Swiss Life Gruppe . Geschäftsbericht 2003 . Brief des VR Präsidenten und des CEO
8 Strategy 15 Summary of Group Results 16 Life Core 16 Switzerland 18 France 19 Germany 20 Netherlands 21 Belgium/Luxembourg 22 Life Non-Core 23 Non-Life 24 Private Banking 25 Investment Management 26 Swiss Life Network 28 Embedded Value 35 Risk Management 37 Asset and Liability Management 45 Corporate Governance
1) Gross written premiums incl. deposits under investment contracts 2) On consolidated basis
CHF 557 million - Return to profit zone owing to operational improvements and strict pricing and underwriting policies - Targets for cost and headcount reductions set for the end of 2004 already exceeded by the end of 2003 - Balance sheet strengthened through growth in equity, write-downs on investments and reductions in goodwill and tax loss carryforwards - Continued concentration on core business - Well positioned for future premium growth - Corporate governance improved - Definition of values and goals lays foundation for performance-oriented corporate culture - Brand structure simplified and image refreshed
Chemist, Thomas A. (39), pictured here with his daughter Selina (4), is taking up a new opportunity abroad.
Expertise. Individuals who demonstrate exceptional skills and ability go further in life. Each pension and long-term savings solution is only as good as its ability to accommodate an individual’s personal circumstances. The solution must be aligned to the person’s specific financial situation as well as to their need for change and personal development. Swiss Life accompanies people from one stage of life to the next and provides them with a sense of security, even during challenging times. For life.
The solvency ratio of the Swiss Life Insurance and Pension Company, which relates to more than 80% of the insurance business of the entire Group, stood at 179% on 31 December 2003 and demonstrates that our customers’ assets are in safe hands at Swiss Life. A decisive contribution to this security comes from our uncompromising reserve policy, which guarantees that our reserves are always sufficient to meet existing obligations to policyholders.
Our structure was simplified by the delisting of Swiss Life/Rentenanstalt shares and the subsequent reduction in minority interests, and by the transfer of Swiss Life Asset Management units to Swiss Life Holding. We could thus better utilise the advantages of the holding company approach.
We continued to improve our corporate governance. In order to clearly delineate the various internal competencies and responsibilities and create an optimum structure for cooperation between the Board of Directors, management and internal control bodies, the Board of Directors revised the Organisational Regulations along with the regulations for each Board of Directors committee and for the Corporate Executive Board as of 1 December 2003.
We are again aiming for moderate premium growth in 2004. In the medium term, we want to achieve sustainable growth that outpaces the market, and thus expand our market share. This growth should primarily be organic and come from making better use of our distribution network and focusing more on benefits for our customers when it comes to product design and service provision. Swiss Life wants to distinguish itself from competitors in the quality of its advice and services. Improving service quality is accordingly a high priority for us in 2004, and corresponding programmes are under way in all our markets.
Underlying these efforts is a commitment to a performanceoriented corporate culture. This includes harmonising staff performance appraisals, setting clear criteria for determining salaries, and consistently using performance-linked salary components. Shared values are, however, also an important part of the corporate culture. They are the watchwords and signposts guiding us on our way. These values should also direct our day-to-day work, becoming second nature to us. They will thus come to represent a commitment to our customers, our shareholders and the general public. Everyone has to be aware of what they can expect of Swiss Life and its staff, what Swiss Life stands for.
To convey this internally and externally, in the course of implementing our strategy we have taken the step of streamlining our brand architecture and adapting our brand image. Our former complex brand structure with many different names and logos is being replaced by a simple, clear look with “Swiss Life” as the umbrella brand. The name “Rentenanstalt” will not be used in future. The new image will gradually be introduced in all markets by the end of 2005.
The debate on occupational provisions in Switzerland remains a matter of serious concern for us, as this is an important part of our business. We have taken a clear position on this issue. We were the first company to show support for rates determined strictly on the basis of actuarial and economic criteria. We were criticised for doing so, but it was necessary and it set the entire industry in motion. At the same time, we also called for more realistic operating parameters, and we will continue to do so. Discussions concerning the minimum interest rate in 2003 were already quite a bit more objective than a year earlier. Now that this rate has been reduced to 2.25% as of 1 January 2004, we can breathe more easily.
In the interest of our customers and a sustainable second pillar, we are determined to continue providing full coverage for as long as possible. This need is especially felt by small and medium-sized companies, which are normally not in a position to carry the insurance and investment risks on their own. It is up to the responsible political bodies to ensure that we can stay on course in providing security and stability.
In recent months, we have held concrete negotiations on the sale of Banca del Gottardo. After these were broken off, we decided to retain the bank as part of our organisation and to strengthen its market position. Because we are convinced of the bank’s potential to appreciate in value, this is the best solution for the Swiss Life Group, its shareholders and customers, under the circumstances; after all, the bank was already well into the profit zone again in 2003, contributing significantly to the Group’s return on equity.
We wish to thank our shareholders, our customers and our business partners for their support and trust during the past year. A very special thank you goes to our staff, whose impressive performance under demanding conditions made our good result possible. Their dedication is a pledge for the future, and a pledge to our customers and shareholders.
Expertise that stands out thanks to focus on traditional strengths Concentrating on core business enables Swiss Life to build on its traditional strengths: product knowledge and risk expertise, the quality of its advice and services and well-established, high-performance sales networks. The company is focusing on the core markets of Switzerland, France, Germany, the Netherlands, and Belgium and Luxembourg. These are markets which combine the prospect of sustainable, profitable growth with a strong or expandable market position for Swiss Life.
Goal Swiss Life is a leading provider of pensions and long-term savings.
Mission We are committed to helping people create a f inancially secure future. For Life.
Setting out. “The idea of being my own boss had always appealed to me–and by opening my own beauty salon, I am now making it come true. When I was working for someone else, I would often think up better ways of doing things. My boss was sometimes receptive–and sometimes not. We’ll now see whether my ideas are any good. Of course I have a business plan and my finances are under control. I am confident of establishing a steady source of regular customers fairly rapidly if I run my business well–which of course I will! Many of my friends and other acquaintances have promised to come by. I am sure that I’ll also have walk-in customers as my studio is in an ideal location in the centre of Antwerp. I can’t wait!”
Swiss Life Group . Review of Operations 2003 . Summary of Group Results
Gross written premiums decreased by 4% to CHF 18.8 billion. This slight decline was accepted in the interests of restoring profitability and in support of the corresponding pricing and underwriting policy measures. In core business, premiums fell 2% to CHF 16.1 billion. The declining premium volume in Switzerland (down 19%) was not quite offset by premium growth in the other markets.
Net equity exposure stood at 2.1% as of 31 December 2003.
Assets under management came to CHF 184.2 billion on 31 December 2003, representing a slight increase in spite of the sale of STG Schweizerische Treuhandgesellschaft (previous year: CHF 184.0 billion).
15Summary of Group results The Swiss Life Group generated a profit of CHF 233 million in 2003. This clear return to the profit zone was attributable to the unwavering focus on profitability and operational progress in all areas. In return, the company had to accept a 4 % decline in premium volume, which fell to CHF 18.8 billion. Equity rose by 19 % to CHF 5.0 billion.
Swiss Life Group . Review of Operations 2003 . Life Core Segment 16 Life Core Following a loss of CHF 561 million in the previous year, Swiss Life generated
For Swiss Life, the keynotes of the 2003 financial year in its domestic market, Switzerland, were the implementation of its new strategy and the restoration of confidence among clients and the public. The central feature of the strategic realignment was the clear focus on profitability following the previous year’s loss of CHF 566 million. Swiss Life adjusted its product and pricing structure accordingly with effect from the beginning of the year. Important factors in this adjustment were the strong rise in disability claims (reflecting the state of the economy) and the moves to pass administrative charges back to the parties originating the costs. The cost-reduction programme went forward faster than planned, resulting in a 20% decline in operating expenses compared with the year before. The measures taken had the desired effect and Swiss Life returned to the profit zone with an operating result of CHF 76 million.
Since Swiss Life was now emphasising profitability, it knew it would have to accept a decline in premium income. Gross written premiums fell back by 19% compared to the previous year, to CHF 6643 million. The drop was due above all to the decline in single premiums, which went down 34% from the prior-year figure to stand at CHF 3094 million. The very low level of interest rates continued to have a negative impact on premium volume for this product category. Swiss Life recorded a rise of 1% in periodic premiums compared to the 2002 figure, bringing them to CHF 3370 million for 2003. A reduction of 19% was recorded in insurance benefits (including changes in insurance reserves), which fell to CHF 7748 million. This reflected the departure of certain major clients as well as the decline in premiums. Both causes were also a factor in the development of technical provisions, which were 2% lower as of 31 December 2003 than at the end of 2002.
Gross written premiums, policy fees and deposits under investment contracts 6 643 8 196 –18.9%
Benefits paid and changes in insurance reserves –7 448 –9 158 –18.7%
Policyholder bonuses and participation in surplus – 230 – 288 –20.1%
Uncertainty over the operating conditions for group business continued to be a factor in 2003. Although the minimum required interest rate was indeed lowered from 4.00% to 3.25% as of 1 January 2003, it remained significantly higher than the risk-free interest rate, with the average yield on 10-year Swiss federal bonds working out at 2.50% for the year. The Federal Council has reduced the guaranteed interest rate further to 2.25% as of 1 January 2004. How and when the minimum rate should be set in future is not clear. The high conversion rate for mandatory insurance is another talking point: in view of today’s life expectancies and the trend in interest rates, the current 7.2% is clearly too high and favours the generation of retired persons at the expense of the working population.
Market development stands in the foreground for 2004 following the return to profitability. The company is also aiming to gradually recapture the market share lost in the previous year by pursuing a systematic orientation towards service with a high standard of quality and by further optimising the product range. Swiss Life changed the compensation system for its distribution channels as of 1 January 2004 in order to reinforce customer loyalty and improve its competitive position for the future.
Customer servicing is now being given more weight in the distribution organisation’s remuneration, and with it the quality created by a longer-term customer relationship.
Swiss Life Group . Review of Operations 2003 . Life Core Segment 18 France With a volume of EUR 93 billion, France represents the second-biggest life insurance market in Europe, and one that grew another 9% in 2003. Swiss Life ranks thirteenth in France with a market share of 2.4%. In health insurance the company holds fourth place with a share of 9%. Products are distributed via the organisation’s own external sales force and via brokers. In Erisa, a joint venture between Swiss Life and Crédit Commercial de France (HSBC Group), Swiss Life also enjoys direct access to the growing distribution network represented by banks.
As a provider of individual protection products for the French market, Swiss Life is also active in health insurance in France. Premium volume in this sector went up 2% from the previous year’s level. Swiss Life subjected its contracts in this sector to close review for profitability, and gave notice on contracts it found unprofitable.
Swiss Life Group . Review of Operations 2003 . Life Core Segment 19Germany Germany is the third-biggest life insurance market in Europe and showed a growth rate of 3.6% in 2003. Swiss Life’s share of this highly fragmented market works out at 1.6%. The good development of new individual insurance business enabled Swiss Life to outpace the growth of the market in the year under review. Total premium income expanded by more than 5% in local currency terms, while premium volume expressed in Swiss francs was up 9% to CHF 1766 million.
