28 Banking 29 Investment Management 30 Swiss Life Network 37 Corporate Governance 56 Responsible Corporate Conduct 65 Embedded Value 67 Risk Management 70 Asset and Liability Management
Segment result Direct written premiums by type of insurance Gross written premiums, policy fees and deposits received by country
1) The 2003 f igures were not adjusted to the f inancial reporting requirements as at 1 January 2005.
– Profit from operations improved by 23% to CHF 1258 million
Swiss Life in brief The Swiss Life Group is one of Europe’s leading providers of pension and life insurance products. The Swiss Life Group offers individuals and companies comprehensive advice across a broad range of products via agents, brokers and banks in its domestic market, Switzerland, where it is market leader, and selected European markets. Multinational companies are serviced with tailor-made solutions by a network of partners in over 60 countries and regions. With Banca del Gottardo, the Swiss Life Group is also active in private banking. The bank, with its head office in Lugano, has an extended national and international network and around CHF 36 billion in customer assets under management.
Swiss Life Holding, registered in Zurich, dates back to Schweizerische Rentenanstalt founded in 1857. Shares of Swiss Life Holding are listed on the SWX Swiss Exchange (SLHN). The Swiss Life Group employs a staff of around 9000.
The implementation of our strategy continues to proceed according to plan. Our company has developed into a focused European life insurer over the past several years. The turnaround achieved in 2003 and 2004 was quite impressive. In 2005 and 2006, we made good progress towards our stated goal of sustained, profitable growth.
Further improvements in earning power and efficiency The strategic and operational progress is clearly reflected in the results for the 2006 financial year. Profit went up by 9% to CHF 954 million thanks to the rise in earning power and the enhanced operational efficiency. The quality of earnings improved as well. The contribution of the financial result declined by CHF 368 million, primarily because fewer capital gains were realised on bonds, but efficiency gains and the good risk experience lifted the basic insurance result to CHF 598 million compared to CHF 148 million in the previous year.
Growing in attractive market segments The Swiss Life Group increased its gross written premiums by another 9% in 2006 to CHF 22.1 billion. The growth momentum in our international markets showed no sign of weakening.
Pensions and long-term savings is a dynamic market with sustained long-term growth potential. Increasing life expectancy and declining birth rates are forcing policymakers to make adjustments to state social security systems. This, in turn, is leading to a shift from publicly to privately financed pensions and increasing the demand for personal retirement and savings plans. High growth rates are the result – and not only in emerging markets. Pension plan assets in Western Europe, for example, are projected to double by 2015.
Positioning Swiss Life has developed into a focused European life insurer in recent years. It currently holds a roughly 5% share in its markets and is the only leading international player that concentrates mainly on life insurance and pension and retirement solutions. This puts Swiss Life in an outstanding position to continue to benefit to an above-average extent from the fast growing pensions market.
The strong Swiss Life brand is an essential part of this positive development. Branding is a continuous, marketspecific process. Swiss Life received the 2006 “ReBrand 100 Best of Award” for its campaign launched in 2004. The jury acknowledged the company’s rebranding as a key factor in its successful turnaround. Swiss Life was the first Swiss company to win a “Best of Award”, the highest award conferred in the competition, with an international jury assessing the effectiveness of brand repositioning and redesign in meeting strategic goals.
Expertise: We offer first-class solutions for pensions and long-term savings. This expertise is based on our proven professional competence and many years of experience.
To realise these targets, Swiss Life’s strategic focus is on growth, efficiency and leadership.
Growth Swiss Life aims to benefit from the growing pensions market and establish itself as the preferred provider of solutions for individuals and companies in the markets in which it operates. A steady increase in customer satisfaction is an important driver for this. In the life insurance business the Swiss Life Group wants to maintain its leading position while reinforcing its development of pension products and services. It wants to further sharpen its focus on the more sophisticated customer segments. Distribution in the different markets will be further diversified to create additional contact points for customers. Swiss Life expects to grow at least 1% faster than the market average in the countries in which it operates as a result of these efforts.
In keeping with its strategy of focusing on selected core markets, Swiss Life sold its two insurance companies active in Italy. The Swiss Life Network will continue to offer occupational pension solutions in Italy for large international accounts.
Swiss Life Group . Review of Operations 2006 . Strategy 13Efficiency Swiss Life intends to further improve its basic profitability in the insurance business while reducing its reliance on the financial result. A basic profitability of CHF 500 million was targeted for 2008. This target was already exceeded in 2006, due to the alignment of premiums with costs and risks and strict cost management. Operating costs showed no increase despite the substantial growth in premiums of 9% and the ongoing strategic initiatives.
In Switzerland, further savings will be achieved over the next few years by consolidating and standardising internal IT systems and by simplifying and optimising operational processes. Outside Switzerland efficiency gains were achieved primarily through greater cross-border cooperation. Various Group-wide initiatives in the areas of product development, process optimisation and expansion of distribution channels should unlock growth potential and facilitate further efficiency gains at the international level.
Swiss Life is committed to finding sustainable solutions for the political debate surrounding retirement provisions. In addition to Switzerland, where it has traditionally played a key role in forming political opinion, the company is now more active in its international markets as well. In Belgium, for example, the company hosts the annual “Swiss Life Pension Day”, at which experts from various areas discuss the issue of retirement planning. In Germany, Swiss Life encourages dialogue with the key players in the worlds of politics, economics and media through its “Salon Palais Leopold” range of events. In addition, it supports the EuropVital e.V. senior citizens association, whose main purpose is to uphold the social and political interests of its members.
The section on the insurance business from page 21 contains further details of market-specific developments.
Summary of Group Results The Swiss Life Group generated a profit of CHF 954 million and a return on equity of 12.2% in 2006. Thanks to operational advances, Swiss Life not only increased its profit, but also significantly enhanced the quality of earnings.
Efficiency enhanced further Due to the good risk experience, insurance benefits fell slightly to CHF 13.8 billion compared with the previous year. At CHF 2.3 billion, total policyholder participation matched the previous year’s level. Interest expenses (excluding borrowing costs) went up 5% to CHF 908 million. Despite the strong growth in premiums, operating costs remained stable at CHF 2.0 billion, which indicates another increase in efficiency. All in all, operating expenses fell 5% to CHF 3.2 billion, which was partly due to the sharp drop in depreciation and amortisation expense. Following a tax credit of CHF 21 million in the previous year, tax expenses totalled CHF 128 million in the period under review. The low tax rate was the result of special situations in the Netherlands and France.
Swiss Life Group . Review of Operations 2006 . Insurance 21Insurance The insurance segment generated a result of CHF 1105 million, to which
Switzerland – as the home market – contributed CHF 668 million. The above-average growth continued abroad, with gross written premiums up 16%.
Switzerland According to estimates by the Swiss Insurance Association (SIA), premiums in the Swiss Life insurance market fell by 1.9% to CHF 27 billion. This decrease on last year was primarily due to the newly acquired autonomy of several Vorsorgewerke (employee benefit units), in addition to low interest rates, which adversely affected the demand for individual insurance.
Net insurance benefits and claims fell by 3% to CHF 7719 million. This reduction stems from the dropping of the non-life business, the positive risk experience and the decreased need for provisions for future risk. In keeping with the decline in the financial result and “other income”, policyholder participation for 2006 was down slightly on the previous year, but – at CHF 864 million – remained at a high level.
Swiss Life Group . Review of Operations 2006 . Insurance 23France The growth trend in the French life insurance market continued in 2006. Premium income was up 17% to EUR 141 billion. However, the high level of market growth can be partly explained by switchings from building society and traditional life insurance products to unit-linked products as a result of a change in legislation. Adjusted for this special factor, the market growth was 9%. Unit-linked insurance policies in particular remained in great demand. The rise in these products amounted to 45%. Premium income in health insurance rose by 6% to EUR 14 billion. Swiss Life’s market share for life and health insurance totalled 3%.
The company grew its gross premium income in the French life insurance business by 12% (11% in local currency) to CHF 5932 million, thus lying above the adjusted market growth. The growth in unit-linked life insurance policies was also very pleasing, surging 158% (154% in local currency ) to CHF 1979 million and clearly outperforming the market. Swiss Life increased its premium volume in health insurance by 10% (8% in local currency) to CHF 1691 million.
Swiss Life in France is well positioned to benefit to an above-average degree from the continued growing demand for financial provisions. In addition to its own, highperformance distribution channel, Swiss Life will continue to strengthen its relationships with private banks and independent asset managers.
The increase in premium volume stems mainly from group business. Swiss Life is a leader in occupational pension provision and intends to further expand its activities in this area.
Income increased by a total of 3% to CHF 2868 million on the back of the premium growth and a higher financial result. The company used the good stock market year to realise gains on equity investments.
Swiss Life increased its gross written premiums by 19% (18% in local currency) compared with the previous year, clearly outpacing the market’s growth. The strong advance in premium income was also due to a contract concluded with a large pension fund, which led to a one-off premium of CHF 204 million. An increasing number of autonomous pension funds in the Netherlands are looking for the security of a life insurer. Swiss Life’s know-how and service quality in this area makes it one of the leading providers.
Swiss Life Group . Review of Operations 2006 . Insurance 26 Belgium For Swiss Life in Belgium, a highlight of the 2006 financial year was the merger of Swiss Life (Belgium) and Zelia S.A. into Swiss Life (Belgium) S.A., which was successfully completed in July.
A premium tax on individual insurance contributions, which was introduced on 1 January 2006 led to a fall in demand for life insurance in the reporting period. Swiss Life’s gross premium income came to CHF 742 million (–2%). The 19% growth in group insurance helped to keep the overall premium decline within bounds.
The financial result, at CHF 184 million, was CHF 20 million lower than the previous year, when the gains realised on the sale of bonds in connection with asset and liability management had a positive impact. This also adversely affected the segment result, which came to CHF 5 million.
Operating expenses increased by 7% to CHF 123 million. The rise was due to the one-off additional costs connected with the merger of the Belgian insurance business mentioned above.
On 9 November 2006 at the second annual “Swiss Life Pension Day”, politicians and experts met to discuss the challenges facing a sustainable and financially viable pension system. The event, in addition to other targeted communication measures, enabled Swiss Life to establish itself as the opinion leader in Belgium on this important subject.
Luxembourg In Luxembourg, Swiss Life’s gross written premiums surged 78% to CHF 841 million (75% in local currency). This gratifying development can be primarily attributed to the cross-border business with structured insurance solutions for high net worth individuals. The local group insurance market also contributed to the premium growth. Swiss Life in Luxembourg is one of the leading providers in both these areas.
Income increased by 9% to CHF 71 million. This increase was primarily due to higher earned premiums and policy fees. Expenses for net insurance benefits and claims were down 35% at CHF 26 million. In 2005, the increased reserves requirement in connection with higher life expectancy adversely affected the result. Expenses went down 19% overall to CHF 61 million, resulting in a segment result of CHF 10 million.
Gross written premiums, policy fees and deposits received 742 754 –1.6%
Swiss Life in Luxembourg was named “Best provider of retirement solutions” for the fourth year in a row. International cooperation, in particular with Swiss Life (Liechtenstein) and Banca del Gottardo, is being further strengthened with a view to the targeted acquisition of high net worth customers.
Other The results realised in Liechtenstein and Italy were presented together in this reporting period for the last time.
Liechtenstein In Liechtenstein Swiss Life reported gross written premiums for 2006 totalling CHF 646 million. This represents a quadrupling of premium volume vis-à-vis the previous year. The positive trend in premiums demonstrates that Swiss Life’s offering is meeting an increasing customer requirement. Policies under Liechtenstein law make it possible for high net worth individuals to place their assets in a life insurance policy and thus profit from the attractive taxation framework as well as advantages with regard to asset growth and succession planning.
Gross written premiums, policy fees and deposits received 841 473 77.8%
Italy Swiss Life generated gross written premiums of CHF 19 million in Italy for 2006. The sale of both Italian subsidiaries to the Italian banking group bancApulia, announced in August 2006, was completed at the end of January 2007. Due to currency factors, a loss on deconsolidation amounting to CHF 11 million was realised.
The Banking segment result was primarily generated by Banca del Gottardo and represented an increase of CHF 56 million (51%) vis-à-vis the previous year.
Net income was down 9% to CHF 447 million compared to the previous year. This decline is largely due to the sale of Dreieck Industrie Leasing and Banca del Gottardo (Monaco), two subsidiaries that were no longer part of core business activities.
Business expenses were reduced by 3% to CHF 325 million. Excluding special factors, the cost/income ratio remained at the previous year’s level of 65%.
The special factors mainly pertained to a net capital gain of CHF 72 million from the sale of companies which were no longer part of core business activities, in addition to costs, provisions and impairments of CHF 44 million related to strategic projects and CHF 24 million in provisions following a reassessment of credit and process risks. These figures also take tax effects into consideration.
The Investment Management segment is primarily responsible for managing Swiss Life’s insurance assets in Switzerland and third-party mandates. The main companies grouped under Swiss Life Investment Management Holding AG include key firms in this segment, namely, Swiss Life Asset Management, Swiss Life Funds AG and Swiss Life Funds Business AG, as well as two companies that are active in the real estate sector, Swiss Life Property Management AG and Livit AG. The key objective of the Investment Management segment is to generate an optimal return on the insurance portfolio while maintaining a competitive cost structure. Furthermore, the available know-how should be applied to the management of thirdparty mandates, thereby generating additional income.
Swiss Life Investment Management Holding AG was founded in 2005 to simplify Investment Management’s operational structures and to enhance the transparency and efficiency of the asset management activities. In 2006, Swiss Life transferred some tasks, such as the processing of securities transactions and the exercise of control functions, from the Insurance segment to the Investment Management segment to further optimise operational structures. Approximately 70 employees have been transferred as a result of these measures. The Investment Management segment companies receive compensation for managing the insurance assets and providing other services on the basis of service agreements. Due to these changes, a year-on-year comparison of segment results is not very informative. For example, income for 2006 amounted to CHF 212 million while expenses amounted to CHF 169 million, an increase of 18% and 42%, respectively, vis-à-vis the previous year. Continued growth in income and the segment result is expected in the years ahead. Swiss Life also adjusted the method used to calculate assets under management, which resulted in the elimination of certain double counts and the exclusion of the real estate assets managed by Livit AG. On a comparable basis, assets under management were up 13% to CHF 74.4 billion, of which CHF 71.1 billion consisted of insurance assets and CHF 3.3 billion of third-party mandates.
