Gross written premiums 2) CHF million Net earned premiums and policy fees CHF million
1) Before goodwill amortisation 2) Gross written premiums incl. deposits under investment contracts 3) On consolidated basis
– Improved results: Net profit of CHF 624 million and return on equity of 10.7%
– Business focus: Concentration on life insurance and pensions business now complete
Swiss Life Holding, registered in Zurich, dates back to the Swiss Life Insurance and Pension Company founded in 1857. Shares of Swiss Life Holding are listed on the SWX Swiss Exchange (SLHN). The Swiss Life Group employs a staff of
The year 2004 was characterised by historically low interest rates and the absence of the significant economic growth which was generally anticipated. The Swiss Life Group achieved a welcome result, despite this rather unfavourable environment.
We have significantly improved results. The significant improvement on the previous year’s results from CHF 233 million to CHF 624 million derives from a very good financial result, reduced costs and risk-based pricing. The net profit earned corresponds to a return on equity of 10.7%. The operating income (before amortisation of goodwill) improved from CHF 557 million to CHF 1252 million. Inasmuch as we had already achieved the objectives set by the cost savings programme at the end of 2003, one year ahead of schedule, we managed to reduce operating costs by an additional CHF 110 million (–5%) in 2004 despite the considerable growth in premiums. Operating expenses decreased by 3% to CHF 2.8 billion.
We have strengthened our balance sheet. As of 31 December 2004 the total equity of the Swiss Life Group stood at CHF 6.7 billion. This represents an increase of 35% compared to the previous year. The Swiss Life Group thus has a solid financial base. The significant rise in equity is mainly attributable to operating performance, as well as the capital increase concluded in June 2004. The solvency margin of the Swiss Life Group came to 195% on 31 December 2004. More important to our policyholders than this figure, but also to you, our shareholders, is that we have suitable reserves, thanks to our farsighted reserving policy, and are thus also in a position to fulfil our existing obligations over the long term.
We thank all our employees. Their competence and commitment have made this progress possible. The performance achieved in 2004 allows us to view the future with confidence.
The demand for financial provisions for the future continues to grow. Because people are now living to an ever-riper old age, the need for financial provisions for the future will be continue to grow. The state pension systems in many European countries are promising benefits that simply cannot be financed in the long run. With the ratio of pensioners to the actively employed visibly increasing, most countries are being forced to usher in reforms for which even acquired entitlements are not sacrosanct. Germany is a striking example, where the “firstpillar ” pension benefits (paid for by current employees in a pay-as-you-go process) make up around 80% of the average retirement income. These inevitable corrections to the system are shifting the accent towards fully-funded occcupational or individual solutions. These alternatives are the core business of Swiss Life.
The conditions governing our business in Europe are intact. Although the tax advantages of endowment insurance might be reduced even more, in the private pensions business retirement products, in particular, will continue to enjoy a favourable tax situation. We are in a position to react flexibly to any unforeseen changes (as we proved in the previous year). Nevertheless, in Switzerland, our domestic market, important parameters for occupational benefits remain inappropriate and disadvantageous to both insured persons and shareholders. The minimum interest rate remains a political factor, as before, which limits the risk capacity of the employee benefits institutions, reduces their earnings potential and thus negatively impacts the future pension entitlement. Even after the legislative revision to the law, the legally defined conversion rate for the obligatory portion of second pillar pensions still fails to correspond to reality. Too high a rate poses a long-term danger to the financial stability of the pension system and produces a redistribution of the burden to the younger generation which is neither economically nor socially desirable. We will continue to do everything in our power to see that the conditions in Switzerland are adapted to reality in order to have a sustainable pension system over the long term.
The business of providing financial benefits is a growing market. People are getting older. The need for individual retirement solutions in the form of pensions and longterm savings is growing with increasing life expectancy and the rising percentage of retired people in the population. Swiss Life assumes that, in coming years, the market growth in Europe for both private and occupational benefits will be considerably above the general trend in economic growth.
Between 2002 and 2004, Swiss Life successfully adjusted its business model to the changed conditions: the company concentrated on its core business, reduced costs, adapted product conditions to economic and demographic circumstances, implemented an integrated risk management
Expertise: We offer f irst-class solutions for pensions and longterm savings. This expertise is based on our proven professional competence and many years of experience.
Swiss Life Group . Review of Operations 2004 . Strategy 9approach with Group-wide asset and liability management, and strengthened its capital base. In the coming years Swiss Life will be focusing on the following three strategic directions: growth, efficiency and leadership.
Growth Swiss Life wants to profit from the growing pensions market and position itself internationally as the preferred provider of pension solutions for individuals and companies. The continuous improvement of customer satisfaction is one important driver for this. Distribution in the individual markets will be more strongly diversified in order to create additional possibilities for customers to make contact. Swiss Life intends to grow by at least 1% above the market average in the countries in which it operates.
Leadership Swiss Life wants to promote a performanceoriented culture and an entrepreneurial approach. The basis for this includes our corporate values, clear objectives and performance yardsticks, short decision-making processes, a performance-oriented remuneration system, and the systematic recording and development of our employees’ skills and abilities.
Swiss Life Group . Review of Operations 2004 . Summary of Group Results
The Swiss Life Group achieved a good result in 2004. The company increased profits from CHF 233 million in 2003 to CHF 624 million, thus generating a return on equity of 10.7% (2003: 5.3%). Earnings per share came to CHF 20.50 (2003: CHF 8.83). Operating income before amortisation of goodwill worked out at CHF 1252 million (2003: CHF 557 million). The Life Core segment (Switzerland, France, Germany, the Netherlands, Belgium/ Luxembourg) contributed CHF 957 million to this figure (2003: CHF 341 million).
Swiss Life boosted its gross premium income by 8% from the prior-year figure to more than CHF 20.3 billion. Premium growth in the Life Core segment was also 8%. Swiss Life profited from significantly greater demand for pension products in France and Germany, achieving premium growth there of 18% (France) and 8% (Germany). Swiss Life gained market share in both countries. But also in its domestic market of Switzerland, Swiss Life returned to the growth zone (+8%) and recovered lost market share after suffering a drop of 19% in the previous year.
Equity stood at CHF 6.7 billion on 31 December 2004. The increase of 35% compared with the end of 2003 can be attributed partly to the profit generated, but above all to the capital increase of CHF 917 million that took place in June 2004. Core capital for capital adequacy purposes, which includes deferred Group-related funds in addition to equity capital per se, improved by 39% to stand at CHF 12.3 billion. Goodwill was further reduced by CHF 243 million.
Assets under management totalled CHF 189.1 billion on 31 December 2004 (+3%).
On 31 December 2004 the full-time equivalents came to 9419, a decline of 7% in the personnel figure compared with the preceding year.
Swiss Life Group . Review of Operations 2004 . Life Core Segment 16 Life Core Swiss Life’s operating income in 2004 came to CHF 957 million in the Life
Switzerland An estimate of the Swiss Insurance Association (SIA) indicates that premium volume in the Swiss life insurance market dropped by roughly 6% to CHF 30 billion. After the plunge in the individual insurance segment in 2003, premium volume in the group business slowed down more in the year under review. Swiss Life, which wrote some 80% of its premium volume in group business, with a market share of 25%, ranks number two in this segment. With a slice of 18% of the individual insurance market, Swiss Life is the clear market leader.
The financial result of CHF 2574 million was 9% above the previous year due to higher realised capital gains and a reduced need for valuation adjustments, as well as interest rate and currency effects.
This resulted in overall operating income of CHF 443 million (2003: CHF 76 million). The one-off impacts of the reduction in the conversion rate and the introduction of a statutory minimum payout ratio (known in Switzerland as the “legal quote”) contributed CHF 148 million to this figure.
Net earned premiums and policy fees 7 023 6 460 8.7%
Swiss Life Group . Review of Operations 2004 . Life Core Segment 17In 2004 Swiss Life reaffirmed its commitment to a secure and calculable pension system. With regard to group insurance, the company underscored its intention to continue full insurance. Swiss Life is convinced that this form of occupational benefits (in which the insurer also assumes the investment risk) is the best type for small and medium-sized companies. At the same time, due to the unrealistic conditions, the company saw no way around a need to adjust conditions for the supplementary portion of occupational pensions at the beginning of 2005, and to lower the pension conversion rate in stages over three years. In the individual insurance segment, however, Swiss Life continues to forgo reductions to bonus annuities.
Customers respect these confidence-building measures. Most group insurance clients accept the new BVG model.
Indeed, Swiss Life succeeded in switching over 90% of the mathematical reserve in the supplementary segment to contracts subject to the new conditions. In addition, Swiss Life recorded very low surrender sums in individual insurance during the reporting period. Intensive market development efforts, and measures to improve service quality also played a role in this development.
In 2004, reality re-entered the political discussion about the conditions governing occupational pensions. Awareness grew that wrongly applied parameters would lead to an undesireable redistribution of the burden to the younger generation, thus putting the security of the Swiss pension system at risk. For that reason the Swiss parliament is discussing a more radical and rapid reduction of the pension conversion rate for the obligatory portion. All insurance companies have already completed the reduction of this rate to a realistic level for the supplementary portion. As regards the minimum interest rate, the Swiss Insurance Association and the Swiss Pension Fund Association have joined forces in favour of a transparent, intelligible and market-oriented formula that can be borne by the economy as well as being calculable for all concerned. This formula should be the basis for introducing the subject once again into the political debate.
Such measures pave the way for an increase in sales productivity and additional improvements to efficiency. In 2005 Swiss Life is also placing emphasis on the streamlining of processes, and the simplification of its IT system architecture.
Swiss Life Group . Review of Operations 2004 . Life Core Segment
Germany Swiss Life has a market share of 1.7% in Germany, the third-largest insurance market in Europe with a premium volume of EUR 68 billion.
The year 2004 confirmed once again that Swiss Life is a preferred partner for brokers. In a broker survey on occupational pensions (bAV Award) in November 2004, Swiss Life was rated the best provider of occupational pension products. At the beginning of 2005 Swiss Life announced that it was taking a stake in MetallRente. MetallRente, the largest superannuation scheme in Germany, is directly involved with the 3.6 million employees of the metalworking and electronics industries. The stake in this consortium opens up new marketing possibilities for sales of direct insurance and pension funds. The Retirement
Income Act that came into effect on 1 January 2005 contains new regulations on important facets of retirement provisions. For example, retirement provisions are to be encouraged by the government with the newly created Rürup pension. Swiss Life offers the “Swiss Life Basisplan” in this context.
Manfred Behrens has been the new CEO at Swiss Life in Germany since 1 April 2004. He suceeded Jürgen Strauss, who retired after more than ten years of distinguished service.
