28 Banking 29 Investment Management 30 Swiss Life Network 37 Corporate Governance 56 Responsible Corporate Conduct 63 Embedded Value 65 Risk Management 67 Asset and Liability Management
– Profit reaches CHF 874 (+44%) for a return on equity of 12.3%
– Insurance and banking strategy reviewed and further developed with clear objectives for 2008
“Music transports me to another world. It is the balance that I need to my career. In order to be able to play in an orchestra, I have to master my instrument and also work on myself. Music has shown me what I can achieve with commitment, concentration and perseverance.”
Expertise is a characteristic of our team. It’s exactly the same as playing in an orchestra, as we listen to each other and work towards a common goal. For example, if we have to analyse a specific risk or develop a new model, the end result reflects both our knowledge and the experience of experts who are masters of their instruments.
Swiss Life Group . Review of Operations 2005 . Letter to Shareholders
Balance sheet risks were actively steered as part of Asset and Liability Management. This ensures that Swiss Life will fulfill the capital requirements of the new Swiss Solvency Test, which is based on the Basel II directive for the European Union. The solvency margin of the Swiss Life Group came to 211% as per 31 December 2005 (2004: 192%). The total of outstanding borrowings dropped by around to CHF 4.4 billion, and the goodwill position was reduced to below CHF 700 million. This strong capitalisation led Standard & Poor’s to confirm its “A–” rating for the operating companies and to change the forecast from “negative” to “stable” in July 2005. The share price also reflects this positive business trend. Swiss Life Holding shares were up with the best in the Swiss Market Index, with a performance of 44% in 2005. Market capitalisation was CHF 8.0 billion as per 31 December 2005. It has more than tripled in the past three years.
Growing by optimising the distribution and product mix Our strategic priorities for the coming years are growth, efficiency and leadership. The growth is based on positioning Swiss Life as the provider of choice for pensions and long-term savings, and continuing to improve customer satisfaction levels. We are following a multi-channel strategy in every country and working at fine-tuning our marketing capabilities. The further development of our product range is also moving ahead briskly. We were well prepared for the changes to the legal parameters of our markets and were able to bring new, appropriate products to market in good time. The growth we achieved last year is proof of this.
We are targeting a basic insurance result of CHF 500 million by 2008. In 2005 we achieved CHF 148 million. We have various drivers to help us achieve the necessary improvement: premium volume, pricing, underwriting policy, reserve policy and costs. Achieving our objective will not be possible by concentrating on just one of these drivers. But it is clear that an increase in efficiency has a direct, oneon -one effect on our basic insurance result. For this reason, increasing efficiency is our highest priority in all our markets.
Encouraging and promoting corporate responsibility Our task where leadership is concerned is to develop our corporate culture further, based on our values. On the one hand, leadership means that Swiss Life as a company wants to establish itself as an authoritative voice in the political debate surrounding the framework conditions regarding pensions. As market leader, Swiss Life has always participated in the political debate in Switzerland. What is new is that we now want a say in the political discussion taking place in the other markets. Several times a year, Swiss Life invites decision-makers and leading figures from business, politics, academia and the media to the historic Palais Leopold in Munich, where they can exchange views on important social issues of the future. In June 2005, Swiss Life hosted a “National Pensions Day” in Belgium. Representatives from politics, business and academia discussed the challenges faced by retirement savings plans in Belgium and Europe as a whole during this event.
Banca del Gottardo as an important part of the Group Banca del Gottardo belongs to the Swiss Life Group and is an important part of it. The bank makes a major contribution to the earning power of our Group and thus to the achievement of our strategic objectives. In future, the bank will concentrate on private banking. Geographically the emphasis will be on Switzerland for onshore and offshore business together with Italy as the most important market abroad. The first important steps in implementing our adapted strategy were the decision to outsource the IT and back-office procedures in May 2005 and to sell the Banque du Gothard (Monaco) and Dreieck Leasing SA at the beginning of 2006. Despite the various changes introduced during the period under review, the bank posted a good return for the 2005 financial year.
Swiss Life Group . Review of Operations 2005 . Letter to Shareholders 9Personnel and organisational changes In connection with the Group’s strategic priorities, we decided to fine tune the assignment of responsibilities in the Corporate Executive Board as of 1 January 2006. Bruno Pfister, formerly Chief Financial Officer (CFO), assumes responsibility for the Group’s international business as CEO International. Thomas Müller, formerly CFO of Banca del Gottardo, succeeds him as CFO. Reto Himmel, formerly Chief Technology Officer, is being given a slightly different portfolio of responsibilities in his role as Chief Technology & Operations Officer. His focus will be directed entirely to the implementation of Group-wide synergies in IT and operations.
Georges Muller, member of the Board of Directors, will not be standing for another term at the General Meeting on 9 May 2006. Mr Muller was elected to the Supervisory Board of Swiss Life/Rentenanstalt in 1995 and in 1997 he became a member of the Board of Directors. Since November 2002 he has been a member of the Swiss Life Holding Board of Directors as well as Chairman of the Board of «La Suisse» and a member of the Board of Directors of Banca del Gottardo. With his comprehensive experience of internationally operating companies and his outstanding specialist knowledge, in particular in the field of financial market law and corporate governance, he has contributed a considerable amount to the successful development of the Swiss Life Group. We would like to thank Georges Muller warmly for his committed contribution as a member of the Board of Directors and for the pleasant professional relationship we enjoyed.
Thank you We would like to thank all our customers, our shareholders and our business partners for their trust and loyalty to Swiss Life. In particular, we would like to thank our employees for their contribution to the successful development of our company in the previous year, and for their unstinting commitment. We are convinced that, with the same level of enthusiasm and commitment, we shall be able to successfully master the challenges that lie ahead and reach our ambitious goals.
Chairman of the Chairman of the Board of Directors Corporate Executive Board
With a share of around 5%, Swiss Life is the major international provider of pension solutions in its target markets. In its domestic market Switzerland it is the market leader again in terms of premium volume. More than a million customers in Switzerland have ties with Swiss Life through their private or occupational pension arrangements. Thanks to its competence, effective sales channels and strong brand, especially for affluent clients and in the group life business, Swiss Life is a preferred alternative to domestic providers in the French, German, Dutch, Belgian and Luxembourg markets.
Strategy Swiss Life wants to achieve a position of pensions leadership. Swiss Life means to be the first choice for customers, investors and employees in this sector. Based on the three strategic directions – growth, efficiency and leadership – our company is right on track to realising this ambition.
Swiss Life Group . Review of Operations 2005 . Strategy 11Ambitious goals Swiss Life aims to be first choice for its clients, by setting standards with regard to quality of advice, products and service. This will lay the groundwork for Swiss Life to record a profit of CHF 1 billion and a sustainable return on equity above 10% by 2008. Shareholders should be adequately compensated by regular dividends for making risk capital available. Swiss Life wants to be an attractive employer for its staff – a company they are proud to work for.
Growth Swiss Life intends to benefit from the growing pensions market and position itself in its markets as the preferred provider of pension solutions for individuals and companies. Swiss Life wants to grow by at least 1% above the market average in all the countries in which it operates. This puts a high priority on the quality of products, services and customer care in every market. In the life insurance business Swiss Life wants to maintain its leading position while stepping up the development of pension products and expanding its services relating to future provisions, with products like the Life Asset Portfolios (LAP), for example, which enable clients to place whatever invested assets they wish in a life insurance policy. Swiss Life advanced across a broad front last year with the development of solutions focused on returns and a significantly increased share of non-traditional products. Distribution in the individual markets will be more strongly diversified in order to create additional possibilities for customers to make contact. Swiss Life already has a very good mix of distribution channels in France with its own sales force network, a system of tied agents and cooperation with brokers and banks. Distribution in Germany and the Netherlands, which has relied strongly on brokers up to now, is being reinforced with its own distribution channel. New sales opportunities have been created in Germany with Swiss Life’s membership of the country’s largest employee benefits institution, the MetallRente consortium. In Switzerland the emphasis is on raising the effectiveness of Swiss Life’s own external sales force and strengthening of sales via banks and brokers.
Moreover the new cooperation arrangements with Helsana, the leading health insurer, and Mobiliar, the leading property insurer, give Swiss Life access to new groups of customers.
Switzerland in particular saw important progress in this direction last year. This included the clear focus on the Swiss Life brand exemplified by the integration of the «La Suisse» life business and the sale of the former subsidiary’s other business lines. Swiss Life simplified the product landscape for group life as an important precondition for further cost economies in administrative and business operations. Work on reducing the number of administration systems to one single platform in group and one for individual insurance is proceeding according to plan.
“Meeting face-to-face means a lot to me. E-mail and the phone are practical, but nothing beats a personal discussion. I would like to make our clients better acquainted with our products and our philosophy and to really instil confidence in them. This takes time, but it’s time I’m willing to take.”
Proximity to the client is important to us. It comes about if we continue to keep in contact and actively communicate. We support all our clients on a personal, honest and direct basis. We are always available for them.
Client Services in Luxembourg (from top left to bottom right): Alexandre Stanescot, Steve Goedert, Daniel Pascuzzo, Thomas Scheifer, Roger Braun, Pierre Dubru, Orietta Fagiani, France Delplanque, Mathilde Tassot, Ronny Simon, Dieter Putzeys
Revenue came to a total of CHF 21.5 billion (–4%). However, it must be noted that in the income statement, in accordance with the international accounting standards (IFRS), only the earned premiums are incorporated and not the gross premium income including investment contracts, as in the usual premium comparisons. Whilst the investment contracts rose by 40% to CHF 6.0 billion in the period under review, the net earned premiums fell by 9% to CHF 13.2 billion. Swiss Life increased its fee income on investment contracts both from banking and asset management by 16% to CHF 774 million.
Compared to 2004, insurance benefits declined by 9% net to CHF 14.0 billion in line with the premium income earned. The total appropriated for to policyholders increased by 43% to CHF 2.2 billion. This is primarily due to the above-mentioned allocation to the reserves for policyholder bonuses. Interest expenses (excluding borrowing costs) decreased by 5% to CHF 862 million.
The Swiss Life Group increased profits by 44% to CHF 874 million compared to the previous year. After allowing CHF14 million for minority interests, CHF 860 million is available for the shareholders of Swiss Life Holding. This translates into (diluted) earnings per share of CHF 24.82 and a return on equity of 12.3%, (2004: 10.7%). The strategic and operational advances are also reflected in the growth in premium income on a comparable basis by 8% to CHF 20.2 billion and a further reduction in operating costs by 2%. Swiss Life achieved growth that was sometimes well above the market average, in France (+19%), Germany (+8%), Belgium (+32%) and Luxembourg (+100%), thus gaining market share. In Switzerland, Swiss Life was able to retain its market share although premium income dropped back slightly.
Operating profit totalled CHF 1023 million. Insurance contributed CHF 918 million. The decline of CHF 123 million in the result for the insurance segment compared to the previous year is mainly attributable to a clearly higher allocation to reserves for policyholder bonuses as a result of profits realised on bonds. Swiss Life created additional risk capital on the books to provide more flexibility in its investment policy during the period of the lowest interest rates. The largest proportion of the operating profit comes from the domestic market in Switzerland, with CHF 620 million. In the European markets, Swiss Life realised an operating profit totalling CHF 302 million (France: CHF 98 million; Germany: CHF 80 million; Netherlands: CHF 111 million; Belgium/Luxembourg: CHF 18 million; other: CHF –5 million). The segment result for Banking came to CHF 117 million (2004: CHF 73 million), in Investment Management CHF 61 million (2004: CHF 59 million). The segment other and the eliminations reduced the operating profit by CHF 73 million (2004: CHF –25 million).
Tight cost management led to a further reduction in operating costs by 2% to CHF 2.0 billion. Overall operating expenses increased by 1% to CHF 3.4 billion. The lower expenses for benefits to employees and impairment adjustments for tangible fixed assets and intangible assets were offset by an increase in fees and commissions, and expenditure on depreciation. As of 31 December 2005 the Swiss Life Group employed a workforce of 8979 on a full-time equivalent basis (end 2004: 9419). The decrease is a result of the integration of the «La Suisse» life insurance business in Swiss Life and the sale of all other «La Suisse» business lines, and the outsourcing of the Banca del Gottardo IT and back-office functions.
Income tax expense made a positive contribution of CHF 21 million due to special situations and a partial release of reserves in connection with changes in the law, whilst in the previous year income tax expense represented a total charge of CHF 337 million.
As per 31 December 2005 the Swiss Life Group’s assets under management stood at CHF 207.6 billion (+9%).
Switzerland Swiss Insurance Association (SIA) estimates for 2005 indicate that premiums dropped by 6% for the Swiss life insurance market as a whole to CHF 28.4 billion. The primary reasons were that some insurance companies spun off their occupational benefits business, and that low interest rates had a negative impact on demand for individual insurance.
For Swiss Life 2005 was a year of laying the groundwork for a successful future. Swiss Life integrated the life insurance business of «La Suisse» and the Vaudoise group life business into its own operations, entered into new sales agreements, made excellent progress on the project to simplify administrative systems and improved its product range. Gross premium income totalling CHF 7807 million represents an 11% decline from the previous year. Group insurance premiums dropped by 14% to CHF 5624 million.
The financial result of CHF 2938 million was just below the result of the previous year (–2%). Investment income dropped 6% to CHF 2150 million, mainly as the result of the lower interest rate level. This drop was only partially offset by higher realised and unrealised capital gains.
Net insurance benefits, claims and claim settlement costs –7 983 –9 297 –14.1%
The following themes were also prominent in 2005: increasing efficiency and profitability, launching new products in both individual and group insurance and continuing to improve customer satisfaction. The standardisation of the IT systems in individual business (2007) and group business (2008) will further lower operating expenses in the coming years. Efforts are underway to increase the quality and sales performance of our external sales force using improved distribution management and marketing programmes tailored to each region as well as by expanded training opportunities. The redesigned product range should also be a positive contribution. In the individual insurance business Swiss Life successfully launched a new investment vehicle in the autumn of 2005 which optimally combines security and attractive earnings perspectives (Swiss Life GarantiePlus). In 2006, this innovation, which has only been available on a single-premium basis to date, will be possible with periodic premiums as well. With regard to group insurance, Swiss Life remains convinced that full coverage is the best occupational benefits solution for small and medium-sized companies. Indeed, Swiss Life continues to be very successful in the market with this model. Last year the company also launched a transparent and inexpensive solution for small companies (Swiss Life Modula Basic), which was expanded by additional modules in the first quarter of 2006. But Swiss Life also offers customised solutions that allow customers to decide on the basis of their own individual risk profile whether their emphasis is security or returns (Swiss Life Prime Solution).