Following an operating loss in Germany of CHF 9 million in the previous year, Swiss Life recorded CHF 40 million in operating income for 2003. Along with a higher financial result, the improvement in the operating result is attributable to clear progress on the operations side and a good sales performance. The improvement to the financial result reflected the recovery on the financial markets, which meant the big losses of the previous year did not recur. The largest portion of the financial returns was passed on to policyholders in the form of bonuses or allocated to surplus reserves in accordance with the applicable German law. Thanks to the systematic realisation of the cost-reduction programme launched in 2002, Swiss Life lowered administrative costs to the point where operating expenses were brought down by 1% despite the pronounced growth in premiums in the local currency. The migration of data to the new IT platform went according to plan, creating the preconditions for further increases in efficiency.
In the framework of the efficiency drive which started in 2002, Swiss Life reorganised its distribution in 2003 and cut the number of regional managements by eight locations, bringing the total to 29. With new approaches to relationship management the company strengthened the sales channel representing financial services providers.
The confidence-building campaign launched in 2003 and the high level of competence in occupational pension benefits further cemented Swiss Life’s relations with the brokers, who constitute its most important sales channel in Germany.
Policyholder bonuses and participation in surplus – 435 – 22 n.a.
Total benefits, losses and interest expenses –2 278 –1 631 39.7%
Swiss Life generated CHF 101 million in operating income in the Netherlands for 2003 (previous year: CHF 34 million ). A new contract with the pension fund for HBG, a Dutch construction company, was a highlight of the financial year. The contract involved a single premium of around EUR 570 million, which in turn resulted in premium growth of 63% in local currency terms. Swiss Life designed a model that will guarantee the pension fund’s commitments to the insured persons. Total premium volume for the Netherlands came to CHF 2356 million (+68%). Even without the contract just mentioned, Swiss Life would have increased its premiums received: the volume of new group business went up 65% from the prior-year level while new individual business showed a 13% increase. New products and an improved operating performance made significant contributions to this growth. In tandem with the expansion in volume, insurance benefits advanced by 76% while insurance reserves were augmented by 23%. Operating expenses climbed 11% to CHF 199 million, mainly due to higher acquisition costs. In local currency terms the rise in operating expenses came to 7%.
Third-pillar provisions are continuing to gain in significance in the Netherlands as well, in view of demographic trends and the strain on public sector budgets. In addition, independent pension funds are increasingly turning to insurance companies for solutions. Swiss Life intends to utilise these changes and opportunities in the market in 2004 to further reinforce its position as the life and pension insurer in the Dutch market. Swiss Life also wants to make further progress on customer satisfaction so it can rank among the best in this area in 2005.
Total benefits, losses and interest expenses –2 231 –1 217 83.3%
The operating result with a profit of CHF 1 million was a marked improvement on the previous year, when the result still showed a loss of CHF 126 million. The 31% reduction in operating expenses to CHF 74 million in connection with the restructuring programme was a major contributing factor, along with the higher financial result of CHF 137 million (previous year: CHF 41 million).
A new law coming into force in Belgium in 2004 introduces the second pillar for the self-employed and reorganises the system of group coverage for small and mediumsized enterprises (SMEs). Swiss Life plans to exploit the resultant increased demand for employee benefit products selectively and concentrate above all on the self-employed, as well as SMEs. In Luxembourg, Swiss Life will continue to forge ahead with the expansion of cross-border insurance business.
Benefits paid and changes in insurance reserves – 261 – 262 –0.4%
Total benefits, losses and interest expenses – 332 – 316 5.1%
Swiss Life Group . Review of Operations 2003 . Life Non-Core Segment
Key figures for Life Non-Core in CHF million 2003 2002 +/-%
Gross written premiums, policy fees and deposits under investment contracts 1 646 2 045 –19.5%
Benefits paid and changes in insurance reserves –1 445 –1 657 –12.8%
The Non-Life segment no longer forms part of Swiss Life’s core business. Nevertheless, various sales channels for nonlife indirectly support life business in France and Belgium, as well as at «La Suisse».
Total benefits, losses and interest expenses – 747 – 847 –11.8%
Number of employees (full-time 1) Due to reclassif ication (see note 40 to the Financial Statements) the f igures for 2002 differ slightly from those published last year.
Continuing its concentration on core business, Swiss Life sold STG Schweizerische Treuhandgesellschaft for CHF 197 million to the LGT Group, effective 25 June 2003. Consequently, the Private Banking segment now consists primarily of Banca del Gottardo.
During the year under review, operating profit came to CHF 86 million. The CHF 105 million loss on the sale of STG resulted in a loss of CHF 19 million for the Private Banking segment. Compared with the previous year, when Banca del Gottardo recorded extraordinary write-downs, valuation adjustments and provisions, this represents an improvement of CHF 90 million.
Assets under management on 31 December 2003 amounted to CHF 41.8 billion. An increase of CHF 0.3 billion was generated despite the loss of assets managed by STG. The number of full-time positions decreased by 400 to 1205, whereby the 329 jobs at STG constituted the lion’s share of this reduction.
Banca del Gottardo Banca del Gottardo’s result was significantly better than its figures for 2001 and 2002. Gross profits, at CHF 174 million, were 54% higher than the previous year (all figures in this section are calculated on a local basis). The net profit came to CHF 85 million. In the previous year, the company experienced a loss of CHF 160 million stemming from extraordinary writedowns, valuation adjustments and the strengthening of provisions.
Net income increased to CHF 467 million, 4% higher than the preceding year, principally as a result of the 52% growth in trading income, which totalled CHF 72 million.
On 31 December 2003 consolidated equity stood at CHF 910 million, a 10% increase. In terms of the provisions of the law, the bank thus has a capital surplus of CHF 388 million.
At the end of the year assets under management at Banca del Gottardo totalled CHF 38.5 billion, an increase of 5%. The second Italian tax amnesty resulted in a net outflow of CHF 500 million. Of the CHF 1.2 billion in assets transferred out of Switzerland, CHF 700 million went to accounts at the subsidiary Banca del Gottardo Italia.
Without this the segment would have registered a profit of CHF 86 million. Banca del
Key figures for Private Banking in CHF million 2003 2002 +/-%
Total interest expenses and expenses from interest operations – 103 – 227 –54.6%
Although the first signs of a recovery in both the global economy and equity markets were perceived at the end of 2003, for long stretches of the financial year conditions for asset management remained challenging. Swiss Life posted a profit of CHF 95 million in the Investment Management segment. The decline of 10% compared with the previous year can be traced to the markedly lower financial result (CHF 42 million less, a reduction of 16%), whereby the sale of Swiss Life Hedge Fund Partners Ltd. the year before realised a profit of CHF 92 million.
Investment Management Swiss Life’s Investment Management segment generated a profit of CHF 95 million. In addition to ongoing business, the focus in 2003 was on defining and introducing new processes in asset and liability management. Compared to the previous year, assets under management rose by 8 % to CHF 99.4 billion.
Key figures for Investment Management in CHF million 2003 2002 +/-%
The Swiss Life Network continued to perform a twofold function in 2003: pooled premiums contributed directly to the Swiss Life Group’s gross written premiums, and the network made it possible to forge and maintain important contacts with multinational clients, thereby providing continued support for the business of the branches and subsidiaries in the Swiss Life Group.
26 Swiss Life Network The Swiss Life Network specialises in comprehensive employee benefit plans for multinational corporations. The 2003 business volume came to
CHF 1.9 billion. The network embraced 49 partners in 43 countries at the end of 2003.
Embedded value serves as an indicator of the value of the existing insurance portfolio. It consists of two components: the present value of future profits (PVFP) and the equity attributable to shareholders (adjusted net asset value or ANAV). Future new business is not included. All calculations relating to embedded value are based on the statutory accounts. The information published here has been reviewed and certified by Deloitte & Touche LLP.
Economic sensitivities in CHF million Europe without Other Switzerland Switzerland effects Total
Impact of 50 bp decrease in investment return – 645 – 331 – – 976
Deloitte & Touche LLP (“Deloitte”), our consulting actuaries, have reviewed the choice of methodology together with the assumptions and calculations made by the Swiss Life
Deloitte have performed certain checks on data provided, but have not verif ied and have relied on f inancial information underlying the Group’s f inancial statements.
New ground. “The news came out of the blue. The letter from the law firm that was lying in my mailbox several weeks ago said I had come into an inheritance. I couldn’t believe my eyes: I had been left a small farm close to Ivry. The property was in good condition and there were also around 15 hectares of orchards–all of which was to be mine! The farm had belonged to an uncle of mine and I had spent summer holidays there as a child. I always loved climbing the trees there. I am passionate about gardening and spend almost every weekend in our small garden, whatever the weather. I simply love being out in the fresh air and forgetting about the office. Thanks to this inheritance, I will now be able to earn a living from my hobby. I am going to produce top-quality cider and perhaps also distil a little Calvados. I am not worried about my turnover. Quality sells itself. Et voilà!”
Openness. Being open to the new opens up a multitude of future prospects. Changes in a person’s private and professional life also have an impact on their pension and long-term savings. Opportunities and risks arise that have to be identified and carefully weighed up against each other. Swiss Life favours an open and direct dialogue with its customers that clearly sets out the benefits and disadvantages of different options and forms the basis for a relationship of trust.
Swiss Life places great emphasis on a high degree of diversification, both in the structure of its investment portfolio and with regard to individual investments. The bulk of Swiss Life’s investments are in fixed-income securities, since insurance benefits must in many cases be guaranteed over several decades. Interest rate risk is managed and controlled by means of a newly introduced, Group-wide asset and liability management (ALM) process.
Ongoing improvements Since early 2003, the Swiss Life Group has used a periodic reporting strategy for measuring and assessing all of the above risks according to uniform criteria. The system quantifies and aggregates the economic aspects of market, credit and underwriting risks, enabling Swiss Life to determine what maximum loss the Group may incur in the course of one year in the most adverse circumstances. This loss potential is compared with the Group’s risk capacity and used as a basis for action. As part of the risk budgeting process being introduced in 2004, for example, limits are to be set for interest rate risk. A Group-wide risk controlling process ensures compliance with risk limits by comparing exposures to the designated limits.
A Group Risk Committee was set up in 2003, comprising all Corporate Executive Board members under the chairmanship of the Chief Risk Officer. This committee is kept informed of current exposures on a monthly basis and takes any corrective measures that may be necessary, for example if current risk exposures exceed risk capacity. The Group Risk Committee reports periodically to the Investment and Risk Committee of the Board of Directors.
By using asset and liability management (ALM) to systematically get the right fit between assets and liabilities, Swiss Life aims to make sure it can meet its commitments towards policyholders at all times, while also enabling shareholders to be adequately compensated for making risk capital available.
Compliance with external constraints As well as economic considerations, there are other factors that have to be considered (regulatory requirements, funding ratio, solvency, local and international accounting standards, liquidity requirements, rating agency models), some of which may lead to results that conflict with the economic approach.
Three important decisions have to be made in the context of the ALM process, based on these basic principles: – How are the policyholders’ funds and the insurer’s free reserves to be invested (asset allocation)?
– What guarantees and benefits are being promised to policyholders and at what price (product design)?