Net earned premiums and policy fees 1 815 1 673 8.5%
Total benefits, losses and interest expenses –2 452 –2 278 7.6%
Netherlands The life insurance market in the Netherlands (with a premium volume of some EUR 25 billion) is heavily concentrated, with the five largest companies accounting for two-thirds of the business. Swiss Life, which holds a market share of about 5%, is ranked eighth. About half of the premium volume is channelled through independent brokers. The market growth for 2004 is estimated at
Gross written premiums totalled CHF 1959 million in 2004, a 17% decline (18% in local currency) from the previous year. The acquisition in the second half of the year of the group insurance portfolio from the Netherlands insurer De Goudse (EUR 300 million) only partly came up to the one-off impact of the contract concluded in 2003 with the pension fund of construction company HBG (EUR 570 million). Excluding the one-off impact of the above-mentioned contracts, premium volume was nearly constant from year to year.
A survey conducted by insurance brokers in 2004 revealed that Swiss Life had achieved the greatest improvement in service quality in the industry, and underscored the positive impact of initiatives to increase customer satisfaction. Swiss Life intends to achieve further progress in service quality as one of the best in this area, by consistently gearing processes and systems to customer needs. With its acquisition of the De Goudse group business, Swiss Life expanded its strong position in the corporate clients segment. Swiss Life’s acquisition on 1 January 2005 of the pension fund of the employees of the Netherlands central bank counts as a further success.
Net earned premiums and policy fees 1 593 2 020 –21.1%
Benefits paid and changes in insurance reserves –1 953 –2 296 –14.9%
Total benefits, losses and interest expenses –2 017 –2 231 –9.6%
Belgium/Luxembourg With a volume of EUR 20 billion, Belgium is a medium-sized life insurance market. In 2004, this market experienced 13% growth. Luxembourg is an important centre for cross-border insurance business. Swiss Life occupies ninth place in both segments in terms of premium volume.
In 2005 Swiss Life in Belgium will be increasing its collaboration with independent brokers and banks. Swiss Life started a survey in Belgium at the end of February 2005 to assess the needs and expectations of the populace concerning retirement and pensions. The results will be used for the further development of the business and to improve customer communications. Swiss life intends to further expand its strong position in cross-border business in Luxembourg by collaborating with very large brokers.
Gross written premiums, policy fees and deposits under investment contracts 741 566 30.9%
«La Suisse» As a result of the 100% takeover of the contingency fund on 1 January 2004, gross premium income increased by 76% to CHF 1368 million. The transfer led to a single premium of CHF 554 million. The reduction of the conversion rate and introduction of the statutory distribution ratio in Switzerland as of 1 January 2004 had a one-off positive impact of CHF 50 million on the results at «La Suisse».
United Kingdom Swiss Life has not written any new business in the UK since July 2003. Premium income fell by 32% to GBP 507 million in 2004. The sale of Swiss Life (UK) to the Resolution Life Group had a negative impact of CHF 125 million on the results of Swiss Life in the United Kingdom.
Italy Swiss Life is confining itself to the group risk business in Italy, and continues to refrain from writing any new individual business. This led to a slight decline in total premium income in the period under review.
Net earned premiums and policy fees 1 306 1 322 –1.2%
Benefits paid and changes in insurance reserves –1 289 –1 445 –10.8%
Swiss Life Group . Review of Operations 2004 . Non-Life Segment
Belgium The restructuring of portfolios led to a decline of 3% in Zelia’s gross premiums. Thanks to the significantly more favourable claims experience and lower costs, the combined ratio improved from 122.3% to 109.7%.
The Private Banking segment consists primarily of the Banca del Gottardo. Operating income for the 2004 financial year amounted to CHF 96 million in this segment. A loss of CHF 19 million was posted the previous year due to the loss of CHF 105 million on the sale of Schweizerische Treuhandgesellschaft STG. Assets under management increased by 7%, and amounted to CHF 44.6 billion on 31 December 2004. The Swiss Life Group employed a total of 1221 staff in this segment (on the basis of full-time equivalents).
Banca del Gottardo Banca del Gottardo achieved a consolidated net profit of CHF 71 million (these and all following figures are calculated on a local basis). The reduction of 17% against the previous year is largely due to the 66% increase in taxes paid, from CHF 9 million to CHF 17 million. Operating profit before extraordinary returns and tax amounted to CHF 78 million (+3%).
Key figures for Private Banking in CHF million 2004 2003 +/–%
The Investment Management segment manages Swiss Life’s insurance assets, amounting to CHF 72.2 billion, as well as third-party assets of CHF 13.8 billion.
Swiss Life sold its third-party private equity business as per 31 March 2004.
The two investment companies Adamed and Adamed Investments were dissolved in the fourth quarter of 2004 and the remaining investments transferred to a new institutional fund. Apart from these measures to concentrate on the pensions business, considerable progress was made in winning new third-party mandates. The 8% decline in fee income to CHF 173 million is a consequence of the concentration on core business and lower earnings in the real estate sector. France reported gratifyingly higher fee income. Swiss Life Asset Management, Zurich, the fourth-largest institutional asset manager in Switzerland, increased its assets under management by 40%. This will positively affect fee income from 2005 onwards.
Investment Management Swiss Life’s Investment Management segment generated a profit of CHF 67 million. The concentration on core business and a successful acquisition of additional third-party clients reflect our new alignment in this segment.
Key figures for Investment Management in CHF million 2004 2003 +/–%
The Swiss Life Network enables multinational companies to bundle their group contracts, which they maintain with the Swiss Life Group and partners in the Swiss Life Network. This service includes employee benefit plans customised to meet client-specific needs and risk profiles. Broader distribution makes it possible to achieve better spreading of risks. Clients are also able to centrally monitor and determine the benefits and costs of their employee benefit plans worldwide. Favourable loss experience within the pool means that costs are also reduced.
Another service offered by the Swiss Life Network is to share expertise and to provide information on local social insurance requirements, benefit plans and market-specific developments. The quarterly newsletter and the annually updated Employee Benefit Reference Manual, which provides data on the 46 most important life insurance markets, take into account the growing information needs of clients and partners. In order to set standards in the area of consultancy services, clients in need of internet services are permitted internet access to their contract data.
In the period under review, Veritas Life Insurance, Finland, and GAN Portugal joined the Swiss Life Network as new partners.
Swiss Life Group . Review of Operations 2004 . Swiss Life Network
Openness. Those who encounter others with open arms engender trust. Because they know what really moves people. And because they are capable of explaining risks and opportunities objectively. Openness thus provides new perspectives and encourages a pioneering approach – in both a traditional family business and the pensions solutions from Swiss Life.
The internal procedures of the Swiss Life Group are constantly being monitored and, if necessary, adapted in light of changing operating conditions and standards. The company has clearly delineated the various internal competencies and responsibilities and created an optimum structure for cooperation between the Board of Directors, management and internal control bodies. The Board of Directors of Swiss Life Holding is composed entirely of non-executive directors; there is a division of functions between the Chairman of the Board of Directors and the Chairman of the Corporate Executive Board (CEO). This upholds the separation of powers between the decision-makers and guarantees the autonomy of the Board of Directors.
The following report highlights the main aspects of corporate governance at the Swiss Life Group. The information is provided and structured in accordance with the Directive on Information Relating to Corporate Governance issued by the SWX Swiss Exchange, which came into effect on 1 July 2002.
The operational Group structure is organised around the core functions of the business (see chart on page 9). The resulting allocation of functional responsibilities across borders is reflected in the division of responsibilities in the Corporate Executive Board and can be seen in the market units. Along with the allocation of functional responsibilities across borders, each country has one person with market responsibility who is also responsible for results.
Shareholders On 8 January 2004, Queensgate Bank & Trust Company Ltd., P.O. Box 30464 SMB, Grand Cayman, Harbour Place, 103 South Church St., Grand Cayman, Cayman Islands, disclosed a 6.76% interest (1586098 shares) in Swiss Life Holding. Queensgate holds the shares in its capacity as trustee for the “MCS Share Trust”, which was established in connection with the MCS II (2003–2004) mandatory convertible securities issued in 2003. These mandatory convertible securities expired on 30 December 2004. As a consequence, all Swiss Life Holding shares held by Queensgate were delivered to the holders of the MCS II (2003–2004) mandatory convertible securities.
Threadneedle Asset Management Ltd., Station Road, Swindon, UK, reported that on 12 March its participation had gone under and then on 15 March had exceeded the notifiable 5% limit. On 31 March 2004, Threadneedle disclosed a 4.98% stake (1246610 shares) in Swiss Life Holding.
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 (3141026 shares) in Swiss Life Holding.
Between March and June 2004, the fund management company Fidelity International Limited, P. O. Box HM 670, Hamilton HMCX, Bermuda, reported that it had under or overshot the 5% limit on registered share capital on six occasions. As of 2 August 2004, Fidelity reported a 4.99% shareholding (1666865 shares).
33Corporate Governance The Swiss Life Group is committed to good corporate governance for the benefit of its shareholders, policyholders and employees.
Swiss Life Holding is not aware of any other parties who directly or indirectly held more than 5% of the registered shares in issue as of the balance sheet date (see table on page 151).
– Conditional capital: CHF 183406100, divided into 3668122 registered shares with a par value of CHF 50 per share.
The Swiss Life Holding General Meeting of Shareholders on 18 November 2002 approved the creation of conditional capital of no more than CHF 270992600 through the issuance of a maximum number of 5419852 registered shares to be paid in full, each with a par value of CHF 50. Such capital is at the disposal of the holders of conversion or option rights granted by the company or companies belonging to the Group in connection with existing and new loan debentures or similar bonds issued by Swiss Life Holding and companies belonging to the Group. The shareholders are excluded from subscription rights, however their advance subscription rights remain safeguarded. The Board of Directors sets the terms of conversion and option conditions.
In December 2002, Swiss Life Holding completed an ordinary capital increase of CHF 541985200, divided into 10839704 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 1083970400, divided into 21679408 registered shares. Also in December 2002, pursuant to the issue of MCS I (2002–2005) mandatory convertible securities, 1768535 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 88426750 from CHF 1083970400 to CHF 1172397150, divided into 23447943 registered shares. The conditional capital thus decreased to CHF 182565850 or 3651137 registered shares.
Swiss Life Group . Review of Operations 2004 . Corporate Governance transaction as efficiently as possible. In conjunction with the issue of MCS II (2003–2004) mandatory convertible securities, on 30 December 2003 a further 1586098 registered shares, each with a CHF 50 par value, were issued from conditional capital. Ordinary share capital thus expanded by CHF 79304900 to CHF 1251702050, divided into 25034041 fully paid registered shares of CHF 50 par value each, while conditional capital fell to CHF 103260950 or 2065219 registered shares.
