the right customers…
”
Financial Report 2005
contents
Consolidated Annual Financial Statements of the Baloise Group
Consolidated balance sheet
4Consolidated income statement
6Consolidated statement of cash flow
8Consolidated statement of changes in equity
10Notes to the consolidated annual financial statements
12General remarks 12
1. accounting basis 12
2. application of new accounting standards 12 3. consolidation and accounting principles 14 4. critical accounting principles and measurement uncertainties 25 5. Management of insurance and financial risks 25 6. information on regions and business segments 37
Notes to the consolidated balance sheet 42
7. property, plant and equipment 42
8. intangible assets 43
9. investments in associated companies 44
10. investment properties 45
11. Financial assets 45
12. Mortgages and loans 46
13. Derivative financial instruments 47
14. Receivables and assets from reinsurance 48 15. Receivables from the insurance business 48
16. employee benefits 49
17. Deferred income taxes 52
18. non-current assets held for sale and discontinued operations 53
19. Share capital 53
20. change in unrealized gains and losses in shareholders’ equity 54
21. actuarial provisions (gross) 54
22. liabilities from the banking business and financial contracts 60 23. Reconciliation of minimum lease payments to their present values for finance leases 60
24. Financial liabilities 61
25. Financial provisions 61
26. liabilities from the insurance business 62
90 Bâloise-Holding Financial Report 2005
Bâloise-Holding Financial Report 2005
Notes to the consolidated income statement 62
27. premiums earned and policy fees 62
28. income from capital investments 62
29. Realized gains and losses on capital investments 63
30. income from services 65
31. other operating income 65
32. overview of expense types 65
33. number of employees 65
34. expenses from financial contracts 66
35. Borrowing costs 66
36. earnings per share 67
37. income taxes 67
Other disclosures 68
38. Business acquisitions 68
39. Business disposals 69
40. transactions with related companies and individuals 70 41. proportionately consolidated companies 71 42. contingent liabilities and future liabilities 71
43. operating leases 73
44. events after the balance sheet date 73 45. Significant subsidiaries, joint ventures and associated companies as of
December 31, 2005 74
External auditor’s report 76
Annual financial statements of Bâloise-Holding
income statements 79
Balance sheet 80
notes 81
proposed allocation of retained earnings 83
Report of the statutory auditors 84
Bâloise-Holding Financial Report 2005
7 647.5 626.3 8 1,223.1 1,162.4 9 152.6 174.7 10 5,619.2 5,581.7 11 5,573.7 7,537.8 1,183.7 2,301.2 11 8,390.5 8,037.0 14,373.3 14,411.1 445.0 467.0 12 16,995.5 17,635.5 13 264.9 48.6 14 690.6 740.1 15 552.0 593.8 16 33.3 36.9 363.9 451.5 657.8 623.0 17 999.7 1,022.2 55.5 61.4 163.8 145.6 698.0 450.2 59,08.6 6,08.0
consolidated balance sheet
Assets
note
12.31.2004
(restated) ..005
property, plant and equipment intangible assets
investments in associated companies investment properties
Financial assets of an equity nature available-for-sale
Recognized in income at fair value Financial assets of a debt nature
Held-to-maturity available-for-sale
Recognized in income at fair value Mortgages and loans
Derivative financial instruments Receivables and assets from reinsurance Receivables from the insurance business Receivables from employee benefits other receivables
accrued investment income Deferred tax assets current income tax assets other assets
cash and cash equivalents Total assets
in cHF million
Bâloise-Holding Financial Report 2005 5
19 5.5 5.5 125.6 105.4 –79.5 –43.8 20 140.9 664.5 3,241.4 3,598.8 ,.9 ,0. 63.9 60.9 ,97.8 ,9. 21 42,825.8 44,721.1 22 272.0 326.3 4,363.2 4,628.9 858.7 1,107.3 24 1,585.9 1,084.1 25 117.9 104.5 13 160.3 243.4 26 1,710.6 1,648.4 16 1,371.4 1,418.4 485.0 562.8 17 1,710.1 1,724.6 124.9 146.9 55,585.8 57,76.7 59,08.6 6,08.0
Liabilities & Equity
Equity note 12.31.2004 (restated) ..005 Share capital equity reserves treasury stock
Unrealized gains and losses (net) profit reserves
Equity before minority interests Minority interests
Total equity
Liabilities
actuarial provisions (gross)
liabilities from the banking business and financial contracts With discretionary participation feature (DpF)
Measured at amortized cost Recognized in income at fair value Financial liabilities
Financial provisions
Derivative financial instruments liabilities from the insurance business liabilities from employee benefits other liabilities and deferrals Deferred tax liabilities
liabilities from current income taxes Total liabilities
Total equity and liabilities
in cHF million
Bâloise-Holding Financial Report 2005 5
27 6,936.0 6,835.1 27 –211.2 –197.3 27 6,724.8 6,637.8 28 1,862.1 1,794.5 29 265.2 549.4 30 312.2 211.9 9 3.7 35.5 31 137.1 74.3 9,05. 9,0. –5,418.4 –5,772.1 –1,251.4 –1,094.6 51.6 189.7 32 –475.3 –524.8 32 –806.4 –815.1 32 –75.9 –88.1 –90.1 –78.5 34 –248.9 –130.0 32 –612.9 –460.6 –8,97.7 –8,77. 35 –52.6 –53.4 .8 75.9 37 –101.5 –72.4 . 0.5 210.0 395.8 13.3 7.7 36 3.89 7.29 3.89 7.29
consolidated income statement
note
2004
(restated) 005
premiums earned and policy fees (gross) Reinsurance premiums ceded
premiums earned and policy fees for own account income from capital investments
Realized gains and losses on capital investments income from services
net income from associated companies other operating income
Income
claims and benefits paid (gross) change in actuarial provisions (gross) Share of reinsurance in claims incurred acquisition costs
operating and administrative expenses for insurance business expense for management of capital investments
interest expense on the insurance business expense from financial contracts
other operating expenses Expense
Borrowing costs Pre-tax annual profit income taxes
Consolidated annual profit allocated to:
Shareholders Minority interests
in cHF million
earnings per share Diluted Basic
in cHF
6 Bâloise-Holding Financial Report 2005 7
6 Bâloise-Holding Financial Report 2005 7
324.8 475.9 7/8 72.4 100.5 –4.2 2.0 –181.2 –568.2 545.3 672.8 8.8 0.2 52.6 53.4 –17.8 24.2 49.4 42.7 –49.8 59.3 –1,093.5 –713.0 –1,550.7 434.5 1,197.0 –577.7 1.6 –121.0 127.4 912.2 358.3 –217.4 –59.6 580. –60.2 –92.7 –9.8 87.7 7 –45.3 –84.0 7 27.2 40.2 8 –50.9 –84.4 8 –6.1 9.0 38 –/– –60.8 39 51.9 2.3 9 –19.2 –19.0 9 106.6 42.5 9 9.2 2.6 7. –5.6
consolidated statement of cash flow
note2004 005
Cash flow from operating activities pre-tax annual profit
Adjustments for
Valuation allowances and amortization/depreciation on intangible assets and property, plant and equipment
income from investments in associated companies