Distribution policy The distribution policy at Swiss Life serves to harmonise the interests of the individual stakeholders. For policyholders the accent is firmly on security: they want the safety of the minimum interest rate coupled with a regular and appropriate bonus. Shareholders place greater emphasis on returns commensurate with the level of risk: they are looking for a dividend or capital gain to adequately compensate them for the risks assumed. From the enterprise’s point of view, the stress is on sustainability: its business model has to remain successful in the long run. A lasting balance must be found between the differing interests of policyholders and shareholders.
Equity securities and equity funds 7 780 6.0% 7 072 5.7%
Product design Product design involves deciding, on the basis of customers’ needs, which guarantees and benefits are to be promised to policyholders. The actuarial bases prescribed for this purpose guarantee that each individual product will generate a sufficient contribution margin.
Finally, Swiss Life decided to reduce the existing duration gap, i.e. the difference in interest-rate sensitivity between assets and liabilities, and thus diminish its balance sheet risk. To this end the duration of the bond portfolio was increased in 2003 by 1.1 years, allowing for the difficulty of determining the duration for existing liabilities, given the various uncertainties that surround the legal parameters for group business in Switzerland (including the minimum interest rate and pension conversion rate).
Jumping for joy. “I’d really love to do a somersault from a standing position. But that’s really hard–even if it looks easy when someone else does it. I can already do rolls and handstands and am now practising handsprings with a run-up. I would like to join the circus when I’m older but my father thinks I should learn something proper. But when I perform my stunts, I can see that he’s proud of me. Unfortunately, I’m not too good at arithmetic and I don’t like sitting still. My teacher tells me I’m always fidgeting. If I try harder with my sums, I’ll be allowed to go to an acrobatics course for children every Thursday afternoon. I would go there every day of the week if I could!”
The Swiss Life Holding Board of Directors is composed entirely of non-executive directors; there is a strict division of functions between the Chairman of the Board of Directors and the Chairman of the Corporate Executive Board. This organisational structure upholds the separation of powers between the decision-makers and guarantees the autonomy of the Board of Directors.
The companies falling within the Group’s scope of consolidation are presented in note 43 of the Financial Statements. Details concerning the SWX Swiss Exchange listing and market capitalisation can be found on page 47. The operational Group structure is described on page 9.
Shareholders On 8 January 2003, Premafin Finanziaria S.P.A. reported that a group consisting of Premafin Finanziaria S.P.A. Rome; Fondiaria-SAI SPA, Florence; Fondiaria Nederland BV, Amsterdam; and Milano Assicurazioni S.P.A., Milan, held a 10.87% stake (2 356 112 shares) in Swiss Life Holding.
And as of 24 December 2003, the fund management organisation Fidelity International Limited, P. O. Box HM 670, Hamilton HMCX, Bermuda, reported a 5.22% shareholding (1 224 098 shares) in Swiss Life Holding.
45Corporate Governance In 2003, the Swiss Life Group made further improvements to corporate governance. The revision of the Organisational Regulations with effect from 1 December 2003 was another step in the ongoing process of aligning corporate governance with best practice standards.
On the balance sheet date, Swiss Life Holding held 8.06% of its own shares, either directly or indirectly via its subsidiaries Swiss Life/Rentenanstalt, Banca del Gottardo and Swiss Life Cayman Finance Ltd. Following the MCS I (2002-2005) issue of mandatory convertible securities in 2002, 7.54% of this total was earmarked for the allocation reserve required to carry out the compulsory conversion of the securities issued under MCS I (2002-2005) into shares of Swiss Life Holding (additional information on both MCS I (2002-2005) and MCS II (2003-2004) can be found in the “capital structure” section below and in note 31 to the financial statements). These percentage figures are in relation to the share capital recorded in the commercial register as of 31 December 2003 (CHF 1 172 397 150 divided into 23 447 943 registered shares).
On 19 December 2002, pursuant to the issue of MCS I
In conjunction with the issue of MCS II (2003-2004) mandatory convertible securities, on 30 December 2003 a further 1 586 098 registered shares, each with a CHF 50 par value, were issued from conditional capital. Ordinary share capital thus expanded by CHF 79 304 900 to its current value as per the balance sheet date of CHF 1 251 702 050, divided into 25 034 041 fully paid shares of CHF 50 par value per share, while conditional capital fell to CHF 103 260 950.
Further information concerning the capital structure can be found in the Financial Statements, starting on page 69, and in the prospectus of 18 November 2002 for the ordinary capital increase, published separately, the prospectus of 9 December 2002 for the MCS I (2002-2005) and the prospectus of 22 December 2003 for the MCS II (2003-2004).
Shares The share capital of Swiss Life Holding came to CHF 1 251 702 050 on the balance sheet date, divided into 25 034 041 fully paid registered shares with a par value of CHF 50 per share. Each share entitles the holder to one vote at the General Meeting of Shareholders.
Information on the restriction on voting rights laid down in the Articles of Association, which prevents any person from collecting more than 10% of the total share capital, can be found in the section on shareholders’ participation rights on page 59. No other kind of shares exist with either increased or restricted voting rights, privileged or restricted voting rights, privileged dividend entitlement or other preferential rights. Likewise, there are no other equity securities. No registration restrictions apply to Swiss Life Holding shares.
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 of 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 determining strategy as well as supervising the Corporate Executive Board.
Composition The Board of Directors of Swiss Life Holding currently consists entirely of non-executive directors with no duties related to operational management within Swiss Life Holding, and who have not exercised such duties during the past three financial years. No member of the Board moreover has any significant business relationship with Swiss Life Holding or any of the Group companies.
There are no mutual cross-directorships with listed companies. Information on further directorships held by individual members of the Swiss Life Holding Board of Directors with other listed companies can be found in the following section.
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 Elected until
Bruno Gehrig Chairman 2003 2006 Chairman’s Committee, Chairman Investment and Risk Committee
Gerold Bührer Vice Chairman 2002 1) 2005 Chairman’s Committee Investment and Risk Committee, Chairman
Franziska Tschudi Member 2003 2005 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 respectively member of the board of directors since 1997
Other appointments: – Bruno Gehrig is being put forward for election to the
Other appointments: – Association of Swiss Companies in Germany, domiciled in Basel, Vice Chairman – Bank Sal. Oppenheim jr.& Cie.(Schweiz) AG, Zurich,
Canton of Schaffhausen – Member of the Swiss Parliament since 1991 – 2001/2002 President of the Free Democratic Party (FDP)
Volker Bremkamp joined Albingia Versicherungs AG in Hamburg in 1963 (a subsidiary of Guardian Royal Exchange plc, London), receiving his qualifications as an insurance expert in 1965. Between 1969 and 1971 he was employed by various insurance companies and brokers in London and Paris. He returned to Albingia Versicherungs AG, Hamburg, in 1971, serving as a member of the Board of Directors from 1978 to 1989 and from 1989 to 2002 as Chairman of the Board of Directors of Albingia Lebensversicherungs AG and of Albingia Versicherungs AG. Volker Bremkamp was a member of the Board of Directors and Group Executive Director, Continental Europe, at Guardian Royal Exchange plc, London, from 1995 to 1999, which was taken over by the AXA Group in 1999. From 1999 to 2000 he was a member of the Board of Directors of AXA Colonia Konzern AG, Cologne, which is the holding company of AXA Germany. Since 2000 he has been Managing Director of BMB Bremkamp Management- und Beteiligungs-GmbH.
Other appointments: – Vereins- und Westbank AG, Hamburg (a member of Hypo Vereinsbank AG, Munich), Supervisory Board – AON International Insurance Broker, Hamburg,
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 construction industry, including three years in the United Kingdom. Rudolf Kellenberger joined Swiss Re in 1978, where he served as Head of the Engineering Department from 1990 to 1992. In 1993 he was appointed as a Member of the Executive Board with responsibility for Europe. In 2000, he was named Deputy Chief Executive Officer at Swiss Re.
Other appointments: – Atradius (formerly Gerling NCM Credit & Finance AG
Member of the Supervisory Board – Fortis, Brussels, Member of the International Advisory
Council – British-Swiss Chamber of Commerce, Council Member – Swiss Insurance Association, Member of the Board of Directors – Association for the Promotion of the Insurance Institute,
Life/Rentenanstalt’s Internal Services and External Sales staff in Switzerland, Deputy Member of the Board of Trustees
Other appointments: – «La Suisse» Vie, Lausanne, Chairman of the Board of
Directors – SGS SA, Geneva, Chairman of the Board of Directors – Bertarelli & Cie., Chéserex, Vice Chairman – Schindler Elevator Limited, Ebikon, Member of the
Peter Quadri will be put forward for re-election at the Swiss Life Holding Annual General Meeting of Shareholders on 18 May 2004.
Other appointments: – IBM Switzerland, Zurich, Chairman of the Board of
Other appointments: – Finter Bank Zürich, Zurich, Vice Chairman of the Board of Directors – Finter Bank France, Paris, Member of the Board of
Franziska Tschudi studied Law at the University of Bern between 1978 and 1984, and passed her Bar exam there in 1984. From 1985 to 1986 she studied US law at Georgetown University, Washington, DC, earning an LL.M.
degree, and passed the Bar exam for the states of New York and Connecticut in 1987. Franziska Tschudi also did postgraduate studies at the University of St. Gallen (1991 – 1993), receiving an Executive MBA. From 1984 to 1985, after completing various internships in law between 1981 and 1983, Franziska Tschudi was an Assistant for Media Law at the Institute for Constitutional and Administrative Law at the University of Bern. Between 1984 and 1992 she practised business and media law in
Zurich, Geneva and Washington, DC. From 1992 to 1995 she served as Secretary General at SIG Swiss Industrial Company. Franziska Tschudi then became a member of the Executive Board of WICOR Holding AG, Rapperswil (“Weidmann Group”) in 1995, where she was Head of Corporate Development and from 1998 Head of Business Area Electrical Technology Asia/Pacific. She has been Chief Executive Officer and Managing Director of WICOR Holding AG since 2001.
– IHK, Chamber of Commerce and Industry St. GallenAppenzell, Member of the Board
– OSEC, Member of the Advisory Committee – Judge at Commercial Court for the Canton of St. Gallen – “Die Chance” Foundation, Member of the Board of Trustees – Employee benefits foundations for Swiss
Resignations During the review period the following members of the Board of Directors stood down with effect from the General Meeting of 27 May 2003.
Retiring for reasons of age: Rino Rossi (Member of the Board of Directors 19881)–2003, Vice Chairman of the Board of Directors 1996–2003)
Chairman’s Committee The Chairman’s Committee assists the Chairman of the Board of Directors in fulfilling his leadership and coordination role, and assists the Board of Directors with matters concerning corporate governance. It additionally assists the Board of Directors in decisions concerning the appointment of personnel at the highest levels of management (nomination function) and in setting guidelines for compensation of members of the Board of Directors and the Corporate Executive Board, and determining how these guidelines will be applied to the compensation and terms of employment of the CEO and the other members of the Corporate Executive Board (compensation function).
1) As Swiss Life Holding was founded only in 2002, the dates given refer to the f irst appointment to the Supervisory Board or Board of Directors of Swiss Life/Rentenanstalt.
