL EXPENSES total personnel expenses for 2018 came to cHF 890.3 million (2017: cHF 916.3 million). 2017 2018 – 801.4 – 776.7 – 42.0 – 32.3 – 50.4 – 73.4 – 42.7 – 41.1 – 45.7 – 32.4 – 34.9 – 66.6 – 43.4 – 6.8 – 544.2 – 606.9 – 13.1 – 6.5 – – 106.5 – 163.3 – 12.0 – 1.2 – – 66.9 – 218.9 – 1,916.9 – 1,912.4 250 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 35. GAINS OR LOSSES ON FINANCIAL CONTRACTS cHF million With discretionary participation features (DPFs) Financial contracts with discretionary participation features (DpFs) Sub-total Measured at amortised cost interest on loans interest due interest arising from banking business interest expenses on repurchase agreements acquisition costs in banking business expenses arising from financial contracts Sub-total Recognised at fair value through profit or loss (designated) change in fair value of other financial contracts Sub-total 2017 2018 – 49.7 – 49.7 – 0.1 – 9.4 – 12.1 6.8 – 19.8 – 11.1 – 45.7 – 518.1 – 518.1 – 49.0 – 49.0 0.0 – 9.6 – 5.3 6.6 – 15.1 – 10.6 – 34.1 884.3 884.3 Total gains or losses on financial contracts – 613.4 801.2 Of which: gains on interest rate hedging instruments interest rate swaps: cash flow hedges, balance carried forward from cash flow hedge reserves interest rate swaps: fair value hedges Total gains on interest rate hedging instruments – – – – – – 251 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 36. INCOME TAXES 36.1 Current and deferred income taxes cHF million current income taxes Deferred income taxes Total current and deferred income taxes 2017 2018 – 134.1 16.2 – 117.9 – 104.0 – 70.7 – 174.7 36.2 Expected and current income taxes the expected average tax rate for the Baloise Group was 18.8 per cent in 2017 and 20.7 per cent in 2018. these rates correspond to the weighted average tax rates in those countries where the Baloise Group operates. cHF million profit before taxes expected average tax rate (per cent) Expected income taxes Increase / reduction owing to tax-exempt profits and losses non-deductible expenses withholding taxes on dividends change in tax rates change in unrecognised tax losses recognition of tax credits tax items related to other reporting periods non-taxable measurement differences intercompany effects other impacts Current income taxes 2017 2018 649.8 18.81 % – 122.2 697.6 20.65 % – 144.1 16.7 – 9.8 – 0.6 31.0 18.3 – 6.7 – 0.9 – 1.7 – 10.3 – 20.1 – – 1.1 – 7.9 – 17.9 4.2 – 3.2 – 9.4 – 16.4 3.0 – 117.9 – 174.7 in 2018, the “other impacts” item was heavily affected by the impairment of a tax credit and by countervailing tax effects resulting from a real-estate portfolio transaction. 252 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 37. EARNINGS PER SHARE profit for the period attributable to shareholders (cHF million) average number of shares outstanding Basic earnings per share (CHF) Profit for the period attributable to shareholders (CHF million) adjustment of interest expenses on convertible bonds, including tax effects (cHF million) Adjusted profit for the period attributable to shareholders (CHF million) average number of shares outstanding adjustment due to theoretical exercise of share-based payment plans adjustment due to theoretical exercise of put options Adjusted average number of shares outstanding Diluted earnings per share (CHF) 2017 548.0 2018 523.2 47,641,577 46,979,421 11.50 11.14 2017 548.0 – 548.0 2018 523.2 – 523.2 47,641,577 46,979,421 97,459 61,603 – – 47,739,036 47,041,024 11.48 11.12 the dilution of earnings was attributable to the performance Share Units (pSU) share-based payment plan. 253 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 38. OTHER COMPREHENSIVE INCOME 38.1 Other comprehensive income cHF million Items not to be reclassified to the income statement change in reserves arising from reclassification of investment property other items not to be reclassified to the income statement change in reserves arising from assets and liabilities of post-employment benefits (defined benefit plans) change arising from shadow accounting Deferred income taxes Total items not to be reclassified to the income statement Items to be reclassified to the income statement Available-for-sale financial assets: Gains and losses arising during the reporting period Gains and losses reclassified to the income statement Total available-for-sale financial assets Investments in associates Gains and losses arising during the reporting period Gains and losses reclassified to the income statement Total investments in associates Hedging reserves for derivative financial instruments held as hedges of a net investment in a foreign operation Gains and losses arising during the reporting period Gains and losses reclassified to the income statement Total hedging reserves for derivative financial instruments held as hedges of a net investment in a foreign operation Reserves arising from reclassification of held-to-maturity financial assets: Gains and losses arising during the reporting period Gains and losses reclassified to the income statement Total reserves arising from reclassification of held-to-maturity financial assets: change arising from shadow accounting change arising from exchange differences Deferred income taxes Total items to be reclassified to the income statement 2017 2018 – 0.7 1.3 72.4 9.9 – 21.4 61.6 4.6 9.6 118.5 – 7.7 – 26.7 98.3 369.4 – 551.9 – 182.5 – 726.3 – 182.9 – 909.1 7.5 – 7.5 72.7 5.4 78.1 0.2 – 2.6 – 2.5 197.0 119.3 38.1 255.1 – 0.9 – 2.8 – 3.8 – 7.7 0.0 – 7.7 – – 0.7 – 0.7 271.0 – 52.5 116.2 – 586.6 Total other comprehensive income 316.6 – 488.3 254 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 38.2 Income taxes on other comprehensive income cHF million Other comprehensive income before deferred income taxes Deferred income taxes of Items not to be reclassified to the income statement change in reserves arising from reclassification of investment property change in reserves arising from assets and liabilities of post-employment benefits (defined benefit plans) change arising from shadow accounting change arising from exchange differences additions and disposals arising from change in the scope of consolidation 2017 2018 299.9 – 577.8 0.1 – 26.1 1.0 3.6 – – 1.3 – 19.7 0.5 – 1.5 – 4.6 Total deferred income taxes of items not to be reclassified to the income statement – 21.4 – 26.7 Deferred income taxes on items to be reclassified to the income statement available-for-sale financial assets investments in associates Hedging reserves for derivative financial instruments held as hedges of a net investment in a foreign operation Reserves arising from reclassification of held-to-maturity financial assets change arising from shadow accounting change arising from exchange differences additions and disposals arising from change in the scope of consolidation Total deferred income taxes of items to be reclassified to the income statement 120.8 – 1.5 – 15.4 0.8 – 50.1 – 16.5 – 0.1 38.1 171.3 – 0.2 1.5 0.1 – 66.5 5.3 4.6 116.2 Other comprehensive income after deferred income taxes 316.6 – 488.3 255 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements Other disclosures 39. ACQUISITION AND DISPOSAL OF COMPANIES cHF million investments other assets Receivables and assets cash and cash equivalents actuarial liabilities other accounts payable non-controlling interests Net assets acquired / disposed of Funds used / received for acquisitions and disposals cash and cash equivalents offsetting transfer of assets Directly attributable costs equity instruments issued Reclassification of investments in associates Acquisition / disposal price net assets acquired / disposed of other comprehensive income 1 Goodwill / negative goodwill or proceeds from disposals cash and cash equivalents used / received for acquisitions and disposals cash and cash equivalents acquired / disposed of Outflow / inflow of cash and cash equivalents 1 this includes primarily historical cumulative exchange differences. 