Realized gains and losses on financial instruments, investment properties, and associated companies
changes in actuarial provisions (gross) interest income on assets from reinsurance
Borrowing costs paid 35
currency exchange gains and losses
amortized cost measurement of financial instruments Additions and disposals of cash-effective assets and liabilities purchase/sale of investment properties
purchase/sale of financial instruments of an equity nature purchase/sale of financial instruments of a debt nature addition/disposal of mortgages and loans
addition/disposal of derivative financial instruments addition/disposal of financial contracts and liabilities from the banking business
other changes in assets and liabilities from operating activities Cash flow from operating activities (gross)
taxes paid
Cash flow from operating activities (net) 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 associated companies Sale of investments in associated companies Dividends from associated companies Cash flow from investing activities (net)
8 Bâloise-Holding Financial Report 2005 9
19 –/– –/– 19 –/– –/– 252.8 106.6 –/– –608.4 –52.6 –53.4 –13.2 15.5 –33.2 –60.8 5.8 –600.5 7. –6. 695.9 698.0 7.4 –264.4 –5.3 16.6 698.0 50. 0.1 0.0 1,136.4 1,107.5 51.6 76.9 203.6 179.3 note 2004 (restated) 005 Cash flow from financing activities
capital increases capital reductions
addition to financial liabilities Disposal of financial liabilities Borrowing costs paid cash flow from treasury stock Dividend payments
Cash flow from financing activities (net) Total cash flow
Cash and cash equivalents Balance as of January 01 change during the fiscal year
changes in exchange rates on cash and cash equivalents Balance as of December
of which: cash equivalents
Supplemental disclosures on cash flow from operating activities other interest received
Dividends received interest paid
in cHF million
8 Bâloise-Holding Financial Report 2005 9
5.5 90. –9.7 6. ,.6 ,9.8 0.7 ,60.5 –32.2 20.1 –12.1 –12.1 86.2 –90.5 –4.3 –4.3 40.8 –28.6 14.5 22.4 49.1 49.1 5.5 . –78. 9.6 ,06.6 ,5.5 0.7 ,9. 20 172.3 172.3 172.3 20 –9.6 –9.6 –9.6 20 –9.3 –9.3 –9.3 20 98.8 98.8 98.8 20 –13.6 –13.6 –13.6 20 –/– –/– –/– 20 –97.6 –97.6 –0.3 –97.9 20 –179.8 –179.8 –179.8 20 –45.2 –45.2 –45.2 20 –4.7 –4.7 –4.7 –/– –/– –/– –88.7 –/– –88.7 –0. –89.0 210.0 210.0 13.3 223.3 –/– –/– –/– –88.7 0.0 . .0 . –33.2 –33.2 –8.8 –42.0 19 –/– –/– –5.5 –1.2 –6.7 –6.7 –/– 19.0 19.0 5.5 5.6 –79.5 0.9 ,. ,.9 6.9 ,97.8
consolidated statement of changes in equity
note Share capital
equity reserves treasury stock Unrealized gains and losses (net) profit reserves Equity before minority interests Minority interests Total equity Balance as of January 0, 00 (before restatement)
Restatements: iFRS 4
iaS 39/iaS 32 revised other
Balance as of January 0, 00 (after restatement) change in unrealized gains
and losses on available-for-sale financial instruments
change in unrealized gains and losses from associated companies
change in hedging reserve on derivative financial instruments held for cash flow hedging
change in hedging reserve on derivative financial instruments as hedge of net investment in a foreign company
change in reserves from reclassification of held-to-maturity financial instruments change in reserves from reclassification of investment properties
currency translation adjustments Less change:
in policyholder bonuses in shadow accounting
(Dac, URR, terminal policyholder bonuses) in deferred taxes
Total effects on equity not recognized in the income statement
annual profit
Total effects on equity recognized and not recognized in the income statement Dividends
capital increase/repayment purchase / sale of treasury stock
increase / decrease in minority interests due to change in the reporting entity structure
Balance as of December , 00 (after restatement)
in cHF million
0 Bâloise-Holding Financial Report 2005
5.5 77.6 –50. 8.5 ,0. ,8.5 6.5 ,56.0 –25.0 7.2 –17.8 –17.8 2.3 –90.3 –88.0 –88.0 48.0 –29.3 15.1 23.4 57.2 0.4 57.6 5.5 5.6 –79.5 0.9 ,. ,.9 6.9 ,97.8 8 22.4 22.4 22.4 5.5 5.6 –79.5 0.9 ,6.8 ,56. 6.9 ,50. 20 810.1 810.1 0.0 810.1 20 27.0 27.0 27.0 20 –0.9 –0.9 –0.9 20 –240.0 –240.0 –240.0 20 19.5 19.5 19.5 20 –/– –/– –/– 20 300.2 300.2 –0.4 299.8 20 –242.0 –242.0 –242.0 20 –118.1 –118.1 –118.1 20 –32.2 –32.2 –32.2 –/– –/– –/– 5.6 –/– 5.6 –0. 5. 395.8 395.8 7.7 403.5 –/– –/– –/– 5.6 95.8 99. 7. 96.7 –60.8 –60.8 –9.6 –70.4 19 –/– –/– –20.2 35.7 15.5 15.5 –/– –0.7 –0.7 5.5 05. –.8 66.5 ,598.8 ,0. 60.9 ,9.
note Share capital
equity reserves treasury stock Unrealized gains and losses (net) profit reserves Equity before minority interests Minority interests Total equity Balance as of January 0, 005 (before restatement)
Restatements: iFRS 4
iaS 39/iaS 32 revised other
Balance as of January 0, 005 (after restatement) Disolution of negative goodwill (iFRS 3)
Balance as of January 0, 005 (after restatement IFRS ) change in unrealized gains and losses
on available-for-sale financial instruments
change in unrealized gains and losses from associated companies
change in hedging reserve on derivative financial instruments held for cash flow hedging
change in hedging reserve on derivative financial instruments as hedge of net investment in a foreign company
change in reserves from reclassification of held-to-maturity financial instruments change in reserves from reclassification of investment properties
currency translation adjustments Less change:
in policyholder bonuses in shadow accounting
(Dac, URR, terminal policyholder bonuses) in deferred taxes
Total effects on equity not recognized in the income statement
annual profit
Total effects on equity recognized and not recognized in the income statement Dividends
capital increase/repayment purchase/sale of treasury stock increase / decrease in minority interests due to change in the reporting entity structure Balance as of December , 005
in cHF million
0 Bâloise-Holding Financial Report 2005
notes to the consolidated annual
financial statements
General remarks
1. Accounting basis
the Baloise Group operates exclusively in europe in the direct insur-ance business and comprises 15 insurinsur-ance companies, which pro-vide almost all types of life and non-life insurance. the parent com-pany is Bâloise-Holding, a Swiss stock corporation domiciled in Basel, Switzerland. the shares of Bâloise-Holding are listed on the Swiss exchange (SWX). its subsidiaries operate in the direct insur-ance markets in Switzerland, Germany, Belgium, austria, luxem-bourg, croatia and Slovakia. the banking business is operated by subsidiaries in Switzerland and Germany. in addition, the Baloise Group has an investment fund structure in luxembourg.