Investment and Risk Committee The Investment and Risk Committee assists the Board of Directors in matters concerning investment management, financial management and risk management within the company. The tasks and competencies of the Investment and Risk Committee include, among others, submitting proposals to the Board of Directors concerning the principles of asset and liability management and the definition of investment policy, monitoring capital adequacy, verifying compliance with guidelines on investments, and establishing the risk tolerances in insurance and investment operations.
Audit Committee The Audit Committee assists the Board of Directors in its supervision of the accounting function and financial reporting activities as well as 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.
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 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.
Corporate Executive Board The CEO directs the business operations of the Group. Together with the Corporate Executive Board he determines the long-term goals and strategic direction of the Group for approval by the Board of Directors and, based on the Board of Directors’ decisions, ensures the target-oriented management and development of the Group. The Corporate Executive Board may form committees for individual areas of responsibility and delegate competencies to such a Corporate Executive Board Committee.
Each member of the Corporate Executive Board has responsibility for a functional division within the Group. The members of the Corporate Executive Board are responsible for setting the objectives, financial planning, HR management and achievement of objectives within their division. They issue directives for their division within the context of legal and regulatory requirements, the relevant regulations and the Group directives intended for the Group as a whole.
Since July 2002 he has been Professor of Life Insurance Mathematics at the Swiss Federal Institute of Technology, Zurich. He has served on various professional bodies and is the author of a large number of publications.
Rolf Dörig laid the groundwork for his professional career by obtaining a Doctorate in Law 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 of Credit Suisse Financial Services, he was assigned responsibility for Swiss corporate and retail banking from 2000 onwards. In spring 2002 he became Chairman of Switzerland for the Credit Suisse Group.
Other appointments: – Swiss Insurance Association (SIA), Member of the Board – economiesuisse, Zurich, Member of the Board – Zurich Chamber of Commerce, Member of the Board of Directors – ANBE AG, Baar, Member of the Board of Directors – Grasshopper-Club Zürich, Member of the Board of
He took up his new position as Chief Markets Officer and CEO Switzerland at the Swiss Life Group in January 2003.
Bruno Pfister obtained his Law Degree from the University of Geneva before being admitted to the Bar of Geneva. He then turned his attention to business management studies, earning an MBA from the Graduate School of Management in Los Angeles. The initial stages of his career saw Mr Pfister work for Chase Manhatten 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 LGT Bank, Liechtenstein in 1998. In 1999 he took over as Head of Customer Segment and Product Management at Credit Suisse.
Bruno Pfister has been Chief Financial Officer (CFO) of the Swiss Life Group since August 2002.
Other appointments: – Telekurs-Holding Ltd, Zurich, Member of the Board of
Directors (to May 2003) – Banca del Gottardo, Lugano, Member of the Board of Directors – Castle Alternative Invest Ltd., Freienbach, Member of the
Martin Senn attended the Commercial School and Business School in Basel before attending the International Executive Program at INSEAD in Fontainebleau and the Advanced Management Program at Harvard Business School. 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 he moved to Credit Suisse where his many executive roles included that of Regional Treasurer for Europe and Turnaround Manager with a mandate to restructure and reposition all legal entities of the Credit Suisse Group in Japan. A member of the Credit Suisse Executive Board, he was appointed Head of its Trading and Investment Services Division in 2001.
Other appointments: – Maerki Baumann & Co. AG, Zurich, Member of the
Board of Directors – Nomura Bank (Switzerland) Ltd, Zurich, Member of the
Board of Directors – Swiss Life Asset Management, Zurich, Chairman of the
René van der Smeede obtained his degree as Qualified Actuary in 1976. Until 1984 he worked for the Dutch insurers ENNIA, subsequently heading their subsidiary in Spain as Director. He then went on to hold various management positions at the Dutch insurance company Aegon, serving on their Executive Board in the Netherlands for ten years.
In 1998 he became CEO of Swiss Life Netherlands (ZwitserLeven). René van der Smeede was named acting Head of the new International Markets division at Swiss Life in November 2002. He became a Member of the Corporate Executive Board on 1 January 2003.
Compensation, participation in equity, loans Practice and procedure Pursuant to the Organisational Regulations, the Board of Directors as a whole is responsible for determining the level and make-up of compensation for its members. The Chairman’s Committee, in its capacity as a Compensation Committee, is responsible for putting forward corresponding proposals. The Board of Directors also establishes guidelines for the compensation policy within the Group. In so doing, it takes into consideration the compensation policies of other organisations of comparable size and in comparable industries, with its findings drawn from publicly available information or, as necessary, studies by external experts. Based on these guidelines, the Chairman’s Committee determines the compensation for individual members of the Corporate Executive Board.
In the year under review the share option plan for Swiss Life Group management introduced in 2000 was discontinued. Accordingly, no share options were allocated in 2003.
Further details on compensation and benefit expenditure for the Swiss Life Group management and employees can be found in Note 26 of the Financial Statements.
Corporate Executive Board CHF 6 920 656 1) of which CHF 532 000 was paid in the f irst half-year and CHF 636 540 in the second half-year
Members of the Board who resigned during the period under review received no severance packages. There were no resignations from the Corporate Executive Board during the review period.
Share allotment in the year under review Swiss Life Holding registered shares with a par value of CHF 50 each were allocated to members of the Board of Directors and the Corporate Executive Board as follows during the 2003 financial year.
Board of Directors 368 shares allocated at a value of CHF 184.70. These are subject to a three-year vesting period.
No shares were allocated to parties closely linked1) to such persons within the meaning of the law.
Share ownership On the balance sheet date, members of the Board of Directors and the Corporate Executive Board (including closely linked parties) held a total number of Swiss Life Holding registered shares, with a par value of CHF 50 each, as follows: Options The following gives an overview of the options on shares of Swiss Life/Rentenanstalt or Swiss Life Holding allocated to members of the Board of Directors and the Corporate Executive Board in the context of the share option plan for 2000, 2001, and 2002 introduced in 2000 for the entire senior management of the Swiss Life Group. At the end of 2002 this share option programme was discontinued as of 2003. In connection with the exchange of Swiss Life/Rentenanstalt shares for shares of Swiss Life Holding and the subsequent capital increase in autumn 2002, the parameters of the corresponding options were adjusted in accordance with Eurex guidelines. No other changes have been made to the allocated share options.
Right of representation The Articles of Association stipulate that a shareholder may be represented by another shareholder, a legal representative, a management representative, independent voting representative or a representative of deposited shares. Married persons may also be represented by their spouses, who are not required to be shareholders.
The interest rates used for the three mortgages were 5% and 4% on CHF 903 495 of this amount and 2.75% on CHF 50 000. These terms are available to all employees of Swiss Life.
Duration of the mandate and term of office of the lead auditor At the time Swiss Life Holding was established in 2002, PwC was named as Group Auditor and was re-elected at the Annual General Meeting of Shareholders in May 2003. The Articles of Association stipulate that the External Auditor is to be elected by the General Meeting of Shareholders for one financial year at a time. PwC has served as Group Auditor for Swiss Life since 1994.
The lead auditor from PwC was first charged with reviewing the consolidated financial statements of Swiss Life Holding or its predecessor Swiss Life in 1997. A successor will be chosen for the 2004 financial year.
Auditing fees In 2003 the auditing fees received by PwC from the Swiss Life Group came to CHF 11.602 million (previous year: CHF 13.503 million). These include the costs of reviewing Swiss Life’s half-year accounts and of comfort letters issued in connection with the issue of MCS II (2003-2004) mandatory convertible securities.
Additional auditing fees In 2003 PwC received additional payments totalling CHF 2.785 million for advisory services (previous year: CHF 3.907 million).
– commissioning audits to be performed by internal or external auditors
– taking note of and evaluating the statutory auditors’ findings and recommendations, and receiving reports from the management regarding measures taken
– reviewing and assessing the quality of external reporting – examining the organisation and effectiveness of internal auditing, and taking note of the findings and results of internal auditors’ reports
The Audit Committee meets at least four times a year. The Audit Committee held six meetings during the 2003 financial year. The lead auditor from PwC took part in these sessions.
Board of Directors (from left to right): Volker Bremkamp, Rudolf Kellenberger, Peter Quadri, Bruno Gehrig, Paul Embrechts,
Mountain air. “I can still hardly believe it! An old friend of mine called me three weeks ago. He is the warden of an alpine hut and asked whether I could help him out during the next season. That means cooking, clearing up, getting food down in the valley and so on. I love being in the mountains and immediately agreed. Over the last 30 years, I have spent every spare moment in the mountains–I simply can’t live without them. Every year, I do a three or four thousand meter ascent. After a strenuous climb, it is an incredible feeling to stand on the summit and gaze out over the mountain peaks. You are suddenly transformed into someone completely new.”
Housewife, Sophie V. (57), takes up her brush and paints once again.
Swiss Life Group . Financial Statements 2003 . Index to the Financial Statements
Swiss Life Group . Financial Statements 2003 . Consolidated Statement of Income 71Consolidated statement of income for the years ended 31 December
Net earned premiums and policy fees 1) 24 14 822 15 265
Net realised and unrealised gains/losses on investments 8 334 –2 304
Interest credited to investment contracts, customer deposits and other funds on deposit 8 –818 –946
Diluted earnings per share (in CHF) 7 10.6 –104.6 1) Under the accounting principles adopted, deposits made under investment contracts are not recognised as income
Swiss Life Group . Financial Statements 2003 . Consolidated Balance Sheet 72 Consolidated balance sheet as of 31 December
Investment contracts, customer deposits and other funds on deposit 21 29 352 28 086
Swiss Life Group . Financial Statements 2003 . Consolidated Statement of Cash Flow 74 Consolidated statement of cash flow for the years ended 31 December
Interest credited to investment contracts, customer deposits and other funds on deposit, net of fee income 974 530
Acquisitions and disposals of subsidiaries, net of cash and cash equivalents 4 –117 91
Deposits under investment contracts, other policyholder funds and reinsurance contracts 3 282 3 400
Withdrawals under investment contracts, other policyholder funds and reinsurance contracts –2 699 –1 406
Withdrawals under financial reinsurance contracts that do not transfer risk –6 –15
Effect of exchange rate differences on cash and cash equivalents 128 –67
Reclassification to minority interests due to new structure (unexchanged SL/RA shares) – –912 296 – –45
Issuance of mandatory convertible securities (MCS) 1 586 098 1 768 535 80 88
Purchases of SLH treasury shares 1 365 921 308 795 –172 –43
Balance carried forward to page 77 21 558 979 21 555 329 3 179 2 852
Swiss Life Group . Financial Statements 2003 . Consolidated Statement of Changes in Equity 77Consolidated statement of changes in equity for the years ended 31 December
Number Number gains gains change change of shares of shares and losses and losses in equity in equity
Balance carried forward from page 76 21 558 979 21 555 329 3 179 2 852
Note 80 Summary of Significant Accounting Policies . . . . . . . 2 88 Effect of Changes in Accounting Policies . . . . . . . . . . 3 89 Acquisitions and Disposals of Subsidiaries . . . . . . . . 4 97 Details of Life Core Segment . . . . . . . . . . . . . . . . . . . 6 99 Details for Certain Items in the Income Statement . . 8 102 Held-to-Maturity Securities and 103 Financial Assets and Liabilities Held for Trading . . . 10 104 Trading Account Assets and Liabilities 107 Future Minimum Lease Payments under
Non-Cancellable Operating Leases - Lessor . . . . . . . 13 107 Loans Originated by the Enterprise . . . . . . . . . . . . . 14 112 Goodwill and Other Intangible Assets . . . . . . . . . . . 19 113 Separate Account (Unit-Linked) Assets . . . . . . . . . . 20 113 Investment Contracts, Customer Deposits and Other Funds on Deposit . . . . . . . . . . . . . . . . . . 21 116 Insurance Liabilities and Reinsurance Assets . . . . . . 25 125 Insurance and Other Receivables and Payables . . . . 29 128 Core Capital for Capital Adequacy Purposes. . . . . . 32 137 Fair Value of Financial Instruments Not Presented in the Balance Sheet at Fair Value . . . . . . . . . . . . . . 39 138 Reclassifications in the Statement of Income. . . . . . 40 138 Branches, Subsidiaries, Associates, Partnerships 138 Events after the Balance Sheet Date. . . . . . . . . . . . . 42
A holding structure was established and a company was founded as a wholly-owned subsidiary for this purpose on 17 September 2002. This company, Swiss Life Holding (SLH), had a share capital of CHF 250 000. On 23 September 2002, Swiss Life launched an exchange offer to all holders of Swiss Life/Rentenanstalt (SL/RA) shares. At the end of the exchange offer period, a total of 10 834 704 SL/RA shares or 92.23% of the total SL/RA shares had been tendered. In connection with the capital increase resolved by the Extraordinary General Meeting of Shareholders held on 18 November 2002 and its entry in the Commercial Register of the Canton of Zurich on 19 November 2002, the SL/RA shares were transferred to Swiss Life Holding by way of a contribution in kind in exchange for the issue to the tendering shareholders of 10 834 704 SLH shares. With this transaction Swiss Life Holding became the parent company of the Swiss Life Group.
