Philips 2004 Annual Report Download - page 170

Credit risk in EUR 25-100 million 100-500 million A500 million
AAA-rated bank counterparties 1 1
AAA-rated money market funds 2
AA-rated bank counterparties 6 11
A-rated bank counterparties 1 2
Lower-rated bank counterparties in China 2
The Company does not enter into any financial derivative instruments to protect against default
of financial counterparties. However, where possible the Company requires all financial
counterparties with whom it deals in derivative transactions to complete legally enforceable
netting agreements under an International Swap Dealers Association master agreement or
otherwise prior to trading and, whenever possible, to have a strong credit rating from Standard
& Poor’s and Moody’s Investor Services. Wherever possible, cash is invested and financial
transactions are concluded with financial institutions with strong credit ratings.
Country risk
The Company is exposed to country risk by the very nature of running a global business. The
country risk per country is defined as the sum of equity of all subsidiaries and associated
companies in country cross-border transactions, such as intercompany loans, guarantees
(unless country risk is explicitly excluded in the guarantee), accounts receivable from third
parties and intercompany accounts receivable. The country risk is monitored on a regular basis.
As of December 31, 2004 the Company had country risk exceeding EUR 500 million in each of
the following countries: Belgium, France, Germany, the Netherlands, the United States, China,
South Korea and Taiwan.
The degree of risk of a country is taken into account when new investments are considered.
The Company does not, however, enter into financial derivative instruments to hedge country
risk.
Other insurable risks
The Philips Group is covered for a range of different kinds of losses by global insurance policies
in the areas of: Property Damage, Business Interruption, Liability, Transport, Directors and
Officers Liability, Employment Practice Liability, Crime and Aviation Products Liability.
To lower exposures and to avoid potential losses, Philips has a worldwide Risk Engineering
program in place. The main focus is on the business risks, which also include interdependencies.
Sites of Philips, but also a limited number of sites of third parties, are inspected on a regular
basis by the Risk Engineering personnel of the Insurer. Inspections are carried out against
predefined Risk Engineering standards which are agreed between Philips and the Insurers.
Recommendations are made in a Risk Management report and are reviewed centrally. This is
the basis for decision-making by the local management of the business, as to which
recommendations will be implemented.
For all policies, deductibles are in place which vary from EUR 45,000 to EUR 500,000 per
occurence and this variance is designed to differentiate between the existing risk categories
within the Group. Above this first layer of working deductibles, Philips has a re-insurance
captive, which retains for business losses EUR 10 million per occurence and EUR 30 million in
the aggregate per year.
169Philips Annual Report 2004