the consolidated annual financial statements of the Baloise Group are prepared on a historical cost basis, taking into account adjustments resulting from regular measurement of the fair market value of financial assets and liabilities, and have been prepared in accordance with international Financial Reporting Standards (iFRS), which correspond to Swiss legal requirements. iFRS 4 regulates the accounting and disclosure of insurance and reinsurance contracts. Measurement is done based on local accounting principles; in the case of the Baloise Group, these are the american Generally accept-ed accounting principles (US Gaap).
at its meeting of March 10, 2006, the Board of Directors of Bâlo-ise-Holding approved the annual financial statements and the Finan-cial report and released them for publication. the finanFinan-cial state-ments and report are subject to approval by the annual General Meeting of Bâloise-Holding.
2. Application of new accounting standards
IFRS — Share-based PaymentFrom January 1, 2005, iFRS 2 “Share-based payment” is applied with regard to plans granting stock options and treasury stock concluded after november 7, 2002. the standard regulates the measurement and disclosure of share-based payment plans and other treasury stock transactions. plans that are settled using shares of Bâloise-Holding are measured at fair value as of the grant date and are rec-ognized as a personnel expense during the vesting period. plans that are serviced in cash and the amount of which is based on the market value of Bâloise-Holding shares are recognized at fair val-ue on the balance sheet date as a liability. in connection with initial application of iFRS 2 and additional revised standards, which are to be applied retroactively, the employee Share ownership trust, not previously included, has been included within the structure of the consolidated financial statements as of January 1, 2004.
IFRS — Business Combinations
the Baloise Group has been applying iFRS 3 for business acqui-sitions since March 31, 2004. as of January 1, 2005, in accor-dance with iaS 36 “impairment of assets” and iaS 38 “intangible assets”, goodwill is no longer subject to regular amortization, but rather undergoes a periodic impairment test. the negative good-will of cHF 22.4 million existing at the end of fiscal year 2004 was charged directly to equity as of January 1, 2005.
IFRS — Insurance Contracts
iFRS 4 governs the accounting and disclosure of insurance and reinsurance contracts and has been applied retroactively as of January 1, 2004. as iFRS 4 does not address the measurement of insurance contracts, the US Gaap provisions regarding their mea-surement shall continue to be applied until a corresponding stan-dard exists. However, the application of iFRS 4 engenders the mod-ification of certain US Gaap provisions (e.g. the liability adequacy test). iFRS 4 requires that all insurance products be classified as insurance contracts or financial contracts. there must be a signif-icant insurance risk to be classified as an insurance contract. to the extent that they do not include a discretionary participation feature (DpF), financial contracts are treated in accordance with iaS 39 revised. Depending on their classification and the applica-ble standard, the measurement of such financial contracts is made at fair value or pursuant to the amortized cost method. Due to the application of iFRS 4, certain insurance contracts were reclassified as financial contracts or, due to the limitation on the applicability of this standard, as liabilities under iaS 19 “employee Benefits”. the latter applies notably to the insurance relationship between Basler lebens-Versicherungs-Gesellschaft, Basel and its occu-pational benefits foundation (Vorsorgestiftung). the new iFRS 4 essentially affects the life insurance business; its effects on non-life business are marginal. iFRS 4 also treats the accounting and disclosure of discretionary participation features (DpF) in insur-ance contracts.
IFRS 5 — Non-current Assets Held for Sale and Discontinued Oper-ations
this new standard has been applied as of January 1, 2005 and con-cerns the accounting, measurement and disclosure of the affected assets and disposal groups. the latter are assets and associated liabilities that are disposed of as a group in a single transaction. IAS 7 revised — Consolidated and Separate Financial Statements under IFRS
the provisions of this revised standard were applied as of January 1, 2004. accordingly, disclosure of minority interests is now made within equity. the portion of the Group’s annual profit attributable to minority interests is disclosed in a separate list outside of the consolidated income statement.
Bâloise-Holding Financial Report 2005
IAS revised — Financial Instruments: Disclosure and Presen-tation
the revised iaS 32 states the definition and accounting treatment of recognized financial instruments more precisely. as a result, the recognition of options on treasury stock was adjusted retroactively as of January 1, 2004 based on their exercise characteristics. IAS 9 revised — Financial Instruments: Recognition and Mea-surement
the revised iaS 39 essentially affects the Baloise Group with regard to the impairment of financial assets. the previous provision with regard to impairment losses on available-for-sale financial assets of an equity nature applied by the Baloise Group required that impairment losses be recognized on securities whose fair value on the balance sheet date was less than half of their cost. an impair-ment test is required for securities whose fair value on the balance sheet date is between 20% and 50% below cost. a new addition to the previous provision requires the Baloise Group to recognize an impairment if the fair value is continually below cost during the 12 months prior to the balance sheet date. this new impairment provision applies independently of the previously applied criteria. in addition, one-time adjustments to available-for-sale financial assets of an equity nature may no longer be reversed. the Balo-ise Group has applied the revBalo-ised iaS 39 retroactively as of Janu-ary 1, 2004.
Reclassifications
Various items were reclassified or reviewed for offsetting options in connection with changes on the balance sheet structure caused by the adjustments described above. in so doing, premium billings due after the balance sheet date and previously recorded as receiv-ables and subsequently treated as accrued liabilities were offset with one another.
New IFRS Standards not yet applied
the Baloise Group has not yet applied the following standards or revised standards issued by the iaSB due to their effective date:
Standard Subject Applied as of:
iaS 19 amendments employee Benefits Jan. 1, 2006
iFRS 7 Financial instruments: Disclosures Jan. 1, 2007
Both standards primarily deal with disclosure. the application of the standards by the Baloise Group is therefore not expected to have any significant impact on the income statement.