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 are prepared under the historical cost convention as modified by recording available-for-sale investments, investment property and trading account assets and liabilities at fair values.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 81Consolidation principles
Foreign currency translation On consolidation, assets and liabilities of Group companies denominated in foreign currencies are translated into Swiss francs at year-end exchange rates. Income and expense items are translated into Swiss francs at the annual average exchange rate. Goodwill is translated at historical exchange rates. The resulting translation differences are recorded directly in equity as cumulative translation adjustments. On disposal of foreign entities, such translation differences are recognised in income as part of the profit or loss on the sale.
For contracts with a short duration, premiums are recorded as written upon inception of the contract and are earned primarily on a pro-rata basis over the term of the related policy coverage. The unearned premium reserve represents the portion of the premiums written relating to the unexpired terms of coverage.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 82 Deferred acquisition costs Costs that vary with and are directly related to the acquisition of new and renewed insurance contracts including commissions, underwriting costs, agency and policy issue expenses, are deferred. Deferred acquisition costs (DAC) are periodically reviewed to ensure that they are recoverable from future revenues.
For participating life insurance contracts, where the contribution principle applies to the allocation of the policyholder bonus, the deferred acquisition costs are amortised over the life of the contract based on the present value of the estimated gross margin amounts which are expected to be realised. Expected gross margins include expected premiums and investment results less expected benefit claims and administrative expenses, anticipated changes to future life policyholder benefits and expected annual policyholder bonuses.
Future life policy benefit liabilities, policyholder contract deposits and loss reserves For participating life insurance contracts, where the contribution principle applies to the allocation of the policyholder bonus, future life policy benefit liabilities are determined by using the net-level-premium method on the basis of appropriate mortality and interest assumptions. In most instances a liability for terminal bonuses is accrued in the liability for future policy benefits, in proportion to the estimated gross margins.
Liabilities for policyholder investment contracts and universal life contracts are not calculated actuarially; they move in line with premiums paid by the policyholders plus interest credited less expenses and mortality charges and withdrawals.
Separate-account and unit-linked assets and liabilities These contracts represent life insurance contracts whose risk is borne according to their specific investment objectives by the policyholders. Investment income and both realised and unrealised gains and losses accrue directly to the policyholder. The assets of each account are segregated and are not subject to liabilities that arise out of any other business of the company. The assets and liabilities are carried at fair value. Deposits, withdrawals, net investment income and realised and unrealised capital gains and losses on such assets are not reflected in the consolidated statement of income or equity. The cost of insurance, administrative charges and surrender charges are included in policy fee income.
83Reinsurance The Group assumes and/or cedes insurance in the normal course of business. Reinsurance assets principally include receivables due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable or due under reinsurer contracts are recognised in a manner consistent with the reinsured risks and in accordance with the terms of the reinsurance contract. Reinsurance is presented on the consolidated balance sheet on a gross basis unless a right and the intention to offset exist.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 84 Loans originated by the enterprise are carried at amortised cost using the effective interest rate method. The computation includes all fees and points paid or received. Loans with indefinite maturities are carried at unpaid principal amounts or cost.
Property held for sale in the ordinary course of business is reported under other assets.
Investment property is carried at fair value and changes in fair values are recognised in income. Fair values are determined either on the basis of periodic independent valuations (at least every three years) or annually by using discounted cash flow projections. Rental income is recognised on a straight-line basis over the lease term.
Derivatives and risk management activities The Group enters into forward foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, currency and interest rate options and other derivative financial instruments for hedging risk exposures or for trading purposes. To manage the risks associated with derivative trading, the Group establishes risk levels and monitors these exposures. Exposure to price risk on both derivatives and their underlyings is managed in accordance with risk limits set by management for buying or selling instruments or closing out positions. The Group restricts its exposure to credit risk by entering into derivative contracts with counterparties that have at least an A credit rating and by entering into master netting agreements. The notional amounts or contract volumes of derivatives, which are used to express the volume of instruments outstanding and to provide a basis for comparison with other financial instruments, do not represent the amounts that are effectively exchanged by the parties and, therefore, do not measure the Group’s exposure to credit risk. The amounts exchanged are calculated on the basis of the notional amounts or contract volumes and other terms of the derivatives that relate to interest or exchange rates, securities prices and the volatility of these rates and prices.
Derivatives 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 (fair value hedge), or changes in future cash flows of an asset, liability, firm commitment, or forecasted transaction (cash flow hedge).
In a qualifying cash flow hedge, the effective portion of the gain or loss on the hedging derivative is recognised directly in equity. When the firm commitment or forecasted transaction results in the recognition of an asset or liability, the gain or loss is removed from equity and included in the carrying amount of the asset or liability. Otherwise, the gain or loss is recognised in income in the period during which the hedged item affects income. Any ineffective portion of the gain or loss is recognised in the income statement immediately.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 85Cash and cash equivalents Cash amounts represent cash on hand and demand deposits. Cash equivalents are primarily short-term highly liquid investments with a maturity of 90 days or less from the date of acquisition.
Goodwill and other intangible assets The Group’s acquisitions of other companies are accounted for under the purchase method, whereby the purchase price is allocated to the fair value of assets and liabilities acquired at the date of acquisition, with any residual amount allocated to goodwill. Goodwill acquired prior to 1995 was charged directly to equity. Goodwill is amortised using the straight-line method over its estimated useful life, normally up to a maximum of 20 years. In determining the useful life, the Group considers the expected pattern of benefits to be received from the acquired company which is based on factors such as the type of business, the duration of the underlying insurance contracts, client relationships and distribution networks. The useful life of goodwill is reviewed annually and written down for impairment where necessary.
Other intangible assets primarily consist of trademarks and brand names and are amortised over their useful lives, generally 20 years, using the straight-line method.
Impairment of assets The Group reviews the carrying value of assets regularly for indications of impairment.
A financial asset is impaired if its carrying amount is greater than the recoverable amount. Depending on the type of financial asset the recoverable amount is estimated as follows: present value of expected future cash flows discounted at the instrument’s original effective interest rate or current market rate; the fair value using an observable market price; or an amount based on the fair value of any collateral. Debt instruments carried at amortised cost are considered impaired if it is probable that the Group will not be able to collect all amounts due according to the contractual terms. Equity instruments are considered impaired if the fair value remains substantially below cost for a prolonged period, or objective evidence indicates that costs may not be recovered.
The Group’s contributions to the defined contribution plans are charged to income in the reporting period to which they relate.
No new IFRS pronouncements relevant to the Swiss Life Group for the reporting period 2003 were issued between 1 January 2003 and 31 December 2003.
The Accounting Standards Executive Committee (AcSEC) issued a Statement of Position (SOP) 03-1 “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” in July 2003. This pronouncement will be relevant for the 2004 reporting period.
– Policyholder investment contracts and other funds on deposit are estimated using discounted cash flow calculations based upon interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. The fair values of demand or savings deposits are equal to the amount payable on demand or the carrying amount. The carrying amounts of variable-rate deposits approximate their fair values at the reporting date.
– The carrying amount of accrued interest and other financial liabilities approximates their fair value.
The International Accounting Standards Board (IASB) issued the following new or revised IFRS/IAS Standards which will be effective for periods beginning on 1 January 2005: IFRS 2 Share-based Payment, IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39 Financial Instruments: Recognition and Measurement and Improvements to International Accounting Standards.
The financial effects of these new accounting pronouncements have not been quantified.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 89With regard to the implementation of the strategy of the Group and its focus on the life insurance business in some core markets, the following divestitures took place in 2003: In June 2003, the Swiss Life Group sold STG Schweizerische Treuhandgesellschaft and all its subsidiaries to the LGT Group. The selling price was CHF 197 million minus related costs of CHF 1.4 million. The loss recognised on the sale amounted to CHF 105 million.
Swiss Life Asset Management (UK) was sold on 5 November 2003 to King & Shaxson Bond Brokers. In September 2003, the equity stake in Swiss Life Partner AG, Germany, an insurance intermediary, was reduced from 77.5% to 49.9%. The remaining equity stake totalling CHF 1.3 million qualifies as an investment in an associate and is accounted for under the equity method. The proceeds from sale for both transactions amounted to CHF 2.5 million.
The Swiss Life Group acquired three real estate companies in Belgium in 2003. The total acquisition cost was CHF 12 million. Additionally, Banca del Gottardo acquired a subsidiary in Italy. The acquisition price was CHF 1 million.
In May 2002, Swiss Life carried out a reorganisation of its hedge fund and leveraged finance activities. The subsidiary Swiss Life Hedge Fund Partners Ltd., a joint enterprise with RMF, was fully integrated into RMF Investment Group. Total proceeds of the sale were CHF 100 million.