In 2005 Swiss Life expanded its gross written premiums in the life insurance business by 26% to a level of CHF 5276 million, thus considerably outpacing market growth. Swiss Life’s share of the French market works out at around 3%. With an increase of 74% Swiss Life also enjoyed significantly above-average growth in the market for unit-linked insurance products. The premium volume from traditional insurance products rose by 19%.
Gross premiums from Swiss Life’s health insurance business rose by 7% to CHF 1541 million. Premium volume in property insurance, which makes up 8% of Swiss Life’s premiums, dropped by 2%. All sales channels contributed to Swiss Life’s strong growth in premiums: In addition to its own sales organisation, Swiss Life has a network of sales agents working exclusively for the company in France (tied agents), outstanding relationships with brokers and sales agreements with well-known banks. The strength of the product range also contributes to the sales success. This is also underscored by the many awards garnered by Swiss Life in the year under review.
Swiss Life’s income in France rose by 8% to CHF 4748 million, which can be attributed to higher premium and fee income as well as to an improved financial result. Net insurance benefits (including claims and claim settlement costs, net) increased by 4% to CHF 2198 million during the reporting year. The outlay for bonuses increased by 50% to CHF 816 million, largely reflecting the course of business but also tax provisions which were released and partially credited to policyholders. Operating expenses decreased 7% to CHF 1083 million. The drop in expenditures is largely due to the amortisation of goodwill in 2004. In total even after adjusting for this amortisation the operating result increased from CHF 14 million to CHF 98 million.
Swiss Life, which holds some 2% of the German market, increased its gross written premiums there by 8% compared with the previous year. This above-market-average premium growth was mainly possible thanks to a strong second half. The total earnings rose by 8% to CHF 2795 million compared with the previous year. This was driven above all by the increase in gross written premiums and capital gains realised on investments.
Insurance benefits paid rose in connection with premium growth by 15% to stand at CHF 2066 million. The slight reduction of participation in surplus, and the considerably lower outlay for deferred policyholder bonuses, led to a drop in the total expenditure for policyholder bonuses to CHF 231 million. The 57% increase in operating expenses over the previous year to CHF 384 million can be particularly attributed to the more conservative model assumptions used to calculate the deferred acquisition costs, which also led to a significantly higher cost for their amortisation. Additional expenditures in connection with the optimisation of internal processes also increased the operating expenses. This produced an operating result of CHF 80 million, which is CHF 16 million (+25%) more than in the previous year.
Net insurance benefits, claims and claim settlement costs –2 066 –1 793 15.2%
rating agency Morgan & Morgan confirmed Swiss Life’s leading position as a specialist in coverage for disability.
In 2005 Swiss Life achieved gross written premiums of CHF 1592 million, representing a drop of 19% from the previous year. This decline is explained by the acquisition, concluded in 2004, of the group business of the Dutch insurer “De Goudse” (EUR 300 million). On a comparable basis, premium volume rose by 6% over the previous year.
Net insurance benefits and losses from the insurance business dropped by CHF 542 million (–27%) to CHF 1456 million. This development reflects the disposal of a large portfolio in 2005 and the acquisition of the “De Goudse” group business in 2004. Operating expenses were reduced to CHF 212 million (–15%) mainly due to significantly lower write-downs on deferred acquisition costs. Bonuses for policyholders rose from CHF 63 million to CHF 229 million. This rise was largely the result of an increase in gains realised on investments for separate accounts. The operating result dropped from CHF 284 million to CHF 111 million, primarily due to the extraordinary gain on the sale of the mortgage portfolio in 2004.
Net insurance benefits, claims and claim settlement costs –1 456 –1 998 –27.1%
Net insurance benefits, claims and claim settlement costs –358 –294 21.8%
Other After the sale of its business in the UK in 2004, the Swiss Life Group is still active in Liechtenstein and Italy.
Customers establish an investment strategy, which they may change at any time if need be. The range of investments is very broad. All normal asset categories, such as equities, bonds, hedge funds, etc. can be brought into the LAP. Customers profit from tax advantages, the privileged position policyholders have in case of bankruptcy, and effective estate planning. Customers may retain their previous investment strategy and are protected by the strict secrecy regarding policyholders in Liechtenstein.
The consolidated net income amounted to CHF 493 million (+9%). Commissions and service fees contributed CHF 262 million (+7%), the interest business CHF 146 million (+1%) and trading income CHF 76 million (+48%) to this result.
Customer assets under management, not including custody assets entrusted by third parties for safekeeping, rose in the reporting period from CHF 34 billion to CHF 39 billion. New customer money in the private banking division grew by CHF 440 million. Thanks to additional transfers of Swiss Life Group custody assets the volume of the custody business rose in 2005 by CHF 31 billion, reaching CHF 38 billion as at 31 December 2005. This brought the value of assets under control at the end of 2005 to CHF 77 billion.
Total assets rose by 43% over the previous year to CHF 15 billion. This marked increase is primarily due to the high level of customer assets on the balance sheet date. Equity before distribution of profit amounted to CHF 1031 million (+3%) on 31 December 2005.
Banking In 2005 the Swiss Life Group generated a segment result of CHF 117 million in Banking. The implementation of the new strategy and the outsourcing of IT and backoffice services are on track at Banca del Gottardo.
Swiss Life Group . Review of Operations 2005 . Investment Management
In the year under review Swiss Life continued focusing and simplifying the structures in Investment Management with the founding of Swiss Life Investment Management Holding AG. The major companies in the Investment Management segment were incorporated into the new holding company as subsidiaries. The new arrangement brought improvements in the transparency and efficiency of Swiss Life and simplified the management structure. Swiss Life Investment Management Holding AG is responsible for functions such as controlling for all the companies belonging to this segment. Swiss Life realised savings in the funds business by exploiting synergies within the group and reducing the number of external providers.
Swiss Life Group . Review of Operations 2005 . Swiss Life Network
The Swiss Life Network offers pension plans everywhere in the world for employees of international companies.
Service provision is based on the bundling or pooling of the group contracts of multinational companies.
United Kingdom UnumProvident 1) Health insurer for Swiss Life Network's international clients
Jérôme Mesnil works in Paris and supports brokers in the Paris area and in southwest France.
Openness is the key to success when selling products. The needs of our clients and the working methods of the broker firms are changing faster and faster. We are successful because we are always prepared to accommodate the most varied needs.
Our broker consultants in Paris (from top left to bottom right): Thierry Villetelle, Sandrine Tellier, Jérôme Mesnil, Patrick Oliva, Jean-Louis Remise, Anne Joly
The Board of Directors and Corporate Executive Board of the Swiss Life Group place great importance on corporate governance. The requirements this entails are reflected in the organisation and transparency of the Group. Good corporate governance is seen as an important precondition for adding value on a sustained basis for the benefit of the shareholders, policyholders and employees.
The Code of Compliance introduced by the company as of 1 January 2006 sets out rules of conduct to ensure the legally and ethically correct conduct of business based on the values of the Swiss Life Group. Further information on responsible corporate conduct can be found on page 56.
Shareholders On 8 June 2004, Premafin Finanziaria S.P.A. reported that a group consisting of Premafin Finanziaria S.P.A. Rome; Fondiaria-SAI SPA, Florence; Fondiaria Nederland BV, Amsterdam; and Milano Assicurazioni S.P.A., Milan, held a 9.93% stake (3 141 026 shares) in Swiss Life Holding. From that time up to and including the balance sheet date on 31 December 2005, no further announcements were received from Premafin Finanziaria S.P.A.
37Corporate Governance The Swiss Life Group is committed to openness and transparency in management and actively supports good corporate governance.
With the above-mentioned exception concerning the group of companies around Premafin Finanziaria S.P.A., no shareholders are known to Swiss Life Holding whose direct or indirect interest on the balance sheet date (31 December 2005) exceeded the threshold level of 5% of the registered shares in issue.
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 1 553 699 588, divided into 33 776 078 fully paid registered shares with a par value of CHF 46 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, by 10 834 704 registered shares with a par value of CHF 50 each to shares).
In December 2002, Swiss Life Holding completed an ordinary capital increase of CHF 541 985 200, divided into 10 839 704 registered shares of CHF 50 par value each, in which existing shareholders were granted negotiable subscription rights for each share. As a result, the share capital increased to CHF 1 083 970 400, divided into 21 679 408 registered shares with a par value of CHF 50 per share. Also in December 2002, pursuant to the issue of the MCS I (2002–2005) mandatory convertible securities, 1 768 535 registered shares with a par value of CHF 50 per share were created from the conditional capital. As a result, the ordinary share capital rose by CHF 88 426 750 from CHF 1 083 970 400 to CHF 1 172 397 150, divided into 23 447 943 registered shares. The conditional capital decreased accordingly, to CHF 182 565 850 or 3 651 137 registered shares.
At the end of 2003, Swiss Life Holding simplified its shareholder structure by making an offer to purchase the minority interests remaining in its Swiss Life/Rentenanstalt subsidiary after the exchange of Swiss Life/Rentenanstalt shares for Swiss Life Holding shares in 2002. The company issued the MSC II (2003–2004) mandatory convertible securities so as to be able to buy up these Swiss Life/Rentenanstalt shares as efficiently as possible. In conjunction with the issue of MCS II (2003–2004) mandatory convertible registered shares, each with a CHF 50 par value, were issued
To 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 the issue of a maximum of 8 344 680 fully paid registered shares at 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.
Due to partial conversion of the 0.625% convertible bond issue (2004–2010) (cf. section on “Convertible bonds and options” on page 40), 19 registered shares in all were created from conditional capital in 2004. The share capital thereby rose to CHF 1 688 790 900, divided into 33 775 818 registered shares with a par value of CHF 50 each, and the conditional capital was reduced by CHF 950 to stand at CHF 183 406 100, divided into 3 668 122 registered shares with a par value of CHF 50 each.
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 return 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.
No types of shares exist with either increased or limited voting rights, privileged or restricted voting rights, privileged dividend entitlements or other preferential rights. No registration restrictions apply to Swiss Life Holding shares.
Information on options granted by Swiss Life Holding or by Group companies on rights to participate in Swiss Life Holding under equity compensation plans for employees can be found in the Financial Statements (note 25).
Composition The Board of Directors of Swiss Life Holding consists entirely of non-executive directors with no duties related to operational management within the Swiss Life Group, and who have not exercised such duties during the past three financial years. No member of the Board, moreover, has any significant business relationship with Swiss Life Group or any other Group companies. The members of the Board of Directors of Swiss Life Holding also make up the Board of Directors of Swiss Life/Rentenanstalt.
St. Gallen and was Head of its Swiss Institute of Banking and Finance. In 1996 Mr Gehrig was appointed Member of the Governing Board of the Swiss National Bank as Head of Department III, and served as the Board’s Vice Chairman from 2001 to 2003. His political activities include his serving as Chairman of the economic policy study group of the Swiss Christian Democratic Party from 1984 to 1991. He was a member of the Swiss Federal Banking Commission between 1992 and 1996.
Bruno Gehrig will be put forward for re-election at the Swiss Life Holding Annual General Meeting of Shareholders on 9 May 2006.
Other appointments: – Roche Holding AG, Basel, Vice Chairman of the Board of Directors and Independent Lead Director – SWISS Luftfahrtstiftung, Chairman of the Board of
Gerold Bührer Born 1948, Swiss national Vice Chairman of the Board of Directors
Other appointments: – Association of Swiss Companies in Germany, domiciled in Basel, Vice Chairman – Bank Sal. Oppenheim jr. & Cie. (Schweiz) AG, Zurich,
Member of the Board of Directors – Cellere AG, St. Gallen, Member of the Board of Directors – Georg Fischer AG, Schaffhausen, Member of the
Canton of Schaffhausen – Member of the Swiss Parliament since 1991
Volker Bremkamp joined Albingia Versicherungs AG in Hamburg in 1963 (a subsidiary of Guardian Royal Exchange plc, London), receiving his qualifications as an insurance expert in 1965. Between 1969 and 1971 he was employed by various insurance companies and brokers in London and Paris. He returned to Albingia Versicherungs AG, Hamburg, in 1971, serving as a member of the Board of Directors from 1978 to 1989 and from 1989 to 2000 as Chairman of the Board of Directors of Albingia Lebensversicherungs AG and of Albingia Versicherungs AG. Volker Bremkamp was a member of the Board of Directors and at the same time Group Executive Director, Continental Europe, at Guardian Royal Exchange plc, London, from 1995 to 1999, which was taken over by the AXA Group in 1999. From 1999 to 2000 he was a member of the Board of Directors of AXA Colonia Konzern AG, Cologne, which is the holding company of AXA Germany.
Board – K 1 F Knowledge One Fonds AG, Hamburg, Chairman of the Supervisory Board – WAVE Management AG, Hamburg, Deputy Chairman of the Supervisory Board – AON International Insurance Broker, Hamburg,
Member of the Supervisory Board – UKE University Clinic Hamburg, Member of the
Other appointment: – Julius Bär Holding AZ, Zurich, Member of the Board of Directors
Other appointments: – Swiss Pool for Aviation Insurance, Chairman of the
Board of Directors – Converium Holding AG, Zug, Member of the Board of
Georges Muller graduated from the University of Lausanne in law and business administration in 1963 and earned an LL.M. at Harvard University in 1969. In 1973 he received a Doctor of Law from the University of Lausanne. Mr Muller joined the Swiss Federal Tax Administration in 1964 and has been a partner with the law office of BMP Associés since 1975. From 1984 to 2000 he was an Extraordinary Professor at the University of Lausanne. He has been an Honorary Professor since 2000.
Georges Muller’s term of office terminates with the Annual General Meeting of Swiss Life Holding on 9 May 2006. Georges Muller has decided not to stand for another term.
Other appointments: – Serono SA, Coinsins, Chairman of the Board of Directors – SGS SA, Geneva, Chairman of the Board of Directors – Bertarelli Biotech S. A., Chéserex, Vice Chairman of the
Peter Quadri received his master’s degree in economics and business administration and operations research (lic. oec. publ.) in 1969 from the University of Zurich. He began his career in 1970 as a systems engineer and software/operating systems specialist at IBM and held various management positions before assuming his current appointment as Country General Manager at IBM Switzerland in 1998.
