Financial Statements 75 Index to the Financial Statements 77 Consolidated Financial Statements 77 Consolidated Statement of Income 78 Consolidated Balance Sheet 80 Consolidated Statement of Cash Flow 82 Consolidated Statement of Changes in Equity 85 Notes to the Consolidated Financial Statements 191 Report of the Group Auditors 192 Swiss Life Holding Financial Statements 198 Report of the Statutory Auditors
Net earned premiums and fees CHF million Net insurance benefits, claims and claim settlement costs CHF million
Segment result Direct written premiums by type of insurance Gross written premiums, fees and deposits received by country2)
1) The 2003 f igures were not adjusted to the f inancial reporting requirements as per 1 January 2005.
2) On consolidated basis * Equity ** Equity (incl. minority interest)
Swiss Life Group . Annual Report 2005 . Swiss Life at a Glance
Swiss Life in brief The Swiss Life Group is one of Europe’s leading providers of pension and life insurance products. The Swiss Life Group offers individuals and companies comprehensive advice across a broad range of products via agents, brokers and banks in its domestic market, Switzerland, where it is market leader, and selected European markets. Multinational companies are serviced with tailor-made solutions by a network of partners in over 60 countries and regions. With Banca del Gottardo, the Swiss Life Group is also a provider of banking services. The Bank, with its head office in Lugano, has an extended national and international network and around CHF 40 billion in customer assets under management.
(From top left to bottom right): Esther Reinhard, Res Urech, Annelis Lüscher, Tobias Grässli and Ali Lashgari Faghani work at Group Head Office in Zurich in the area of financial risk management
We are committed to helping people create a financially secure future. For life. By providing an insight into various teams this Annual Report illustrates how our employees understand this mission and implement our corporate values in their daily professional lives.
The Swiss Life Group again achieved a good result in 2005, and by further developing its strategy is on track for a successful future. Group profit increased by 44% to CHF 874 million compared to the previous year. All segments and markets contributed significantly to these gratifying results. The trend in earnings underscores the strategic and operational advances made by the company. The return on equity amounts to 12.3% and the profit per share to CHF 24.82. On the strength of these results, the Board of Directors will recommend an increase in the dividend from CHF 4 to CHF 5 at the General Meeting on 9 May 2006. As in the previous year, the dividend will take the form of a repayment of par value.
Growth in premiums – reduction in costs Premium income amounting to CHF 20.2 billion represents 8% growth compared to the previous year. In the home market, Switzerland, market share was maintained. In a market characterised by declining turnover, premium income was down 5% on a comparable basis. The growth momentum continued undiminished abroad. Premium growth in our European markets totalled 19%. Swiss Life thus generated around 40% of its premium volume in Switzerland and around 60% abroad in the 2005 financial year. We anticipate that the share of the amount of our premiums attributable to other countries will continue to increase due to stronger market growth and our differentiated positioning. It is also noteworthy that the share of non-traditional (e.g. unit-linked) products was significantly increased.
This impressive premium growth proves convincingly that Swiss Life has an efficient distribution system and offers attractive products in its markets. This is further confirmed by the various awards for the quality of our products and services as well as for product innovations. Despite the clear premium growth it was possible to reduce our operating costs by a further 2%. Strict cost management is still a top priority in all units. The efforts to further simplify structures and processes and to realise synergies within the Group will lead to a marked increase in efficiency in the coming years.
The new Swiss Life brand, introduced in 2004, supports this market success. It underscores the positioning of the company as a specialist in financial provisions for the future, and as a trustworthy partner for private individuals and companies. Company-specific marketing campaigns contributed to a pronounced increase in brand recognition, a clear profile and a significantly improved image among the general public. Our sponsorship commitment to the Swiss Football Association, which started in July 2004, is particularly worthy of mention. During the extremely exciting final phase of the qualifying rounds for the 2006 world championships in Germany, Swiss Life benefited in its domestic market from the enthusiasm surrounding the Swiss national football team.
On the other hand, leadership means that we want to systematically promote the leadership skills of our management and the entrepreneurial responsibility of our staff. Measures here include the harmonisation of the employee assessment system within the Swiss Life Group based on our values and the competency model that is built upon them. Moreover, in 2005 we began systematically recording and promoting the individual talents. The annual employee survey is an important yardstick in this area. Over 80% of the Swiss Life Group employees took part in this survey last year. The key measurement in the results of this survey is Commitment. This value is a combination of employee job satisfaction and identification with the company. In 2005 this value stood at 70 out of 100 index points across the whole Group. In comparison to the previous year, this represented a an encouraging increase of 9 index points.
Martin Senn, who has been a member of the Corporate Executive Board and Chief Investment Officer of the Swiss Life Group since January 2003, has decided to leave Swiss Life. He has been appointed Chief Investment Officer and member of the Group Executive Committee of the Zurich Financial Services Group as of 1 April 2006. We would like to thank Martin Senn for his major contribution to the successful turnaround of the company and wish him every success in his new role.
The business of providing financial benefits for the future is a sustainable growth market in the long term. With increasing life expectancy and the rising percentage of retired people in the total population, the need for individual retirement solutions in the form of pensions and long-term savings is also growing. The necessary reforms to the social security systems are far from complete and will open up new opportunities for growth. Swiss Life is assuming that, in coming years, the market growth in Europe for both private and occupational benefits will be considerably above the general economy.
With Banca del Gottardo, the Swiss Life Group is also a provider of banking services. The bank makes an important contribution to the Group’s earning power, independent of the insurance business. Banca del Gottardo will in future concentrate more fully on private banking in the Swiss and Italian markets.
Mission We are committed to helping people create a financially secure future. For Life.
Values Expertise: We offer first-class solutions for pensions and long-term savings. This expertise is based on our proven professional competence and many years of experience.
To realise this ambition, Swiss Life is concentrating on growth, efficiency and leadership as its strategic directions.
Efficiency Swiss Life intends to continue improving its basic insurance profitability and to reduce its dependence on the financial result. A basic profitability of CHF 500 million should be achieved by 2008. In 2005 the figure came to CHF 148 million. Along with the necessary increase produced by setting premiums consistent with the costs and risks, the above goal is to be achieved by simplifying and optimising operational processes, reducing the complexities across the entire value chain and sticking to strict cost management. Viewed overall, Swiss Life was able to lower operating costs another 2% despite substantial growth in premiums and the ongoing strategic initiatives.
Leadership Swiss Life wants to promote a performanceoriented culture and an entrepreneurial approach. Another important element in the strategy is the further improvement of employee job satisfaction and commitment by 2008. These advances will be driven by shorter decisionmaking processes, a performance-oriented remuneration system and the systematic recording and development of employees’ skills and abilities. A central development programme with comparable rating and promotion criteria for management employees was introduced throughout the Swiss Life Group in the year under review. Further changes being introduced in personnel policy are described in the section entitled “Responsible Corporate Conduct”.
Managament Structure In connection with the Group’s strategic targets, as of 1 January 2006 Swiss Life decided to streamline the management structure and fine-tune the assignment of responsibilities in the Corporate Executive Board. The tasks of Head Office, the market organisation in Switzerland and the international business are being unbundled. The company is also reducing interfaces and now intends to take better account of the different priorities in Switzerland (boosting profitability) and abroad (profitable growth).
Swiss Life Group . Review of Operations 2005 . Summary of Group Results
Summary of Group Results The Swiss Life Group generated a profit of CHF 874 million and a return on equity of 12.3% in 2005. The company continued its dynamic growth momentum abroad and laid the groundwork for a sustainable increase in profitability in
The financial result for investments held at own risk amounts to CHF 7.0 billion and is thus 2% higher than the previous year’s result. The slightly lower direct earnings on investments are offset by higher realised and unrealised capital gains. The direct return on insurance portfolio investments is 3.7% (2004: 4.1%). The total return is 5.5% (2004: 6.4%). Net equity exposure stood at 4.1% as per 31 December 2005.
Shareholders’ equity rose by 22% to CHF 7.7 billion in the period under review. As well as the profit for the period, the increase in the revaluation reserves for bonds and the conversion into shares of the mandatory convertible securities falling due December 2005 contributed to the increase. Core capital for capital adequacy purposes rose by 21% to CHF 16.6 billion. The goodwill position was reduced a further CHF 109 million and came to CHF 692 million as per 31 December 2005, which corresponds to less than 10% of equity.
Embedded value serves as an indicator of the value of the existing insurance portfolio. In the Swiss Life Group this increased by 12% to CHF 8.9 billion during the period under review. This corresponds to an embedded value per share of CHF 263. The rise can be attributed to growth in our markets abroad and the better than expected investment returns. The contribution from new business amounted to CHF 48 million.
The Swiss Life Group’s accounts were drawn up in compliance with the new and amended international accounting standards that came into force on 1 January 2005. The Group also reports under a simplified segment structure as of 2005, which consists of the Insurance, Banking, Investment Management and Other segments. The accounting standards used and the changes are comprehensively described and explained in the financial statements contained in this Annual Report (in the Financial Statements, from page 75).
Swiss Life Group . Review of Operations 2005 . Insurance 21Insurance Swiss Life consolidated its leading position in the company’s home market of Switzerland and established the conditions for growth in profitability. The growth momentum continued undiminished abroad. The segment result on our insurance business came to CHF 918 million.
A large portion of this drop can be traced to the new independent status of the contingency fund. This was transferred to an autonomous foundation as at 1 January 2004 and temporarily taken over in its entirety by «La Suisse» during the 2004 transitional year. The transfer led to a single premium of CHF 554 million in the previous year. If this event is screened out, the decline in group insurance amounts to 6%, the greater portion of which is attributable to lower single premiums. As the employment market saw fewer job changes than usual, income resulting from people taking up new jobs was correspondingly lower. Voluntary purchases of additional insurance years were also below the level of the year before. Swiss Life’s written premiums for individual insurance advanced 4% from the prior-year figure to stand at CHF 1831 million so that Swiss Life maintained its position as market leader in its home market. The Swiss Life market share in group business amounted to some 30% and in individual business 21%.
Insurance benefits, including claims and claim settlement costs, net, dropped by 14% to CHF 7983 million. This reduction is due to a lower premium volume and decreased need for provisions for future risk. The drop in insurance benefits also reflected the improved claims experience. On the other hand, the increase of the minimum BVG interest rate from 2.25% to 2.5% as at 1 January 2005 increased insurance benefits by CHF 31 million. A considerable increase in policyholder bonuses was recorded, from CHF 450 million to CHF 939 million due to a significantly higher allocation being made to the bonus reserves for the formation of risk capital.
In 2005 business development in Switzerland was substantially influenced by the integration of the «La Suisse» life portfolio and merger of the sales organisations. The 111 agencies in all were consolidated into 58 locations. By focusing on the life insurance business and concentrating on a single brand and unified sales force Swiss Life reinforced its competitive position and distribution depth in its domestic market. The non-life business lines of «La Suisse» were sold and a large portion of the corresponding positions transferred to the new owner. The shortterm disability and accident insurance business went to Helsana, while the motor insurance business and property and liability lines were sold to Vaudoise. In addition, Swiss Life acquired the group business portfolio from Vaudoise and entered into a distribution agreement with that company for occupational provisions. During the reporting year, 90% of the acquired contracts had already been converted to Swiss Life conditions. In addition, Swiss Life implemented sales agreements with the leading providers in property insurance (Mobiliar) and in health insurance (Helsana).
Satisfied customers are Swiss Life’s highest aim. Here, as well, great progress was achieved in Switzerland. As surveys show, Swiss Life managed to considerably increase its customer satisfaction over the course of 2005.
Swiss Life Group . Review of Operations 2005 . Insurance 23France Premium volume for individual insurance in France came to EUR 133 billion in 2005, for a growth rate of 13% over the previous year. Life insurance premium volume grew by 14%. The positive developments on the financial markets contributed especially to the strong attraction of unit-linked insurance policies (+45%). Growth in traditional life insurance policies was 8%. Health insurance premiums rose by 7% to EUR 13 billion.
Net insurance benefits, claims and claim settlement costs –2 198 –2 106 4.4%
Germany The growth trend in the German life insurance market continued in 2005 as well. Indeed, the premium growth of 7% was unexpectedly high.
Individual retirement savings solutions will continue to gain in importance in Germany as well. With its outstanding expertise and its market position as a specialist in retirement solutions, Swiss Life is poised to profit from this development. Swiss Life sees considerable growth potential for occupational benefits through its membership in the MetallRente consortium, Germany’s largest employee benefits institution. Indeed, MetallRente has also been offering private occupational disability insurance since November 2005. The provider for this new product is Swiss Life, which presented the most convincing offer and now leads a consortium of well-known insurers for MetallRente.BU.
In total, income decreased by 22% to CHF 2025 million. In addition to the lower premium income, the financial result, down by CHF 140 million, also contributed to this fall, although an extraordinary profit of CHF 135 million was achieved on the sale of the mortgage business in 2004.
In 2005, Swiss Life continued the process of focusing its processes more consistently on customer needs in the Netherlands. Among other things, the company introduced a system for large group contracts that makes it possible for customers to have direct administrative access to contract data.
In 2006 new laws come into effect that will have a strong influence on the life insurance market. The introduction of the new Life Course Plan (“Levensloop”) foresees special savings products for employees and will further intensify the competition between insurance companies and banks. One new law will regulate the brokering of financial services, placing greater demands on insurance brokers’ transparency, independence and quality of advice. Swiss Life is continuing its initiatives to boost efficiency and is committed to a multi-channel distribution strategy.
Belgium/Luxembourg With some EUR 25 billion in premium volume, Belgium belongs to the medium-sized life insurance markets of Europe. Premium volume rose by about 25%. A premium tax on life insurance contributions (introduced 1 January 2006) and a new tax on bond funds increased demand for life insurance during the reporting period. The Luxembourg life insurance market was dominated by cross-border insurance business.