Upon the sale of Swiss Life Hedge Fund Partners Ltd. to RMF an agreement was concluded concerning the withdrawal of Swiss Life funds managed by RMF. The original sales price of CHF 100 million shall be adjusted if a withdrawal occurs within seven years. The adjustment is calculated based on the residual term of the original seven years and the portion of the funds withdrawn. The maximum adjustment of the sales price is CHF 59 million. In December 2002, Swiss Life sold Redsafe Bank, its financial portal, to an external party, after the decision to cease the portal’s operations. The sales price was CHF 25 million. Gesfid SA, Lugano, and Gesfid International, Nassau, two subsidiaries of Banca del Gottardo, were disposed of in September 2002. The proceeds from sale were CHF 52.5 million. In 2002, a real estate company in Belgium was acquired. Total purchase consideration was CHF 5.5 million. The purchase of Long Term Strategy for CHF 15 million from the members of the Corporate Executive Board is also included in the acquisitions.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 90 Assets and liabilities from acquisitions and disposals
Present value of profits on acquired insurance portfolios – – – –
Cash and cash equivalents acquired (+)/disposed of (-) 0 37 –370 –111
Net cash outflow (-)/inflow (+) from acquisitions/disposals –13 16 –104 75 4 Acquisitions and Disposals of Subsidiaries (continued)
The Group’s reportable segments are defined using the “management approach” reflecting the sources and nature of the Group’s risks and returns as monitored by management in order to strategically manage the Group and make business decisions. Primary segmentation is based on product lines and services. Secondary segmentation is based on geographical areas.
– 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. Under the Group’s new strategy, which involves refocusing on the life and pension business and a number of key European markets, some life insurance operations have been defined as core business and others as non-core business. Life operations in Switzerland (excl. «La Suisse»), France, Germany, the Netherlands and Belgium/Luxembourg are defined as core business. Life operations in the United Kingdom, Spain, Italy and «La Suisse» in Switzerland are defined as noncore business. The “Life” segment also includes a number of companies which are predominantly active in the management of investments pertaining to life insurance.
91– “Private Banking” involves the management of assets for high net worth individuals, as well as the provision of corresponding special asset management services. “Private Banking” also covers the Group’s banking operations.
The accounting policies for the segments are the same as those described in the summary of significant accounting policies. Inter-segmental services and transfers of assets and liabilities are treated as if the transactions were with third parties, i.e. at market prices applicable at the time of the transaction. The statement of income, balance sheet and footnote disclosure for the primary segments are given on the following pages: 5 Segment Information
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 92 Statement of income for the year ended 31 December 2003
Expenses for depreciation and amortisation 503 18 93 9 3 3 – 629 5 Segment Information (continued)
Investment management, banking and other fee income 79 1 1 392 228 32 –159 574 of which inter-segment 88 –42 34 32 97 –4 –205
Benefits paid and changes in insurance reserves –13 805 –1 657 –868 – – – 1 –16 329
Policyholder bonuses and participation in surplus –349 –20 25 – – – 4 –340
Interest credited to investment contracts, customer deposits and other funds on deposit –787 –30 –2 –131 – –2 6 –946
Interest on borrowings –273 –9 –1 –96 0 –2 18 –363
Other interest expenses –10 0 –1 0 –1 –2 3 –11
Total benefits, losses and interest expenses –15 224 –1 716 –847 –227 –1 –6 32 –17 989 of which inter-segment –84 66 –5 –4 0 –5 32
Other operating and administrative expenses –549 –127 –122 –4 –3 –65 41 –829
Segment result –561 –157 –95 –109 105 16 – –801 of which inter-segment –86 9 15 18 61 –17 –
Additions of property and equipment and intangible assets 253 37 9 37 3 2 – 341
Financial assets held for trading 1 185 412 1 1 353 91 – –18 3 024
Separate account (unit-linked) assets 7 607 1 051 – – – – – 8 658
Financial assets held for trading 1 091 400 0 2 035 64 – –38 3 552
Separate account (unit-linked) assets 7 848 933 – – – – – 8 781
Investment contracts, customer deposits and other funds on deposit 20 339 983 98 6 934 – – –268 28 086
Separate account (unit-linked) liabilities 7 806 932 – – – – – 8 738
Revenues, assets and purchases of owner-occupied property, equipment and intangible assets are allocated to the geographical segment in which the entity reporting such assets is located.
Benefits paid and changes in insurance reserves –7 448 –1 730 –1 821 –2 296 –261 –1 –13 557
Interest credited to investment contracts, customer deposits and other funds on deposit –113 –548 –15 – –48 –1 –725
Insurance-underwriting and policy-acquisition costs –498 –405 –164 –70 –30 5 –1 162
Other operating and administrative expenses –144 –185 –85 –128 –38 17 –563
The income and expenses of the Life Core segment are broken down into the five core markets Switzerland, France, Germany, the Netherlands and Belgium/Luxembourg.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 98 Statement of income Life Core segment for the year ended 31 December 2002
Net earned premiums and policy fees 7 848 1 934 1 539 1 074 265 1 12 661
Investment management, banking and other fee income 80 1 0 13 2 –17 79
Interest credited to investment contracts, customer deposits and other funds on deposit –183 –539 –28 – –37 0 –787
Other operating and administrative expenses –153 –157 –94 –122 –41 18 –549
Total operating expenses –944 –548 –260 –179 –107 20 –2 018
Weighted average number of shares outstanding 21 515 729 16 186 778
Basic earnings per share (EPS) are calculated on the weighted average number of shares outstanding during the reporting period, excluding the average number of shares purchased by the Group and held as treasury shares. Diluted earnings per share include the dilutive effect of convertible bonds and share options issued to employees and other dilutive effects. In the diluted EPS calculation, the convertible debt is assumed to have been converted into shares and the net result is adjusted for the applicable interest expenses minus the related taxes. Share options are dilutive when they would result in the issuance of shares for less than fair value. The number of dilutive shares is determined as the difference between the weighted average number of shares under option during the period and the number of shares that would be issued based on the average fair value for the period. The resulting number of shares is considered to have been issued for no consideration.
Fair value gains/losses – equity instruments, investment fund units and hedge funds –510 449
Fair value gains/losses – foreign currency instruments and other 414 869
Total benefits paid and changes in insurance reserves 15 726 16 329 8 Details for Certain Items in the Income Statement (continued)
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 101Interest credited to investment contracts, customer deposits and other funds on deposit
Impairment losses on property and equipment and other intangible assets – 0
Impairment losses on property and equipment and other intangible assets 0 0
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.
Investment fund units – mixed 763 853 –63 –98 700 755
Total available-for-sale securities, net of impairment losses 85 204 78 856 2 914 1 965 88 118 80 821
Balance at the beginning of the reporting period –1 014 –724
Total impairment losses at the end of the reporting period –1 440 –1 014
Currency options (over-the-counter) – liabilities 1 309 1 223 38 20
Total currency-related derivative instruments – liabilities 11 502 10 701 376 626
Interest rate options (over-the-counter) – assets 968 1 293 7 11
Total interest-related derivative instruments – assets 9 429 9 034 291 473
Derivative financial instruments not qualifying for hedge accounting were as follows as of 31 December: 11 Trading Account Assets and Liabilities by Type of Derivative
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 105Equity and equity-index-related instruments
Total equity and equity-index-related derivative instruments – assets 1 675 3 297 244 526
11 Trading Account Assets and Liabilities by Type of Derivative (continued)
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 107Rental income from investment property was CHF 685 million and CHF 672 million for the periods ended 31 December 2003 and 2002, respectively. Operating expenses arising from investment property that generated rental income stood at CHF 182 million and CHF 174 million for the periods ended 31 December 2003 and 2002, respectively.
Later than 1 year not later than 5 years 378 349
Total loans originated by the enterprise 25 800 31 941 –200 –291 25 600 31 650 25 916 32 150
The Group accepted securities at a fair value of CHF 515 million as collateral under repurchase agreements and CHF 1510 million under securities borrowing arrangements which it is permitted to sell or repledge. CHF 687 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.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 108 Allowance for loan losses
Balance as of 31 December, net of impairment losses 64 181
Amortisation and interest charged to income, including adjustments due to new actuarial assumptions –455 –355
Cost/ Cost/ Net Net Amortised Amortised unrealised unrealised Fair Fair cost cost gains/losses gains/losses value value
Total other investments, net of impairment losses 853 1 050 0 –47 853 1 003 16 Other Investments
Balance at the beginning of the reporting period –63 0 – –
Additions arising from acquisitions – – 0 – 0 0 0
Transfers to assets held for sale –26 – – – – –26 –
Splitting-up of assets under finance lease by class 45 – – 32 –77 – –
Balance as of 1 January –178 – –135 –357 –46 –716 –715
Balance as of 31 December –202 – –150 –378 –29 –759 –716
Balance as of 31 December 0 –4 0 –4 –1 –9 –7
In 2002, a detailed review of the impairment policy of the Group resulted in a considerable increase of impairment charges. Impairment losses on goodwill were estimated at CHF 832 million for 2002 and mainly related to the private banking business. Valuation in respect of goodwill impairment is based on discounted cash flow projections (Banca del Gottardo and Schweizerische Treuhandgesellschaft ) as well as on methods used for embedded value calculation (Lloyd Continental).
Annual amortisation charges on the present value of future profits relating to acquired insurance portfolios totalling CHF 25 million are estimated as ranging from CHF 5 million to CHF 6 million for the years 2004 to 2007.
Total separate account (unit-linked) assets 8 658 8 781 20 Separate Account (Unit-Linked) Assets
Total investment contracts, customer deposits and other funds on deposit 29 352 28 086 21 Investment Contracts, Customer Deposits and Other Funds on Deposit
Deposit assets and liabilities for insurance and reinsurance contracts not transferring risk as of 31 December
Reserves for losses and loss adjustment expenses 25 9 896 9 330
The reserves for unpaid losses and loss adjustment expenses are determined on the basis of information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments or if catastrophic events occur. The following analysis provides a reconciliation of the movement in the reserves for losses and loss adjustment expenses for the years ended 31 December: Movement in reserves for losses and loss adjustment expenses
Gross reserves for losses and loss adjustment expenses 9 330 8 804
Net reserves for losses and loss adjustment expenses 8 593 8 072
Total losses and loss adjustment expenses paid –2 105 –1 944
Net reserves for losses and loss adjustment expenses 9 105 8 593
The life operations limit exposure to loss on any single life. Retention limits vary by country. Amounts recoverable from reinsurers are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented in the balance sheet as a component of reinsurance assets. Approximately 2% and 8% of life insurance in force was ceded at 31 December 2003 and 2002, respectively.
– Mortality and surrender rates are based upon actual experience, geographical area and product type.
– The average rate of assumed investment yield used for estimating gross margins ranges from 0.8% to 8%.
Net earned premiums and policy fees 2 741 2 759 12 081 12 506 25 Insurance Liabilities and Reinsurance Assets
Reserves for losses and loss adjustment expenses 9 896 791 9 105 9 330 737 8 593
Reserves for future life policyholder benefits 88 743 614 88 129 86 516 554 85 962
Reserves for policyholder bonuses and other reserves 4 845 5 4 840 4 406 9 4 397
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 72 million and CHF 33 million as of 31 December 2003 and 2002, respectively. Plan assets do not include any property occupied by the Group. The amounts recognised in the consolidated statement of income for the years ended 31 December were as follows: Amounts recognised in the consolidated statement of income
Other long-term employee benefits A liability of CHF 12 million was recognised in 2003 which relates to part-time employment contracts prior to retirement and to profit-sharing arrangements for certain employees.
Termination benefits Termination benefits totalling CHF 15 million and CHF 27 million for the years ending 31 December 2003 and 2002, respectively, arose as a result of early retirements and voluntary redundancies.