After optimising the Investment Management segment structures in 2005 and 2006, the primary goal now is to fully exploit the existing income and synergy potential. Another major aim is to enhance efficiency by intensifying cooperation throughout the entire Group. In the coming years, investments will also be made to improve the asset management infrastructure to ensure that these goals are reached.
CHF 74.4 billion, of which CHF 71.1 billion consisted of insurance assets and
The Swiss Life Network offers employee benefit solutions worldwide for employees of international companies. These solutions are tailored to the country-specific requirements and risk profile of each customer. The services are based on bundling together, or pooling, local group contracts. In this way, multinational corporate clients benefit from a greater risk spread and the ability to centrally coordinate and optimise the benefits and costs of their employee benefit plans around the world. Companies within the SwissLife Group and partnerships with leading local insurance companies ensure global coverage.
A key strategic reassessment took place in the year under review. The Swiss Life Network intends to offer more products that go beyond pure risk coverage and incorporate a stronger savings component. The Network’s international presence will be extended through forging additional partnerships with local insurance providers. Beyond western Europe and the USA, there is a special focus on Asia and eastern Europe, where the Network’s presence has already been increased during the reporting period and will continue to develop throughout 2007. The Swiss Life Network has set itself the goal of achieving significant growth in new business over the next three years, generating annual double-digit growth rates. It will also continue to intensively manage and expand its existing business.
The newly-established Swiss Life Network Board brings together representatives from Network partners with senior executives from the Swiss Life Network to discuss developments in international employee benefits. The aim is to recognise and analyse trends in the global employee benefit market early on, and to create suitable responses.
Swiss Life Network The Swiss Life Network specialises in employee benefit solutions for multinational companies. The Network is made up of 52 partners and serves around 430 multinationals in over 60 countries. In the year under review, the Swiss Life Network generated business amounting to CHF 1.6 billion.
The dark-shaded areas on the world map represent the 67 countries and regions in which the Swiss Life Network provides services through its Network partners.
Swiss Life Group . Review of Operations 2006 . Swiss Life Network
Ingrid Baldinger works as a construction manager at GMS Partner AG and headed one of Swiss Life’s construction projects in Zurich.
Openness is a must for my work. I am the contact person for many different people: building contractors, architects, builders, tradesmen, officials. I listen to their ideas and try to implement them as best I can. The size and speed of construction projects calls for open and direct dialogue with all participants. This creates trust, on which I can build.
This report shows the essential features of corporate governance at the Swiss Life Group. The breakdown largely follows the Directive on Information Relating to Corporate Governance issued by the SWX Swiss Exchange, which came into force on 1 July 2002.
Group structure and shareholders Group structure Swiss Life Holding is a public limited company incorporated under Swiss law with its registered office in Zurich. It was established in 2002 and has been listed on the SWX Swiss Exchange since 19 November of that year. Swiss Life Holding brings together all the Swiss Life Group companies and activities under a single holding company umbrella. The holding company structure makes it easier to effect investments, enter into partnerships or cooperation agreements and execute capital market transactions. Transparency is also improved by separating the interests of shareholders from those of policyholders.
The company is committed to openness and transparency in the context of responsible management.
Shareholders On 16 January 2006, Premafin Finanziaria S.P.A. reported that it had fallen below the 5% limit notifiable under stock exchange law. It stated that the group consisting of Premafin Finanziaria S.P.A. Rome; Fondiaria-SAI SPA, Florence; Fondiaria Nederland BV, Amsterdam; and Milano Assicurazioni S.P.A., Milan, which had held a 9.93% stake (3 141 026 shares) in Swiss Life Holding on 8 June 2004, no longer held any Swiss Life Holding shares. No further disclosure reports were received in the year under review.
Shareholder structure On the balance sheet date a total of 194 578 shareholders and nominees were listed in the Swiss Life share register, of which about 5000 are institutional shareholders. Taken together, the shareholders entered in the share register held over 50% of the shares issued. Around half of these shares were owned by shareholders domiciled in Switzerland; almost a quarter of the registered shares were in private hands.
Capital structure Capital and changes in capital The capital structure of Swiss Life Holding was as follows on the balance sheet date: – Ordinary share capital: CHF 1 384 827 029, divided into 33 776 269 fully paid registered shares with a par value of CHF 41 each
– Conditional share capital: CHF 150 374 511, divided into 3 667 671 registered shares with a par value of CHF 41 each
Since the establishment of Swiss Life Holding on 17 September 2002 with a share capital of CHF 250 000, divided into 5000 registered shares with a par value of CHF 50 each, a number of capital market transactions have been conducted. In a first step, this included the offer presented to the then Swiss Life/Rentenanstalt shareholders to exchange their registered shares for Swiss Life Holding registered shares on a 1:1 basis. Around 92% of Swiss Life/Rentenanstalt’s shareholders accepted the public exchange offer, and on 18 November 2002 the Swiss Life Holding share capital was increased, through taking delivery of 10 834 704 Swiss Life/Rentenanstalt registered shares with a par value of CHF 50 each, to shares).
The Swiss Life Holding General Meeting on 18 November 2002 approved the creation of conditional capital of no more than CHF 270 992 600 through the issuance of a maximum number of 5 419 852 registered shares to be paid in full, with a par value of CHF 50 each. The conditional capital was (and the remaining conditional capital is) at the disposal of the holders of conversion or option rights granted by Swiss Life Holding or by companies belonging to the Group in connection with existing and new loan debentures or similar bonds issued by Swiss Life Holding and companies belonging to the Group. The shareholders are excluded from subscription rights, however their advance subscription rights remain safeguarded. The Board of Directors sets the terms of conversion and option conditions.
To partially finance the purchase of Banca del Gottardo from the Swiss Life/Rentenanstalt insurance company, the Annual General Meeting of Shareholders on 18 May 2004 created CHF 417 234 000 in authorised capital and authorised the Board of Directors to increase the share capital by a maximum of 8 344 680 fully paid registered shares with a par value of CHF 50 each, at the latest by 18 May 2006. At the same General Meeting the shareholders also resolved to increase the existing conditional capital by CHF 100 000 000 or 2 000 000 registered shares with a par value of CHF 50 each, bringing it to CHF 203 260 950, divided into 4 065 219 registered shares with a par value of CHF 50 each. On 2 June 2004 the Board of Directors decided to increase the ordinary capital out of the authorised capital by CHF 417 234 000 to CHF 1 668 936 050, divided into 33 378 721 registered shares with a par value of CHF 50 each, thus reducing the authorised capital to nil.
In conjunction with the adjustments of the conversion rate of the MCS I (2002–2005) and MCS II (2003–2004) mandatory convertible securities, which were required following capital dilution as a result of the capital increase, 397 078 registered shares with a par value of CHF 50 each were created from conditional capital on 30 June 2004. The ordinary share capital consequently increased to shares with a par value of CHF 50 each, while conditional capital decreased by CHF 19 853 900 to CHF 183 407 050, divided into 3 668 141 registered shares with a par value of CHF 50 each.
On 10 May 2005 the Swiss Life Holding General Meeting resolved to pay a dividend of CHF 4 per registered share in the form of a repayment of par value. As a result of the corresponding reduction in capital, the share capital went down to CHF 1 553 687 628, divided into 33 775 818 registered shares with a par value of CHF 46 each. Conditional capital was reduced accordingly to CHF 168 733 612, divided into 3 668 122 registered shares with a par value of CHF 46 each.
Again as a result of conversions of the 0.625% convertible bond issue (2004–2010), another 260 registered shares were created from conditional capital in 2005. Swiss Life Holding’s ordinary share capital as at 31 December 2005 therefore amounted to CHF 1 553 699 588, divided into 33 776 078 fully paid registered shares with a par value of CHF 46 each. The conditional capital amounted to CHF 168 721 652, divided into 3 667 862 registered shares with a par value of CHF 46 each.
In the year under review, the 0.625% convertible bond (2004-2010) was also partially converted to create 191 new registered shares. Ordinary share capital increased as a result to CHF 1 384 827 029, divided into 33 776 269 registered shares of CHF 41 each, and the conditional capital was reduced accordingly to CHF 150 374 511, divided into 3 667 671 registered shares of CHF 41 each.
There are no outstanding shares with either increased or limited voting rights, privileged or restricted voting rights, privileged dividend entitlements or other preferential rights. Moreover, no registration restrictions apply to Swiss Life Holding shares.
Convertible bonds and options One convertible bond issue was outstanding on the balance sheet date, the SwissLife Holding 0.625% issue (2004–2010) amounting to CHF 317 000 000. The specific conditions attached to these convertible securities can be found in the Financial Statements (note 23) as well as in the issue prospectus of
Staggered terms of office When the Board of Directors was reconstituted in 2003, the new members were given staggered terms of office to ensure that, as far as possible, an equal number of members will come up for re-election every year. If a member steps down during his or her term of office, the successor will serve only for the rest of that term. This ensures that the continuity of the Board of Directors is maintained.
There are no mutual cross-directorships with boards of directors of listed companies. Acceptance of an appointment to the board of directors of other companies by members of the Swiss Life Holding Board of Directors requires the permission of the Board of Directors. Information on additional board mandates held by individual members of the Board of Directors is presented in the following pages.
Investment and Risk Committee 1) Member of the Board of Directors of Swiss Life/Rentenanstalt since 2000
Other appointments: – Roche Holding AG, Basel, Vice Chairman of the Board of Directors and Independent Lead Director – Swiss Air Transport Foundation,
Other appointments: – economiesuisse, Zurich, Chairman – Bank Sal. Oppenheim jr. & Cie. (Schweiz) AG, Zurich,
Volker Bremkamp Born 1944, German national Member of the Board of Directors
Volker Bremkamp will be put forward for re-election at the Swiss Life Holding Annual General Meeting of Shareholders on 8 May 2007.
Paul Embrechts Born 1953, Belgian national Member of the Board of Directors
Paul Embrechts received his master’s degree in mathematics from the University of Antwerp (Belgium) in 1975 and his doctorate (Dr. sc. [Math.]) from the Catholic University of Leuven (Belgium) in 1979. Between 1975 and 1983 he held a post as Research Assistant at the Catholic University of Leuven. From 1983 to 1985 he was Lecturer in Statistics at Imperial College, University of London, moving to a position as Lecturer at the University of Limburg (Belgium), which he held from 1985 to 1989. In 1989 he was appointed Professor of Mathematics at the Swiss Federal Institute of Technology (ETH) in Zurich.
Rudolf Kellenberger Born 1945, Swiss national Member of the Board of Directors
Henry Peter Born 1957, Swiss and French national Member of the Board of Directors
Henry Peter completed his studies in law at the University of Geneva in 1979, and in 1981 he was called to the Geneva bar. Following a pupillage in Geneva, a period of study as a visiting scholar at the University of California at Berkeley and legal work in Lugano, he obtained his PhD at the University of Geneva in 1988. Since 1988 he has been a partner in a law firm in Lugano, now Peter · Bernasconi & Partners. In addition, he has been Professor of Business Law at the University of Geneva since 1997. Henry Peter frequently acts as arbitrator in commercial and sport cases. He has been a member of the Swiss Takeover Board since 2004, and a member of the Sanction Commission of the SWX Swiss Exchange since 2007.
Member of the Board of Directors – Ferrari (Suisse) SA, Nyon,
Peter Quadri Born 1945, Swiss national Member of the Board of Directors
Swiss Life Group . Review of Operations 2006 . Corporate Governance
Peter Quadri will be put forward for re-election at the Swiss Life Holding Annual General Meeting of Shareholders on 8 May 2007.
Member of the Board of Trustees – Fondazione Nerina Bellingeri ved. Gualdi, Lugano,
Member of the Board of Trustees – Fondazione Rudolf Chaudoire, Lugano,
Member of the Executive Committee – St. Gallen – Appenzell Chamber of Commerce and
The Board of Directors meets as often as business requires, but at least six times a year as a rule. Meetings are generally called by the Chairman of the Board of Directors. However, any member of the Board of Directors may request that a meeting be called, as can the Corporate Executive Board. In addition to the members of the Board of Directors, the Group CEO generally also attends the meetings or parts of meetings in an advisory capacity, as do other members of the Corporate Executive Board when required.
Three standing committees support the work of the Board of Directors as a whole: the Chairman’s Committee, the Investment and Risk Committee, and the Audit Committee. The Board of Directors may establish other committees to be entrusted with special tasks.
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, and takes due note of their reports and recommendations.
As a rule, the Group CFO and the Head of the Corporate Internal Audit attend the Audit Committee meetings or parts of meetings in an advisory capacity. The Group CEO may attend the meetings of the Audit Committee (without voting rights). Representatives from the external audit services are also regularly invited (cf. also “Supervisory and control instruments vis-à-vis the auditors”, page 53). In addition, further members of the Corporate Executive Board or in-house specialists may also be invited to attend.
The Chairman of the Board of Directors may participate (without voting rights) in the meetings of the Corporate Executive Board. He receives the invitations and the minutes of the meetings of the Corporate Executive Board. The Chairman of the Board of Directors attended the majority of the Corporate Executive Board meetings or parts of meetings in the year under review.
Corporate Internal Audit, which reports directly to the Chairman of the Board, represents a suitable means of independent monitoring and information gathering for the Board of Directors. Moreover, regular meetings take place between the Chairman of the Board of Directors and the Head of Corporate Internal Audit as well as between the Chairman of the Audit Committee and the Head of Corporate Internal Audit.