256 Cumulative acquisitions Cumulative disposals 2017 2018 2017 2018 386.8 10.5 1.1 99.3 – – 192.7 – 47.8 257.2 262.6 7.3 – – – – 269.9 – 257.2 – 12.7 – 262.6 99.3 – 163.3 – – – – – – – – – – – – – – – – – – – – – 1,911.5 24.5 37.2 0.1 – 1,888.5 653.5 42.0 8.8 – – – 40.5 – 688.4 – 44.5 – 15.8 37.7 15.0 – – – 7.8 – – 29.9 – 44.5 – 7.1 – 21.7 37.7 – 37.7 – – – – – 15.0 – 15.8 – 0.6 – 1.4 15.0 – 15.0 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements in 2017, 84.9 per cent of the shares in the listed company pax anlage aG, Basel, were purchased. the acquisition resulted in negative goodwill of cHF 10.3 million, which was recognised under other operating income. this negative goodwill arose from the remeasurement of development projects, taking account of the current situation in the real- estate market. in the acquiring Group company, there was an opposite negative effect on earnings of cHF 8.8 million as a result of applying the deferred gains / losses for policyholders’ dividends. the purchase price paid in 2017 for Movu aG in Switzerland was cHF 25.6 million and the purchase price for Drivolution nV in Belgium was cHF 2.0 million. the disposals in 2017 included the German companies assekuranz Herrmann GmbH and Wilhelm Herrmann assekuranz Makler GmbH as well as the portfolio of life insurance policies of Baloise life ltd. the loss on the disposal of the two Herrmann insurance companies totalled cHF 5.9 million. the sale of the portfolio of life insurance policies of Baloise life ltd. resulted in a loss of cHF 15.8 million. these losses were recognised under other operating expenses. the acquisitions and disposals had no material effect for the year profit 2017. no companies were acquired in the reporting year. the disposals in 2018 were the German companies Deutscher Ring Bausparkasse aG and RolanD Rechtsschutz Beteiligung GmbH. these disposals had no material impact on the profit for 2018 because the companies’ assets and liabilities were already treated as a disposal group and an impairment loss had been recognised on them in 2017 (note 21). incremental acquisitions are not included in this table. that is why the outflow of cash and cash equivalents varies from the presentation in the cash flow statement. 257 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 40. RELATED PARTY TRANSACTIONS as part of its ordinary operating activities the Baloise Group conducts transactions with associates and with members of Bâloise Holding ltd’s Board of Directors and corporate executive committee. the terms and conditions governing such transactions can be found in the Remuneration Report as part of corporate governance (page 88 to 113). the executive management team consists of the members of Bâloise Holding ltd’s Board of Directors and corporate executive committee. RELATED PART Y TRANSACTIONS Premiums earned and policy fees Investment income Expenses Mortgages and loans Liabilities 2017 2018 2017 2018 2017 2018 31.12.2017 31.12.2018 31.12.2017 31.12.2018 cHF million associates Key management personnel – 0.1 – 0.1 1.7 0.1 1.6 0.0 – 28.2 – 12.1 – 26.8 – 10.8 – 10.3 – 8.4 – 3.9 – – 2.8 – EXECUTIVE MANAGEMENT REMUNERATION cHF million Short-term employee benefits post-employment benefits payments under share-based payment plans Total 2017 2018 – 7.7 – 1.3 – 3.2 – 6.3 – 1.0 – 3.5 – 12.1 – 10.8 15,583 shares worth cHF 2.3 million were repurchased from members of the corporate executive committee in 2018 (2017: cHF 2.5 million) under the Share participation plan (section 18.4.3). 41. REMUNERATION PAID TO THE BOARD OF DIRECTORS AND THE CORPORATE EXECUTIVE COMMITTEE the information to be disclosed in accordance with sections 663b (bis) and 663c of the Swiss code of obligations (oR) is contained in the Remuneration Report, which can be found on pages 88 to 113 in the part of corporate governance. the key information disclosed here includes: ▸ ▸ ▸ ▸ Remuneration paid to the members of the Board of Directors Remuneration paid to the members of the corporate executive committee loans and credit facilities granted to members of the Board of Directors and the corporate executive committee Shares held by members of the Board of Directors and the corporate executive committee 258 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 42. CONTINGENT AND FUTURE LIABILITIES 42.1 Contingent liabilities 42.1.1 Legal disputes the companies in the Baloise Group are regularly involved in litigation, legal claims and lawsuits, which in most cases constitute a normal part of its operating activities as an insurer. the corporate executive committee is not aware of any new circumstances having arisen since the last balance sheet date that could have a material impact on the consolidated annual financial statements for 2018. 42.1.2 Guarantees and collateral for the benefit of third parties the Baloise Group has issued guarantees and provided collateral to third parties. these include obligations – in contractually specified cases – to make capital contributions or payments to increase the amount of equity, provide funds to cover principal and interest payments when they fall due, and issue guarantees as part of its operating activities. the Baloise Group is not aware of any cases of default that could trigger such guarantee payments. in the normal course of its insurance business, the Baloise Group provided contractually binding collateral, mainly joint collateral relating to insurance-backed construction guarantees, and professional and commercial surety bonds. 31.12.2017 31.12.2018 cHF million Guarantees collateral Total guarantees and collateral 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 CREDIT RATINGS OF GUARANTEES AND COLLATERAL 31.12.2017 cHF million Guarantees collateral 31.12.2018 cHF million Guarantees collateral AAA – – AAA – – AA – – AA – – A 30.3 – A 30.5 – 51.5 509.0 560.5 – – – Lower than BBB or no rating BBB 0.0 0.2 21.2 508.7 Lower than BBB or no rating BBB – 0.1 21.4 472.7 51.9 472.8 524.7 – – – Total 51.5 509.0 Total 51.9 472.8 259 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 42.1.3 Pledged or ceded assets, securities-lending assets and collateral held CARRYING AMOUNTS OF ASSETS PLEDGED OR CEDED AS COLLATERAL cHF million Financial assets under repurchase agreements Financial assets in the context of securities lending investments pledged intangible assets pledged property, plant and equipment other Total FAIR VALUE OF COLLATERAL HELD cHF million Financial assets under reverse repurchase agreements Financial assets in the context of securities lending other Total of which: sold or repledged – with an obligation to return the assets – with no obligation to return the assets 31.12.2017 31.12.2018 649.5 3,983.0 2,024.0 – 4,476.4 2,112.1 – – – – – – 6,656.5 6,588.5 31.12.2017 31.12.2018 59.1 64.0 4,883.4 6,002.2 – – 4,942.5 6,066.2 – – – – the Baloise Group engages in securities-lending transactions that may give rise to credit risk. collateral is required in order to hedge these credit risks by more than covering the underlying value of the securities that are being lent (mainly bonds). the value of the counterparty’s lending securities is regularly measured in order to minimise the credit risk involved. additional collateral is immediately required if this value falls below the value of cover provided. the Baloise Group retains control over the loaned securities throughout the term of its lending transactions. the income received from securities lending is recognised in profit or loss. 260 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 42.2 Future liabilities 42.2.1 Capital commitments cHF million Commitments undertaken for future acquisition of investment property financial assets property, plant and equipment intangible assets Total commitments undertaken of which: in connection with joint ventures of which: own share of joint ventures’ capital commitments 31.12.2017 31.12.2018 499.0 735.7 – – 490.1 766.8 – – 1,234.7 1,256.9 – – – – Due to plans to introduce new software, an in-depth analysis of future liabilities in respect of investment property was conducted. this resulted in a better set of data that was used to assess the liabilities in the year under review and in the prior year. the prior-year figures have been restated accordingly. CREDIT RATINGS OF CAPITAL COMMITMENTS 31.12.2017 cHF million capital commitments 31.12.2018 cHF million capital commitments AAA 199.2 AAA 117.4 AA – AA – A 61.5 Lower than BBB or no rating BBB Total – 974.1 1,234.7 A Lower than BBB or no rating BBB Total 110.9 – 1,028.6 1,256.9 obligations undertaken by the Baloise Group to make future purchases of investments include commitments in respect of private equity, which constitute unfunded commitments to invest directly in private equity or to invest in private equity funds. 261 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 43. OPERATING LEASES 43.1 The Baloise Group as a lessee the Baloise Group has entered into non-cancellable leasing arrangements to lease buildings, vehicles and operating equipment. the average residual term of its leases is between three and five years. DUE DATES OF LEASE PAYMENTS cHF million Due within one year Due after one to five years Due after five years or more Total Minimum lease payments contingent lease payments Leasing expenses income from sub-leases during the reporting period Future income from sub-leases 2017 2018 – 18.1 – 29.8 – 1.4 – 49.3 – 19.1 – – 19.1 0.5 0.7 – 18.3 – 33.2 – 3.5 – 55.1 – 19.5 0.0 – 19.5 0.5 0.5 contingent lease payments are made in cases where the lease is indexed. in connection with the introduction of iFRS 16 (for annual periods beginning on or after 1 January 2019), the leasing arrange- ments underwent an in-depth analysis and the internal accounting principles were updated. this also resulted in a new set of data in the system that was used to reassess the leases in the year under review and in the prior year. the prior-year figures have been restated accordingly. 