Measured by premium volume Swiss Life is among the ten largest life insurers in both countries.
In Belgium Swiss Life had gross written premiums in the life business amounting to CHF 684 million. Thanks to the expansion of sales channels and an outstanding product range, the 37% growth achieved was considerably above the market average. The Swiss Life Group is also active in the non-life business in Belgium with Zelia. The non-life premiums, which make up 9% of Swiss Life’s total premium volume in Belgium, dropped by 3% in the reporting period. In Luxembourg, Swiss Life managed to double gross written premiums to CHF 473 million. This gratifying development can be primarily attributed to the cross-border insurance business with unit-linked products.
Income increased by 10% over the previous year to CHF 592 million. This was due both to greater premium income and to a higher financial result. In the wake of expanding premiums and in connection with restructuring measures in the non-life business, net insurance benefits (including claims and claim settlement costs, net) rose by 22% to CHF 358 million. The operating expenses increased by 16% to CHF 133 million for the same reasons, and also due to IT development costs. The operating result dropped to CHF 18 million, from CHF 54 million in the previous year.
In February 2006 Swiss Life announced the appointment of Charles Relecom, then CEO of Zelia, as the new CEO for its entire Belgian insurance business. This designation took place within the context of a plan to merge the activities of the Belgian branch and Zelia S.A., its subsidiary, within a single legal entity under the name Swiss Life (Belgium) S.A.
The Liechtenstein policies from Swiss Life – the Life Asset Portfolios (LAP) – make it possible for high net worth individuals to place their existing assets in a life insurance policy and thus profit from the advantages offered by Liechtenstein as a location. Swiss Life is working successfully with a number of banks to market these products. The assets on deposit at a bank can be brought into the insurance policy as a contribution in kind.
Swiss Life (Liechtenstein) AG offers customised countryspecific products for Germany, Italy and Sweden. In addition, the company has a universal product that can be offered worldwide. In order to keep up with the constantly growing demand on the part of affluent private clients, the company is constantly looking into the development of products for additional countries.
Italy In Italy Swiss Life confines itself to the writing of group risk business. Once again, no new business was written in the individual insurance sector. Swiss Life achieved gross written premiums of CHF 20 million in Italy and generated a positive operating result.
The increase in the segment result for banking, from CHF 73 million to CHF 117 million, can be attributed to operational improvements and the positive trend on the international capital markets. The banking segment of the Swiss Life Group consists primarily of Banca del Gottardo.
Banca del Gottardo The following details regarding Banca del Gottardo refer to the results under local accounting practices. In 2005 the Banca del Gottardo Group achieved a consolidated net profit of CHF 83 million (+17%) and a sound operating profit before extraordinary items and taxes of CHF 92 million (+17%).
Consolidated business expenses in 2005 amounted to CHF 335 million (+8%). This rise is largely due to one-off costs for the extensive outsourcing of the IT and backoffice services, and to ongoing projects within the context of the strategic focus of the bank.
The year 2005 was marked by far-reaching decisions for the bank. After the resolution in the first half of the year to extensively outsource the IT and back-office services, the future strategy of Banca del Gottardo moved to the forefront in October. The bank is concentrating on private banking. Geographically the emphasis will be on Switzerland for onshore and offshore business together with Italy as the most important market abroad. The most important staffing changes were the change in the Chairmans ’s Committee of the Board of Directors and the handover by Claudio Generali of his duties to Felix R. Ehrat at the General Meeting in 2005. Claudio Generali was a strong presence at the bank for 15 years. At the start of 2006 Rolf Aeberli took over from Marco Netzer as CEO.
Swiss Life Asset Management manages part of the insurance assets of Swiss Life and third-party mandates. It is the fourth-largest institutional asset manager in Switzerland. The insurance assets under management rose by 17% compared to the previous year to CHF 53.2 billion. This increase is attributable to the integration of the group insurance business of Vaudoise and «La Suisse» last year, as well as to the performance-related growth in value of the portfolio. The assets under management for third-party mandates at Swiss Life Asset Management rose by 26% to CHF 2.7 billion.
Swiss Life Funds AG, which focuses on managing funds governed by Swiss law, recorded a marked increase of CHF 11.9 billion to a total of CHF 15.5 billion attributable to institutional funds for the management of insurance assets and third-party mandates. The trends in the financial markets had a positive influence on the performance of funds business. A moderate inflow of new funds was recorded in investment funds open to the general public.
The fee income for the Investment Management segment rose in comparison to the previous year by 15% to CHF 173 million. Due to an increase in business activity, operating expenses also rose by 16% to CHF 119 million. Swiss Life thus posted a segment result of CHF 61 million.
In 2005, Swiss Life was the first Swiss life insurance company to set up institutional funds for the investment of its pension assets. Those pension assets that had previously been managed via direct investments can now be invested more efficiently and cost-effectively. Swiss Life also offers this form of investment to the Swiss Life Investment Foundation and its institutional third-party clients via Swiss Life Asset Management.
Swiss Life was honoured in the funds business by being awarded the “Lipper Fund Award Switzerland 2006”. Swiss Life received this award for the performance of its funds in the equity, bond and mixed-portfolio categories on a risk-adjusted basis over a period of three years.
Investment Management Swiss Life’s Investment Management segment generated a segment result of CHF 61 million. Compared to the previous year, assets under management rose by 21% to CHF 80.2 billion, of which CHF 68.8 billion are accounted for by the management of insurance assets and CHF 11.4 billion by third-party mandates.
Companies of the Swiss Life Group and partnerships with leading local insurance companies guarantee global coverage. In the year under review Ping An Life Insurance Company of China joined the Network. The company is a subsidiary of the Ping An Insurance (Group) Company of China, Ltd., number two in the Chinese life insurance market with a market share of approximately 15%. In Switzerland, Helsana, the largest Swiss health insurance provider, also joined the Swiss Life Network, followed by Fort Dearborn Life in the US in January 2006. Fort Dearborn Life is one of the leading providers of group insurance for risk coverage in the US.
In spite of strong competition, the Swiss Life Network managed to strengthen its leading market position in the international employee benefits business in the year under review. Good personal relationships, excellent knowledge of local social insurance schemes, and a convincing cost/benefit ratio played a key role. Business volume amounted to CHF 1.5 billion in the year under review. The Swiss Life Network has more than 400 customers and covers 67 countries and regions.
The employee benefits solutions are customised to meet the specific requirements and risk profiles of the customers. The advantages for the customers include a better diversification of risk and the option to centrally coordinate the benefits and costs of employee benefits plans globally. If the loss experience of the pooled group contracts is favourable, the costs associated with employee benefits are also reduced.
Another service offered by the Swiss Life Network is country-specific information on social security systems, pension plans and market developments. The Employee Reference Manual, which is updated annually, provides data on around 50 of the world’s most important life insurance markets. A newsletter published quarterly reports on events, Network partners and customers.
The International Employee Benefits Conference, which takes place every five years, was held in Interlaken in May 2005. The event was attended by approximately 200 customers, Network partners and brokers, who used the opportunity to exchange information and to strengthen relationships. The participants attended lectures and workshops, and received the latest information on demographic developments and the global insurance market from representatives of academia and the economy. With this event, the Swiss Life Network cemented its global reach and its leading position as a provider of employee benefits. The Asia Pacific Conference for Network partners, customers and brokers in Asia was held for the first time in Singapore in September.
30 Swiss Life Network The Swiss Life Network specialises in employee benefits solutions for companies that operate internationally. The network comprises 51 partners and covers 67 countries and regions. New partners include Ping An Life Insurance Company in China, Helsana in Switzerland and Fort Dearborn Life in the US.
“For me, life is a journey. In my profession I deal a lot with insurance brokers. I like the fact that people are different. I’m always getting to know new people and I enjoy imagining myself in the other person’s shoes.”
Group structure and shareholders Group structure Swiss Life Holding is a public limited company incorporated under Swiss law with its registered office in Zurich. It was established in 2002 and has been listed on the SWX Swiss Exchange since 19 November of that year. Swiss Life Holding brings together all Swiss Life Group companies and activities under a single holding company umbrella. The holding company structure makes it easier to effect investments, enter into partnerships or cooperation agreements and execute capital market transactions. Transparency is also improved by separating the interests of shareholders from those of policyholders.
The most important companies falling within the Group’s scope of consolidation are presented in the Financial Statements (note 42). Details concerning the listing on the SWX Swiss Exchange and on market capitalisation are located on page 40 and the operational management structure is shown on page 13. 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. Along with the allocation of functional responsibilities across borders, each country has one person with market responsibility who is also responsible for results.
The delivery of Swiss Life Holding shares resulting from the expiry of the MCS I (2002–2005) convertible bond (cf. section on “Convertible bonds and options” on page 40) led to a decline in holdings of own shares to below the threshold level of 5%. This was notified in accordance with stock exchange law on 27 December 2005. On the balance sheet date, Swiss Life Holding still held 1.22% of its own shares, either directly or indirectly via its subsidiaries Swiss Life/Rentenanstalt and Banca del Gottardo.
No cross participations exceeding the 5% threshold exist between Swiss Life Holding or its subsidiaries and other listed companies.
Shareholder structure On the balance sheet date a total of 199 455 shareholders and nominees were listed in the Swiss Life share register, of which about 5000 are institutional shareholders. Taken together, the shareholders entered in the share register held around 60% of the shares issued. Roughly half of these shares were owned by shareholders domiciled in Switzerland; about a quarter of these shares were in private hands.
– Conditional share capital: CHF 168 721 652, divided into 3 667 862 registered shares with a par value of CHF 46 each
The Swiss Life Holding General Meeting on 18 November 2004 approved the creation of conditional capital of no more than CHF 270 992 600 through the issuance of a maximum number of 5 419 852 registered shares to be paid in full, each with a par value of CHF 50. The conditional capital was (and the remaining conditional capital is) at the disposal of the holders of conversion or option rights granted by the company or by companies belonging to the Group in connection with existing and new loan debentures or similar bonds issued by Swiss Life Holding and companies belonging to the Group. The shareholders are excluded from subscription rights, however their advance subscription rights remain safeguarded. The Board of Directors sets the terms of conversion and option conditions.
In conjunction with the adjustments of the conversion rate of the MCS I (2002–2005) and MCS II (2003–2004) mandatory convertible securities, which were required following capital dilution as a result of the capital increase, 397 078 registered shares at a par value of CHF 50 each were created from conditional capital on 30 June 2004. The ordinary share capital consequently increased to shares at a par value of CHF 50 each, while conditional capital decreased by CHF 19 853 900 to CHF 183 407 050, divided into 3 668 141 registered shares at a par value of CHF 50 each.
Again as a result of the partial conversion of the 0.625% convertible bond issue (2004–2010), another 260 registered shares were created from conditional capital, bringing Swiss Life Holding’s ordinary share capital as per the balance sheet date to CHF 1 553 699 588, divided into 33 776 078 fully paid registered shares with a par value of CHF 46 each, and its conditional capital to CHF 168 721 652, divided into 3 667 862 registered shares with a par value of CHF 46 each.
Shares As described in detail above, 33 776 078 fully paid Swiss Life Holding registered shares with a par value of CHF 46 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.
Key figures as at 31 December in CHF 2005 2004 +/–%
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 such 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 free decision-making based upon a due assessment of the circumstances. No such exceptions were granted during the period under review.
Convertible bonds and options Only one convertible bond issue was outstanding on the balance sheet date, the Swiss Life Holding 0.625% issue (2004–2010) amounting to more than CHF 317 000 000. The specific conditions attached to these convertible securities can be found in the Financial Statements (note 23) as well as in the issue prospectus of 8 June 2004. The MCS II (2002–2005) mandatory convertible securities issued by Swiss Life Cayman Finance Ltd. expired on 19 December 2005.
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 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 Annual General Meeting of Shareholders in the year in which the member reaches the age of 70.
There are no mutual cross-directorships with listed companies. Acceptance of an appointment to the board of directors of other companies by members of the Swiss Life Holding Board of Directors requires the permission of the Board of Directors. Information on additional board mandates held by individual members of the Board of Directors is presented in the following pages.
Members of the Board of Directors As of the balance sheet date the Board of Directors was composed of the following members: Name Functions Year appointed/reelected Elected until
Investment and Risk Committee 1) Member of the Board of Directors of Swiss Life/Rentenanstalt since 2000 2) Member of the Supervisory Board of Swiss Life/Rentenanstalt since 1995 and member of the Board of Directors since 1997
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.
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 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
Board of Directors – Züblin Immobilien Holding AG, Zurich, Member of the
Since 2000 he has been Managing Director of BMB Bremkamp Management- und BeteiligungsGmbH.
Paul Embrechts received his Master’s Degree in Mathematics from the University of Antwerp (Belgium) in 1975 and his doctorate (Dr. sc. [Math.]) from the Catholic University of Leuven (Belgium) in 1979. Between 1975 and 1983 he held a post as Research Assistant at the Catholic University of Leuven. From 1983 to 1985 he was Lecturer in Statistics at Imperial College, University of London, moving to a position as Lecturer at the University of Limburg (Belgium), which he held from 1985 to 1989. In 1989 he was appointed Professor of Mathematics at the Swiss Federal Institute of Technology (ETH) in Zurich.
Rudolf Kellenberger received his degree in Civil Engineering from the Swiss Federal Institute of Technology (ETH), Zurich in 1970. Between 1970 and 1978 he held various project management positions in the bridge construction industry, including three years in the United Kingdom. He joined Swiss Re in 1978, where he served as Head of the Engineering Department from 1990 to 1992. In 1993 he was appointed Member of the Executive Board with responsibility for Europe. From 2000 to the end of December 2004 Mr Kellenberger served as Deputy Chief Executive Officer at Swiss Re. He has exercised various advisory functions in the area of insurance since retiring in March 2005.