The performance of the Corporate Executive Board and the contributions made by its members are regularly discussed and evaluated by the Chairman’s Committee and the Board of Directors with no members of the Corporate Executive Board being present. The acceptance of directorships and senior political or military roles by members of the Corporate Executive Board is subject to the consent of the Chairman of the Board of Directors.
Each member of the Corporate Executive Board has responsibility for a Group division. The members of the Corporate Executive Board are responsible for setting 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 valid for the Group as a whole.
Members of the Corporate Executive Board On 31 December 2006, the Corporate Executive Board of Swiss Life Holding was composed of the following members: Member of the Corporate Executive
Rolf Dörig Born 1957, Swiss national Group Chief Executive Officer (Group CEO)
Rolf Dörig laid the groundwork for his professional career by obtaining a doctorate in law (Dr. iur.) from the University of Zurich before being called to the bar in 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 Credit Suisse Group. As a member of the Executive Board, he was assigned responsibility for Swiss Corporate and Retail Banking from 2000 onwards. In spring 2002 he became Chairman Switzerland for Credit Suisse Group.
Bruno Pfister Born 1959, Swiss national Chief Executive Officer International (CEO International)
Chairman of the Economics and Finances Committee – Castle Alternative Invest AG, Freienbach,
Member of the Board of Directors – Member of the Admission Board and
– Board of Trustees of WBZ Reinach, Canton of Basel-Land (Wohn- und Bürozentrum für körperlich Behinderte)
Reto Himmel Born 1956, Swiss national Group Chief Technology & Operations Officer (Group CTO)
Reto Himmel has been Group Chief Technology & Operations Officer (Group CTO) for the Swiss Life Group since January 2003.
Member of the Board of Directors – The Sustainability Forum, Zurich,
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 the 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 and informs the entire Board of Directors accordingly.
With a view to the upcoming 2007 equity compensation programme, the Chairman’s Committee of the Board of Directors has decided that the retention component (factor of 0.5) which was appropriate during the turnaround phase will be rescinded in future so that the number of PSUs could drop to zero after three years. The maximum possible factor of 1.5 will be maintained. Furthermore, the programme will continue to be based on two performance criteria, each with a 50% weighting. One criterion is the Total Shareholder Return on Swiss Life Holding shares (TSR Swiss Life Holding), whereby a performance in excess of 20% is required for the subscription right to share allocation to arise. The TSR of the company’s own shares will also be compared with the TSR of the companies included in the Dow Jones STOXX 600 Insurance Index (TSR outperformance); on the basis of this criterion, a subscription right arises if the performance is above the first quartile in comparison with the companies in question on expiry of the three-year period.
Options No share options have been granted in the Swiss Life Group since 2003. Options on shares of Swiss Life/Rentenanstalt were allocated to the members of the Board of Directors and Corporate Executive Board in 2000, 2001 and 2002 in the context of the share option plan introduced in 2000 for the entire senior management of the Swiss Life Group, and were subsequently converted into options on Swiss Life Holding shares. At the end of 2002 this share option programme was discontinued with effect from 2003. The share options allocated in the years 2000 and 2001 expired worthless at the end of March 2004 and the end of May 2006. In connection with the exchange of Swiss Life/Rentenanstalt shares for shares of Swiss Life Holding and the capital increases in autumn 2002 and spring 2004 as well as the reductions in par value of the Swiss Life Holding shares in August 2005 and 2006, the parameters of the options allocated in 2001 and 2002 were adjusted in accordance with Eurex guidelines. No other changes have been made to the allocated share options.
Allotment year 2006 No share options issued 2005 No share options issued 2004 No share options issued 2003 No share options issued
Additional honorariums and remunerations During the period under review no additional honorarium or remuneration payments were made to members of the Board of Directors or the Corporate Executive Board.
Loans On the balance sheet date, there were no loans outstanding to members of the Board of Directors or members of the Corporate Executive Board.
Highest total compensation, Board of Directors The highest total compensation for a member of the Board of Directors in 2006 was paid to Bruno Gehrig as Chairman of the Board. The total compensation paid in the year under review is as follows: Compensation1) CHF 615 000
Highest total compensation, Corporate Executive Board The highest total compensation for a member of the Corporate Executive Board was paid to Rolf Dörig as Group CEO. The total compensation paid in 2006 was as follows: Shares2) CHF 447 364 1 737 SLHN shares at CHF 257.55
Total compensation 2006: in cash and shares CHF 3 759 999 including contribution to occupational provisions CHF 3 950 039
Total compensation 2005: in cash and shares CHF 3 321 339 including contribution to occupational provisions CHF 3 598 709 1) including bonus in cash 2) In accordance with the 2004 regulations, these shares are allocated via the longterm remuneration component and blocked for one year until the end of March 2007. The share price at the time of allocation was CHF 273.00; the allocation, subject to a one-year vesting period, took place at an economic value of CHF 257.55, which corresponds to the tax value.
Board of Directors; – change these provisions of the Articles of Association
Convocation of the General Meeting of Shareholders and agenda The rules set out in the Articles of Association for convening a General Meeting of Shareholders and drawing up the agenda encompass the stipulations of the law. Shareholders representing shares with a par value of at least one million francs can submit a written request within a time limit published in advance by Swiss Life Holding for the inclusion on the agenda of an item for discussion, together with the relevant motions. The written application must be accompanied by a certificate issued by a bank to confirm that the shares are deposited with it until after the General Meeting of Shareholders is held.
Voting system and procedures Voting at Swiss Life Holding is generally by a show of hands; A written vote may be requested by the presiding officer at the General Meeting of Shareholders, or by shareholders who together represent at least 10% of the entire share capital. The presiding officer may use electronic voting for a written vote. Swiss Life Holding uses a certified electronic voting system to permit balloting with remote-controlled handsets and to record the exact number of voting shares represented.
Changes of control and defence measures Duty to make an offer Swiss Life Holding’s Articles of Association provide for neither an “opting up” nor an “opting out” clause within the meaning of Art. 32 and 22 BEHG (Swiss Stock Exchange Act).
Clauses on changes of control No contractual provisions exist in favour of the Board of Directors or the Corporate Executive Board with regard to control of the company.
Auditors PricewaterhouseCoopers (PwC) serves as external statutory auditor for 84% of the Swiss Life Group companies that are directly or indirectly held by Swiss Life Holding under its scope of consolidation. PwC is also the Group auditor for Swiss Life Holding. The remaining auditing mandates for subsidiaries are carried out by Ernst & Young (11%) and other auditing firms (5%).
Supervisory and control instruments vis-à-vis the auditors The Audit Committee maintains regular contact with the external auditors. It assesses the quality and effectiveness of the external reporting, ascertains the independence of the statutory auditors and identifies possible conflicts of interest. Representatives from the external auditing firms may be called upon by the Audit Committee to attend any meetings it may hold. The Audit Committee held four meetings during the year under review. Representatives from the external auditors attended all the meetings, either in their entirety or for specific items on the agenda.
Swiss Life Group . Review of Operations 2006 . Board of Directors
From top left to bottom right: Rolf Dörig, Reto Himmel, Patrick Frost, Paul Müller, Bruno Pfister, Thomas Müller
Swiss Life Group . Review of Operations 2006 . Corporate Executive Board
Swiss Life is committed to serving its customers, employees and the general public. Group-wide corporate values and our Code of Compliance provide the foundation for this. Responsible action is also evident in its modern personnel policy, open communication and active championing of social causes and environmental protection.
Values and Code of Compliance At Swiss Life, the values expertise, proximity, openness, clarity and commitment shape our conduct in dealings with customers, partners and colleagues. These values put our corporate culture on a strong footing. On top of this, the Code of Compliance sets out specific rules of conduct. Adherence to these rules is an essential prerequisite for legally and ethically correct business conduct as well as for economic profitability. The principles in the Code of Compliance apply to the entire Group. Outside Switzerland and Liechtenstein, they are supplemented or modified in accordance with the local legal requirements.
Personnel policy Swiss Life offers modern conditions of employment and actively promotes a motivating working environment.
The personnel policy instruments available include the annual discussion of objectives and the performance assessment process. These are paired with customised development programmes and performance-related and results-oriented remuneration.
Responsible Corporate Conduct Swiss Life takes its social responsibility seriously –
for 150 years now, and into the future. Various long-range activities are planned for the anniversary year under the recurring theme “Perspectives for people”, thereby enabling Swiss Life to build on its tradition of social commitment.
Active cooperation with various social partners also has a high priority. Action plans exist with the social partners in Switzerland and Germany, for instance, for employees who need to find other work as a result of restructuring projects. The Europa Forum represents the interests of employees at the international level.
Outside their jobs, employees benefit from the availability of sports and cultural activities, as well as programmes for the promotion of health and partnerships with child care services. Insurance products are available to employees at favourable rates and season tickets for public transport facilities are partially subsidised.
Foundations The foundation Jubiläumsstiftung für Volksgesundheit und medizinische Forschung, set up in 1957, supports public and private charitable institutions in Switzerland which are engaged in public health and medical research activities.
Professional involvement Swiss Life is active in professional associations and supports educational initiatives.
Swiss Life employees serve on various committees and commissions of the Swiss Insurance Association. The Group supports projects and courses at several universities and collaborates with professional and specialist associations. Swiss Life is a member of the Sustainability Forum in Zurich and the Standard Setting Board of the Federal Office of Private Insurance, among others.
Initiatives in the markets In its individual markets, SwissLife is involved in various activities for the benefit of the public.
senior citizens association, whose main purpose is to uphold the social and political interests of its members.
Swiss Life Group . Review of Operations 2006 . Responsible Corporate Conduct
Environmental protection Swiss Life intends to reduce its energy consumption in Switzerland by 15% from 2000 to 2010. The aim is to increase energy efficiency at the Zurich locations by at least 1.5% per year, while energy consumption and emissions are continuously reduced. In 2005, Swiss Life became a member of the Swiss climate foundation. The foundation was set up by the “Energy Model Zurich” and supports various climate protection measures in Switzerland as well as providing funds for small and medium-sized enterprises committed to cutting their CO2 emissions.
Moreover, Swiss Life has subscribed to an international charter, joining other financial institutions in signing a commitment to the environment and sustainable development as part of the United Nations Environment Programme (UNEP).
The refurbishment of the head office building on General-Guisan-Quai in Zurich was completed in 2006. MINERGIE® principles and ecological criteria were observed in the construction design and in the selection of building materials. Materials and products with a low emission potential were employed. This systematic implementation made Swiss Life the first company in Switzerland to earn the “GI Gutes Innenraumklima” (good indoor atmosphere) label for air quality in office premises. The label is awarded by S-Cert AG, an accredited, neutral inspection and certification company for construction products in Switzerland.
Anniversary In 2007, Swiss Life is celebrating its 150th anniversary with a variety of activities focusing on people in Switzerland. “Perspectives for people” – the recurring theme of the anniversary year – is based on the company’s mission: “Swiss Life is committed to helping people create a financially secure future. For life.” This leitmotif reflects the organisation’s perception of itself as a company of people for people. Swiss Life offers perspectives to its customers, staff and shareholders and is also committed to building perspectives for society beyond the scope of its business activities. Further information on the anniversary is available at www.swisslife.ch/150jahre.
My uncle was a painter. I was happy to see how much people respected him and his paintings. I also wanted to be an artist and copied comic figures from books. At school, too, I was only really interested in pictures. If a teacher brought pictures into school I was wide awake in seconds. Later I studied painting at the academy of arts.
I’ve been working in printing for 18 years now. Some people would regard that as a demotion, from artist to printer, but that’s not how it is. I have pictures of art in my mind when I’m printing, I need them to work. Art has taught me how to see. And I’m always working with pictures. They make me happy, let me dream.
Bart Mols from Michiels printers in Booischot prints brochures for Swiss Life Belgium.
Clarity and print quality go hand in hand. Paper, colours, circulation – all these details must be agreed before the client issues the print approval. I prefer complex print orders because extreme precision is required. It makes me proud when everything’s perfect in the end and the customer is satisfied.
Swiss Life Group . Review of Operations 2006 . Embedded Value
For the model PVFP calculations, the best possible assumptions were made regarding a number of factors, in particular returns on investment, the development of costs and claims, insurance customers’ participation in surplus and the risk discount rate. Business is also assumed to be continuing at the same level (going concern) and the current cost ratios – adjusted for inflation – are thus assumed to hold good for the future as well. Future costs for maintaining classic solvency capital funded by the shareholders, which underpins the insurance business, are charged to the PVFP. This value is listed separately in the table below.
Change in 2006 Embedded value for the Swiss Life Group came to CHF 10 665 million as at 31 December 2006. This corresponds to an increase of CHF 1778 million compared with the figure for the previous year and an embedded value per share of CHF 316. The increase can be attributed to growth in the markets abroad and future investment income that exceeded expectations. Other impacts positively affecting performance included fiscal effects, the change in the euro’s exchange rate against the Swiss franc and a more precise determination of the equity tied up in connection with the solvency rules. A compilation of other changes in embedded value is given in the “Analysis of change” table on the next page.
Unwind 2006 +705 2006 investment return: divergence from assumptions made at the end of 2005 –61
Future investment return: divergence from assumptions made at the end of 2005 +167
Swiss Life Group embedded value at end of 2006 10 665
Swiss Life Group embedded value at end of 2006 4 053 4 502 2 110 10 665
Impact of 100 bp increase in investment return +524 +506 +1 030
Impact of 100 bp decrease in risk discount rate +267 +320 +587
Impact of 100 bp increase in return on new bond investments +46
Swiss Life pursues an integrated approach in the area of risk management. The economic perspective serves as a basis for all processes. Other relevant aspects also come into play when making decisions on risk. These are primarily statutory considerations such as solvency, annual financial statements and investment regulations. Furthermore, the possible implications for the Group consolidated results in accordance with the International Financial Reporting Standards (IFRS) and considerations about the possible effects on the capital requirements of rating agencies also form part of the risk analysis.