Bâloise-Holding Financial Report 2005
57.0 952.0 ,09.0 17.7 96.4 –/– ,. 8. 4.4 5.6 –/– –/– –/– 5.6 ,88. 1,132.1 6,06. –/– –6,050.1 –/– 9,966. ,.6 –1,143.6 –/– –/– ,. –554.1 ,578. 31.5 –/– 30.1 ,69.8 ,55.5 –901.4 0,5. 2.2 5,824.2 21.4 6,0.9 59,60.8 –50.6 59,0. 5. –9.5 5.5 59,08.6 ,56.0 –/– ,56.0 –17.8 –88.0 57.6 ,97.8 ,70. 1,646.0 ,9. –1,383.7 –139.8 –/– ,85.8 ,.6 –1,143.6 –/– –/– –/– –/– –/– –/– 4,688.9 ,688.9 805.0 –/– –/– 5,9.9 –/– 1,585.9 ,585.9 –/– –/– –/– ,585.9 60. –/– 60. –/– –/– –/– 60. 0,. –5,649.4 ,66.9 647.9 98.3 –6.1 5,0.0 ,756. –1,638.4 7.9 –/– –/– –/– 7.9 59,60.8 –50.6 59,0. 5. –9.5 5.5 59,08.6 .7 –/– .7 –5.7 –7.6 1.6 0.0
Reconciliation of the IFRS restatements
Consolidated balance sheet as of December 31, 2004
Balance sheet items
Before restatement and reclassifications Reclassifica-tions Before restate-ment, after reclassifications iFRS 4 iaS 39 rev.
iaS 32 rev.1 other
After restatement and reclassifications intangible assets
investments in associated companies Financial assets of an equity or debt nature investments for the account and at the risk of life insurance policyholders
Receivables additional assets Total assets Equity
actuarial provisions (gross)
actuarial provisions for the account and at the risk of life insurance policyholders
liabilities from the banking business and financial contracts Financial liabilities
Derivative financial instruments liabilities
additional liabilities Total equity and liabilities
in cHF million
1 including shadow accounting
2004 consolidated annual profit (after minority interests)
Before restate-ment and reclassifications Reclassi- fications Before re-statement, after reclassifications iFRS 4 iaS 39 rev.
iaS 32 rev. other
After restatement and reclassifications Consolidated annual profit
in cHF million
the effects on the income statement of the first-time application of iFRS 4 comprise primarily the reclassification of insurance con-tracts to financial concon-tracts. the effects on the income statement of changes in iaS 39 and iaS 32 comprise predominantly valuation adjustments of capital investments of an equity nature, as the valu-ation adjustment regulvalu-ations have been modified. the other effects recognized in income are mainly due to the first-time application of iFRS 2.
3. Consolidation and accounting principles
the accounting principles applied by the Baloise Group are described below. Unless otherwise indicated, the accounting principles are applied consistently in all reporting periods presented.3.1 Consolidation method
3.1.1. Subsidiaries
the consolidated annual financial statements comprise the finan-cial statements of Bâloise-Holding and its subsidiaries, including special purpose entities (“Spes”). a subsidiary is consolidated if the Baloise Group directly or indirectly controls the company. this is normally the case if more than 50% of the voting rights are held. potential voting rights are included when determining control. companies newly acquired during the course of the year under review are included in the consolidated annual financial statements as of the date of the effective assumption of control, and all companies disposed of during the year are included up to the relinquishment of control. acquisitions of companies (fully and proportionately con-solidated) are recognized using the purchase method. the cost of an acquisition at the takeover date is composed of the fair value of the assets taken over, liabilities entered into and the equity instru-ments issued in exchange for control of the acquired company plus
Bâloise-Holding Financial Report 2005 5
all costs directly allocable to the business combination. the iden-tifiable assets, liabilities and contingent liabilities of the company are recognized at fair value as of the date of the first-time consolida-tion, regardless of possible minority interests. if the purchase price exceeds the assets and liabilities measured at fair value, the differ-ence is recognized as goodwill. conversely, if the fair value exceeds the purchase price, the difference is recognized directly in income in “other operating income”.
all intra-Group transactions and the resulting gains or losses are eliminated. in contrast, the non-Group share of intra-Group transac-tions of proportionately-consolidated companies are not eliminat-ed.
3.1.2 Joint ventures
Joint ventures are companies jointly controlled by contractual agreement between two or more partners. Deutscher Ring Beteili-gungsholding, including its subsidiaries, is a joint venture. the Bal-oise Group has a direct 65% interest. the remaining 35% is held by Deutscher Ring Krankenversicherung, a mutual insurance associa-tion. the contractual agreements are structured such that the major-ity shareholder does not have control. these companies are consoli-dated on a proportional basis, i.e. the Baloise Group recognizes its share of the assets, liabilities, income and expenses.
3.1.3 Associates
associates are initially recognized at cost and subsequently using the equity method (the Baloise Group’s share in the intrinsic val-ue of the company) if the Baloise Group has significant inflval-uence on the management of the company in question. adjustments of asso-ciates are normally recognized in income, taking possible dividend flows into account. if the share in the losses exceeds the value of the associate, no additional loss shares are recognized. the good-will paid for associates is included in the carrying value of the equi-ty investment.
3.2 Foreign currency translation
3.2.1 Functional and reporting currency
each subsidiary prepares its annual financial statements using its functional currency, i.e. in the currency of its primary business envi-ronment. the consolidated annual financial statements are present-ed in millions of Swiss francs (cHF), the Baloise Group’s reporting currency.
3.2.2.Translation of transaction currencies into the
func-tional currency for Group companies
income and expenses in foreign currencies are measured using the rates as of the transaction date or at average exchange rates. Mone-tary balance sheet items, as well as those carried at fair value, from foreign currency transactions of Group companies are measured using year-end rates. non-monetary items are measured using his-torical rates. the resulting exchange rate differences are recognized in income. an exception is exchange rate differences that are
recog-nized directly in the hedging reserve in connection with cash flow hedges or that are used to hedge a net investment in a foreign com-pany.
exchange rate differences arising on non-monetary financial instruments measured at fair value and recognized in income are disclosed in the gains and losses realized on these instruments. exchange rate differences on available-for-sale non-monetary finan-cial instruments are recognized in unrealized profits and losses within equity.
3.2.3. Translation of functional currency into reporting
currency
the annual financial statements of all business units which were not prepared using cHF are translated as follows when preparing the consolidated financial statements:
n assets and liabilities at year-end rates n income and expenses at average annual rates
n the resulting currency translation adjustments are accumulated
and recognized directly to equity
Upon the disposal of foreign subsidiaries, the currency translation adjustments from the sale are recognized in income as income or expense from the transaction.