Other appointments: – IBM Switzerland, Zurich, Chairman of the Board of Directors – Vontobel Holding AG, Zurich, Member of the Board of Directors – Swiss-American Chamber of Commerce, Member of the Board – economiesuisse, Zurich, Member of the Board – Zurich Chamber of Commerce, Member of the Board of Directors
Pierfranco Riva will be put forward for re-election at the Swiss Life Holding Annual General Meeting of Shareholders on 9 May 2006.
Other appointments: – Finter Bank Zürich, Zurich, Vice Chairman of the
Board of Directors – Fondazione Daccò, Lugano, Member of the Board of Trustees – Fondazione Nerina Bellingeri ved. Gualdi, Lugano,
Member of the Board of Trustees – Fondazione Rudolf Chaudoire, Member of the Board of Trustees
Executive Committee – Chamber of Commerce Germany-Switzerland, Member of the Executive Committee – St. Gallen – Appenzell Chamber of Commerce and
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.
The Chairman 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 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 meets as often as business requires, but at least six times a year as a rule. Meetings are generally called by the Chairman of the Board of Directors. However any member of the Board of Directors may request that a meeting be called, as can the Corporate Executive Board. In addition to the members of the Board of Directors, the Group CEO, as well as other members of the Corporate Executive Board as required, shall normally attend the meetings or parts of meetings in an advisory capacity. The Board of Directors met seven times during the year under review, with the meetings lasting around four and a half hours on average.
All the Board members took part in all the meetings of the Board of Directors in the year under review as well as all meetings of the Board’s committees to which they belonged, with the single exception of one meeting of the Audit Committee which one member missed, as well as the absences of the Chairman of the Board in the closing weeks of 2005 due to illness.
Audit Committee The Audit Committee assists the Board of Directors in its supervision of the accounting function and financial reporting activities as well as the Group’s compliance with the legal requirements. It reviews the appropriateness of the internal control structures and processes used to comply with the legal requirements. It monitors the activities of Corporate Internal Audit and the external audit services, and takes due note of their reports and recommendations.
Delineation of competencies between the Board of Directors and the Corporate Executive Board The Organisational Regulations of Swiss Life Holding provide for the comprehensive delegation of the executive management of the company to the Group CEO and the Corporate Executive Board, with the exception of those duties reserved for other bodies in accordance with the law, the Articles of Association or the Organisational Regulations themselves. The Corporate Executive Board bears responsibility in particular for the implementation of corporate strategy, for the conditions governing business operations and for financial guidance. It is further responsible for the preparation of the resolutions for the Board of Directors and its committees, and for monitoring the implementation of these decisions in the Group. It is vested with the authority to rule on business referred to it by the Board of Directors, the Board of Directors’ committees and the Chairman of the Board of Directors insofar as approval or a decision is not reserved exclusively to the delegating body.
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. The Chairman of the Board of Directors may participate in the meetings of the Corporate Executive Board in an advisory role and receives all the minutes of the meetings of the Corporate Executive Board. Internal auditing procedures represent an efficient means of independent monitoring and information gathering for the Board of Directors, whereby the Corporate Internal Audit department reports directly to the Chairman of the Board.
Rolf Dörig laid the groundwork for his professional career by obtaining a Doctorate in Law (Dr. iur.) from the University of Zurich before being called to the Bar of Zurich. Joining Credit Suisse in 1986, he assumed a number of executive responsibilities in various areas of banking and in different geographical markets. He subsequently became Chief of Staff and Chief Communications Officer for the Credit Suisse Group. As a member of the Executive Board, he was assigned responsibility for Swiss Corporate and Retail Banking from 2000 onwards. In spring 2002 he became Chairman Switzerland for the Credit Suisse Group.
Reto Himmel has been Group Chief Technology Operations Officer (Group CTO) for the Swiss Life Group since January 2003.
Other appointments: – Chamber of Commerce Germany-Switzerland, Member of the Executive Committee – Society for the Promotion of the Institute of Insurance
Chief Executive Officer International (CEO International) as of 1 January 2006
Bruno Pfister graduated from the University of Geneva with a Master’s Degree in Law before being called to the Bar of Geneva. Following completion of his business management studies (MBA from the UCLA Graduate School of Management in Los Angeles), the initial stages of his career saw him working for Chase Manhattan Bank in London and Geneva. From 1988 onwards he was a management consultant for McKinsey & Co. In 1996 Mr Pfister became Chief of Staff of the Private Banking division at Liechtenstein Global Trust (LGT) where he managed a global strategic project before being appointed Chief Financial Officer of the LGT Group and LGT Bank in Liechtenstein in 1998. In 1999, as a member of the Credit Suisse Corporate Executive Board, he took over as Head of Customer Segment Management and Product Management at Credit Suisse.
Martin Senn graduated from INSEAD in Fontainebleau and the Harvard Business School having studied commerce and management. He worked at the former Swiss Bank Corporation from 1976 to 1994, where his positions included Treasurer in Hong Kong and Regional Treasurer for Asia and the Pacific region in Singapore before ultimately managing the company’s Tokyo office. In 1994
Mr Senn has been Group Chief Investment Officer (Group CIO) of the Swiss Life Group since 1 January 2003.
Board of Directors – Castle Alternative Invest AG, Freienbach, Member of the
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 were allocated in 2003, 2004 or 2005. The share options issued in the year 2000 expired worthless at the end of March 2004.
Swiss Life Group . Review of Operations 2005 . Corporate Governance shares, entitling them to receive Swiss Life Holding shares free of charge after a period of three years has elapsed to the extent that the relevant prerequisites have been satisfied. The number of PSU can increase no more than by a factor of 1.5, or drop by a factor of 0.5 within three years, depending on how the criteria develop.
Further details on compensation and benefit expenditure for the Swiss Life Group management and employees can be found in the Financial Statements (note 25).
Compensation paid to former members of governing bodies Two former members of the Corporate Executive Board who left the Corporate Executive Board in 2004 were paid remuneration in cash totalling CHF 1 084 899 as well as receiving 971 shares at a price of CHF 179.80 in the period under review.
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 2005 financial year: Board of Directors 1 645 shares allocated at values of CHF 191.00, 150.96 and 142.55. They are subject to a three-year vesting period.
1) The 6797 shares were allocated under the 2004 regulations governing the long-term remuneration component.
Options No more share options were granted in the Swiss Life Group in 2003, 2004 or 2005. Options on shares of Swiss Life/Rentenanstalt were allocated to the members of the Board of Directors and Corporate Executive Board in 2000, 2001 and 2002 in the context of the share option plan introduced in 2000 for the entire senior management of the Swiss Life Group, and were subsequently converted into options on Swiss Life Holding shares. At the end of 2002 this share option programme was discontinued as of 2003. The share options allocated in the year 2000 expired worthless at the end of March 2004. In connection with the exchange of Swiss Life/Rentenanstalt shares for shares of Swiss Life Holding and the capital increases in autumn 2002 and spring 2004 as well as the reduction in par value of the Swiss Life Holding shares as of 3 August 2005, the parameters of the options allocated in 2001 and 2002 were adjusted in accordance with Eurex guidelines. No other changes have been made to the allocated share options.
Allotment year 2005 No share options issued 2004 No share options issued 2003 No share options issued
Highest total compensation, Board of Directors The highest total compensation for a member of the Board of Directors in 2005 was paid to Bruno Gehrig as Chairman of the Board. The total compensation paid in the year under review is as follows: Compensation CHF 555 000
Total compensation 2004 CHF 604 245 1) The 308 allocated shares are subject to a blocking period of three years. The allocation, subject to a three-year blocking period, took place at an economic value of CHF 150.96, which corresponds to the tax value; the share price at the time of distribution was CHF 179.80.
Shareholders’ participation rights Restrictions on voting rights In exercising voting rights, no shareholder can collect more than 10% of the total share capital directly or indirectly in respect of his own shares and those he represents. Legal entities and partnerships which are connected through capital, voting rights, uniform management or in any other way, as well as individuals or legal entities and partnerships which act in concert by virtue of agreement, as a syndicate or in any other way, are deemed to be a single person. Any amendment to or revocation of restrictions on voting rights must be approved by at least two-thirds of the voting shares represented at the General Meeting of Shareholders and an absolute majority of the share par value represented. The Board of Directors can permit exceptions to this limit on the basis of its discretionary powers; however, during the year under review no exceptions were granted.
Entry in the share register Entries can be made in the share register up to, but not including, the day before the General Meeting of Shareholders. In all cases, however, the company reserves the right to adhere to the legal maximum period of 20 days for refusal to recognise entries in the share register in accordance with Art. 685, cl. G of the Swiss Code of Obligations. For administrative reasons (postal delivery times) the deadline for registering to participate in the General Meeting of Shareholders is usually seven calendar days before the event takes place.
Changes of control and defence measures Duty to make an offer Swiss Life Holding’s Articles of Association provide for neither an “opting up” nor an “opting out” clause within the meaning of Art. 22 and 32 BEHG (Swiss Stock Exchange Act).
In the report of the Group auditors, PwC confirms that it meets the legal requirements concerning professional qualification and independence.
Auditing fees In 2005 the auditing fees credited to PwC by the Swiss Life Group came to CHF 11.3 million (2004: CHF 14.1 million). This includes the fees for reviewing Swiss Life’s half-year accounts.
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 those recorded in the share register. In addition, the third Investor’s Day was held on 1 December 2005.
Swiss Life Group . Review of Operations 2005 . Board of Directors
From top left to bottom right: Rolf Dörig, Bruno Pfister, Thomas Müller, Reto Himmel, Paul Müller
Swiss Life Group . Review of Operations 2005 . Responsible Corporate Conduct
Adherence to these rules is a prerequisite for legally and ethically correct business conduct and for economic profitability. The Code of Compliance applies to the employees of the Swiss Life Group in Switzerland and in Liechtenstein. In the other markets it is implemented in compliance with local legislation.
Employees The second Group-wide employee survey was carried out in the year under review. The fact that more than 80% of employees took part in the survey that they are greatly interested in assessing and actively influencing their working environment. The value given to commitment in the survey is key. 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 70 out of 100 index points on average, up from 61 points in 2004. The strategic target is to achieve a value of 80 index points in all units by the year 2008.
In the 2005 survey employees gave a particularly positive rating to the questions regarding acceptance in their teams and the opportunity to take on more responsibility. However, the survey also demonstrated that employees suffer from a lack of development perspectives. Targeted offers in this area serve to continuously improve their working situation. These measures include annual meetings to agree objectives and the process of assessing the attainment of targets. This is paired with customised development programmes and performance-related and results-oriented salaries.
Swiss Life identifies employees with high potential and actively fosters their talents in an effort to steer their development towards a responsible position as manager, specialist or project manager. A central development programme with comparable rating and promotion criteria for management employees was introduced in the year under review.
Employees (full-time equivalents) by country as at 31.12.2005 8979 EmployeesTotal: Switzerland4412 France2355 Germany825 Netherlands732 Belgium/Luxembourg401 Other254
Communication Swiss Life communicates actively and openly both, internally and to outside world. Public Relations and Investor Relations serve the interests of private and institutional investors, financial analysts, journalists and the public by providing up-to-date reports. These reports are also available at www.swisslife.com. The aim of the internal communication processes is to provide employees with transparent information on the development of the company. “Life”, the Group-wide staff magazine, is published five times a year in three languages, with a circulation of 11 000 copies. The intranet provides country-specific and Group-wide information and is designed on the same lines as the Swiss Life Group’s internet website, which has won several web competitions.
“In order to achieve success I need clarity about both my personal and professional goals. This was enormously helpful to me when I had to tighten up and streamline the group insurance product range in a short time. I had to set priorities, make clear decisions and then carry them out.”
Clarity and transparency were the aims when restructuring our product landscape. Our team clarifies the needs of clients, develops the appropriate products and ensures what we offer is comprehensible and clear.
The product design team for group life insurance in Switzerland (from top left to bottom right): Christine Ruckstuhl, Paul Pardamec, Andreas Epper, Hugo Pfister, Monika Behr
Shareholders’ equity in future – the statutory equity adjusted for the shareholders’ interest in the revaluation reserve – produces the ANAV.
The extent to which the embedded value is dependent on the assumptions made can be seen in the “economic sensitivities” table on the next page.
Embedded Value The embedded value of the Swiss Life Group rose to CHF 8.9 billion as at 31 December 2005.
Deloitte & Touche LLP (“Deloitte”) have reviewed the choice of methodology together with the assumptions and calculations made by the Swiss Life Group in the calculation of its embedded value results. Deloitte have reported to Swiss Life that they consider that the methodology is appropriate, the Group’s assumptions are altogether reasonable and that the embedded value results have been properly compiled on the basis of the methodology and assumptions chosen. For the purpose of this report, Deloitte have performed certain checks on data provided by Swiss Life, but have not verif ied it themselves and have relied on f inancial information underlying the Group’s f inancial statements.
Swiss Life Group embedded value at end of 2005 3 614 3 460 1 813 8 887
Impact of 100 bp increase in investment return +657 +697 +1 354
Impact of 100 bp decrease in investment return –985 –842 –1 827
Impact of 100 bp increase in return on new bond investments +216 +386 +602
Life insurers are also exposed to market risks on the liabilities side of their balance sheets, especially interest-rate risks stemming from the sale of long-term insurance policies with interest guarantees. Three elements – guarantees, bonuses and options – determine the financial risk of classical life insurance policies. Because clients have often taken on a long-term commitment, they expect to profit from uptrends on the financial markets in the form of bonuses in addition to the guarantees. Options embedded in the insurance contracts, such as the right to early surrender, provide the client with the necessary flexibility required for long-term contracts.
