Review of Operations 7 Letter to Shareholders 10 Strategy 19 Summary of Group Results 21 Insurance 21 Switzerland 23 France 24 Germany 25 Netherlands 26 Belgium 26 Luxembourg 27 Other (Liechtenstein, Italy)
Financial Statements 77 Index to the Financial Statements 79 Consolidated Financial Statements 79 Consolidated Statement of Income 80 Consolidated Balance Sheet 82 Consolidated Statement of Cash Flow 84 Consolidated Statement of Changes in Equity 87 Notes to the Consolidated Financial Statements 193 Report of the Group Auditors 194 Swiss Life Holding Financial Statements 200 Report of the Statutory Auditors
Core capital CHF million Assets under management CHF million Employees (full-time equivalents)
Swiss Life Group . Annual Report 2006 . Swiss Life at a Glance
– Growth momentum sustained in international markets with premiums up 16%
– Quality of earnings improved and operating costs reduced in Switzerland
My father was a beekeeper and so was my grandfather. I was more interested in beetles than bees. My friends and I spent a lot of time outdoors. We collected frogs and lizards and put them in terrariums or aquariums. At home, we had a large garden and space for my collections. Later I studied zoology.
I wrote my thesis on sheet weaver spiders (money spiders). These days I’m more involved with technological webs than natural ones. I look after the intranet and web applications of Swiss Life in Germany. One of my first projects was to build a platform for insurance brokers. I no longer do any programming, but coordinate projects, which requires thinking “outside the box”.
Thomas Schmidt is a Swiss Life employee based in Munich and responsible for web-based technologies.
Expertise is not simply a matter of having specialist skills. It also involves the acquisition, extension and transfer of knowledge, and the readiness to learn new things on an ongoing basis. Every day I experience new things, work on my expertise, and on our IT. I do my bit so that Swiss Life can offer its customers top-class solutions.
They wanted to be chefs, artists or kindergarten teachers. But life doesn’t always go according to plan. In our annual report we introduce five people who now work at or for Swiss Life. Their professional life is characterised by values which are also decisive for Swiss Life: expertise, proximity, openness, clarity and commitment.
Swiss Life Group . Review of Operations 2006 . Letter to Shareholders
The Swiss Life Group again achieved good results in 2006. Profit increased by 9% to CHF 954 million. The return on equity stood at 12.2%, which is in line with our target of achieving an ROE of more than 10%. Earnings per share amounted to CHF 26.92. Based on these strong results, the Board of Directors will recommend an increase in the dividend from CHF 5 to CHF 7 at the General Meeting of Shareholders on 8 May 2007. As in previous years, the dividend will take the form of a repayment of par value.
Measured by premium volume, we are now the sixth largest life insurer in our markets with a market share of approximately 5%. We are ranked eighth in Europe overall and are one of the very few international players that is exclusively focused on pensions and long-term savings.
This clearly sets us apart from the competition. We are still the market leader in Switzerland, our home market, with a 28% share. In the international markets we are growing above the average and are successfully establishing Swiss Life as a leading specialist for occupational and personal pension products, despite competition from large local players. We have built up an attractive portfolio of business activities and will continue to expand it going forward.
Profit from operations rose by 23% to CHF 1258 million. Insurance operations accounted for the bulk of this figure, at CHF 1105 million, of which approximately 60% was generated in Switzerland and the remaining 40% in other markets. The Swiss Life Group achieved a segment result of CHF 165 million in Banking and CHF 43 million in Investment Management. The performance of the Swiss Life share reflects the positive course of business, ranking among the best performers in the Swiss Market Index (SMI) in 2006 with a gain of 28%. Market capitalisation stood at CHF 10.3 billion as per 31 December 2006, double the figure of three years ago. The value of the Swiss Life Group as measured by embedded value rose 20% to CH 10.7 billion.
Swiss Life generated gross written premiums of CHF 14.5 billion outside Switzerland, a rise of 16% from the previous year. This better than average growth is proof that our products and services satisfy customers’ needs and their high expectations. More than 40% of the premium growth outside Switzerland was achieved by the subsidiaries in Liechtenstein and Luxembourg, where Swiss Life is focusing on structured insurance solutions for high net worth individuals. We continued to strengthen our position selectively in this attractive business. As announced in December 2006, the Liechtenstein-based CapitalLeben was acquired in early 2007 and will be merged with our subsidiary in Liechtenstein. These two companies’ business models and products are similar and there is little geographical overlap. Through this acquisition Swiss Life has become one of the leading providers in the area of pension planning for a wealthy international clientele.
Swiss Life Group . Review of Operations 2006 . Letter to Shareholders 8 Our French operations accounted for another 40% of the premium growth generated abroad. There is still considerable unsatisfied demand in the French market for pension and long-term savings solutions. Swiss Life is very well positioned in this highly competitive market. With our outstanding products, our effective, well diversified distribution network, our focus on attractive client segments and our strong brand, we stand to benefit substantially from the growing demand for pensions and long-term savings products in the future as well. We are also on track to achieve our profitability and growth targets in Germany, the Netherlands and Belgium.
In Switzerland, Swiss Life’s gross written premiums in the life business rose only slightly (as expected) to CHF 7.6 billion. Group insurance showed a 3% increase and performanceoriented products with capital protection were well received by the market. The consolidation and standardisation of internal IT systems proceeded according to plan. Operating costs in Switzerland declined by 2% due to various measures to enhance operational efficiency and further savings are expected going forward.
Strong commitment of Swiss Life employees The trend in employee attitudes is particularly gratifying. Employee commitment, a reflection of employee identification with the company and job satisfaction, is measured annually and showed further improvement in 2006. At 73 index points, the Group-wide commitment value rose by another 3 points from the 2005 level. Employee commitment has thus improved by 15 points since 2003. The survey reflected very favourably on the skills and resources of Swiss Life managers but individual career development prospects were still viewed somewhat critically. We have therefore intensified our training and development efforts in response and will expand these activities in line with our strategic priorities.
Swiss Life Group . Review of Operations 2006 . Letter to Shareholders 9150 years of Swiss Life In September 2007, it will have been 150 years since Conrad Widmer, of Thurgau, established Schweizerische Rentenanstalt, the first national life insurance company under Swiss law, in a small, tuckedaway building near Zurich’s Paradeplatz. Swiss Life looks back on a successful 150-year history. We have arranged a number of activities under the recurring theme “Perspectives for people” to mark the occasion and show our pride and gratitude. “Perspectives for people” is derived from our mission: “Swiss Life is committed to helping people create a financially secure future. For life.” The aforementioned theme reflects our perception of ourselves as a company of people for people that offers interesting perspectives to its customers, staff and shareholders and is also committed to building perspectives for society beyond the scope of its business activities. A few examples of our anniversary activities are “Young people design living space”, a national project in which Switzerland’s youth are invited to present their vision for their future living space, the “Kids Festival”, a football tournament organised in cooperation with the Swiss Football Association for young children at more than 40 locations throughout Switzerland, and the founding of the non-profit “Perspectives” foundation so we can strengthen and better coordinate our long-standing social commitment. Our strong regional ties to our home market will also be highlighted by ten client events organised in all regions of Switzerland.
Outstanding perspectives The Swiss Life Group is on track to achieve the goals it has set for 2008. We have further improved our earning power and financial strength as well as our operational efficiency. We have established a sound foundation for the company to ensure long-term success as a leading specialist in the growing market for pension and long-term savings solutions. Swiss Life will thus remain an excellent choice. For customers wanting a reliable pensions partner to whom they can entrust their long-term financial security, and for shareholders seeking an attractive investment proposition.
We thank our customers and our shareholders alike for the confidence they have placed in Swiss Life and we appreciate their continued trust. We are particularly grateful to our employees for their contribution to the successful development of our company. We are confident that we will be able to master whatever challenges the future may bring while steadfastly striving to reach the ambitious goals we have set.
Strategy The need for pensions and long-term savings is great. Demand for the right products and services will continue to grow. Swiss Life intends to establish a position of leadership in this fast growing market. With its strategic focus on growth, efficiency and leadership, Swiss Life is on track to achieve this ambition and reach the targets defined for 2008.
Swiss Life Group . Review of Operations 2006 . Strategy 11In its home market of Switzerland, Swiss Life has the leading position in terms of total premiums. More than a million customers in Switzerland entrust Swiss Life with their personal or occupational pension plans. Swiss Life is a preferred alternative to local players in the French, German, Dutch and Belgian markets, especially for high net worth individuals and corporate customers, by virtue of its competence, high-performance sales channels and strong brand. Subsidiaries in Liechtenstein and Luxembourg have a leading position in the market for structured pension solutions for high net worth individuals.
The Swiss Life Group is also active in private banking with Banca del Gottardo. The bank makes an important contribution to the Group’s earnings that is not dependent on the insurance business. Banca del Gottardo is pursuing a growth strategy focused on Switzerland and Italy. Revenue and cost synergies with the insurance business will be exploited even more effectively. During the year under review, for example, administrative operations for the Swiss Life Group’s mortgage business in Switzerland were bundled into a single competency centre at Banca del Gottardo.
Swiss Life increased its market share in Switzerland to 28%. In individual business, innovative performance-oriented products with capital protection helped to expand its market share. In the increasingly competitive occupational pensions market, the product portfolio was enhanced with a flexible, modular solution. Retaining full-coverage insurance solutions, through which companies transfer all pension-related risks to Swiss Life, proved to be a wise decision. Improvements in quality and productivity on the sales side as well as the selective focus on specific customer segments in which Swiss Life was underrepresented are expected to have a lasting positive impact on future growth and profitability.
Swiss Life has sustained its strong growth momentum in markets outside Switzerland. Sales productivity has been further improved through selective measures and the expansion of multi-channel distribution structures continues.
Non-traditional pension solutions accounted for a considerably higher share of the total business. Product innovation is primarily targeted at high income and high net worth individuals as well as the self-employed and corporate customers. Thanks to its flexible products, concentration on clients with sophisticated needs and targeted market measures, Swiss Life is benefiting strongly from demographically -driven growth opportunities. Through the acquisition of CapitalLeben, a life insurer headquartered in Liechtenstein that focuses on high net worth individuals, Swiss Life can accelerate its dynamic growth in the global market for structured pension solutions.
1st pillar: state benefits 2nd pillar: occupational provisions 3rd pillar: private provisions
Leadership Swiss Life fosters a performance-oriented culture and entrepreneurial thinking throughout its workforce. An important strategic aim is further raising employee job satisfaction and identification with the company by 2008. Additional progress on this front will be driven by shorter decision-making processes, performanceoriented remuneration and the systematic recording and development of employee skills and abilities. Employee satisfaction and identification with the company continued to rise in the year under review. This was reflected by the results of the employee survey. Clear objectives, trust in management, improved communications and the general level of satisfaction were the main drivers behind the increase.
A love of music was present from day one. As a child, I sung and played the piano. I followed every parade on the street, totally enthralled. Recorder, guitar, saxophone … I played every instrument I got my hands on. Aged 18, I performed with my band. But my parents thought that I should choose a “proper” career – with a secure income.
Swiss Life Group . Review of Operations 2006 . Summary of Group Results
International premium income up 16% Gross premiums, policy fees and deposits received under insurance and investment contracts climbed 9% to CHF 22.1 billion. This rise was largely attributable to international business, where the premium volume grew by 16%. Swiss Life outpaced the market in France (+11%), Germany (+3%), the Netherlands (+19%), Belgium (–2%), Luxembourg (+78%) and Liechtenstein (+295%) in some cases by a wide margin. In Switzerland, Swiss Life increased its gross written premiums in the life business by 1% to CHF 7.6 billion. However, due to the sale of the non-life business, Swiss Life’s reported premium income fell 3% in Switzerland.
As in the previous year, total income amounted to CHF 21.5 billion. Net earned premiums rose 2% to CHF 13.8 billion and policy fees were up 17% to CHF 460 million in the period under review. Deposits received under insurance and investment contracts (usually counted as premiums for sector comparisons but not included in the income statement) grew by 27% to CHF 7.6 billion. At CHF 493 million, the fee income from asset management and banking matched the 2005 figure.
The Swiss Life Group increased profits by 9% to CHF 954 million vis-à-vis the previous year, which was above all attributable to the 23% rise in profit from operations to CHF 1258 million. This marked improvement reflects the company’s consistent focus on profitable growth, the implementation of additional measures to enhance efficiency and the good risk experience. After allowing CHF 21 million for minority interests, CHF 933 million is available for the shareholders of Swiss Life Holding. This translates into (diluted) earnings per share of CHF 26.92 and a return on equity of 12.2%, (2005: 12.3%).
Profit from operations up 23% The segment result generated by the insurance business totalled CHF 1105 million, which corresponds to approximately 80% of the segment profit. The home market in Switzerland made up CHF 668 million or 60% of the result generated in the Insurance segment. In the European markets, Swiss Life realised a segment result of CHF 437 million (France: CHF 217 million, Germany: CHF 84 million; the Netherlands: CHF 135 million; Belgium: CHF 5 million; Luxembourg: CHF 10 million; other: CHF –14 million). The segment result for Banking, to which Banca del Gottardo contributed with a solid performance, came to CHF 165 million (2005: CHF 109 million). In Investment Management, Swiss Life generated a segment result of CHF 43 million (2005: CHF 61 million). The segment “other” (which mainly comprises financing and holding companies) and “eliminations” totalled CHF 4 million (2005: CHF –73 million).
Lower contribution from financial result The financial result for investments held at own risk came to CHF 6.6 billion, down 5% on the prior-year figure. At CHF 5.2 billion, direct investment income remained at the previous year’s level, but realised and unrealised gains on assets dropped considerably. The direct return on insurance portfolio investments came to 3.6% (2005: 3.7%) and the total return to 1.8% (2005: 5.5%). The reason for this decline vis-à-vis the previous year was rising interest rates, which adversely affected the value of bond holdings. Having significantly shorted the duration by mid 2006, Swiss Life again lengthened the average term of the portfolio to 8.4 years by the end of the financial year. Net equity exposure stood at 6.7% as at 31 December 2006.