3.2.4. Exchange rates
Balance sheet Income statement
currency 2004 005 2004 005
eUR (euro) 1.55 1.55 1.54 1.55
USD (US dollar) 1.14 1.32 1.24 1.25 GBp (pound sterling) 2.18 2.26 2.28 2.26
JpY (yen) 1.11 1.12 1.15 1.13
in cHF
3.3 Property, plant and equipment
property, plant and equipment are recognized at cost less accumulat-ed depreciation. the cost of an item of property, plant and equipment includes all directly allocable costs. Subsequent costs are capitalized only if there is a flow of future economic benefits related to the asset and these costs can be reliably measured. all other repair and mainte-nance costs are recognized as an expense when incurred.
property, plant and equipment are normally financed in full using internal resources. if any outside financing is used, interest is recog-nized as appropriate during the period of accrual.
land is not depreciated on a regular basis. Straight-line depreci-ation on other property, plant and equipment is taken based on the expected useful life as follows:
n Buildings for own use — 25 to 50 years n equipment and furnishings — 5 to 10 years n computer hardware — 3 to 5 years
the impairment and expected useful life of an item of property, plant and equipment are reviewed at the end of each fiscal year.
the carrying value of an item of property, plant and equipment is adjusted as soon as the recoverable amount falls below the carrying value (see also Section 3.10.3).
Bâloise-Holding Financial Report 2005 5
the gain or loss resulting from the sale of an item of property, plant and equipment is immediately recognized in the income statement under “other operating income” or “other operating expenses”, respectively.
3.4 Leasing
(a) The Baloise Group as lessee
Finance lease agreements: lease agreements on real estate, equip-ment and fixtures and other property, plant and equipequip-ment under which the Baloise Group essentially assumes all risks and rewards incident to ownership are classified and treated as finance lease agreements. the fair value of the leased property or the lesser pres-ent value of the lease paympres-ents is recognized at the inception of the lease agreement as property, plant and equipment. each lease payment is apportioned into a reduction of the outstanding liabili-ty and interest expense. the portion reducing the outstanding lia-bility is deducted from the capitalized lease lialia-bility, which is rec-ognized under “liabilities from the banking business and financial contracts”. property, plant and equipment in finance leases are depreciated over the shorter of the expected useful life or term of the lease agreement.
operating lease agreements: other lease agreements are classi-fied as operating lease agreements. lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term.
(b) The Baloise Group as lessor
investment properties leased in connection with operating lease agreements are recognized in the consolidated balance sheet as investment properties. there are no additional lease agreements as a lessor as of the balance sheet date.
3.5 Intangible assets
3.5.1 Goodwill
Goodwill arises as the difference between the purchase price and the assets and liabilities taken over recognized at market value at the time of the takeover. Goodwill is disclosed under intangible assets. Goodwill is measured at cost less all accumulated amorti-zation and impairment losses up to December 31, 2004. as of Jan-uary 1, 2005, goodwill is no longer subject to regular amortization, but to an annual impairment test. Upon acquisition of a new equi-ty investment, the closing date for future impairment tests is deter-mined and subsequently conducted annually at the same date. pro-rata goodwill is recognized in income for disposals. For purposes of impairment testing, goodwill is allocated to cash-generating units (“cGUs”).
3.5.2 Present value of the profits on acquired insurance
contracts (present value of future profits — PVFP)
the present value of the profits from acquired insurance contracts arises from the purchase of a life insurance company or upon the purchase of a life insurance portfolio. the initial measurement as well as the determination of the amortization model is made in accordance with actuarial principles and the pVFp is subjected to regular impairment testing. See also Section 3.17.2.
3.5.3 Deferred acquisition costs (DAC)
the costs incurred in direct connection with the acquisition of insur-ance contracts and financial contracts with discretionary partici-pation features (DpF) (e.g. commissions) are capitalized and amor-tized over the term of the agreements, or over the period of premium payments if shorter. the deferred acquisition costs are reviewed for recoverability and each balance sheet closing date. See also Sec-tion 3.17.3.
3.5.4 Deferred capital investment fees
Direct capital investment fees (for example commissions) that arise upon the conclusion of financial contracts are capitalized and amor-tized against income over the term of the financing contract. impair-ment is tested annually.
3.5.5 Other intangible assets and internal developments
other intangible assets consist primarily of equipment software, external it consultancy and internal developments (e.g. software). these are recognized at cost and amortized on a straight-line basis over the expected useful life, but no longer than 10 years as a rule. intangible assets are, as a rule, financed by own means.
in the case of debt financing, the interest is charged to equity during the period of accrual. With the exception of goodwill, the Bal-oise Group has no intangible assets with an indeterminable useful life.
3.6 Investment properties
investment properties comprise land as well as buildings held to generate rental income and/or for purposes of capital appreciation. For mixed-used investment properties (used by the Group/used by a third party), if a division is not possible the entire property is allocat-ed basallocat-ed on the intendallocat-ed purpose of the majority of usable space. investment properties are recognized at fair market value using the discounted cash flow (DcF) method. this is determined internal-ly each year by trained experts by using assumptions approaching market conditions. the fair market values are derived primarily from the future cash flows (net cash flows from rental income, mainte-nance expenses and administrative costs) and by means of mathe-matical methods from comparable transactions. the majority of the Baloise Group’s directly held real estate portfolio is in Switzerland. the interest rate for the calculation under the DcF method is deter-mined on a hedonic basis. the expected change in vacancy rates is
6 Bâloise-Holding Financial Report 2005 7
also included in the calculation. external appraisals are obtained at regular intervals. changes in market value are recognized in income immediately in the period in which they arise as realized book gains/ losses.
if an investment property is used internally as a result of a change in use it is reclassified to property, plant and equipment. the reclassification is made at the fair market value as of the reclas-sification date.
if an internally used property becomes an investment property as a result of a change in use, the difference between the carrying value and the fair market value at the time of the change is recog-nized directly to equity (in unrealized gains and losses) if a gain, or to income for the period if a loss. if a reclassified investment prop-erty is disposed of, the amount recognized in equity is reclassified directly into profit reserves.
3.7 Financial assets
For reasons of comprehensibility, in some places in the financial report and paragraph headers in the notes the term capital invest-ments is used. the term capital investinvest-ments itself is not defined in the iFRS. in addition to financial assets, mortgages and loans, deriv-ative financial instruments and cash and cash equivalents, capital investments also include investment properties.
the following investment categories are recognized in the finan-cial assets of an equity nature: stocks, equity securities, shares in stock and bond funds along with alternative financial assets such as private equity investments and hedge funds. Financial assets of an equity nature are normally exposed to higher risks than financial assets of a debt nature.
Financial assets of a debt nature comprise securities such as bonds and other fixed-interest securities. they normally bear inter-est and are issued in a fixed or determinable amount.
the Baloise Group classifies its financial assets of an equity or debt nature in the following categories: recognized in income at fair val-ue, held-to-maturity, and available-for-sale financial assets. classi-fication follows the motive in the acquisition of the financial asset. Mortgages and loans are, as a rule, not classified as held-to-matu-rity (see Section 3.8).