Process The financial risk specialists at head office and in the local units jointly develop the principles and measuring methods for risk management, which are subsequently approved by the Board of Directors. The various risk categories are measured and monitored as part of the risk policy. The Investment and Risk Committee of the Board of Directors determines Swiss Life’s risk tolerance based on the preset risk capacity parameters, and this forms the basis for deriving the individual limits for the various risk categories at each Group company. It is the responsibility of the relevant teams in the individual companies to ensure that these limits are complied with at all times. Every month, a central system tracks the limits currently being used; this system is also available to the individual companies.
The Investment and Risk Committee of the Board of Directors receives quarterly reports on the risk situation of the Group companies and the Group as a whole. The Committee appraises the situation, defines suitable measures and informs the Board of Directors.
Risk Management Risk management is one of a life insurer’s core tasks. In this respect,
The market risk corresponds to fluctuations on the financial markets which impact on the value of capital investments and liabilities. As part of the market risk, the interest rate risk arises from fluctuations in interest rates which simultaneously affect both capital investments and liabilities.
Such interest-rate risks are reduced by purchasing corresponding interest instruments, in particular bonds, as the maturity structures of investments and liabilities are harmonised. To diversify the investment portfolio and benefit from the higher longer-term earnings expectations, Swiss Life also opts for other types of investment, such as equities, alternative investments or foreign currency investments. The equity risk replicates fluctuations in global equity markets. The individual business units control this risk by setting investment limits. The currency risk concerns fluctuations in foreign currencies vis-à-vis the Swiss franc and is restricted by exchange rate hedging transactions.
In addition to being monitored and controlled in the individual business units, market risks are also consolidated and centrally managed at Group level.
Credit risk Describes the risk that a counterparty will fail to honour its obligations towards Swiss Life. Such risks are especially common in the reinsurance and investment areas, for instance outstanding interest payments in the case of bonds, loans or mortgages. Stringent guidelines on minimum borrower ratings and guarantees in the event of default are in place throughout the Group to prevent such instances. The guidelines also specify individual limits for each borrower depending on the borrower’s rating.
Swiss Life primarily invests in government bonds with excellent ratings (AAA). The remaining credit positions are greatly limited to ensure that the company is exposed to a marginal credit risk only.
Risk capital to be allocated 1) operational, business and strategic risk 1) incl. government bonds
Risk-based solvency check The revised Swiss Insurance Supervisory Law (VAG) came into effect on 1 January 2006. With the introduction of the Swiss Solvency Test (SST), Swiss insurers are subject to new regulatory requirements. Large insurers were required to implement the SST as early as 2006. Smaller companies have until 2008 to determine their solvency in accordance with the new riskbased principles. In the Swiss Solvency Test, Swiss Life records the details of the parent company, i.e. the Swiss business as well as activities in the German, French and Dutch subsidiaries.
The European Solvency II project also has the aim of checking solvency based on risk monitoring. Swiss Life is involved in shaping the Solvency II guidelines together with the Swiss Insurance Association (SIA) and the European Insurance and Reinsurance Federation (CEA). Harmonising the Solvency II principles with those of the Swiss Solvency Test is extremely important for the internationally active Swiss Life Group.
– What is the best way the Group can invest the policyholders ’ funds and the company’s free reserves and equity with respect to the given parameters of security, return and liquidity (asset allocation)?
– What principles apply with regard to the distribution of the surplus generated on investments (distribution policy)?
– What benefits do the policyholders receive and at what price (product design)?
Risk budget The amount of risk capital available is determined in the risk management process by an economic valuation of the assets and liabilities. The risk capital at Swiss Life’s disposal sets the risk appetite parameters for the Group. Two types of limits are applied: – Risk capital limits: These limits apply to the market, interest rate, currency and credit risks entered into.
– Exposure limits: These limits apply on a net basis to individual foreign currencies and to equities and equitylike investments.
Both of these limits form the parameters for spreading the funds invested over various types of investment vehicles, i.e. the asset allocation. The risk budget is based on a purely economic perspective. Non-economic restrictions such as regulatory and accounting requirements form part of the determination of the risk appetite and the limits, and are considered in the asset allocation itself.
Asset and Liability Management Matching assets and liabilities is one of the most important aspects of risk management in life insurance. Asset and liability management ensures that benefits can be paid when due and that core capital will always be available to absorb fluctuations in the value of assets and liabilities.
Distribution policy Swiss Life’s distribution policy seeks to harmonise the interests of policyholders and shareholders. For policyholders the accent is firmly on the need for security: They favour a guaranteed minimum interest rate coupled with regular and appropriate discretionary participation. Meanwhile, shareholders place greater emphasis on returns commensurate with the level of risk: They are looking for adequate compensation in the form of dividends and capital gains for the equity capital they provide.
Swiss Life reviews the product design principles every half year, while the economic viability of new business is examined quarterly. This permits the company to adapt the conditions of sale for the individual products to a dynamically changing environment.
The responsible bodies at local level implement the decisions reached for the Group in close collaboration with the local Asset and Liability Committee at their business unit.
Franz-Toni Schallberger from the General Agency in Stans advises private and corporate clients in Central Switzerland.
Swiss Life Group . Financial Statements 2006 . Index to the Financial Statements
Consolidated Statement of Changes in Equity. . . . . . . . . . . . . . 84
Swiss Life Holding Financial Statements. . . . . . . . . . . . . . . . . . 194
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 197
Net gains/losses on financial instruments at fair value through profit or loss 6, 9 351 –687
Benefits and claims under investment contracts with discretionary participation 39 –91 –240
Net profit attributable to equity holders of Swiss Life Holding 933 860 minority interest 21 14
Intangible assets including intangible insurance assets 19 3 507 3 075
Swiss Life Group . Financial Statements 2006 . Consolidated Balance Sheet 81Consolidated balance sheet
Swiss Life Group . Financial Statements 2006 . Consolidated Statement of Cash Flow
Repayment of Guaranteed Exchangeable Monetisations of Multiple Shares (GEMMS) – –870
Total change in cash and cash equivalents –6 360 5 378
Cash and cash equivalents for the account and risk of the Swiss Life Group’s customers 408 345
Swiss Life Group . Financial Statements 2006 . Consolidated Statement of Changes in Equity
Obligation to purchase own shares – –15 – – – – –15 – –15
Equity-settled share-based payments – 5 – – – – 5 – 5
Changes in accounting policies 19 – – – – – 4 4 – 4
Reduction in par value 28 –135 9 – – – – –126 – –126
Obligation to purchase own shares – –10 – – – – –10 – –10
Equity-settled share-based payments – 4 – – – – 4 – 4
Not at Fair Value in the Balance Sheet . . . . . . . . . . . . . 181 38 Future Minimum Lease Payments under
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 1 General Information
The Swiss Life Group is one of Europe’s leading providers of pension and life insurance products. The Swiss Life Group offers individuals and companies comprehensive advice across a broad range of products via agents, brokers and banks in its domestic market, Switzerland, and selected European markets. Multinational companies are serviced with tailor-made solutions by a network of partners in over 60 countries and regions. With Banca del Gottardo, the Swiss Life Group is also a provider of banking services. The bank, headquartered in Lugano, has an extended national and international network of offices and significant customer assets under management. Additionally, the Group offers non-life insurance products and investment management services in selected countries.
The following events had an influence on the period under review: Reduction in par value As approved by the shareholders at the General Meeting of Swiss Life Holding on 9 May 2006, a reduction in par value of CHF 5 per registered share was effected in 2006. The payout took place on 3 August 2006 and led to a reduction in the share capital of Swiss Life Holding of CHF 169 million.
Conversion of convertible debt In 2006, convertible bonds were converted into 191 Swiss Life Holding shares in total with a corresponding increase of share capital and share premium (2005: conversion into 260 Swiss Life Holding shares).
2.1 Basis of preparation The consolidated financial statements of Swiss Life have been prepared in accordance with and comply with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared on a historical cost basis, except for the following assets and liabilities which are stated at their fair value: derivatives, financial assets and liabilities at fair value through profit or loss, financial assets classified as available for sale and investment property.
2 Summary of Significant Accounting Policies 2.2 Changes in accounting policies In December 2004, the International Accounting Standards Board issued IFRIC Interpretation 4 Determining whether an Arrangement contains a Lease. The Interpretation explains that the requirements of IAS 17 Leases have wider applicability than just those agreements described as leases. Elements of some supply and outsourcing agreements may need to be treated as leases. The Interpretation was adopted by the Swiss Life Group for annual periods beginning on 1 January 2006. One significant outsourcing agreement, comprising a large part of the back office and IT activities of Banca del Gottardo, was identified. This outsourcing agreement qualifies as an operating lease under the Interpretation. The future minimum lease payments to be paid as a lessee are disclosed in note 36.
In December 2004, an amendment to IAS 19 Employee Benefits, covering actuarial gains and losses, group plans and disclosures, was issued by the International Accounting Standards Board. The amendment introduces an additional recognition option for actuarial gains and losses arising in post-employment defined benefit plans. The amendment clarifies that a contractual agreement between a multiemployer plan and participating employers that determines how a surplus is to be distributed or a deficit funded will give rise to an asset or liability. The amendment also requires additional disclosures. The Swiss Life Group has adopted this amendment for annual periods beginning on 1 January 2006. No financial impact arose from the adoption of this amendment as the Swiss Life Group did not change its accounting policy for the recognition of actuarial gains and losses and does not participate in any multiemployer plans. The additional disclosures required by the amendment are included in note 25.
In August 2005, the International Accounting Standards Board issued an amendment to IAS 39 Financial Instruments: Recognition and Measurement dealing with requirements associated with financial guarantee contracts. The amendment is intended to ensure that issuers of financial guarantee contracts include the resulting liabilities in their balance sheet. The amendment was adopted by the Swiss Life Group for annual periods beginning on 1 January 2006. No financial impact arose from the adoption of this amendment as the Group has been compliant with the new requirements.
In July 2006, IFRIC 10 Interim Financial Reporting and Impairment was issued by the International Accounting Standards Board. The Interpretation addresses the conflict between the requirements of IAS 34 Interim Financial Reporting and those in other standards on the recognition and reversal in financial statements of impairment losses on goodwill and certain financial assets. IFRIC 10 states that any such impairment losses recognised in an interim financial statement must not be reversed in subsequent interim or annual financial statements. No financial impact arose from the early adoption of this Interpretation as the Group has already been compliant with IFRIC 10.
In November 2006, the International Accounting Standards Board issued IFRIC 11 IFRS 2 – Group and Treasury Share Transactions. The Interpretation addresses how to apply IFRS 2 Share-based Payment to share-based payment arrangements involving an entity’s own equity instruments or equity instruments of another entity in the same group. The Interpretation requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments needed are obtained. The amendment was adopted by the Swiss Life Group for annual periods beginning on 1 January 2006. No financial impact arose from the adoption of this Interpretation.
IFRS 1 (amendment) First-time Adoption of International Financial Reporting Standards. The Swiss Life Group is not a first-time adopter of International Financial Reporting Standards.
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. The Interpretation is not relevant to the Group’s operations.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 912.3 Reclassifications in the consolidated statement of income and consolidated balance sheet Reclassifications made in the consolidated statement of income and consolidated balance sheet are shown in note 39.
Subsidiaries are consolidated from the date on which effective control is transferred. All intercompany balances, transactions and unrealised gains and losses on such transactions have been eliminated. A listing of the Group’s principal subsidiaries is set out in note 41. The financial effect of acquisitions and disposals of subsidiaries is shown in note 30. Associates, partnerships and certain joint ventures for which the Group has between 20% and 50% of the voting rights and/or exercises significant influence are accounted for using the equity method. The Group’s share of net income for the year is recognised as a share of results of associates and the ownership interest in the investment is recorded in the balance sheet at an amount that reflects its share of the net assets. The Group’s share of net income is included from the date that significant influence begins until the date that significant influence ceases. Unrealised gains arising from transactions with associates, partnerships and joint ventures are eliminated to the extent of the Group’s interest. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. The carrying amount includes goodwill on the acquisition. A listing of the Group’s principal associates, partnerships and joint ventures is shown in note 41.
Goodwill reported before 1 January 2005 is translated at historical exchange rates. Goodwill for which the agreement date is on or after 1 January 2005 is carried in the foreign operation’s functional currency and is translated into Swiss francs at year-end 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.
Foreign currency transactions For individual Group entities, foreign currency transactions are accounted for using the exchange rate at the date of the transaction. Outstanding balances in foreign currencies at year-end arising from foreign currency transactions are translated at year-end exchange rates for monetary items while historical rates are used for non-monetary items. Those non-monetary items in foreign currencies recorded at fair values are translated at the exchange rate on the revaluation date.
2.6 Cash 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.
– Certain financial assets with embedded derivatives which otherwise would have to be separated.
Financial assets available for sale (AFS) Financial assets classified as available for sale are carried at fair value.
Financial assets are classified as available for sale if they do not qualify as held to maturity, held for trading, loans and receivables or if they are not designated as at fair 2 Summary of Significant Accounting Policies (continued)
value through profit or loss. Gains and losses arising from fair value changes of AFS investments, being the difference between fair value and cost/amortised cost, are reported in equity. On disposal of an AFS investment, the cumulative gain or loss is transferred from equity to income for the period. Gains and losses on disposal are determined using the average cost method.
Financial assets held to maturity (HTM) Financial assets which the Group has the ability and positive intent to hold to maturity are carried at amortised cost, using the effective interest method.
Financial assets pledged as collateral Sales or purchases of financial assets under agreements to repurchase or resell and under lending agreements are accounted for as collateralised borrowings or loans and are carried at the contracted resale or repurchase amount, plus accrued interest. Interest paid or received is recognised in income over the life of each agreement.
If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by the amount that represents the difference between the carrying amount and the new amortised cost value by adjusting the allowance account. The amount of the reversal is recognised in income.
have no discernible effect on the economics of the transaction ). The classification of contracts identifies both the insurance contracts that the Group issues and reinsurance contracts that the Group holds. As a Group policy, Swiss Life considers those contracts to be insurance contracts that require the payment of additional benefits in excess of 10% of the benefits that would be payable if the insured event had not occurred, excluding scenarios that lack commercial substance.