43.2 The Baloise Group as a lessor the Baloise Group has entered into operating leasing arrangements in order to lease its investment property to third parties. there were no further leasing arrangements at the balance sheet date. DUE DATES OF CONTRACTUALLY STIPULATED LEASING INCOME cHF million Due within one year Due after one to five years Due after five years or more Total Minimum lease payments contingent lease payments Leasing income 262 2017 2018 49.3 119.5 200.7 369.6 50.5 0.1 50.5 48.0 121.2 187.9 357.1 60.3 0.1 60.4 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 44. CLAIM PAYMENTS RECEIVED FROM NON-GROUP INSURERS the companies in the Baloise Group received claim payments totalling cHF 0.0 million in 2018 (2017: cHF 0.1 million) from non-Group insurers in connection with insurance contracts under which the Baloise Group companies are themselves policyholders. Most of these claim payments were made for damage to buildings in Switzerland where, depending on the building’s location, mandatory insurance cover is provided by government agencies. 263 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 45. SIGNIFICANT SUBSIDIARIES, JOINT VENTURES AND ASSOCIATES entities are defined as significant if they either individually or together contribute a significant proportion of the gross premiums, net income or total assets of the Baloise Group. other long-term equity investments may be included for qualitative reasons, e. g. they are listed on a stock exchange. Group’s share of voting rights / capital (per cent) 2 Direct share of voting rights / capital (per cent) 2 Primary activity Operating segment 1 Method of consoli- dation 3 Currency Share capital (million) Total assets (million) Gross premiums / policy fees (million) F F F F F F F F F F F F F F F e F – – – – – – – cHF cHF cHF cHF cHF cHF cHF cHF 4.9 2,399.3 – 75.0 5,355.5 1,360.2 50.0 32,080.8 2,728.0 18.0 1.0 179.8 282.4 50.0 7,707.2 0.2 1.5 32.4 35.1 cHF 1.5 15.2 eUR 94.7 377.3 eUR 22.0 9,316.7 330.7 eUR 15.1 1,614.8 640.4 eUR eUR eUR eUR eUR 12.8 1.5 – – 0.5 235.0 7.3 7.3 – 18.0 – – 7.9 – – 31.12.2018 Switzerland Bâloise Holding ltd, Basel Baloise insurance ltd, Basel Baloise life ltd, Basel artires aG, Basel 4 Baloise Wohnbauten aG, Basel Baloise Bank SoBa aG, Solothurn Haakon aG, Basel Holding non-life life Holding other Banking other o nl l l l B o B Holding Holding 100.00 100.00 100.00 100.00 85.04 85.04 85.04 100.00 100.00 100.00 74.75 74.75 100.00 100.00 Baloise asset Management Schweiz aG, Basel investment manage- ment Baloise asset Management international aG, Basel investment B 100.00 100.00 consulting Germany Basler Versicherung Beteiligungen B. V. & co KG, Hamburg Basler lebensversicherungs- aktiengesellschaft, Hamburg Basler Sachversicherungs- aktiengesellschaft, Bad Homburg Basler Beteiligungsholding GmbH, Hamburg Basler Financial Services GmbH, Hamburg Deutsche niederlassung der FRiDaY insurance S.a., Berlin oVB Holding aG, cologne ZeUS Vermittlungsgesellschaft mbH, Hamburg Holding life o l 100.00 100.00 100.00 100.00 non-life nl 100.00 100.00 Holding other non-life other other o o 100.00 100.00 100.00 100.00 nl 100.00 100.00 – o 32.57 32.57 100.00 100.00 1 l: life, nl: non-life, B: Banking, o: other activities / Group business. 2 Shares stated as a percentage are rounded down. 3 F: Full consolidation, e: equity-accounted investment. 4 former pax anlage aG, Basel 264 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 31.12.2018 Belgium Baloise Belgium nV, antwerp euromex nV, antwerp Merno-immo nV, antwerp Luxembourg Bâloise (luxembourg) Holding S.a., Bertrange (luxembourg) Bâloise assurances luxembourg S.a., Bertrange (luxembourg) Bâloise Vie luxembourg S.a., Bertrange (luxembourg) Baloise Fund invest advico, Bertrange (luxembourg) Bâloise Delta Holding S.à.r.l., Bertrange (luxembourg) Baloise private equity (luxembourg) ScS, luxembourg Baloise alternative invest S.a. SicaV-RaiF, luxembourg Other territories Bâloise participations Holding B. V., amsterdam Baloise life (liechtenstein) aG, Balzers Baloise alternative investment Strategies limited, St. Helier (Jersey / channel islands) Group’s share of voting rights / capital (per cent)2 Direct share of voting rights / capital (per cent)2 Primary activity Operating segment1 life and non-life non-life other l / nl 100.00 100.00 nl nl 100.00 100.00 100.00 100.00 Holding o 100.00 100.00 non-life nl 100.00 100.00 life other Holding l B o 100.00 100.00 100.00 100.00 100.00 100.00 investment l / nl 100.00 100.00 manage- ment investment l / nl / o 100.00 100.00 manage- ment Holding life o l 100.00 100.00 100.00 100.00 investment l / nl 100.00 100.00 manage- ment 1 l: life, nl: non-life, B: Banking, o: other activities / Group business. 2 Shares stated as a percentage are rounded down. 3 F: Full consolidation, e: equity-accounted investment. Method of consoli- dation3 Currency Share capital (million) Total assets (million) Gross premiums / policy fees (million) F F F F F F F F F F F F F eUR 215.2 9,143.6 1,032.2 eUR eUR 2.7 17.1 193.8 27.3 cHF 250.0 1,240.2 67.2 – – eUR 15.8 325.5 116.4 eUR 32.7 7,683.5 68.9 eUR 0.1 14.4 eUR 224.3 274.7 USD 0.0 642.7 USD – 1,580.4 eUR 10.9 0.9 cHF USD 7.5 0.0 2,926.3 397.9 – – – – – 0.9 – 265 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements 46. CHANGES TO SHAREHOLDINGS in 2018, there had been no transactions resulting in a change of control over a subsidiary. 47. STRUCTURED ENTITIES 47.1 Consolidated structured entities the Baloise Group held one consolidated structured entity – Baloise Fund invest (lux) – at the end of the reporting year. Baloise Fund invest (lux) is a luxembourg-based firm in the legal form of an investment company with variable capital (SicaV managed by a third party). Baloise Fund invest (lux) is an umbrella fund consisting of various pools of assets and liabilities (or “sub-funds”), with each sub-fund pursuing its own investment policy. Baloise Fund invest (lux) and its sub-funds collectively constitute a legal entity. However, each sub-fund is deemed to be a separate entity as far as the legal relationship between unitholders is concerned. a sub-fund’s assets are liable to third parties only for the liabilities and obligations relating to this sub-fund. the prime objective of Baloise Fund invest (lux) is to enable unitholders to benefit from professional management strategies based on the principle of risk diversification in line with each sub-fund’s specified investment policy. the holding of units in Baloise Fund invest (lux) does not give rise to any contractual obligations. there are no arrangements that oblige the Baloise Group to provide financial support to the consolidated entity Baloise Fund invest (lux), and no voluntary financial or other support was provided during the reporting year. 47.2 Non-consolidated structured entities Baloise immobilien Management aG launched the Baloise Swiss property Fund (iSin cH 0414551033) for institutional investors on 1 october 2018. to this end, investment properties held by Baloise life ltd and Basler insurance ltd were transferred to the fund. the fund is managed by Baloise immobilien Management aG. Baloise Group subsidiaries are invested in the fund. the Baloise Group’s total exposure and its decision-making powers indicate that the requirements of iFRS 10 are not met, so the Baloise Swiss property Fund is not included in the basis of consolidation. 48. JOINT ARRANGEMENTS there were no joint arrangements in 2018 and in 2017. 49. EVENTS AFTER THE BALANCE SHEET DATE on 10 February 2019, voters accepted the amendment of legislation on direct taxation in the canton of Basel-Stadt (Basel compromise on tax proposal 17). the governing council of the canton of Basel-Stadt decided on 26 February 2019 that the rates of tax on profit and capital would be lowered with effect from 1 January 2019. the other parts of the proposal will come into force later on, potentially subject to the requirement that the federal proposal on tax reform and old-age and survivors’ insurance (StaF) is accepted on 19 May 2019. it is proposed that status companies be abolished and replacement measures be introduced. the lowering of the rates of tax on profit and capital will reduce the tax expense of the companies in the Baloise Group that are based in the canton of Basel-Stadt and currently do not benefit from a special tax status. Further amendments to tax legislation at canton level are expected over the course of 2019. 266 Baloise Group annual Report 2018 Financial Report notes to the consolidated annual financial statements this page has been left empty on purpose. 267 Baloise Group annual Report 2018 Financial Report Report of the statutory auditor Ernst & Young Ltd Aeschengraben 9 P.O. Box CH-4002 Basel Phone: Fax: www.ey.com/ch +41 58 286 86 86 +41 58 286 86 00 To the Annual General Meeting of Bâloise Holding Ltd, Basel Basel, 22 March 2019 Report of the statutory auditor on the consolidated financial statements Opinion We have audited the consolidated financial statements (pages 118 - 266) of Bâloise Holding Ltd and its subsidiaries (the “Group”), which comprise the consolidated balance sheet as at 31 December 2018, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated cash flow statement, the consolidated statement of changes in equity for the year then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. Basis for opinion We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the section Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements of our report. We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the section Auditor’s responsibilities for the audit of the consolidated financial statements of our report. Accordingly, our audit included procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the consolidated financial statements. 