Solid capital base In the first half of 2006, shareholder’s equity fell by 6% to CHF 7.2 billion because of the significant hike in interest rates and the resultant reduction in the revaluation reserves for the bond portfolio. However, thanks to the annual profit achieved and the slight ease in interest rates, equity gained ground later in the year and totalled CHF 7.6 billion as at 31 December 2006. The core capital came to CHF 14.8 billion. The goodwill position was unchanged at CHF 692 million, which represents less than 10% of equity. As at 31 December 2006, the Swiss Life Group’s assets under management totalled CHF 205.5 billion (–1%), CHF 175.8 billion of which was carried on its own balance sheet (+6%).
Embedded value (which serves to indicate the value of the existing insurance portfolio) rose by 20% in the period under review to stand at CHF 10.7 billion. This represents an embedded value per share of CHF 316. The rise can be attributed to operational advances, growth and the improved economic environment. The value of new business accounted for CHF 121 million of this increase.
As at 31 December 2006, the Swiss Life Group employed a workforce of 8693 on a full-time equivalent basis (286 less than at the end of 2005). This decrease is due to the sale of Banca del Gottardo (Monaco) and Dreieck Industrie Leasing Ltd, as well as Swiss Life’s merger with «La Suisse».
With a market share of 28% for 2006, Swiss Life again maintained its position as the market leader in its home market. The financial year was characterised by a focus on future growth and further enhancement of efficiency: Swiss Life selectively strengthened its distribution capabilities, expanded its product portfolio and exploited the synergies from its merger with «La Suisse». In the period under review, the company generated a segment result of CHF 688 million, thereby maintaining the previous year’s performance despite the significant decline of about CHF 300 million in “other income” and the substantially lower financial result. This has set the groundwork for a further increase in profitability.
Swiss Life Group . Review of Operations 2006 . Insurance 22 Due to the market slowdown and Swiss Life’s conservative bonus policy (also with a view to profitability), premium volume for the traditional individual insurance business declined by 7% to CHF 1594 million. In contrast, the volume for performance-oriented pension products rose by over 60% to CHF 322 million in line with the company’s strategic targets.
The financial result fell by 6% to CHF 2773 million. Investment income was stable, but realised and unrealised capital gains fell by CHF 153 million due to the fact that the previous year’s result included considerably higher gains realised from the sale of bonds. A decrease of CHF 306 million was posted for “other income”, which in 2005 had included foreign currency gains and profit from portfolio sales.
Income increased by a total of 7% to CHF 5056 million. In addition to earned premiums, which were up 8%, higher policy fees (+16%) also made a contribution. Net insurance benefits and claims rose 3% to CHF 2268 million, reflecting the course of business. The outlay for policyholder participation rose 5% to CHF 857 million. Along with the strong growth in premiums, commission expense increased by 9% to CHF 666 million, which also largely explains the 9% rise in operating expenses to CHF 1171 million.
Swiss Life also again won a number of awards this year. It received the “Grand Prix de la Transparence” from the trade press for the “Swiss Life Strategic” product. In addition, Swiss Life was the first health insurance company in France to receive the “Excell Santé” quality seal from the certification company Bureau Veritas Quality International.
Swiss Life Group . Review of Operations 2006 . Insurance 24 Germany With premium volume of around EUR 78 billion, Germany is the third largest life insurance market in Europe after the United Kingdom and France. Market growth in 2006 amounted to 4%, with Swiss Life’s share of the German market at about 2%.
Net insurance benefits and claims dropped 4% to CHF 1988 million. The improved technical result and higher financial result led to an 82% increase in policyholder participation to CHF 420 million. Meanwhile, operating expenses went down 8% to CHF 350 million. Adjustments to the model assumptions used to calculate the deferred acquisition costs led to a decline in the cost for their amortisation. Furthermore, measures to increase efficiency and reduce costs had an effect. At CHF 84 million, the segment result was similar to that of the previous year.
The German life insurance market is undergoing change. The EU insurance mediation directive entered into force in 2007, and sets out new liability, training, auditing and documentation standards. The new regulations apply to agencies and tied agents – the main distribution channels of Swiss Life in Germany. Furthermore, the maximum guaranteed interest rate for newly concluded traditional life and annuity insurance policies in individual and group business has been reduced to 2.25%. The revised Law on Insurance Contracts (VVG) will also enter into force in 2008. These legislative changes pose major challenges for the whole insurance sector. For this reason, investments were made as early as 2006 in client retention measures, cost reduction programmes and making the product portfolio more flexible. Swiss Life extended its range of products in 2006 and introduced both an index-linked and a unit-linked annuity insurance product. Awards from well-
known independent rating agencies such as Assekurata, Franke & Bornberg and Morgen & Morgen confirm the high quality of Swiss Life’s products and services.
Income rose 3% on the previous year’s level to stand at CHF 2090 million, with net earned premiums and policy fees coming in CHF 77 million higher. Net insurance benefits and claims also increased to CHF 1512 million for a year-on-year rise of 4%, reflecting the trend in premiums. The outlay for policyholder participation declined from CHF 229 million to CHF 168 million because of the lower investment gains realised on separate-account contracts. The 25% rise in operating expenses to CHF 260 million was due above all to adjustments in model assumptions for calculating deferred acquisition costs and to an increase in amortisation expense. The segment result in the Netherlands improved by 17% to CHF 135 million.
The year 2006 saw new legislation take effect in the Netherlands which had repercussions for the life insurance market. Insurers are subject to new transparency requirements with regard to costs and commissions, particularly where unit-linked life insurance is concerned, and the scaling back of tax-exempt contributions led to stiffer competition with the banks. For Swiss Life, this meant that the year under review was marked by the launch of innovative products and services. The company is focusing increasingly on a multichannel distribution strategy. Swiss Life has introduced innovations such as internet sales and a franchising concept featuring “advice lounges”. Modern consulting and sales facilities have been set up in Amsterdam and Scheveningen. On the product front, Swiss Life launched its “levensloop” policy as a savings vehicle with
tax incentives for companies’ employees. With “i-Pensioen”, a standardised pension product for small and mediumsized enterprises, Swiss Life enables its customers to conclude and fully manage their contracts via the internet. Swiss Life intends to lead the way in 2007 as well with another innovative product specially developed for small businesses.
Income totalled CHF 4 million for the period under review. The unit, which is still in the development stage, posted a segment loss of CHF 5 million for its second year of business.
Gross written premiums, policy fees and deposits received 665 183 n.a.
As announced in December 2006, Swiss Life acquired Liechtenstein-based CapitalLeben at the beginning of 2007. The companies have a comparable business model and similar products. CapitalLeben posted gross premium income for 2006 of CHF 1.3 billion with customer assets under management of CHF 4.0 billion. The acquisition makes Swiss Life, with its companies in Liechtenstein and in Luxembourg, one of the leading providers of structured pension solutions for international high net worth individuals, and will enable it to accelerate its dynamic growth in this global market.
Banca del Gottardo 2006 was a year of repositioning for Banca del Gottardo under largely new leadership. Under local accounting practices, the bank reported a consolidated net profit of CHF 97 million, which corresponded to an increase of 17% on the prior-year figure. The implementation of the new strategy meant that the accounts included significant special factors, but the overall impact on the net profit was neutral.
As planned, Banca del Gottardo repaid CHF 100 million in capital to Swiss Life Holding in the year under review. With a core capital ratio (BIS Tier 1) of 13% at the end of 2006 (2005: 12%), Banca del Gottardo is still adequately capitalised and has enough funds to implement its growth strategy.
This year Banca del Gottardo is celebrating its 50th anniversary and Swiss Life its 150th. To mark the occasion, the bank will be staging various events and actively sponsoring social and cultural events under the motto “50 Years – Looking Forward”.
Investment Management Swiss Life’s Investment Management generated a segment result of CHF 43 million. Assets under management at the end of 2006 totalled
Business volume increased slightly in the year under review to CHF 1.6 billion. Although 2006 was also characterised by strong competitive pressure, the Network reaffirmed its leading market position. This was largely due to its longstanding and strong relationships with its Network partners and customers. Over the past year, the Network managed 4,000 contracts for 430 customers.
The year under review saw a further increase in requests for services such as the provision of country-specific information, and advice on local benefit plans and market developments. Customers make full use of the Network’s extensive knowledge of international employee benefit solutions, saving themselves the need to develop their own resources in this area. From its head office in Zurich, the Swiss Life Network team of around 40 specialists works closely with its Network partners to win new clients and serve existing customers.
In November 2006, the Swiss Life Network held its second Asia Pacific Conference. Approximately 100 Network partners, customers and brokers attended the event in Mumbai, India, exchanging views on regional market developments, and strengthening the Network’s presence in the AsiaPacific region while intensifying cooperation with local partners.
I was in a world of my own when I played. I have fond memories of my time at kindergarten. I liked the lively atmosphere. The teacher gave us a lot of freedom. We were allowed to play alone or in groups and to try out whatever crossed our minds. However, she always had the overview. I wanted to be like her.
Today I’m a construction manager. I love being outside on the building site. In construction, there are no second chances; everything must work the first time round. Therefore, the search for the right solution is often very lively, almost hectic. But there is something playful about it – like in the old days – but in another dimension.
The most important companies falling within the Group’s scope of consolidation are presented in the Financial Statements (note 41). Details concerning the listing on the SWX Swiss Exchange and market capitalisation can be found on page 40. The organisational structure of the Group reflects the company’s main areas of business. The resulting allocation of functional responsibilities is reflected in the division of responsibilities in the Corporate Executive Board and can be seen in the market units. With regard to the insurance business, each country has one person with market responsibility who is also responsible for the results.
No shareholders are known to Swiss Life Holding whose direct or indirect interest on the balance sheet date (31 December 2006) exceeded the threshold level of 5% of the registered shares in issue requiring notification.
In December 2002, Swiss Life Holding completed an ordinary capital increase of CHF 541 985 200, divided into 10 839 704 registered shares with a par value of CHF 50 each, in which existing shareholders were granted negotiable subscription rights for each share. As a result, the share capital increased to CHF 1 083 970 400, divided into 21 679 408 registered shares with a par value of CHF 50 each. Also in December 2002, pursuant to the issue of the MCS I (2002–2005) mandatory convertible securities, 1 768 535 registered shares with a par value of CHF 50 each were created from the conditional capital. As a result, the ordinary share capital rose by CHF 88 426 750 from CHF 1 083 970 400 to CHF 1 172 397 150, divided into 23 447 943 registered shares. The conditional capital decreased accordingly, to CHF 182 565 850 or 3 651 137 registered shares with a par value of CHF 50 each.
Due to partial conversion of the 0.625% convertible bond issue (2004–2010) (cf. section on “Convertible bonds and options” on page 41), 19 registered shares in all were created from conditional capital in 2004. The share capital thereby rose to CHF 1 688 790 900, divided into 33 775 818 registered shares with a par value of CHF 50 each, and the conditional capital was reduced by CHF 950 to stand at CHF 183 406 100, divided into 3 668 122 registered shares with a par value of CHF 50 each.
At Swiss Life Holding’s Annual General Meeting on 9 May 2006, shareholders once more approved a reduction in par value of CHF 5 per registered share instead of a dividend distribution. The share capital was thus reduced to CHF 1 384 819 198, divided into 33 776 078 registered shares with a par value of CHF 41 each, and the conditional capital went down to CHF 150 382 342, divided into 3 667 862 registered shares of CHF 41 each.
Shares 33 776 269 fully paid Swiss Life Holding registered shares with a par value of CHF 41 each were outstanding on the balance sheet date. Subject to the 10% limit on voting rights set out in the Articles of Association (cf. the section below on “Shareholders’ participation rights” on page 52), each share conveys a right to one vote at the General Meeting of Shareholders.
There are no other equity securities besides the registered shares mentioned above, nor do any participation certificates or dividend right certificates exist.
Limitations on transferability and nominee registrations Swiss Life Holding shares are not subject to any limitations on transferability. According to the Articles of Association, resolutions for the introduction, amendment or repeal of restrictions on transferability must be put before the General Meeting of Shareholders and must be approved by at least two-thirds of the voting shares represented and by at least an absolute majority of the share par value represented. Swiss and foreign banks, securities brokers and companies acting on their behalf may be entered in the share register as nominees if they are holding shares of Swiss Life Holding in their custody for the account of the beneficial owners. Professional asset managers may also be registered as nominees if, in a fiduciary capacity, they have deposited Swiss Life Holding shares for the account of third parties with Swiss or foreign banks or securities brokers in their own name. Nominees are required to be subject to banking or financial market supervision. A request must be filed to register as a nominee. The voting rights of nominees are restricted to 10% of the share capital, whereby nominees who are connected with regard to capital or voting rights under uniform management or contractual agreement will be counted as a single shareholder. The Board of Directors may approve exceptions to these restrictions on registration, observing the principle of responsible judgement. No such exceptions were granted during the period under review.
Board of Directors Function The Board of Directors is responsible for all matters that are not reserved for the consideration of the General Meeting of Shareholders (formally the supreme decision-making body of a public limited company) under the terms of the law (Art. 698 of the Swiss Code of Obligations (OR)) or by the company’s Articles of Association. In addition to its non-transferable duties (stipulated in Art. 716a OR) the Board of Directors is responsible, in particular, for the ultimate direction of the Group, including determination of strategy as well as supervision of the Corporate Executive Board.
Elections and terms of office Pursuant to the Articles of Association, the Board of Directors shall consist of no fewer than five and no more than fourteen members. The members of the Board are elected by the General Meeting of Shareholders for a term of office not exceeding three years, and as a rule individually. The Organisational Regulations stipulate that a member of the Board of Directors shall automatically resign from the Board at the General Meeting of Shareholders in the year in which the member reaches the age of 70.
Composition The Board of Directors of Swiss Life Holding consists entirely of non-executive directors with no duties related to operational management within the Swiss Life Group, and who have not exercised such duties during the past three financial years. No member of the Board, moreover, has any significant business relationship with Swiss Life Holding or any other Group companies. The members of the Board of Directors of Swiss Life Holding also make up the Board of Directors of Swiss Life/ Rentenanstalt.