3.7.1 Financial assets recognized in income at fair value
this category consists of two subcategories: financial assets held for trading (trading portfolio), and those that are assigned to this category. a financial instrument is classified in this category if it was acquired primarily with the intention to resell it in the short term, or if it is part of a portfolio for which there are recent indications of the realization of short-term gains, or if it was assigned to this catego-ry. Derivative financial instruments are classified as held for trading (trading portfolio), with the exception of derivative financial instru-ments that have been designated for hedge accounting.
3.7.2 Held-to-maturity financial assets
Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments — but not mortgages, loans (Section 3.8) and accounts receivable (Section 3.9) — which the Bal-oise Group can and intends to hold until final maturity.
3.7.3 Available-for-sale financial assets
available-for-sale financial assets are those non-derivative finan-cial instruments that are classified as available-for-sale or have not been classified in any of the categories mentioned above or as mort-gages, loans, or receivables.
alternative financial assets such as private equity investments and hedge funds are classified as available-for-sale.
3.7.4 Recognition, measurement and derecognition
all commercial purchases and sales of financial assets are recog-nized as of the trade date. Financial assets are initially recogrecog-nized at fair value. With the exception of financial assets recognized in income at fair value, transaction costs are included in the acquisi-tion costs.
Financial assets are derecognized if the rights to the cash flows from the financial instrument have expired or the financial instru-ment has been sold and substantially all of the associated risks and opportunities have been transferred. the cash outflows arising with reverse repurchase transactions are recognized as receivables. Financial assets received as collateral from the transaction are not recognized. the posting to the balance sheet is made on the set-tlement date. Financial assets transferred as collateral with repur-chase transactions continue to be recognized in financial assets. the cash inflow is recognized under liabilities. With respect to secu-rities and lending transactions, the Baloise Group only conducts securities lending transactions. the lent financial instruments con-tinue to be recognized as financial assets. the securities coverage of repurchase and reverse-repurchase transactions, as well as secu-rities lending transactions is made daily at the current fair values.
available-for-sale financial assets and financial assets rec-ognized in income at fair value are measured at fair value. Held-to-maturity financial assets are measured in accordance with the amortized cost method by applying the effective interest method. Realized and unrealized gains and losses on financial assets rec-ognized in income at fair value are recrec-ognized in income. Unreal-ized gains and losses on financial assets that have been classified as available-for-sale are recognized in shareholders’ equity. For life insurance companies, the shares of unrealized gains and losses to be used in future for reducing the liability from the acquisition costs, with accrued taxes, and for payment of the policyholder bonuses are deducted from the unrealized gains and losses (shadow account-ing). if available-for-sale financial assets are sold or remeasured, the accumulated amount recognized in shareholders’ equity is rec-ognized in income as a realized gain or loss on financial assets. Regardless of the classification, changes to the fair market values of
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financial assets which are secured by a fair value hedge are recog-nized in the income statement for the duration of the hedge.
the fair value of listed financial assets is based on exchange prices. if there is no active market, the fair market value is estimat-ed basestimat-ed on generally acceptestimat-ed methods (net present value concept etc.), independent appraisals, by comparison with the market prices of similar instruments and the current market situation.
Derivative financial instruments are measured based on listed market prices or on models.
For private equity investments, to the extent that no fair value is available, various methods are applied for the estimate, such as analysis of the discounted cash flows or reference to compara-ble recent transactions between knowledgeacompara-ble, willing and arm’s-length contractual partners.
if the estimates do not permit any reliable measurement, these financial assets are recognized at cost and disclosed accordingly.
3.8 Mortgages and loans
Mortgages and loans (including policy loans) are non-derivative financial instruments with fixed or determinable payments which are not listed on an active market. Mortgages and loans are mea-sured using the amortized cost method by applying the effective interest method. Mortgages and loans are tested for impairment as part of an impairment process.
3.9 Receivables
Receivables are recognized at amortized cost (i.e. using the amor-tized cost method), less any valuation allowances for doubtful receivables. the amortized cost normally corresponds to the nom-inal value of the receivables.
3.10 Impairment loss
3.10.1 Financial assets measured using the amortized
cost method (mortgages, loans, receivables and
held-to-maturity financial assets)
at each balance sheet date the Baloise Group determines whether there are objective indications of an impairment loss on a financial asset or a group of financial assets. a financial asset or a group of financial assets is only impaired if, as a result of one or more events, there is an objective indication of an impairment that has an effect on the financial asset’s expected future cash flows which can be reli-ably estimated. objective indications of an impairment of a financial asset include observable data on the following cases:
n Significant financial difficulties of the debtor,
n a breach of contract such as a default on or delinquency in inte-
rest or principal payments,
n an increased probability that the borrower will enter into insol-
vency or another reorganization proceeding,
n the disappearance of an active market for that financial asset, n observable data that indicates a measurable reduction in the
expected future cash flows from a group of financial assets since its initial recognition.
analyst reports from banks as well as ratings by rating agencies are used for assessing an impairment.
if there is an objective indication for an impairment loss on loans and accounts receivable or financial assets held to maturi-ty, the impairment loss is determined as the difference between the asset’s carrying value and the present value of the future cash flows, discounted using the financial asset’s original effective inter-est rate. if the amount of the write-down decreases in one of the fol-lowing reporting periods, and this reduction can be traced back to a circumstance arising after recognition of the impairment, the write-down previously recorded must be reversed (reversal of an impair-ment loss).
the mortgage portfolio is tested for impairment at regular inter-vals. if there are objective indications that the entire amount owed pursuant to the original contractual conditions or the correspond-ing equivalent value of a receivable can be obtained, an adjustment is recognized. loan commitments are measured individually, taking into consideration the character of the borrower, its financial situ-ation, its payment behavior, the existence of any guarantor and, if necessary, the disposal value of possible collateral recognized. all mortgages classified as not at risk at the individual counterparty level are divided into economically homogeneous portfolios, which are tested for impairment as a whole, and in any case, are adjusted based on the historical default probability.
3.10.2 Financial assets measured at fair value
on each balance sheet date the Baloise Group determines wheth-er thwheth-ere are objective indications of an impairment loss on financial assets classified as available-for-sale, which also include financial assets of an equity nature. an impairment loss must be recognized for financial assets of an equity nature, the fair value of which on the balance sheet date is more than 50 percent below cost, or whose fair value was below cost during the entire 12 months prior to the bal-ance sheet closing date. an impairment test is conducted for securi-ties whose fair value on the balance sheet date is between 20% and 50% below cost and an impairment is recognized if necessary.
in the case of an impairment, the cumulative net loss recorded directly to equity is reversed to the income statement.
impairment losses on available-for-sale financial assets of an equity nature recognized in the income statement may no longer be recognized in income retroactively. if the fair value of an avail-able-for-sale financial asset of a debt nature increases in a subse-quent reporting period and the increase is objectively traced back to an event which arose after the recognition of the impairment in the income statement, the adjustment must be reversed and the amount must be recognized in the income statement as a reversal of an impairment loss.