Investment contracts with and without discretionary participation features For investment contracts that contain discretionary participation features (see below) the same recognition and measurement principles as for insurance contracts apply. For investment contracts without discretionary participation features the recognition and measurement rules for financial instruments apply.
The bonuses which are allocated to the policyholders in the participating insurance business (insurance and investment contracts) in Switzerland, France, Germany, Belgium, Luxembourg, Liechtenstein and partially in the Netherlands generally follow the definition of DPF as set out in IFRS 4 Insurance Contracts.
When such temporary valuation differences disappear (e.g. management decides to realise certain unrealised gains and losses on assets) additional benefits which arise from the application of the statutory minimum distribution ratio (“legal quote”) are allocated to the policyholders and become part of their guaranteed benefits. These amounts are always accounted for as liabilities.
Because there is a direct effect on the measurement of DPFliabilities when asset gains or losses are realised, changes in these liabilities are recognised directly in equity when, and only when, the valuation differences on the assets arise from gains or losses recognised directly in equity (“shadow accounting”).
The statutory minimum distribution ratios (“legal quote”) relating to the Swiss Life Group’s operations are as follows: Switzerland Group business subject to “legal quote”: At least 90% of the calculated income on the savings, risk and cost components minus the expenses thereof must be allocated to the policyholders.
Non-discretionary participation features Certain policyholder participation systems do not satisfy the criteria for discretionary participation features. These policyholder bonuses might be guaranteed elements. Some policyholder bonuses are based on benchmark interest rates which are credited to the policyholders. For certain products, policyholder bonuses are based on the development of biometric parameters such as mortality and morbidity. These policyholder bonuses are allocated based on the risk result of the contracts involved. The amount and timing of these bonuses are not subject to management discretion and are accrued to the policyholders’ liabilities based on the relevant contractual terms and conditions.
Future life policyholder benefit liabilities For participating life insurance contracts for which the contribution principle applies to the allocation of the policyholder bonus, future life policyholder 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 policyholder benefits, in proportion to the estimated gross margins.
If the actual results show that the carrying amount of the insurance liabilities together with anticipated future revenues (less related deferred acquisition costs (DAC) and related intangible assets) are not adequate to meet the future obligations and to recover the unamortised DAC or intangible assets, the entire deficiency is recognised in profit or loss, initially by reducing the unamortised DAC or intangible assets and subsequently by increasing the insurance liabilities. The liability adequacy test is performed at each reporting date in accordance with a loss recognition test considering current estimates of future cash flows including those resulting from embedded options and guarantees.
Policyholder deposits For investment contracts with discretionary participation, savings premiums collected are reported as deposits (deposit accounting). The liabilities relating to these 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.
Embedded options and guarantees in insurance contracts Insurance contracts often contain embedded derivatives. Embedded derivatives which are not closely related to their host insurance contracts are separated and measured separately at fair value. Exposure to embedded options and guarantees in insurance contracts which are closely related or which are insurance contracts themselves, such as guaranteed annuity options or guaranteed interest rates, are reflected in the measurement of the insurance liabilities.
Reinsurance 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 in the consolidated balance sheet and income statement on a gross basis unless a right and the intention to offset exist.
Assets associated with separate account/unit-linked contracts are included in financial assets designated as at fair value through profit or loss, investment property, derivatives and cash and cash equivalents. The related income and gains and losses are included in the income statement under the respective line items. The Group has allocated on a rational basis the proportion of acquisition costs related to the insurance and deposit components, respectively.
The accounting policy for deferred acquisition costs applies to the portion of acquisition costs associated with the insurance component and the policy for deferred origination costs applies to the other portion (see 2.16 Intangible assets).
2.13 Property and equipment Property and equipment are carried at cost less accumulated depreciation. Land is carried at cost and not depreciated. Depreciation is principally calculated using the straightline method to allocate their cost to their residual values over the assets’ estimated useful life as follows: buildings 25 to 50 years; furniture and fixtures five to ten years; computer hardware three to five years.
When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period the lease becomes onerous.
2.15 Investment management Revenue consists principally of investment management fees, commission revenue from distribution, sales of investment fund units and custody account fees. Such revenue is recognised when earned, i.e. when the services are rendered.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 1012.16 Intangible assets Goodwill The Group’s acquisitions of other companies are accounted for under the purchase method. Goodwill acquired prior to 1995 was charged directly to equity.
PVP is amortised in proportion to gross profits or gross margins over the effective life of the acquired contracts, which generally ranges from 20 to 30 years. Realised gains/ losses are thereby taken into account as well as gains/losses recognised directly in equity (unrealised gains/losses). If these unrealised gains/losses were to be realised, the gross profits or gross margins used to amortise PVP would be affected. Therefore, an adjustment relating to these unrealised gains/losses is recognised in equity and is also reflected in the amount of PVP in the balance sheet (“shadow accounting”).
Computer software development costs recognised as assets are amortised using the straight-line method over their useful lives, not exceeding a period of three years.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 1032.17 Impairment of non-financial assets For non-financial assets the recoverable amount is measured as the higher of the fair value less costs to sell and its value in use. Fair value less costs to sell is the amount obtainable from the sale of an asset or cash-generating unit in an arm’s-length transaction between knowledgeable, willing parties, less the costs of disposal. “Value in use” is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
2.18 Income taxes Current and deferred income taxes are recognised in income except when they relate to items recognised directly in equity. Income taxes are calculated using the tax rates enacted or substantively enacted as of the balance sheet date.
Deferred income taxes are recognised for all temporary differences between the carrying amounts of assets and liabilities in the consolidated balance sheet and the tax bases of these assets and liabilities, using the balance sheet liability method. Current income taxes and deferred income taxes are charged or credited directly to equity, if the income taxes relate to items that are credited or charged in the same or a different period, directly to equity.
2.20 Financial liabilities Financial liabilities are recognised in the balance sheet when the Swiss Life Group becomes a party to the contractual provisions of the instrument.
Borrowing costs presented in the consolidated statement of income relate to the interest expense on the financial liabilities classified as borrowings whilst interest expense presented in the consolidated statement of income relates to interest expense on bank deposits and insurance and investment contract deposits.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 1052.21 Employee benefits Post-employment benefits The Swiss Life Group provides post-employment benefits under two types of arrangement: defined benefit plans and defined contribution plans. The assets of these plans are generally held separately from the Group’s general assets in trustee-administered funds. Defined benefit plan contributions are based upon regulatory requirements and/or plan terms. The Group’s defined benefit obligations and the related service costs are determined at each balance sheet date by a qualified actuary, using the Projected Unit Credit Method.
2.26 Forthcoming changes in accounting policies In August 2005, the International Accounting Standards Board issued IFRS 7 Financial Instruments: Disclosures and a complementary amendment to IAS 1 Presentation of Financial Statements. The IFRS introduces new requirements to improve the information on financial instruments. The amendment to IAS 1 introduces requirements for disclosures about capital. IFRS 7 Financial Instruments: Disclosures and the amendment to IAS 1 Presentation of Financial Statements will be adopted by the Swiss Life Group for annual periods as of 1 January 2007. The adoption of the IFRS and the amendment will result in expanded disclosures associated with financial instruments such as a sensitivity analysis to market risk and the new capital disclosures required by IAS 1 Presentation of Financial Statements.
In January 2006, the International Accounting Standards Board issued IFRIC Interpretation 8 Scope of IFRS 2. The Interpretation clarifies that IFRS 2 Share-based Payment applies to arrangements where an entity makes share-based payments for apparently nil or inadequate consideration. The Swiss Life Group will adopt the IFRIC Interpretation for annual periods as of 1 January 2007. No material financial impact is expected from the adoption of this amendment as the Group currently does not have any transactions that fall under the scope of the IFRIC Interpretation.
The following new International Financial Reporting Interpretations are not relevant to the Swiss Life Group: IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies. The Swiss Life Group does not have operations in hyperinflationary economies.
IFRIC 12 Service Concession Arrangements. The Interpretation is not relevant to the Group’s operations.
Fair value of financial instruments The fair value of financial instruments is determined based on quoted market prices, where available, or on estimates using present values or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. Where market prices are not readily available, fair value is based either on estimates obtained from independent experts or quoted market prices of comparable instruments. In that regard, the derived fair value estimates cannot be substantiated by comparison with independent markets and, in many cases, could not be realised immediately.
– The fair value of borrowings, which are carried at amortised cost, is estimated using discounted cash flow calculations based upon the Group’s current borrowing rates for similar borrowings with remaining maturities consistent with the debt being valued.
For long-term insurance contracts and investment contracts with discretionary participation features with fixed and guaranteed terms, the definition of estimates occurs in two stages. At inception of the contract, estimates of future deaths, surrender, exercise of policyholder options, investment returns and administrative expenses are made and form the assumptions used for calculating the liabilities during the life of the contract. A margin for risk and uncertainty (adverse deviation) is added to these assumptions.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 109For insurance contracts and investment contracts with discretionary participation features without fixed and guaranteed terms, future premiums can be increased in line with experience. The assumptions used to determine the liabilities do not contain margins and are not locked-in but are updated at each reporting date to reflect the latest estimates.
Mortality and longevity The main source of uncertainty is that epidemics such as AIDS, SARS, avian flu and wide-ranging lifestyle changes, such as in eating, smoking and exercise habits, could result in future mortality being significantly worse than in the past for the age groups in which significant exposure to mortality risk exists. However, continuing improvements in medical care and social conditions could result in improvements in longevity in excess of those allowed for in the estimates used to determine the liability for contracts where exposure to longevity risk exists.
For the mandatory part of the group life insurance business in Switzerland (BVG, Swiss occupational plans), the legally stipulated conversion rate is applied whereas in the nonmandatory part of the BVG business a reduced conversion rate calculated using actuarial assumptions is applied.
Policyholder options In certain contracts, the policyholder has the option to choose a guaranteed annuity at maturity of an endowment contract. The value of the options depends on how the guaranteed mortality tables and guaranteed interest rates differ from actual mortality and interest rates. The influence on the insurance liabilities may therefore depend on the behaviour of the policyholders.
Expense base and inflation In Switzerland, expenses are taken into account in the pricing of the contracts using internal statistics. Such calculated amounts are allocated to the different lines of business. Inflation is reflected in these calculations.
The technical interest rates in Switzerland are based on assumptions with regard to guaranteed benefits and discount rates. In certain countries, the insurance liabilities are based on the guaranteed interest rates.
Under the Group’s strategy primary segmentation is split into four categories: Insurance, Banking, Investment Management and Other. The organisational and management structure within the “Insurance” segment is based on geography whereas the organisational and management structure of other segments is primarily based on products/ services.
– The “Insurance” segment consists of life and non-life insurance operations. Life insurance operations offer a broad range of life, pension, annuity and investment-type policies to both groups and individuals, including accident, health and disability coverage. Non-life operations principally include property and casualty, liability and motor insurance. The Group’s strategy focuses primarily on the life and pension business in a number of key European markets, such as Switzerland, France, Germany, the Netherlands, Belgium, Luxembourg and Liechtenstein. Non-life operations include operations in France, Belgium and Italy. The non-life operations in Switzerland («La Suisse») were sold in July 2005 (accident & health business) and in August 2005 (motor insurance business and property and liability lines). Non-life operations are no longer disclosed as a separate segment as these operations are no longer strategically relevant to the Group and do not fulfill the critical thresholds for separate disclosure. The “Insurance” segment also includes a number of companies which hold investments primarily pertaining to life insurance.
Premiums earned on insurance contracts 13 960 – – – 0 13 960
Premiums earned on investment contracts with discretionary participation 78 – – – – 78
Policy fees earned on investment and unit-linked contracts 332 – – – – 332
Asset management and other commission income 154 310 202 6 –179 493
Net gains/losses on investment property 97 – – – – 97 of which inter-segment 78 28 124 49 –279
Net insurance benefits and claims –13 840 – – – – –13 840
Acquisition and origination costs deferred 538 – – – – 538
Share of results of associates 4 –11 – 8 – 1
Premiums earned on insurance contracts 13 519 – – – – 13 519
Policy fees earned on investment and unit-linked contracts 280 – – – – 280
Net gains/losses on investment property –24 – – – – –24 of which inter-segment –86 130 91 36 –171
Other expenses –663 –155 –35 –9 94 –768 of which inter-segment –99 –9 –29 –7 144 of which inter-segment –185 121 62 29 –27
Additions of property and equipment and intangible assets 844 7 0 – – 851 4 Segment Information (continued)
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 114 Balance sheet as at 31 December 2006
Financial assets at fair value through profit or loss 26 541 2 883 – 13 – 29 437
Intangible assets including intangible insurance assets 3 095 412 0 – – 3 507
Insurance payables and other payables 4 108 235 35 32 –142 4 268
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 116 Geographical segments
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 5 Details of Insurance Segment
Statement of income “Insurance” segment for the year ended 31 December 2006
Premiums earned on insurance contracts 7 301 3 055 2 022 1 208 328 43 19 –16 13 960
Policy fees earned on investment and unit-linked contracts 15 283 7 – 15 9 4 –1 332
Asset management and other commission income 60 42 30 25 2 0 – –5 154
Net gains/losses on financial assets 648 55 185 157 17 1 –2 – 1 061
Net gains/losses on investment property 39 53 3 5 –3 – – – 97 of which inter-subsegment 30 –5 –2 –3 0 –11 –1 –8
Benefits and claims under investment contracts with discretionary participation –76 –15 – – – – – – –91
Benefits and claims recovered from reinsurers 8 72 74 3 5 3 2 –7 160
Commission expense –141 –666 –200 –66 –49 –6 –3 3 –1 128
Employee benefits expense –388 –246 –113 –90 –51 –8 –6 – –902
Impairment of property and equipment and intangible assets –1 – –29 – –2 – – – –32
Other expenses –310 –233 –47 –58 –42 –6 –7 3 –700 of which inter-subsegment –4 –3 0 –1 –4 8 –4 8
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 5 Details of Insurance Segment (continued)
In CHF million Switzer- Nether- Luxem- Elimiland France Germany lands Belgium bourg Other nations Total
Premiums ceded to reinsurers –43 –117 –70 –8 –9 –4 –5 16 –240
Policy fees earned on investment and unit-linked contracts 20 232 6 – 14 7 1 – 280
Benefits and claims recovered from reinsurers 6 53 71 2 14 1 3 –6 144
Net insurance benefits and claims –7 936 –2 198 –2 066 –1 456 –318 –40 –18 –8 –14 040
Commission expense –137 –609 –200 –66 –41 –7 –2 0 –1 062
Employee benefits expense –425 –237 –105 –86 –47 –7 –6 0 –913
Depreciation and amortisation expense –250 –290 –138 –39 –11 –1 0 – –729
Impairment of property and equipment and intangible assets –48 – –4 – –1 – – – –53
Acquisition and origination costs deferred 110 262 134 37 25 4 – – 572
Insurance segment result by country 671 105 85 115 31 –10 –5 –4 988 of which inter-subsegment 9 4 0 –6 5 –6 –2 –4
Risk management functions are fulfilled at several levels by different bodies within the Swiss Life Group, such as the Investment and Risk Committee at the level of the Board of Directors of the Swiss Life Group and the Group Risk Committee at the level of the Corporate Executive Board of the Swiss Life Group. The risk management functions at the level of the individual operations of the Swiss Life Group are organised appropriately.