Members of the Board of Directors As of the balance sheet date, the Board of Directors was composed of the following members: Year appointed/ Elected Name Functions reelected until
Bruno Gehrig Born 1946, Swiss national Chairman of the Board of Directors
Bruno Gehrig received his doctorate in economics (Dr. rer. pol.) in 1975 from the University of Berne where, following studies at the University of Rochester, New York, he also qualified as a lecturer in 1978 with a paper on monetary policy. From 1971 to 1980 Mr Gehrig was an assistant and lecturer at the University of Berne, becoming Assistant Professor in 1978. In 2006 he received an honorary doctorate from the University of Rochester and became a Doctor of Laws.
From 1981 to 1984 Bruno Gehrig was head of the Economics Section at the Union Bank of Switzerland. In 1985 he spent a year studying international banking. In 1988 he was promoted to Head of the Stock Markets and Securities Sales Division for the UBS Group. Between 1989 and 1991 Mr Gehrig was Chairman of the Executive Board of Bank Cantrade. From 1992 to 1996 he held the chair as Professor of Business Administration at the University of St. Gallen and was Head of its Swiss Institute of Banking and Finance. In 1996 Mr Gehrig was appointed Member of the Governing Board of the Swiss National Bank as Head of Department III, and served as the Board’s Vice Chairman from 2001 to 2003. His political activities include serving as Chairman of the economic policy study group of the Swiss Christian Democratic Party (CVP) from 1984 to 1991. He was a member of the Swiss Federal Banking Commission between 1992 and 1996.
Gerold Bührer graduated from the University of Zurich in economics (lic. oec. publ.) in 1972. Following 17 years with the Union Bank of Switzerland as a member of management in its Financial Sector and Member of the Executive Board of its fund investment company, he joined Georg Fischer AG in 1991 where he was a member of its Executive Board (Finances) until 2000. He currently acts as an independent economic consultant.
Member of the Board of Directors – Cellere AG, St. Gallen, Member of the Board of Directors – Georg Fischer AG, Schaffhausen,
Volker Bremkamp joined Albingia Versicherungs AG in Hamburg in 1963 (a subsidiary of Guardian Royal Exchange plc, London), receiving his qualifications as an insurance expert in 1965. Between 1969 and 1971 he was employed by various insurance companies and brokers in London and Paris. He returned to Albingia Versicherungs AG, Hamburg, in 1971, serving as an Executive Director from 1978 to 1989 and from 1989 to 2000 as Chief Executive Officer of Albingia Lebensversicherungs AG and of Albingia Versicherungs AG. Volker Bremkamp was an Executive Director and at the same time Group Executive Director, Continental Europe, of Guardian Royal Exchange plc, London, from 1995 to 1999, which was taken over by the AXA Group in 1999. From 1999 to 2000 he was an Executive Director of AXA Colonia Konzern AG, Cologne, which is the holding company of AXA Germany. Since 2000 he has been Managing Director of BMB Bremkamp Management- und Beteiligungs-GmbH.
Chairman of the Supervisory Board – AON International Insurance Broker, Hamburg,
Other appointments: – Swiss Pool for Aviation Insurance, Chairman – Converium Holding AG, Zug,
Member of the Board of Directors – Otis, Fribourg, Member of the Board of Directors – Autogrill Switzerland LTD, Olten,
Member of the Board of Directors – Swiss Olympic Association, Berne, Vice-Chairman of the disciplinary chamber in charge of doping cases – America’s Cup, Member of the Jury
Peter Quadri received his master’s degree in economics and business administration (lic. oec. publ.) in 1969 from the University of Zurich. In 1970 he joined IBM as a systems engineer and software/operating systems specialist. Following various periods spent in the USA, Denmark and Switzerland, he held the position of CEO of IBM
Member of the Board of Directors – Bühler AG, Uzwil, Member of the Board of Directors – Zurich Chamber of Commerce, Chairman – economiesuisse, Zurich, Member of the Board
Pierfranco Riva Born 1940, Swiss national Member of the Board of Directors
Pierfranco Riva studied at the universities of Fribourg, Munich and Berlin between 1960 and 1966, and received his Doctorate in Law in 1968. He became a member of the bar in 1970. He has been an attorney and notary public with the law firm Felder Riva Soldati in Lugano since 1970. He served as Chairman of the Council of the Bar Association of the Canton of Ticino between 1987 and 1989, and from 1995 to 1999 was a member of the supervisory authority, Council of Magistrates for the Canton of Ticino.
Franziska Tschudi Born 1959, Swiss national Member of the Board of Directors
Resignations The term of office of Georges Muller expired with the Annual General Meeting of Swiss Life Holding on 9 May 2006. Georges Muller decided not to stand for reelection. Henry Peter was appointed to the Board of Directors in his stead.
Internal organisational structure In line with the Articles of Association, and in observance of local and international standards for corporate governance, the Board of Directors decided to introduce a revision of the Organisational Regulations, effective 1 December 2003. These regulations are reviewed regularly in line with current practice and developments in national and international best practice, and are updated whenever necessary. They apply to the internal organisation and delineate the tasks and competencies of the Board of Directors, the Board of Directors’ committees, the Chairman of the Board of Directors and the Corporate Executive Board.
The Chairman of the Board of Directors coordinates the work of the Board and the committees, and ensures reporting from the Corporate Executive Board to the Board of Directors. In urgent situations, the Chairman may also determine the necessary measures and take steps falling within the scope of the competencies of the Board until it takes a decision. If a timely decision cannot be reached by the Board of Directors, the Chairman is empowered to take a decision.
The Board of Directors met seven times during the year under review, with the meetings lasting around three and a half hours on average. All the Board members took part in all the meetings with the exception of a single absence of one member of the Board of Directors. The Group CEO also attended all the meetings. The other members of the Corporate Executive Board were also invited to all the meetings of the Board of Directors. Parts of the meetings on specific subject areas are regularly held in closed conference among the Board of Directors only.
The Board of Directors performs a self-assessment once a year, while discussions take place regularly between the Chairman of the Board and its members on an individual basis.
The committees of the Board of Directors sometimes call in external consultants for their work and assess their work themselves once a year. If the Chairman of the Board of Directors is not a member of a committee of the Board of Directors, he has the right to attend meetings (without voting rights).
In the year under review, all the Board members took part in all the meetings of the Board’s committees to which they belong.
Chairman’s Committee The Chairman’s Committee assists the Chairman of the Board of Directors in fulfilling his leadership and coordination role, and assists the Board of Directors with matters concerning strategy and corporate governance. It additionally assists the Board of Directors in decisions concerning the appointment of personnel at the highest levels of management (nomination function) and in setting guidelines for compensation of members of the Board of Directors and the Corporate Executive Board, and determines, in application of these guidelines, the compensation and terms of employment of the Group CEO and the other members of the Corporate Executive Board (compensation function).
The Chairman of the Board of Directors presides over meetings. As a rule, the Group CEO attends the Chairman’s Committee meetings or parts of meetings in an advisory capacity. Further members of the Corporate Executive Board or in-house specialists may also be invited to attend.
Investment and Risk Committee The Investment and Risk Committee assists the Board of Directors in matters concerning investment management, financial management and risk management within the Group. The tasks and competencies of the Investment and Risk Committee include, among others, submitting proposals on the principle features of asset and liability management to the Board of Directors, determining the investment policy, assessing capital adequacy, verifying compliance with guidelines on investments, and establishing the risk tolerance in insurance and investment operations.
As a rule, the Group CIO and Group CFO attend the Investment and Risk Committee meetings or parts of meetings in an advisory capacity. The Group CEO may attend the meetings of the Investment and Risk Committee (without voting rights). Further members of the Corporate Executive Board or in-house specialists may also be invited to attend.
The Investment and Risk Committee meets at least four times a year. Four meetings of the Investment and Risk Committee were held in the year under review, with a duration of around two and a half hours.
The Audit Committee meets at least four times a year. The frequency of meetings depends on the financial budgeting and reporting process. The Audit Committee met four times during the year under review, with the meetings lasting around three and a half hours on average.
Control instruments vis-à-vis the Corporate Executive Board The Board of Directors is kept continually and comprehensively informed regarding the activities of the Corporate Executive Board. The Group CEO keeps the Chairman of the Board of Directors as well as the Board of Directors and its committees regularly informed about the conduct of business, new business activities and significant projects. The Group CEO informs the Chairman of the Board of Directors immediately about extraordinary matters.
Rolf Dörig has been Group Chief Executive Officer (Group CEO) of the Swiss Life Group since
Other appointments: – Swiss Insurance Association, Member of the Board – economiesuisse, Zurich,
Vice-Chairman of the Board of Directors – Danzer AG, Baar, Member of the Board of Directors – Zurich Chamber of Commerce,
Executive Committee of the Admission Board of the SWX Swiss Exchange
Paul Müller Born 1950, Swiss national Chief Executive Officer Switzerland (CEO Switzerland)
Paul Müller studied economics at the University of St.Gallen. After graduating with a master’s degree (lic. oec. HSG) in 1975 he launched his career by joining Winterthur Versicherungen. In 1982 he moved to Baloise Insurance where he held a number of leading positions. As a member of the Executive Board he was ultimately assigned responsibility for the German, Austrian, French, Belgian and Luxembourg markets. From 1995 Mr Müller served as CEO of Helvetia Patria Assurances’ Swiss Division in Basel.
He took up his new position as Chief Executive Officer Switzerland (CEO Switzerland) for the Swiss Life Group in January 2003.
Member of the Executive Committee – Society for the Promotion of the Institute of Insurance
The physicist Reto Himmel (Master’s Degree in Physics, Swiss Federal Institute of Technology (ETH), Zurich, 1982) graduated from the Harvard Business School in 1987 with an MBA. He began his career in 1982 as a software engineer with Brown Boveri & Co. in Baden, before joining Credit Suisse in 1985. From 1990 to 1994 he went on to head the General Secretariat at Bank Leu, where he was also in charge of Corporate Planning. He then served as Chief of Staff of the Investment and Trading division at Credit Suisse. In 1997 Mr Himmel became a member of the Executive Board of ABN AMRO (Switzerland), assuming responsibility for the bank’s logistics operations. He became Head of Operations at UBS Warburg Switzerland in August 2001.
Other appointments: – SWX Swiss Exchange, Member of the Board of Directors and the Audit Committee – Technopark Zurich, Member of the Board of Trustees
Thomas Müller Born 1965, Swiss national Group Chief Financial Officer (Group CFO)
Thomas Müller studied economics and business administration (lic. rer. pol.) at the University of Berne and earned an MBA from the IMD in Lausanne. His professional career began in 1991 at Swiss Volksbank where he was responsible for asset and liability management. Up to and after the integration of Swiss Volksbank into Credit Suisse Group, he headed the treasury department at Credit Suisse from 1994 to 1997. In 1997 he moved to Marc Rich Holding where he was responsible for the group’s trading in interest rate instruments. Thomas Müller joined Banca del Gottardo in 2002 as Chief Financial & Risk Officer and Member of the Executive Board.
He became Group Chief Financial Officer (Group CFO) for the Swiss Life Group on 1 January 2006.
Patrick Frost Born 1968, Swiss national Group Chief Investment Officer (Group CIO)
Patrick Frost studied at the ETH in Zurich and the universities of Cologne, Basel and Zurich, obtaining degrees in natural science (dipl. Natw. ETH, 1993), economics (Dr. rer. pol., 1998) and law (lic. iur., 2001). He began his professional career in 1996 as a portfolio manager and analyst in financial engineering at Winterthur Group. Between 1991 and 2001 he was a Senior Bond Portfolio Manager at Winterthur Investment Management Corp. in New York. He was head of Global Fixed Income at Winterthur Group from 2001, where he played a key role in the further strategic development of its asset management.
Patrick Frost has been Group Chief Investment Officer (Group CIO) for the Swiss Life Group since July 2006.
Resignations Martin Senn, Group Chief Investment Officer (Group CIO) from 1 January 2003 to 31 March 2006, resigned from the Corporate Executive Board and moved to Zurich Financial Services Group. The new Group CIO for the Swiss Life Group is Patrick Frost.
The share option programme for Swiss Life Group management, which was introduced in 2000, was discontinued at the end of 2002. Accordingly, no more share options have been allocated since 2003. The share options issued in the years 2000 and 2001 expired worthless at the end of March 2004 and the end of May 2006.
During the review period, 36 members of the Swiss Life Group senior management participated in the corresponding continued equity compensation programme. A total of 46 651 PSUs were allocated; a total of 22 255 for the Corporate Executive Board, of which 7153 to the Group CEO.
Further details on compensation and benefit expenditure for the Swiss Life Group management and employees can be found in the Financial Statements (notes 25 and 33).
Compensation paid to acting members of governing bodies Compensation paid to acting members of the Board of Directors and the Corporate Executive Board during the period under review was as follows: In CHF 2006 2005
The following compensation was received by acting members of the Board of Directors of Swiss Life Holding in 2006 during the year under review.
Franziska Tschudi CHF 72 000 121 1) c.f. also the section on share allotment 2) including remuneration for his role as Vice-Chairman of the Board of Directors and Committee member of the Board of Banca del Gottardo
There was one resignation from both the Board of Directors and the Corporate Executive Board during the review period; in 2006 a new member of the Board of Directors was appointed, and two new members of the Corporate Executive Board were approved.
Share allotment in the year under review Swiss Life Holding shares were allocated to members of the Board of Directors and the Corporate Executive Board as follows during the 2006 financial year: Board of Directors 1483 shares allocated at values of CHF 255.25, 229.22 and 226.281). They are subject to a three-year vesting period
allocated at a value of CHF 257.553). They are subject to a one-year vesting period.
1) Economic value equivalent to the taxable value taking the vesting period into account. The share prices on allocation amounted to CHF 304.00, 273.00 and 269.50.