In conjunction with the adjustments of the conversion rate of the MCS I (2002–2005) and MCS II (2003–2004) mandatory convertible securities, which were required following capital dilution as a result of the capital increase, 397078 registered shares at a par value of CHF 50 each were created from conditional capital on 30 June 2004. The ordinary share capital consequently increased to CHF 1688789950, divided into 33775799 registered shares at a par value of CHF 50 each, while conditional capital decreased by CHF 19853900 to CHF 183407050, divided into 3668141 registered shares at a par value of CHF 50 each.
Shares On the balance sheet date, 33775818 fully paid Swiss Life Holding registered shares with a par value of CHF 50 each were outstanding. Each share conveys an entitlement to one vote at the General Meeting of Shareholders. Information on the restriction on voting rights to 10% of the total share capital as laid down in the Articles of Association can be found in the section on shareholders’ participation rights on page 46. No other kind of shares exist with either increased or restricted voting rights, privileged or restricted voting rights, privileged dividend entitlement or other preferential rights. Likewise, there are no other equity securities. No registration restrictions apply to Swiss Life Holding shares.
Members of the Board of Directors Function The Board of Directors is responsible for all matters that are not reserved for the consideration of the General Meeting of Shareholders (formally the supreme decision-making body of a public limited company) under the terms of Art. 698 of the Swiss Code of Obligations (OR) or of the company’s Articles of Association. In addition to its non-transferable duties (stipulated in Art. 716a OR) the Board of Directors is responsible, in particular, for the ultimate direction of the Group, including determination of strategy as well as supervision of the Corporate Executive Board.
Elections and terms of office Pursuant to the Articles of Association, the Board of Directors shall consist of no fewer than five and no more than fourteen members. Individual members of the Board are elected by the General Meeting of Shareholders for a term of office not exceeding three years. When the Board of Directors was reconstituted in 2003, the new members were given staggered terms of office to ensure that, as far as possible, an equal number of members will come up for re-election every year. If a member steps down during his or her term of office, the successor will serve for the rest of that term.
Swiss Life Group . Review of Operations 2004 . Corporate Governance as Professor of Business Administration at the University of St. Gallen and was Head of its Swiss Institute of Banking and Finance. In 1996 Bruno 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.
Gerold Bührer graduated from the University of Zurich in Economics (lic. oec. publ) in 1972. Following 17 years with the Union Bank of Switzerland as a member of management in its Financial Sector and Member of the Executive Board of its investment company, he joined Georg Fischer AG in 1991 where he was a member of its Corporate Executive Board (Finances) until 2000. He currently acts as an independent economic consultant.
Gerold Bührer will be put forward for re-election at the Swiss Life Holding Annual General Meeting of Shareholders on 10 May 2005.
Other appointments: – Banca del Gottardo, Lugano, Vice Chairman of the Board of Directors – Employee benefits foundations for Swiss Life/Rentenanstalt ’s internal services and external sales staff in Switzerland, Member of the Board of Trustees
– 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
Other appointments: – Vereins- und Westbank AG (a member of Hypo
– Julius Bär Holding AG, Zurich, Member of the Board of Directors
Rudolf Kellenberger received his Degree in Civil Engineering from the Swiss Federal Institute of Technology (ETH), Zurich in 1970. Between 1970 and 1978 he held various project management positions in the construction industry, including three years in the United Kingdom. Rudolf Kellenberger joined Swiss Re in 1978, where he served as Head of the Engineering Department from 1990 to 1992. In 1993 he was appointed as a Member of the Executive Board with responsibility for Europe. From 2000 to the end of December 2004 Mr Kellenberger served as Deputy Chief Executive Officer at Swiss Re.
– Swiss Pool for Aviation Insurance, Chairman of the Board of Directors
– Atradius Kreditversicherung NV, Amsterdam, Vice Chairman of the Supervisory Board
Other appointments: – Serono SA, Coinsins, Chairman of the Board of Directors – SGS SA, Geneva, Chairman of the Board of Directors – Bertarelli & Cie., Chéserex, Vice Chairman of the Board of Directors – Schindler Elevator Limited, Ebikon, Member of the
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 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.
Member of the Board of Trustees – Fondazione Rudolf Chaudoire, Lugano, Member of the
degree, and passed the Bar exam for the States of New York and Connecticut in 1987. Franziska Tschudi also did postgraduate studies at the University of St. Gallen (1991– 1993), receiving an Executive MBA. From 1984 to 1985, after completing various internships in law between 1981 and 1983, Ms Tschudi was an Assistant for Media Law at the Institute for Constitutional and Administrative Law
Franziska Tschudi will be put forward for re-election at the Swiss Life Holding Annual General Meeting of Shareholders on 10 May 2005.
Other appointments: – Employee benefits foundations for Swiss Life/Rentenanstalt ’s Internal services and external sales staff in Switzerland, Member of the Board of Trustees
– Chamber of Commerce and Industry St. Gallen-Appenzell, Member of the Board
The Board of Directors meets as often as business requires, but normally at least six times a year. As a rule, meetings are called by the Chairman. However, any member of the Board of Directors or the Corporate Executive Board may request that a meeting be called. In addition to the members of the Board of Directors, the CEO, as well as other members of the Corporate Executive Board as required, will normally attend the meetings or parts of meetings in an advisory capacity. The Board of Directors met eight times during the year under review.
Each member of the Corporate Executive Board has responsibility for a division within the Group. The members of the Corporate Executive Board are responsible for setting the objectives, financial planning, HR management and achievement of objectives within their division. They issue directives for their division within the context of legal and regulatory requirements, the relevant regulations and the Group directives intended for the Group as a whole.
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. He then returned to Credit Suisse where he held the position of Chief of Staff of the Investment and Trading Division. In 1997 Mr Himmel became a member of the Executive Board at ABN AMRO Bank (Switzerland), assuming responsibility for the bank’s logistics operations. He became Head of Operations at UBS Warburg Switzerland in August 2001.
Swiss Life Group . Review of Operations 2004 . Corporate Governance
Mr Senn has been Chief Investment Officer (CIO) of the Swiss Life Group since January 2003.
Other appointments: – Banca del Gottardo, Lugano, Member of the Board of
Board of Directors – Maerki Baumann & Co. AG, Zurich, Member of the
Resignations Two members of the Corporate Executive Board resigned during the year under review. Since the resignation of Michael Koller, Chief Risk Officer, in August 2004, Group Compliance and Regulatory Affairs reports directly to CEO Rolf Dörig. CFO Bruno Pfister is responsible for Group Risk Management and the actuarial units. René van der Smeede, Head of International Markets, resigned with effect from the end of the year to devote himself to personal interests, as had long been his intention. The national CEOs in the international markets now report directly to Rolf Dörig.
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 composition of compensation for its members. The Chairman’s Committee, in its capacity as 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 the year under review based on a corresponding 2004 directive. In line with this, shares and rights to shares of Swiss Life Holding are allocated to the participants free of charge. The rights convey an entitlement to subscribe to Swiss Life Holding shares at no cost after one or two years have elapsed. They expire worthless if the employment relationship is severed by the participants before the delivery of the shares. The shares in the immediate allocation are subject to a threeyear vesting period. The shares to be allocated on the basis of the rights after a one or two-year period, as the case may be, shall be blocked for a period of three years from the date when the rights 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: Board of Directors CHF 1 391 000
The following compensation was received by incumbent members of the Board of Directors of Swiss Life Holding (as of 31 December 2004) during the year under review.
Franziska Tschudi CHF 72 000 125 1) c.f. also the section on share allotment 2) for activities as Vice Chairman of the Board of Directors of Banca del Gottardo (from April 2004)
There were no resignations from the Board of Directors during the review period. Apart from the contractual agreements for continued payment of salary, members of the Corporate Executive Board who resigned during the period under review received no further benefits by way of severance payments.
Share allotment in the year under review Swiss Life Holding shares with a par value of CHF 50 each were allocated to members of the Board of Directors and the Corporate Executive Board as follows during the 2004 financial year: Board of Directors 1 458 shares allocated at values of CHF 164.15, CHF 155.65 and CHF 142.80. They are subject to a three-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, with a par value of CHF 50 each, as follows: Board of Directors 5 734 shares
Options No more share options were granted in the Swiss Life Group in 2003 and 2004. Options on shares of Swiss Life/Rentenanstalt were allocated to the members of the Board of Directors and Corporate Executive Board in 2000, 2001 and 2002 in the context of the share option plan introduced in 2000 for the entire senior management of the Swiss Life Group, and were subsequently converted into options on Swiss Life Holding shares. At the end of 2002 this share option programme was discontinued as of 2003. The share options allocated in the year 2000 expired worthless at the end of March 2004. In connection with the exchange of Swiss Life/Rentenanstalt shares for shares of Swiss Life Holding and the capital increases in autumn 2002 and spring 2004, the parameters of the options allocated in 2001 and 2002 were adjusted in accordance with Eurex guidelines. No other changes have been made to the allocated share options.
Corporate Executive Board none 1) “Closely linked parties” are natural persons and legal entities pursuant to Art. 678 of the Swiss Code of Obligations that have close personal, economic, legal or de facto ties with members of governing bodies. This typically includes spouses, minors, companies controlled by the member of the governing body, and natural or legal persons serving the member of the governing body in a f iduciary capacity.
Total compensation CHF 604 245 1) The 300 shares allocated are subject to a vesting period of three years.
Highest total compensation, Corporate Executive Board The highest total compensation for a member of the Corporate Executive Board was paid to Rolf Dörig as CEO. For transparency reasons and in view of forthcoming statutory disclosure rules on remuneration, the compensation he received is broken down. The total compensation paid in 2004 was as follows: Shares 2) CHF 534 308 3 255 SLHN shares at CHF 164.15
Shareholders’ participation rights Restrictions on voting rights In exercising voting rights, no shareholder can collect more than 10% of the total share capital directly or indirectly in respect of his own shares and those he represents. Legal entities and partnerships which are connected through capital, voting rights, uniform management or in any other way, as well as individuals or legal entities and partnerships which act in concert by virtue of agreement, as a syndicate or in any other way, are deemed to be a single person. Any amendment to or revocation of restrictions on voting rights must be approved by at least two-thirds of the voting shares represented at the General Meeting of Shareholders and an absolute majority of the share par value represented. The Board of Directors can permit exceptions to this limit on the basis of its discretionary powers; however, during the review period no exceptions were permitted.
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
Board of Directors; – change these provisions of the Articles of Association.