Credit risk Credit risk involves the possibility that a debtor may no longer be able to meet his obligations. Responsibility for monitoring credit risks lies with the individual units, which follow stringent, Group-wide guidelines with regard to minimum borrower ratings and the diversification of credit risks. Swiss Life is exposed to such risks, in particular in the investment and reinsurance segments. To avoid concentrations of risk across the Group as a whole, the credit positions are regularly collated at Group level and where necessary reduced at the individual units. All in all, this strict credit risk management process ensures a broadly diversified credit portfolio with low risk exposure.
Underwriting risks In the life insurance business a distinction is drawn between three types of underwriting risk: longevity, death and disability. Swiss Life conducts an annual review and analysis of the structure of its customer portfolio with regard to mortality, cancellations and reinstatements. To manage disability risk and stabilise risk performance, individual evaluations are used along with portfolio analyses for disability risk to allow a better assessment of the exposure structure. The information gained is used in setting appropriate prices and rates as well as ensuring that reserves are sufficient for future insurance obligations to be met at all times. It also forms the basis for determining the risk capital that will be required to offset unexpected deviations in the economic value of the liabilities.
The new rules ensure risk-based and economically focused compliance from an accounting and thus static perspective. In this context, companies’ own models are permitted. The internal processes and systems are checked in the test, in preparation for the new solvency regulations.
Asset and liability management (ALM) is aimed at systematically getting the right match of assets and liabilities, to make sure that commitments to policyholders can be met at all times. Another objective is to adequately compensate shareholders for making risk capital available.
– What guarantees and benefits are being promised to policyholders and what would be the ideal pricing (product design)?
Given that developments on the liabilities side can be dynamic, a static asset allocation approach is unsuitable. If the liabilities are split into a guaranteed segment and a nonguaranteed segment (bonus component), the guaranteed segment can be presented as 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. If the market interest rate increases, so too do policyholders’ expectations with regard to bonus payments. This is evident in the interest sensitivity (duration) on the liabilities side. While the guarantees have a fixed duration, the duration of the non-guaranteed segment behaves inversely to the interest level. The duration is highest when the guaranteed interest corresponds to the actual current interest level. The effect described above means that rising interest rates lead to a disproportionate reduction in the average duration of the liabilities. The latter is weakened, however, when the interest level is relatively high.
In addition to the purely economic considerations, there are other factors that have to be taken into account (regulatory requirements, funding ratio, solvency, local and international accounting standards, liquidity requirements, requirements by the rating agencies), some of which may lead to results that conflict with the economic approach. For example, the economic approach is not consistent with the international accounting standards currently promulgated (International Financial Reporting Standards, IFRS). Under the current accounting treatment liabilities are not carried at fair value. Valuations are not adjusted following interest-rate movements, although the value of 67Asset and Liability Management Matching assets and liabilities is one of the most important aspects of risk management in life insurance. It ensures that benefits can be paid when due and that core capital will always be available to absorb fluctuations in the value of assets and liabilities.
Swiss Life Group . Review of Operations 2005 . Asset and Liability Management future commitments will obviously have changed. However, the focus on managing assets and liabilities according to economic criteria does make sense, this being highlighted by the fact that accounting standards are clearly moving in the direction of the fair-value valuation of liabilities. Moreover, the introduction of the Basel II solvency guidelines and the Swiss Solvency Test (SST) is leading to more attention being paid to economic principles.
As regards the actual distributions, the bonus policies of the other market participants (insurers) also have to be taken into account, and a certain bandwidth of market expectations can be anticipated in this regard. Distributing more to policyholders does not automatically lead to the desired increase in business volume. However, if bonus payments were pitched below the average, this could lead to a clear drop in volume.
Product design The overriding objective of product design is to develop a product range tailored to clients’ requirements with binding guarantee commitments and simultaneous participation in positive market trends.
The underlying calculation is aimed at generating positive contribution margins for every single product. This makes it possible to avoid cross-subsidisation between products. The options for policy surrender and waiver of premium are also reflected in the calculation, together with the costs of the capital tied up in the contracts. Product design, ALM and bonus policy are coordinated in such a way that the influence of capital market developments on profitability is reduced to a minimum.
The product design principles are reviewed twice a year while the economic viability of new business is examined quarterly, so that Swiss Life can adapt the conditions of sale for the individual products in line with ongoing changes.
69Process management The ALM process is managed centrally, with responsibility for the Group-wide ALM process resting with the Group Chief Financial Officer (Group CFO). At local level, the competent bodies implement the decisions reached at Group level in collaboration with the local Asset and Liability Committee at their business unit. All the relevant functions are represented in the ALM process: risk management, investments, actuarial services, product management and finance.
Hans Langenegger from the general agency in Herisau (Switzerland) in discussion with Maria Koch.
Employees at the general agency in Herisau (from top left to bottom right): Thomas Rechsteiner, Patrik Lüthi, Willi Niedermann, Marcel Mathis, Daniel Jnglin, Hanspeter Fuchs, Peter Müller, Remo Eugster, Othmar Ammann, Markus Brülisauer, Hans Langenegger, Peter Graf, Heinz Gähler, Jürg Renggli
Premiums earned on investment contracts with discretionary participation 8 233 58
Net gains/losses on financial assets 6, 9 2 582 1 087
Insurance benefits, claims and claim settlement costs –14 184 –16 013
Impairment of property and equipment and intangible assets 18, 19 –119 –174
Profit for the period attributable to equity holders of Swiss Life Holding 860 579 minority interest 14 27
Basic earnings per share for the profit attributable to equity holders of Swiss Life Holding (in CHF) 7 25.67 18.57
Swiss Life Group . Financial Statements 2005 . Consolidated Balance Sheet
Financial assets at fair value through profit or loss 12 23 653 19 363
Financial assets held to maturity 15, 35 4 256 4 147
Swiss Life Group . Financial Statements 2005 . Consolidated Balance Sheet 79Consolidated balance sheet as at 31 December
Financial liabilities at fair value through profit or loss 12 6 919 4 939
Investment contracts and deposits at amortised cost 22, 35 7 307 8 181
Liabilities associated with assets held for sale 32 1 734 –
Swiss Life Group . Financial Statements 2005 . Consolidated Statement of Cash Flow 81Consolidated statement of cash flow for the years ended 31 December
Total net cash flow from financing activities –1 925 1 572
Cash and cash equivalents as at 1 January 8 304 6 250
Cash and cash equivalents for the account and risk of customers (not available for use) 345 364
Total cash and cash equivalents as at 1 January 8 649 6 614
Total cash and cash equivalents as at 31 December 14 170 8 649
Consolidated Statement of Changes in Equity 82 Consolidated statement of changes in equity for the year ended 31 December 2005
Purchases of treasury shares – – –133 – – – –133 – –133
Acquisitions of minority interest – – – – – – – –7 –7
Changes in accounting policies 40 – –216 – – –58 –129 –403 0 –403
Options on own shares – 4 – – – – 4 0 4
Purchases of treasury shares – – –262 – – – –262 – –262
Sales of treasury shares – –9 245 – – – 236 –1 235
Acquisitions of minority interest – – – – – – – –24 –24
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 87 Summary of Significant Accounting Policies . . . . . . . . . 2 103 Critical Accounting Estimates and Judgements 115 Risk Management Policies and Procedures . . . . . . . . . . 6 134 Premiums, Fees and Deposits Received . . . . . . . . . . . . . 8 135 Details of Certain Items in the 138 Insurance and Other Receivables and Payables. . . . . . 10 142 Financial Assets and Liabilities at Fair Value 143 Financial Assets Available for Sale . . . . . . . . . . . . . . . . 13 145 Financial Assets Held to Maturity . . . . . . . . . . . . . . . . 15 150 Intangible Assets including Intangible 154 Investment Contracts with Discretionary 155 Investment Contracts and Deposits 158 Insurance Liabilities and Reinsurance Assets. . . . . . . . 24 170 Acquisitions and Disposals of Subsidiaries . . . . . . . . . 30 172 Assets Held for Sale and Associated Liabilities . . . . . . 32 175 Fair Value of Financial Instruments not at
Fair Value in the Balance Sheet . . . . . . . . . . . . . . . . . . 35 177 Future Minimum Lease Payments under
Rate and of Statutory Distribution Ratio 185 Events after the Balance Sheet Date . . . . . . . . . . . . . . 41
The Swiss Life Group is one of Europe’s leading providers of pension and life insurance products. The Swiss Life Group offers individuals and companies comprehensive advice across a broad range of products via agents, brokers and banks in its domestic market, Switzerland, where it is market leader, and selected European markets. Multinational companies are serviced with tailor-made solutions by a network of partners in over 60 countries and regions. With Banca del Gottardo, the Swiss Life Group is also a provider of banking services. The bank, headquartered in Lugano, has an extended national and international network of offices and significant customer assets under management. Additionally, the Group offers non-life insurance products and investment management services in selected countries.
Conversion of mandatory convertible securities On 19 December 2005, the mandatory convertible securities (MCS I, 2002–2005) matured and the liability component totalling CHF 250 million was reclassified to share premium. As at 31 December 2005, no mandatory convertible securities were outstanding.
Conversion of convertible debt In 2005, convertible bonds were converted into 260 Swiss Life Holding shares in total with a corresponding increase of share capital and share premium (2004: conversion into 19 Swiss Life Holding shares).
Approval of financial statements On 27 March 2006, 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.
The General Meeting of Shareholders of Swiss Life Holding has the power to amend the financial statements after issue.
Basis of preparation The consolidated financial statements of Swiss Life have been prepared in accordance with and comply with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared on a historical cost basis, except for the following assets and liabilities which are stated at their fair value: derivatives, financial assets and liabilities at fair value through profit or loss, financial assets classified as available for sale and investment property.
IAS 8 (revised 2003) Accounting Policies, Changes in Accounting Estimates and Errors
IFRS 5 (issued 2004) Non-current Assets Held for Sale and Discontinued Operations
The adoption of IAS 8, IAS 10, IAS 16, IAS 17, IAS 27, IAS 40 (all revised in 2003) as well as IFRS 2 and IFRS 5 (both issued in 2004) did not result in substantial changes to the Swiss Life Group’s accounting policies.
The changes attributable to the other standards were as follows: IFRS 4 Insurance Contracts The adoption of IFRS 4 (issued in 2004) has resulted in the following changes: New definition of insurance contracts Some insurance products previously considered as insurance contracts have been reclassified to investment contracts as they do not contain significant insurance risk.
Separate account/unit-linked assets and liabilities The separate account/unit-linked assets and liabilities have been reclassified to other line items in the balance sheet. Separate account/unit-linked assets have been reclassified to financial assets designated as at fair value through profit or loss, investment property, derivatives and cash and cash equivalents. Separate account liabilities have been reclassified to 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. These derivatives are separately recognised under derivatives. The deposit components of unit-linked liabilities have been reclassified to financial liabilities designated as at fair value through profit or loss.
Financial assets at fair value through profit or loss The standard permits an entity to designate any financial asset or financial liability on initial recognition as one to be measured at fair value, with changes in fair value recognised in profit or loss (fair value option). The adoption of IAS 39 (revised) resulted in the reclassification of certain financial assets and financial liabilities as at fair value through profit or loss.
Impairment of financial assets With regard to impairment of financial assets, clarification is given that an impairment loss is recognised only when it has been incurred. IAS 39 also provides additional guidance on what events provide objective evidence of impairment for investments in equity instruments. An impairment loss on available-for-sale equity instruments cannot be reversed through profit or loss. Any subsequent increase in fair value is recognised in equity. As a Group policy, availablefor -sale investments in equity securities and investment funds are assessed for impairment when the market value as at the balance sheet date is 30% or more below cost, or the market value remained below cost for the previous 12 months or longer.
The previous Group policy was as follows: Available-for-sale investments in equity securities and investment funds were assessed for impairment when the market value as at the balance sheet date was 20% or more below cost for the previous 12 months or longer.
IAS 28 (revised) Investments in Associates IAS 28 has resulted in new disclosures relating to investments in associates.
IAS 33 (revised) Earnings per Share With the adoption of IAS 33 (revised) basic earnings per share and diluted earnings per share have been recalculated. The effect of the issuance of the mandatory convertible securities has been included in the calculation of basic earnings per share. As at 31 December 2005, no mandatory convertible securities were outstanding.
IFRS 3 Business Combinations, IAS 36 (revised) Impairment of Assets, IAS 38 (revised) Intangible Assets The accounting policy for goodwill has changed due to the adoption of IFRS 3, IAS 36 and IAS 38. As from 2005, goodwill is no longer amortised and accumulated amortisation as at 31 December 2004 has been eliminated.
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. 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 interest 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.
Derivatives and other financial instruments are also used to hedge or modify exposures to interest rate, foreign currency and other risks if certain criteria are met. Such financial instruments are designated to offset changes in the fair value of an asset or liability and unrecognised firm commitments (fair value hedge), or changes in future cash flows of an asset, liability or a highly probable forecast transaction (cash flow hedge).
Financial assets “Regular way” purchases and sales of financial assets are recorded on the trade date, net of transaction costs. The amortisation of premiums and discounts on investments is computed using the effective interest method and is recognised in income as an adjustment of yield. Dividends are recorded as revenue on the ex-dividend date. Interest income is recognised on an accrual basis.
A financial asset is derecognised when the contractual rights to the cash flows from the financial asset have expired or all substantially risks and rewards of ownership have been transferred or the risks and rewards have neither been transferred nor retained, but control of the asset has been transferred.
Loans and receivables Loans and receivables are nonderivative 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.