2) The 6949 shares were allocated under the 2004 regulations governing the long-term remuneration component.
3) Economic value equivalent to the taxable value taking the vesting period into account. The share price on allocation amounted to CHF 273.00.
No shares were allocated to closely linked parties4) within the meaning of the law.
Share ownership On the balance sheet date, acting members of the Board of Directors and the Corporate Executive Board (including closely linked parties) held a total number of Swiss Life Holding registered shares as follows: Board of Directors 10 276 shares
4) “Closely linked parties” are natural persons and legal entities pursuant to Art. 678 of the Swiss Code of Obligations that have close personal, economic, legal or de facto ties with members of governing bodies. This typically includes spouses, minor children, companies controlled by the member of the governing body, and natural or legal persons serving the member of the governing body in a f iduciary capacity.
Expenditure for occupational provisions Details on benefit expenditure can be found in the Financial Statements (notes 25 and 33). For reasons of transparency, details of the following benefits are provided here: As Chairman of the Board of Directors, Bruno Gehrig is affiliated to the employee benefits institutions of Swiss Life for the purpose of occupational provisions. The same conditions as for other insured persons apply. The expenditure for occupational provisions for Bruno Gehrig assumed by Swiss Life in the period under review amounted to CHF 92 022. No such affiliation exists for other members of the Board of Directors; no contributions have been made on their behalf.
Expenditure for occupational provisions in favour of members of the Corporate Executive Board totalled CHF 689 796 in the period under review, of which CHF 190 040 for Rolf Dörig as Group CEO. No special allocations in the form of purchases of insurance years, etc. were made.
As a result of the changes in the law which became effective on 1 January 2006 pertaining to occupational provisions and the associated reduction in employee benefits, as well as the simultaneous reduction of expenditure for occupational provisions on the part of the employer, Swiss Life paid a sum of CHF 1 240 000 to Rolf Dörig to equalise the limitation of the insurable salary. Tax advantages which cease to apply under the new legal provisions governing the insurable salary are not compensated. No additional expenditure arises for SwissLife as a result of this measure.
Total compensation 2006: in cash and shares CHF 694 998 including contribution to occupational provisions CHF 787 020
Right of representation The Articles of Association stipulate that a shareholder may be represented by another shareholder, a legal representative, a management representative, an independent voting representative or a representative of deposited shares. Married persons may also be represented by their spouses, who are not required to be shareholders.
Required majorities In addition to the resolutions provided for by law, a qualified majority (corresponding to at least two thirds of the voting shares represented and an absolute majority of the share par value represented) is required to: – change provisions concerning restrictions on voting rights – dissolve the company (liquidation) – dismiss more than one third of the Members of the
Duration of the mandates and term of office of the lead auditor The Articles of Association stipulate that the external auditor is to be elected by the General Meeting of Shareholders for one financial year at a time. At the time Swiss Life Holding was established in 2002, PwC was named as Group auditor. Since then PwC has been reelected without fail, most recently for the year 2006 at Swiss Life Holding’s Annual General Meeting of Shareholders in May 2006. PwC has also acted as Group auditor for Swiss Life/Rentenanstalt since 1994. The partner in charge of auditing the Swiss Life Holding consolidated financial statements at PwC (lead auditor) has held that function since the 2004 financial year.
53Auditing fees In 2006 the auditing fees credited to PwC came to CHF 12 million (2005: CHF 11.3 million). This includes the fees for reviewing the 2006 half-year accounts.
Additional fees In 2006 PwC received additional fees totalling around CHF 2.1 million for advisory services (2005: CHF 1.2 million), approximately a quarter of which was for financial and auditing advice, respectively. The remainder resulted from legal, fiscal and strategic advice, as well as other advisory services.
Information policy In addition to its comprehensive Annual Report and Financial Statements, Swiss Life Holding also publishes its half-year results. All the Swiss Life annual and half-year reports since 1997 can be accessed on the www.swisslife.com website. Twice a year, a report with important facts and figures is sent to all the shareholders listed in the share register. In addition, the fourth Investor’s Day was held on 5 December 2006.
The goal of personnel development is the promotion of all employees. It is aimed at developing strengths, plugging gaps in competencies and maintaining and improving each and every individual’s employability. All employees can take advantage of the internal training courses in this context. In Switzerland, the “Life Learn” learning platform introduced in the year under review created greater flexibility. This platform includes around 600 courses for Internal Services and External Sales staff. Besides courses that are entirely online, courses requiring attendance and various combinations are offered. The plan is to employ this platform throughout the Group following its successful introduction in Switzerland. The training resources also include a Group-wide development programme for the promotion of employees with development potential.
The aim of internal communication processes is to provide employees with transparent information on the development of the company. In this connection, the most important communications channel is the intranet, which provides country-specific and Group-wide information. Periodic rounds of talks with executive board members at corporate and company level encourage a dialogue between staff and management. Employees receive first-hand information on the course of business at information events concerning the annual and half-year results and on other suitable occasions. Moreover, the Group-wide staff magazine “Life” comes out five times a year in Dutch, French and German.
Sponsoring Sponsoring is a way of positioning Swiss Life in the market and cultivating relationships. In Switzerland, Swiss Life is a partner of the Swiss Football Association as sponsor of the teams for international competitions – from the national side to the U15 juniors. Swiss Life supports running events with a national and an international profile, such as the Zurich marathon. With regard to cultural activities, the company’s sponsorship mainly lies in the areas of music and the circus. Banca del Gottardo, a member of the Swiss Life Group, is the only bank with its own art gallery, the Galleria Gottardo. This gallery is run in close cooperation with the Peggy Guggenheim Foundation.
Alongside the training and development measures, SwissLife relies on ideas from its employees on improving the work environment. Employees can play an active part in shaping their area of work by assessing their own activities each year and rating their job environment and their immediate superior. 84% of all employees availed themselves of this opportunity last year. The measurement of commitment is the central evaluation criterion in the Employee Survey. This value shows how strongly the employees identify with their employer and their work, and reflects their level of satisfaction. In the year under review, the value given to commitment was 73 out of 100 index points on average. The strategic target is 80 index points in all business units.
To commemorate its 150th anniversary, Swiss Life established the “Perspectives” foundation to support charitable, scientific, cultural and sports activities which promote public welfare. The foundation’s keynote themes for the years ahead are integration and education.
Customers in Switzerland and France are offered a number of prevention programmes, focusing on health issues, preventive measures and help with illnesses as major themes. In addition, support is given in dealing with dependency, stress and burnout. In Switzerland, Swiss Life also endeavours to make experts on social and health issues accessible to its policyholders, and to provide help with reintegration in the event of illness.
In France, Swiss Life supports the annual solidarity event for the Institut Curie. The Institut Curie is a hospital and treatment and research facility whose mission is to fight cancer. At the “Courir pour la vie, courir pour Curie” run, money is collected for every metre that is run and used to finance cancer research.
In Germany, Swiss Life launched the “Salon Palais Leopold” series of events. Decision-makers from the worlds of business, politics and media hold regular discussions on important social and political subjects. The subsidiary in Germany also helped to set up the new EuropVital e.V.
In Belgium, Swiss Life supports active public discussion of financial provisions for the future. The subjects go beyond short-term political and financial debates and take in developments around the world. Swiss Life also conducts surveys in this area. Since 2005, the company has been asking people questions about pension issues. The goal is to provide a sounding board for the articulation of the population’s requirements to decision-makers, employers and politicians. As an example: The second “Swiss Life Pension Day” took place in November 2006. Around 350 people participated – including business leaders, members of parliament, academics and insurance brokers.
The company also takes ecological factors into consideration for construction projects and as one of the biggest private real estate owners in Switzerland. Swiss Life installs measuring devices to monitor water consumption in its rental properties in order to encourage a more enlightened approach to water use. Usage-based costing reduces water consumption by 20% on average.
From the shareholder’s point of view, embedded value serves as an indicator of the value of the existing insurance portfolio. It is composed of three components: the present value of future profits (PVFP) minus the present value of the cost of holding capital (CoHC) and the adjusted net asset value attributable to shareholders (ANAV). Future new business is not included.
Embedded Value The embedded value of the Swiss Life Group rose by 20%
Embedded value of the Swiss Life Group as at 31 December
ANAV of Swiss Life Holding1,2) 2 110 1 813 of which cost of holding capital –1 050 –1 864 1) Adjusted Net Asset Value 2) Equity of Swiss Life Holding less book value of Swiss Life/Rentenanstalt and embedded value of Swiss Life Luxembourg (for 2006)
“PricewaterhouseCoopers has reported to the Board of Directors, that, based on the procedures performed, in their opinion.
– The methodology set out in the EV-Guidelines, in all material respects and with due regard to the nature of the business, is appropriate and consistent for the purpose of the (traditional) Embedded Value; – The local implementation of the methodology is, in all material respects and with due regard to the nature of the business, consistent with the prescriptions of the management of the Company and in line with general market practice; – The assumptions determined by Swiss Life are reasonable to derive the embedded value Information; – The Embedded Value Information has been properly compiled on the basis of the chosen assumptions and methodology.
The assurance report issued by PricewaterhouseCoopers to the Board of Directors where the assumptions made, the work performed, and the results are outlined, can be seen on www.swisslife.com.”
Fiscal effects: divergence from assumptions made at the end of 2005 +134
Impact of 100 bp decrease in investment return –1 070 –603 –1 673
Impact of 100 bp increase in return on new bond investments +170 +299 +469
In addition to involvement with the Group-wide risk management process, the relevant local units are responsible for ensuring compliance with the regulatory and legal requirements specific to each country, and support local management in all matters relating to risk management.
Swiss Life pursues an integrated approach. For many years now, the company has been using an internal risk model that essentially corresponds to the new risk-based solvency regulations in Switzerland.
Market risks It is imperative that a life insurance company monitors and controls market risks. Swiss Life is obliged to offer insurance contracts with a guaranteed rate of interest to its policyholders. Besides the guarantees, often customers with long-term ties expect to benefit from a positive trend on the financial markets in the form of bonuses. In the individual countries, life insurers are required by law to allocate to policyholders a minimum share of the profit in the form of bonuses. In order to generate the guaranteed interest and the anticipated or legally prescribed bonuses, suitable financial instruments are used on the investment side. These are usually bonds or investments which – like properties – generate regular income and preserve value.
As of 31 December 2006, the Swiss Life Group held assets under management of CHF 205.5 billion. The insurance portfolio came to CHF 147.5 billion, the lion’s share of which (60%) was invested in bonds. The net equity exposure – adjusted for positions held on the client’s account and allowing for hedging instruments – amounted to 6.7% on the key date. As Swiss Life announced in December 2006, the Group’s equity exposure may exceed the previous target range (0% to 7%) in the future.
Swiss Life Group . Review of Operations 2006 . Risk Management
The individual business units constantly monitor the creditworthiness of their borrowers. To avoid concentrations of risk across the Group as a whole, the central risk management team collates the credit positions at Group level and reduces them, as required, in the individual units. In the case of credit business with financial institutions, Swiss Life regularly appraises the outstanding positions and requests additional payments if an agreed limit has been exceeded.
Swiss Life Group . Review of Operations 2006 . Risk Management 69Underwriting risks These include mortality, disability and cancellations. Swiss Life conducts an annual review of the mortality tables and analyses the mortalities. To manage disability risk and stabilise risk performance, Swiss Life draws up evaluations on specific disability cases in addition to the portfolio analyses. This information is incorporated in the setting of premium rates. The data is also used to form suitable reserves so that Swiss Life can meet its future obligations in the insurance business at any time. Sensitivity analyses quantify the actuarial risk by examining fluctuations in the value of liabilities as a result of variations in risk factors such as mortality, disability and costs. Swiss Life analyses the cancellation rate annually by making comparisons between assumed and actual customer behaviour.
Operational risks Operational risks include process risks, risks relating to moral hazard, technology risks and business risks; they result from changes in the economic, fiscal or legal environment. In order to pre-empt such risks, a review based on uniform criteria is carried out periodically throughout the Group. The consolidated report highlights any potential need for action at an early stage.
The risk categories that Swiss Life has been using for several years to steer economic risk are congruent with the corresponding categories of the Swiss Solvency Test. The new Supervisory Act also stipulates that operational risks be included; these have yet to be incorporated in the Swiss Life model.
Asset and liability management (ALM) is aimed at systematically getting the right match of assets and liabilities, thereby ensuring that commitments to policyholders can be met at all times. Another objective is to adequately compensate shareholders for making risk capital available. Based on the underlying economic principles, Swiss Life determines the risk budget, asset allocation, product design and distribution policy, taking the statutory and regulatory framework into account. Asset and liability management addresses the following questions: – How big are the risks that Swiss Life can assume (risk capacity)? To what extent does Swiss Life want to accept risks and in what form (risk appetite)? The risk capacity and risk appetite determine the risk budget.
Given that developments on the liabilities side are dynamic, a static asset allocation approach would be unsuitable. Insurance liabilities can be split into a guaranteed segment and a non-guaranteed segment (bonus component). The guaranteed segment corresponds to the guaranteed minimum interest rate. The bonus is subject to change over the course of time, because the amounts to be distributed are directly influenced by developments on the financial markets.
With regard to interest-rate risks, the management of the duration gap between assets, on the one hand, and liabilities, on the other, is decisive. Swiss Life’s risk capacity enables it to enter into interest rate risks selectively. In this connection, Swiss Life has lengthened the asset duration since 30 June 2006 by almost three years in response to interest-rate developments, thus shortening the duration gap by two years. Moreover, under the holistic ALM approach, asset allocation differentiates by product line to a greater extent, thereby facilitating optimisation of the equity ratio. As a result, the Group’s equity exposure may exceed the previous target range (0% to 7%) in future.
In addition to purely economic considerations, other factors still have to be taken into account for asset allocation, such as regulatory requirements and international accounting standards. Moreover, the level of equity (solvency), the need for liquidity and the requirements of rating agencies also influence the asset allocation.
From the company’s point of view, the focus is ultimately on ensuring the long-term success of the business model: Swiss Life is therefore interested in a sustainable balance between the different interests of policyholders and shareholders.