Share options The Group offers share options to directors and managers in Switzerland and abroad. No new share options were allocated in 2003. In 2002, 124 918 new shares under options were allocated. Due to the capital increase, the number and the exercise price of shares under option granted in prior years were adjusted using the Eurex R factor of 0.718232. The outstanding share options did not have an intrinsic value as of 31 December 2003. Movements in the number of share options outstanding were as follows: 26 Employee Benefits (continued)
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 119Movements in the number of shares under option
Amounts in CHF (if not noted otherwise) 2003 2002 2003 2002 2003 2002 2003 2002
Other benefits The Swiss Life Group maintains incentive programmes for certain management and other employees.
Exchangeable debt (GEMMS) The GEMMS (Guaranteed Exchangeable Monetisations of Multiple Shares) were issued by the Group on 15 May 1998 and are exchangeable at the option of the holder into shares of the designated company until the maturity date of the issue. The Group may redeem some of the issues on or after a specific redemption date at an early redemption price. The Group called a USD 250 million Vodafone tranche of the GEMMS bond for premature redemption on 20 May 2001. The USD 300 million 2% bond exchangeable into GlaxoSmithKline shares was called on 20 March 2002. On 20 May 2003, the remaining EUR 200 million debt exchangeable into Unilever shares matured and was repaid. During 2003 GEMMS with a nominal amount of CHF 81 million were repurchased in the market. The loss on the repurchased debt was CHF 2 million.
As of 31 December 2003 and 2002, respectively, issues with the following terms were outstanding: In CHF million In CHF million Final Outstanding Carrying amount Carrying amount Interest redemp- Exchange ratio principal 2003 2002 rate Maturity date tion price (face value/shares) Designated company
USD 166 939 000 219 279 2.00 % 20 May 2005 113.86 % USD 1 000 = 13.6141 Royal Dutch Petroleum
CHF 332 550 000 318 335 0.75 % 20 May 2005 100.00 % CHF 10 000 = 2.915451 Novartis/Syngenta
CHF 304 610 000 292 286 1.00 % 20 May 2005 100.00 % CHF 10 000 = 86.95653 UBS AG
Subordinated debt As of 31 December 2003 and 2002, respectively, the Group had outstanding subordinated debts with the following terms: In CHF million In CHF million Carrying Carrying
Banca del Gottardo, ex-warrants USD 3.375 % 1997 2004 16 13
Euribor SwAFE B.V. - Mezzanine Class B mortgage-backed notes EUR +0.650 % 2002 2079 23 21
Interest amount amount Issuer/Instrument Currency rate Year of issue Maturity 2003 2002
Banca del Gottardo - bond CHF 5.75 % 1993 2003 – 62
Banca del Gottardo - bond, ex-warrants CHF 3.00 % 1996 2003 – 66
Banca del Gottardo - medium-term notes 1) CHF 2.90 % n.a. n.a. 5 8
Swiss Life Prévoyance et Santé - bond EUR 5.56 % 1998 2003 – 48
Deferred tax expenses arising from changes in tax rates –11 0
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. 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 no deferred tax asset has been recognised as of 31 December 2003 and 2002, respectively, which will expire as follows:
Total insurance and other payables 4 779 3 792 30 Other Assets and Liabilities
Swiss Life Holding acquired an additional 878 978 SL/RA shares and increased the equity stake held in its subsidiary Swiss Life/Rentenanstalt from 92.23% as of 31 December 2002 to 99.72% as of 31 December 2003. This transaction was financed through the issuance of mandatory convertible securities (MCS II, 2003-2004) totalling CHF 341 million on 30 December 2003. 341 011 MCS II were issued in denominations of CHF 1000 each with a maturity date of 30 December 2004. The MCS II may at the option of the holder or at the option of the issuer be converted into SLH shares at any time between 9 February 2004 and 15 December 2004. Unless converted by 15 December 2004, or purchased by the issuer and cancelled, each MCS II will be mandatorily converted on 30 December 2004 into such number of shares as is equal to the maturity conversion ratio (4.65116 SLH shares per MCS II, subject to adjustment ). The holders of the MCS II are entitled to annual interest payments per MCS II at 1.0% of the nominal value and certain payments in the event of any dividends or other cash distributions made by Swiss Life Holding to its shareholders. The MCS II are accounted for as equity, as they represent a forward sale of Swiss Life Holding shares, except for the present value of the interest payments totalling CHF 3.4 million which is deferred and recognised as a liability. Share premium increased by CHF 240 million due to the issuance of the MCS II. Subsequently, 1 586 098 SLH shares equal to the number of SLH shares required under the conversion ratio were created from the conditional capital of Swiss Life Holding and transferred to the MCS Share Trust. These SLH shares are accounted for as treasury shares acquired for no consideration. With the issuance of these SLH shares, the ordinary share capital of Swiss Life Holding increased by CHF 79 304 900 and amounted to CHF 1 251 702 050 as of 31 December 2003.
Following the exchange offer, a capital increase of 10 839 704 new Swiss Life Holding shares with a nominal value of CHF 50 each was effected on 2 December 2002. One subscription right granted its holder the right to purchase one offered share at the offer price of CHF 79 per share.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 31 Equity (continued)
ratio (max. 8.96057 shares per MCS I). The maturity conversion ratio equals CHF 1000 divided by the arithmetic average of the closing prices of the SLH shares for the period of 15 consecutive trading days prior to 19 December 2005. If the closing price is less than or equal to the minimum conversion price of initially CHF 111.60, the conversion ratio is equal to the maximum conversion ratio of initially 8.96057 shares per MCS I. If the closing price is greater than or equal to the maximum conversion price of initially CHF 141.36, the conversion ratio is equal to the minimum conversion ratio of initially 7.07414 shares per MCS I. The MCS I are accounted for as equity, as they represent a forward sale of Swiss Life Holding shares, except for the present value of the interest payments of 5.25% p.a., which is deferred and recognised as a liability. Subsequent to the MCS I issue, 1 768 535 SLH shares (a number equal to the minimum number of shares required under the conversion ratio) were created and are held by the Swiss Life Group as treasury shares acquired for no consideration.
The changes in gains and losses not recognised in the income statement were as follows: Gains/losses recognised directly in equity
Total gains/losses recognised directly in equity, net of taxes and other items 537 177 714
Unrealised gains/losses arising during the period 1 386 21 – 1 407 –1 494
Foreign currency gains/losses reclassified to the income statement 66 – – 66 331
Change during the period, gross 996 4 31 1 031 764
The Group’s capital can perform several important functions, such as funding future growth and providing a protective cushion for shareholders and policyholders as well as hedging future risks. Because of the importance of adequate capital levels, the Corporate Executive Board has set certain internal capital requirements which are both qualitative and quantitative in nature. For the purposes of measuring capital adequacy, the defined Group core capital includes certain liabilities with equity characteristics (deferred Group-related funds) and minority interests.
SLH shares issued to key management under equity compensation plan (number) 42 492 800
Between January 2001 and July 2002 the relevant members of the Corporate Executive Board sold their shares in LTS to Swiss Life/Rentenanstalt at the net asset value of those shares in accordance with the terms of a shareholders’ agreement concluded with Swiss Life/Rentenanstalt in connection with the LTS capital increases.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 34 Assets under Management
Total on-balance-sheet assets managed by the enterprise 139 914 136 375
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 35 Provisions 36 Contingent Liabilities and Commitments
Unused amounts reversed during the reporting period –2 –8 –10 –7
Increase in the discounted amounts during the reporting period – – – –
Restructuring costs Due to a restructuring programme in the United Kingdom, additional amounts for redundancies totalling CHF 8 million were provided in 2003.
Further provisions were set up for termination benefits which mainly relate to the private banking business and to the life insurance business in Germany.
Guarantees, letters of credit and surety bonds The Group has issued financial guarantees and transactionrelated 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. Transactionrelated 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.
The total amount of credit commitments includes commitments to lend at fixed rates which expose the Group to interest rate risk. These commitments are entered into for restricted periods of time. As of 31 December 2003, committed principal amounts stood at EUR 76 million. The periods for which these commitments were made extend from one year to two years, and the range of committed interest rates is 4.1% to 6.8%.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 36 Contingent Liabilities and Commitments (continued)
Operating lease commitments The Group has entered into various operating leases as a lessee. Rental expenses recognised in income for these items totalled CHF 73 million and CHF 80 million for the years ending 31 December 2003 and 2002, respectively. Of these amounts, minimum lease payments totalled CHF 71 million in 2003 and CHF 80 million in 2002, while contingent rents totalled CHF 2 million in 2003.
Legal proceedings The Group is involved in various legal proceedings, claims and litigation generally relating to its insurance operations.
Assets are pledged as security for credit lines, for liabilities under repurchase agreements and mortgages on the Group’s property. The following table shows assets pledged as security for liabilities and assets subject to restriction of title as of 31 December: In CHF million 2003 2002
Total assets pledged include collateral provided under repurchase agreements and securities lending arrangements of CHF 2231 million and CHF 1072 million as of 31 December 2003 and 2002, respectively.
As the Group operates internationally, it is exposed to fluctuations in prices, interest rates and foreign exchange rates. The Group uses various investment strategies and derivatives to mitigate these risks and optimise its investment performance. The following tables present total derivatives held for hedging purposes by risk category as of 31 December: Fair value hedges
In CHF million Gains/ Gains/ Expected Contract/ Fair Fair losses losses occurrence Periods notional value value recognised transferred of hedged expected to amount assets liabilities in equity to income transactions affect income
Interest rate risk The Group is exposed to various risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its assets, liabilities and cash flows. Matching of assets and liabilities is utilised as the main method of hedging the interest rate risk associated with interest-sensitive insurance liabilities. To the extent this is not practicable, swap contracts and other instruments are used to hedge interest rate risk. The table below summarises the Group’s exposure to interest rate risks: In CHF million Earlier of expected repricing or maturity
Separate account (unit-linked) assets – – – 8 658 8 658
Non-interest bearing financial instruments – – – –9 330 –9 330
Separate account (unit-linked) liabilities – – – –8 674 –8 674
Balance sheet interest rate sensitivity gap 12 199 11 415 56 035 –74 470 5 179
Balance sheet interest rate sensitivity gap 14 836 14 468 48 439 –73 068 4 675
The carrying amounts of financial assets with variable interest rates were CHF 9760 million and CHF 9041 million as of 31 December 2003 and 2002, respectively. Financial liabilities with variable interest rates had carrying amounts of CHF 2094 million and CHF 8685 million as of 31 December 2003 and 2002, respectively.
The weighted average effective interest rates vary by major currencies and products for interest-bearing assets and liabilities.
Net balance sheet currency gap –9 688 6 006 1 329 6 630 91 307 4 675
The main method of hedging the foreign currency risks associated with insurance and other liabilities is by using forward exchange and option contracts.