268   Baloise Group annual Report 2018 Financial Report Report of the statutory auditor Claims reserves - non-life Area of focus Claims reserves non-life include Management’s estimate of notified but not yet paid claims, reserves for incurred but not reported losses and the provision for claims handling costs. Our audit response Inappropriate valuation of the claims reserves non-life could result in a misstatement to the financial statements of the Group and its overall financial position. The valuation of claims reserves non-life involves a significant amount of Management’s judgement. The selection of methodology, underlying assumptions and input parameters may significantly affect the annual result and the Group’s equity position. Management discloses the valuation principles used in the recognition of the claims reserves in note 5.4 “Non-Life” and note 5.4.2 “Assumptions”. The impact of various scenarios is described in note 5.4.4 “Sensitivity analysis”. We also refer to notes 3.18 and 23.1 on pages 142 to 144 and 233 to 236 of the Group’s financial statements. As part of the audit of the significant portfolios, we involved our non-life insurance actuarial specialists to independently assess the methodology and the underlying assumptions used by Management. Our assessment of the claims reserves included an independent valuation and a comparison to the Group’s financial statements. We further assessed the operating effectiveness of selected key controls over the input parameters and the mathematical correctness of the actuarial calculations. In addition, we evaluated the required disclosures in the notes to the financial statements. Based on our audit procedures we did not identify exceptions with regard to the valuation and disclosure of claims reserves non-life. Technical reserves - life Area of focus Life insurance technical reserves consist of the actuarial reserves and the policyholders’ dividends credited and provisions for future policyholders’ dividends. The actuarial reserves are valued using actuarial methodologies and assumptions (such as biometric, economic and cost assumptions). Inappropriate valuation of the life insurance technical reserves could result in a misstatement to the financial statements of the Group and its overall financial position. The valuation of technical reserves for life insurance contracts involves a significant amount of Management’s judgement. The selection of methodology, underlying assumptions and input parameters may significantly affect the annual result and the Group’s equity position. Management discloses the valuation principles used in the recognition of technical reserves for life insurance contracts in note 5 “Management of insurance and financial risk” and note 5.5.2 “Assumptions”. The impact of various scenarios is described in note 5.4.4 “Sensitivity 269 Baloise Group annual Report 2018 Financial Report Report of the statutory auditor 270 analysis”. We also refer to notes 3.19 and 23.2 on pages 144 to 146 and 237 to 241 of the Group’s financial statements. Our audit response As part of the audit, we involved our life insurance actuarial specialists. On a sample basis, the actuaries assessed the methodology and underlying assumptions used by Management as well as the implementation of the technical reserves based on tariff assumptions. In addition, we assessed the technical reserves by reviewing Management’s Liability Adequacy Tests (LAT). We further tested the operating effectiveness of selected key controls over the input parameters and the mathematical correctness of the actuarial calculations. In addition, we evaluated the required disclosures in the notes to the financial statements. Based on our audit procedures we did not identify exceptions with regard to the valuation and disclosure of life insurance technical reserves. Valuation of investments without publically available market values Area of focus Certain investments (such as derivatives and investment properties) are valued using generally recognised methods without reference to any observable market data. Due to the complexity of those models and the significant judgement exercised by Management in determining the parameters of the models, any deficiencies or inaccurate input data could lead to a material misstatement within the Group’s financial statements. Management discloses the inherent risks related to the valuation of investments without publically available market prices in note 4 “Key accounting judgements, estimates and assumptions” and the valuation principles in note 5.10 “Fair value measurement”. We also refer to notes 3.7 and 12 on pages 134 to 136 and 209 to 213 of the Group’s financial statements. Our audit response We assessed and tested the design and the operating effectiveness of key controls related to the valuation of investment properties, including the controls over the review of the models and the model parameters. We engaged real estate valuation specialists to independently assess the valuation of selected investment property positions. For a sample of equity instruments and derivative financial instruments without publically available market prices, we identified the market data input used by the Group and tested it against independent data. For complex products, we engaged our internal valuation specialists to perform an independent calculation. In addition, we evaluated the required disclosure in the notes to the financial statements. Based on our audit procedures we did not identify exceptions with regard to the valuation and disclosure of investments without publically available market values. Baloise Group annual Report 2018 Financial Report Report of the statutory auditor Other information in the annual report The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements and our auditor’s reports thereon. Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work performed, we conclude that there is a material misstatement of the other information, we are required to report it. We have nothing to report in this regard. Responsibility of the Board of Directors for the consolidated financial statements The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law, ISAs and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users of these consolidated financial statements. A further description of our responsibilities for the audit of the consolidated financial statements is located on the website of EXPERTsuisse: http://www.expertsuisse.ch/en/audit- report-for-public-companies. The description forms part of our auditor’s report. 271 Baloise Group annual Report 2018 Financial Report Report of the statutory auditor Report on other legal and regulatory requirements In accordance with article 728a para. 1 item 3 CO and the Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. Ernst & Young Ltd Christian Fleig Licensed audit expert (Auditor in charge) Patrick Schwaller Licensed audit expert 272 Baloise Group annual Report 2018 Financial Report Report of the statutory auditor this page has been left empty on purpose. 273 Unterkapitel4 Baloise 16 Review of operating performance 38 Sustainable business management 64 corporate Governance 116 Financial Report 274 Bâloise Holding Ltd 292 General information Bâloise Holding Ltd income statement of Bâloise Holding ltd ......................... 276 Balance sheet of Bâloise Holding ltd .............................. 277 notes to the financial statements of Bâloise Holding ltd ... 278 appropriation of distributable profit as proposed by the Board of Directors ................................................ 287 Report of the statutory auditor to the annual General Meeting of Bâloise Holding ltd, Basel ..... 