Product design Swiss Life offers its customers the products they need. These products include guarantee commitments while allowing customers to participate in positive market trends. In designing products, Swiss Life coordinates asset and liability management and the distribution policy to ensure that future developments on the capital market only have a marginal impact on profitability. Product development guidelines have been introduced throughout the Group to ensure that the product design principles are observed. They serve as standards for the local guidelines. When business is written, therefore, the responsibility does not rest exclusively with the local business unit; in certain cases, it lies with the Corporate Executive Board as stipulated by directive.
There must always be sufficient reserves to meet the contractual and regulatory requirements arising from the existing business. Consequently, not only must the regulatory constraints be observed, but internal estimates concerning specific types of risk must also be taken into consideration.
Process management Swiss Life manages the asset and liability process centrally. Responsibility for the Groupwide ALM process rests with the Group Chief Risk Officer. The areas of risk management, asset management, actuarial services, product management and finance management determine the ALM process which is extensively monitored by the Group CFO.
Rösti potatoes and fried eggs got boring after a while. So I learned to cook. I cut out recipes and baked my own bread. And of course desserts! On Sundays, I would make vanilla ice-cream with bananas and hot chocolate for my six siblings. They thought it was great and I became a chef.
I cooked on the Bürgenstock near Lucerne, as well as in Australia and Honolulu. Then I followed in the footsteps of my grandfather. He was a district sales manager at Rentenanstalt. I looked after people’s nutritional wellbeing for a long time. But for the last eight years it has been even more enjoyable to look after the financial wellbeing of my customers.
Commitment means staying on the ball. In contrast to cooking, contact with people plays a major role in pension consultations. Everyone is different – and that fascinates me. In some discussions, I can lose track of time. I especially like the fact that I can do good for others. Our solutions enable our customers to lead a better, worry-free life.
Consolidated Statement of Cash Flow . . . . . . . . . . . . . . . . . . . . 82
Notes to the Consolidated Financial Statements . . . . . . . . . . . 87
Report of the Group Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . 193
Report of the Statutory Auditors . . . . . . . . . . . . . . . . . . . . . . . 200
Policy fees earned on investment and unit-linked contracts 39 332 280
Net gains/losses on financial assets 6, 9 1 045 2 582
Benefits and claims under insurance contracts 39 –13 909 –13 944
Impairment of property and equipment and intangible assets 18, 19 –32 –119
Basic earnings per share for the net profit attributable to equity holders of Swiss Life Holding (in CHF) 7 27.87 25.67
Diluted earnings per share for the net profit attributable to equity holders of Swiss Life Holding (in CHF) 7 26.92 24.82
Swiss Life Group . Financial Statements 2006 . Consolidated Balance Sheet
Financial assets pledged as collateral 12, 13, 37 124 1 232
Financial liabilities at fair value through profit or loss 12, 39 9 538 6 830
Liabilities associated with assets held for sale 32 – 1 734
Net realised and unrealised gains (–)/losses (+) –1 474 –1 685
Financial instruments at fair value through profit or loss 897 –1 287
Disposals of subsidiaries, net of cash and cash equivalents 30 119 18
Swiss Life Group . Financial Statements 2006 . Consolidated Statement of Cash Flow 83Consolidated statement of cash flow for the years ended 31 December
Cash and cash equivalents as at 31 December 7 445 13 762
Cash and cash equivalents as at 1 January 13 762 8 304
Total cash and cash equivalents as at 1 January 14 170 8 649
Total cash and cash equivalents as at 31 December 7 621 14 170
Consolidated statement of changes in equity for the year ended 31 December 2006
In CHF million Notes Foreign Gains/ currency losses trans- recog- Total lation nised share-
Share Share Treasury differ- directly Retained holders’ Minority Total capital premium shares ences in equity earnings equity interest equity
Reduction in par value 28 –169 2 – – – – –167 – –167
Capital contributions from minority interest – – – – – – – – –
Swiss Life Group . Financial Statements 2006 . Consolidated Statement of Changes in Equity 85Consolidated statement of changes in equity for the year ended 31 December 2005
Non-Cancellable Operating Leases – Lessor . . . . . . . . 183 39 Reclassifications in the Consolidated Statement of Income and Consolidated Balance Sheet . . . . . . . . 184 40 Events after the Balance Sheet Date . . . . . . . . . . . . . . . 186
Approval of financial statements On 26 March 2007, the Board of Directors approved the annual financial statements and the financial report and authorised them for issue. The financial report therefore only reflects events up to this date.
In April 2005, the International Accounting Standards Board issued an amendment to IAS 39 Financial Instruments: Recognition and Measurement covering the hedge accounting provisions. The foreign currency risk of a highly probable forecast intragroup transaction can qualify as a hedged item in the consolidated financial statements. The amendment was adopted by the Swiss Life Group for annual periods beginning on 1 January 2006. No financial impact arose from the adoption of this amendment as the Swiss Life Group does not currently have any intragroup transactions that would qualify as a hedged item in the consolidated financial statements.
In June 2005, the International Accounting Standards Board issued an amendment to the fair value option in IAS 39 Financial Instruments: Recognition and Measurement. The amendment limits the use of the fair value option to those financial instruments that meet certain conditions. The Swiss Life Group adopted this amendment for annual periods beginning on 1 January 2006. No financial impact arose from the adoption of this amendment as the Group has been compliant with the amended criteria for the designation of financial instruments at fair value through profit or loss.
In December 2005, an amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates was issued by the International Accounting Standards Board. The amendment requires exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation to be recognised initially in a separate component of equity in the consolidated financial statements. This requirement applies irrespective of the currency of the monetary item and of whether the monetary item results from a transaction with the reporting entity or any of its subsidiaries. The amendment was adopted by the Swiss Life Group for annual periods beginning on 1 January 2006. No financial impact arose from the adoption of this amendment as the Group currently does not have monetary items that form part of a net investment in a foreign operation with differences to be recognised in equity as required by the amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates.
The following new and/or amended International Financial Reporting Standards and Interpretations, which are mandatorily applicable in 2006, are not relevant to the Swiss Life Group: IFRS 6 Exploration for and Evaluation of Mineral Resources. The IFRS is not relevant to the Group’s operations.
2.4 Consolidation principles The Group’s consolidated financial statements include the assets, liabilities, revenues and expenses of Swiss Life Holding and its subsidiaries. A subsidiary is an entity in which Swiss Life Holding owns directly or indirectly more than 50% of the voting rights, or in which it otherwise has the power to exercise control over operations.
2.5 Foreign currency translation and transactions Functional and presentation currency Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the Group’s entities operate (the “functional currency”). The consolidated financial statements are presented in millions of Swiss francs (CHF), which is the Group’s presentation currency.
2.7 Derivatives The Group enters into forward foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, currency and interest rate options and other derivative financial instruments for hedging risk exposures or for trading purposes. The notional amounts or contract volumes of derivatives, which are used to express the volume of instruments outstanding and to provide a basis for comparison with other financial instruments, do, except for certain foreign exchange contracts, not represent the amounts that are effectively exchanged by the parties and, therefore, do not measure the Group’s exposure to credit risk. The amounts exchanged are calculated on the basis of the notional amounts or contract volumes and other terms of the derivatives that relate to interest or exchange rates, securities prices and the volatility of these rates and prices.
Derivatives embedded in other financial instruments or in insurance contracts which are not closely related to the host contract are separated and measured at fair value, unless they represent surrender options with a fixed strike price. Changes in the fair value are included in income. Derivatives embedded in insurance contracts which are closely related or which are insurance contracts themselves, such as guaranteed annuity options or guaranteed in terest rates, are reflected in the measurement of the insurance liabilities. Options, guarantees and other derivatives embedded in an insurance contract that do not carry any insurance risk are separately recognised as derivatives.
In a qualifying fair value hedge, the change in fair value of a hedging derivative is recognised in income. The change in fair value of the hedged item attributable to the hedged risk adjusts the carrying value of the hedged item and is also recognised in income.
In a qualifying cash flow hedge, the effective portion of the gain or loss on the hedging derivative is recognised directly in equity. For a hedged forecast transaction that results in the recognition of a financial asset or liability, the associated gain or loss recognised in equity is reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. Any ineffective portion of the gain or loss is recognised immediately in the income statement. When a hedging instrument expires or is sold, or a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in income. However, when a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to income.
Financial assets at fair value through profit or loss (FVPL) Financial assets at fair value through profit or loss comprise financial assets held for trading and financial assets designated as at fair value through profit or loss. Financial assets which the Group buys with the intention to resell in the near term are classified as held for trading. Financial assets designated as at fair value through profit or loss are irrevocably designated as such when initially recognised. Financial assets are primarily designated as at fair value through profit or loss in the following instances: – Financial assets backing insurance liabilities and liabilities arising from investment contracts for the account and risk of the Swiss Life Group’s customers (contracts with unit-linked features, separate accounts).
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments. Loans include loans originated by the Group and investments in debt instruments which are not quoted in an active market and for which no intention of sale in the near term exists. Loans are initially recognised at fair value, net of transaction costs or direct origination costs. Subsequent measurement is at amortised cost using the effective interest method.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows from groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the asset being evaluated.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 952.10 Investment property Investment property consists of investments in residential, commercial and mixed-use properties primarily located within Switzerland. Property held for investment purposes includes both land and buildings.
2.11 Insurance operations Definition of insurance contracts Insurance contracts are contracts under which one party accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. Significant insurance risk exists if an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e.
Recognition and measurement principles Subject to certain limitations, the Group uses its existing accounting policies for the recognition and measurement of insurance contracts and investment contracts with discretionary participation features that it issues (including related deferred acquisition costs and related intangible assets) and reinsurance contracts that it holds. The existing accounting policies for recognition and measurement have primarily been based on the requirements of the Generally Accepted Accounting Principles in the United States (US GAAP). The accounting policies for insurance contracts and investment contracts with discretionary participation features have been modified as appropriate to be consistent with the IFRS requirements. Guidance dealing with similar and related issues, definitions, recognition and measurement criteria for assets, liabilities, income and expenses as set out in the IASB Framework for the Preparation and Presentation of Financial Statements has been considered.
In other jurisdictions, a statutory minimum distribution ratio (“legal quote”) exists for certain types of business. Geographical areas in which the Swiss Life Group is present and in which such a statutory minimum distribution ratio (“legal quote”) exists are as follows: Switzerland (only group business subject to “legal quote”), France, Germany and the Netherlands. For these contracts the Swiss Life Group defines DPF as the policyholder bonus reserve set up in the statutory accounts and the amount of temporary valuation differences between the IFRS basis and statutory basis on the assets and liabilities relating to the respective insurance portfolio measured using the statutory minimum distribution ratio (“legal quote”). The policy of the Swiss Life Group is to classify as a liability the entire DPF as defined.
France 85% of the investment result and 90% of any other results are allocated to the policyholders at the minimum.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 992.12 Separate account/unit-linked contracts Separate account contracts represent life insurance contracts with a separated part that is invested in assets managed for the account and risk of the Swiss Life Group’s customers according to their specific investment objectives. Separate account liabilities are included in insurance liabilities. A derivative embedded in separate account contracts has been separated for the right of the policyholder to participate in the performance of the underlying assets.
Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repair and maintenance costs are charged to the income statement during the financial period in which they are incurred. Borrowing costs directly attributable to the construction or acquisition of a qualifying asset are capitalised as part of the cost of that asset. Realised gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in the income statement.
2.14 Leases Operating lease The Group primarily enters into operating leases for the rental of equipment. The total payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.
Finance lease If the lease agreement transfers the risks and rewards of the assets, the lease is recorded as a finance lease and the related asset is capitalised. At inception, the asset is recognised at the lower of the present value of the minimum lease payments or fair value and is depreciated over its estimated useful life. The corresponding finance lease obligations are recorded as liabilities.
Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on a straight-line basis for the expected useful life up to three years.
Impairment losses and reversals on other assets are recognised in operating expenses.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 104 2.19 Assets held for sale and associated liabilities A disposal group consists of a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with these assets. Non-current assets classified as held for sale and disposal groups are measured at the lower of the carrying amount and the fair value less costs to sell. The carrying amount will be recovered through a highly probable sale transaction rather than through continuing use. Assets held for sale and the associated liabilities are presented separately in the balance sheet.
Borrowings Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest method. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings.
Debt instruments with embedded conversion options to a fixed number of shares of the Group are separated into a debt and an equity component. The difference between the proceeds and fair value of the debt at issuance is recorded in equity. The fair value of the debt at issuance is determined using a market interest rate for similar instruments with no conversion rights. The Group does not recognise any change in the value of these options in subsequent reporting periods.
Investment contracts and deposits at amortised cost For investment contracts and deposits with fixed and guaranteed terms the amortised cost basis is used. Initial recognition is at the proceeds received, net of transaction costs incurred. Subsequently, they are stated at amortised cost using the effective interest method. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the deposits.
The amount recognised in the balance sheet represents the present value of the defined benefit obligations, reduced by the fair value of plan assets and adjusted for unrecognised actuarial gains and losses and unrecognised past service costs. The recognition of a resulting asset is limited to the total of any cumulative unrecognised net actuarial losses and past service costs or the present value of any future refunds from the plans or reductions in future contributions to the plans, if lower.
2.22 Provisions and contingent liabilities Provisions are liabilities with uncertainties as to the amount or timing of payments. Provisions are recognised if there is a present obligation that probably requires an outflow of resources and a reliable estimate can be made at the balance sheet date and be measured on a best-estimate basis.
Contingent liabilities are disclosed in the Notes if there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources or the amount of the obligation cannot be measured with sufficient reliability.
For the diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of all dilutive potential shares, such as convertible debt and share options issued. Potential or contingent share issuance is treated as dilutive when conversion to shares would decrease earnings per share.
Financial assets and liabilities are offset with the net amount being reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.