Pierfranco Riva studied at the Universities of Freiburg, Munich and Berlin between 1960 and 1966, and received his Doctorate in Law in 1968. He became a member of the Bar in 1970. He has been an attorney and notary public with the law firm Felder Riva Soldati in Lugano since 1970. He served as Chairman of the Council of the Bar Association of the Canton of Ticino between 1987 and 1989, and from 1995 to 1999 was a member of the supervisory authority, Council of Magistrates for the Canton of Ticino.
Franziska Tschudi studied law at the University of Berne between 1978 and 1984, and passed her Bar exam there in 1984. From 1985 to 1986 she studied US law at Georgetown University, Washington, DC, earning an LL.M., and passed the Bar exam for the States of New York and Connecticut in 1987. Franziska Tschudi also did postgraduate studies at the University of St. Gallen (1991 to1993), receiving an Executive MBA. After initially working as an Assistant for Media Law at the Institute for Constitutional and Administrative Law at the University of Berne and practising business and media law in Zurich, Geneva and Washington, DC, she served as Secretary General at SIG Holding AG from 1992 to 1995. Ms Tschudi then became a member of the Executive Board of WICOR Holding AG (“Weidmann Group”), Rapperswil in 1995, where she was Head of Corporate Development and from 1998 Head of Business Area Electrical Technology Asia/Pacific. She has been Chief Executive Officer and Managing Director of WICOR Holding AG since 2001.
Other appointments: – SCRJ Sport AG, Rapperswil, Vice Chairperson – BIOMED AG, Dübendorf, Member of the Board of
Resignations There were no resignations from the Corporate Executive Board during the review period. The term of office of Georges Muller expires with the Annual General Meeting of Swiss Life Holding on 9 May 2006. Georges Muller has decided not to stand for re-election. The shareholders will be asked to vote on the appointment of Henry Peter to the Board of Directors in his stead. Henry Peter is a professor at the law school of the University of Geneva, and is Head of the Master in Business Law (MBL) postgraduate programme of the universities of Geneva and Lausanne. He is also a lawyer and partner in the law firm Bernasconi Peter Gaggini in Lugano. Due to his nomination to the Swiss Life Holding Board of Directors, Henry Peter will be resigning from the Banca del Gottardo Board of Directors, which he has been a member of since 1994.
These regulations are reviewed regularly in line with current practice and developments in national and international best practice, and are updated whenever necessary.
They apply to the internal organisation and delineate the tasks and competencies of the Board of Directors, the Board of Directors’ committees, the Chairman of the Board of Directors and the Corporate Executive Board.
The committees of the Board of Directors sometimes call in external consultants for their work and assess their work themselves once a year. The Board of Directors also performs a self-assessment once a year, while discussions take place regularly between the Chairman of the Board and its members on an individual basis.
Chairman’s Committee The Chairman’s Committee assists the Chairman of the Board of Directors in fulfilling his leadership and coordination role, and assists the Board of Directors with matters concerning strategy and corporate governance. It additionally assists the Board of Directors in decisions concerning the appointment of personnel at the highest levels of management (nomination function) and in setting guidelines for compensation of members of the Board of Directors and the Corporate Executive Board, and determining how these guidelines will be applied to the compensation and terms of employment of the Group CEO and the other members of the Corporate Executive Board (compensation function).
Investment and Risk Committee The Investment and Risk Committee assists the Board of Directors in matters concerning investment management, financial management and risk management within the company. The tasks and competencies of the Investment and Risk Committee include, among others, submitting proposals on the principle features of asset and liability management for the Group to the Board of Directors, assessing capital adequacy, submitting proposals on the definition of the Group’s investment policy to the Board of Directors, verifying compliance with Group guidelines on investments, and establishing the risk tolerance in insurance and investment operations.
The Investment and Risk Committee meets at least four times a year. Six meetings of the Investment and Risk Committee were held in the year under review, with an average length of around three hours.
The Audit Committee meets at least four times a year. The frequency of meetings depends on the financial budgeting and reporting process. The Audit Committee met six times during the year under review, with the meetings lasting around four hours on average.
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 Board of Directors is subject to the consent of the Chairman of the Board of Directors.
Corporate Executive Board The Group CEO directs the business operations of the Group. The Group CEO, together with the Corporate Executive Board, works out the long-term objectives and strategic orientation of the Group for consideration by the Board of Directors and, based on the resolutions of the Board of Directors, ensures the goal-oriented leadership and development of the Group. The Corporate Executive Board can form committees to address specific areas and can delegate competencies to such a Corporate Executive Board committee.
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 intended for the Group as a whole.
Thomas Müller Group Chief Financial Officer 01.01.2006 1) up to 31.03.2006
Rolf Dörig has been Group Chief Executive Officer (Group CEO) of the Swiss Life Group since 6 November 2002.
Other appointments: – Swiss Insurance Association, Member of the Board – economiesuisse, Zurich, Member of the Board
Committee – Kaba Holding AG, Rümlang, Member of the Board of Directors – Danzer AG, Baar, Member of the Board of Directors – Zurich Chamber of Commerce, Member of the Board of Directors – Grasshopper-Club Zürich, Chairman of the Board of Directors
The physicist Reto Himmel (Master’s Degree in Physics, Swiss Federal Institute of Technology (ETH), Zurich, 1982) graduated from the Harvard Business School in 1987 with an MBA. He began his career in 1982 as a software engineer with Brown Boveri & Co. in Baden, before joining Credit Suisse in 1985. From 1990 to 1994 he went on to head the General Secretariat at Bank Leu, where he was also in charge of Corporate Planning. He then served as Chief of Staff of the Investment and Trading division at Credit Suisse. In 1997 Mr Himmel became a member of the Executive Board at ABN AMRO (Switzerland), assuming responsibility for the bank’s logistics operations. He
Swiss Life Group . Review of Operations 2005 . Corporate Governance became Head of Operations at UBS Warburg Switzerland in August 2001.
Other appointment: – SWX Swiss Exchange, Member of the Board of Directors and Audit Committee
Paul Müller studied Economics at the University of St. Gallen. After graduating with a Master’s degree (lic. oec. HSG) in 1975 he launched his career by joining Wintherthur Versicherungen. In 1982 he moved to Baloise Insurance where he held a number of leading positions. As a member of the Corporate Executive Board he was ultimately assigned responsibility for the German, Austrian, French, Belgian and Luxembourg markets. From 1995 Mr Müller served as CEO of Helvetia Patria Assurances’ Swiss Division in Basel.
Economics of the University of St. Gallen, Member of the Board
He has been with the Swiss Life Group since August 2002, first as Chief Financial Officer (Group CFO) and then as Chief Executive Officer International (CEO International) as of 1 January 2006.
Board of Directors – Member of the Admission Board and Executive
Martin Senn Born 1957, Swiss national Group Chief Investment Officer (Group CIO) up to
Thomas Müller Born 1965, Swiss national as of 1 January 2006 Group Chief Financial Officer (Group CFO)
Thomas Müller studied economics and business administration (lic. rer. pol.) at the University of Berne and earned an MBA from the IMD in Lausanne. His professional career began in 1991 at Swiss Volksbank where he was responsible for asset and liability management. Up to and after the integration of Swiss Volksbank into the Credit Suisse Group, he headed the treasury department at Credit Suisse from 1994 to 1997. In 1997 he moved to Marc Rich Holding where he was responsible for the group’s trading in interest rate instruments. Thomas Müller joined Banca del Gottardo in 2002 as Chief Financial & Risk Officer and Member of the Executive Board.
He became Group Chief Financial Officer (Group CFO) for the Swiss Life Group as of 1 January 2006.
Resignations No members of the Corporate Executive Board resigned in 2005.
As the Swiss Life Group announced on 9 January, Martin Senn, Group Chief Investment Officer (Group CIO), is leaving the company as of 31 March 2006 at his own request.
Compensation, participation in equity, loans Practice and procedure Pursuant to the Organisational Regulations, the Board of Directors as a whole is responsible for determining the level and make-up of compensation for its members. The Chairman’s Committee, in its capacity as a Compensation Committee, is responsible for putting forward corresponding proposals. The Board of Directors also establishes guidelines for the compensation policy within the Group. In so doing, it takes into consideration the compensation policies of other organisations of comparable size and in comparable industries, with its findings drawn from publicly available information or, as necessary, studies by external experts. Based on these guidelines, the Chairman’s Committee determines the compensation for individual members of the Corporate Executive Board and informs the entire Board of Directors accordingly.
Within the framework of the compensation arrangements for the members of the Corporate Executive Board and other key performers within the Swiss Life Group, set by the Corporate Executive Board with the concurrence of the Chairman’s Committee, a long-term remuneration component was introduced in 2004 under a corresponding directive. The equity compensation programme was adjusted slightly in the year under review by defining specific performance criteria. These take account of both the performance of the Swiss Life Holding share and its performance against the market using the Dow Jones STOXX insurance index. Participants in the equity compensation plan are granted future subscription rights, in the form of Performance Share Units (PSU) on Swiss Life Holding
During the review period 37 members of the Swiss Life Group senior management participated in this programme. A total of 67 412 PSU were allocated.
Compensation paid to acting members of governing bodies Compensation paid to incumbent members of the Board of Directors and the Corporate Executive Board during the period under review was as follows: In CHF 2005 2004
The following compensation was received by incumbent members of the Board of Directors of Swiss Life Holding as per 31 December 2005 during the year under review.
There were no resignations from the Board of Directors or the Corporate Executive Board during the review period.
allocated at a value of CHF 160.02. They are subject to a two-year vesting period.
Share ownership On the balance sheet date, members of the Board of Directors and the Corporate Executive Board (including closely linked parties) held a total number of Swiss Life Holding registered shares as follows: Board of Directors 9 055 Shares
Additional honorariums and remunerations During the period under review there were no additional honorarium or remuneration payments to members of the Board of Directors or the Corporate Executive Board that would have been subject to disclosure requirements.
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 that would have been subject to disclosure requirements.
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 2005 was as follows: Shares2) CHF 271 874 1699 SLHN shares at CHF 160.02
2) In accordance with the 2004 regulations, these shares are allocated via the longterm remuneration component and blocked for two years until the end of March 2007. The allocation, subject to a blocking period, took place at an economic value of CHF 160.02, which corresponds to the tax value; the share price at the time of distribution was CHF 179.80.
Required majorities In addition to the resolutions provided for by law, a qualified majority (corresponding to at least two–thirds of the voting shares represented and an absolute majority of the share par value represented) is required to: – change provisions concerning restrictions on voting rights – dissolve the company (liquidation) – dismiss more than one–third of the Members of the
Auditors PricewaterhouseCoopers (PwC) serves as external statutory auditor for 74% 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 (12%) and other auditing firms (14%).
Duration of the mandats and term of office of the lead auditor The Articles of Association stipulate that the External Auditor is to be elected by the General Meeting of Shareholders for one financial year at a time. At the time Swiss Life Holding was established in 2002, PwC was named as Group Auditor. Since then PwC has been re-elected without fail, most recently for the year 2005 at Swiss Life Holding’s Annual General Meeting of Shareholders in May 2005. PwC has also been acting as Group Auditor for Swiss Life/Rentenanstalt since 1994. The partner in charge of auditing the Swiss Life Holding consolidated financial statements at PwC (lead auditor) has held that function since the 2004 financial year.
Additional auditing fees In 2005 PwC received additional payments totalling CHF 1.2 million for advisory services of which about half was for financial advice and a quarter each for legal and other advisory services (2004: a total of CHF 1.6 million).
Supervisory and control instruments vis-à-vis the auditors The Audit Committee maintains regular contact with the external auditors. It assesses the quality 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 six meetings during the year under review. Representatives from the external auditors took part in all or some of these meetings, with one exception.
Contact addresses can be found on at the end of the Annual Report.
At Swiss Life, mutual values, the Code of Compliance, a progressive HR policy, an active approach to communication and support for the concerns of society and environmental protection form the foundation for responsible corporate management.
Values and Code of Compliance At Swiss Life, the values expertise, proximity, openness, clarity and commitment shape our conduct in our dealings with customers, partners and employees. These values put our corporate culture on a strong footing. The stories told by the photos in this Annual Report show how our employees interpret these values and implement them in their daily working lives. The Code of Compliance introduced in January 2006 supplements these values with specific rules of conduct.
Our collaboration with the representatives of our employees takes central importance and is actively managed. In Switzerland, for example, the Group has introduced a plan of action for employees who need to find other employment as a result of restructuring measures. During their reorientation phase, they are advised and assisted by a team of specialists. The Europa Forum represents the interests of employees at the international level.
In addition, employees also benefit, among other things, from the Group’s sports and cultural programmes, health promotion programmes, favourable conditions for insurance products, partnerships with day care facilities, contributions to public transport subscriptions, and internal HR and legal advisory services.
Responsible Corporate Conduct Customers, shareholders and employees alike place their confidence in Swiss Life. The Group feels honour bound to justify this confidence and therefore acts in a responsible manner.
In the Netherlands, Swiss Life underlines its commitment to society by supporting volunteer work. Employees are involved in the “Help with Your Heart” project and went shopping with the inhabitants of retirement homes or supported the severely handicapped during relaxation sessions in the swimming pool. In France, Swiss Life supports the annual solidarity event in favour of the Curie Institute, which is both a hospital and a cancer research institution. Employees also take part in the “Courir pour la vie, courir pour Curie” run, where money is collected for every metre that is run. These funds are used to finance cancer research.
Environment In Switzerland, Swiss Life aims to cut its energy consumption by 15% between 2000 and 2010. To this end, energy efficiency at the Zurich locations should be increased by at least 1.5% per year, and energy consumption and emissions reduced continuously. Swiss Life adopted these targets as part of its obligations as a member of Energy Model Zurich. As one of the largest private owners of real estate in Switzerland, Swiss Life pays particular attention to ecological issues and, to mention just one example, instigates measures to enhance awareness of water as a valuable resource. Swiss Life also signed the financial institutions’ declaration of commitment to the environment and sustainable development as part of the United Nations Environment Programme (UNEP).
Embedded value serves as an indicator of the value of the existing insurance portfolio. It is composed of two components: the present value of future profits (PVFP) and the adjusted net asset value attributable to shareholders (ANAV). Future new business is not included. All calculations relating to the embedded value are based on the statutory accounts. The information published here has been reviewed and checked by Deloitte & Touche LLP.
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 of the traditional solvency capital underpinning the insurance business are charged to the PVFP and accordingly reported separately in the embedded value table (cost of capital).