Financial assets at amortised cost The Group assesses at each balance sheet date if there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If there is objective evidence that an impairment 2 Summary of Significant Accounting Policies (continued)
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements investment property, any surplus previously recorded in equity is transferred to retained earnings; the transfer is not made through income.
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. have no discernible effect on the economics of the transaction). The classification of contracts identifies both the insurance contracts that the Group issues and reinsurance contracts that the Group holds. As a Group policy, Swiss Life considers those contracts to be insurance contracts that require the payment of additional benefits in excess of 10% of the benefits that would be payable if the insured event had not occurred, excluding scenarios that lack commercial substance.
The accounting for the amounts identified as DPF has been done as follows: In some 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, the Netherlands and Italy. For these contracts, the contractual right to receive as a supplement to guaranteed benefits, additional benefits which are likely to be a significant portion of the total contractual benefits, arises
– when valuation differences arise on the assets and liabilities relating to the respective insurance portfolio. To the extent a statutory minimum distribution ratio (“legal quote”) exists, the rights arising from DPF relating to valuation differences in respect of the relevant assets and liabilities are accounted for as liabilities (“shadow accounting”). The liabilities are measured using the statutory minimum distribution ratio (“legal quote”).
In jurisdictions where no statutory minimum distribution ratio (“legal quote”) exists, no amounts identified as DPF relating to valuation differences on the assets and liabilities on the respective insurance portfolios have been separated. Such amounts have been included within shareholders’ equity. For these contracts, the contractual right to receive, as a supplement to guaranteed benefits, additional benefits which are likely to be a significant portion of the total contractual benefits, arises when management ratifies the allocation of policyholder bonuses. When ratified by management, a corresponding liability is set up. To the extent discretion with regard to amount and/or timing is involved, these amounts are included within discretionary participation liabilities. In that respect the policyholder bonus reserve set up in the statutory accounts for these contracts is regarded as discretionary.
Germany 90% of the after-income-tax pre-refund statutory surplus is allocated to the policyholders.
The Netherlands Several systems for policyholder participation, such as systems based on guaranteed interest rates and proportional profit sharing, are in place.
Future life policyholder benefit liabilities for other traditional life insurance contracts and investment contracts with discretionary participation features are calculated using a net-level-premium method based on actuarial assumptions as to mortality, persistency, expenses and investment return, including a margin for adverse deviation. These assumptions are based on figures at the time the policy is issued.
Reinsurance contracts that do not transfer insurance risk are accounted for as financial reinsurance and are included in financial assets or liabilities. A deposit asset or liability is recognised based on the consideration paid or received, less any explicitly identified premiums or fees retained by the reinsured. These contracts are primarily measured at amortised cost using the effective interest method with future cash flows being estimated to calculate the effective interest rate.
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.
For the purpose of impairment testing, goodwill is allocated to cash-generating units. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses.
Present value of future profits (PVP) arising from acquired insurance contracts and investment contracts with discretionary participation features On acquisition of a portfolio of insurance contracts or a portfolio of investment contracts with discretionary participation features (DPF), either directly from another insurer or through the acquisition of a subsidiary undertaking, the group recognises an intangible asset representing the present value of future profits (PVP) embedded in these contracts acquired. The PVP is determined by estimating the net present value of future cash flows from the contracts in force at the date of acquisition. For acquired insurance and investment contracts with DPF, future positive cash flows generally include net valuation premiums while future negative cash flows include policyholders’ benefits and certain maintenance expenses.
PVP is amortised in proportion to gross profits or gross margins over the effective life of the acquired contracts, which generally ranges from 20 to 30 years. Realised gains/ losses are thereby taken into account as well as gains/losses recognised directly in equity (unrealised gains/losses). If these gains/losses were to be realised, the gross profits or gross margins used to amortise PVP would be affected.
Assumptions used to estimate the future value of expected gross margins and profits are evaluated regularly and adjusted if estimates change. Deviations of actual results from estimated experience are reflected in income.
Deferred origination costs (DOC) Incremental costs directly attributable to securing investment management contracts are recognised as an asset if they can be identified separately and measured reliably and if it is probable that they will be recovered.
Deferred origination costs are generally amortised on a straight-line basis over the life of the contracts unless another method is more appropriate.
Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the software development team’s employee costs and an appropriate portion of relevant overheads.
Impairment of non-financial assets For non-financial assets the recoverable amount is measured as the higher of the fair value less costs to sell and its value in use. Fair value less costs to sell is the amount obtainable from the sale of an asset or cash-generating unit in an arm’s-length transaction between knowledgeable, willing parties, less the costs of disposal. “Value in use” is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
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.
Financial liabilities at fair value through profit or loss Financial liabilities at fair value are irrevocably designated as at fair value at initial recognition. Financial liabilities are designated as at fair value through profit or loss in the following instances: – Financial liabilities for the account and risk of the SwissLife Group’s customers where the insurance benefits are linked to unit values of investment funds.
Borrowings Borrowings are recognised initially at the proceeds received, net of transaction cost 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 on 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.
Employee benefits Post-employment benefits The Swiss Life Group provides post-employment benefits under two types of arrangement: defined benefit plans and defined contribution plans. The assets of these plans are generally held separately from the Group’s general assets in trustee-administered funds. Defined benefit plan contributions are calculated based upon regulatory requirements and/or plan terms. The Group’s defined benefit obligations and the related service costs are determined at each balance sheet date by a qualified actuary, using the Projected Unit Credit Method.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements obligation that may, but probably will not, require an outflow of resources or the amount of the obligation cannot be measured with sufficient reliability.
Treasury shares Treasury shares are presented in the consolidated balance sheet as a deduction from equity and are recorded at cost. The difference between the purchase price and the sales proceeds is included in share premium.
Earnings per share Basic earnings per share are calculated by dividing net income available to shareholders by the weighted average number of shares in issue during the reporting period, excluding the average number of shares purchased by the Group and held as treasury shares. The effect of mandatorily convertible securities is included in the calculation of basic earnings per share.
Forthcoming changes in accounting policies In December 2004, the International Accounting Standards Board issued IFRIC Interpretation 4 Determining whether an Arrangement contains a Lease. The interpretation explains that the requirements of IAS 17 Leases have wider applicability than just those agreements described as leases. Elements of some supply and outsourcing agreements may need to be treated as leases. The Interpretation will be adopted by the Swiss Life Group for annual periods beginning on 1 January 2006. The Swiss Life Group expects that the impact from the adoption of this Interpretation will not be material as the Swiss Life Group does not have significant supply and outsourcing agreements.
In December 2004, an amendment to IAS 19 Employee Benefits, covering actuarial gains and losses, group plans and disclosures, was issued by the International
Accounting Standards Board. The amendment introduces an additional recognition option for actuarial gains and losses arising in post-employment defined benefit plans. The amendment clarifies that a contractual agreement between a multi-employer plan and participating employers that determines how a surplus is to be distributed or a deficit funded will give rise to an asset or liability. The amendment also requires additional disclosures. The SwissLife Group will adopt this amendment for annual periods beginning on 1 January 2006. No financial impact is expected from the adoption of this amendment as the Swiss Life Group does not intend to change the accounting policy for the recognition of actuarial gains and losses and does not participate in any multi-employer plans. The adoption of this amendment will impact the disclosures presented 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 will adopt this amendment for annual periods beginning on 1 January 2006. No material financial impact is expected from the adoption of this amendment as the Group believes that it is compliant with the amended criteria for the designation of financial instruments at fair value through profit or loss.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements amendment is intended to ensure that issuers of financial guarantee contracts include the resulting liabilities in their balance sheet. The amendment will be adopted by the SwissLife Group for annual periods beginning on 1January 2006. No material financial impact is expected from the adoption of this amendment as the Group believes that it is compliant with the new requirements.
The following new International Financial Reporting Standards, Interpretations or amendments to International Financial Reporting Standards, issued but not yet effective, are not relevant to the Swiss Life Group: IFRS 1 (amendment) First-time Adoption of International Financial Reporting Standards. The Swiss Life Group is not a first-time adopter of International Financial Reporting Standards.
IFRS 6 (amendment) Exploration for and Evaluation of Mineral Resources. The IFRS is not relevant to the Group’s operations.
IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment. The IFRS is not relevant to the Group’s operations.
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies. The Swiss Life Group does not have any operations in hyperinflationary economies.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 3 Critical Accounting Estimates and Judgements in Applying Accounting Policies
Insurance liabilities are established by using appropriate estimates and assumptions on mortality, morbidity 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.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (continued)
Mortality and longevity The main source of uncertainty is that epidemics such as AIDS, SARS and wide-ranging lifestyle changes, such as in eating, smoking and exercise habits, could result in future mortality being significantly worse than in the past for the age groups in which significant exposure to mortality risk exists. However, continuing improvements in medical care and social conditions could result in improvements in longevity in excess of those allowed for in the estimates used to determine the liability for contracts where exposure to longevity risk exists.
In certain markets, expense allocation is based on an activity-based cost methodology. Recurrent costs are subdivided into four main cost categories: acquisition costs, administration costs, pay out costs and asset management costs.
Investment returns Assumptions relating to investment returns are based on the strategic asset allocation. For certain asset classes, a fixed return is used, centrally set by the Group. From this gross investment return, projected asset management fees are deducted to obtain a net investment return.
Under the new strategy primary segmentation is split into four categories: Insurance, Banking, Investment Management and Other. The organisational and management structure within the “Insurance” segment is based on geography whereas the organisational and management structure of other segments is primarily based on products/services.
– The “Insurance” segment consists of life and non-life insurance operations. Life insurance operations offer a broad range of life, pension, annuity and investment-type policies to both groups and individuals, including accident, health and disability coverage. Non-life operations principally include property and casualty, liability and motor insurance. The Group’s strategy focuses primarily on the life and pension business in a number of key European markets, such as Switzerland, France, Germany, the Netherlands, Belgium, Luxembourg, Liechtenstein and Italy. Non-life operations include operations in France, Belgium and Italy. The nonlife operations in Switzerland («La Suisse») were sold in July 2005 (accident & health business) and in August 2005 (motor insurance business and property and liability lines). Non-life operations are no longer disclosed as a separate segment as these operations are no longer strategically relevant to the Group and do not fulfill the critical thresholds for separate disclosure. The “Insurance” segment also includes a number of companies which hold investments primarily pertaining to life insurance.
– “Investment Management” refers to the management of assets for institutional clients and the Group’s insurance business, as well as the provision of expert advice for such clients.
Net earned insurance premiums 13 319 – – – –40 13 279
Policy fees arising from insurance contracts 114 – – – – 114
Net gains/losses on investment property –24 – – – – –24 of which inter-segment –46 130 91 36 –211
Insurance benefits, claims and claim settlement costs ceded to reinsurers 144 – – – – 144
Share of results of associates 2 –2 0 3 – 3
Statement of income for the year ended 31 December 2004 (restated)
Insurance premiums ceded to reinsurers –863 – – – – –863
Policy fees arising from insurance contracts 167 – – – – 167
Net gains/losses on financial instruments at fair value through profit or loss 467 46 1 –1 – 513
Net gains/losses on investment property –47 – – – – –47
Other income –166 19 9 –2 –15 –155 of which inter-segment 60 11 66 30 –167
Net insurance benefits, claims and claim settlement costs –15 406 – – – 31 –15 375
Impairment of property and equipment and intangible assets –174 – – – – –174
Share of results of associates 3 0 0 – – 3
Additions of property and equipment and intangible assets 715 30 0 0 – 745 4 Segment Information (continued)
Insurance receivables and other receivables 4 055 144 32 28 –84 4 175
Financial assets available for sale 79 413 595 11 12 – 80 031
Insurance payables and other payables 4 119 346 19 34 –63 4 455
Financial liabilities at fair value through profit or loss 6 204 715 – – – 6 919
Investment contracts with discretionary participation 23 652 – – – – 23 652
Investment contracts and deposits at amortised cost 2 661 9 439 – – –4 793 7 307
Financial assets held to maturity 4 076 71 – – – 4 147
Intangible assets including intangible insurance assets 2 876 531 0 – – 3 407
Insurance payables and other payables 3 847 388 12 24 –46 4 225
Investment contracts with discretionary participation 19 988 – – – – 19 988
Investment contracts and deposits at amortised cost 2 790 5 407 – – –16 8 181
Liabilities associated with assets held for sale – – – – – –
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 5 Details of Insurance Segment
Insurance benefits, claims and claim settlement costs ceded to reinsurers 6 53 71 2 15 3 –6 144
Policyholder participation –939 –816 –231 –229 –15 – 2 –2 228
Commission expense –127 –605 –194 –59 –48 –2 – –1 035
Acquisition and origination costs deferred 110 262 134 37 29 – – 572
Other expenses –329 –213 –77 –65 –47 –8 24 –715 of which inter-subsegment –10 0 –2 –7 1 0 18 of which inter-subsegment 28 –3 –5 –10 –4 –2 –4
Net gains/losses on financial instruments at fair value through profit or loss 272 64 –92 152 –1 72 – 467
Net gains/losses on investment property –73 33 –11 –2 4 2 – –47
Other income –32 1 –20 8 –1 –118 –4 –166 of which inter-subsegment 71 –5 –1 –3 –9 –12 –41
Employee benefits expense –511 –230 –98 –81 –51 –26 – –997
The Group’s core business is life insurance and pensions. A life insurance and pensions contract represents a longterm promise to the policyholder. To fulfil its future payment obligations to the policyholders, the insurance entities of the Group must be financially sound over an extended period of time. The ability to remain financially healthy and strong depends on a number of risk factors. The Group risk map can be broadly divided into financial, insurance and operational risks. All of these risk categories can impact the financial stability of the Group.