IFRIC 9 Reassessment of Embedded Derivatives comments on the issue of whether IAS 39 requires an assessment to separate any embedded derivatives from the host contract only when the entity first becomes a party to the contract or if an assessment has to be reconsidered throughout the life of the contract. The Interpretation states that the assessment should be made when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. This Interpretation will be adopted by the Swiss Life Group for annual periods as of 1 January 2007. No material financial impact is expected from the adoption of this Interpretation as the Group currently does not expect to have any significant embedded derivatives that would result in significant modifications of the cash flows under the contract.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 107Certain reported amounts of assets and liabilities are subject to estimates and assumptions. Estimates and judgements by management are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The principal methods and assumptions used by the Group in estimating the fair value of the following financial instruments are as follows: – Fair values for debt and equity securities are generally based upon quoted market prices.
– The majority of the private equity investments are classified as available for sale or as at fair value through profit or loss. Investments are normally valued at market if the market value represents the fair value. If no market 3 Critical Accounting Estimates and Judgements in Applying Accounting Policies value is available, fair value is estimated considering various factors such as purchase price, estimated liquidation value, restrictions on transferability, prices received in recent significant private placements of the same issuer, prices of investments relating to comparable companies engaged in similar business, and changes in the financial condition and prospects of the issuer.
Insurance liabilities are established by using appropriate estimates and assumptions on mortality, morbidity, surrender, exercise of policyholder options and interest rates. With regard to mortality these estimates are typically based on standard industry tables. Management makes allowance for expected improvements due to continued advances in medical science and social conditions. An increase in morbidity results in higher benefits for contracts where disability is the insured risk. The most significant factors which could increase the frequency of such claims are epidemics (such as AIDS or SARS) or widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in more claims than expected.
These assumptions are “locked-in” for the duration of the contract. Subsequently, new estimates are made each year in order to determine whether the liabilities so established are adequate in the light of these latest estimates. If the liabilities are considered adequate the assumptions are not altered. If the liabilities are not adequate, the assumptions for the calculation of the liabilities are altered (“unlocked”) to reflect the latest estimates; no margin is added to the assumptions in this event. Improvements in estimates have no impact on the value of the liabilities and related assets, while significant enough deteriorations in estimates have an impact.
Morbidity and disability For individual and group life business in Switzerland internal tables are in place. In the individual life business, for certain contracts tariffs can be adjusted with regard to disability. The internal tables reflect the loss experience of the past. In individual life, only reactivation is considered, whereas increased mortality is also taken into account in the group life business. In the individual business the disability tables reflect the average situation of the past in the Swiss market based on Swiss Insurance Association statistics. In the individual life business disability tables are usually reviewed every five years when new statistics from the Swiss Insurance Association become available. The tables are updated for significant changes.
In other markets, standard industry disability tables, national statistics and own company records are applied. Standard pricing principles are typically validated against the clientspecific disability experience.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 110 Surrender In certain contracts the policyholder has the option to surrender the contract for a specified cash surrender value or a value which varies in response to the change in a financial variable such as an equity price or index. In certain countries and markets, surrender is not explicitly taken into account for the pricing of insurance contracts and investment contracts with discretionary participation. In other businesses assumptions based on own company records are used. The assumptions vary by product type and policy duration.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 111The Group’s reportable segments are defined using the “management approach” reflecting the sources and nature of the Group’s risks and returns as monitored by management in order to strategically manage the Group and make business decisions. Primary segmentation is based on product lines and services. Secondary segmentation is based on geographical areas.
– “Banking” involves the management of assets for private banking clients, as well as the provision of corresponding asset management services. “Banking” covers the Group’s banking operations.
Secondary segmentation is based on geographical areas, covering the following segments: Switzerland, France, Germany, the Netherlands, Belgium and other countries.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 4 Segment Information (continued)
Policy fees earned on insurance contracts 128 – – – – 128
Benefits and claims under insurance contracts –13 909 – – – – –13 909
Benefits and claims under investment contracts with discretionary participation –91 – – – – –91
Additions of property and equipment and intangible assets 653 4 3 – – 660
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 113Statement of income for the year ended 31 December 2005
Policy fees earned on insurance contracts 114 – – – – 114
Asset management and other commission income 139 312 173 9 –139 494
Net gains/losses on financial instruments at fair value through profit or loss –779 81 – 12 –1 –687
Benefits and claims under investment contracts with discretionary participation –240 – – – – –240
Benefits and claims recovered from reinsurers 144 – – – – 144
Net insurance benefits and claims –14 040 – – – – –14 040
Insurance receivables and other receivables 4 724 172 86 66 –149 4 899
Financial assets available for sale 91 492 1 328 21 75 – 92 916
Financial assets held to maturity 4 046 42 2 – – 4 090
Financial assets pledged as collateral – 124 – – – 124
Financial liabilities at fair value through profit or loss 8 709 829 – – – 9 538
Insurance payables and other payables 3 954 149 19 34 –63 4 093
Revenues, assets and purchases of owner-occupied property, equipment and intangible assets are allocated to the geographical segment in which the entity reporting such assets is located. Due to cross-border activities and the nature of operations the Group is unable to break down revenues and assets according to the locations of the customers.
Premiums ceded to reinsurers –16 –128 –80 –8 –11 –4 –3 17 –233
Policy fees earned on insurance contracts 8 64 1 54 1 – – – 128
Policyholder participation –864 –857 –420 –168 –8 –3 – 0 –2 320
Interest expense –131 –543 –26 –15 –78 –13 –1 1 –806
Acquisition and origination costs deferred 90 261 122 35 28 2 0 – 538
Insurance segment result by country 668 217 84 135 5 10 –14 – 1 105 of which inter-subsegment 26 –8 –2 –4 –4 –3 –5 –
Statement of income “Insurance” segment for the year ended 31 December 2005
Policy fees earned on insurance contracts 15 68 – 30 1 – – 0 114
Asset management and other commission income 70 24 22 25 4 0 – –6 139
Net gains/losses on financial assets 1 820 126 224 211 51 3 0 – 2 435
Net gains/losses on investment property –47 33 –8 1 –3 – – – –24 of which inter-subsegment 19 –3 –3 –3 1 –6 –2 –3
Benefits and claims under insurance contracts –7 707 –2 246 –2 137 –1 458 –332 –41 –21 –2 –13 944
Benefits and claims under investment contracts with discretionary participation –235 –5 – – – – – – –240
Policyholder participation –938 –816 –231 –229 –7 –8 – 2 –2 227
Interest expense –106 –553 –34 –17 –56 –12 0 0 –778
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 6 Risk Management Policies and Procedures
Risks must be identified, assessed, managed and monitored locally. On a consolidated basis, half-yearly reports covering interest rate risk, equity price risk, currency risk, credit risk and insurance risk are prepared. Additionally, market risks and financial risk limits are reported on a monthly basis for the largest operations in the insurance business. Strategic and operational risks are assessed and reported on an annual basis.
Total assets for the account and risk of the Swiss Life Group’s customers 15 145 10 710
Net gains/losses on financial assets 1 045 2 582 – – 1 045 2 582
6.3 Asset and liability management (ALM) The main objective of the ALM process is to ensure that the Swiss Life Group’s insurance operations can meet their commitments to policyholders at all times while also adequately compensating shareholders for making risk capital available. Based on the economic principles of risk management and on the risk appetite definition applied in the risk budgeting process, ALM comprises the following main activities: strategic asset allocation, distribution policy with regard to surplus generated on investments and product design.
The ALM process is centrally coordinated at Group level by means of local Asset and Liability Management Committees with representatives from local senior management and representatives from Group level. The local units are in charge of implementing the decisions. The process requires all relevant functions within the Swiss Life Group, such as investment management, finance, actuarial functions, product management and marketing, to be involved.
Product design Product design defines which guarantees and benefits are built into a specific product to respond to the demand from and expectations of customers. The actuarial bases used for this purpose should ensure that each individual product will generate a sufficient contribution margin. To ensure that the Group’s principles are observed, guidelines on underwriting have been introduced to harmonise the local guidelines and to ensure that they are in line with the guidelines of the Group.
Total insurance liabilities with embedded derivatives not separated and fair valued 99 482 99 076
Interest rate risk relating to financial instruments and insurance contracts The Group’s primary interest rate exposure is on contracts with guaranteed benefits and the risk that the interest rates of the financial assets purchased with the consideration received from the contract holders is insufficient to fund the guaranteed benefits and expected discretionary participation payable to them.
Insurance liabilities with interest rate risk borne by the policyholder 1 767 1 531
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 125Exposure to interest rate risk
Liabilities for the account and risk of the Swiss Life Group’s customers – – – – –13 820 –13 820
Balance sheet interest rate sensitivity gap 35 126 11 027 21 339 40 731 1 749 109 972 6 Risk Management Policies and Procedures (continued)
In addition to the strategic minimisation of the net interest rate risk exposure at an economic level, the Group has designated a portion of assets to be held to maturity and matching the maturity profile of the associated liabilities to minimise the interest risk arising from these positions. The assets to be held to maturity fund the insurance and investment contracts that will not be surrendered or will not require the payment of a death benefit.
Equity price risk A decline in the equity market may lead to a reduction of the Swiss Life Group’s realised and unrealised gains/losses, which may also negatively affect the Swiss Life Group’s results of operations and financial condition.
Swiss Life’s investment portfolios also include investments in hedge funds. The liquidity of such investments can vary according to market conditions, and the investment styles of such hedge funds could amplify any factors affecting the performance of any particular class of funds or investments.
The Group monitors the investment portfolio risks by establishing mandatory risk limits. The investment portfolio is adequately diversified and there was only one investment exceeding 10% of shareholders’ equity as at 31 December 2006: HSBC totalling CHF 0.8 billion (2005: CHF 0.8 billion).
To reduce the credit exposure relating to derivatives a collateral management process has been established. As soon as the market value of the derivatives per counterparty exceeds a certain threshold the Swiss Life Group calls collateral from the counterparty. The threshold increases with the rating of the counterparty. The minimum rating for a counterparty is A– (Standard & Poor’s or equivalent) for the Swiss Life Group’s insurance operations. If a counterparty falls below this level, outstanding positions must be fully collateralised or closed out. The collateral is called at least weekly, but in times of turbulent markets the frequency would be increased. As leverage is not allowed, certain coverage rules apply with regard to cash or long positions. A list of the counterparties for derivative transactions, over-the-counter and exchange-traded, is approved by the Group Risk Committee.
related reinsurance agreements in the form of deposited funds and securities.
For fixed-income assets (including money market and cash positions) the total exposure per counterparty is aggregated and reported to the Group Risk Committee. The individual operations maintain records of the payment history for the significant contract holders with whom they conduct regular business. Ratings and single positions above a certain level with regard to fixed-income assets are reported to management on a regular basis. The exposure to individual counterparties is also managed by other mechanisms such as the right to offset where counterparties are both debtors and creditors of the Group. Information reported to management includes assessment of bad debts. Where there exists a certain exposure to individual policyholders, or homogenous groups of policyholders, a financial analysis equivalent to that conducted for reinsurers is carried out.
Debt instruments available for sale 58 252 14 568 7 725 925 268 – 81 738
Debt instruments held to maturity 3 401 562 85 – 42 – 4 090
Debt instruments pledged as collateral 209 217 146 – 4 – 576
Total assets bearing credit risk 71 751 22 453 11 850 1 236 23 008 2 380 132 678
Currency risk The Swiss Life Group operates internationally and its exposures to currency risk primarily arise with respect to the euro, US dollar and British pound. Most of the investments and liabilities are denominated in Swiss francs, euros and US dollars, the value of which is subject to exchange rate fluctuations. The Group operates with various functional currencies (predominantly Swiss francs and euros). Its financial position and earnings could be significantly affected by a weakening of said foreign currencies against the Swiss franc.
Financial assets available for sale 16 391 68 053 6 607 1 467 398 – 92 916
Insurance payables and other payables –2 254 –1 980 –17 –4 –13 – –4 268
Financial liabilities at fair value through profit or loss –231 –2 007 –123 –2 – –7 175 –9 538
Carrying amounts as at 31 December 2005 6 Risk Management Policies and Procedures (continued)
Due to the limitations of the Swiss capital market with regard to liquidity, investments in Switzerland are also made in currencies other than the Swiss franc. The balance sheet currency gap is to a large extent hedged on an economic basis using foreign currency derivatives.
Liquidity risk Liquidity risk is the risk that not enough cash resources may be available to pay obligations when due at a reasonable cost. The Swiss Life Group is exposed to liquidity risk which primarily arises on calls on its cash
Financial assets available for sale 6 305 9 259 2 916 20 041 54 395 – 92 916
Financial assets pledged as collateral 95 – – 29 – – 124
The Group’s insurance entities neither generally accept nor generally deny insurance coverage to applicants, but ensure that all the insurance risks are identified and thoroughly assessed, and that the insurance premiums accurately reflect the costs for the risk taken among other things. The amount of risk taken must be in line with the Group’s strategy and risk policy, and must also meet the profitability targets.
Bonus and profit allocation The uncertainty in the estimation of future benefit payments and premium receipts for long-term insurance contracts is due to systemic risk arising from the unpredictability of long-term changes in overall levels of mortality and disability. On the other hand, there are random fluctuations, such as variability in policyholder behaviour, which cause deviations from the expected outcome of a portfolio. Benefit payments can be strongly affected by such deviations. The impact of random fluctuations depends on the extent of diversification within a portfolio of contracts.
Options The ability of a policyholder to pay reduced or no future premiums under a contract, to terminate the contract completely or to exercise a guaranteed annuity option means that the amount of insurance risk is also subject to policyholder behaviour to a certain extent. On the assumption that a certain part of policyholders will make decisions rationally, overall insurance risk can be assumed to be aggravated by such behaviour. For example, it is likely that policyholders whose health has deteriorated significantly will be less inclined to terminate contracts insuring disability or death benefits than those policyholders remaining in good health, thus resulting in an increasing trend in the expected mortality of policyholders, as the portfolio of insurance contracts is reduced due to surrender (adverse selection).