The risk management of Banca del Gottardo, which functions as an independent entity within the Group, is described separately.
6.1 Contracts for the account and risk of the Swiss Life Group’s customers Certain life insurance and investment contracts are managed for the account and risk of the Swiss Life Group’s customers (separate account/unit-linked contracts). The assets relating to these contracts are segregated and managed to meet specific investment objectives of the policyholders. These assets back the insurance liabilities and the financial liabilities arising from these contracts. The fair values of the liabilities reflect the fair values of the assets. Certain contracts with unit-linking features contain guaranteed minimum insurance benefits. The liabilities relating to this part are included in the insurance liabilities.
The assets and liabilities from separate account/unit-linked contracts are generally excluded from the Swiss Life Group’s financial risk management considerations to the extent that the risks are borne by the customers.
Net gains/losses on investment property 93 –24 4 0 97 –24
The financial result for the account and risk of the Swiss Life Group’s customers consists of net gains/losses on financial assets and investment property 1 069 1 249 net gains/losses on financial liabilities –985 –1 156
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 1216.2 Risk budgeting and limit setting The risk capacity and the risk appetite of the Swiss Life Group’s insurance operations are primarily defined based on economic principles. Consequently, the market values or best estimates of both the assets and the liabilities are obtained by discounting the cash flows generated by these assets and liabilities with an appropriate discount rate. The risk capital available is defined as the positive difference of the economic value of the assets compared to liabilities. The available risk capital is used to cover the different risks to which the Swiss Life Group’s insurance operations are exposed by the nature of their activities. The final decision on the risk appetite for each insurance operation is with the Board of Directors.
Strategic asset allocation Strategic asset allocation is the first major task of the ALM process and aims at minimising risk exposure while optimising the returns on the asset portfolio for the available risk capital defined within the risk budgeting process, taking into account all known constraints.
The liabilities are largely predefined in terms of amount and timing of the payments and the associated assumptions are regularly reviewed. The corresponding asset portfolios mainly comprise fixed-income instruments. This way, the impact of interest rate fluctuations and the risk capital consumption are strategically minimised, thus ensuring that the policyholders receive the benefits they were promised.
6.4 Financial risk management objectives and policies The Group is exposed to financial risk through its financial assets, financial liabilities (primarily investment contracts and borrowings), reinsurance assets and insurance liabilities. In particular, the key financial risk is that the proceeds from the financial assets are not sufficient to fund the obligations arising from the insurance and investment contracts, as well as from borrowings and other liabilities. The most important components of the financial risk are interest rate risk, equity price risk, credit risk, currency risk and liquidity risk.
Hedging The Swiss Life Group uses derivatives within the strict limits set by the applicable insurance legislation and by internal guidelines. Derivatives are primarily used to manage the exposure to equity securities, interest rates and foreign exchange rates. The main instruments include index futures and option structures in stock markets, bond futures and swaps in order to manage duration, and currency forwards in order to manage currency risk. Within certain limits, derivatives are used to enhance returns on the existing portfolio. The types of derivatives generally permitted for usage within the Swiss Life Group have been approved by the Group Risk Committee.
The hedging strategies used by Banca del Gottardo are set out in the respective section of this note.
Financial assets not at fair value through profit or loss as at 31 December 2006
The minimum interest rates which are guaranteed and the proportion of insurance liabilities that are interest-sensitive are as follows: Most life insurance products with a savings component and investment contracts are subject to minimum guaranteed interest rates. The guaranteed rate differs according to the type of contract.
The Group manages interest rate risk by managing the interest rate sensitivity of key rate exposures of its investment portfolio against the interest sensitivity of key rate exposures of liabilities issued. The key rate exposure of the liabilities is determined by projecting the expected cash flows from the contracts using best estimates of mortality, disability, expenses, surrender and exercise of policyholder options. The ALM process defines the strategic asset allocation minimising the net interest rate sensitivity of the investment and liability portfolios. To the extent that this is not practicable, swap contracts and other instruments are used to hedge interest risk. In certain markets receiver swaptions are used to hedge the risk of interest rates decreasing below guaranteed interest rates. Payer swaptions are used to hedge the risk of fair value changes of interest-sensitive financial assets. Strategically a minimum interest rate risk will remain, since a perfect interest rate hedge can either not be achieved or would not be aimed at.
Assets for the account and risk of the Swiss Life Group’s customers – – – – 15 138 15 138
Balance sheet interest rate sensitivity gap 26 677 15 051 22 985 44 382 1 318 110 413
Hedges in place with respect to the Swiss Life Group’s equity investments are designed to reduce the exposure to declines in equity values but would not prevent an impairment loss in the event the impairment criteria were met.
A portion of Swiss Life’s investment portfolio is comprised of investments in funds which hold securities issued by non-public companies (private equity). These investments may be illiquid or may only be disposed of over time or at a loss, and they may not produce adequate returns or capital gains. If Swiss Life were required to liquidate some or all of the investments in its private equity portfolio, the proceeds of such liquidation may be significantly less than the amount paid for, or the carrying amount of, such investments.
The Group is also exposed to credit risk associated with reinsurance recoverables. As a consequence, the financial strength of reinsurers is monitored. The creditworthiness of reinsurers is considered on an annual basis by reviewing their financial strength prior to any contract being signed. The general policy of the Swiss Life Group is to reinsure its insurance risks only with counterparties rated A– or above (Standard & Poor’s or equivalent). In exceptional cases, reinsurers with a lower rating may be considered. Additionally, the Group holds substantial collateral under
Exposure to credit risk of the financial assets as at 31 December 2006
Insurance receivables and other receivables 530 304 95 10 3 960 – 4 899
Debt instruments at fair value through profit or loss 1 703 2 130 772 88 220 2 800 7 713
Debt instruments pledged as collateral 44 – 41 – – – 85
Total assets bearing credit risk 76 781 25 107 13 627 1 227 17 138 2 977 136 857
Insurance receivables and other receivables 559 91 69 38 3 418 – 4 175
Debt instruments at fair value through profit or loss 1 189 2 654 431 55 351 1 970 6 650
Debt instruments available for sale 50 685 12 817 5 552 647 1 170 – 70 871
Debt instruments held to maturity 3 557 482 155 – 62 – 4 256
The non-rated loans primarily comprise mortgages and policy loans. In certain countries, specific additional guidelines and rules have been defined locally to monitor credit risk. Such guidelines cover investments in fixedincome securities whereby the average rating of the fixedincome portfolio (calculated by weighting in accordance with the Standard & Poor’s method) must be AA– or higher (Standard & Poor’s or equivalent). Minimum and maximum thresholds apply with regard to permitted investments in non-government bonds. For these investments additional exposure limits are in place. For certain businesses, credit risk is monitored and controlled with a risk limit framework whereby maximum limits are reviewed and at least approved annually. Ratings are monitored on a daily basis and a weekly rating migration report is submitted to the local risk department. All investments in bonds are at or above investment grade. The majority of the bond portfolio is invested in government bonds (including supranationals and sovereign) and in bonds issued by the financial sector (generally covered by collateral or government guarantees).
Although Swiss Life actively engages in currency management to reduce the effect of exchange rate fluctuations on its assets and liabilities, particularly by hedging against the risk of such movements in relation to part of its investments denominated in euros and in US dollars, significant movements in exchange rates could adversely affect Swiss Life’s earnings and financial position, including the value of its investment portfolio. Foreign exchange exposure is hedged to a large extent in line with the strategic asset allocation. The Group’s hedging arrangements are directed at covering its exposure from an economic perspective. The instruments which the Swiss Life Group uses to hedge exposure may not be perfectly correlated to the related assets, so the Group will still be exposed to losses if the value of the hedge and the value of the underlying asset or liability do not correspond appropriately. The Swiss Life Group is further required to bear expenses and costs in establishing such hedging arrangements.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 129Exposure to currency risk
In CHF million For the account and risk of the Swiss Life
Insurance receivables and other receivables 1 367 3 463 41 21 7 – 4 899
Financial assets at fair value through profit or loss 3 104 9 693 1 349 11 319 14 961 29 437
Financial assets pledged as collateral 95 29 – – – – 124
Up to 1 1–3 3–12 More than Group’s month months months 1–5 years 5 years customers Total
Insurance receivables and other receivables 1 578 1 109 1 808 404 – – 4 899
Financial assets at fair value through profit or loss 7 848 1 181 747 3 542 1 158 14 961 29 437
Financial assets held to maturity 25 4 370 1 830 1 861 – 4 090
Insurance payables and other payables –554 –520 –2 295 –899 – – –4 268
Financial liabilities at fair value through profit or loss –768 –1 382 –176 –37 – –7 175 –9 538
Carrying amounts as at 31 December 2005 resources from claims, amounts payable at maturity and surrenders arising from insurance and investment contracts. Liquidity risk is considered in the strategic asset allocation.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 1316.5 Insurance risk management objectives and policies Insurance contracts are contracts under which one party accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. Significant insurance risk exists if an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction).
Product development When designing a new product or reviewing an existing one, care has to be taken that the product neither includes systemic risk nor provides incentives for adverse selection. The product should meet the market’s need. Swiss Life generally favours transparent and simple product design with minimised model risk and a reliable pricing basis with sufficient statistical data available.
5 years later 641 – – – – – n. a.
Liabilities for the current and previous 5 years 142 112 139 151 209 407 1 160
The underwriting guidelines exclude certain risks from coverage. For certain businesses reinsurance limits are in place. The reinsurance arrangements primarily include non-proportional coverage for any single risk and/or event, adapted to the specifications of each contract.
As far as non-life insurance is concerned, the reinsurance arrangement includes mostly non-proportional coverage on any single risk and/or event, adapted to the specifications of each contract. This includes excess, stop-loss and catastrophe coverage. Facultative reinsurance is also written for protection against specific risks.
history of the applicants. The limits relate to sums at risk, maximum insured losses or present value of premiums at the contract or insured person level. Depending on the type of business and the limit exceeded, the new or renewed contract must be approved by a specific investment and risk committee or senior management. Contracts exceeding the set limits must be tested for profitability according to predefined procedures before approval. Certain contracts which include specific risks relating to derivatives or demographic risk factors for which no reliable data is available must be submitted for approval irrespective of the amount of coverage offered. Insurance risks exceeding set limits are subject to regular internal reporting requirements. Additionally, it must be ensured that the underwriting practices are in line with local laws.
Reinsurance Reinsurance is used to limit the Group’s exposure to insurance risk. This does not, however, discharge the Group’s liability as a primary insurer, and, if a reinsurer fails to pay a claim, the Group remains liable for the payments to the policyholder. A loss allowance would be recognised for any estimated unrecoverable reinsurance. In addition, the Group holds substantial collateral under related reinsurance agreements in the form of deposited funds and securities. 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 the reinsurance assets.
Approximately 1.7% of insurance in force in terms of earned insurance premiums was ceded as at 31 Decem-
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 136 For liabilities under long-term insurance contracts with fixed and guaranteed terms, changes in risk factors will not cause a change to the amount of the liability, unless the change is severe enough to trigger a liability adequacy test adjustment. The liability adequacy test adjustment relates to the net insurance liabilities (less related deferred acquisition costs and related intangible assets). In the analysis, the level of the net insurance liabilities that will trigger a liability adjustment is determined. A further deterioration of the level of the respective risk factor implied in these net insurance liabilities results in a liability adjustment. As a consequence, the effect of changes in the risk factors on the insurance liabilities is not symmetrical. While improvements of risk factors may have no effect on the measurement of the insurance liabilities, significant enough deteriorations will impact the insurance liabilities.
The risk factor moves are applied to the entire projection period. If a contract allows for continuous repricing – as a consequence of bad loss experience – the risk factor move is applied to a limited period only if it can be demonstrated that corrective action can be taken within this period. The level of certain insurance liabilities would be affected by repricing the contracts.
At 31 December 2006, if the longevity improvement parameter had increased by 10%, the insurance liabilities would have been CHF 81 million higher in Switzerland and CHF154 million higher in the other countries.
6.6 Banca del Gottardo Asset and liability management (ALM) The main purpose of the asset and liability management at Banca del Gottardo is to manage the interest rate risk of the bank. The interest rate risk derives typically from fluctuations of interest rates that could reduce the value of the banking book or have a negative impact on the bank’s income. The interest rate risk of the banking book at Banca del Gottardo is managed by a designated committee of senior management representatives (ALM Committee). The management of the interest rate risk aims at planning, controlling and influencing the structure of the balance sheet in a manner that the defined limits are respected.