Auditors PricewaterhouseCoopers (PwC) serves as external statutory auditor for 77% 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 (14%) and other auditing firms (9%).
Supervisory and control instruments vis-à-vis the auditors The Audit Committee maintains regular contact with the external auditors. The Audit Committee 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 2004 financial year. Representatives of the external auditors attended each of these meetings, in whole or part.
Swiss Life is aware of its responsibilities towards shareholders, clients, staff and the general public, and acts accordingly. A study of Swiss Life’s activities, focusing on Switzerland, reflects the company’s commitment to sustainable corporate management.
Responsible Corporate Conduct Swiss Life is committed to helping people create a financially secure future. For life. This mission statement takes into account not only product-oriented and legal and regulatory requirements, but also the company’s obligations towards the environment and the community.
Environment In connection with its membership of the Zurich Energy Model, Swiss Life has set itself the goal of increasing energy efficiency by at least 1.5% each year and lowering its energy consumption and emissions continuously. The goal is to reduce overall energy consumption by 15% between 2000 and 2010. Individual measures include optimising operating times for heating, ventilation and lighting, waste separation, use of rain and lake water for roof cooling and sanitary facilities, as well as creating IT procurement criteria that take environmental aspects into account. Great importance was attached to observing “Minergie” principles and ecological criteria when planning structural features and selecting building materials, particulary for the renovation of Head Office in Zurich, in 2004 and 2005. Swiss Life has also subscribed to an international charter, joining other financial institutions in signing a commitment to the United Nations Environment Programme (UNEP).
Information Open and sincere communication, both internal and external, is an important prerequisite for longterm confidence. Staff events, for example, serve as information platforms and forums in which employees can address their questions to the Corporate Executive Board. To cultivate dialogue, employees use the intranet and specific e-mail addresses, lunchtime conversations with senior managers, information events on the annual and half-year results, and the annual international meeting for 130 management staff. “Life”, the Group-wide staff magazine, is published five times a year in three languages, with a circulation of 11000 copies. Since Swiss Life went public in 1997, Shareholder Services has been its first point of contact for shareholders, offering them all the services they need to administer their Swiss Life Holding shares in a securities account, free of charge. In the interests of private and institutional investors, financial analysts and the general public, the Investor Relations department also provides up-to-date, transparent reporting, which is permanently accessible on its website at www.swisslife.com. The nomination as best investor relations website by the Swiss newspaper “Finanz und Wirtschaft” in 2002 and 2004 is further evidence that the site is acknowledged to be extremely valuable.
Precise, passionate, determined, dextrous, and has stamina. Together with her colleagues in Berne, she makes the Swiss Life logo glow.
Swiss Life Group . Review of Operations 2004 . Embedded Value
For the model PVFP calculations, the most realistic assumptions were made regarding several factors, in particular returns on investments, the development of costs and claims, insurance customers’ participation in surplus and the risk discount rate. Business is also assumed to be proceeding at the same level (going concern). The current cost ratios – adjusted for inflation – are thus assumed to hold good for the future as well. The PVFP makes allowance for the future costs of the solvency capital required to underpin the insurance business. This is shown separately in the “Embedded Value” table (cost of capital). Equity attributable to shareholders in the future – the statutory equity adjusted for the shareholders’ interest in the revaluation reserve – produces the ANAV.
Development in 2004 Embedded value for the Swiss Life Group came to CHF 7936 million on 31 December 2004.
Embedded Value The Swiss Life Group’s embedded value rose by 15% to
Swiss Life Group embedded value at end of 2004 7 936
Deloitte & Touche LLP (“Deloitte”), our consulting actuaries, have reviewed the choice of methodology together with the asumptions and calculations made by the Swiss Life
Group (“the Group”) in the calculation of its embedded value results. Deloitte have reported to the Group that they consider that the methodology is appropriate, the
For the purpose of this report, Deloitte have performed certain checks on data provided by the Group, but have not verif ied and have relied on f inancial information underlying the Group’s f inancial statements.
Impact of 50 bp increase in return on new bond investments +94 +141 – +235
Impact of 10% decrease in asset values (property only) –542 –28 – –570
Part of Swiss Life’s risk policy is to measure and monitor the various risk categories regularly to make sure the risk structure conforms to the company’s risk capacity. The Investment and Risk Committee of the Board of Directors determines Swiss Life’s risk appetite within the preset risk capacity parameters, and this forms the basis for deriving the limits for the various risk categories at the individual Group companies. It is the responsibility of the risk management units at the individual companies to ensure that these limits are complied with at all times. The limit utilisations are monitored centrally and locally with the help of a common risk management system.
Market risks Market risks are among the largest quantifiable risks of a life insurance company. On the assets side of the balance sheet market risk refers to the risk of changes in the value of securities, such as stocks and bonds, or real estate holdings, as well as fluctuations in foreign exchange rates. The high volatilities on the financial markets in recent years perfectly illustrated the necessity of actively managing these market risks.
These interest-rate risks are reduced by purchasing corresponding interest instruments, and in particular bonds. The main source of exchange-rate risks for Swiss Life is its foreign-currency investments, and these risks are managed using currency hedges. Swiss Life also seeks to reduce market risks by ensuring a high level of diversification both in its investment portfolio and direct investments.
59Risk Management As is the case with any life insurance company, risk management is one of Swiss Life’s core tasks, and one that ensures it is able to meet its long-term obligations to clients with the greatest possible security.
Liquidity risk The purpose of liquidity risk management is to ensure that there is sufficient liquidity at all times to meet any payments that fall due. To this end, Swiss Life continuously forecasts its expected cash flows on both sides of the balance sheet. In addition to this, the investment portfolio is also structured in such a way as to ensure the necessary flexibility to react on the investment side both to changes in the capital markets and in the insurance portfolio.
Ongoing improvements The regular Group-wide reporting on all the above risks was fine-tuned and improved further in 2004. Aggregating the various risks makes it possible to determine the possible total loss potential, which is set against the risk capacity to form the basis for assessing the risk exposure using uniform criteria. This information is integrated into the risk budget, which is largely compatible with the Swiss Solvency Test and serves as the basis for the strategic asset allocation (SAA) as part of the asset and liability management process. In summer 2004, Swiss Life took part in the initial trial run of the Swiss Solvency Test, which gave it the opportunity to check the internal risk model introduced at the beginning of 2003 and to prepare for the new solvency regulations, as the requirement to determine the risk-based solvency is likely to come into effect in 2006 with the introduction of the new Insurance Supervisory Act (VAG) in Switzerland.
Reference to each risk class with page numbers in Financial Statements
By using asset and liability management (ALM) to systematically get the right match of assets and liabilities, Swiss Life aims to make sure it can meet its commitments to policyholders at all times, while also adequately compensating shareholders for making risk capital available.
Based on the economic principles of risk management, the ALM process at Swiss Life defines the answers to the following four questions: – How high is Swiss Life’s risk capacity and its corresponding appetite for risk (risk budget)?
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 its risk appetite. 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. The purpose of the capital set aside for interestrate risks is to limit the interest-rate instability differential between assets and liabilities.
– exposure limits: These limits apply primarily to foreign currencies and on a net basis to equity positions.
Both types of limits set the parameters for the asset allocation. Risk budgeting 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 process 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. To this end, cash flows up to a certain term to maturity are aligned with one another (cash-flow matching), while the durations of the other liabilities are aligned (duration matching).
Within the parameters of the risk capital and exposure limits, the remaining risk capital is then used for investments in higher-yielding assets for tactical reasons. The ensuing higher investment returns benefit policyholders in the form of bonuses and shareholders in the form of dividends and a boost to equity.
In addition to the purely economic considerations, there are other factors that have to be taken into account (regulatory requirements, funding ratio, solvency, local and international accounting standards, liquidity requirements, demands from the rating agencies), some of which may lead to results that conflict with the economic approach. For example, the economic approach is not consistent with the international accounting standards currently promulgated (International Financial Reporting Standards, IFRS). Under the current accounting treatment liabilities are not carried at fair value. Valuations are not adjusted following interest-rate movements, although the value of future commitments will obviously have changed. However, the focus on managing assets and liabilities according to economic criteria does make sense, this being highlighted by the fact that accounting standards are clearly moving in the direction of the fair-value valuation of liabilities. Moreover, the introduction of the Basel II solvency guidelines will see more attention being paid to economic principles given that the risk-adjusted approach is based on this perspective.
Swiss Life began to reduce its duration gap in 2003, and it continued its efforts in this regard during the year under review, narrowing the difference in interest-rate sensitivity between assets and liabilities and thus reducing its balance sheet risk. To this end, the duration of the bond portfolio was increased by 1.9 years in 2004, allowing for the difficulty of determining the duration for existing liabilities given the various uncertainties that surround the legal parameters for Group business in Switzerland (including the minimum interest rate and pension conversion rate).
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 will be concentrating in the coming financial year on refining the long-term crediting policy and setting priorities for the distribution of income to the individual stakeholder groups. There are plans for drawing up guidelines on the annual allocation of bonuses, dividend policy, beefing up reserves and setting the relative priorities for these measures. Such guidelines have already been issued for certain business units.
The parameters for the long-term crediting policy have an impact on the modelling of liabilities and their valuations, which in turn affect risk management and ALM.
Duration of loans originated by the enterprise 3.7 years 3.3 years
The actual 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.
In 2004, ALM activities focused on honing the cost breakdown per product and on promoting risk products, such as life and disability insurance.
In 2004, Swiss Life implemented the ALM process as an integral component of corporate procedures at all business units. Information from the risk budgeting process now flows into the asset allocation. Once the asset allocation has been defined on the basis of these parameters and the bonuses for the policyholders have been set, the data is fully factored into the planning process.
Commitment. Those who are dedicated to doing a job well can achieve outstanding results. That’s why Swiss Life is committed to helping employees achieve their goals and actively motivates each and every one of them. The result: a commitment that extends beyond day-to-day business and spurs our staff to extraordinary achievements – like Josef Huy’s excellent position at the New York Marathon.