Change in 2005 Embedded value for the Swiss Life Group came to CHF 8887 million as of 31 December 2005. This corresponds to an increase of CHF 951 million over the prior-year figure and an embedded value per share of CHF 263. This increase can be attributed to growth in our markets abroad and the better than expected investment returns. A compilation of other changes in embedded value is given in the “analysis of change” table on the next page.
Swiss Life Group . Review of Operations 2005 . Embedded Value 64 Economic assumptions
Swiss Life Group embedded value at end of 2005 8 887
Impact of 100 bp decrease in risk discount rate +375 +294 +669
Impact of 10% decrease in asset values (property only) –481 –36 –517
Swiss Life follows an integrated approach in the area of risk management. The economic perspective serves as a basis for all the processes in risk management. However, there are further relevant aspects when making decisions on risk: first and foremost statutory considerations such as solvency, statutory accounts and stipulations governing the security reserves. Then the possible implications for the Group consolidated results in accordance with the “International Financial Reporting Standards” (IFRS) and considerations about the conceivable impacts on the rating capital are also part of the risk analysis.
The Investment and Risk Committee of the Board of Directors receives regular reports on the overall risk situation of the individual companies and also of the Swiss Life Group as a whole. It assesses the situation and determines appropriate measures. It also ensures that the risk management processes are up to the above-mentioned requirements.
In addition to integration with the Group-wide risk management process, the local risk management units are also responsible for ensuring compliance with the specific regulatory and statutory requirements in their respective countries, and support the local management teams in all risk management matters.
The basic principles and measurement methods are developed by the risk management team at Group level in conjunction with the local units, and are then approved by the Investment and Risk Committee of the Board of Directors.
The various risk categories are measured and monitored as part of Swiss Life’s risk policy. The Investment and Risk Committee of the Board of Directors determines Swiss Life’s risk appetite 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 risk management units at the individual companies to ensure that these limits are complied with at all times. A central risk management system tracks the limits currently being used; this system is also available to individual companies.
Market risks Monitoring and steering market risks is essential for a life insurance company. Market risk refers to the risk of changes in the value of securities or real estate holdings, as well as to fluctuations in foreign exchange rates. The extreme volatility of the financial markets in past years shows clearly that it is necessary to steer these market risks actively.
Such interest-rate risks are reduced by purchasing corresponding interest instruments, in particular bonds. Exchange rate hedges steer the exchange rate risks. Swiss Life also seeks to reduce market risks by ensuring a high level of diversification both in its investment portfolio and direct investments. You will find details on Group-wide Asset and Liability Management, i.e. on harmonising the fit between assets and liabilities, in the next chapter on page 67.
65Risk Management As with any life insurance company, risk management is one of
Swiss Life’s core tasks. Swiss Life follows an integrated approach, and for many years now has been using an internal risk model that basically corresponds with the new risk-based solvency regulations in Switzerland.
Swiss Life Group . Review of Operations 2005 . Risk Management
Operational risks The operational risks include process risks, risks relating to moral hazard, technology risks and risks resulting from changes in the economic, fiscal or legal environment. In order to pre-empt such risks, a review based on uniform criteria is carried out periodically throughout the Group. The consolidated report highlights any potential need for action at an early stage, and the effectiveness of the measures introduced is subsequently checked.
66 Risk based solvency check Since 2004 Swiss insurers have been subject to the new regulatory requirements in the form of the Swiss Solvency Test, which become binding as of 2010. Swiss Life has been using these rules since 2004.
The risk categories that Swiss Life has been using for several years for steering economic risk are congruent with the corresponding categories of the Swiss Solvency Test. In 2005, Swiss Life expanded the test to include the Swiss Life/Rentenanstalt and its branches. The successful trial runs show that the definitive introduction of the Swiss Solvency Test will not have any risk management implications. Operational risks are not included in the capital requirements of the test. However, the new Swiss Insurance Supervisory Law (VAG) which came into effect on 1 January 2006 requires appropriate risk management.
The European Solvency II Project also has the aim of checking solvency based on risk monitoring. Swiss Life anticipates being involved in shaping the Solvency II guidelines together with the Swiss Insurance Association (SIA) and the Comité Européen des Assurances (CEA). Harmonising the Solvency II principles with those of the Swiss Solvency Test is extremely important for the Swiss Life Group as a market leader in Europe. As the use of the internal model is permitted, Swiss Life does not foresee any significant new challenges for risk management here either.
– How are the policyholders’ funds and the company’s free reserves to be invested (asset allocation)?
Risk budget The risk capital available is determined by way of an economic valuation of the assets and liabilities, and is matched against the economic risk capital employed. The risk capital available to Swiss Life sets the parameters for the risk appetite within the Group. There are two types of limits in this regard: – risk capital limits: These limits apply for the market risk capital, the interest-rate risk capital and the credit risk capital.
Both types of limits set the parameters for the asset allocation. The risk budget is based on a purely economic perspective, and additional non-economic restrictions such as regulatory and accounting aspects are not taken into account. These are considered in the asset allocation itself.
Asset Allocation On the asset side the portfolio is managed in such a way that economic risk capital deployment is consistent with Swiss Life’s risk appetite. The responsible bodies, the Investment and Risk Committee and the Asset and Liability Committee, prescribe limits for market, interest and credit risk as well as currency limits. Within these broad parameters, the individual market units determine their asset allocation themselves.
Up to the third quarter of the year under review, Swiss Life continued the efforts it began in 2003 to narrow the duration gap and thus reduce its balance sheet risk. In the fourth quarter Swiss Life took profits on the bond portfolio in order to strengthen its statutory risk capital. In anticipation of rising interest rates, the corresponding amount of cash and cash equivalents was not reinvested. This measure was taken within the framework of the risk limits set by the Investment and Risk Committee. The strategic asset allocation established in 2004 continues to apply.
Distribution policy The distribution policy at Swiss Life seeks to harmonise the interests of the different groups of stakeholders. For policyholders the accent is firmly on security: They want the safety of the minimum interest rate coupled with a regular and appropriate bonus. Meanwhile, shareholders place greater emphasis on returns commensurate with the level of risk: They are looking for a dividend or capital gain to adequately compensate them for the risks assumed. From the company’s point of view, the focus is on sustainability: Its business model has to remain successful in the long run, and a lasting balance must be found between the divergent interests of policyholders and shareholders. In this regard, ALM needs to concentrate for the financial year on refining the long-term crediting policy and setting priorities for the distribution of income to the individual stakeholder groups. A guideline to this effect as well as a discussion and decision process in the same direction were implemented.
The parameters for the long-term crediting policy have an impact on the modelling of liabilities and their valuations, which in turn are included in risk management and ALM.
The crediting rates are determined on an annual basis, whereas the underlying principles are defined only once. To ensure a balance is maintained between the expectations of the policyholders and the shareholders, the Group’s perspective is included in the decision-making process.
Duration of loans originated by the enterprise 3.3 years 3.2 years
Swiss Life Group . Review of Operations 2005 . Asset and Liability Management
To ensure these product design principles are observed, Group-wide guidelines on underwriting and reinsurance have been introduced to coordinate and provide an overlaying structure for the local guidelines. In writing business, the responsibility does not rest exclusively with the local business unit, and Head Office must also be involved as circumstances require.
There must always be sufficient reserves to meet the contractual and regulatory requirements arising from existing business. Consequently, not only must the regulatory constraints be observed, but internal estimates concerning specific types of risk must also be taken into consideration.
The process is designed to add value with the support of these areas. In the case of investment decisions, the contractual and non-contractual obligations towards policyholders must be heeded. Products and their prices should be in line with the investment returns that can actually be achieved, so that the promises to policyholders are fulfilled and the expectations of shareholders met. The approaches adopted by the competition must also be taken into account.
“I admire people who get involved and dare to do something. Maria and Christoph Koch have turned their parental farm into a successful business in the space of a few years. They realised their dreams of an asparagus farm, then a farm shop, and finally their own restaurant – and are extremely successful.”
Commitment is more than a word. It requires a personal effort and is based on closeness to your fellow man. In the general agency in Herisau we feel it is our duty to find the best solution every time. Our clients show their gratitude by remaining loyal to us over the years and thus contributing to our success.
Swiss Life Group . Financial Statements 2005 . Index to the Financial Statements 77 Consolidated Financial Statements 77 Consolidated Statement of Income 78 Consolidated Balance Sheet 80 Consolidated Statement of Cash Flow 82 Consolidated Statement of Changes in Equity 85 Notes to the Consolidated Financial Statements 191 Report of the Group Auditors 192 Swiss Life Holding Financial Statements 192 Review of Operations 193 Statement of Income 194 Balance Sheet 195 Notes to the Financial Statements 197 Appropriation of Profit 198 Report of the Statutory Auditors
Swiss Life Group . Financial Statements 2005 . Consolidated Statement of Income
Net gains/losses on financial instruments at fair value through profit or loss 6, 9 –687 513
Insurance benefits, claims and claim settlement costs ceded to reinsurers 144 638
Diluted earnings per share for the profit attributable to equity holders of Swiss Life Holding (in CHF) 7 24.82 18.27
Intangible assets including intangible insurance assets 19 3 075 3 407
Swiss Life Group . Financial Statements 2005 . Consolidated Statement of Cash Flow
Acquisitions of subsidiaries, net of cash and cash equivalents 30 2 –28
Repayment of Guaranteed Exchangeable Monetisations of Multiple Shares (GEMMS) –870 –
Cash and cash equivalents as at 31 December 13 762 8 304
Cash and cash equivalents for the account and risk of customers (not available for use) 408 345
Balance as at 1 January restated 1 689 2 213 –38 –115 890 1 642 6 281 213 6 494
Profit for the period – – – – – 860 860 14 874
Options on own shares – 0 – – – – 0 – 0
Swiss Life Group . Financial Statements 2005 . Consolidated Statement of Changes in Equity
Consolidated statement of changes in equity for the year ended 31 December 2004 (restated)
In CHF million Notes Gains/ Foreign losses currency recogtrans - nised Total lation directly share-
Share Share Treasury diffe- in equity, Retained holders’ Minority Total capital premium shares rences net earnings equity interest equity
Balance as at 1 January restated 1 252 1 732 –21 –117 656 1 059 4 561 215 4 776
Changes in foreign currency translation differences – – – –9 –5 – –14 –1 –15
Disposals of subsidiaries – – – 11 –24 – –13 –3 –16
Issuance of MCS (adjustment) 20 –20 – – – – – – –
Conversion of convertible debt 0 0 – – – – 0 – 0
Equity transaction costs (convertible debt), net of taxes – –1 – – – – –1 – –1
Equity-settled share-based payments – 6 – – – – 6 0 6
Non-Cancellable Operating Leases – Lessor . . . . . . . . 38 178 Impact on Equity of Reduction in BVG Conversion
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 1 General Information
The following events had an influence on the period under review: Restructuring of investment management activities In 2005, the Swiss Life Group restructured its investment management activities. Investment management activities relating to investment property have been separated. For this purpose, a new company, Swiss Life Real Estate Management Holding, has been set up. The minority shareholders of Swiss Life/Rentenanstalt, representing a 0.15% interest in Swiss Life/Rentenanstalt, Zurich, were given 6.7% of the Swiss Life Real Estate Management Holding shares in exchange for their Swiss Life/ Rentenanstalt shares. Therefore, Swiss Life Holding now holds a 100% interest in Swiss Life/Rentenanstalt.
Reduction in par value As approved by the shareholders at the General Meeting of Swiss Life Holding on 10 May 2005, a reduction in par value of CHF 4 per registered share was effected in 2005. The payout took place at the beginning of August 2005 and led to a reduction in the share capital of Swiss Life Holding of CHF 135 million.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 2 Summary of Significant Accounting Policies
Changes in accounting policies In 2005, the Swiss Life Group adopted the IAS/IFRS as listed below. The 2004 accounts have been restated as required, in accordance with the relevant standards: IAS 1 (revised 2003) Presentation of Financial Statements
IAS 21 (revised 2003) The Effects of Changes in Foreign Exchange Rates
All changes in the accounting policies have been made in accordance with the transitional provisions in the respective standards.
Discretionary participation features Discretionary participation features (DPF) are defined in IFRS 4 Insurance Contracts as contractual rights to receive, as a supplement to guaranteed benefits, certain additional benefits. Amounts identified as DPF are accounted for as liabilities.
Defined benefit plans covering own employees Insurance contracts issued to a defined benefit plan covering own employees have been eliminated. The liabilities relating to these contracts are no longer included in the insurance liabilities. They are now reflected in the defined benefit liabilities.
IAS 1 (revised) Presentation of Financial Statements IAS 1 has affected the presentation of minority interest and other disclosures. Minority interest is now presented within equity. On the face of the income statement, minority interest is presented as an allocation of profit or loss.
IAS 21 (revised) The Effects of Changes in Foreign Exchange Rates With the adoption of this standard, the functional currencies of all entities of the Swiss Life Group have been re-evaluated. Goodwill that has arisen since 1 January 2005 has been translated at closing rates.
IAS 24 (revised) Related Party Disclosures IAS 24 has affected the identification of related parties and some other related party disclosures.
IAS 32 (revised) Financial Instruments: Disclosure and Presentation IAS 32 has resulted in the re-evaluation of whether a financial instrument qualifies as a liability or as an equity instrument and in the adoption of new and expanded disclosure requirements relating to financial instruments. Due to these requirements, the mandatory convertible securities totalling CHF 250 million issued in 2002 (MCS I, 2002–2005) were retrospectively split into an equity component and a liability component.
With effect from 1 January 2005 goodwill is tested for impairment on an annual basis. The carrying amount of negative goodwill as at 1 January 2005 was derecognised with a corresponding adjustment to the opening balance of retained earnings.
Consolidation principles The Group’s consolidated financial statements include the assets, liabilities, revenues and expenses of Swiss Life Holding and its subsidiaries. A subsidiary is an entity in which Swiss Life Holding owns directly or indirectly more than 50% of the voting rights, or in which it otherwise has the power to exercise control over operations. 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 42. 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 42.
Foreign currency translation and transactions Functional and presentation currency Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the Group’s entities operate (the “functional currency”). The consolidated financial statements are presented in millions of Swiss francs (CHF), which is the Group’s presentation currency.
Foreign currency translation On consolidation, assets and liabilities of Group companies denominated in foreign currencies are translated into Swiss francs at year-end exchange rates. Income and expense items are translated into Swiss francs at the annual average exchange rate. Goodwill 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 nonmonetary items in foreign currencies recorded at fair values are translated at the exchange rate on the revaluation date.