Nature of insurance risk Insurance risk arises when biometric and demographic trends as well as administrative costs deviate adversely from expectations and the premium rates agreed with the policyholder. Insurance risk quantification starts with the pricing of products. The insurance premiums are commonly determined by applying the equivalence principle, thereby using estimated values to calulate the future benefits. The Group’s insurance entities generally use the most up-to-date pricing basis when pricing new products or repricing existing ones.
The nature of insurance risk can be summarised as follows: Mortality and longevity Increasing mortality rates result in higher benefits for contracts where death is the insured risk. On the other hand, decreasing mortality rates lead to higher annuity payments (longevity risk). The most significant factors resulting in an increase of longevity are continued improvement in medical science and social conditions.
The BVG business (Swiss occupational plans) is a significant part of the Group’s life insurance business in Switzerland. The guaranteed annuity conversion rate for the Swiss Life Group’s mandatory BVG business is set at the rate of 7.2%. Under an amendment to the BVG legislation, which took effect on 1 January 2005, this rate will be reduced in stages to 6.8% until 2015. The prevalent guaranteed annuity conversion rates for retirements beginning in 2006 are set at 7.2% (women) and 7.1% (men). The Swiss Life Group has taken the reduction into account in the pricing and structure of its life insurance products in Switzerland (including a phased reduction of the conversion rate on its supplementary BVG business to 5.835% over 4 years).
Morbidity and disability An increase in morbidity results in higher benefits for contracts where disability is the insured risk. The most significant factors which could increase the frequency of such claims are epidemics (such as AIDS, avian flu or SARS) or widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in more claims than expected. Additionally, the termination rate with regard to disability (death or reactivation) has a significant impact on the benefits paid.
Claims arising from the accident and health business (group and individual contracts) primarily cover refunds for medical treatments, daily allowances in the case of sick leave, annuities and long-term medical care.
The insurance liabilities arising from accident and health insurance contracts must consider outstanding claims and claims incurred but not reported (IBNR). A large part of the insurance liabilities arising from these contracts relates to IBNR and experience shows that health insurance contracts are sensitive to late reporting of claims (both number of claims and amounts).
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 133Risk concentration per product category with regard to mortality and longevity is as follows: 6 Risk Management Policies and Procedures (continued)
Cumulative payments to date –499 –436 –396 –373 –338 –231 –2 273
France Non-life business in France covers car insurance, fire and property relating to industrial risks and commercial risks, other property insurance, legal protection insurance and general liability insurance.
Underwriting strategy Underwriting is the process of selecting and classifying insurable risks. The underwriting strategy attempts to ensure that the risks underwritten are well diversified in terms of type of risk and level of insured benefits. Life insurance underwriting is performed to ensure that the premiums and the general conditions of the insurance policies are consistent with the risks to be insured. The first step in the underwriting process is to determine which individual risks can be accepted. The second step is to place the accepted risks into groups of roughly equivalent levels of risk. Both processes must be conducted objectively and consistently. The Group sets limits for the acceptance of insurance risk arising from new and renewal business. Medical selection is part of the Group’s underwriting procedures, whereby premiums are charged to reflect the health condition and family medical
For certain group life business, local law is relevant with regard to medical examinations required before any business is written. For certain individual life business, agreements exist with regard to medical examinations of applicants before business is written. If the risk is assessed as high, exclusion of specific risks, premium adjustments and reinsurance are considered.
Other risk transfer Risk transfer primarily takes the form of reinsurance. Alternative forms of risk transfer (such as securitisation) require formal approval of the Group Risk Committee. No significant alternative form of risk transfer is used by the Group at present.
In the event of a deterioration of a specific risk factor, the effect of lower allocations to policyholder participation as a consequence is considered in the analysis. In addition, offsetting effects of changes in a risk factor are considered if such a beneficial effect would effectively be reflected in the measurement of the insurance liabilities.
At 31 December 2006, if mortality had been higher by 10%, the insurance liabilities would have been CHF 51 million higher in Switzerland and CHF 135 million lower in the other countries.
At 31 December 2006, if disability had been higher by 10%, the insurance liabilities would have been CHF 215 million higher in Switzerland and CHF 64 million higher in the other countries.
The bank is exposed to interest rate risk on its on-balancesheet positions (including derivatives). Interest rate risk is managed using gap analysis together with an approach based on the sensitivity of a parallel shift in the yield curve (±100 bps) which measures the effect of rate movements in terms of net present values. Banca del Gottardo also uses a further measure of net present value sensitivity, which provides information on the yield curve twist risk. The effect on the bank’s earnings is measured with a parallel shift and a twist in the yield curve. The interest rate margin for the following year is simulated on the basis of the hypothetical refinancing of lending operations.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 137The bank’s principal risk measure for the general market risk of the trading book is value at risk (VaR). In addition, the risk exposure for each single portfolio or desk is regulated through a system of limits, which is subordinated to the comprehensive value at risk limits. The limits include risk measures such as mark-to-market exposure, delta, gamma and vega exposure, basis point values and other indicators.
In managing its exposure to interest rate risk, the bank uses interest rate swaps as hedging instruments and applies the methodology of cash flow hedging. The cash flow hedge starts from the assumption that a payer swap hedges the repricing exposure of maturing liability cash flows, and a receiver swap hedges the repricing exposure of maturing asset cash flows. The hedging objective consists in eliminating adverse cash flow impacts due to interest rate fluctuations over hedging time buckets on existing and forecast structural balance sheet positions.
Liquidity risk management at Banca del Gottardo comprises cash optimisation of assets and liabilities under regulatory constraints. Regulatory definitions of short-term liquidity (cash liquidity) and global liquidity (total liquidity) must be considered. Liquidity management focuses on the valuation of static gaps that are determined by projecting maturities of assets and liabilities. Liquidity risk mitigation at Banca del Gottardo aims at reducing the maturity gap.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 139Basic earnings per share (EPS) are calculated on the weighted average number of shares outstanding during the reporting period, excluding the average number of shares purchased by the Group and held as treasury shares. The effect of the issuance of the mandatory convertible securities (MCS) has been included in the calculation of basic earnings per share.
Diluted earnings per share include the dilutive effect of convertible bonds and share options issued. In the diluted EPS calculation, the convertible debt is assumed to have been converted into shares and the profit attributable to shareholders is adjusted for the applicable interest expense 7 Earnings per Share minus the related taxes. Share options are dilutive when they would result in the issuance of shares for less than the average market price during the period. Dilutive share options are assumed to have been exercised. The assumed proceeds are regarded as having been received from the issuance of shares at the average market price during the period. The difference between the number of shares issued and the number of shares that would have been issued at the average market price during the period is considered as an issuance of shares for no consideration.
Net profit attributable to equity holders of Swiss Life Holding 933 860
Assumed conversion of convertible bonds 1 511 806 1 512 188
Weighted average number of shares outstanding for diluted earnings per share 35 104 369 35 095 099
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 8 Premiums, Policy Fees and Deposits Received
Deposits received under insurance and investment contracts 7 570 5 976
Net earned premiums, policy fees and deposits received 21 835 19 882
Interest income on financial assets held to maturity and available for sale 3 048 3 177
Fair value gains/losses on interest rate instruments 631 162 liabilities designated as at fair value through profit or loss –529 –631 foreign currency instruments and other –1 344 –1 810
Realised gains/losses on sales of subsidiaries and other assets 56 –13
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 143Employee benefits expense
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 10 Insurance and Other Receivables and Payables
Derivatives embedded in insurance contracts – – 1 0 18 18
Derivatives for the account and risk of the Swiss Life Group’s customers 1 2 1 445 887 238 248
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 11 Derivatives (continued)
Derivatives designated as cash flow hedges 4 3 8 24 762 1 051
Derivatives held for trading Derivatives held for trading primarily comprise: Derivatives that share a risk with other financial instruments and give rise to opposite changes in fair value that tend to offset each other (“economic hedges”).
To manage the risks associated with derivative trading, the Group establishes risk levels and monitors these exposures. Exposure to price risk on both derivatives and their underlyings is managed in accordance with risk limits set by management for buying or selling instruments or closing out positions. The risks arise from open positions in interest rates, currencies and equity instruments, all of which are exposed to general and specific market movements. The risks that the Group primarily faces due to the nature of its investments and liabilities are interest rate risk and equity price risk.
Fair value Fair value Fair value Fair value on hedging on hedging notional notional assets assets liabilities liabilities instruments instruments amount amount
In CHF million Cash flows Fair Fair Amounts Amounts Contract/ Cash flows expected to value value recognised included in notional expected affect profit assets liabilities in equity profit or loss amount to occur or loss
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 12 Financial Assets and Liabilities at Fair Value through Profit or Loss
Designated as Designated as Held Held at fair value at fair value for for through through trading trading profit or loss profit or loss Total Total
Total financial assets at fair value through profit or loss 2 877 1 738 26 560 21 915 29 437 23 653
Assets pledged that can be sold or repledged by transferee 86 813 – – 86 813
Total financial assets available for sale, net of impairment 90 673 74 165 2 243 5 866 92 916 80 031
Assets pledged that can be sold or repledged by transferee 38 407 0 12 38 419
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 14 Loans
Allowance Allowance Gross Gross for loan for loan Carrying Carrying amount amount losses losses amount amount Fair value Fair value
Interest income accrued on impaired loans was CHF 12 million as of 31 December 2006 (2005: CHF 8 million ). The Group’s loan portfolio is monitored closely through the review of information such as debt service, annual reports and assessments. This information is evaluated in light of current economic conditions and other factors such as diversification of the property portfolio. This evaluation is part of the regular review to determine whether the allowance for potential loan losses is warranted. Management believes that the allowance for loan losses is sufficient. However, management cannot predict with assurance the impact of future economic circumstances or how the mortgage and real estate portfolios would be affected by various economic circumstances.
Goodwill relating to investments in associates has been included in the carrying amount of investments in associates in accordance with IAS 28 (revised) Investment in Associates.
The Swiss Life Group has significant influence on AIA Pool, which is a pool of several insurance companies. AIA Pool specialises in the insurance of architects and engineers. The significant influence of the Swiss Life Group is based on agreements with the other insurers participating in AIA Pool. No investments in associates had published price quotations as at 31 December 2006 and 2005. As at 31 December 2006 and 2005, no contingent liabilities arose from the Group’s investments in associates.
Transfers from/to investment property 16 –13 –157 – – – –170
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 154 Property and equipment for the year ended 31 December 2005
Transfers from/to investment property 16 –22 –59 – – – –81
Transfers to assets held for sale – – 0 –6 –17 –23
Transfers to investment property 16 5 4 – – – 9
No borrowing costs were capitalised in property and equipment in 2006 and 2005.
Intangible assets including intangible insurance assets for the year ended 31 December 2006
Additions from business combinations – – – – 2 0 2
Additions from internal development – – – – – 0 0
Disposals and write-offs –1 –20 –1 307 0 – –18 –1 346
Amortisation recognised in income – –1 –435 –18 –3 –11 –468
Effect of gains/losses recognised directly in equity – 0 318 – – – 318
Reversal of impairment losses – – – – – – –
Key assumptions used for impairment tests * 1% in 2010 and 2009 respectively, reduced by 0.25% in each subsequent year
Balance as at 1 January restated 1 706 65 4 706 212 15 181 6 885
Balance as at 1 January restated –901 –50 –2 400 –10 –3 –110 –3 474
Effect of gains/losses recognised directly in equity – 3 –126 – – – –123
Total intangible assets as at 31 December 692 17 2 077 223 10 56 3 075
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 157Goodwill relating to Banca del Gottardo has been allocated to the banking segment and goodwill relating to Lloyd Continental has been allocated to the insurance segment in France.
Annual amortisation charges on the present value of future profits relating to acquired insurance portfolios totalling CHF 17 million as at 31 December 2006 are estimated as ranging from CHF 1 million to CHF 3 million for the years
Deferred acquisition costs (DAC) Certain acquisition costs relating to new and renewed insurance contracts and investment contracts with discretionary participation features are deferred.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 20 Other Assets and Liabilities
Investment contracts without discretionary participation at amortised cost 35 586 888
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 159Investment contracts with discretionary participation with actuarial valuation
Effect of changes in actuarial assumptions and other movements –8 –9
Convertible debt On 10 June 2004, Swiss Life Holding issued CHF 317 million in 0.625% convertible bonds due in 2010. The bonds may be converted into registered shares of Swiss Life Holding at any time at the option of the holder. Bondholders exercising their conversion right are entitled to receive the number of shares equal to the principal amount of CHF 1000 divided by the conversion price of CHF 209.625 (subject to adjustments).
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 23 Borrowings (continued)
Swiss Life Holding has the option to redeem all outstanding bonds at their principal amount (together with unpaid accrued interest) at any time on or after 25 June 2007, provided that the closing price of the Swiss Life Holding share was at least 130% of the conversion price for 20 consecutive trading days. The early redemption at the option of Swiss Life Holding is subject to a period of 30 days’ notice to the bondholders.
Interest Year of Carrying Carrying Issuer Currency rate issue Maturity amount amount
Interest Year of Carrying Carrying Issuer/instrument Currency rate issue Maturity amount amount
Swiss Life Insurance Finance Ltd. – guaranteed bonds EUR 4.375% 2004 2008 480 464 1) Medium-term notes are f ixed-rate debentures issued continuously by Banca del Gottardo on demand with a maturity of 2 to 8 years. As at 31 December 2006, the average interest rate was 2.0% (2005: 1.9%) and the average remaining time to maturity 25 months (2005: 33 months).
Claims under non-life insurance contracts 1 440 1 386 243 239 1 197 1 147
Deposits released for payments on death, surrender and other terminations during the year –765 –951
Insurance liabilities without discretionary participation 11 191 9 559 24 Insurance Liabilities and Reinsurance Assets
Claims under non-life insurance contracts Claims under non-life insurance contracts represent the liability needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the financial reporting date. The estimated liability includes the amount that will be required for future payments on both claims that have been reported to the insurer and claims relating to insured events that have occurred but have not been reported to the insurer as at the date the liability is estimated. Loss development tables are generally used to make these estimates.