Swiss Life Group . Financial Statements 2004 . Consolidated Statement of Income
Net earned premiums and policy fees 24 15 262 14 822
Net benefits paid and changes in insurance reserves 9 –15 741 –15 726
Diluted earnings per share (in CHF) * 8 20.50 8.83 * Year-end 2003 f igures adjusted to ref lect the rights issue of June 2004
Total net cash flow from operating activities 1 936 2 342
Swiss Life Group . Financial Statements 2004 . Consolidated Statement of Cash Flow 75Consolidated statement of cash flow for the years ended 31 December
Effect of exchange rate differences on cash and cash equivalents –47 128
Cash and cash equivalents as of 1 January 6 250 4 217
Swiss Life Group . Financial Statements 2004 . Consolidated Statement of Changes in Equity
Issuance of mandatory convertible securities (MCS) – 1 586 098 – 80
Issuance of shares in form of MCS – 1 586 098 – –
Issuance of shares in form of MCS (adjustment) 397 078 – – –
Swiss Life Group . Financial Statements 2004 . Consolidated Statement of Changes in Equity 77Consolidated statement of changes in equity for the years ended 31 December
In CHF million (except for per share data) 2004 2003 2004 2003 2004 2003
Number Number gains and gains and change change of shares of shares losses losses in equity in equity
The following events had an influence on the period under review: Capital increase On 2 June 2004, Swiss Life Holding issued 8344680 Swiss Life Holding (SLH) registered shares with a nominal 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.
Convertible bond offering On 10 June 2004, Swiss Life Holding 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.
Acquisition of minority interests During 2004, Swiss Life Holding acquired an additional 15216 Swiss Life/ Rentenanstalt shares. The equity stake held by Swiss Life Holding in Swiss Life/Rentenanstalt shares therefore increased from 99.7% to 99.8% as of 31 December 2004.
Dividends No dividend in respect of 2003 was paid in the period under review.
Swiss Life Group . Financial Statements 2004 . Notes to the Consolidated Financial Statements 2 Summary of Significant Accounting Policies
The consolidated financial statements of Swiss Life have been prepared in accordance with and comply with International Financial Reporting Standards (IFRS). The consolidated financial statements are prepared under the historical cost convention as modified by recording available-for-sale investments, investment property and financial assets and liabilities held for trading at fair values.
Currently, IFRS has no insurance industry guidelines for the technical areas. Swiss Life has generally based the accounting for the insurance (technical) areas on the requirements of the Generally Accepted Accounting Principles in the United States (US GAAP).
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates.
Insurance operations Insurance income and related expenses Premiums from traditional life insurance contracts are recognised when due from the policyholder. Reserves are established in order to recognise future benefits and expenses. Amounts collected as premiums from investment-type contracts such as universal life and unit-linked contracts are reported as deposits. Only those parts of the premiums used to cover the insured risks and associated costs are treated as premium income. These include fees for the cost of insurance, administrative charges and surrender charges. Benefits recognised under expenses include claims for benefits incurred in the period under review that exceed the related deposits under policyholder contracts and interest that is credited to the appropriate insurance policy accounts.
For investment-type products bonuses are only accrued on deposits under policyholder accounts if the policyholders are entitled to receive those bonuses upon surrender at the balance sheet date.
Separate account and unit-linked assets and liabilities These contracts represent life insurance contracts whose risk is borne according to their specific investment objectives by the policyholders. Investment income and both realised and unrealised gains and losses accrue directly to the policyholder. The assets of each account are segregated and are not subject to liabilities that arise out of any other business of the company. The assets and liabilities are carried at fair value. Deposits, withdrawals, net investment income and realised and unrealised capital gains and losses on such assets are not reflected in the consolidated statement of income or equity. The cost of insurance, administrative charges and surrender charges are included in policy fee income.
Commissions and certain operating expenses related to the sale of certain investment funds have been deferred. These costs are charged to income in relation to revenues earned on these investment funds. Certain front-end fees charged to unitholders have been deferred and amortised in proportion to the related expenses which have also been deferred. The Group periodically reviews and updates its assumptions made in determining projected revenues, with amortisation periods being adjusted as necessary.
“Regular way” purchases and sales of financial assets are recorded on the trade date, net of transaction costs. The amortisation of premiums and discounts on investments is computed using the effective interest method and is recognised in income as an adjustment of yield. Dividends are recorded as revenue on the ex-dividend date. Interest income is recognised on an accrual basis.
Sales or purchases of securities under agreements to repurchase or resell and under lending agreements are accounted for as collateralised borrowings or loans and carried at the contracted resale or repurchase amount, plus accrued interest. Interest paid or received is recognised in income over the life of each agreement.
Investment property is property held to earn rentals or for capital appreciation or both.
Derivatives and risk management activities The Group enters into forward foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, currency and interest rate options and other derivative financial instruments for hedging risk exposures or for trading purposes. To manage the risks associated with derivatives trading, the Group establishes risk levels and monitors these exposures. Exposure to price risk on both derivatives and their underlyings is managed in accordance with risk limits set by management for buying or selling instruments or closing out positions. The Group restricts its exposure to credit risk by entering into derivative contracts with counterparties that have at least an A credit rating and by entering into master netting agreements. The notional amounts or contract volumes of derivatives, which are used to express the volume of instruments outstanding and to provide a basis for comparison with other financial instruments, do not represent the amounts that are effectively exchanged by the parties and, therefore, do not measure the Group’s exposure to credit risk. The amounts exchanged are calculated on the basis of the notional amounts or contract volumes and other terms of the derivatives that relate to interest or exchange rates, securities prices and the volatility of these rates and prices.
Swiss Life Group . Financial Statements 2004 . Notes to the Consolidated Financial Statements in equity. When the firm commitment or forecasted transaction results in the recognition of an asset or liability, the gain or loss is removed from equity and included in the carrying amount of the asset or liability. Otherwise, the gain or loss is recognised in income in the period during which the hedged item affects income. Any ineffective portion of the gain or loss is recognised in the income statement immediately. When a hedge relationship is no longer effective, expires or is terminated, hedge accounting is discontinued from that point on.
If the lease agreement transfers the risks and rewards of the asset, the lease is recorded as a finance lease and the related asset is capitalised. At inception, the asset is recognised at the lower of the present value of the minimum lease payments or fair value and is depreciated over its estimated useful life. The corresponding finance lease obligation is recorded as a liability.
Goodwill and other intangible assets The Group’s acquisitions of other companies are accounted for under the purchase method, whereby the purchase price is allocated to the fair value of assets and liabilities acquired at the date of acquisition, with any residual amount allocated to goodwill. Goodwill acquired prior to 1995 was charged directly to equity.
The accounting policies for goodwill and intangible assets relating to business combinations for which the agreement date is before 31 March 2004 are as follows: Goodwill is amortised using the straight-line method over its estimated useful life, normally up to a maximum of 20 years. In determining the useful life, the Group considers the expected pattern of benefits to be received from the acquired company which is based on factors such as the type of business, the duration of the underlying insurance contracts, client relationships and distribution networks. The useful life of goodwill is reviewed annually and written down for impairment where necessary.
The present value of future profits from acquired insurance contracts is recognised as an intangible asset and amortised over the premium or gross profit recognition period of the insurance contracts acquired, which generally ranges from 20 to 30 years.
The accounting policies for goodwill and intangible assets relating to business combinations for which the agreement date is on or after 31 March 2004 are as follows: The allocation of the cost of a business combination includes the separate recognition of the liabilities for terminating or reducing the activities of the acquiree and contingent liabilities of the acquiree. Intangible assets of the acquiree which can be identified separately and for which the fair value can be measured reliably are separately recognised as part of allocating the cost of a combination.
Goodwill acquired in a business combination is measured after initial recognition at cost less any accumulated impairment losses. Goodwill is not amortised but tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired. Negative goodwill is recognised immediately in profit or loss.
For non-financial assets the recoverable amount is measured as the higher of net selling price and value in use. Net selling price is the amount obtainable from the sale of an asset in an arm’s-length transaction between knowledgeable, willing parties, after deducting any direct disposal costs. “Value in use” is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.
When an impairment loss has been incurred, the carrying amount of the asset is reduced to its recoverable amount, and the amount of the loss is recognised in the income statement. When an available-for-sale financial asset is impaired, the unrealised loss previously included in equity is removed from equity and recognised in the income statement. This includes any portion attributable to foreign currency changes in the case of non-monetary assets.
In respect of financial assets, an impairment loss is reversed if the subsequent increase in recoverable amount can be objectively related to an event occurring after the impairment was recognised. In respect of non-financial assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.
An impairment loss recognised for goodwill is not reversed in a subsequent period.
Earnings per share Basic earnings per share are calculated by dividing net income available to shareholders by the weighted average number of shares in issue during the reporting period, excluding the average number of shares purchased by the Group and held as treasury shares.
Some Group companies provide healthcare benefits to their retirees. The entitlement to these benefits is usually based on the employee remaining in service up to the retirement age and the completion of a minimum service period. The expected costs of these benefits are accounted for in the same manner as for defined benefit plans.
Borrowings Borrowings are recognised initially at the proceeds received, net of transaction cost incurred. Borrowings are subsequently stated at amortised cost using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings.
The Accounting Standards Executive Committee (AcSEC) issued a Statement of Position (SOP) 03–1 “Accounting and Reporting by Insurance Enterprises for Certain NonTraditional Long-Duration Contracts and for Separate Accounts” in July 2003. The adoption of this new pronouncement resulted in additional reserves for universal life contracts and additional reserves for annuitisation options totalling CHF 54 million in France and the United Kingdom. The net impact (net of policyholder bonuses and taxes) on the opening balance of retained earnings as of 1 January 2004 was a decrease of CHF 5 million. The impact of the adoption of this new pronouncement is shown in note 41.
IFRS 3 Business Combinations applies to the accounting for business combinations for which the agreement date is on or after 31 March 2004. IFRS 3 applies to goodwill or any excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the business combination arising from business combinations for which the agreement date is on or after 31 March 2004. The Swiss Life Group has applied IFRS 3 to business combinations for which the agreement date is on or after 31 March 2004 in accordance with the transitional provisions and will adopt the remaining requirements of IFRS 3 as of 1 January 2005. The main changes from IAS 22 are as follows: 3 Effect of Changes in Accounting Policies
– Goodwill acquired in a business combination must be measured after initial recognition at cost less any accumulated impairment losses. Therefore, the goodwill is not amortised and instead must be tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired.
IFRS 4 Insurance Contracts IFRS 4 Insurance Contracts applies to insurance contracts (including reinsurance contracts). The standard provides for limited improvements to the accounting for insurance contracts and requires an insurer to disclose information about such contracts. The main changes resulting from the adoption of this standard as of 1 January 2005 are as follows: – Certain contracts that do not meet the definition of an insurance contract contained in IFRS 4, together with investment contracts without discretionary participation features, will be accounted for as financial instruments in accordance with IAS 39 Financial Instruments (revised): Recognition and Measurement.
– Additional guidance is provided on the derecognition of financial assets. The standard clarifies that the evaluation of the transfer of risks and rewards of ownership precedes the evaluation of the transfer of control for all derecognition transactions.