Contracts for the account and risk of the Swiss Life Group’s customers Certain life insurance and investment contracts are managed for the account and risk of the Swiss Life Group’s customers (separate account/unit-linked contracts). The assets relating to these contracts are segregated and managed to meet specific investment objectives of the policyholders. These assets back the insurance liabilities and the financial liabilities arising from these contracts. The fair values of the liabilities reflect the fair values of the assets. Certain contracts with unit-linking features contain guaranteed minimum insurance benefits. The liabilities relating to this part are included in the insurance liabilities.
Assets for the account and risk of the Swiss Life Group’s customers as at 31 December
Total assets for the account and risk of the Swiss Life Group’s customers 6 732 5 401
For the For the For the For the account account account account and risk of the and risk of the and risk of the and risk of the Swiss Life Swiss Life
Net gains/losses on financial assets 2 582 1 087 – – 2 582 1 087
Net gains/losses on investment property –24 –47 0 0 –24 –47
Share of results of associates 3 3 – – 3 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, the ALM comprises the following main activities: strategic asset allocation, distribution policy with regard to surplus generated on investments and product design.
The cash flows resulting from the liabilities up to a certain maturity of the Swiss Life Group’s insurance operations are matched with the cash flows from the assets in the investment portfolios. For the cash flows resulting from the liabilities beyond this maturity, a duration matching approach is applied. The matching approach should ensure that the Swiss Life Group’s insurance operations always meet their contractual commitments to policyholders. Since the majority of the liabilities are largely predefined in terms of amount and timing of the payments, the corresponding asset portfolios mainly comprise fixedincome instruments. This way, the impact of interest rate fluctuations is minimised, thus ensuring that the policyholders receive the benefits they were promised.
The strategic asset allocation is therefore determined on the basis of the individual existing commitments and the risk capacity of the Swiss Life Group’s insurance operations. The strategic asset allocation is reviewed at least once a year and adjusted if necessary.
The ALM process has successfully been implemented in all relevant insurance operations of the Swiss Life Group.
External constraints must be considered in the definition of the distribution policy. Important elements which influence such policy are minimum guaranteed interest rates and statutory minimum distribution ratios (“legal quote”), which strongly depend on the regulatory environments of the Swiss Life Group’s insurance operations.
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 guarantee 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 sensitive to interest rate, market and foreign exchange risks that are not separated and fair valued 99 076 94 722
Hedging The Swiss Life Group uses derivatives within the strict limits set by the applicable insurance legislation and by internal guidelines. Derivatives are primarily used to manage the exposure to equity securities, interest rates and foreign exchange rates. The main instruments include index futures and option structures in stock markets, bond futures and swaps in order to manage duration, and currency forwards in order to manage foreign currency risk. Within certain limits, derivatives are used to enhance returns on the existing portfolio. The types of derivatives generally permitted for usage within the Swiss Life Group have been approved by management.
Financial assets not at fair value through profit or loss as at 31 December 2005
Financial assets not at fair value through profit or loss as at 31 December 2004 (restated)
Investment contracts and deposits at amortised cost 0.3–4.2% 1.0–4.4% 1.3–2.7% 2.7–4.1%
The following table summarises across all applicable Group financial assets and financial liabilities the effective interest rate at the balance sheet date by major currencies.
Most life insurance products with a savings component and investment contracts are subject to minimum guaranteed interest rates. The guaranteed rate differs according to the type of contract.
Assets for the account and risk of the Swiss Life Group’s customers – – – – 6 728 6 728
Liabilities for the account and risk of the Swiss Life Group’s customers – – – – –5 218 –5 218
Balance sheet interest rate sensitivity gap 35 126 11 266 21 339 40 731 1 510 109 972
In addition to the 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.
Interest rate risk exposure existing on contracts with guaranteed benefits where the risk is that the interest rates earned on the assets are insufficient to fund the guaranteed payments puttable bonds are used to counter the impact of falling interest rates. To increase the convexity of interest-rate-sensitive assets, which is generally lower than the convexity of the insurance liabilities, receiver bonds are part of the asset portfolios in certain countries.
In certain businesses, a large part of the impact of interest rate changes is for the account and risk of the policyholders based on the specific profit sharing systems.
For fixed-income assets (including money market and cash positions) the total exposure per counterparty is aggregated and reported to management. 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.
Exposure to credit risk of the financial assets as at 31 December 2005
Total assets bearing credit risk 71 232 22 430 11 840 1 205 19 590 2 340 128 637
Currency risk The Swiss Life Group operates internationally and its exposures to foreign currency risk primarily arise with respect to the euro and the US dollar. 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 such currencies against the Swiss franc.
Financial assets at fair value through profit or loss 2 948 13 110 857 163 257 6 318 23 653
Financial assets available for sale 18 231 53 081 7 245 1 364 110 – 80 031
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 resources from claims, amounts payable at maturity and surrenders arising from insurance and investment contracts. Liquidity risk must be considered in the strategic asset allocation.
Insurance receivables and other receivables 1 707 516 1 830 122 – – 4 175
Financial assets pledged as collateral 655 – 187 354 36 – 1 232
Insurance risk management objectives and policies 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. have no discernible effect on the economics of the transaction).
Management of investment risks related to the savings process is included in certain insurance contracts.
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 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.
Risk concentration per product category with regard to mortality and longevity is as follows: 6 Risk Management Policies and Procedures (continued)
Total Total Total Total Number of annuities Number of annuities Number of annuities Number of annuities insured payable insured payable insured payable insured payable persons per annum persons per annum persons per annum persons per annum
Widow’s and widower’s annuities – deferred 65 514 1 268 27 212 328 –15 527 –209 77 199 1 387
Total Total Total Total Number of benefits Number of benefits Number of benefits Number of benefits policies insured policies insured policies insured policies insured
Life benefits insured – per type of insurance for the year ended 31 December 2005 – group life
Three years later 427 501 538 – – – n. a.
Current estimate of cumulative claims 477 579 538 550 511 595 3 250
Cumulative payments to date –387 –438 –395 –347 –343 –177 –2 087
Liabilities recognised in the balance sheet 90 141 143 203 168 418 1 163
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements amount of coverage offered. Insurance risks exceeding set limits are subject to regular internal reporting requirements. Additionally, it must be ensured that the underwriting practices are in line with local laws.
Approximately 1.8% of life insurance in force in terms of earned insurance premiums was ceded as at 31 Decem-
For certain businesses, quota share and surplus contracts primarily covering high amounts insured and catastrophe risks are in place. In other businesses, the reinsured risks are mortality and disability. These reinsurance arrangements are all on an excess of loss basis.
For liabilities under long-term insurance contracts with fixed and guaranteed terms, changes in risk factors will not cause a change to the amount of the liability, unless the change is severe enough to trigger a liability adequacy test adjustment. The liability adequacy test adjustment relates to the net insurance liabilities (less related deferred acquisition costs and related intangible assets). In the analysis, the level of the respective risk factor that will trigger a liability adjustment is determined. A further deterioration of the risk factor results in a liability adjustment. As a consequence, the effect of changes in the risk factors on the insurance liabilities is not symmetrical. While improvements of risk factors have no effect on 6 Risk Management Policies and Procedures (continued)
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.
Financial risks Risk management policies and hedging activities The risk management objectives and strategy of Banca del Gottardo are formalised and approved by management. The bank aims to adequately manage the incurred economic risks, which also involves hedging activities including hedge accounting in order to avoid potential asymmetric results in the balance sheet versus the profit and loss account.
The bank’s principal risk measure for the general market risk 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.
The local banking law requires compliance with a limit of 25% of available shareholders’ equity for a single group of counterparties that are connected with each other. Internal guidelines require the evaluation of exposures to each group of counterparties that exceed 10% of available shareholder’s equity. The risk exposure in respect of a single counterparty is evaluated by determining the credit equivalent associated with each credit risk position including off-balance-sheet transactions and collateral holdings. The credit equivalent is a measure calculated for each counterparty in total (including any non-utilised lines of credit). Banca del Gottardo uses credit derivatives to hedge complex financial strategies. No such hedges were in place on the balance sheet date.
Currency risk Banca del Gottardo is active in the currency markets and is exposed to currency risk from trading transactions as well as from the global currency exposure of the balance sheet.
The effect of the issuance of the mandatory convertible securities (MCS) has been included in the calculation of basic earnings per share.
Weighted average number of shares outstanding 33 488 058 31 163 795
Diluted earnings per share for the profit attributable to equity holders of Swiss Life Holding (in CHF) 24.82 18.27
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 8 Premiums, Fees and Deposits Received
Deposits received under insurance and investment contracts 5 976 4 256
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 9 Details of Certain Items in the Consolidated Statement of Income
Interest income on financial assets held to maturity and available for sale 3 177 3 164
financial assets available for sale 28 –64 –103 loans 14 –20 –35
Total net gains/losses on financial instruments at fair value through profit or loss –687 513 1) includes interest and dividend income of CHF 283 million (2004: CHF 294 million)
Change in liability for future life policyholder benefits 1 387 –221
Total net insurance benefits, claims and claim settlement costs 14 040 15 375
Total other expenses 830 829 9 Details of Certain Items in the Consolidated Statement of Income (continued)
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 11 Derivatives
Fair Fair Fair Fair Contract/ Contract/ value value value value notional notional assets assets liabilities liabilities amount amount restated restated restated
For the account and risk of customers – – – – – –
For the account and risk of customers – – 110 47 110 48
For the account and risk of customers 2 – 151 119 129 91
Total derivatives held for trading 774 1 556 1 708 887 66 163 51 674
Derivatives embedded in separate account contracts for the right of the policyholder to participate in the performance of the underlying assets that have been separated.
Derivatives designated and accounted for as hedging instruments Derivatives designated and accounted for as hedging instruments primarily comprise derivatives associated with fair value hedges and cash flow hedges that qualify for hedge accounting.
Fair value Fair value Fair value Fair value on hedging on hedging notional notional assets assets liabilities liabilities instruments instruments amount amount restated restated restated restated
In CHF million Gains/ Gains/ Expected Fair Fair losses losses Contract/ occurrence Periods value value recognised transferred notional of hedged expected to assets liabilities in equity to income amount transactions affect income
Banca del Gottardo hedges its exposure to variability in cash flows attributable to interest rate risk and associated with banking book interest-bearing assets and liabilities using interest rate swaps, the maximum maturity of which is eight years. A cash flow schedule, including both principal and interest flows, is built from the hedged items’ contractual terms for material currencies, and both prospective and retrospective hedge effectiveness tests are performed accordingly.
The effective portion of the fair value changes on the interest rate swaps designated as hedging instruments is recognised directly in equity and reclassified to the income statement when the hedged cash flows affect profit or loss. The ineffective portion of the fair value changes is recognised immediately in the income statement. As at 31 December 2005, a total negative amount of CHF 13 million was deferred in equity (2004: CHF 23 million).
Total financial assets at fair value through profit or loss 1 738 1 123 21 915 18 240 23 653 19 363
Total financial liabilities designated as fair value through profit or loss 1 340 948 1 335 946
Assets pledged that can be sold or repledged by transferee 407 552 12 13 419 565 13 Financial Assets Available for Sale
No held-to-maturity securities were transferred to the available -for-sale category and no available-for-sale securities were transferred to the held-to-maturity category in the period under review.
The Group accepted securities at a fair value of CHF 2.6 billion (2004: CHF 492 million) as collateral under repurchase agreements and securities at a fair value of CHF 42 million (2004: CHF 705 million) under securities borrowing arrangements which it is permitted to sell or repledge. CHF 835 million (2004: CHF 966 million) of this was either repledged or sold to third parties. An allowance for loan losses is set aside for management’s estimate of loan losses as soon as objective evidence exists that the loan amount may not be fully recoverable. An allowance is recognised for the difference between the carrying value and the estimated recoverable amount, if lower.
Later than 1 year and not later than 5 years 34 427 31 401
The Group leases equipment to third parties under finance leases. The average contractual period of leasing arrangements is approximately 7 years. The average interest rate is 3.2%. Finance lease receivables are included in other loans.
Total financial assets held to maturity, net of impairment 35 4 256 4 147 276 277 4 532 4 424
Assets pledged that can be sold or repledged by transferee – – – – – –
Balance as at 31 December 76 58 16 Investment Property 17 Investments in Associates
Rental income from investment property was CHF 675 million for the period ended 31 December 2005 (2004: CHF 690 million). Operating expenses arising from investment property that generated rental income stood at CHF 157 million for the period ended 31 December 2005 (2004: CHF 140 million). Operating expenses arising from investment property that did not generate rental income during the period stood at CHF 11 million for the period ended 31 December 2005 (2004: CHF 16 million).
In July 2005, Banca del Gottardo outsourced the IT and back office processes to B-Source, Lugano, and acquired an equity stake of 37% of this company.
Goodwill relating to investments in associates has been included in the carrying amount of investments in associates in accordance with IAS 28 (revised) Investment
Crédit et services financiers (CRESERFI) 212 100 112 37 51 10 3 33.4%
LGT Swiss Life Non Traditional Advisers 12 3 9 4 10 8 0 43.4%
in Associates. An amount totalling CHF 0.02 million was reclassified from intangible assets to investments in associates as at 1 January 2004.