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3.10.3 Impairment losses on non-financial assets
Up to December 31, 2004, goodwill was amortized on a regular basis and if necessary subject to impairment. as of January 1, 2005, good-will and any assets with indefinite useful lives are not amortized/ depreciated on a regular basis, but rather undergo impairment test-ing annually at the same time or if there are objective indications of an impairment. For purposes of impairment testing, goodwill is allocated to cash-generating units (“cGUs”). the carrying value of the cGU, including the goodwill, is compared with the recoverable amount. the recoverable amount is the higher of the net proceeds from disposal (estimated sales proceeds less all costs incurred directly in connection with the sale) and the present value of the estimated future cash inflows and outflows from the utilization and later sale of an asset. the estimate of the future cash inflows and outflows is based on realistic assumptions regarding the future development of the asset as well as on approved extrapolations and financial planning. an impairment exists if the carrying value is high-er than the recovhigh-erable amount. an impairment is recognized in the income statement under the item “other operating expenses”.
other non-financial assets are subjected to impairment testing whenever there are objective indications of an impairment.
an impairment loss recognized on an asset with a finite use-ful life in previous reporting periods is reversed if there has been a change in the estimates that were used to determine the recover-able amount since the recognition of the last impairment loss. this increase represents a reversal of an impairment loss. an impairment loss on goodwill or on assets with indefinite useful lives recognized in previous reporting periods is no longer reversed.
3.11 Derivative financial instruments
Derivative financial instruments are recognized on the balance sheet at fair value. Upon the conclusion of a contract, they are clas-sified either as a hedging instrument for the fair value of an asset or liability (fair value hedge), as a hedge of future transactions (cash flow hedge), as a hedge of a net investment in a foreign company, or as a trading instrument. Derivative financial instruments which did not satisfy the iFRS requirements for a hedging transaction, even though they have a hedging function pursuant to the Baloise Group’s risk management rules, are treated as trading instruments.
the Baloise Group documents the effectiveness of the hedge as well as the goals and strategies followed for each hedging trans-action. effectiveness of the hedge is monitored continuously from the conclusion of a contract. Derivatives that no longer satisfy the requirements of a hedging transaction are reclassified as trading instruments.
3.11.1 Fair value hedges
changes in the fair value of derivatives classified as fair value hedg-ing instruments, together with the hedged part of the fair value of the asset or liability, are recognized in the income statement.
3.11.2 Cash flow hedges
changes to the fair value of derivatives classified as cash flow hedg-ing instruments are recognized directly to equity. the amounts rec-ognized in shareholders’ equity are later recrec-ognized in the income statement in accordance with the hedged cash flows.
if a hedging instrument is disposed of, terminates or is exer-cised, or no longer satisfies the criteria for a hedging transaction, the cumulative gain or loss remains recognized in shareholders’ equity until the planned transaction occurs. if the anticipated trans-action is no longer expected to occur, the cumulative gains and loss-es recognized in shareholders’ equity are transferred to the income statement.
3.11.3 Hedging of a net investment in a foreign company
the hedging of a net investment in a foreign company is treated as a cash flow hedge. the gain or loss of the hedging instrument on the effective hedge is recognized in shareholders’ equity; the ineffec-tive portion is recognized on the income statement.
the gain or loss recognized in shareholders’ equity is transferred to the income statement upon the (partial) disposal of the foreign company.
3.11.4 Derivative financial instruments that do not satisfy
the requirements of a hedging transaction
changes to the fair value of derivative financial instruments that do not satisfy the requirements of a hedging transaction are recognized in income as “Realized gains and losses on capital investments”.
3.11.5 Structured products
Structured products are financial instruments (assets or liabili-ties) which include embedded derivatives in addition to the under-lying transaction. For the most part, the underunder-lying transaction and derivative are not separated but are classified as a unit under the subject of the underlying transaction, so that the unrealized gains and losses are recognized immediately in the income statement. Sometimes the derivative is separated and recognized, measured and disclosed separately. in this case the economic characteristics and risks of the embedded derivative must differ from those of the underlying transaction and it must itself satisfy the definition of a derivative financial instrument.
3.12 Offsetting of receivables and liabilities
Receivables and liabilities are offset and recognized on the balance sheet at net value if offsetting is permitted and the Baloise Group intends to realize these assets and liabilities at the same time.
3.13 Non-current assets held for sale and discontinued
operations
non-current assets or asset groups which are held for sale and meet the criteria of iFRS 5 “non-current assets Held for Sale and Discontin-ued operations” are disclosed separately in the balance sheet. those
8 Bâloise-Holding Financial Report 2005 9
assets addressed by the standard are measured at the either the car-rying value or the attributable current value, whichever is lower, minus disposal costs. adjustments arising on such assets are recognized in the income statement. any regular depreciation/amortization is halted as of the reclassification date.
the detailed disclosure of discontinued operations, if any, is made in the notes to the annual financial statements.
3.14 Cash and cash equivalents
cash and cash equivalents consist predominantly of cash, demand deposits and short-term liquid assets with maturities of up to 24 hours. they are measured at their nominal value.
3.15 Equity
3.15.1 Share capital
equity instruments are classified as equity unless there is a contrac-tual obligation for repayment or the contribution of other financial assets. transaction costs in connection with equity transactions are reduced by all income tax advantages related to the transactions and are accounted for as a deduction from equity. the transaction costs of an equity capital transaction in connection with a business combination are allocated to the cost of the acquisition.
3.15.2 Equity reserves
paid-in share capital in excess of the nominal value (premium) as well as the net income from the purchase and sale of treasury stock is contained in equity reserves.
3.15.3 Treasury stock
treasury stock held by Bâloise-Holding or by subsidiaries appears in the consolidated financial statements at cost (including transaction costs) as a deduction from shareholders’ equity. there is no ongoing adjustment to fair market value. Upon resale, the difference between the cost and the sales price is recognized as a change to equity. only shares of Bâloise-Holding are considered treasury stock.
3.15.4 Unrealized gains and losses (net)
this item includes changes in market value of financial instruments classified as available-for-sale, effects from cash flow hedges, effects from hedging net investments in a foreign company, curren-cy translation differences and gains in the reclassification of own-use properties to investment properties.
adjustments for policyholder bonuses and the amortization of deferred acquisition costs recognized directly to equity are deduct-ed from this item. Deferrdeduct-ed taxes and minority interests are also deducted from this item.