– With regard to impairment of financial assets clarification is given that an impairment loss is recognised only when it has been incurred. It also provides additional guidance on what events provide objective evidence of impairment for investments in equity instruments. An impairment loss on available-for-sale equity instruments cannot be reversed through profit or loss. Any subsequent increase in fair value is recognised in equity.
The financial effects of these new accounting pronouncements are in the process of being quantified.
SwAFE B.V., a special purpose entity in the Netherlands which had issued notes backed by a portfolio of firstranking mortgages originated by Zwitserse Maatschappij van Levensverzekering en Lijfrente was transferred to a third party in 2004. With this sale, mortgage loans totalling CHF 782 million and mortgage-backed notes totalling CHF 493 million were transferred. The gain recognised on this sale amounted to CHF 21 million.
SwAFE B.V. contributed CHF 15 million in net income to the Group result for the period 1 January 2004 to 31 October 2004 (1 January 2003 to 31 December 2003: CHF 23 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 23 December 2004 (1 January 2003 to 31 December 2003: CHF 8 million).
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 31 December 2004.
With regard to the implementation of the strategy of the Group and its focus on the life insurance business in some core markets, the following divestitures took place in 2003: On 12 November 2003, the Swiss Life Group sold its life insurance business in Spain to VidaCaixa, a subsidiary of the CaiFor Group. The life insurance business in Spain was reported within the Life, Non-Core segment. The selling price amounted to EUR 43 million, net of transaction costs. Additionally, VidaCaixa transferred CHF 14 million to the Swiss Life Group to redeem a loan to Swiss Life Spain. The loss recognised on the sale amounted to CHF 3 million. The life business in Spain contributed a loss of CHF 2 million to the Group result for the period from 1 January 2003 to 12 November 2003.
In June 2003, the Swiss Life Group sold STG Schweizerische Treuhandgesellschaft and all its subsidiaries to the LGT Group. The selling price was CHF 197 million minus related costs of CHF 1 million. The loss recognised on the sale amounted to CHF 105 million. The contribution of STG Schweizerische Treuhandgesellschaft and its subsidiaries to the net income of the Swiss Life Group amounted to CHF 6 million for the period 1 January 2003 to 25 June 2003.
Cash and cash equivalents acquired (+)/disposed of (–) 52 0 –145 –370
– Life insurance operations offer a broad range of life, pension, annuity and investment-type policies to both groups and individuals, including accident, health and disability coverage. Under the Group’s new strategy, which involves refocusing on the life and pension business and a number of key European markets, some life insurance operations have been defined as core business and others as non-core business. Life operations in Switzerland (excl. «La Suisse»), France, Germany, the Netherlands and Belgium/Luxembourg are defined as core business. Life operations in the United Kingdom, Spain, Italy and «La Suisse» in Switzerland are defined as non-core business. The “Life” segment also includes a number of companies which are predominantly active in the management of investments pertaining to life insurance.
– “Other” refers principally to various service companies and general corporate functions not specifically related to any of the other segments.
Net earned premiums and policy fees 12 998 1 306 968 – – – –10 15 262
Share of results of associates 3 – 0 0 0 0 – 3
Net benefits paid and changes in insurance reserves –13 746 –1 289 –708 – – – 2 –15 741
Investment management and banking expenses –161 –3 –2 –381 –120 0 102 –565
Other operating and administrative expenses –566 –48 –105 –2 –1 –65 46 –741
Expenses for depreciation and amortisation 490 52 97 –1 1 9 – 648 6 Segment Information (continued)
Results for the Life Core segment and the Life, Non-Core segment include the one-off effects of the introduction of the statutory minimum payout ratio ( “legal quote”) and the reduction of the conversion rate for pensions under the non-mandatory part of the BVG business as described in note 41. These one-off effects amount to CHF 148 million (before taxes) for the Life Core segment and to CHF 50 million (before taxes) for the Life, Non-Core segment.
Investment management, banking and other fee income 134 1 1 313 188 41 –125 553 of which inter-segment 55 –39 5 –1 91 65 –176
Interest credited to investment contracts, customer deposits and other funds on deposit –725 –26 –2 –68 – – 3 –818
Insurance-underwriting and policy-acquisition costs –1 162 –170 –229 – – –5 20 –1 546
Expenses for depreciation and amortisation 503 18 93 9 3 3 – 629 6 Segment Information (continued)
The result for the Private Banking segment includes the loss of CHF 105 million on the sale of STG Schweizerische Treuhandgesellschaft.
Financial assets held for trading 1 226 8 1 1 769 60 – –19 3 045
Loans originated by the enterprise 13 475 1 405 144 5 723 1 400 –377 20 771
Separate account (unit-linked) assets 8 164 13 – – – – – 8 177
Financial liabilities held for trading 235 – – 948 – – –18 1 165
Investment contracts, customer deposits and other funds on deposit 25 408 420 70 5 408 – – –37 31 269
Separate account (unit-linked) liabilities 8 180 12 – – – – – 8 192
Life Non- Non- Private Manage- ElimiCore Core Life Banking ment Other nations Total
Financial liabilities held for trading 261 3 0 976 – – –15 1 225
Investment contracts, customer deposits and other funds on deposit 23 081 714 76 5 605 – – –124 29 352
Net realised and unrealised gains/losses on investments 439 159 232 197 57 – 1 084
Share of results of associates 1 2 0 – 0 – 3
Investment management, banking and other fee income 76 2 0 16 8 –20 82
Net benefits paid and changes in insurance reserves –7 907 –1 804 –1 821 –1 953 –261 0 –13 746
Interest credited to investment contracts, customer deposits and other funds on deposit –103 –545 –24 0 –63 0 –735
Investment management and banking expenses –125 –15 –14 –2 –6 1 –161
The income and expenses of the Life Core segment are broken down into the five core markets Switzerland, France, Germany, the Netherlands and Belgium/Luxembourg. The result for the core market Switzerland includes the oneoff effects totalling CHF 148 million (before taxes) of the introduction of the statutory distribution ratio (“legal quote”) and the reduction of the conversion rate for pensions under the non-mandatory part of the BVG business as described in note 41.
Swiss Life Group . Financial Statements 2004 . Notes to the Consolidated Financial Statements 7 Details of Life Core Segment (continued)
Statement of income Life Core segment for the year ended 31 December 2003
In CHF million Belgium/ ElimiSwitzerland France Germany Netherlands Luxembourg nations Total
Investment management, banking and other fee income 131 1 0 18 1 –17 134
Total benefits, losses and interest expenses –7 961 –2 529 –2 278 –2 231 –332 28 –15 303
Dividend income on equity securities, investment fund units, private equity and hedge funds 334 491
Elimination of interest expenses on convertible bonds and mandatory convertible securities, net of taxes 7 2
Fair value gains/losses – foreign currency instruments and other 266 414
Interest credited to investment contracts, customer deposits and other funds on deposit
Total interest credited to investment contracts, customer deposits and other funds on deposit 926 818
Impairment losses on property and equipment and other intangible assets 11 –
Total held-to-maturity investments, net of impairment losses 6 339 5 317 440 259 6 779 5 576
Fair Fair Cost/ Cost/ Net Net value value amortised amortised unrealised unrealised (carrying (carrying cost cost gains/losses gains/losses amount) amount)
Investment fund units – mixed 969 763 –36 –63 933 700
Total available-for-sale investments, net of impairment losses 90 514 85 992 5 027 2 914 95 541 88 906
Balance at the beginning of the reporting period –1 –1 –1 577 –1 077
Total accumulated impairment losses at the end of the reporting period –1 –1 –1 260 –1 577
Based on detailed assessments with regard to indications of impairment, impairment losses totalling CHF 95 million were recognised in the period under review. The impairment losses primarily related to equity securities and investment fund units.
The Group monitors the investment portfolio risks by establishing mandatory risk limits. The investment portfolio is adequately diversified and there was only one 10 Held-to-Maturity and Available-for-Sale Investments (continued)
investment exceeding 10% of shareholders’ equity: HSBC totalling CHF 0.9 billion (2003: CHF 1.1 billion). At 31 December 2004 debt securities with a fair value of CHF 1.5 billion (2003: CHF 1.7 billion) had a BBB rating or lower. No held-to-maturity securities were transferred to the available-for-sale category and no available-for-sale securities were transferred to the held-to-maturity category.
The Group held the following positions in financial instruments used for trading purposes as well as derivative financial instruments that do not qualify for hedge accounting. The fair values of these assets and liabilities are shown in the following table for the years ended 31 December: 11 Financial Assets and Liabilities Held for Trading
Fair Fair Fair Fair Contract/ Contract/ value value value value notional notional assets assets liabilities liabilities amount amount
Total derivatives held for trading 1 549 1 622 606 744 51 292 47 121
The Group writes covered call options through various brokers. The underlying securities are placed in a blocked account. The options are typically written for a period of 6 to 24 months. The Group receives an option premium at the beginning of the contract period and bears the risk associated with the writing of options. Future cash requirements for options written are equal to the fair value of the options. Options are carried in the consolidated balance sheet at fair value. Option premiums are recognised in income through the change in fair value of the option.
Total loans originated by the enterprise 20 956 25 800 –185 –200 20 771 25 600 21 157 25 916 15 Loans Originated by the Enterprise
Balance as of 31 December, net of impairment losses 58 64
Impairment losses at the beginning of the reporting period –1 –1
Impairment losses at the end of the reporting period –1 –1 16 Investments in Associates
Land and construc- and Other buildings tion fixtures Hardware equipment Total Total
Balance as of 1 January –202 – –150 –378 –29 –759 –716
Reclassification of computer software to intangible assets – – – 134 – 134 –
Balance as of 31 December –169 – –144 –207 –30 –550 –759
Foreign currency translation differences –1 – – –1 1 –1 0
Total property and equipment as of 31 December 952 170 51 45 19 1 237 1 468 of which assets under finance leases 43 – – 4 – 47 53 18 Property and Equipment
Amortisation and interest charged to income, including adjustments due to new actuarial assumptions –505 –455
Reclassification of computer software from property and equipment – – – 205 205 –
Balance as of 31 December –901 – – –901 –740 19 Goodwill and Other Intangible Assets
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 goodwills totalling CHF 40 million were charged as an impairment.