288 D t l G n i D l o H e S i o l â B Unterkapitel   Baloise Group annual Report 2018 Bâloise Holding ltd income statement of Bâloise Holding ltd Income statement of Bâloise Holding Ltd cHF million income from long-term equity investments income from interest and securities other income Total income administrative expenses Depreciation, amortisation and impairment interest expenses other expenses Total expenses Tax expense Profit for the period Note 2017 2018 2 3 4 5 406.8 33.8 6.9 447.5 – 46.6 – – 30.5 – 2.8 – 79.9 432.2 21.6 37.3 491.1 – 37.6 – 1.8 – 35.2 – 2.6 – 77.2 – 0.3 – 2.0 367.3 411.9 276 Baloise Group annual Report 2018 Bâloise Holding ltd Balance sheet of Bâloise Holding ltd Balance sheet of Bâloise Holding Ltd cHF million Assets cash and cash equivalents Receivables from Group companies Receivables from third parties Current assets Financial assets loans to Group companies long-term equity investments Non-current assets Total assets Equity and liabilities current liabilities liabilities to Group companies liabilities to third parties current interest-bearing liabilities to third parties Deferred income non-current liabilities long-term interest-bearing liabilities to Group companies long-term interest-bearing liabilities to third parties provisions Liabilities Share capital Statutory retained earnings General reserve Reserve for treasury shares Voluntary retained earnings Free reserves Distributable profit: – profit carried forward – profit for the period treasury shares Equity Total equity and liabilities Note 31.12.2017 31.12.2018 6 7 8 9 10 11 12 96.1 359.9 2.8 458.8 36.5 341.7 7.5 385.7 102.0 1,860.8 1,962.8 529.7 1,786.1 2,315.8 2,421.6 2,701.5 3.4 1.6 – 27.7 340.0 1,250.0 7.7 7.4 3.5 175.0 21.2 620.0 1,075.0 4.4 1,630.4 1,906.5 4.9 11.7 6.1 4.9 11.7 6.4 472.4 566.1 0.6 367.3 – 71.8 791.2 0.7 411.9 – 206.7 795.0 2,421.6 2,701.5 277 Baloise Group annual Report 2018 Bâloise Holding ltd notes to the financial statements of Bâloise Holding ltd Notes to the financial statements of Bâloise Holding Ltd 1. ACCOUNTING POLICIES General these annual financial statements of Bâloise Holding ltd domiciled in Basel have been prepared in accordance with the provisions of Swiss accounting law (title 32 of the Swiss code of obligations). the main policies applied which are not prescribed by law are described below. all amounts shown in these annual financial statements of Bâloise Holding ltd are stated in millions of Swiss francs (cHF million) and have been rounded to one decimal place. consequently, the sum total of amounts that have been rounded may in isolated cases differ from the rounded total shown in this report. Cash and cash equivalents cash and cash equivalents include bank deposits and cash equivalents such as call money, fixed-term deposits and money market instruments. they are recognised at their nominal amount. Receivables from Group companies this line item includes expenses relating to the new financial year that have been paid in advance and income from the reporting year that will not be received until a later date. it also comprises dividends approved by subsidiaries’ annual general meetings at the balance sheet date, which Bâloise Holding reports as dividends receivable. they are recognised at their nominal amount. Receivables from third parties Receivables are recognised at their nominal amount less any impairment losses. Loans to Group companies these loans are measured at their nominal amount less any impairment losses. Specific write-downs are recognised for all identifiable risks in accordance with the prudence principle. Long-term equity investments long-term equity investments are recognised individually at cost less any impairment losses. 278 Notes to the financial statements of Bâloise Holding Ltd Baloise Group annual Report 2018 Bâloise Holding ltd notes to the financial statements of Bâloise Holding ltd Liabilities liabilities are recognised at their nominal amount. Deferred income and accrued expenses this line item comprises income relating to the new financial year that has already been received, as well as expenses relating to the reporting year that will not be paid until a later date. Interest-bearing liabilities interest-bearing liabilities include bonds to third parties and interest-bearing liabilities to Group companies are recognised at their nominal amount. issuance costs – less any premiums – are charged in full to the income statement at the time the bonds are issued. the liabilities are categorised as current (less than twelve months) or non-current interest-bearing liabilities depending on their residual term. Provisions provisions to cover any risks that may arise are recognised in accordance with the principles of risk-based management and are charged to the income statement. Treasury shares treasury shares are recognised at cost on the date of acquisition as deductions from equity. if the shares are subsequently sold, any gains or losses are recognised in profit or loss as financial income or expense. 279 Baloise Group annual Report 2018 Bâloise Holding ltd notes to the financial statements of Bâloise Holding ltd NOTES TO THE INCOME STATEMENT 2. INCOME FROM INTEREST AND SECURITIES cHF million income from treasury shares interest on loans to Group companies Realized income treasury shares other income from interest and securities Total income from interest and securities 3. OTHER INCOME cHF million Write-up on long-term equity investment Sundry other income Total other income 2017 2018 6.7 3.7 23.4 – 33.8 4.5 17.1 – 0.0 21.6 2017 2018 – 6.9 6.9 30.0 7.3 37.3 in 2018, the investment in Baloise Bank SoBa aG, Solothurn, was written-up by cHF 30 million to its acquisition cost. 4. ADMINISTRATIVE EXPENSES cHF million personnel expenses1 other administrative expenses Total administrative expenses 1 Bâloise Holding ltd has no direct employees. all staff members are employed by Baloise insurance ltd, Basel. 5. INTEREST EXPENSES cHF million interest on bonds other interest expenses Total interest expenses 280 2017 2018 – 33.5 – 13.1 – 46.6 – 22.1 – 15.5 – 37.6 2017 2018 – 30.5 – – 30.5 – 28.7 – 6.5 – 35.2 Baloise Group annual Report 2018 Bâloise Holding ltd notes to the financial statements of Bâloise Holding ltd NOTES TO THE BALANCE SHEET 6. RECEIVABLES FROM GROUP COMPANIES cHF million Dividends other receivables Total receivables from Group companies 31.12.2017 31.12.2018 359.1 0.8 359.9 341.3 0.4 341.7 the annual general meeting of the following aGMs voted to recognise the dividends receivable for the 2018 financial year as accrued income: ▸ ▸ ▸ ▸ 27 February 2019: Haakon aG, Basel 18 March 2019: Baloise Bank SoBa aG, Solothurn 22 March 2019: Basler Versicherung aG, Basel and Basler leben aG, Basel 27 March 2019: Baloise asset Management Schweiz aG, Basel and Baloise asset Management international aG, Basel 7. LOANS TO GROUP COMPANIES cHF million Subordinated loans to Baloise Bank SoBa Subordinated loans to Bâloise (luxembourg) Holding S.a. loans to Bâloise (luxembourg) Holding S.a. loans to Basler Versicherung Beteiligungen B. V. & co. KG Total loans to Group companies 31.12.2017 31.12.2018 40.0 62.0 – – 102.0 40.0 162.0 283.7 44.0 529.7 281 Baloise Group annual Report 2018 Bâloise Holding ltd notes to the financial statements of Bâloise Holding ltd 8. LONG-TERM EQUITY INVESTMENTS Total shareholding as at 31.12.2017 (with voting rights) Total shareholding as at 31.12.2018 (with voting rights) Share capital as at 31.12.2018 Capital share (per cent) 1 (per cent) 1 Currency (million) (million) 100.00 100.00 100.00 100.00 100.00 100.00 74.75 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 74.75 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 cHF cHF cHF cHF cHF cHF cHF cHF eUR cHF eUR eUR eUR eUR cHF 75.0 50.0 50.0 1.5 1.5 1.0 0.2 7.5 <0.1 250.0 224.3 0.1 <0.1 <0.1 0.3 75.0 50.0 50.0 1.5 1.5 1.0 0.1 7.5 <0.1 250.0 224.3 0.1 <0.1 <0.1 0.3 Company Basler Versicherung aG, Basel Basler leben aG, Basel Baloise Bank SoBa aG, Solothurn Baloise asset Management Schweiz aG, Basel Baloise asset Management international aG, Basel Baloise immobilien Management aG, Basel Haakon aG, Basel Baloise life (liechtenstein) aG, Balzers Basler Saturn Management B. V., amsterdam Bâloise (luxembourg) Holding S.a., Bertrange (luxembourg) Bâloise Delta Holding S.à.r.l., Bertrange (luxembourg) Baloise Fund invest advico, Bertrange (luxembourg) Baloise alternative investments partner S.à.r.l., Bertrange (luxembourg) Baloise private equity partner S.