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 2005 and 2004. As at 31 December 2005 and 2004, no contingent liabilities arose from the Group’s investments in associates.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 18 Property and Equipment
Transfers to assets held for sale 32 – – 0 –6 –17 –23
Balance as at 1 January –181 –4 –144 –207 –30 –566
Transfers to assets held for sale 32 – – 0 5 12 17
Balance as at 31 December –202 –2 –120 –111 –19 –454
Total property and equipment as at 31 December 981 192 38 44 8 1 263 of which assets held under a finance lease 41 – – 3 – 44
Property and equipment for the year ended 31 December 2004 (restated)
Land and construc- and Other buildings tion fixtures Hardware equipment Total
Reclassification of computer software to intangible assets – – – –205 – –205
Transfers from/to investment property 16 –139 –95 – – – –234
Reclassification of computer software to intangible assets – – – 134 – 134
Balance as at 31 December –181 –4 –144 –207 –30 –566
Additions from business combinations – – – – – 0 0
Transfers to assets held for sale –275 – – – – 0 –275
Amortisation recognised in income – –16 –621 –14 –3 –20 –674
Intangible assets including intangible insurance assets for the year ended 31 December 2004 (restated)
In CHF million Present value of Deferred Deferred future acquisition origination Customer Other profits costs costs relation- intangible
Adoption of IFRS 4 – – –362 200 – – –162
Balance as at 1 January restated 2 500 70 4 230 200 – 14 7 014
Additions from business combinations 0 – – – 16 0 16
Foreign currency translation effects 0 0 –17 –4 –1 1 –21
Reclassification of computer software from property and equipment – – – – – –134 –134
Balance as at 31 December –1 699 –50 –2 400 –10 –3 –110 –4 272
Banca del Banca del Lloyd Lloyd Gottardo Gottardo Continental Continental restated restated
The calculations relating to the recoverable amounts which have been determined on a value-in-use basis use cash flow projections based on financial budgets approved by management covering a five-year period for Banca del Gottardo and a four-year period for Lloyd Continental. The calculations are based on present values that traditionally use a single set of estimated cash flows and a single discount rate.
On 11 August 2005, the Swiss Life Group announced the completion of the purchase of the Vaudoise group life insurance portfolio. This purchase led to a present value of future profits associated with short-duration contracts amounting to CHF 45 million which was fully impaired in 2005.
Deferred origination costs (DOC) These costs are recoverable and are directly attributable to securing investment management contracts. They primarily relate to costs deferred in the Netherlands and Belgium.
Liabilities arising from investment contracts with discretionary participation features for which deposit
Liabilities released for payments on death, surrender and other terminations during the year –246 –52
For contracts that do not have significant insurance risk but contain discretionary participation features, the Swiss Life Group bases its accounting policies on the requirements of the Generally Accepted Accounting Principles in the United States (US GAAP).
For traditional contracts in the life insurance business, future life policy benefit liabilities are determined by using the net-level-premium method on the basis of actuarial assumptions as to mortality, persistency, expenses and investment return, including a margin for adverse deviation. These amounts primarily relate to contracts issued in Switzerland and France.
Investment contracts and deposits at amortised cost as at 31 December
Repurchase agreements Securities sold under agreements to repurchase the same or substantially the same securities at a specific future date at a fixed price are generally treated as collateralised borrowing. Securities pledged as collateral under repurchase agreements are not derecognised from the balance sheet, unless control of these securities is transferred. As at 31 December 2005 securities of CHF 990 million were provided as collateral in respect of repurchase agreements (2004: CHF 1317 million) and CHF 399 million in respect of securities lending arrangements (2004: CHF 531 million).
Hybrid debt In March 1999, Swiss Life/Rentenanstalt privately placed a subordinated perpetual step-up loan comprising three simultaneous advances of EUR 443 million (at a rate of interest of Euribor plus a margin of 1.05%, increasing by 100 basis points as from April 2009), CHF 290 million (at a rate of interest of Libor plus a margin of 1.05%, increasing by 100 basis points as from April 2009) and EUR 215 million (at a rate of interest of 5.3655%, as from October 2009 the rate of interest will be an aggregate of Euribor plus a margin of 2.05%). Swiss Life/Rentenanstalt can call the EUR 443 million floating rate loan at the earliest on 6 April 2009, the CHF 290 million floating rate loan at the earliest on 7 April 2009 and the EUR 215 million fixed rate loan at the earliest on 6 October 2009 or at five-year intervals thereafter, upon notice and subject to the consent of the Federal Office of Private Insurance.
Also in November 2005, a nominal EUR 200 million of the EUR 215 million fixed rate loan was repurchased in the market at a price of 102.22%. The loss on the repurchased debt was CHF 8.2 million and is included in borrowing costs.
In 2005, convertible bonds were converted into 260 SLH shares (2004: 19 SLH shares) with a corresponding increase in share capital totalling CHF 11 960 (2004: CHF 950) and an increase in share premium totalling CHF 33 885 (2004: CHF 2433).
1 768 535 Swiss Life Holding shares, equivalent to the minimum number of shares convertible under the MCS, were created at inception with an increase of share capital totalling CHF 88 million and a corresponding decrease of share premium. These mandatory convertible securities had previously been classified as equity, except for the present value of the interest payments of 5.25% p.a., which had been deferred and recognised as a financial liability.
Interest Year of Carrying Carrying Issuer/instrument Currency rate issue Maturity amount amount restated
Swiss Life Insurance Finance Ltd. – guaranteed bonds EUR 4.375% 2004 2008 464 460 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 2005, the average interest rate was 1.9% (2004: 2.5%) and the average remaining time to maturity 33 months (2004: 23 months).
Bank loans Bank loans outstanding as at 31 December are repayable as follows: In CHF million 2005 2004 restated
Later than 1 year and not later than 5 years 12 19 11 17
Future finance charges 2 3 24 Insurance Liabilities and Reinsurance Assets
Claims under life insurance contracts 7 887 7 730 133 128 7 754 7 602
Medium and long-term bank loans include various mortgage loans with the following interest rates and maturities:
Total insurance liabilities with and without discretionary participation features as at 31 December 106 909 103 068 24 Insurance Liabilities and Reinsurance Assets (continued)
The net asset/liability position does not incorporate any reimbursement rights. Plan assets included own financial instruments issued by the Group with a fair value of CHF 100 million as at 31 December 2005 (2004: CHF 70 million). Plan assets do not include any property occupied by the Group.
Present value of fully and partially funded obligations –2 554 –2 565
Other long-term employee benefits The liability for longterm employee benefits amounted to CHF 12 million as at 31 December 2005 (2004: CHF 12 million). It relates to part-time employment contracts prior to retirement and to profit-sharing arrangements for certain employees.
Termination benefits Termination benefits totalling CHF 2 million for the year ending 31 December 2005 (2004: CHF 3 million) arose as a result of early retirements and voluntary redundancies.
Equity compensation plans In 2005, a share-based payment programme was established which gives key management personnel and senior employees the right to receive a certain number of Swiss Life Holding shares (performance share units) after three years of service. The number of the shares allocated depends on two criteria. One criterion is the performance of the share price of the Swiss Life Holding share during the vesting period of three years. The other criterion is the performance of the share price of the Swiss Life Holding share during the vesting period of three years compared to the performance of the Dow Jones STOXX Insurance index. The number of shares granted under this programme amounts to 67 412. Due to the reduction in par value of the Swiss Life Holding shares in 2005, the number of shares granted was adjusted using the Eurex R factor of 0.978284. The date of grant was 31 March 2005.
Change in net asset/liability recognised in the balance sheet as at 31 December
Elimination of insurance reserves which do not qualify as plan assets – –2 035
Elimination of unrecognised actuarial gains/losses on unqualifying plan assets – –94
1) Number of shares adjusted due to reduction in par value of Swiss Life Holding shares in accordance with Eurex rules 2) Exercise price adjusted due to reduction in par value of Swiss Life Holding shares in accordance with Eurex rules 25 Employee Benefits (continued)
A similar programme was established in 2004 with a number of shares granted totalling 44 015 and a vesting period of three years. Due to the reduction in par value of the Swiss Life Holding shares in 2005 and the capital increase in 2004, the number of shares granted was adjusted using the Eurex R factors of 0.978284 and 0.894092, respectively. The date of grant was 31 March 2004.
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. Due to the capital increase in 2004, the number and the exercise price of shares under option granted in prior years were adjusted using the Eurex R factor of 0.894092. The intrinsic value of the outstanding share options (issued in 2002) was CHF 12.80 as at 31 December 2005. The outstanding share options issued in 2001 did not have an intrinsic value as at 31 December 2005. The exercise prices of the outstanding share options at the end of the period ranged from CHF 224.90 to CHF 686.50 (2004: CHF 224.90 to CHF 686.50, adjusted using the Eurex R factor of 0.978284). The weighted average remaining contractual life of the outstanding share options at the end of the period was 336 days (2004: 686 days). The number of options exercisable at the end of 2005 amounted to 276 621 (2004: Other benefits The Swiss Life Group maintains incentive programmes for certain management and other employees.
Related expenses in 2005 were CHF 15 million (2004: CHF 10 million).
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 26 Income Taxes
Deferred Deferred Deferred Deferred tax tax tax tax assets assets liabilities liabilities restated restated
Financial instruments and investment property 162 79 1 233 1 161
Deferred tax liabilities have not been established for withholding taxes and other taxes that would be payable on the unremitted income of certain subsidiaries, as such amounts are always retained.
Deferred tax assets are recognised for tax-loss carryforwards and unused tax credits only to the extent that realisation of the related tax benefit is probable. Swiss tax assets are calculated in accordance with cantonal and communal tax legislation. The uncertainty of the recoverability of tax losses and tax credits is taken into account in establishing the valuation allowance. For the following tax-loss carryforwards and tax credits, which will expire as follows, no deferred tax asset has been recognised as at 31 December: Unrecognised tax losses and tax credits
Restructuring costs In 2005, a provision totalling CHF 72 million relating to the restructuring programme of «La Suisse» in Switzerland has been set up. As at 31 December 2005 the remaining provision amounted to CHF 35 million and CHF 37 million were used during the period. The provision primarily relates to redundancy programmes and onerous contracts. The outflow of the remaining amounts is expected within the next two to three years.
In 2005, additional provisions relating to restructuring programmes and termination benefits totalling
In 2004, provisions were primarily set up in Switzerland and in Germany for restructuring programmes and for termination benefits for employees.
Other provisions Other provisions were primarily set up in 2004 for litigations and to cover costs arising from the sale of the life business in the United Kingdom.
Retained earnings Retained earnings comprise accumulated retained earnings of the Group entities which have not been distributed to the shareholders. The distribution of profit is subject to restriction in the various jurisdictions where the Group entities are located.
The Group’s insurance subsidiaries are subject to regulatory restrictions on the amount of dividends, cash loans and advances which can be remitted to the Group. Certain foreign jurisdictions have restrictions that allow the payment of dividends but may cause a delay in their remittance. Dividends payable are not accrued for until they have been ratified at the General Meeting.
Maturity of mandatory convertible securities (MCS I) in 2005 On 19 December 2005, the mandatory convertible securities (MCS I, 2002–2005) matured and the liability component totalling CHF 250 million was reclassified to share premium. As a result, the number of treasury shares
In 2004, convertible bonds were converted into 19 SLH shares with a corresponding increase in share capital totalling CHF 950 and an increase in share premium totalling CHF 2433.
Maturity of mandatory convertible securities (MCS II) in 2004 On 30 December 2004, the 1.00% mandatory convertible securities (MCS II) issue totalling CHF 341 million matured. 1 586 098 SLH shares equal to the number of SLH shares required under the conversion ratio were created upon issuance of the MCS II. As an adjustment to the minimum number of shares convertible under the MCS II another 187 608 shares were created in June 2004 in connection with the capital increase as described above. They were accounted for as treasury shares acquired for no consideration. Upon maturity of the MCS II, the number of treasury shares decreased by 1 773 706.
Reserving and regulatory requirements The Group’s insurance entities must set aside sufficient reserves to meet their long-term obligations. The Group Chief Actuary is responsible for the assessment of the financial impact of the Group’s insurance business practices. The Group is subject to the regulatory and solvency supervision of the Swiss Federal Office of Private Insurance (FOPI), as well as to the local regulatory supervision in all jurisdictions in which it is active.
In CHF million Financial assets available Cash flow for sale hedges Other Total
Effect of changes in accounting policies 40 –149 – – –149
Balance as at 1 January restated 2 765 –28 31 2 768
Gains/losses on financial instruments 11 3 184 –4 – 3 180
(mandatory convertible debt and hybrid capital instruments ) and deferred Group-related funds (theoretical policyholder participation in surplus under consideration of additional DAC amortisation and deferred taxes).
Cash used for acquisitions (–)/received from disposals (+) 0 –80 18 3
Consideration not yet received in cash in the period – – – 279
These companies contributed CHF 0 million in net income to the Group result for the period 1 January 2005 to 31 May 2005 (1 January 2004 to 31 December 2004: CHF 7 million).
SwAFE B.V., a special purpose entity in the Netherlands which had issued notes backed by a portfolio of firstranking mortgages originated by Zwitserse Maatschappij van Levensverzekering en Lijfrente was transferred to a third party in 2004. With this sale, mortgage loans totalling CHF 782 million and mortgage-backed notes totalling CHF 493 million were transferred. The gain recognised on this sale amounted to CHF 21 million. SwAFE B.V. contributed CHF 15 million in net income to the Group result for the period 1 January 2004 to 31 October 2004.
Total liabilities associated with assets held for sale 1 734 – 1 734
Gain (+)/loss (–) recognised directly in equity relating to assets held for sale –1 – –1
In November 2005, the Swiss Life Group announced the sale of Banca del Gottardo Monaco. The sale has been approved by the regulator and is effective in 2006. In January 2006, the Swiss Life Group announced the sale of Dreieck Industrie Leasing which is also effective in 2006.
The group of assets to be disposed of and the liabilities directly associated with those assets (disposal group) have been presented separately in the balance sheet as at 31 December 2005 under assets held for sale and liabilities associated with assets held for sale.