Derivatives The Group enters into forward foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, currency and interest rate options and other derivative financial instruments for hedging risk exposures or for trading purposes. The notional amounts or contract volumes of derivatives, which are used to express the volume of instruments outstanding and to provide a basis for comparison with other financial instruments, do not represent the amounts that are effectively exchanged by the parties and, therefore, do not measure the Group’s exposure to credit risk. The amounts exchanged are calculated on the basis of the notional amounts or contract volumes and other terms of the derivatives that relate to interest or exchange rates, securities prices and the volatility of these rates and prices.
In a qualifying cash flow hedge, the effective portion of the gain or loss on the hedging derivative is recognised directly in equity. For a hedged forecast transaction that results in the recognition of a financial asset or liability, the associated gain or loss recognised in equity is reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. Any ineffective portion of the gain or loss is recognised immediately in the income statement.
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 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.
Impairment of financial assets The Group reviews the carrying value of financial assets regularly for indications of impairment.
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 adjusting the allowance account. The amount of the reversal is recognised in income.
Financial assets carried at fair value At each balance sheet date, an assessment is made whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of an equity instrument classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the asset is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. As a Group policy, available-for-sale investments in equity securities and investment funds are assessed for impairment when the market value as at the balance sheet date is 30% or more below cost, or the market value remained below cost for the previous 12 months or longer. Impairment losses on equity instruments recognised in the income statement are not reversed through income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event after the impairment loss was recognised, the impairment loss is reversed through the income statement.
Impairment losses are recognised in income as part of net gains and losses on financial assets.
Investment property Investment property consists of investments in residential, commercial and mixed-use properties primarily located within Switzerland. Property held for investment purposes includes both land and buildings.
If an item of property and equipment becomes an investment property because its use has changed, the positive difference resulting between the carrying amount and the fair value of this item at the date of transfer is recognised in equity as a revaluation surplus. However, if a fair value gain reverses a previous impairment loss, the gain is recognised in the income statement. Any resulting decrease in the carrying amount of the property is recognised in net profit or loss for the period. Upon the disposal of such 2 Summary of Significant Accounting Policies (continued)
Investment contracts with and without discretionary participation features For investment contracts that contain discretionary participation features 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.
Recognition and measurement principles Subject to certain limitations, the Group uses its existing accounting policies for the recognition and measurement of insurance contracts and investment contracts with discretionary participation features that it issues (including related deferred acquisition costs and related intangible assets) and reinsurance contracts that it holds. The existing accounting policies for recognition and measurement have been based on the requirements of the Generally Accepted Accounting Principles in the United States (US GAAP). The accounting policies for insurance contracts and investment contracts with discretionary participation features have been modified as appropriate to be consistent with the IFRS requirements. Guidance dealing with similar and related issues, definitions, recognition and measurement criteria for assets, liabilities, income and expenses as set out in the IASB Framework for the Preparation and Presentation of Financial Statements has been considered.
Discretionary participation features (DPF) Discretionary participation features are defined in IFRS 4 Insurance Contracts as contractual rights to receive, as a supplement to guaranteed benefits, additional benefits which are likely to be a significant portion of the total contractual benefits and whose amount or timing is contractually at the discretion of the issuer. These DPF are contractually based on the performance of a specified pool of contracts or a specified type of contract or on the realised and unrealised investment returns on a specified pool of assets held by the issuer or on the profit or loss of the company. The unrealised investment returns comprise gains/losses recognised directly in equity.
The bonuses which are allocated to the policyholders in the participating insurance business (insurance and investment contracts) in Switzerland, France, Germany, Belgium, Luxembourg, Italy and partially in the Netherlands generally follow the definition of DPF as set out in IFRS 4 Insurance Contracts.
– when such additional benefits which arise from the application of the statutory minimum distribution ratios are allocated to the policyholders. These amounts are accounted for as liabilities.
France 85% of the investment result and 90% of any other result are allocated to the policyholders at the minimum.
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. These amounts are accrued as liabilities when ratified by management.
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 the loss recognition test under US GAAP and considers current estimates of future cash flows including those resulting from embedded options and guarantees.
Policyholder deposits For certain investment-type contracts, 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. Deposit accounting is used for investment contracts at amortised cost without DPF, investment contracts at fair value without DPF, certain investment contracts with DPF and universal life contracts.
Liabilities for claims and claim settlement costs Liabilities for unpaid claims and claim settlement costs are for future payment obligations under insurance claims for which normally either the amount of benefits to be paid or the date when payments must be made is not yet fixed. They include claims reported at the balance sheet date, claims incurred but not yet reported and claim settlement expenses. Liabilities for unpaid claims and claim settlement costs are calculated at the estimated amount considered necessary to settle future claims in full, using actuarial methods. These methods are continually reviewed and updated. Claim reserves are not discounted except for claims with determinable and fixed payment terms.
Separate account/unit-linked contracts These contracts represent life insurance and investment contracts whose risk is borne according to their specific investment objectives by the policyholders. Separate account/unit-linked assets are managed for the account and risk of the Swiss Life Group’s customers. Unit-linked contracts are insurance or investment contracts where the insurance benefits are linked to the unit values of investment funds. Certain unit-linked contracts contain guaranteed minimum insurance benefits. Separate account contracts are insurance contracts with a separated part that is managed for the account and risk of the customer.
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.
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.
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.
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”).
Deferred acquisition costs for other traditional life insurance contracts and annuities with life contingencies and investment contracts with DPF are amortised in proportion to the expected premiums.
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.
Investment contracts and deposits at amortised cost For investment contracts and deposits with fixed and guaranteed terms the amortised cost basis is used. Initial recognition is at the proceeds received, net of transaction cost incurred. Subsequently, they are stated at amortised cost using the effective interest method. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the deposits.
Insurance contracts issued to a defined benefit pension plan covering own employees have been eliminated. These plans are typically partially funded as certain assets relating to these plans qualify as plan assets and are not required to be eliminated.
The Group recognises the contribution payable to a defined contribution plan in exchange for the services of the employees rendered during the period as an expense and as a liability after deducting any contribution already paid.
Share-based payments The Group operates equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of the shares is recognised in income with a corresponding increase in equity. As the fair value of the services received cannot reliably be measured, the value is measured by reference to the fair value of the equity instruments granted and the price the employees are required to pay.
Provisions and contingent liabilities Provisions are liabilities with uncertainties as to the amount or timing of payments. Provisions are recognised if there is a present obligation that probably requires an outflow of resources and a reliable estimate can be made at the balance sheet date. Contingent liabilities are disclosed in the Notes if there is a possible obligation or a present 2 Summary of Significant Accounting Policies (continued)
In April 2005, the International Accounting Standards Board issued an amendment to IAS 39 Financial Instruments: Recognition and Measurement covering the hedge accounting provisions. The foreign currency risk of a highly probable forecast intragroup transaction can qualify as a hedged item in the consolidated financial statements. The amendment will be adopted by the Swiss Life Group for annual periods beginning on 1 January 2006. No material financial impact is expected from the adoption of this amendment as the Swiss Life Group does not currently have any intragroup transactions that would qualify as a hedged item in the consolidated financial statements.
In 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 beginning on 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 December 2005, an amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates was issued by the International Accounting Standards Board. The amendment requires exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation to be recognised initially in a separate component of equity in the consolidated financial statements. This requirement applies irrespective of the currency of the monetary item and of whether the monetary item results from a transaction with the reporting entity or any of its subsidiaries. The amendment will be adopted by the Swiss Life Group for annual periods beginning on 1 January 2006. No material financial impact is expected from the adoption of this amendment as the Group currently does not have monetary items that form part of a net investment in a foreign operation with differences to be recognised in equity as required by 2 Summary of Significant Accounting Policies (continued)
the amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates.
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 beginning on 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.
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. The IFRS is not relevant to the Group’s operations.
– The fair value of investment contracts with discretionary participation features cannot reliably be determined. It is impracticable to determine the fair value of such instruments due to the lack of a reliable basis to measure such supplemental discretionary returns. IFRS 4 Insurance Contracts is silent on the measurement of the amounts identified as DPF.
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 either based 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 majority of the private equity investments are classified as available for sale or as at fair value through profit or loss. Investments are normally valued at market if the market value represents the fair value. If no market value is available, fair value is estimated considering various factors such as purchase price, estimated liquidation value, restrictions on transferability, prices received in recent significant private placements of the same issuer, prices of investments relating to comparable companies engaged in similar business, and changes in the financial condition and prospects of the issuer.
– The fair values of loans, which are carried at amortised cost, are estimated using discounted cash flows based upon the Group’s current lending rates for similar loans. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values equal the carrying values.
Impairment of available-for-sale equity instruments At each balance sheet date, an assessment is made whether there is objective evidence that an available-for-sale equity instrument is impaired. A significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the asset is impaired. Judgement is used in determining what a significant or prolonged decline is. As a Group policy, available-for-sale investments in equity securities and investment funds are assessed for impairment when the market value as at the balance sheet date is 30% or more below cost, or the market value remained below cost for the previous 12 months or longer.
Insurance liabilities Past experience, adjusted for the effect of current developments and probable trends, is assumed to be an appropriate basis for predicting future events. Management ’s estimates for incurred but not reported losses are continually reviewed and updated and adjustments resulting from this review are reflected in income.
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, 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. These assumptions are “locked-in” for the duration of the contract.
Subsequently, new estimates are made each year in order to determine whether the liabilities so established are adequate in the light of these latest estimates. If the liabilities are considered adequate the assumptions are not altered. If the liabilities are not adequate, the assumptions for the calculation of the liabilities are altered (“unlocked”) to reflect the latest estimates; no margin is added to the assumptions in this event. Improvements in estimates have no impact on the value of the liabilities and related assets, while significant enough deteriorations in estimates have an impact.
Tables based on statistics by national insurance associations, national and standard industry tables or internal generation tables reflecting own company records are used for the life business with regard to mortality and longevity.
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 non-mandatory part of the BVG business a reduced conversion rate calculated using actuarial assumptions is applied.
Morbidity and disability For individual and group life business in Switzerland internal tables are in place. In the individual life business, for certain contracts tariffs can be adjusted with regard to disability. The internal tables reflect the loss experience of the past. In the individual life business, reactivation is considered whereas in the group life business also increased mortality is taken into account. In the individual business the disability tables reflect the average situation of the past in the Swiss market based on Swiss Insurance Association statistics. In the individual life business disability tables are usually reviewed every five years when new statistics from the Swiss Insurance Association become available.
Disability coverage comprises annuities and waiver of premiums. Benefits are typically paid after a waiting period. In certain countries, the benefits are paid based on medical examinations and on different levels of disability (ranging from fully disabled with no expectations of recovery to partially disabled with full recovery expected).
Surrender In certain contracts the policyholder has the option to surrender the contract for a specified cash surrender value or a value which varies in response to the change in a financial variable such as an equity price or index. In certain countries and markets, surrender is not explicitly taken into account for the pricing of insurance contracts and investment contracts with discretionary participation. In other businesses assumptions based on own company records are used. The assumptions vary by product type and policy duration.
Defined benefit liabilities The Swiss Life Group uses certain assumptions relating to the calculation of the defined benefit liabilities. These assumptions comprise the expected return on plan assets which is based on estimates relating to the projection of the returns of the investments held, as well as future salary increases and future pension increases which have been derived from estimates based on past experience. The assumptions are set out in note 25.
Provisions The recognition of provisions involves assumptions about the probability, amount and timing of an outflow of resources embodying economic benefits. To the extent an outflow of resources embodying economic benefits is probable and a reliable estimate can be made, a provision is recognised.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 4 Segment Information
– “Banking” involves the management of assets for high net worth individuals, as well as the provision of corresponding special asset management services. “Banking” covers the Group’s banking operations.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements
Insurance premiums ceded to reinsurers –240 – – – – –240
Premiums earned on investment contracts with discretionary participation 233 – – – – 233
Net gains/losses on financial assets 2 435 146 0 0 1 2 582
Insurance benefits, claims and claim settlement costs –14 231 – – – 47 –14 184
Net insurance benefits, claims and claim settlement costs –14 087 – – – 47 –14 040
Impairment of property and equipment and intangible assets –53 –66 – – – –119
Acquisition and origination costs deferred 572 – – – – 572
Other expenses –715 –180 –36 –9 110 –830 of which inter-segment –147 –1 –29 –7 184 of which inter-segment –193 129 62 29 –27
Net earned insurance premiums 14 684 – – – –27 14 657
Premiums earned on investment contracts with discretionary participation 58 – – – – 58
Net gains/losses on financial assets 1 110 –25 0 2 – 1 087
Insurance benefits, claims and claim settlement costs –16 044 – – – 31 –16 013
Insurance benefits, claims and claim settlement costs ceded to reinsurers 638 – – – – 638
Acquisition and origination costs deferred 576 – – – – 576
Other expenses –698 –153 –33 –33 88 –829 of which inter-segment –116 –2 –16 –5 139 of which inter-segment –56 9 50 25 –28
Financial assets at fair value through profit or loss 21 892 1 761 – – – 23 653
Financial assets held to maturity 4 203 44 9 – – 4 256
Intangible assets including intangible insurance assets 2 660 415 0 – – 3 075
Liabilities associated with assets held for sale – 1 734 – – – 1 734
Insurance receivables and other receivables 4 302 132 42 295 –102 4 669
Financial assets at fair value through profit or loss 18 168 1 195 – – – 19 363
Financial assets pledged as collateral – 878 – – – 878
Financial liabilities at fair value through profit or loss 4 286 653 – – – 4 939
Statement of income insurance segment for the year ended 31 December 2005
In CHF million Switzer- Nether- Belgium/ Elimiland France Germany lands Luxembourg Other nations Total
Insurance premiums ceded to reinsurers –43 –117 –70 –8 –13 –5 16 –240
Policy fees arising from insurance contracts 15 68 – 30 1 – 0 114
Net gains/losses on financial assets 1 820 126 224 211 54 0 – 2 435
Net gains/losses on financial instruments at fair value through profit or loss –985 263 –96 22 17 0 – –779
Net gains/losses on investment property –47 33 –8 1 –3 – – –24 of which inter-subsegment 38 –3 –3 –3 –5 –2 –22
Employee benefits expense –462 –237 –105 –86 –54 –6 – –950
Statement of income insurance segment for the year ended 31 December 2004 (restated)
Insurance premiums ceded to reinsurers –57 –131 –65 –9 –18 –615 32 –863
Policy fees arising from insurance contracts 8 89 – 47 1 8 14 167
Net gains/losses on financial assets 531 186 124 196 59 14 – 1 110
Depreciation and amortisation expense –159 –292 –43 –85 –11 –27 – –617
Impairment of property and equipment and intangible assets –35 –140 1 – – – – –174
Acquisition and origination costs deferred 93 240 185 27 19 12 – 576
Other expenses –315 –222 –45 –66 –31 –41 22 –698 of which inter-subsegment –6 1 –3 –5 2 –13 24 of which inter-subsegment 65 –4 –4 –8 –7 –25 –17 5 Details of Insurance Segment (continued)
Risks must be identified, assessed, managed and monitored locally. On a consolidated basis, half-yearly reports covering interest rate risk, equity price risk, currency risk, credit risk and insurance risk are prepared. Additionally, market risks and risk limits are reported on a monthly basis for the largest operations in the insurance business. Strategic and operational risks are assessed and reported on an annual basis.