Total investment contracts, customer deposits and other funds on deposit 31 269 29 352 21 Investment Contracts, Customer Deposits and Other Funds on Deposit
Deposit liabilities – 34 20 Separate Account (Unit-Linked) Assets 19 Goodwill and Other Intangible Assets (continued)
Reserves for losses and loss adjustment expenses 25 2 088 2 040
Reserves for future life policyholder benefits 25 87 285 88 743
Reserves for policyholder bonuses and other reserves 25 6 730 4 845 22 Insurance Reserves
Net reserves for losses and loss adjustment expenses 1 732 1 675
The Group limits its exposures to loss within its insurance operations through participation in reinsurance agreements. Reinsurance arrangements do not relieve the Group of its direct obligations to the parties insured. Thus, a credit exposure exists with respect to both non-life and life reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements. A provision has been recorded for estimated unrecoverable reinsurance. In addition, the Group holds substantial collateral under related reinsurance agreements in the form of deposited funds and securities.
Future life policyholder benefits Long-duration contract liabilities included in future life policyholder benefits result from traditional participating and non-participating life products with mortality and morbidity risk. Shortduration contract liabilities are primarily accident and health products. The liability for future life policyholder benefits has been estimated using actuarial techniques, generally based on present values of future net cash flows and the following parameters: – Interest rates vary by country, year of issuance and product.
Gross written premiums and policy fees 2 992 3 124 13 087 12 254 16 079 15 378
Net written premiums and policy fees 2 346 2 761 12 873 12 085 15 219 14 846
Swiss Life Group . Financial Statements 2004 . Notes to the Consolidated Financial Statements 25 Insurance Liabilities and Reinsurance Assets
Reserves for future life policyholder benefits 87 285 534 86 751 88 743 614 88 129
1) Number of shares adjusted due to capital increase in accordance with Eurex rules 2) Exercise price adjusted due to capital increase in accordance with Eurex rules
The Group had 9419 full-time equivalents as of 31 December 2004 (2003: 10015).
Exchangeable debt (GEMMS) The GEMMS (Guaranteed Exchangeable Monetisations of Multiple Shares) were issued by the Group on 15 May 1998 and are exchangeable at the option of the holder into shares of the designated company until the maturity date of the issue. The Group may redeem some of the issues principally on or after a specific redemption date at an early redemption price. In May 2003, the remaining EUR 200 million debt exchangeable into Unilever shares matured and was repaid. During 2004 GEMMS with a nominal amount of CHF 6 million were repurchased in the market (2003: CHF 81 million). The loss on the repurchased debt was CHF 0.4 million (2003: CHF 2 million).
As of 31 December, issues with the following terms were outstanding: Hybrid debt In March 1999, Swiss Life privately placed a subordinated perpetual step-up loan comprising three simultaneous advances of EUR 443 million (at a rate of interest of Euribor plus a margin of 1.05%, increasing by 100 basis points as from March 2009), EUR 215 million
In CHF million In CHF million Final reOutstanding Carrying Carrying Interest demption Exchange ratio principal amount amount rate Maturity date price (face value/shares) Designated company
USD 162 089 000 205 219 2.00% 20 May 2005 113.86% USD 1 000 = 13.6141 Royal Dutch Petroleum
CHF 332 550 000 327 318 0.75% 20 May 2005 100.00% CHF 10 000 = 2.915451 Novartis/Syngenta
(at a rate of interest of 5.3655%, increasing by 100 basis points as from September 2009) and CHF 290 million (at a rate of interest of Libor plus a margin of 1.05%, increasing by 100 basis points as from March 2009). Swiss Life can call the floating rate loans at the earliest on 31 March 2009
Banca del Gottardo - medium-term notes 1) CHF 2.500% n.a. n.a. 3 5
Swiss Life Insurance Finance Ltd. CI - Guaranteed bonds EUR 4.375% 2004 2008 460 –
SwAFE B.V. - Senior Class A2 mortgage-backed notes EUR 5.320% 2002 2079 – 11 1) Medium-term notes are f ixed-rate debentures issued continuously by Banca del Gottardo on demand with a maturity of 2 to 8 years. As of 31 December 2004, the average interest was 2.5% (2003: 2.9%) and the average remaining time to maturity 23 months (2003: 24 months).
Medium and long-term bank loans include various mortgage loans with the following interest rates and maturities: Minimum Minimum Present value of Present value of lease lease minimum lease minimum lease payments payments payments payments
Finance lease obligations Finance lease obligations as of 31 December were as follows:
Net deferred income tax assets and liabilities as of 31 December
Derivatives designated and accounted for as hedging instruments 38 143 111
Sundry liabilities 294 292 29 Insurance and Other Receivables and Payables
Gains/losses recognised directly in equity Gains/losses recognised directly in equity comprise fair value changes of available-for-sale investments, revaluation surpluses on the transfer of owner-occupied property to investment property and the effective portion of the gain or loss on hedging derivatives in qualifying cash flow hedges. These amounts are net of certain policyholder bonuses and other policyholder liabilities and deferred acquisition costs, deferred income taxes and minority interests.
Retained earnings Retained earnings comprise accumulated retained earnings of the Group entities which have not been distributed to the shareholders. The distribution of profit is subject to restriction according to the various jurisdictions where the Group entities are located.
They were accounted for as treasury shares acquired for no consideration. Upon maturity of the MCS II, the number of treasury shares decreased by 1773706.
Total gains/losses recognised directly in equity, net of taxes and other items 714 217 931
Unrealised gains/losses arising during the period 38 3 621 –4 – 3 617 1 407
Gains reclassified to the income statement 9 –1 763 – – –1 763 –1 165
Change during the period, gross 2 113 5 103 2 221 1 031
Change during the period, net of taxes and other items 217 177
Swiss Life Group . Financial Statements 2004 . Notes to the Consolidated Financial Statements 32 Core Capital
The Group’s capital can perform several important functions, such as funding future growth and providing a protective cushion for shareholders and policyholders as well as hedging future risks. The defined Group core capital includes certain liabilities with equity characteristics (deferred Group-related funds) and minority interests.
Reserves and appropriations As of 31 December 2004 and 2003 respectively, the Swiss Life Group was in substantial compliance with all applicable regulatory capital adequacy requirements.
Deferred Group-related funds after deduction of minority interests 3 760 1 964
– assets managed for third parties by the Group – minus assets managed by third parties and alternative investments managed by third parties
Unused amounts reversed during the reporting period –17 –22 –39 –10
Restructuring costs In 2004, additional provisions were primarily set up in Switzerland and in Germany for restructuring programmes and for termination benefits for employees. Due to a restructuring programme in the United Kingdom, additional amounts for redundancies totalling CHF 8 million were provided in 2003. Further provisions were set up for termination benefits which mainly relate to the private banking business and the life insurance business in Germany.
Other contingencies and commitments 49 14 36 Contingent Liabilities and Commitments
With the sale of the life business in the UK, representations and warranties have been agreed with the buyer which limit the exposure for the Swiss Life Group in respect of time and amount with regard to arising claims and taxes. Misselling, in particular, has been included within the provisions covering a material financial deterioration in the position of the OB fund of the former Swiss Life UK business, in which case the financial consequences will be shared between the Swiss Life Group and the buyer according to a clear set of rules which limit the impact on the Swiss Life Group with regard to time (five years) and amount (GBP 31.5 million).
The total amount of credit commitments includes commitments to lend at fixed rates which expose the Group to interest rate risk. These commitments are entered into for restricted periods of time. As of 31 December 2004, committed principal amounts stood at EUR 40 million and CHF 309 million. The periods for which these commitments were made extend from three months to one year, and the range of committed interest rates is 1.7% to 5.3%.
Other contingencies and commitments Contractual obligations for repairs and maintenance of investment property amounted to CHF 48 million as of 31 December 2004, which are included in this line item.
Swiss Life Group . Financial Statements 2004 . Notes to the Consolidated Financial Statements 37 Assets Pledged (continued)
Total derivatives designated as fair value hedges 129 97 – – 2 851 1 932
value value recognised transferred of hedged expected to notional assets liabilities in equity to income transactions affect income amount
Total derivatives designated as cash flow hedges 14 49 21 –19 n. a. n. a. 3 134
Hedge accounting As the Group operates internationally, it is exposed to fluctuations in prices, interest rates and foreign exchange rates. The Group uses various investment strategies and derivatives to mitigate these risks and optimise its investment performance. The following tables present total derivatives designated as hedging instruments by risk category as of 31 December:
The Group enters into interest rate swaps, caps, floors and collar agreements to manage interest rate risk on its financial instruments. These measures are taken in order to effectively convert the portfolio into an acceptable fixed, variable and capped rate mix. The swap agreements are contracts to exchange floating or fixed-rate interest payments periodically over the life of the agreements without exchanging the underlying notional amounts.
Separate account (unit-linked) liabilities – – – –8 192 –8 192
Balance sheet interest rate sensitivity gap 15 197 6 158 60 336 –74 783 6 908
The foreign currency gains and losses on derivatives designated as hedges for currency risks are recognised in the consolidated statement of income in the same period that the gains or losses are recognised on the related assets, liabilities and anticipated transactions. For 2004 gains of CHF 245 million (2003: CHF 78 million) were recognised in income.
On Subject Not later Later than No matudemand to notice than 1 year 1–5 years 5 years rity date Total
Separate account (unit-linked) assets – – – – – 8 177 8 177
Non-interest-bearing financial instruments –2 868 –18 –2 365 –1 616 –947 –5 –7 819
Non-financial instruments – – – – – –107 745 –107 745
Net balance sheet liquidity gap –2 492 299 16 774 5 592 60 178 –73 443 6 908
Fair value changes of both the derivative financial instruments designated as fair value hedges and the underlying assets and liabilities are recognised in income. The realised losses recognised on the derivatives designated as fair value hedges for the year ended 31 December 2004 were CHF 34 million (2003: CHF 180 million).
Credit risk The Group mainly operates throughout Europe with a large percentage of business transacted in Switzerland. However, credit risk is well spread over a diversity of individual and commercial clients. The Group has no significant exposure to any particular client or counterparty.
Loans originated by the enterprise 20 771 25 600 21 157 25 916
Liabilities under investment contracts, customer deposits and other funds on deposit 31 269 29 352 31 269 29 353 39 Fair Value of Financial Instruments Not Presented in the Balance Sheet at Fair Value
ReclasIn CHF million 2003 sif ication 2003 as disclosed reclassif ied
Held-to-maturity investments classified previously as other investments have been reclassified to held-to-maturity 40 Reclassifications in the Statement of Income and in the Balance Sheet investments. A similar treatment has been adopted for available-for-sale investments which were previously classified as other investments.
Provisions previously carried under other liabilities are now presented separately in the balance sheet.
A list of the principal branches, subsidiaries, associates, partnerships and joint ventures together with the country of registration and the Group’s ownership interest and voting interest, if different, is shown in note 44.
41 Impact on Equity of Reduction in BVG Conversion Rate and of Statutory Distribution Ratio (“legal quote”) and Change in Accounting Policy
Due to the adoption of SOP 03–1, “Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contracts and for Separate Accounts”, additional reserves totalling CHF 54 million were set up.