Claims under life insurance contracts Represents the liability for all claim payments in individual and group life business which were due in the current or previous reporting periods that are still left unpaid at the reporting date. Measurement at the reporting date is the sum of all payments for claims still left unsettled but which were due in the current or any previous reporting period.
Future life policyholder benefits For participating contracts where the contribution principle applies to the allocation of the policyholder bonus, future life policy benefit liabilities are determined by using the net-level-premium method on the basis of appropriate mortality and interest rate assumptions.
The contributions expected to be paid for the year ending 31 December 2007 are CHF 72 million.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 167Defined benefit plans
Plan assets include own equity instruments 129 100 own debt instruments – –
Experience adjustments on plan assets 43 49 25 Employee Benefits (continued)
Defined contribution pension plans Certain subsidiaries sponsor various defined contribution plans. Participation in the various plans is based either on completion of a specific period of continuous service or on the date of hire. The plans stipulate contributions by both employers and employees. The Group’s expenses under these plans amounted to CHF 3 million in 2006 (2005: CHF 5 million).
Termination benefits The termination benefit liability totalling CHF 14 million for the year ending 31 December 2006 (2005: CHF 6 million) arose as a result of early retirements and voluntary redundancies.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 169Share-based payment programmes (performance share units)
Due to the reduction in par value of the Swiss Life Holding shares in 2006, the number and the exercise price of shares under option granted in prior years were adjusted using the Eurex R factor of 0.9965. Due to the reduction in par value of the Swiss Life Holding shares in 2005, the number and the exercise price of shares under option granted in prior years were adjusted using the Eurex R factor of 0.978284. The intrinsic value of the outstanding share options (issued in 2002) was CHF 81.15 as at 31 December 2006 (2005: CHF 12.80). The outstanding share options issued in 2001 did not have an intrinsic value as at 31 December 2005. The exercise price of the outstanding share options at the end of the period was CHF 224.10 (2005: range from CHF 224.10, adjusted using the Eurex R factor of 0.9965, to CHF 686.50). The weighted average remaining contractual life of the outstanding share options at the end of the period was 180 days (2005: 336 days). The number of options exercisable at the end of 2006
Related expenses in 2006 were CHF 12 million (2005: CHF 15 million).
Based on a ruling by the Dutch tax administration, Swiss Life was able to reduce its tax liability by CHF 159 million (2005: CHF 82 million). Due to a change in the French tax legislation with regard to taxation of shareholdings, tax expenses were reduced by CHF 31 million (2005: CHF 116 million).
The expected weighted-average tax rate for the Group was 30.9% in 2006 (2005: 29.2%). This rate was derived by obtaining a weighted average of the expected income tax rates in the various jurisdictions in which the Group operates. The increase of the weighted-average tax rate is due to the geographical allocation of the profits and the different tax rates in these jurisdictions. The actual income tax expenses differ from the expected amounts as follows: Actual and expected income tax
Net deferred income tax assets/liabilities –1 125 147 –105 26 –1 057
Transfer to liabilities associated with assets held for sale – – – –18
In 2005, additional provisions relating to restructuring programmes and termination benefits totalling CHF 50 million for employees were set up in Switzerland and in Germany with an expected outflow of benefits within the next two years.
In 2006, convertible bonds were converted into 191 SLH shares (2005: 260 SLH shares) with a corresponding increase in share capital totalling CHF 8726 (2005: CHF 11 960) and an increase in share premium totalling
As at 31 December 2006, the share capital of SLH consisted of 33 776 269 fully-paid shares with a par value of CHF 41 each. In exercising voting rights, no shareholder can collect more than 10% of the total share capital directly or indirectly in respect of own shares or shares they represent. As at 31 December 2005, SLH had 33 776 078 registered shares with a par value of CHF 46 per share. Conditional share capital was CHF 150 374 511 as at 31 December 2006
Gains and losses recognised directly in equity for the year ended 31 December 2006
Gains/losses on financial instruments 11 –3 020 4 – –3 016
Gains/losses transferred to the income statement 9, 11 –721 5 – –716
Changes in amounts attributable to income tax 336 deferred acquisition costs and present value of future profits 318 policyholder bonuses and other policyholder liabilities 2 163 effect of disposal of subsidiaries 0 foreign currency translation differences –87 minority interest 8
Changes in amounts attributable to income tax –105 deferred acquisition costs and present value of future profits –123 policyholder bonuses and other policyholder liabilities –833 foreign currency translation differences –25 minority interest –3
Total gains and losses, net of income tax and other items 1 185 28 Equity (continued)
Cash and cash equivalents acquired (+)/disposed of (–) 1 2 –143 0
Net cash outflow (–)/inflow (+) from acquisitions/disposals –2 2 119 18
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 32 Assets Held for Sale and Associated Liabilities
Non-current assets held for sale as at 31 December 2006 consist of foreclosed property.
In November 2005, the Swiss Life Group announced the sale of Banca del Gottardo (Monaco). The sale was approved by the regulator and was effective in the first half of 2006. In January 2006, the Swiss Life Group announced the sale of Dreieck Industrie Leasing which was also effective in the first six months of 2006. The group of assets to be disposed of and the liabilities directly associated with those assets (disposal group) were presented separately in the balance sheet as at 31 December 2005 under assets held for sale and liabilities associated with assets held for sale.
In 2005, the Swiss Life Group sold a real estate company in Belgium and Gottardo A.E.P.E.Y., Athens, a subsidiary of Banca del Gottardo. The sales prices of these transactions amounted to CHF 18 million in total. The gain realised on the sales amounted to CHF 6 million.
In 2005, the Swiss Life Group acquired an additional 24.1% of the shares of Swiss Life Partner AG, Munich.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 33 Related Party Transactions
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 34 Assets under Management
Financial assets at fair value through profit or loss 29 437 23 653
Investment contracts without discretionary participation 21 586 888 586 888 36 Commitments and Contingencies
With the sale of the life business in the UK, representations and warranties have been agreed with the buyer which limit the exposure for the Swiss Life Group in respect of time and amount with regard to arising claims and taxes.
Operating lease commitments The Group has entered into various operating leases as a lessee. Rental expenses recognised in income for these items totalled CHF 46 million for the year ending 31 December 2006 (2005: CHF 72 million). Minimum lease payments totalled CHF 46 million in 2006 (2005: CHF 73 million), while contingent rents totalled CHF 0.03 million in 2006 (2005: CHF 0.03 million). Sublease payments received in 2006 amounted to CHF 0.4 million (2005: CHF 1 million).
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 37 Collateral
Financial liabilities at fair value through profit or loss 6 919 –89
Bank overdrafts totalling CHF 362 million were reclassified from insurance payables and other payables to borrowings.
In order to present liabilities arising from investment contracts separately, financial liabilities at fair value through profit or loss amounting to CHF 89 million and liabilities measured at amortised cost amounting to CHF 888 million were reclassified to investment contracts.
Non-discretionary policyholder bonuses and other liabilities totalling CHF 368 million were reclassified from insurance liabilities to policyholder participation liabilities in order to present policyholder participation liabilities separately.
In order to present employee benefit liabilities separately, liabilities relating to other employee benefits amounting to CHF 18 million were reclassified from other liabilities to employee benefit liabilities.
The Swiss Life Group has agreed to sell its majority stakes in ERISA, Paris, and ERISA IARD, Paris, to HSBC, the current minority shareholder. The closing is subject to regulatory approval and is expected in the second half of 2007.
The Swiss Life Group announced the acquisition of CapitalLeben, a company headquartered in Liechtenstein, which specialises in structured life insurance solutions. The acquisition is subject to regulatory approval, which is expected in the first quarter of 2007.
Banca del Gottardo, Lugano Banking 100.0% 100.0% full CHF 70 000
Gottardo Investments SA, Lugano – from 12.08.2005 – – full CHF 30 000 until 11.12.2006
Kuhn & Seal, Nyon – until 23.01.2006 – – full CHF 100
Swiss Life Institutional Funds – SLIF 14, Lugano – until 24.05.2006 – – full – –
Swissville Private Holding, Zürich – until 30.06.2006 – – full CHF 50 000
Carte Blanche Partenaires, Paris Insurance 94.6% 95.1% full EUR 2 300
SCI ERISA IMMO 1, Paris Insurance 50.0% 100.0% full EUR 51 200
Swiss Life Asset Management (France), Paris Insurance 100.0% 100.0% full EUR 3 000
Swiss Life Assurance et Patrimoine, Paris Insurance 99.5% 99.9% full EUR 75 000
Swiss Life Banque, Paris Banking 100.0% 100.0% full EUR 20 000
Swiss Life Prévoyance et Santé, Paris Insurance 99.2% 99.2% full EUR 150 000 41 Significant Subsidiaries and Associates (continued)
Segment 1) Consolidation period Group share Direct share consolidation Currency in 1000 41 Significant Subsidiaries and Associates (continued)
Aareal Holding Verwaltungsgesellschaft mbH, Düsseldorf – 20.4% 20.4% equity EUR 25
Schweizerische Rentenanstalt, München (branch Swiss Life/Rentenanstalt) Insurance – – full – –
Swiss Life Insurance Solutions AG, München Insurance from 04.10.2006 100.0% 100.0% full EUR 7 500
Verwaltung Swiss Life Partner Vertriebs GmbH, Hamburg – 50.0% 50.0% equity EUR 26
Swiss Life Belgium SA, Bruxelles Insurance 100.0% 100.0% full EUR 88 074
ZELIA, Bruxelles – until 01.01.2006 – – full EUR 32 227
Swiss Life Participations Luxembourg, Strassen Insurance from 21.12.2006 100.0% 100.0% full EUR 70 000
Gottardo Asset Management SGR, Milano Banking 96.4% 96.4% full EUR 2 050
Swiss Life (Italia) Infortuni e Malattie, Milano – until 31.12.2006 – – full EUR 2 500
Alpine Services Ltd., Nassau Banking from 01.01.2006 100.0% 100.0% full USD 10
Adroit Private Equity (Offshore), Grand Cayman Insurance 100.0% 100.0% full CHF 0
Swiss Life Cayman Finance, Grand Cayman – until 06.09.2006 – – full CHF 0
Swiss Life Insurance Finance, Grand Cayman Other 100.0% 100.0% full EUR 5
Swiss Life Private Equity Partners (Cayman), Grand Cayman – until 31.03.2006 – – full CHF 60
Banque du Gothard (Monaco), Monaco – until 28.02.2006 – – full EUR 40 000
Gothard Gestion Monaco, Monaco – until 28.02.2006 – – full EUR 160
Gottim Sam, Monaco – until 28.02.2006 – – full EUR 150
Total income rose from CHF 184 million to CHF 261 million. This positive development reflected the increase from CHF 151 million to CHF 231 million in dividends received on participating interests. A third of the dividend income was generated abroad, e.g. by foreign branches. In addition, dividend income was more broadly diversified between the segments.
Swiss Life Holding continued to streamline the Group structure during the reporting period. It founded the subsidiary Swiss Life International Holding AG, which groups together some foreign insurance companies, thereby bringing the legal structure more strongly in line with the management structure.
The newly founded subsidiary Swiss Life Intellectual Property Management AG manages trademark rights within the Swiss Life Group and is responsible for developing the Swiss Life brand and sub-brands further.
A reduction was experienced in the carrying amount of Banca del Gottardo due to a capital repayment of CHF 100 million.
In 2006, Swiss Life Holding distributed a dividend of CHF 5 per share in the form of a repayment of par value. The par value of the Swiss Life Holding share was thereby reduced from CHF 46 to CHF 41 and the company’s total share capital from CHF 1554 million to CHF 1385 million. Convertible bonds outstanding were converted into 191 shares in 2006, for an increase of CHF 7831 in share capital.
Swiss Life Holding . Financial Statements 2006 . Review of Operations
Loans to Group companies CHF 80 million of the loans to Group companies is classified as subordinated.
Share capital As at 31 December 2006, the share capital of Swiss Life Holding (SLH) consisted of 33 776 269 fully-paid shares with a par value of CHF 41 each. In exercising voting rights, no shareholder can collect more than 10% of the total share capital directly or indirectly in respect of their own shares and those they represent. As at 31 December 2005, SLH had 33 776 078 registered shares with a par value of CHF 46 per share. Conditional share capital was CHF 150 374 511 as at 31 December 2006 (2005: CHF 168 721 652).
Legal reserves Legal reserves comprise the general reserves (additional paid-in capital in excess of the par value, net of transaction costs) and reserve for own shares (equivalent in value to SLH shares held by the Swiss Life Group).
Banca del Gottardo, Lugano CHF 70 000 100.0% CHF 170 000 100.0%
Swiss Life Holding . Financial Statements 2006 . Notes to the Financial Statements
Issuance of convertible debt in 2004 On 10 June 2004, SLH issued CHF 317 million in 0.625% convertible bonds 2004–2010 convertible into SLH registered shares. The conversion price was set at CHF 209.625.
Contingencies Swiss Life Holding acts as warrantor for all Swiss Life/Rentenanstalt liabilities with regard to the various tranches of the subordinated perpetual step-up loan (hybrid debt), which amounted to an equivalent value of CHF 1348 million at the balance sheet date.
In 2006, SLH further gave a capital guarantee (2017+2) to a maximum net asset value of CHF 300 million to Swiss Life Funds.
Reserve for own shares (incl. reduction in par value) –23 –4
Swiss Life Holding . Financial Statements 2006 . Appropriation of Profit
Balance carried forward to new account 3 403 418 4 252 874
As statutory auditors, we have audited the accounting records and the financial statements (statement of income, balance sheet and notes to the financial statements; pages 195 to 198) of Swiss Life Holding for the year ended 31 December 2006.
This Annual Report is also available in German and an abridged version has been translated into French. The English text is definitive for the Financial Statements.
Publisher: Swiss Life Holding, Zurich Design: MetaDesign, Zurich Photography: Anita Affentranger, Zurich; Getty Images Production: Management Digital Data AG, Schlieren ZH Printers: NZZ Fretz AG, Schlieren ZH
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