Risk management functions are fulfilled at several levels by different bodies within the Swiss Life Group, such as the Investment and Risk Committee, Group Risk Committee and Group Investment Committee. The risk management functions at the level of the individual operations of the Swiss Life Group are organised appropriately.
The financial result for the years ended 31 December for the account and risk of the Swiss Life Group and the SwissLife Group’s customers was as follows: Financial result
Swiss Life Swiss Life Group’s Group’s Group Group customers customers Total Total restated restated restated
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 excess of the economic values of the assets compared to that of the 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.
Risk and exposure limits are defined to control and limit the exposure to these risks. The limits are set in a way that the maximum exposure to risk resulting from the utilisation of the limits is always below the total available risk capital defined in the risk budgeting process.
The main focus of these limits is on overall market risk, credit risk and more specifically on interest rate risk as well as on foreign currency exposures and equity exposure.
The ALM process is centrally coordinated at Group level by means of an Asset and Liability Management Committee with representatives from senior management, both at Group level and at the level of the individual insurance operations. The competent bodies are in charge of implementing the decisions. The process requires all relevant functions within the Swiss Life Group, such as investment management, finance, actuarial functions, product management and marketing, to be involved.
Compliance with external constraints Aspects other than the purely economic view must also be considered in the ALM process, such as regulatory requirements including statutory minimum distribution ratios (“legal quote”), funding ratios, solvency, local accounting rules and international financial reporting standards, liquidity requirements and rating targets. Some of these views may lead to results that are not aligned with the economic approach, but nevertheless need to be taken into account.
Depending on the regulatory framework in which the SwissLife Group’s insurance operations evolve, the asset portfolios might need to be split to reflect the different categories of insurance products. The asset portfolios of the insurance operations in Switzerland have been separated to distinguish between individual life and group life. As a consequence, such separation is also reflected in the ALM process.
Subject to the risk constraints and external constraints the remaining risk capital is used for investments in higheryielding assets. Policyholders benefit from the ensuing investment returns in the form of discretionary participation, while shareholders benefit from an increase in the value of their investment in the Swiss Life Group.
Distribution policy The distribution policy seeks to harmonise the interests of the different groups of stakeholders. Policyholders favour a minimum interest rate coupled with regular and appropriate discretionary participation whereas shareholders place greater emphasis on returns commensurate with the level of risk they are exposed to. Internal guidelines have been developed which define the policies for the allocation of policyholder participation with regard to annual bonus and terminal bonus. The focus of the Swiss Life Group lies on the sustainability of the business model and should balance the policyholders’ and shareholders’ expectations.
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.
The risk budgeting and limit setting described above ensure that interest rate risk, equity price risk, currency risk and credit risk remain under control. The corresponding market risk capital, credit risk capital and interest rate risk capital limits as well as exposure limits for currencies and net equity for each relevant Group entity have been defined and these limits are assessed and reported on a regular basis.
Financial liabilities not at fair value through profit or loss as at 31 December 2005
Investment contracts and deposits at amortised cost 0.3–4.3% 1.4–3.8% 1.9–4.0% 3.3–4.1%
Financial liabilities not at fair value through profit or loss as at 31 December 2004 (restated)
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 and surrender. The ALM process defines the strategic asset allocation minimising the net interest rate sensitivity of the combined 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.
The minimum interest rates which are guaranteed and the proportion of insurance liabilities that are interest-sensitive are as follows:
More than Group’s Up to 1 year 1–5 years 5–10 years 10 years customers Total
Balance sheet interest rate sensitivity gap 22 781 14 189 30 016 33 622 1 798 102 406
In Switzerland, the Swiss occupational pensions business in the group life insurance (BVG) is subject to guaranteed minimum interest and annuity conversion rates. Following the decision of the Swiss Federal Council on 10 September 2003, a reduction in the guaranteed interest rate for the mandatory BVG business from 3.25% to 2.25% took effect on 1 January 2004. The rate was subsequently raised to 2.50% with effect from 1 January 2005 and confirmed at this level for 2006.
The Group monitors the investment portfolio risks by establishing mandatory risk limits. The investment portfolio is adequately diversified and there was only one investment exceeding 10% of shareholders’ equity: HSBC totalling CHF 0.8 billion (2004: CHF 0.9 billion).
The Swiss Life Group has no significant concentrations of risk with regard to exposures to a single debtor or to groups of debtors having similar characteristics.
To reduce the credit exposure relating to derivatives a collateral management process has been established. As soon as the market value of the derivatives per counterparty exceeds a certain threshold the Swiss Life Group calls collateral from the counterparty. The threshold increases with the rating of the counterparty. The minimum rating for a counterparty is A– (Standard & Poor’s or equivalent). If a counterparty falls below this level, outstanding positions must be fully collateralised or closed out. The collateral is called at least weekly, but in times of turbulent markets the frequency would be increased. As leverage is not allowed, certain coverage rules apply with regard to cash or long positions. A list of the counterparties for derivative transactions, over-the-counter and exchangetraded, is approved by senior management.
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 related reinsurance agreements in the form of deposited funds and securities.
In CHF million For the account and risk of the BBB Swiss Life and Group’s
In certain countries, specific additional guidelines and rules have been defined locally to monitor credit risk. Such guidelines cover investments in fixed-income securities whereby the average rating of the fixed-income 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 approved annually.
The Swiss Life Group’s European insurance and investment operations (excluding Switzerland) generally invest in assets denominated in the same currency as their insurance and investment liabilities, which mitigates the foreign-currencyexchange -rate risk for these operations. As a result, foreign currency risk arises from recognised assets and liabilities denominated in other currencies and net investments in foreign operations. 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 SwissLife 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.
Insurance receivables and other receivables 979 3 108 65 17 6 – 4 175
Financial assets pledged as collateral 355 477 394 – 6 – 1 232
Financial liabilities at fair value through profit or loss –165 –1 615 –136 – –46 –4 957 –6 919
Investment contracts and deposits at amortised cost –3 242 –2 735 –967 –4 –359 – –7 307
Due to the limitations of the Swiss capital market with regard to liquidity, investments in Switzerland are also made in currencies other than the Swiss franc. The exposure is to a large extent hedged on an economic basis using foreign currency derivatives.
In certain other countries, the assets are normally denominated in euro, which is the same currency as the insurance liabilities. The remaining foreign currency exposure is primarily in the US dollar, the British pound, the Swiss franc, the Danish krona and Swedish krona associated with investments in equity securities, unit trusts and cash in these currencies. US dollar exposure is partially hedged on an economic basis using derivatives. The liabilities are not exposed to currency risk.
Financial assets at fair value through profit or loss 9 553 67 879 4 559 2 277 6 318 23 653
Financial assets available for sale 1 979 533 6 229 17 172 54 118 – 80 031
Financial assets held to maturity 54 67 404 1 955 1 776 – 4 256
Financial liabilities at fair value through profit or loss –622 –1 172 –151 –13 –4 –4 957 –6 919
Swiss Life’s core business is life insurance, both individual and group life, in which it has acquired key competence and expertise. The Group’s insurance entities operate in a number of different countries. As a consequence, the local regulatory constraints may have an impact on the business unit organisation and product range. These constraints must always be obeyed. In addition, each insurance entity shall adhere to certain general principles with regard to product development and policyholder bonuses.
Nature of insurance risk Insurance risk arises when biometric and demographic trends as well as administrative costs deviate adversely from expectations and the premium rates agreed with the policyholder. Insurance risk quantification starts with the pricing of products. The insurance premiums are commonly determined by applying the equivalence principle, thereby using estimated values to calculate the future benefits. The Group’s insurance entities generally use the most up-to-date pricing basis when pricing new products or repricing existing ones.
The Group’s insurance entities quantify the insurance risk appropriately. A quantification of the insurance risk includes a sensitivity analysis. Insurance risk is mainly assessed by means of stochastic models. By analogy with the value-at-risk concept, insurance risk capital is defined as the value of accumulated future insurance benefits that shall not be exceeded with a certain predetermined (high) probability.
The nature of insurance risk can be summarised as follows: Mortality and longevity Decreasing mortality rates result in lower benefits for contracts where death is the insured risk. On the other hand, annuity payments increase when mortality decreases (longevity risk). The most significant factors resulting in an increase of longevity are continued improvement in medical science and social conditions.
The BVG business (Swiss occupational plans) is a significant part of the Group’s life insurance business in Switzerland. The guaranteed annuity conversion rate for the Swiss Life Group’s mandatory BVG business is presently set at the rate of 7.2%. Under an amendment to the BVG legislation, which took effect on 1 January 2005, this rate will be reduced in stages to 6.8% over the next 10 years. The Swiss Life Group has taken the reduction into account in its plans to amend the pricing and structure of its life insurance products in Switzerland (including a phased reduction of the conversion rate on its supplementary BVG business to 5.835% over 4 years).
Annuities payable per annum – per type of annuity for the year ended 31 December 2005 – individual life
Number of payable Number of payable Number of payable Number of payable policies per annum policies per annum policies per annum policies per annum
Annuities payable per annum – per type of annuity for the year ended 31 December 2005 – group life
Widow’s and widower’s annuities – in payment 2 734 78 233 9 –228 0 2 739 87
Orphan’s and temporary annuities – in payment 1 085 14 33 1 –48 –2 1 070 13
Orphan’s and temporary annuities – deferred 51 400 1 395 21 806 477 –21 416 –384 51 790 1 488
Amounts in CHF million Balance Accrual due to Reduction Balance as at 1 January new business (without reinstatement) as at 31 December
Number of Total Number of Total Number of Total Number of Total insured benefits insured benefits insured benefits insured benefits persons insured persons insured persons insured persons insured
At end of accident year 466 557 542 496 510 595 n. a.
Four years later 424 579 – – – – n. a.
Five years later 477 – – – – – n. a.
Total claims under non-life insurance contracts 1 386 6 Risk Management Policies and Procedures (continued)
Acceptance rules for risks are consistent with both the Code des Assurances and the French regulation. Underwriting guidelines and tariffs are reviewed on an annual basis.
Belgium Non-life business in Belgium covers disability for self-employed persons and group disability coverage and medical claims. The property and casualty portfolio primarily consists of motor insurance, property insurance and general liability. Limits are set with regard to underwriting of such business. Reinsurance contracts are in place which generally take the form of excess loss contracts and are approved by management.
Underwriting strategy Underwriting is the process of selecting and classifying insurable risks. The underwriting strategy attempts to ensure that the risks underwritten are well diversified in terms of type of risk and level of insured benefits. Life insurance underwriting is performed to ensure that the premiums and the general conditions of the insurance policies are consistent with the risks to be insured. The first step in the underwriting process is to determine which individual risks can be accepted. The second step is to place the accepted risks into groups of roughly equivalent levels of risk. Both processes must be conducted objectively and consistently. The Group sets limits for the acceptance of insurance risk arising from new and renewal business. Medical selection is part of the Group’s underwriting procedures, whereby premiums are charged to reflect the health condition and family medical 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
Other risk transfer Risk transfer primarily takes the form of reinsurance. Alternative forms of risk transfer (such as securitisation) require formal approval of the Chief Risk Officer and the Chief Financial Officer. No significant alternative form of risk transfer is used by the Group at present.
Sensitivity analysis An analysis of sensitivity indicates to which extent the insurance liabilities are affected by variations of risk factors. The analysis is based on changes in the assumptions used in the estimation of insurance liabilities whereby a specific risk factor is changed while holding all other assumptions constant. In practice this is unlikely to occur and changes in some of the assumptions may be correlated. Additionally, for many life insurance contracts several risk factors are considered for the establishment of the associated liabilities. Among others, for widow’s pensions mortality and longevity are taken into consideration whereas for disability annuities disability and mortality are taken into consideration.
Management believes that the insurance liabilities recognised in the balance sheet are adequate.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 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 re-pricing – 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 re-pricing the contracts.
At 31 December 2005, if mortality had been higher by 10%, the insurance liabilities would have been CHF 228 million higher in Switzerland and CHF 74 million higher in the other countries.
At 31 December 2005, if disability had been higher by 10%, the insurance liabilities would have been CHF 393 million higher in Switzerland and CHF 82 million higher in the other countries.
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 in the market 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 (ALCO 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.
The bank is exposed to interest rate risk on its on-balancesheet positions (including derivatives). Interest rate risk is managed using gap analysis together with an approach based on the sensitivity of a parallel shift in the yield curve (±100 bps) which measures the effect of rate movements in terms of net present values. Banca del Gottardo also uses a further measure of net present value sensitivity, which provides information on the yield curve twist risk. The effect on the bank’s earnings is measured with a parallel shift in the yield curve by ±100 bps. The interest rate margin for the following year is simulated on the basis of the hypothetical refinancing of lending operations.
In managing its exposure to interest rate risk, the bank uses interest rate swaps as hedging instruments and applies the methodology of cash flow hedging. The cash flow hedge starts from the assumption that a payer swap hedges the repricing exposure of maturing liability cash flows, and a receiver swap hedges the repricing exposure of maturing asset cash flows. The hedging objective consists in eliminating adverse cash flow impacts due to interest rate fluctuations over hedging time buckets on existing or forecast structural balance sheet 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.