Investment contracts and deposits at amortised cost 0 – 11 11 3
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 35 Fair Value of Financial Instruments not at Fair Value in the Balance Sheet
Investment contracts and deposits at amortised cost 22 7 307 8 181 7 307 8 181 36 Commitments and Contingencies
The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented in the Group’s balance sheet at fair value as at 31 December: Guarantees and letters of credit The Group has issued financial guarantees and transaction-related guarantees and similar instruments. Financial guarantees provide for specified payments to be made to reimburse the holder for a loss incurred in the event that a client fails to make payment when due. Transaction-related guarantees such as performance bonds and bid bonds protect the holder against loss in the event of non-performance of a contract. Irrevocable letters of credit and surety bonds have been issued to secure certain reinsurance contracts.
Other contingencies and commitments Contractual obligations for repairs and maintenance of investment property amounted to CHF 17 million as at 31 December 2005, which are included in this line item (2004: CHF 49 million).
Total assets pledged include collateral provided under repurchase agreements and securities lending arrangements of CHF 1389 million as at 31 December 2005
Later than 1 year and not later than 5 years 350 327
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 39 Impact on Equity of Reduction in BVG Conversion Rate and of Statutory Distribution Ratio (“Legal Quote”)
Change in gains/losses recognised directly in equity (net of one-off effects) 414 234
Impact of changes in valuation differences on reduction in BVG conversion rate (discretionary participation liability) – –253
As previously disclosed, the conversion rate for the pensions under the supplementary part of the BVG occupational pensions business (Swiss occupational plans) is being reduced in stages by the Swiss Life Group from 7.2% to 5.835%. This reduction resulted in a release of insurance liabilities (after taxes) of CHF 253 million.
As previously disclosed, the introduction of the statutory minimum distribution ratio (“legal quote”) in the Swiss group business resulted in a one-off charge on gains/losses recognised directly in equity of CHF 197 million (after taxes) and a one-off charge on net income of CHF 89 million (after taxes).
Amounts recognised as adjustment to the opening balance of retained earnings 222
Adjustment arising on fair value measurement of financial assets previously measured at amortised cost 35
Total adjustments to gains/losses recognised directly in equity, gross 28 –149
Less amounts attributable to excess DAC amortisation and PVP, policyholder participation, deferred taxes and minority interest (adjusted) 91
Adjustment arising on fair value measurement of financial liabilities previously measured at amortised cost –3
Total net adjustments to retained earnings due to changes in accounting policies as at 1 January –129 40 Changes in Accounting Policies
Share premium Previously, the mandatory convertible securities totalling CHF 250 million (MCS I, 2002–2005) had been classified as equity, except for the present value of the interest payments. Share premium had amounted to CHF 114 million at inception. Under the new requirements of IAS 32 (revised) Financial Instruments: Disclosure and Presentation, the MCS were retrospectively split into an equity component and a liability component. At inception, the equity component amounted to CHF 14 million (negative). 1 768 535 Swiss Life Holding shares, equivalent to the minimum number of shares convertible under the MCS, were created at inception with an increase of share capital totalling CHF 88 million and a corresponding decrease of share premium. As a result share premium decreased by CHF 216 million in total.
Due to the adoption of SOP 03–1, “Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contracts and for Separate Accounts”, additional liabilities totalling CHF 54 million were set up with a corresponding decrease in retained earnings.
The elimination of own insurance contracts (defined benefit plans) led to an adjustment totalling CHF 91 million in retained earnings. The adjustment was due to actuarial gains/losses that were previously unrecognised because they fell outside the range for recognition (“corridor”) and the release of insurance liabilities.
Financial assets at fair value through profit or loss 7 604 7 604
Separate account/unit-linked assets totalling CHF 8658 million were reclassified to financial assets at fair value through profit or loss (CHF 8290 million), cash and cash equivalents (CHF 364 million) and investment property (CHF 4 million).
Financial assets available for sale totalling CHF 7604 million and CHF 7476 million were reclassified to financial assets at fair value through profit or loss and to loans, respectively. The reclassification of financial assets available for sale to loans led to an adjustment to gains/losses recognised directly in equity totalling CHF 406 million.
Financial assets held to maturity totalling CHF 1328 million and CHF 39 million were reclassified to financial assets available for sale and financial assets at fair value through profit or loss, respectively. The reclassification of financial assets held to maturity to financial assets available for sale led to an adjustment to gains/losses recognised directly in equity totalling CHF 35 million.
Financial assets at fair value through profit or loss totalling CHF 265 million, financial assets available for sale totalling CHF 399 million and financial assets held to maturity totalling CHF 13 million were reclassified to financial assets pledged as collateral.
Financial liabilities at fair value through profit or loss 4 536
Investment contracts, customer deposits and other funds on deposit 29 352 –20 801
Separate account/unit-linked liabilities were reclassified to financial liabilities at fair value through profit or loss (CHF 4012 million), insurance liabilities (CHF 4047 million ) and investment contracts with discretionary participation (CHF 401 million).
Liabilities totalling CHF 640 million and CHF 16 937 million arising from contracts that no longer qualify as insurance contracts but contain discretionary participation features were reclassified to investment contracts with discretionary participation from insurance liabilities and investment contracts, customer deposits and other funds on deposit, respectively.
An amount of CHF 4322 million was reclassified from insurance liabilities to discretionary participation liabilities. Due to changes in accounting policies as at 1 January 2004 the liability for discretionary participation decreased by CHF 183 million.
Liabilities totalling CHF 43 million relating to structured products were reclassified from borrowings to financial liabilities at fair value through profit or loss with a corresponding negative adjustment to retained earnings of CHF 3 million. The liability component totalling CHF 254 million of the mandatory convertible securities (MCS I, CHF 250 million, 2002–2005) was reclassified from equity to borrowings.
Net insurance benefits, claims and claim settlement costs, policyholder participation (excluding one-off effects) 179
The elimination of insurance contracts covering own employees (defined benefit plans) led to a decrease of CHF 158 million in net earned insurance premiums, policy fees and fee income and to an increase of CHF 90 million in employee benefits expense.
Interest expense on investment contracts decreased by CHF 78 million primarily due to the reclassification of investment contracts previously carried under investment contracts and deposits at amortised cost. These contracts have been reclassified as financial liabilities at fair value through profit or loss. The interest expense relating to these contracts has been included in net gains/losses on financial instruments at fair value through profit or loss.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 41 Events after the Balance Sheet Date
In November 2005, the Swiss Life Group announced the sale of Banca del Gottardo Monaco. The sale has been approved by the regulator and is effective in 2006. In January 2006, the Swiss Life Group announced the sale of Dreieck Industrie Leasing. The group of assets to be disposed of and the liabilities directly associated with those assets have been presented separately in the balance sheet as at 31 December 2005 under assets held for sale and liabilities associated with assets held for sale.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 42 Significant Subsidiaries and Associates
Adroit Private Equity, Zürich Insurance 100.0% 100.0% full CHF 5 000
Banca del Gottardo, Lugano Banking 100.0% 100.0% full CHF 170 000
Dreieck Industrie Leasing, Lausanne Banking 100.0% 100.0% full CHF 15 000
Drive Shop, Thônex – from 01.01.2004 – – full CHF 100 until 24.12.2004
Gottardo Investments SA, Lugano Banking from 12.08.2005 100.0% 100.0% full CHF 30 000
Kuhn & Seal Services, Nyon – until 23.12.2004 – – full CHF 100
«La Suisse» Accidents, Lausanne – until 05.12.2005 – – full CHF 50 000
Livolsi e Associati Private, Lugano – from 10.05.2005 40.0% 40.0% equity CHF 1 000
Oscar Weber AG, Zürich Insurance 100.0% 100.0% full CHF 5 000
Swiss Life General Partners, Zürich Other 100.0% 100.0% full CHF 100
Swiss Life Institutional Funds – SLIF 14, Lugano Insurance from 01.12.2004 100.0% 100.0% full – –
Swiss Life Intellectual Property Management AG, Zürich Other from 20.12.2005 100.0% 100.0% full CHF 250
Swiss Life Investment Management Holding, Zürich IM from 06.04.2005 100.0% 100.0% full CHF 50 000
Swiss Life (Liechtenstein) Services, Vaduz, Branch Zürich Insurance from 11.05.2005 – – full – –
Swiss Life Property Management, Zürich IM from 24.03.2005 100.0% 100.0% full CHF 250
Swiss Life Real Estate Management Holding, Zürich – from 17.06.2005 – – full CHF 13 473 until 25.08.2005
Swissville Europe Holding, Zürich Insurance 100.0% 100.0% full CHF 11 500
Ultrafin, Lugano – until 22.11.2005 – – full CHF 5 000
Swiss Life (Liechtenstein), Vaduz Insurance from 23.11.2004 100.0% 100.0% full CHF 5 000
Daunou Participations, Paris – from 25.05.2004 – – full EUR 4 585 until 21.12.2004
Financière Oudart, Paris – from 25.05.2004 – – full EUR 38 until 21.12.2004
GSD Gestion, Paris – from 25.05.2004 25.0% 25.0% equity EUR 400
Oudart Patrimoine (formerly Oudart Assurances), Paris Banking from 25.05.2004 100.0% 100.0% full EUR 38
Oudart & Associés, Paris – from 25.05.2004 – – full EUR 38 until 21.12.2004
Société suisse vie, Paris (branch) Insurance – – full – –
Swiss Life Asset Management (France), Paris Insurance 91.0% 100.0% full EUR 3 000
Swiss Life Assurance et Patrimoine, Paris Insurance 99.3% 99.7% full EUR 75 000
Swiss Life Assurances de Biens, Paris Insurance 88.6% 88.6% full EUR 110 850
Financial Solutions, München Insurance from 08.09.2004 100.0% 100.0% full EUR 200
Schweizer Leben Pensions Management, München Insurance 100.0% 100.0% full EUR 150
Swiss Life Asset Management, Unterföhring Insurance 100.0% 100.0% full EUR 5 250
Swiss Life Beteiligungs GmbH, München Insurance 100.0% 100.0% full EUR 25
Swiss Life Pensionsfonds, München Insurance 100.0% 100.0% full EUR 3 000
Swiss Life Pensionskasse, München Insurance 100.0% 100.0% full EUR 3 000
European District Properties Three, Sint Stevens Woluwe – 50.0% 50.0% equity EUR 62
Europeloan Finance, Diegem – from 01.10.2005 20.0% 20.0% equity EUR 62
Swiss Life (Belgium), Bruxelles (branch) Insurance – – full – –
Swiss Life Immo-Commerce (Belgium), Bruxelles – until 25.02.2005 – – full EUR 9 965
Swiss Life Immo-Techno Center II, Bruxelles – until 01.01.2004 – – full EUR 285
Banque du Gothard (Luxembourg), Luxembourg Banking 100.0% 100.0% full CHF 14 000
Gottardo Strategy Fund Management, Luxembourg Banking 100.0% 100.0% full CHF 200
Swiss Life Asset Management Holding, Strassen IM 100.0% 100.0% full CHF 8 380
Alpine Holdings, St. Peter Port-Guernsey Banking 100.0% 100.0% full USD 600
Integer Investment PCC Limited Cell 7, St. Peter Port-Guernsey Banking from 01.07.2004 100.0% 100.0% full CHF 0
Swiss Life (UK) Group, Sevenoaks – until 31.12.2004 – – full GBP 200 000
Swiss Life (UK) Services, Sevenoaks – until 31.12.2004 – – full GBP 100
Gottardo Patrimonios, Madrid Banking from 25.05.2005 100.0% 100.0% full EUR 605
Group Direct of con- capital Segment1) Consolidation period share share solidation Currency in 1000
Swiss Life Insurance Finance, Grand Cayman Other from 01.06.2004 100.0% 100.0% full EUR 5
Swiss Life Private Equity Partners (Cayman), Grand Cayman IM 100.0% 100.0% full CHF 60
Podium Sam, Monaco – from 01.01.2004 30.0% 30.0% equity EUR 150
Swiss Life Group . Financial Statements 2005 . Report of the Group Auditors
Total income (net investment income + other income) rose from CHF 166 million to CHF 184 million. This positive development reflected the increase from CHF 125 million to CHF 151 million in dividends received on participating interests. The interest received on loans made to Group companies went down slightly. The decline resulted primarily from loan repayments.
Swiss Life Holding distributed a dividend of CHF 4 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 50 to CHF 46 and the company’s total share capital from CHF 1689 million to CHF 1554 million. Convertible bonds outstanding were converted into 260 shares in 2005, for an increase of CHF 11 960 in share capital.
Swiss Life Holding . Financial Statements 2005 . Review of Operations
Major shareholders At the time of writing there are no individual shareholders or groups of shareholders who own more than 5% of Swiss Life Holding’s share capital and who are known to us.
Legal reserves Legal reserves comprise 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 170 000 100.0% CHF 170 000 100.0%
Swiss Life Funds Business, Zürich – – – CHF 250 100.0%
Swiss Life/Rentenanstalt, Zürich CHF 587 350 100.0% CHF 587 350 99.8%
Additionally, 397 078 new SLH shares with a par value of CHF 50 each were created by reducing conditional share capital. These shares adjust the (minimum) number of shares convertible under the mandatory convertible securities (MCS) issues (MCS I, 2002–2005, and MCS II, 2003–2004) made by SL Cayman Finance, Grand Cayman, a subsidiary of Swiss Life Holding.
Total profit shown in the balance sheet 174 252 874 181 979 262
Swiss Life Holding . Financial Statements 2005 . Report of the Statutory Auditors
In our opinion, the accounting records and financial statements and the proposed appropriation of profit comply with Swiss law and the company’s articles of incorporation.
Swiss Life Group . Annual Report 2005 . Caution regarding forward-looking statements
Publisher: Swiss Life Holding, Zurich Design: MetaDesign, Zurich Photography: Anita Affentranger, Zurich Production: Management Digital Data AG, Schlieren ZH Printers: NZZ Fretz AG, Schlieren ZH © Swiss Life Holding, 2006