An agreement was reached in France with CaixaBank France regarding a cooperation in the areas of distribution and sale of bank and insurance products. The agreement was effective from January 2005 and involved the transfer of 11.4% of the shares of Swiss Life Assurances de Biens, Paris, and 45% of the shares of Swiss Life Banque, Paris. In return the Swiss Life Group purchased 4.7% of the shares of CaixaBank France. The cooperation can be terminated by both parties according to certain rules in 2009, 2011 and 2013.
On 4 April 2005, the Board of Directors approved the annual financial statements and the financial report and authorised them for publication on 5 April 2005.
Adamed, Basel IM l until 01.12.2004 – – full CHF 23 018
Adroit Investment, Zürich Life l 99.8% 100.0% full CHF 5 000
Banca del Gottardo, Lugano PB ° 100.0% 100.0% full CHF 170 000
Kuhn & Seal, Nyon Other l 99.8% 100.0% full CHF 100
Kuhn & Seal Services, Nyon Other l until 23.12.2004 – – full CHF 100
«La Suisse» Vie, Lausanne Life ° 99.8% 100.0% full CHF 24 000
Long Term Strategy in liquidation, Zug Other ° 99.8% 100.0% full CHF 2 000
Schweizerische Treuhandgesellschaft, Zug PB ° until 25.06.2003 – – full CHF 12 000
STG Schweizerische Treuhandgesellschaft, Basel PB ° until 25.06.2003 – – full CHF 8 000
Swiss Life Capital Holding, Zürich IM l 99.8% 100.0% full CHF 5 514
Swiss Life Capital Partners, Pfäffikon IM l until 30.06.2004 – – full CHF 100
Swiss Life Funds Business, Zürich IM l from 16.12.2003 100.0% 100.0% full CHF 250
Swiss Life Institutional Funds - SLIF 14, Lugano IM l from 01.12.2004 99.8% 100.0% full – –
Swissville Centers Holding, Zürich Life l 99.8% 100.0% full CHF 7 100
Swissville Commerce, Zürich Life l 99.8% 100.0% full CHF 150 900
Swissville Commerce Holding, Zürich Life l 99.8% 100.0% full CHF 147 100
Swissville Private Holding, Zürich Life l 99.8% 100.0% full CHF 50 000
Technopark Immobilien, Zürich – – 33.3% 33.3% equity CHF 40 000
Tenium, Zürich IM l until 31.08.2003 – – full CHF 100
Tuxedo Invest, Zug – – until 31.07.2003 – – equity CHF 162 995
LGT Swiss Life Non Traditional Advisers, Vaduz – – 43.3% 43.4% equity CHF 1 000
Carte Blanche Partenaires (formerly Domical Santé), Paris Other ° 94.4% 95.1% full EUR 2 300
Daunou Participations, Paris PB ° from 25.05.2004 – – full EUR 4 585 until 21.12.2004
ERISA IARD, Paris Non-Life l 49.9% 50.0% full EUR 7 500
Financière Oudart, Paris PB ° from 25.05.2004 – – full EUR 38 until 21.12.2004
GSD Gestion, Paris – – from 25.05.2004 25.0% 25.0% equity EUR 400
Oudart & Associés, Paris PB ° from 25.05.2004 – – full EUR 38 until 21.12.2004
Premium Consulting SAS, Paris – – from 27.07.2003 20.0% 20.0% equity EUR 40
SACAT, Paris Other ° until 05.08.2003 – – full EUR 50
SCI DYNAPIERRE, Paris Other l 99.1% 100.0% full EUR 7 317
SCI ERISA IMMO 1, Paris Other l 49.9% 100.0% full EUR 39 980
SCI Paris Dammartin, Roubaix Other ° 99.0% 100.0% full EUR 15
Société suisse de gestion immobilière, Paris Other l 99.7% 100.0% full EUR 22 860
Swiss Life Asset Management (France) (formerly Société suisse de gestion financière), Paris IM l 99.8% 100.0% full EUR 3 000
Financial Solutions, München Other l from 08.09.2004 99.8% 100.0% full EUR 200
Münchner Tor, München Life l 99.8% 100.0% full EUR 59 435
Swiss Life Beteiligungs GmbH, München Other l 99.8% 100.0% full EUR 25
Swiss Life Partner AG, München – – 49.8% 49.9% equity EUR 3 500
Swiss Life Asset Management (Belgium), Bruxelles IM l 99.8% 100.0% full EUR 500
Swiss Life Immo-Commerce (Belgium), Bruxelles Other l 99.8% 100.0% full EUR 9 965
Swiss Life Immo-Cross Roads, Bruxelles Other l 99.8% 100.0% full EUR 64
Swiss Life Immo-Midi (Belgium), Bruxelles Other l 99.8% 100.0% full EUR 2 200
Swiss Life Immo-Techno Center I, Bruxelles Other l from 01.01.2003 99.8% 100.0% full EUR 868
Swiss Life Immo-Techno Center III, Bruxelles Other l until 01.01.2004 – – full EUR 500
Swiss Life Invest (Belgium), Bruxelles Other l 99.8% 100.0% full EUR 646
Gottardo Strategy Fund Management, Luxembourg PB ° 100.0% 100.0% full CHF 200
Swiss Life Asset Management Holding, Strassen IM l 99.8% 100.0% full CHF 8 380
Swiss Life Immo-Arlon, Strassen Other l 99.8% 100.0% full EUR 1 000
Integer Investment PCC Limited Cell 7, St. Peter Port-Guernsey PB ° from 01.07.2004 100.0% 100.0% full CHF 0
Swiss Life (UK) Group, Sevenoaks Life ° until 31.12.2004 – – full GBP 200 000
Gottardo Inversiones Financieras, Madrid PB ° from 19.05.2004 100.0% 100.0% full EUR 800
Swiss Life Gestion, Madrid IM ° until 12.11.2003 – – full EUR 751
Fafid, Milano PB ° from 11.03.2003 95.0% 95.0% full EUR 150
Gottardo Asset Management SGR, Milano PB ° from 01.01.2003 82.1% 85.0% full EUR 2 500
Swiss Life (Italia) Infortuni e Malattie, Milano Non-Life ° 99.8% 100.0% full EUR 2 500
Segment 1) Core = ° period share share dation rency 1000 1) Segment (IM = Investment Management, PB = Private Banking)
MFT Multifin Transactions, Nassau PB ° until 17.01.2003 – – full CHF 1 000
Swiss Life International Finance, Tortola IM l until 30.05.2003 – – full USD 10
Adroit Investment Offshore, Grand Cayman Life l 99.8% 100.0% full CHF 0 EUR 0
Swiss Life Financial Services, Grand Cayman IM l 99.8% 100.0% full CHF 50
Second Pillar, Athens – – from 12.07.2004 25.0% 25.0% equity EUR 60
Banque du Gothard (Monaco), Monaco PB ° 100.0% 100.0% full EUR 40 000
Financial Strategy (Sam), Monaco – – 20.0% 20.0% equity EUR 750
As auditors of the group, we have audited the consolidated financial statements (consolidated statement of income, consolidated balance sheet, consolidated statement of cash flow, consolidated statement of changes in equity and notes to the consolidated financial statements, pages 71 to 145) of the Swiss Life Group for the year ended 31 December 2004.
Swiss Life Group . Financial Statements 2004 . Report of the Group Auditors
On 2 July 2004 Swiss Life Holding acquired Banca del Gottardo, Lugano, from Swiss Life/Rentenanstalt for CHF 1.34 billion. This will result in greater diversification of Swiss Life Holding’s future income base.
On 10 June 2004 Swiss Life Holding brought out a convertible bond issue for a total of CHF 317 million.
Swiss Life Holding . Financial Statements 2004 . Review of Operations
In its third financial year, Swiss Life Holding generated a profit of CHF 153 million
Swiss Life Holding . Financial Statements 2004 . Statement of Income
Loans to Group companies CHF 211.7 million of the loans to Group companies are classified as subordinated loans.
Swiss Life/Rentenanstalt, Zürich CHF 587 350 99.8% CHF 587 350 99.7%
Swiss Life Funds, Lugano CHF 10 000 100.0% CHF 10 000 100.0%
Swiss Life Asset Management, Zürich CHF 250 100.0% CHF 250 100.0%
Swiss Life Asset Management (Nederland), Amstelveen EUR 250 100.0% EUR 250 100.0%
Swiss Life Funds Business, Zürich CHF 250 100.0% – – 0.0%
Assets and liabilities are stated in the balance sheet in accordance with the provisions of the Swiss Code of Obligations (OR).
Personnel expenses No direct staff costs are included under operating expenses.
Contingencies Swiss Life Holding guarantees the interest payments, conversion into Swiss Life Holding shares, and declared dividends or other distributions in cash by Swiss Life Cayman Finance Ltd in connection with the mandatory convertible securities. In addition, 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 1305 million at the balance sheet date.
In 2004, convertible bonds of CHF 4000 were converted into 19 SLH shares with a corresponding increase of share capital and share premium.
Issuance of mandatory convertible securities (MCS II) in 2003 The simplification of the shareholder structure was financed through the issuance of mandatory convertible securities (MCS II, 2003–2004) totalling CHF 341 million on 30 December 2003 by Swiss Life Cayman Finance, Grand Cayman, a subsidiary of Swiss Life Holding. 341011 MCS II were issued in denominations of CHF 1000 each with a maturity date of 30 December 2004. The MCS II could at the option of the holder or at the option of the issuer be converted into SLH shares at any time between 9 February 2004 and 15 December 2004. Unless converted by 15 December 2004, or purchased by the issuer and cancelled, each MCS II was mandatorily converted on 30 December 2004 into such number of shares as was equal to the maturity conversion ratio (4.65116 SLH shares per MCS II, subject to adjustment). The holders of the MCS II were entitled to annual interest payments per MCS II at 1.0% of the nominal value and certain payments in the event of any dividends or other cash distributions made by SLH to its shareholders. Subsequently, 1586098 SLH shares equal to the number of SLH shares required under the conversion
Net result for the year 152 632 808 29 346 454
Balance carried forward to new account 1 979 262 29 346 454
Result shown in the balance sheet 181 979 262 29 346 454
The Annual Report is also available in German and French. The English text is definitive for the financial statements.
Publisher: Swiss Life Holding, Zurich Design: MetaDesign, Zurich Photography: Anita Affentranger, Zurich; Rainer Wolfsberger, Zurich Production: Management Digital Data AG, Schlieren ZH Printers: NZZ Fretz AG, Schlieren ZH