3.15.5 Profit reserves
profit reserves contain the Baloise Group’s retained earnings and its net income for the fiscal year. Dividend distributions to share-holders of Baloise Holding are only recognized once they have been approved by the annual General Meeting.
3.15.6 Minority interests
Minority interests are those shares in the equity of Group companies which are allocated to third parties outside the Group based on the relevant ownership relationships.
3.16 Insurance contracts
an insurance contract is defined as “a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyhold-er if a specified uncpolicyhold-ertain future event (the insured event) advpolicyhold-erse- adverse-ly affects the policyholder”. Here, an insurance risk is any direct or reinsured risk that is not a financial risk. the significance of insur-ance risk is assessed according to the amount of additional benefits to be paid by the insurer if the insured event occurs.
contracts without any significant insurance risk are financial con-tracts. Such financial contracts may contain a discretionary partici-pation feature (DpF), which determines which recognition and valu-ation regulvalu-ations are to be applied.
the Baloise Group considers an insurance risk to be significant if, in a plausible scenario, a payment is linked to the occurrence of the insured event during the contractual period which is 5% greater than the contractual benefits if the insured event does not occur. a discretionary participation feature (DpF) is present if the policy-holder has a contractual right to benefits in excess of the guaran-teed benefits:
n that are likely to be a significant portion of the total contractual
benefits;
n whose payment amount or timing is contractually at the discre-
tion of the insurer; and
n that are contractually dependent on:
n the performance of a specified pool of contracts or a speci-
fied type of contract;
n realized and/or unrealized investment returns on a specified
pool of capital investments held by the insurer; or
n the insurer’s net income.
Self-insurance contracts are eliminated from the annual financial statements. this applies particularly to the reinsurance contracts with the company’s own pension plans insofar as the employees covered by these plans belong to the Baloise Group.
in addition, iFRS 4 creates exceptions for the treatment of embed-ded derivatives that are contained in an insurance contract or financ-ing contract with DpF. to the extent that such embedded derivatives themselves satisfy the definition of an insurance contract, separate measurement and disclosure is not required. For the Baloise Group, this concerns among others certain guarantees for annuity conver-sion rates as well as additional special exceptions, such as certain guaranteed surrender values on traditional policies.
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3.17 Recognition and measurement of life insurance
con-tracts and financial concon-tracts with DPF
For insurance contracts and financial contracts with DpF, iFRS 4 grants users the option to continue using the previous measurement principles for the obligations as well as assets resulting directly from the contracts (deferred acquisition costs and portfolio assets). the measurement principles based on US Gaap thus continue to apply for the Baloise Group.
the following Baloise Group life insurance products include suffi-cient insurance risk to be classified as insurance contracts under iFRS 4:
n endowment life insurance, conventional life insurance and unit-
linked life insurance policies
n the Swiss group life business (BVG) n pure term insurance policies n immediate annuities
n Deferred pension insurance with pension conversion rate guar-
anteed as of conclusion of the contract
n all supplemental insurance policies such as premium waiver,
additional accidental death, disability, etc.
Hence, the following accounting principles find application:
3.17.1 General measurement principles
For traditional life insurance, the US Gaap measurement principles under FaS 60 (long duration) or FaS 120 are applied depending on the type of profit participation. in so doing, premiums are basical-ly recognized as income and benefits as expenses when due. in each case, the establishment of provisions is based on actuarial principles or the net premium principal, which provides for a bal-anced development of the provision from the premium. the actu-arial assumptions for calculating provisions are determined either as best estimates with explicit safety margins for particular trans-actions (FaS 60) or pursuant to local practice regarding provisions and thus also take premium loading into account when contracts are concluded. the assumptions used are retained unchanged over the contractual period (“lock-in”) unless a liability adequacy test (lat) shows that the resulting reserves, after deducting deferred acqui-sition costs (Dac) or the present value of future profit (pVFp), must be increased. Unearned premiums, provisions for terminal divi-dends, as well as certain cost premium components to be deferred (unearned revenue reserve — URR) are also maintained as a compo-nent of the premium reserve.
the liability adequacy test is conducted over the entire life insur-ance line at every balinsur-ance sheet date. a gross reserve is determined as of the valuation date, taking into consideration all future cash flows based on the best estimates applicable to the assumptions at that time. if the minimum reserve for individual business lines thus determined exceeds the existing net reserve, the net reserves are immediately increased to the minimum level and the increase is rec-ognized in income.
traditional insurance with low cover and unit-linked insurance are treated pursuant to FaS 97. Here, in contrast to other tradition-al business, those portions of premiums that are not used to cov-er costs and risk are not recognized through the income statement, but rather are posted directly against the provision. For unit-linked insurance without maturity guarantees, the actuarial provision nor-mally corresponds to the deposit account value of the shares per policyholder and hence to the fair value of the related share in the fund. the change in the value of the corresponding fund is recog-nized in income in the same manner as the corresponding change in the provision. the liability adequacy test is conducted analogously to traditional products. For unit-linked life insurance with maturity guarantees, for which the maturity guarantee is not secured either by an investment approach or by the purchase of cover at an invest-ment company, a provision to cover this obligation is also estab-lished. this supplemental provision is posted under the actuarial reserve for non-unit linked life insurance.
3.17.2 Present value of the future profits (PVFP) on acquired
insurance contracts
the present value of the profits on acquired insurance contracts rep-resents an identifiable intangible asset that arises in connection with the purchase of a life insurance company or of a life insurance portfolio. the initial measurement as well as the determination of the amortization model is made in accordance with actuarial prin-ciples. the pVFp is regularly tested for impairment using the liabil-ity adequacy test.
3.17.3 Capitalization of acquisition costs
acquisition costs are deferred as part of the paid commissions (Dac). Depending on the US Gaap standard, amortization is taken over the period of premium payments or insurance period. impair-ment of the Dac is checked using the loss recognition test.
3.17.4 Unearned revenue reserve (URR)
the unearned revenue reserve (URR) concerns premium nents charged for services in future periods. these premium compo-nents are recognized as liabilities and reversed analogously to the deferred acquisition costs.
3.17.5 Policyholder bonuses
For a major portion of the life insurance contracts, the policyholders have a claim to surplus participation (bonus).
the surpluses are refunded in the form of benefit increases, premi-um reductions, or terminal bonuses or are aggregated at interest to a surplus account. Surpluses already allocated, which are aggregated on an interest-bearing basis, are recognized the balance sheet item “policyholder bonuses credited and provision for future policyholder bonuses”. Surpluses that have been used to finance an increase in the insurance benefit are recognized in the actuarial reserve.
For unit-linked life insurance, generally all investment income is credited to the policyholder.
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