Liquidity risk management at Banca del Gottardo comprises cash optimisation of assets and liabilities under regulatory constraints. Regulatory definitions of shortterm liquidity (liquidity 1) and global liquidity (liquidity 2) must be considered. Liquidity management focuses on the valuation of static gaps that are determined by projecting maturities of assets and liabilities. Liquidity risk mitigation at Banca del Gottardo aims at reducing the maturity gap.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 7 Earnings per Share
Profit attributable to equity holders of Swiss Life Holding 860 579
Basic earnings per share for the profit attributable to equity holders of Swiss Life Holding (in CHF) 25.67 18.57
Weighted average number of shares outstanding for diluted earnings per share 35 095 099 32 036 924
Short-duration Short-duration Long-duration Long-duration contracts contracts contracts contracts Total Total restated restated restated
Net earned premiums, fees and deposits received 19 882 19 362
Gross written premiums, fees and deposits received 20 211 20 180
Under the accounting principles adopted, deposits received under insurance and investment contracts are not recognised as income:
Sale of financial assets held to maturity 1 1 financial assets available for sale 28 1 803 1 466 other – –
Fair value gains/losses on interest rate instruments1) 162 96 liabilities designated as at fair value through profit or loss2) –67 –134 liabilities for the account and risk of customers (unit-linked) –564 –164 foreign currency instruments and other –1 810 284
2) whereof attributable to changes in credit risk: nil (2004: nil)
Total interest expense 862 911 9 Details of Certain Items in the Consolidated Statement of Income (continued)
Total insurance payables and other payables 4 455 4 225 10 Insurance and Other Receivables and Payables
For the account and risk of customers 0 1 – 0 9 53
Derivatives designated as fair value hedges – 76 149 – 8 057 2 601
Derivatives designated as cash flow hedges 3 11 24 43 1 051 2 007
Forward contracts are used as hedging instruments to protect investments in hedge funds against adverse movements in the USD exchange rate.
Designated as Designated as Held Held at fair value at fair value for for through through trading trading profit or loss profit or loss Total Total restated restated restated
Investment contracts without discretionary participation features – – 89 231 89 231
Total financial liabilities at fair value through profit or loss 622 559 6 297 4 380 6 919 4 939 12 Financial Assets and Liabilities at Fair Value through Profit or Loss
The adoption of IAS 39 (revised) has resulted in the designation of certain financial assets and financial liabilities as at fair value through profit or loss.
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: Financial liabilities designated as fair value through profit or loss
Allowance Allowance Gross Gross for loan for loan Carrying Carrying Fair Fair amount amount losses losses amount amount value value
Interest income accrued on impaired loans was CHF 8 million as of 31 December 2005 (2004: CHF 13 million). The Group’s loan portfolio is monitored closely through the review of information such as debt service, annual reports and assessments. This information is evaluated in light of current economic conditions and other factors such as diversification of the property portfolio. This evaluation is part of the regular review to determine whether the allowance for potential loan losses is warranted. Management believes that the allowance for loan losses is sufficient. However, management cannot predict with assurance the impact of future economic circumstances or how the mortgage and real estate portfolios would be affected by various economic circumstances.
Carrying amount as at 1 January restated 11 518 11 086
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 17 Investments in Associates (continued)
Assets Liabilities Net assets net assets Revenues Results results Direct share
LGT Swiss Life Non Traditional Advisers 26 17 9 4 10 8 3 43.4%
Crédit et services financiers (CRESERFI) 202 99 103 34 51 5 2 33.4%
In 2004, Adamant Biomedical Investments Ltd., Basel, LGT Swiss Life Non Traditional Advisers, Liechtenstein, and a service company in Germany, were reclassified to investments in associates due to partial sales of the equity stakes held.
Due to the acquisition of the remaining 60.7% of Oudart in 2004, an asset management group, investments in associates were reduced by CHF 12 million.
Revaluation surplus on transfers to investment property 28 4 – – – – 4
Revaluation surplus on transfers to investment property 28 103 – – – – 103
Balance as at 1 January –202 –4 –150 –382 –30 –768
No borrowing costs were capitalised in property and equipment in 2004 and 2005.
Adoption of IFRS 3 –794 – – – – – –794
Adoption of IFRS 3 798 – – – – – 798
Amortisation recognised directly in equity – 3 –126 – – – –123
Transfers to assets held for sale 228 – – – – 0 228
Balance as at 31 December –739 –108 –3 101 –28 –5 –128 –4 109
Total intangible assets as at 31 December 692 17 2 077 223 10 56 3 075 19 Intangible Assets including Intangible Insurance Assets
Adoption of IAS 28 (revised) –3 – – – – – –3
Balance as at 1 January –1 459 –45 –1 799 – – –12 –3 315
Adoption of IAS 28 (revised) 3 – – – – – 3
Balance as at 1 January restated –1 456 –45 –1 799 – – –12 –3 312
Amortisation recognised in income –80 –5 –481 –14 –3 –17 –600
Amortisation recognised directly in equity – – –139 – – – –139
Total intangible assets as at 31 December 801 15 2 306 202 12 71 3 407 19 Intangible Assets including Intangible Insurance Assets (continued)
Goodwill Due to the adoption of IFRS 3 Business Combinations, negative goodwill totalling CHF 4 million was derecognised with a corresponding adjustment to retained earnings as at 1 January 2005. Additionally, accumulated amortisation of goodwill totalling CHF 798 million was eliminated as at 1 January 2005.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 19 Intangible Assets including Intangible Insurance Assets (continued)
The key assumptions used for the impairment testing on the carrying amount of goodwill totalling CHF 692 million were as follows: Amounts in CHF million 2005 2004 2005 2004
Net carrying amount of goodwill as at 31 December 405 518 287 283
* 1% in 2009, reduced by 0.25% in each subsequent year
Goodwill relating to Banca del Gottardo has been allocated to the banking segment and goodwill relating to Lloyd Continental has been allocated to the insurance segment in France.
The recoverable amounts of the business relating to the goodwill above have been determined on a value-in-use basis for Lloyd Continental and Banca del Gottardo excluding Banca del Gottardo Monaco and Dreieck Industrie Leasing, subsidiaries of Banca del Gottardo, which will be sold in 2006. The recoverable amounts relating to the goodwill of these subsidiaries have been determined on the basis of their fair values less cost to sell, which represent the sales prices of these subsidiaries.
The impairment test on the goodwill relating to Banca del Gottardo Monaco has 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 47million was reclassified to assets held for sale as at 31 December 2005 as these companies will be sold in 2006.
In 2004, a legal reform of the healthcare system in France took place which has had an influence on the business environment of the participants in the accident and health insurance market. Due to this legal reform, an impairment test of the goodwill relating to Lloyd Continental was performed. The recoverable amount of the insurance portfolios relating to Lloyd Continental was estimated using various analyses and valuation techniques based on assumptions which are consistent with the embedded value calculations. These tests resulted in an impairment charge totalling CHF 123 million. Due to insufficient recoverable amounts, other goodwill totalling CHF 40 million were charged as an impairment.
In November 2005, the Swiss Life Group entered into a large employee benefits institution in Germany, a joint collaboration with IG Metall and Gesamtmetall offering occupational disability insurance (MetallRente). The present value of future profits arising from the acquisition of this insurance portfolio amounted to CHF 15 million.
Annual amortisation charges on the present value of future profits relating to acquired insurance portfolios totalling CHF 17 million as at 31 December 2005 are estimated as ranging from CHF 3 million to CHF 5 million for the years 2006 to 2008.
Other intangible assets Other intangible assets consist of computer software, trademarks and brand names.
Liabilities arising from investment contracts with discretionary participation features with actuarial valuation 681 686
Deposits released for payments on death, surrender and other terminations during the year –1 803 –1 596
Balance as at 31 December 681 686 21 Investment Contracts with Discretionary Participation Features
For investment-type contracts, savings premiums collected are reported as deposits (deposit accounting). These amounts primarily relate to contracts issued in France, Belgium and Luxembourg.
Total investment contracts and deposits at amortised cost 35 7 307 8 181 22 Investment Contracts and Deposits at Amortised Cost 23 Borrowings
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. During 2004 GEMMS with a nominal amount of CHF 6 million were repurchased in the market. The loss on the repurchased debt was CHF 0.4 million.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 23 Borrowings (continued)
Mandatory convertible debt Due to the requirements of IAS 32 (revised) Financial Instruments: Disclosure and Presentation, the mandatory convertible securities totalling CHF 250 million issued in 2002 (MCS I, 2002–2005) were retrospectively split into an equity component and a liability component. The equity component represents the option to convert the mandatory convertible securities into Swiss Life Holding shares. At inception, the equity component amounted to CHF 14 million (negative).
On 19 December 2005, the mandatory convertible securities matured and the liability of CHF 250 million was reclassified to share premium.
Interest Year of Carrying Carrying Issuer Currency rate issue Maturity amount amount restated
Other debentures On 30 June 2004, Swiss Life Insurance Finance Ltd., Cayman Islands, issued EUR 300 million in 4.375% bonds at a price of 99.856%. The bonds mature in 2008 and are subject to redemption in whole, at their principal amount, at the option of the issuer at any time in the event of certain changes affecting taxes of the Cayman Islands or Switzerland. The payments of all amounts under the bonds are unconditionally and irrevocably guaranteed by Swiss Life/Rentenanstalt.
Banca del Gottardo – bond CHF 3.250% 1998 2005 – 70
Banca del Gottardo – medium–term notes1) CHF 1.900% n. a. n. a. 6 3
Present Present Minimum Minimum value of value of lease lease minimum lease minimum lease payments payments payments payments restated restated
Claims under non-life insurance contracts 1 386 2 083 239 355 1 147 1 728
Non-discretionary policyholder bonuses and other liabilities 368 574 0 3 368 571
Total insurance liabilities and reinsurance assets 106 909 103 068 923 1 031 105 986 102 037 23 Borrowings (continued)
Liabilities released for payments on death, surrender and other terminations during the year –10 111 –12 530
Deposits released for payments on death, surrender and other terminations during the year –951 –1 164
Insurance liabilities for which deposit accounting is used For investment-type contracts with significant insurance risk, savings premiums collected are reported as deposits (deposit accounting).
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 25 Employee Benefits
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 were eliminated. This elimination led to an adjustment of the net employee benefit liability as at 1 January 2004 of CHF 2035 million. These amounts had previously been treated as plan assets for the calculation of the defined benefit liabilities and had also been included in insurance liabilities. These plans are typically partially funded as certain plan assets relating to these plans were not required to be eliminated. Associated unrecognised actuarial gains/losses totalling CHF 94 million were eliminated against the opening balance of retained earnings as at 1 January 2004.
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 25 Employee Benefits (continued)
Defined contribution pension plans Certain subsidiaries sponsor various defined contribution plans. Participation in the various plans is based either on completion of a specific period of continuous service or on the date of hire. The plans stipulate contributions by both employers and employees. The Group’s expenses under these plans amounted to CHF 5 million in 2005 (2004: CHF 5 million).
Number Number Exercise Exercise Expiry Expiry exercise exercise of shares 1) of shares 1) date date date date price 2) price 2)
The Group determines the fair value of the Swiss Life Holding shares 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 2005 totalled CHF 4 million (2004: CHF 6 million).
Share options The Group offers share options to directors and managers in Switzerland and abroad. No new share options were allocated in 2005, 2004 or 2003.
The expected weighted-average tax rates for the Group were 29.2% in 2005 (2004: 28.4%). These rates were derived by obtaining a weighted average of the expected income tax rates in the various jurisdictions in which the Group operates. The increase of the weighted-average tax rate is due to the geographical allocation of the profits and the different tax rates in these jurisdictions. The actual income tax expenses differ from the expected amounts as follows: Actual and expected income tax
Increase/reduction in taxes resulting from tax-exempt interest –14 –5 tax-exempt dividends –3 –3 other non-taxable income –297 –42 non-deductible expenses 78 74 other income taxes (incl. withholding taxes) 5 8 unrecognised tax losses/credits 31 57 use of previously unrecognised tax losses/credits –83 –16 other 13 –4
Total deferred income tax assets/liabilities 79 30 1 136 1 155
Unused amounts reversed during the reporting period –6 –23 –29 –39
Transfer to liabilities associated with assets held for sale – –18 –18 –
Foreign currency translation differences 0 0 0 0 27 Provisions 28 Equity
CHF 50 million for employees were set up in Switzerland and in Germany with an expected outflow of benefits within the next two to three years.
In 2005, convertible bonds were converted into 260 SLH shares in total with a corresponding increase in share capital totalling CHF 11 960 and an increase in share premium totalling CHF 33 885.
As at 31 December 2005, the share capital of SLH consisted of 33 776 078 fully-paid shares with a par value of CHF 46 each. In exercising voting rights, no shareholder can collect more than 10% of the total share capital directly or indirectly in respect of own shares or shares they represent. As at 31 December 2004, SLH had 33 775 818 registered shares with a par value of CHF 50 per share. Conditional share capital was CHF 168 721 652 as at 31 December 2005
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: Number of shares 2005 2004 restated
Capital increase in 2004 On 2 June 2004, SLH issued 8 344 680 SLH registered shares with a par value of CHF 50 each. The subscription price was CHF 100 per share. The gross proceeds of the rights offering amounted to CHF 834 million.
Issuance of convertible debt in 2004 On 10 June 2004, SLH issued CHF 317 million in 0.625% convertible bonds 2004–2010 convertible into SLH registered shares. The conversion price was set at CHF 209.625. The equity element (embedded conversion options) recognised in share premium amounted to CHF 57 million less costs of CHF 1 million at inception.
Gains and losses recognised directly in equity for the year ended 31 December 2005
Gains/losses on financial instruments 11 3 081 6 – 3 087
Total gains and losses, net of income tax and other items 1 185
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 28 Equity (continued)
Gains and losses recognised directly in equity for the year ended 31 December 2004 (restated)
Gains/losses transferred to the income statement 9, 11 –1 466 9 – –1 457
Changes in amounts attributable to income tax –134 deferred acquisition costs and present value of future profits –139 policyholder bonuses and other policyholder liabilities –1 392 effect of disposal of subsidiaries 36 foreign currency translation differences 13 minority interest –1
Total gains and losses, net of income tax and other items 890
The Group’s capital performs several important functions, such as funding future growth and providing a protective cushion for shareholders and policyholders, as well as hedging future risks. The defined Group core capital includes equity, certain liabilities with equity characteristics
Net cash outflow (–)/inflow (+) from acquisitions/disposals 2 –28 18 –142
In May 2005, the Swiss Life Group sold a real estate company in Belgium and Gottardo A.E.P.E.Y., Athens, a subsidiary of Banca del Gottardo. The sales prices of these transactions amounted to CHF 18 million in total. The gain realised on the sales amounted to CHF 6 million.