à.r.l., Bertrange (luxembourg) Baloise Finance (Jersey) ltd, St. Helier (Jersey) 1 investments stated as a percentage are rounded down. 9. CURRENT INTEREST-BEARING LIABILITIES TO THIRD PARTIES 31.12.2018 Securities with security number Bond 14 829 501 Total current interest-bearing liabilities Interest rate Issued Maturity date Amount CHF million 2.250 % 01.03.2012 01.03.2019 175.0 175.0 282 Baloise Group annual Report 2018 Bâloise Holding ltd notes to the financial statements of Bâloise Holding ltd 10. LONG-TERM INTEREST-BEARING LIABILITIES TO THIRD PARTIES 31.12.2018 Securities with security number Bond 11 768 379 Bond 13 180 461 Bond 19 469 508 Bond 20 004 482 Bond 26 139 906 Total long-term interest-bearing liabilities 11. TREASURY SHARES Number of registered shares Balance as at 1 January 2017 purchases Sales Reduction of share capital Disposals in connection with share participation programmes Balance as at 31 December 2017 purchases Sales Disposals in connection with share participation programmes Balance as at 31 December 2018 Interest rate Issued Maturity date Amount CHF million 2.875 % 3.000 % 2.000 % 1.750 % 1.125 % 14.10.2010 14.10.2020 07.07.2011 07.07.2021 12.10.2012 12.10.2022 26.04.2013 26.04.2023 19.12.2014 19.12.2024 Low in CHF High in CHF Average share price (CHF) 135.86 126.79 158.89 131.25 149.88 129.27 136.40 159.80 147.89 300.0 250.0 150.0 225.0 150.0 1,075.0 Number 1,624,744 468,450 – 345,943 – 1,200,000 – 50,848 496,403 965,475 0 – 56,586 1,405,292 283 Baloise Group annual Report 2018 Bâloise Holding ltd notes to the financial statements of Bâloise Holding ltd 12. CHANGES IN EQUITY cHF million Balance as at 1 January 2017 allocation 2017 Dividend additions Reduction of share capital change in treasury shares Recognition / reversal profit for the period Balance as at 31 December 2017 allocation 2018 Dividend additions change in treasury shares Recognition / reversal profit for the period Share capital Statutory retained earnings Voluntary retained earnings Treasury shares Total equity General reserve Reserve for treasury shares Free reserves Distributable profit 11.7 2.3 5.0 – – – – 0.1 – – – 4.9 – – – – – – – – – – – – – 11.7 – – – – – – 573.8 29.0 – – – 126.6 – – 3.8 – 472.4 94.0 – – – – 0.3 – 566.1 289.6 – 29.0 – 260.0 – – – – 367.3 367.9 – 94.0 – 273.3 – – – 411.9 412.6 – 156.6 – – – 126.7 – 41.9 – – – 71.8 – – – 725.8 0.0 – 260.0 0.0 0.0 – 41.9 0.0 367.3 791.2 0.0 – 273.3 0.0 – 134.8 – 134.8 – – – 206.7 0.0 411.9 795.0 – – – – – 3.8 – 6.1 – – – – 0.3 – 6.4 Balance as at 31 December 2018 4.9 11.7 284 Baloise Group annual Report 2018 Bâloise Holding ltd notes to the financial statements of Bâloise Holding ltd 13. SIGNIFICANT SHAREHOLDERS the information available to the company reveals that the following significant shareholders and shareholder groups linked by voting rights held long-term equity investments in the company within the meaning of section 663c of the Swiss code of obligations (oR) as at 31 December 2018: per cent Shareholders chase nominees ltd. 1 BlackRock inc. UBS Fund Management aG lSV asset Management nortrust nominees ltd. 1 Bank of new York Mellon n. V. 1 credit Suisse Funds aG Total shareholding as at 31.12.2017 Share of voting rights as at 31.12.2017 Total shareholding as at 31.12.2018 Share of voting rights as at 31.12.2018 8.1 >5.0 3.3 >3.0 3.5 5.8 <3.0 2.0 <2.0 2.0 0.0 0.0 0.0 <2.0 10.5 >5.0 3.3 >3.0 3.4 4.3 3.0 2.0 <2.0 0.0 0.0 0.0 0.0 0.0 1 custodian nominees who hold shares in trust for third parties are counted as part of the free float under the SiX exchange regulations. Such shareholder groups are not subject to disclosure requirements under Swiss stock market legislation. 14. CONTINGENT LIABILITIES cHF million collateral, guarantee commitments 31.12.2017 31.12.2018 534.8 533.5 Bâloise Holding ltd has issued the following letter of comfort: as the owner of Baloise life (liechtenstein) aG, Bâloise Holding ltd, Basel, undertakes to ensure that its subsidiary Baloise life (liechtenstein) aG is at all times in a financial position to meet in full its liabilities to its customers arising from the contracts relating to its RentaSafe, BelRenta Safe, Rentaprotect and RentaSafe time products, especially its guarantee commitments. Since october 2012 this letter of comfort has also applied to customers with contracts relating to its Rentaprotect time and RentaSafe time (D-cHF). the maximum liability corresponds to the present value of the outstanding guaranteed insurance benefits as at 31 December 2018. as at the balance sheet date, the expected insurance benefits were fully backed by customer deposit accounts governed by individual agreements, the reinsurance contract and the collateral lodged with Baloise life (liechtenstein) aG by the reinsurer. By taking suitable corporate actions, Bâloise Holding ltd (BH) provides a guarantee to Basler Sachversicherungs- aktiengesellschaft, Bad Homburg (BSaG) that BSaG’s solvency ratio will not fall below a defined threshold. BSaG is obliged to notify BH without undue delay so that BH can initiate the necessary measures to enable BSaG’s solvency ratio to remain above the defined threshold. Bâloise Holding ltd guarantees all obligations of Baloise life ltd relating to the various tranches of the subordinated bonds, which had a total nominal value of cHF 500 million as at the balance sheet date. Bâloise Holding ltd is jointly and severally liable for the value-added tax (Vat) owed by all companies that form part of the tax group headed by Baloise insurance ltd. 285 Baloise Group annual Report 2018 Bâloise Holding ltd notes to the financial statements of Bâloise Holding ltd 15. REMUNERATION PAID TO THE BOARD OF DIRECTORS AND THE CORPORATE EXECUTIVE COMMITTEE the information to be disclosed in accordance with sections 663b (bis) and 663c of the Swiss code of obligations (oR) is contained in the Remuneration Report, which can be found on pages 88 to 113 in the part of corporate governance. the key information disclosed here includes ▸ ▸ ▸ ▸ remuneration paid to the members of the Board of Directors, remuneration paid to the members of the corporate executive committee, loans and credit facilities granted to members of the Board of Directors and the corporate executive committee, shares and options held by members of the Board of Directors and the corporate executive committee. 16. NET REVERSAL OF HIDDEN RESERVES in 2018, no hidden reserves were reversed. 17. EXEMPTIONS DUE TO PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS Because Bâloise Holding ltd has prepared consolidated financial statements in accordance with recognised financial reporting standards (iFRS), in accordance with statutory provisions (article 961d [1] of the Swiss code of obligations [oR]), it has dispensed with the notes on long-term interest-bearing liabilities and audit fees as well as the presentation of a cash flow statement or a management report in these annual financial statements. 18. EVENTS AFTER THE BALANCE SHEET DATE on 28 January 2019, Bâloise Holding ltd issued a bond totalling cHF 200 million as part of its refinancing of the bond maturing on 1 March 2019. 286 Baloise Group annual Report 2018 Bâloise Holding ltd proposel by the Board of Directors Appropriation of distributable profit as proposed by the Board of Directors DISTRIBUTABLE PROFIT AND APPROPRIATION OF PROFIT the profit for the period amounted to cHF 411,909,124.75. the Board of Directors will propose to the annual General Meeting that the company’s distributable profit be appropriated as shown in the table below. cHF profit for the period profit carried forward from the previous year Distributable profit proposals by the Board of Directors: Dividend allocated to free reserves Withdrawn from free reserves Profit to be carried forward 2017 2018 367,343,969.45 411,909,124.75 597,228.24 661,197.69 367,941,197.69 412,570,322.44 – 273,280,000.00 – 292,800,000.00 – 94,000,000.00 – 119,000,000.00 – – 661,197.69 770,322.44 the appropriation of profit is consistent with section 30 of the articles of incorporation. each share confers the right to receive a dividend of cHF 6.00 gross or cHF 3.90 net of withholding tax. 287 Baloise Group annual Report 2018 Bâloise Holding ltd Report of the statutory auditor Ernst & Young Ltd Aeschengraben 9 P.O. Box CH-4002 Basel Phone Fax www.ey.com/ch +41 58 286 86 86 +41 58 286 86 00 To the Annual General Meeting of Bâloise Holding Ltd, Basel Basel, 22 March 2019 Report of the statutory auditor on the financial statements As statutory auditor, we have audited the financial statements (pages 276 - 286) of Bâloise Holding Ltd, which comprise the balance sheet, income statement and notes, for the year ended 31 December 2018. Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the company’s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements for the year ended 31 December 2018 comply with Swiss law and the company’s articles of incorporation. Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each 288 Baloise Group annual Report 2018 Bâloise Holding ltd Report of the statutory auditor matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibility section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the financial statements. Valuation of long-term equity investments Area of focus Bâloise Holding Ltd accounts for long-term equity investments at cost less necessary impairments and valued on an individual basis. Management assesses whether there are any impairment losses in the carrying value of the long-term equity investments by comparing the carrying amount to the net asset value of the subsidiary or to a valuation of the subsidiary using a discounted cash flow analysis. The determination whether a long-term equity investment needs to be impaired involves management’s judgement. This includes assumptions about the profitability of the underlying business and growth. We consider this a key audit matter not only due to the judgement involved but also based on the magnitude of the carrying value of the long-term equity investments within the financial statements of Bâloise Holding Ltd. Bâloise Holding Ltd describes the valuation principles for long-term equity investments as part of the accounting policy note in the financial statements. In relation to the key audit matter set out above, we assessed the appropriateness of the company’s impairment testing methodology. We reperformed management’s impairment test on the carrying value of each investment, including the assessment of management’s assumptions and challenged the impairment decisions taken. We have audited the required disclosures in the notes to the financial statements as at 31 December 2018. Based on our audit procedures we did not identify exceptions with regard to the valuation of long-term equity investments. Our audit response 289 Baloise Group annual Report 2018 Bâloise Holding ltd Report of the statutory auditor Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a para. 