Interest rate risk The overall limit at Banca del Gottardo for the interest risk exposure of structural positions is set by the board of directors of Banca del Gottardo at 6% of the bank’s eligible equity. In order to respect this limit and for bank management purposes, the ALM Committee has the authority to undertake hedging transactions to minimise the impact of adverse interest rate movement on such positions.
The bank has issued internal directives governing the valuation of real estate serving as collateral. As a general rule, the bank’s specialists prepare appraisals of all mortgage properties. The size of the loan is a function of the borrower ’s ability to service the debt and the value of the security held by the bank. Second rank mortgages must be amortised. Centralised credit risk management is ensured by a system of aggregation and analysis of exposures.
The counterparty risk assumed with regard to banks and financial institutions is monitored separately. A line of credit is granted to each group of related counterparties, which is subsequently allocated according to individual operational needs. Lines of credit are granted and renewed periodically based on a system of approval. For banking counterparties, an IT-based internal rating system has been developed. Limits, particularly for forward transactions, are calculated according to market prices. The add-on parameters used are set cautiously. To reduce exposure to overthe -counter positions, the bank generally concludes netting contracts (ISDA). Nearly all financial counterparties (mainly banks) are domiciled in OECD countries (mostly in Western Europe). The bank manages a portfolio of fixedincome securities, which exposes it to counterparty risks. Investments in the capital market and the euro commercial paper market (euro commercial paper, certificates of deposit ) are subject to specific limits with regard to maturity, liquidity, minimum/average ratings and exposure to the economic sector.
The local banking law requires compliance with a limit of 25% of available shareholders’ equity for a single group of counterparties that are connected with each other. Internal guidelines require the evaluation of exposures to each group of counterparties that exceed 10% of available shareholder’s equity. The risk exposure in respect of a single counterparty is evaluated by determining the credit equivalent associated with each credit risk position including off-balance-sheet transactions and collateral holdings. The credit equivalent is a measure calculated for each counterparty in total (including any non-utilised lines of credit).
Basic earnings per share for the net profit attributable to equity holders of Swiss Life Holding (in CHF) 27.87 25.67
Weighted average number of shares outstanding 33 483 512 33 488 058
Diluted earnings per share for the net profit attributable to equity holders of Swiss Life Holding (in CHF) 26.92 24.82
Under the accounting principles adopted, deposits received under insurance and investment contracts are not recognised as income: In CHF million 2006 2005
Gross written premiums, policy fees and deposits received 22 064 20 211
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 141Asset management and other commission income
Sale of financial assets held to maturity 1 1 financial assets available for sale 28 721 1 803 loans –4 77
Total net gains/losses on financial instruments at fair value through profit or loss 351 –687 9 Details of Certain Items in the Consolidated Statement of Income
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 9 Details of Certain Items in the Consolidated Statement of Income (continued)
Net gains/losses on financial instruments at fair value through profit or loss include interest and dividend income of CHF 416 million for the period ended 31 December 2006 (2005: CHF 283 million). Net gains/losses on liabilities designated as at fair value through profit or loss include changes attributable to credit risk: nil for the period ended 9 Details of Certain Items in the Consolidated Statement of Income (continued)
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 11 Derivatives
Total derivatives held for trading 748 774 2 198 1 708 70 326 66 163
Derivatives designated as fair value hedges 107 – 56 149 5 719 8 057
Other embedded derivatives that have been separated from the host contracts.
In 2005 and 2006 the Group entered into interest rate swaps to hedge the available-for-sale fixed-rate bond portfolios in USD and EUR as well as loans in EUR against changes in the fair value attributable to interest rate risk. The fair value of the bond portfolios and the loans as at 31 December 2006 was CHF 2.9 billion in total (2005: CHF 5.6 billion).
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 147Derivatives designated as cash flow hedges
Banca del Gottardo hedges its exposure to variability in cash flows attributable to interest rate risk and associated with banking book interest-bearing assets and liabilities using interest rate swaps, the maximum maturity of which is nine years. A cash flow schedule, including both principal and interest flows, is built from the hedged items’ contractual terms for material currencies, and both prospective and retrospective hedge effectiveness tests are performed accordingly.
The effective portion of the fair value changes on the interest rate swaps designated as hedging instruments is recognised directly in equity and reclassified to the income statement when the hedged cash flows affect profit or loss. The ineffective portion of the fair value changes is recognised immediately in the income statement. As at 31 December 2006, a total negative amount of CHF 4 million was deferred in equity (2005: a negative amount of CHF 13 million).
Total financial liabilities at fair value through profit or loss 768 622 8 770 6 208 9 538 6 830
The financial liabilities at fair value through profit or loss in the line item “other” mainly comprise liabilities relating to structured products and certain investment funds.
The carrying amounts and the contractual redemption amounts at maturity of financial liabilities designated as at fair value through profit or loss are as follows: Carrying Carrying Redemption Redemption amount amount amount amount
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 13 Financial Assets Available for Sale
Money market instruments and loans 105 38 0 – 105 38
Based on detailed assessments with regard to indications of impairment, impairment losses totalling CHF 14 million were recognised in the period under review (2005: CHF 64 million). The impairment losses in 2006 primarily related to equity securities (2005: Primarily debt securities, hedge funds and equity securities).
Later than 1 year and not later than 5 years – 34 – 31
In 2005, the Group leased equipment to third parties under finance leases. The average contractual period of leasing arrangements was approximately 7 years. The average interest rate was 3.2%. Finance lease receivables were included in other loans. In 2006, Dreieck Industrie Leasing, the subsidiary of the Group acting as a lessor under finance leases, was sold.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 15 Financial Assets Held to Maturity
Total financial assets held to maturity, net of impairment 35 4 090 4 256 103 276 4 193 4 532 16 Investment Property
Rental income from investment property was CHF 649 million for the period ended 31 December 2006 (2005: CHF 675 million). Operating expenses arising from investment property that generated rental income stood at CHF 143 million for the period ended 31 December 2006 (2005: CHF 157 million). Operating expenses arising from investment property that did not generate rental income during the period stood at CHF 14 million for the period ended 31 December 2006 (2005: CHF 11 million).
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 17 Investments in Associates
In July 2005, Banca del Gottardo outsourced the IT and back office processes to B-Source, Lugano, and acquired an equity stake of 37% of this company. In 2006, an impairment charge totalling CHF 8 million was recognised on this investment.
Crédit et services financiers (CRESERFI), Paris 233 108 125 42 62 9 3 33.4%
AIA Pool, Sint-Jans-Molenbeek 5 4 1 0 0 0 0 13.0%
Crédit et services financiers (CRESERFI), Paris 212 100 112 37 51 10 3 33.4%
AIA Pool, Sint-Jans-Molenbeek 8 8 0 0 1 1 0 13.0%
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 18 Property and Equipment
Revaluation in respect of transfers to investment property 28 4 – – – – 4
Transfers to investment property 16 2 – – – – 2
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 19 Intangible Assets
Transfers to assets held for sale – – – – – – –
Balance as at 1 January –739 –108 –3 101 –28 –5 –128 –4 109
Foreign currency translation effects – –1 –54 –1 –1 –4 –61
Balance as at 31 December –738 –90 –1 965 –47 –11 –156 –3 007
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 19 Intangible Assets (continued)
Balance as at 1 January –1 699 –50 –2 400 –10 –3 –110 –4 272
The key assumptions used for the impairment testing on the carrying amount of goodwill totalling CHF 692 million were as follows:
These key assumptions have been derived from analysis in the specific markets. Investment returns reflect projected returns based on the specific investment portfolios and the investment strategy. The discount rates used are pre-tax rates and reflect specific risks relating to the business concerned. The growth rate was used for cash flow projections beyond the budgeted periods.
In 2005, the impairment test on the goodwill relating to Banca del Gottardo Monaco resulted in an impairment loss totalling CHF 66 million. The remaining goodwill relating to Banca del Gottardo Monaco and Dreieck Industrie Leasing amounting to CHF 47 million was reclassified as at 31 December 2005 to assets held for sale. These companies were sold in 2006.
Present value of future profits (PVP) The present value of future profits relates to portfolios of insurance contracts and investment contracts with discretionary participation acquired in a business combination or transfer of portfolios. These amounts, representing the present value of future profits amortised in proportion to gross profits over the effective life of the acquired insurance and investment contracts, primarily relate to contracts acquired in Germany and France.
Customer relationships Customer relationships relate to the acquisition of Oudart, an asset management group in France, in 2004.
Investment contracts with discretionary participation with deposit accounting 27 402 22 971
Investment contracts without discretionary participation at fair value through profit or loss 155 89 of which for the account and risk of the Swiss Life Group’s customers 5 200 3 113
Deposits released for payments on death, surrender and other terminations during the year –2 181 –1 803
Liabilities released for payments on death, surrender and other terminations during the year –61 –246
For traditional contracts in the life insurance business, future life policy benefit liabilities are determined by using the net-level-premium method on the basis of actuarial assumptions as to mortality, persistency, expenses and investment return, including a margin for adverse deviation. For participating contracts where the contribution principle applies to the allocation of the policyholder bonus, future life policy benefit liabilities are determined by using the net-level-premium method on the basis of appropriate mortality and interest rate assumptions.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 23 Borrowings
Repurchase agreements Securities sold under agreements to repurchase the same or substantially the same securities at a specific future date at a fixed price are generally treated as collateralised borrowing. Securities pledged as collateral under repurchase agreements are not derecognised from the balance sheet, unless control of these securities is transferred. Details about securities pledged as collateral are shown in note 37.
Hybrid debt In March 1999, Swiss Life/Rentenanstalt privately placed a subordinated perpetual step-up loan comprising three simultaneous advances of EUR 443 million (at a rate of interest of Euribor plus a margin of 1.05%, increasing by 100 basis points as from April 2009), CHF 290 million (at a rate of interest of Libor plus a margin of 1.05%, increasing by 100 basis points as from April 2009) and EUR 215 million (at a rate of interest of 5.3655%, as from October 2009 the rate of interest will be an aggregate of Euribor plus a margin of 2.05%). Swiss Life/Rentenanstalt can call the EUR 443 million floating rate loan at the earliest on 6 April 2009, the CHF 290 million floating rate loan at the earliest on 7 April 2009 and the EUR 215 million fixed-rate loan at the earliest on 6 October 2009 or at five-year intervals thereafter, upon notice and subject to the consent of the Federal Office of Private Insurance.
Also in November 2005, a nominal EUR 200 million of the EUR 215 million fixed-rate loan was repurchased in the market at a price of 102.22%. The loss on the repurchased debt was CHF 8.2 million and is included in borrowing costs.
Exchangeable debt (GEMMS) The GEMMS (Guaranteed Exchangeable Monetisations of Multiple Shares) were issued by the Group on 15 May 1998 and were exchangeable at the option of the holder into shares of the designated company until the maturity date of the issue. The Group could redeem some of the issues principally on or after a specific redemption date at an early redemption price.
Mandatory convertible debt On 19 December 2005, the mandatory convertible securities matured and the liability of CHF 250 million was reclassified to share premium.
Present Present Minimum Minimum value of value of lease lease minimum lease minimum lease payments payments payments payments
Later than 1 year and not later than 5 years 5 12 4 11
Claims under life insurance contracts 7 773 7 887 122 133 7 651 7 754
Total insurance liabilities and reinsurance assets 109 235 106 541 969 923 108 266 105 618 of which for the account and risk of the Swiss Life Group’s customers
Effect of changes in actuarial assumptions and other movements –824 418
Unearned premiums Represents the portion of the premiums written relating to the unexpired terms of coverage.
Total gross claims under non-life insurance contracts 1 440 1 386
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 165Defined benefit plans Employees are covered under various funded and unfunded pension plans. When a third party will reimburse some or all of the expenditure for employee benefits and the rights to reimbursement do not qualify as plan assets, they are treated as a separate asset rather than as a deduction from the obligation. In all other respects the treatment is the same as for plan assets. Participation in the various plans is based either on completion of a specific period of continuous service or on the date of hire. Benefits are based on the employee’s credited years of service and average compensation in the years preceding retirement. Annual funding requirements are determined based on actuarial methods or local requirements.
Due to the requirements of IFRS 4 Insurance Contracts in combination with IAS 19 Employee Benefits, insurance contracts issued to defined benefit plans covering own employees are eliminated. These plans are typically partially funded as certain plan assets relating to these plans are not required to be eliminated.
The major part of the defined benefit liability arises from plans covering employees in Switzerland. The primary benefit of those plans is an old-age pension paid out after 25 Employee Benefits reaching retirement age. The amount of the pension is defined in relation to final salary and depends on completion of years of service (including years of service purchased by the employee with transferred funds from plans of former employers). There are options for early retirement (with reduction of the pension amount determined with actuarial methods) and for choosing to receive a lump-sum payment instead of a pension. Other benefits comprise widows’/orphans’ pensions in case of death as well as disability pensions (if disabled before retirement age). The plans are funded by the employer through ordinary contributions determined with actuarial methods where, under Swiss law, a part (generally less than 50% of the total contribution) is deducted from the employee ’s gross salary. Further funding comprises mandatory transfers of funds made by new employees from plans of former employers, discretionary contributions by employees (within plan restrictions) and the earnings on the plan assets.
The increase in plan assets primarily relates to the restructuring of the pension fund in Germany. These plan assets consist of a qualifying insurance policy included in other plan assets.
Present value of wholly and partly funded obligations –2 625 –2 554
Employee benefit liabilities consist of gross defined benefit liabilities –2 535 –2 558 other employee benefit liabilities –26 –18
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 25 Employee Benefits (continued)
Number of employees The Group had 8693 full-time equivalents as at 31 December 2006 (2005: 8979).