The foreign currency gains and losses on derivatives designated as hedges for currency risks are recognised in the consolidated statement of income in the same period that the gains or losses are recognised on the related assets, liabilities and anticipated transactions. For 2003 and 2002, respectively, gains of CHF 78 million and CHF 167 million were recognised in income.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 38 Risk Management Activities (continued)
On Subject Not later Later than No matudemand to notice than 1 year 1-5 years 5 years rity date Total
Separate account (unit-linked) assets – – – – – 8 658 8 658
Fixed-rate financial instruments – – –6 773 –20 022 –2 890 – –29 685
Variable-rate financial instruments –945 – –401 –253 –495 – –2 094
Separate account (unit-linked) liabilities – – – – – –8 674 –8 674
Put or call provisions on certain instruments may affect the timing, amount and certainty of cash flows.
Fair value changes of both the derivative financial instruments designated as fair value hedges and the underlying assets and liabilities are recognised in income. The realised losses recognised on the derivatives designated as fair value hedges for the year ended 31 December 2003 were CHF 180 million and the realised gains on derivatives for the year ended 31 December 2002 were CHF 66 million.
In most cases, the Group’s exposure to credit risk is reflected in the amounts shown on the balance sheet. The Group enters into master netting agreements which mitigate the overall exposure to credit risk but do not qualify the assets and liabilities for offsetting under IAS 32.
Loans originated by the enterprise 25 600 31 650 25 916 32 150
Liabilities under investment contracts, customer deposits and other funds on deposit 29 352 28 086 29 353 28 009 39 Fair Value of Financial Instruments Not Presented in the Balance Sheet at Fair Value
Amortisation of other intangible assets which was previously carried under amortisation of goodwill and other intangible assets has been reclassified to the operating expenses.
In CHF million Reclas2002 sif ication 2002 as disclosed reclassif ied
A list of the principal branches, subsidiaries, associates, partnerships and joint ventures together with the country of registration and the Group’s ownership interest and voting interest, if different, is shown in note 43.
In 2003 the Swiss Life Group announced the closure of new business for the UK operations. On 16 December 2003, Swiss Life UK entered into a reinsurance arrangement with UnumProvident, which cedes 100% of the retained risk in respect of the claim portfolio of the group income protection business. Additionally, the administration of these claims is outsourced to UnumProvident. The agreements take effect as of 1 January 2004.
On 29 March 2004 the Board of Directors approved the annual financial statements and the financial report and authorised them for publication on 30 March 2004.
Authorised Core/ Consolidation Method share Non- period (first Group Direct of consoli- Cur- capital in
Advisory Services Network, Zürich Other – until 30.09.2002 – – full CHF 8 000
Dreieck Equipment Leasing, Zürich PB ° 42.8% 43.0% full CHF 100
Dreieck Leasing, Lausanne PB ° 99.5% 100.0% full CHF 15 000
Gesfid, Lugano PB – until 16.10.2002 – – full CHF 10 000
Kuhn & Seal, Nyon Other l 99.7% 100.0% full CHF 100
«La Suisse» Vie, Lausanne Life ° 99.7% 100.0% full CHF 24 000
Löwenschanze, Zürich Life – until 30.06.2002 – – full CHF 400
Long Term Strategy in liquidation, Zug Other ° from 01.01.2002 99.7% 100.0% full CHF 2 000
Oscar Weber AG, Zürich Life l 99.7% 100.0% full CHF 5 000
Swiss Life Funds, Zürich IM l 100.0% 100.0% full CHF 10 000
Swiss Life Hedge Fund Partners, Pfäffikon IM – until 01.05.2002 – – full CHF 1 500
Swiss Life Pension Services, Zürich Life l from 17.12.2003 99.7% 100.0% full CHF 250
Swiss Life Private Equity Partners, Zürich IM l 99.7% 100.0% full CHF 250
Swiss Life Real Estate Partners, Zug IM l until 30.09.2003 – – full CHF 250
Swiss Life Selection, Zürich Other l 99.7% 100.0% full CHF 250
Swissville Centers, Zürich Life l 99.7% 100.0% full CHF 2 500
Technopark Immobilien, Zürich – – 33.2% 33.3% equity CHF 40 000
LGT Swiss Life Non Traditional Advisers, Vaduz IM l 57.8% 58.0% full CHF 1 000
Crédit et services financiers (CRESERFI), Paris – – 33.3% 33.4% equity EUR 56 406
SA LABOR, Paris Other – until 01.10.2002 – – full EUR 39
SC Labor sur Saône, Roubaix Other – until 20.11.2002 – – full EUR 900
SCI Armengaud, Paris Other – until 20.11.2002 – – full EUR 16 769
SCI DYNAPIERRE, Paris Other l 99.0% 100.0% full EUR 7 317
SCI Uniphénix, Paris Other l 99.0% 100.0% full EUR 7 398
Société suisse de participations d'assurance, Paris Other l 99.7% 100.0% full EUR 792 296
Société suisse vie, Paris (branch) Life l – – full – –
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 43 Scope of Consolidation (continued)
Swiss Life Asset Management (France), Paris IM l until 23.12.2003 – – full EUR 4 950
Swiss Life Assurance et Patrimoine (formerly Société suisse ADG), Paris Life l 99.0% 99.7% full EUR 75 000
Swiss Life Holding (France), Paris Other – until 11.10.2002 – – full EUR 37
Schweizer Leben Pensions Management, München Other l 99.7% 100.0% full EUR 150
Zwitserleven Vermogensbeheer (formerly Zwitserleven Ziekte- en Ongevallenverzekering), Amstelveen Life l 99.7% 100.0% full EUR 2 269
European District Properties Three, Sint Stevens Woluwe – – from 01.01.2002 49.9% 50.0% equity EUR 62
Swiss Life Asset Management (Belgium), Vilvoorde IM l from 19.04.2002 99.7% 100.0% full EUR 500
Swiss Life (Belgium), Bruxelles (branch) Life l – – full – –
Swiss Life Immo-Commerce (Belgium), Bruxelles Other l 99.7% 100.0% full EUR 9 965
Swiss Life Immo-Cross Roads, Bruxelles Other l from 31.07.2002 99.7% 100.0% full EUR 64
Swiss Life Immo-Midi (Belgium), Bruxelles Other l 99.7% 100.0% full EUR 2 200
Swiss Life Immo-Techno Center I, Bruxelles Other l from 01.01.2003 99.7% 100.0% full EUR 583
Swiss Life Immo-Techno Center II, Bruxelles Other l from 01.01.2003 99.7% 100.0% full EUR 285
Gottardo Equity Fund (Lux) Management, Luxembourg PB ° 99.5% 100.0% full CHF 200
SB-Gotthard I Fund Management, Luxembourg PB ° 99.5% 100.0% full CHF 650
Swiss Life Immo-Arlon, Strassen Other l 99.7% 100.0% full EUR 1 000
Swiss Life Multi Funds (Luxembourg) Management, Luxembourg PB ° 99.5% 100.0% full CHF 200
Alpine Holdings, St. Peter Port-Guernsey PB ° 99.5% 100.0% full USD 600
Swiss Life Asset Management (UK), London IM l until 22.12.2003 – – full GBP 10 000
Swiss Life (UK) Group, Sevenoaks Life ° 99.7% 100.0% full GBP 200 000
Swiss Life Asset Management (España), Madrid IM l until 04.12.2003 – – full EUR 2 110
Swiss Life (Italia), Milano Life ° 99.7% 100.0% full EUR 5 170
Gesfid International, Nassau PB – until 16.10.2002 – – full USD 10 000
Gotthardfin, Nassau PB ° until 27.08.2003 – – full CHF 10 000
Swiss Life Finance, Tortola Life l 99.7% 100.0% full USD 50
Adamed Investments, George Town IM l from 01.01.2002 72.7% 100.0% full USD 0
Adroit Investment Offshore (AIO), Grand Cayman Life ° 99.7% 100.0% full CHF 0 EUR 0
Adroit Private Equity Offshore (APEO), Grand Cayman Life ° 99.7% 100.0% full CHF 0 USD 0
SL Absolute Return Strategies I, Grand Cayman IM – until 01.05.2002 – – full USD 50
Swiss Life Credo Fund I, Grand Cayman IM – until 01.05.2002 – – full USD 50
Swiss Life Flex, Grand Cayman IM – until 01.05.2002 – – full EUR 49 USD 99
Swiss Life High Yield Strategies, Grand Cayman IM – until 01.05.2002 – – full USD 50
Swiss Life Investment Strategies, Grand Cayman IM – until 01.05.2002 – – full USD 55
Gottardo Asset Management (H.K.), Hong Kong PB ° until 02.09.2003 – – full HKD 5 000
Financial Strategy (Sam), Monaco – – 19.9% 20.0% equity EUR 750
CAASU, Montevideo PB ° until 25.06.2003 – – full UYP 1 000 1) Segment (IM = Investment Management, PB = Private Banking)
Swiss Life Group . Financial Statements 2003 . Report of the Group Auditors
As auditors of the group, we have audited the consolidated financial statements (consolidated statement of income, consolidated balance sheet, consolidated statement of cash flow, consolidated statement of changes in equity and notes to the consolidated financial statements, pages 71 to 143) of the Swiss Life Group for the year ended 31 December 2003.
In our opinion, the consolidated financial statements give a true and fair view of the financial position, the results of operations and the cash flows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
In its second financial year, Swiss Life Holding generated a profit of CHF 29.3 million as opposed to a loss of CHF 2.2 million in the prior period from 17 September to 31 December 2002.
Swiss Life Holding . Financial Statements 2003 . Review of Operations
Swiss Life Holding . Financial Statements 2003 . Statement of Income
Assets and liabilities are stated in the balance sheet in accordance with the provisions of the Swiss Code of Obligations (OR). Swiss Life Holding was founded in 2002.
The figures in the statement of income for the previous year reflect the period from 17 September 2002 to 31 December 2002.
Major shareholders In accordance with documents at Swiss Life’s disposal, the following shareholders or groups of shareholders connected to one another held more than 5% of Swiss Life Holding’s registered share capital of
In CHF thousand 2003 2002 Currency Share capital Direct share Currency Share capital Direct share
Swiss Life Funds, Zurich CHF 10 000 100.000% CHF 10 000 100.000 %
Swiss Life Cayman Finance, Grand Cayman CHF 0 100.000% CHF 0 100.000 %
Swiss Life Asset Management, Zurich CHF 250 100.000% CHF – –
The company’s ordinary share capital came to CHF 1 083 970 400 (21 679 408 shares) following the capital increase. Conditional capital in existence at this point in time came to an aggregate par value of CHF 270 992 600 (5 419 852 shares). On 19 December 2002 Swiss Life Cayman Finance Ltd, Cayman Islands, issued mandatory convertible securities to the amount of CHF 250 million. Swiss Life Cayman Finance Ltd then converted the minimum number of deliverable securities.
Issuance of mandatory convertible securities 79 304 900 88 426 750
Issuance of mandatory convertible securities 240 230 403 90 471 735
Net result for the year 29 346 454 –2 188 276
Swiss Life Holding . Financial Statements 2003 . Appropriation of Net Result
The net result for the year amounts to CHF 29 346 454. The Board of Directors proposes to the General Meeting of Shareholders to appropriate the available earnings in
In our opinion, the accounting records and financial statements and the proposed appropriation of the result shown in the balance sheet comply with Swiss law and the company’s articles of incorporation.
Swiss Life Group . Annual Report 2003 . Dates and contacts 154 Caution regarding forward-looking statements