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. Ernst & Young Ltd Christian Fleig Licensed audit expert (Auditor in charge) Patrick Schwaller Licensed audit expert 290 Baloise Group annual Report 2018 Bâloise Holding ltd Report of the statutory auditor this page has been left empty on purpose. 291 Unterkapitel4 Baloise 16 Review of operating performance 38 Sustainable business management 64 corporate Governance 116 Financial Report 274 Bâloise Holding ltd 292 General information General information GLOSSARY ................................................................ 294 ADDRESSES .............................................................. 298 INFORMATION ON THE BALOISE GROUP .................... 299 FINANCIAL CALENDAR AND CONTACTS ...................... 300 Unterkapitel ▸ ▸ ▸ ▸ ▸ ▸ claims ratio the total cost of claims settled as a percentage of total premiums. claims reserve a reserve for claims that have not been settled by the end of the year. combined ratio a non-life insurance ratio that is defined as the sum of the cost of claims settled (claims ratio), total expenses (expense ratio) and profit sharing (profit-sharing ratio) as a percentage of total premiums. this ratio is used to gauge the profitability of non-life insurance business. Deferred taxes probable future tax expenses and tax benefits arising from temporary differences between the carrying amounts of assets and liabilities recognised in the consolidated finan- cial statements and the corresponding amounts reported for tax purposes. the pertinent calculations are based on country-specific tax rates. embedded value the market-consistent embedded value (MceV) measures the value of a life insurance portfolio for shareholders at the balance sheet date. expense ratio non-life insurance business expenses as a percentage of total premiums. Baloise Group annual Report 2018 General information Glossary Glossary actuarial reserves actuarial reserves are the reserves set aside to cover current life insurance policies. annual premium equivalent the annual premium equivalent (ape) is the insurance industry standard for measuring the volume of new life insurance business. it is calculated as the sum of the annual premiums earned from new business plus 10 per cent of the single premiums received during the reporting period. Baloise “Baloise” stands for “the Baloise Group”, and “Bâloise Holding” means “Bâloise Holding ltd”. Baloise shares are the shares of Bâloise Holding ltd. Broker insurance brokers are independent intermediaries. these are firms or individuals who are not restricted to any par- ticular insurance companies when selling insurance prod- ucts. they are paid commission for the insurance policies that they sell. Business volume the total volume of business comprises the premium income earned from non-life and life insurance and from invest- ment-linked life insurance policies during the reporting period. the accounting principles used by the Baloise Group do not allow premium income earned from investment-linked life insurance to be reported as revenue in the consolidated financial statements. claims incurred claims incurred comprise the amounts paid out for claims during the financial year, the reserves set aside to cover unsettled claims, the reversal of reserves for claims that no longer have to be settled or do not have to be paid in full, the costs incurred by the processing of claims, and changes in related reserves. ▸ ▸ ▸ ▸ ▸ ▸ 294 Baloise Group annual Report 2018 General information Glossary ▸ ▸ ▸ ▸ ▸ ▸ ▸ Fixed-income securities Securities (primarily bonds) that yield a fixed rate of interest throughout their term to maturity. Gross the gross figures shown on the balance sheet or income statement in an insurance company’s annual report are stated before deduction of reinsurance. Group life business insurance policies taken out by companies or their employee benefit units for the occupational pension plans of their entire workforce. impairment an asset write-down that is recognised in profit or loss. an impairment test is carried out to ascertain whether an asset’s carrying amount is higher than its recoverable amount. if this is the case, the asset is written down to its recoverable amount and a corresponding impairment loss is recognised in the income statement. insurance benefit the benefits provided by the insurer in connection with the occurrence of an insured event. international Financial Reporting Standards Since 2000 the Baloise Group has been preparing its con- solidated financial statements in compliance with inter- national Financial Reporting Standards (iFRS), which were previously called international accounting Standards (iaS). investments investments comprise investment property, equities and alternative financial assets (financial instruments with characteristics of equity), fixed-income securities (financial instruments with characteristics of liabilities), mortgage assets, policy loans and other loans, derivatives, and cash and cash equivalents. precious metals in connection with investment-linked insurance are reported as “other assets.” ▸ ▸ ▸ investment-linked life insurance life insurance policies under which policyholders invest their savings for their own account and at their own risk. investment-linked premium premium income from life insurance policies under which the insurance company invests the policyholder’s savings for the latter’s own account and at his or her own risk. the international Financial Reporting Standards applied by the Baloise Group do not allow the savings component of this premium income to be recognised as revenue on the income statement. legal quota a legally or contractually binding percentage requiring life insurance companies to pass on a certain share of their profits to their policyholders. ▸ Minimum interest rate the minimum guaranteed interest rate paid to savers under occupational pension plans. ▸ ▸ ▸ net the net figures shown on the balance sheet or income statement in an insurance company’s annual report are stated after deduction of reinsurance. new business margin the value of new business divided by the annual premium equivalent (ape). operating segments Similar or related business activities are grouped together in operating segments. the Baloise Group’s operating segments are non-life, life, Banking (which includes asset management), and other activities. the “other activities” operating segment includes equity investment companies, real estate firms and financing companies. 295 Baloise Group annual Report 2018 General information Glossary performance of investments performance in this context is defined as the rates of return that Baloise generates from its investments. it constitutes the gains, losses, income and expenses recognised in the income statement plus changes in unrealised gains and losses as a percentage of the average portfolio of invest- ments held. periodic premium periodically recurring premium income (see definition of “premium”). policyholder’s dividend an annual, non-guaranteed benefit paid to life insurance policyholders if the revenue generated by their policies is higher and / or the risks and costs associated with their policies are lower than the assumptions on which the cal- culation of their premiums was based. premium the amount paid by the policyholder to cover the cost of insurance. premium earned the proportion of the policy premium available to cover the risk insured during the financial year, i. e. the premium minus changes in unearned premium reserves. profit after taxes profit after taxes is the consolidated net result of all income and expenses, minus all borrowing costs as well as current and deferred income taxes. profit after taxes includes non-controlling interests. profit-sharing ratio total profit sharing as a percentage of total premiums; profit sharing is defined as the reimbursement of amounts to non-life policyholders to reflect the profitability of insurance policies. ▸ ▸ ▸ ▸ ▸ ▸ Reinsurance if an insurance company itself does not wish to bear the full risk arising from an insurance policy or an entire portfolio of policies, it passes on part of the risk to a reinsurance company or another direct insurer. However, the primary insurer still has to indemnify the policyholder for the full risk in all cases. Reserves a measurement of future insurance benefit obligations arising from known and unknown claims that are