Equity compensation plans In 2005, a share-based payment programme was established which gives the members of the Corporate Executive Board and senior employees the right to receive a certain number of Swiss Life Holding shares (performance share units, PSUs) after three years of service, if certain conditions are fulfilled. The number of the shares allocated depends on two criteria. One criterion is the performance of the share price of the Swiss Life Holding share during the vesting period of three years. The other criterion is the performance of the share price of the Swiss Life Holding share during the vesting period of three years compared to the performance of the Dow Jones STOXX 600 Insurance Index. The number of PSUs can increase no more than by a factor of 1.5 or drop by 0.5, within three years, depending on how the criteria develop.
The Group determines the fair value of the PSUs granted for each programme at the grant date. The fair value was determined using the Black-Scholes formula and Monte Carlo simulations. The associated expense during the vesting period is recognised under employee benefits expense with a corresponding increase in share premium. The expense recognised for 2006 totalled CHF 5 million (2005: CHF 4 million).
Number of performance share units Balance after Balance as at Reduction reduction in Employee Balance as at 1 January Issued in par value par value departures Vested 31 December
Share options The Group offered share options to directors and managers in Switzerland and abroad. No new share options have been allocated since 2003.
1) Number of shares adjusted due to reduction in par value of Swiss Life Holding shares in accordance with Eurex rules 2) Exercise price adjusted due to reduction in par value of Swiss Life Holding shares in accordance with Eurex rules
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 26 Income Taxes
In connection with the restructuring of the real estate management business, the Swiss Life Group realised in 2005 a tax benefit of CHF 18 million. Additionally, due to the reduction of the tax base in the real estate business, a tax benefit totalling CHF 23 million was realised in 2005.
Increase/reduction in taxes resulting from tax-exempt interest –9 –14 tax-exempt dividends –12 –3 other non-taxable income –236 –297 non-deductible expenses 61 78 other income taxes (incl. withholding taxes) 0 5 unrecognised tax losses/credits 8 31 use of previously unrecognised tax losses/credits –7 –83 other –12 13
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 26 Income Taxes (continued)
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same tax authority.
Deferred Deferred Deferred Deferred tax tax tax tax assets assets liabilities liabilities
Balance as at Recognised Recognised translation Balance as at 1 January in income in equity differences 31 December
Net deferred income tax assets/liabilities –1 057 –45 336 –5 –771
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements
Unused amounts reversed during the reporting period 0 –8 –8 –29
Deferred tax assets are recognised for tax-loss carryforwards and unused tax credits only to the extent that realisation of the related tax benefit is probable. Swiss tax assets are calculated in accordance with cantonal and communal tax legislation. The uncertainty of the recoverability of tax losses and tax credits is taken into account in establishing the valuation allowance. For the following tax-loss carryforwards and tax credits, which will expire as follows, no deferred tax asset has been recognised as at 31 December: Restructuring costs In 2006, CHF 19 million provisions for restructuring programmes were primarily set up at Banca del Gottardo and in Germany.
Share capital As approved by the shareholders at the General Meeting of Swiss Life Holding (SLH) on 9 May 2006, a reduction in par value of CHF 5 per registered SLH share was effected in 2006 (2005: CHF 4 per registered share). The payout took place at the beginning of August 2006 and led to a reduction in the share capital of SLH of CHF 169 million (2005: CHF 135 million).
Share premium Share premium comprises additional paid-in capital in excess of the par value (net of transaction costs), gains/losses on own equity instruments, equity compensation benefits and equity elements of convertible debt.
Due to the reduction in par value of CHF 5 per registered SLH share in 2006 (2005: CHF 4 per registered SLH share), an amount of CHF 2 million was credited to share premium in respect of treasury shares (2005: CHF 9 million).
Number of shares The following table shows the development of SLH shares issued and treasury shares held by the Swiss Life Group during the period: Gains and losses recognised directly in equity Gains/losses recognised directly in equity comprise fair value changes of available-for-sale investments, revaluation surpluses on the transfer of owner-occupied property to investment property and the effective portion of the gain or loss on hedging derivatives in qualifying cash flow hedges. These amounts are net of certain policyholder bonuses and other policyholder liabilities and deferred acquisition costs, deferred income taxes and minority interests.
Total gains and losses, net of income tax and other items 305
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 175Gains and losses recognised directly in equity for the year ended 31 December 2005
Gains/losses transferred to the income statement 9, 11 –1 803 4 – –1 799
Impairment losses transferred to the income statement 9 64 – – 64
Maturity of mandatory convertible securities (MCS I) On 19 December 2005, the mandatory convertible securities (MCS I, 2002–2005) matured and the liability component totalling CHF 250 million was reclassified to share premium. As a result, the number of treasury shares
(hybrid capital instruments) and deferred Group-related funds (theoretical policyholder participation in surplus under consideration of additional DAC amortisation and deferred taxes).
The Swiss Life Group acquired in December 2006 an insurance broker in Belgium. The acquisition cost amounted to CHF 3 million.
The Italian insurance operations were sold in December 2006. The sales price amounted to CHF 25 million and the loss realised on the sale totalled CHF 11 million.
In February 2006, the Swiss Life Group sold Banca del Gottardo (Monaco). The sales price amounted to CHF 146 million and the gain realised on the sale was CHF 23 million.
Financial assets at fair value through profit or loss – – 0 –
Financial liabilities at fair value through profit or loss – – 0 –
Cash used for acquisitions (–)/received from disposals (+) –3 0 262 18
In 2005, the Swiss Life Group took on the group life portfolio of Vaudoise.
Net gains/losses on financial instruments at fair value through profit or loss – – 19 19 53
Asset management and other commission income – – – – 1
Sales to and purchases from related parties are made at normal market prices. Outstanding balances at year-end are unsecured and settlement is made in cash. There have been no guarantees provided or received for any related party receivables. For the year ended 31 December 2006, no provisions have been made for doubtful debts in respect of the amounts owed by related parties. This assessment is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates.
Total on-balance-sheet assets managed by the enterprise 167 869 160 001
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 35 Fair Value of Financial Instruments Not at Fair Value in the Balance Sheet
Financial assets held to maturity 15 4 090 4 256 4 193 4 532
Later than 1 year and not later than 5 years 57 54
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 182 Commitments to extend credit The Group has also entered into irrevocable commitments to extend credit in the form of loans and other instruments. They represent undrawn credit lines which are available to clients to secure their liquidity needs. With respect to credit risk, these commitments are contingent upon clients maintaining certain credit standards, and the Group monitors its exposure on a regular basis.
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 at 31 December 2006, committed principal amounts stood at EUR 33 million and CHF 114 million (2005: EUR 72 million and CHF 110 million ). The periods for which these commitments were made extend from one month to six years, and the range of committed interest rates is 2.3% to 6.8%.
Capital commitments The Group had commitments to purchase investments of CHF 340 million (excluding private equity) as at 31 December 2006 (2005: CHF 86 million ). Contractual obligations to purchase or construct investment property amounted to CHF 318 million as at 31 December 2006 (2005: CHF 52 million). Commitments for the acquisition of property and equipment amounted to CHF 0.1 million as at 31 December 2006 (2005: CHF 0.1 million).
Other contingencies and commitments Contractual obligations for repairs and maintenance of investment property amounted to CHF 57 million as at 31 December 2006, which are included in this line item (2005: CHF 17 million).
Legal proceedings The Group is involved in various legal proceedings, claims and litigation generally relating to its insurance operations. The outcome of such current legal proceedings, claims and litigation could have a material effect on operating results or cash flows when resolved in a future period. However, in the opinion of the management these matters are adequately provided for as at the balance sheet date.
Securities under repurchase and securities lending transactions 1) 4 167 1 389
1) of which can be sold or repledged by transferee 124 1 232
Securities under repurchase agreements, securities borrowing and lending arrangements 4 495 3 403
Later than 1 year and not later than 5 years 416 350
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 39 Reclassifications in the Consolidated Statement of Income and Consolidated Balance Sheet
Reclassifications in the statement of income for the year ended 31 December 2005
Benefits and claims under investment contracts with discretionary participation – –240
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 185Reclassifications in the balance sheet as at 31 December 2005
Benefits and claims under investment contracts with discretionary participation totalling CHF 240 million which were previously carried under insurance benefits, claims and claim settlement costs are now presented separately.
Certain expenses totalling CHF 37 million relating to asset management were reclassified from other expenses to commission expense.
These reclassifications were also reflected in the consolidated statement of cash flow for the year ended 31 December2005.
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 41 Significant Subsidiaries and Associates
Dreieck Industrie Leasing, Lausanne – until 27.01.2006 – – full CHF 15 000
Pendia Associates, Zürich – until 23.01.2006 – – full CHF 500
Swiss Life General Partners in liquidation, Zürich Other 100.0% 100.0% full CHF 100
Swissville Private, Zürich – until 30.06.2006 – – full CHF 50 000
Swiss Life (Liechtenstein), Vaduz Insurance 100.0% 100.0% full CHF 5 000
SCI Paris Dammartin, Roubaix – until 25.12.2005 – – full EUR 15
Société suisse vie, Paris (branch Swiss Life/Rentenanstalt) Insurance – – full – –
Swiss Life Assurances de Biens, Paris Insurance 100.0% 100.0% full EUR 110 850
Segment 1) Consolidation period Group share Direct share consolidation Currency in 1000
Adamant, Basel – until 29.03.2006 – – equity CHF 250 1) Segment (IM = Investment Management)
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 189Authorised Method of share capital
Swiss Life Asset Management GmbH, München Insurance from 14.12.2006 100.0% 100.0% full EUR 1 000
Swiss Life Beteiligungs-GmbH & Co. Grundstücksverwaltung KG, München Insurance from 10.06.2005 100.0% 100.0% full EUR 50
Swiss Life Partner AG, München Insurance 83.8% 83.8% full EUR 7 000
Zwitserleven, Amstelveen (branch Swiss Life/Rentenanstalt) Insurance – – full – –
Zwitserleven Vermogensbeheer, Amstelveen Insurance 100.0% 100.0% full EUR 2 269 1) Segment (IM = Investment Management)
Swiss Life Group . Financial Statements 2006 . Notes to the Consolidated Financial Statements 1) Segment (IM = Investment Management)
Swissville Europe (Belgium), Bruxelles – until 25.01.2006 – – full EUR 8 087
Gotam Umbrella Fund (Lux) Advisory Company, Luxembourg Banking 100.0% 100.0% full CHF 200
Gottardo Equity Fund (Lux) Management, Luxembourg Banking 100.0% 100.0% full CHF 200
Swiss Life Funds (Lux) Management (formerly Swiss Life Multi Funds (Luxembourg) Management), Luxembourg IM 100.0% 100.0% full CHF 200
Swiss Life Invest Luxembourg, Strassen Insurance from 04.12.2006 100.0% 100.0% full EUR 35 000
Alpine Holdings, St. Peter Port, Guernsey – until 15.08.2006 – – full USD 600
Integer Investment PCC Limited Cell 7, St. Peter Port, Guernsey – until 28.02.2006 – – full CHF 0
Gottardo Gestión, SGIIC, Madrid Banking from 07.02.2005 100.0% 100.0% full EUR 868
Gottardo Inversiones Financieras, Madrid Banking 100.0% 100.0% full EUR 1 667
Gottardo Patrimonios, Madrid Banking from 25.05.2005 100.0% 100.0% full EUR 650 41 Significant Subsidiaries and Associates (continued)
Swiss Life (Italia), Milano – until 31.12.2006 – – full EUR 5 170
Gottardo Trust Company, Nassau Banking 100.0% 100.0% full USD 3 000
Swiss Life Finance, Tortola – until 22.11.2005 – – full USD 50
Swiss Life Financial Services, Grand Cayman Other 100.0% 100.0% full CHF 50
Gottardo A.E.P.E.Y., Athens – until 22.04.2005 – – full EUR 1 600
Financial Strategy (Sam), Monaco – until 27.09.2005 – – equity EUR 750
N.V. Pensioen ESC, Willemstad Insurance 100.0% 100.0% full ANG 1 000 1) Segment (IM = Investment Management)
Swiss Life Group . Financial Statements 2006 . 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 79 to 191) of Swiss Life Group for the year ended 31 December 2006.
The interest received on loans made to Group companies declined because loans outstanding contracted by CHF 137 million.
The total expenses of Swiss Life Holding remained stable vis-à-vis the previous year.
By liquidating its subsidiary Swiss Life Cayman Finance, Swiss Life Holding simplified its participation structure. This liquidation was made possible by the conversion, at the end of 2005, of the mandatory convertible securities issued in 2002.
Swiss Life Holding generated a profit of CHF 249 million in the 2006 financial year compared with CHF 172 million in the previous year.
Swiss Life Holding . Financial Statements 2006 . Statement of Income
Free reserves and retained earnings Free reserves and retained earnings contain accumulated retained earnings which have not been distributed to the shareholders.
Authorised Authorised share share capital in capital in Currency 1000 Direct share Currency 1000 Direct share
Swiss Life Cayman Finance, Grand Cayman – – – CHF 0 100.0%
Swiss Life Intellectual Property Management, Zürich CHF 250 100.0% – – –
Swiss Life International Holding, Zürich CHF 1 000 100.0% – – –
In 2006, convertible bonds of CHF 42 000 were converted into 191 SLH shares with a corresponding increase of share capital and share premium.
Own shares In the year under review the companies in the Swiss Life Group purchased a total of 644 170 Swiss Life shares at an average price of CHF 272.08. In the same period, they sold 570 366 shares at an average price of CHF 281.08. As at 31 December 2006, the Swiss Life Group held 335 517 own shares.
Total profit shown in the balance sheet 253 403 418 174 252 874
The net profit for the year amounts to CHF 249 150 544. The Board of Directors proposes to the General Meeting of Shareholders to appropriate the profit in accordance with the table below. If the Board of Directors’ proposal is adopted, a distribution in the form of a reduction of CHF 7 in the par value per share will be paid.
Swiss Life Group . Annual Report 2006 . Caution regarding forward-looking statements
Swiss Life Group . Annual Report 2006 . Dates and contacts