The equity stake in LGT Swiss Life Non Traditional Advisers, Liechtenstein, was reduced from 58% to 43.4% in December 2004. The remaining equity stake totalling CHF 4 million qualifies as an investment in an associate and is accounted for under the equity method. The contribution of LGT Swiss Life Non Traditional Advisers to the net income of the Swiss Life Group amounted to CHF 5 million for the period 1 January 2004 to
The Swiss Life Group acquired 94.9% of the shares of Renum AG, a real estate company, in Germany. The purchase price amounted to CHF 52 million. Renum contributed CHF 0.2 million in net income to the Group result for the period 18 October 2004 to
In May 2004, the Swiss Life Group acquired through its banking subsidiary Banca del Gottardo the asset management group Oudart by exercising the bank’s option for the acquisition of the remaining 60.7% of Oudart’s shares. The purchase price amounted to CHF 28 million. The contribution of Oudart to the net income of the Swiss Life Group was a loss of CHF 4 million for the period 31 Acquisition of Insurance Portfolio
Total liabilities acquired 3 237 30 Acquisitions and Disposals of Subsidiaries (continued)
Assets held for sale and associated liabilities as at 31 December 2005
Investment contracts and deposits at amortised cost 1 343 – 1 343
Net gains/losses on financial instruments at fair value through profit or loss – – 53 53 –47
Sales to and purchases from related parties are made at normal market prices. Outstanding balances at year-end are unsecured and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables. For the year ended 31 December 2005, 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.
Financial assets associated with other related parties primarily comprise interest in a participation in Germany in which the Group has a certain influence. It consists of strategic investments in a German bank conglomerate.
Financial assets at fair value through profit or loss 23 653 19 363
Total on-balance-sheet assets managed by the enterprise 160 001 147 262
Total assets under management 207 630 189 789 34 Assets under Management
– assets included in the balance sheet for the account and risk of the Swiss Life Group’s customers (separate account/unit-linked investments)
Financial assets held to maturity 15 4 256 4 147 4 532 4 424
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 2005, committed principal amounts stood at EUR 72 million and CHF 110 million (2004: EUR 40 million and CHF 309 million ). The periods for which these commitments were made extend from one month to one year, and the range of committed interest rates is 2.3% to 5.6%.
Capital commitments The Group had commitments to purchase investments of CHF 86 million (excluding private equity) as at 31 December 2005 (2004: CHF 220 million). Contractual obligations to purchase or construct investment property amounted to CHF 52 million as at 31 December 2005 (2004: CHF 123 million). Commitments for the acquisition of property and equipment amounted to CHF 0.1 million as at 31 December 2005 (2004: CHF 0.2 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 management these matters will not materially affect the Group’s consolidated financial position.
(2004: CHF 1849 million), of which CHF 1232 million can be repledged or resold by the transferee (2004: CHF 878 million).
38 Future Minimum Lease Payments under Non-Cancellable Operating Leases – Lessor
Due to a change in accounting policy relating to the valuation differences on the insurance business with discretionary participation, a liability for discretionary participation was set up as at 1 January 2004. The liability also covered the valuation differences on the insurance liabilities relating to the conversion rate for the pensions under the supplementary part of the BVG occupational pensions business. With the release of insurance liabilities (after taxes) of CHF 253 million, the liability for discretionary participation was increased accordingly. This increase of the liability for discretionary participation resulted in an expense which compensated the release of insurance liabilities.
Due to a change in accounting policy relating to the valuation differences on the insurance business with discretionary participation, a liability for discretionary participation was set up as at 1 January 2004. The measurement of the liability relating to the Swiss group business corresponded to the statutory minimum distribution ratio (“legal quote”) on these valuation differences. The one-off charges due to the introduction of the statutory minimum distribution ratio (“legal quote”) were therefore for restatement purposes reflected in gains/losses recognised directly in equity as at 1 January 2004 and in retained earnings as at 1 January 2004.
Adjustment arising on amortised cost measurement of financial assets previously measured at fair value –406
Total net adjustments to gains/losses recognised directly in equity due to changes in accounting policies as at 1 January –58
Amounts reclassified from gains/losses recognised directly in equity (reclassification of available-for-sale investments to financial assets at fair value through profit or loss) 274
Adjustment arising on fair value measurement of financial assets previously measured at amortised cost 0
Total adjustments to retained earnings, before excess DAC amortisation and PVP, policyholder participation, deferred taxes and minority interest –339
Less adjustments attributable to excess DAC amortisation and PVP, policyholder participation, deferred taxes and minority interest 210
Gains/losses recognised directly in equity The revised definition of the loans and receivables category led to the reclassification of available-for-sale debt instruments to loans due to the absence of an active market. As a result gains/losses recognised directly in equity decreased by CHF 406 million.
As permitted by the transitional provisions of IAS 39 (revised) Financial Instruments: Recognition and Measurement, reclassifications of financial assets from the held-to-maturity category to the available-for-sale category were made with an increase in gains/losses recognised directly in equity of CHF 35 million.
Retained earnings Reclassifications of financial assets classified as available for sale to financial assets at fair value through profit or loss were made with a corresponding increase in retained earnings of CHF 274 million. The application of the revised impairment provisions for available-for-sale equity instruments led to a decrease totalling CHF 496 million in retained earnings.
Deferred acquisition costs, deferred policy fees and other fee income were derecognised with corresponding adjustments to retained earnings totalling CHF 233 million (negative) and CHF 121 million (positive), respectively. Deferred investment management fees were recognised and led to an adjustment totalling CHF 25 million in retained earnings. These adjustments primarily related to unit-linked contracts that were unbundled into a deposit component and an insurance component with corresponding adjustments to retained earnings.
Due to the retrospective split of the MCS I into an equity component and a liability component, interest expense relating to the liability component led to a decrease in retained earnings totalling CHF 14 million.
Financial assets at fair value through profit or loss 17 140
In CHF million Carrying amount Fair value Carrying amount as reported reclassified
Financial liabilities at fair value through profit or loss 43 43
Derivatives designated and accounted for as hedging instruments totalling CHF 111 million and trading derivatives totalling CHF 1622 million were reclassified from other assets and financial assets held for trading to derivatives. Additionally, CHF 70 million was reclassified from derivatives to financial assets at fair value through profit or loss. These amounts primarily related to derivatives embedded in debt securities that were previously reported separately from the host contract.
Liabilities totalling CHF 3864 million were reclassified from investment contracts, customer deposits and other funds on deposit to insurance liabilities.
Profit attributable to equity holders of Swiss Life Holding, restated 579
As previously disclosed, the introduction of the statutory minimum distribution ratio (“legal quote”) in the Swiss group business resulted in a one-off charge on the profit for the period of CHF 89 million (after taxes).
Due to a change in accounting policy relating to the valuation differences on the insurance business with discretionary participation, a liability for discretionary participation was set up as at 1 January 2004. The liability relating to the Swiss group business was measured using the statutory minimum distribution ratio (“legal quote”) on these valuation differences. The one-off charge due to the introduction of the statutory minimum distribution ratio (“legal quote”) was therefore reflected in retained earnings as at 1 January 2004 for restatement purposes.
B-Source, Lugano – from 01.07.2005 37.0% 37.0% equity CHF 2 400
«La Suisse» Vie, Lausanne – until 23.11.2005 – – full CHF 24 000
Neue Warenhaus AG, Zürich Insurance 100.0% 100.0% full CHF 5 000
Swiss Life Capital Partners, Pfäffikon – until 30.06.2004 – – full CHF 100
Swiss Life Holding, Zürich Other – – full CHF 1 553 700
Swiss Life Pension Services, Zürich Insurance 100.0% 100.0% full CHF 250
Swissville Commerce Holding, Zürich Insurance 100.0% 100.0% full CHF 147 100
Swissville Private Holding, Zürich Insurance 100.0% 100.0% full CHF 50 000
LGT Swiss Life Non Traditional Advisers, Vaduz – 43.4% 43.4% equity CHF 1 000
Swiss Life (Liechtenstein) Services, Vaduz Insurance from 15.04.2005 100.0% 100.0% full CHF 100
Carte Blanche Partenaires, Paris Insurance 90.3% 95.1% full EUR 2 300
Crédit et services financiers (CRESERFI), Paris – 33.4% 33.4% equity EUR 56 407
Oudart Gestion, Paris Banking from 25.05.2004 100.0% 100.0% full EUR 1 000
SCI ERISA IMMO 1, Paris Insurance 50.0% 100.0% full EUR 39 980
SCI Uniphénix, Paris – until 17.12.2004 – – full EUR 7 398
Société suisse de gestion immobilière, Paris – until 19.12.2005 – – full EUR 22 860
Société suisse de participations d’assurance, Paris Insurance 100.0% 100.0% full EUR 678 353
Swiss Life Banque, Paris Banking 55.0% 55.0% full EUR 20 000
Swiss Life Prévoyance et Santé, Paris Insurance 99.2% 99.2% full EUR 150 000
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 42 Significant Subsidiaries and Associates (continued)
DEPFA Holding Verwaltungsgesellschaft mbH, Düsseldorf – from 29.11.2004 21.9% 21.9% equity EUR 539
Swiss Life Cooperations, München Insurance from 27.01.2005 100.0% 100.0% full EUR 100
Swiss Life Partner AG, München Insurance 74.0% 74.0% full EUR 7 000
Swiss Life Partner Service und Finanzvermittlung, München Insurance 100.0% 100.0% full EUR 1 800
Swiss Life Asset Management (Nederland), Amstelveen Insurance 100.0% 100.0% full EUR 250
Swiss Life Immo-Midi (Belgium), Bruxelles Insurance 100.0% 100.0% full EUR 2 200
Swiss Life Immo-Techno Center I, Bruxelles Insurance 100.0% 100.0% full EUR 868
Swiss Life Invest (Belgium), Bruxelles Insurance 100.0% 100.0% full EUR 646
Swissville Europe (Belgium), Bruxelles Insurance 100.0% 100.0% full EUR 8 087
Gotam Fund Management Company (formerly Gottardo Tower Fund Management), Luxembourg Banking 100.0% 100.0% full EUR 125
SB-Gotthard I Fund Management, Luxembourg Banking 100.0% 100.0% full CHF 650
Swiss Life Immo-Arlon, Strassen Insurance 100.0% 100.0% full EUR 1 000
Swiss Life Multi Funds (Luxembourg) Management, Luxembourg IM 100.0% 100.0% full CHF 200
Dom-James, Sevenoaks – until 31.12.2004 – – full GBP 5 016
Gottardo Gestión, SGIIC, Madrid Banking from 07.02.2005 100.0% 100.0% full EUR 825
Gottardo Inversiones Financieras, Madrid Banking from 19.05.2004 100.0% 100.0% full EUR 3 000
Banca del Gottardo Italia, Bergamo Banking 71.0% 71.0% full EUR 50 000
Gottardo Asset Management SGR, Milano Banking 87.2% 89.3% full EUR 3 500
Swiss Life (Italia), Milano Insurance 100.0% 100.0% full EUR 5 170
Swiss Life (Italia) Infortuni e Malattie, Milano Insurance 100.0% 100.0% full EUR 2 500
Gottardo Trust Company, Nassau Banking 100.0% 100.0% full USD 3 000 1) Segment (IM = Investment Management)
Adroit Investment (Offshore), Grand Cayman Insurance 100.0% 100.0% full CHF 0
Swiss Life Cayman Finance, Grand Cayman Other 100.0% 100.0% full CHF 0
Second Pillar, Athens – from 12.07.2004 25.0% 25.0% equity EUR 60
Banque du Gothard (Monaco), Monaco Banking 100.0% 100.0% full EUR 40 000
Report of the Group Auditors to the General Meeting of Swiss Life Holding Zurich
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 77 to 190) of Swiss Life Group for the year ended
These consolidated financial statements are the responsibility of the board of directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.
Our audit was conducted in accordance with Swiss Auditing Standards and with the International Standards on Auditing, which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements. We have also assessed the accounting principles used, significant estimates made and the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
Swiss Life Holding made further progress in streamlining the Group structure during the reporting period. The Swiss Life Asset Management companies in Switzerland and the Netherlands, as well as Swiss Life Funds Business and Swiss Life Funds, were brought together under the newly founded subsidiary Swiss Life Investment Management Holding.
In addition, after compensation of minority shareholders amounting to CHF 6 million, Swiss Life Holding raised its interest in Swiss Life/Rentenanstalt to 100%
Swiss Life Holding generated a profit of CHF 172 million in the 2005 financial year against CHF 153 million in the previous year.
Swiss Life Holding . Financial Statements 2005 . Statement of Income
Loans to Group companies CHF 61 million of the loans to Group companies are classified as subordinated loans.
Share capital As at 31 December 2005, the share capital of Swiss Life Holding (SLH) consisted of 33 776 078 fully-paid shares with a par value of CHF 46 each. In exercising voting rights, no shareholder can collect more than 10% of the total share capital directly or indirectly in respect of their own shares and those they represent. As at 31 December 2004, SLH had 33 775 818 registered shares with a par value of CHF 50 per share. Conditional share capital was CHF 168 721 652 as at 31 December 2005
Swiss Life Asset Management (Nederland), Amstelveen – – – EUR 250 100.0%
Swiss Life Cayman Finance, Grand Cayman CHF 0 100.0% CHF 0 100.0%
Swiss Life Funds, Lugano – – – CHF 10 000 100.0%
Swiss Life Investment Management Holding, Zürich CHF 50 000 100.0% – – –
Swiss Life Holding . Financial Statements 2005 . Notes to the Financial Statements
Contingencies Swiss Life Holding acts as warrantor for all Swiss Life/Rentenanstalt liabilities with regard to the various tranches of the subordinated perpetual step-up loan (hybrid debt), which amounted to an equivalent value of CHF 1314 million at the balance sheet date.
Balance carried forward to new account 4 252 874 1 979 262
The profit for the year amounts to CHF 172 273 612. 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 5 in the par value per share will be paid.
As statutory auditors, we have audited the accounting records and the financial statements (statement of income, balance sheet and notes to the financial statements; pages 193 to 196) of Swiss Life Holding for the year ended
These financial statements are the responsibility of the board of directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.
Further information can be obtained from: Swiss Life General-Guisan-Quai 40 P.O. Box 2831 CH-8022 Zurich
You can find the Annual Report for the Swiss Life Group on the Internet at
Swiss Life Group . Annual Report 2005 . Dates and contacts