reported as liabilities on the balance sheet. Return on equity a calculation of the percentage return earned on a company’s equity capital during a financial year; it represents the profit generated in a given financial year divided by the company’s average equity during that period. Risk scoring Risk scoring uses analytical statistical methods to derive risk assessments from collected data based on empirical values. insurance companies use this kind of scoring to ensure that the premiums they charge reflect the risks involved. Run-off business an insurance policy portfolio that has ceased to accept new policies and whose existing policies are gradually expiring. Segment Financial reporting in the Baloise Group is carried out in accordance with international Financial Reporting Standards (iFRSs), which require similar transactions and business activities to be grouped and presented together. these aggregated operating activities are presented in “segments”, broken down by geographic region and business line. ▸ ▸ ▸ ▸ ▸ ▸ ▸ 296 Baloise Group annual Report 2018 General information Glossary ▸ ▸ ▸ ▸ ▸ ▸ ▸ Share buy-back programme procedure approved by the Board of Directors under which Baloise can repurchase its own outstanding shares. com- panies in Switzerland open a separate trading line in order to carry out such buy-backs. Shares issued the total number of shares that a company has issued; multiplying the total number of shares in issue by their face value gives the company’s nominal share capital. Single premium Single premiums are used to finance life insurance policies at their inception in the form of a one-off payment. they are mainly used to fund wealth-building life insurance policies, with the prime focus on investment returns and safety. Swiss leader index the Swiss leader index (Sli) comprises the 30 largest and most liquid equities on the Swiss stock market. Solvency Minimum capital requirements that the regulatory author- ities impose on insurance companies in order to cover their business risks (investments and claims). these requirements are usually specified at a national level and may vary from country to country. technical reserve insurers disclose on their balance sheets the value of the benefits that they expect to have to provide in future under their existing insurance contracts. this value is calculated from a current perspective in accordance with generally accepted principles. technical result Baloise calculates its technical result by netting all income and expenses arising from its insurance business. its tech- nical result does not include income and expenses unrelated to its insurance business or the net gains or losses on its investments. ▸ ▸ ▸ Unearned premium reserves Deferred income arising from premiums that have already been paid for periods after the balance sheet date. Unrealised gains and losses (recognised directly in equity) Unrealised gains and losses are increases or decreases in value that are not recognised in profit or loss and arise from the measurement of assets. they are recognised directly in equity after deduction of deferred policyholders’ divi- dends (life insurance) and deferred taxes. these gains or losses are only taken to income if the underlying asset is sold or if impairment losses are recognised. Value of new business the value added by new business transacted during the reporting period; this figure is measured at the time the policy is issued. 297 Baloise Group annual Report 2018 General information addresses Addresses SWITZERLAND Basler Versicherungen aeschengraben 21 postfach cH-4002 Basel tel. + 41 58 285 85 85 Fax + 41 58 285 70 70 kundenservice@baloise.ch www.baloise.ch Baloise Bank SoBa amthausplatz 4 cH-4502 Solothurn tel. + 41 58 285 33 33 Fax + 41 58 285 03 33 bank@baloise.ch www.baloise.ch Baloise Asset Management aeschengraben 21 postfach cH-4002 Basel tel. + 41 58 285 72 99 assetmanagement@baloise.com www.baloise-asset-management.com MOVU okenstrasse 6 cH-8037 Zürich tel. + 41 44 505 14 14 captain@movu.ch www.movu.ch 298 GERMANY Basler Versicherungen Basler Strasse 4 postfach 1145 D-61345 Bad Homburg tel. + 49 61 72 130 Fax + 49 61 72 13 200 info@basler.de www.basler.de FRI:DAY Klosterstrasse 62 D-10179 Berlin tel. + 49 30 959 983 200 info@friday.de www.friday.de LUXEMBOURG Bâloise Assurances 23, rue du puits Romain Bourmicht l-8070 Bertrange tel. + 352 290 190 1 Fax + 352 290 190 9001 info@baloise.lu www.baloise.lu BELGIUM Baloise Insurance posthofbrug 16 B-2600 antwerp tel. + 32 3 247 21 11 Fax + 32 3 247 27 77 info@baloise.be www.baloise.be MOBLY posthofbrug 6 – 8 Box 5 / 102 B-2600 antwerp tel. + 32 491 19 18 49 info@mobly.be www.mobly.be Baloise Group annual Report 2018 General information information on the Baloise Group Information on the Baloise Group the 2018 annual Report is published in German and english. the German version is authoritative in the event of any discrep- ancy. the Financial Report contains the audited 2018 annual financial statements together with detailed information. the annual report contains all of the elements that, in accordance with section 961c of the Swiss code of obligations, make up the management report. AVAILABILITY AND ORDERING the 2018 annual Report and the Summary of the 2018 annual Report will be available from 28 March 2019 on the internet at: www.baloise.com/annualreport corporate publications can be ordered either on the internet or by post from the Baloise Group, corporate communications, aeschengraben 21, 4002 Basel, Switzerland. www.baloise.com/order INFORMATION FOR SHAREHOLDERS AND FINANCIAL ANALYSTS Detailed information and data on Baloise shares, the iR agenda, the latest presentations and how to contact the investor Relations team can be found on the internet at www.baloise.com/investors. this information is available in German and english. INFORMATION FOR MEMBERS OF THE MEDIA You will find the latest media releases, presentations, reports, images and podcasts of various Baloise events as well as media contact details at www.baloise.com/media. CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS this publication is intended to provide an overview of Baloise’s operating performance. it contains forward-looking statements that include forecasts of future events, plans, goals, business developments and results and are based on Baloise’s current expectations and assumptions. these forward-looking state- ments should be noted with due caution because they inherently contain both known and unknown risks, are subject to uncer- tainty and may be adversely affected by other factors. conse- quently, business performance, results, plans and goals could differ substantially from those presented explicitly or implicitly in these forward-looking statements. among the influencing factors are (i) hanges in the overall state of the economy, especially in key markets; (ii) financial market performance; (iii) competitive factors; (iv) changes in interest rates; (v) exchange rate movements; (vi) changes in the statutory and regulatory framework, including accounting standards; (vii) frequency and magnitude of claims as well as trends in claims history; (viii) mortality and morbidity rates; (ix) renewal and expiry of insur- ance policies; (x) legal disputes and administrative proceedings; (xi) departure of key employees; and (xii) negative publicity and media reports. Baloise accepts no obligation to update or revise these forward-looking statements or to allow for new information, future events, etc. past performance is not indicative of future results. © 2019 Bâloise Holding ltd, 4002 Basel, Switzerland Publisher Bâloise Holding ltd corporate communications & investor Relations Concept, design neidhartSchön aG, Zurich Photography Dominik plüss, Basel Publishing mms solutions ag, Zurich English translation lingServe ltd (UK) 299 Baloise Group annual Report 2018 General information Financial calendar and contacts Financial calendar and contacts Corporate Governance philipp Jermann aeschengraben 21 4002 Basel, Switzerland tel. + 41 58 285 89 42 philipp.jermann@baloise.com Investor Relations Markus Holtz aeschengraben 21 4002 Basel, Switzerland tel. + 41 58 285 81 81 investor.relations@baloise.com Corporate Communications Dominik Marbet aeschengraben 21 4002 Basel, Switzerland tel. + 41 58 285 84 67 media.relations@baloise.com 7 MARCH 2019 Annual financial results Media conference conference call for analysts 28 MARCH 2019 Annual Report publication of the annual Report 2018 26 APRIL 2019 Annual General Meeting Bâloise Holding ltd 28 AUGUST 2019 Half-year financial results conference call for analysts and the media 13 NOVEMBER 2019 Q3 interim statement 12 MARCH 2020 Annual financial results Media conference conference call for analysts 26 MARCH 2020 Annual Report publication of the annual Report 2019 24 APRIL 2020 Annual General Meeting Bâloise Holding ltd www.baloise.com 300 Bâloise Holding Ltd aeschengraben 21 cH-4002 Basel, Switzerland www.baloise.com 

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