Financial Statements 69 Index to the Financial Statements 71 Consolidated Financial Statements 71 Consolidated Statement of Income 72 Consolidated Balance Sheet 74 Consolidated Statement of Cash Flow 76 Consolidated Statement of Changes in Equity 79 Notes to the Consolidated Financial Statements 145 Report of the Group Auditors 146 Swiss Life Holding Financial Statements 153 Report of the Statutory Auditors 154 Dates and Contacts
Gross written premiums 1) CHF million Net earned premiums and policy fees CHF million
Gross written premiums by segment 1,2) Gross written premiums Life Core by country 1,2)
Swiss Life Group . Annual Report 2003 . Swiss Life at a glance
Progress in implementation of strategy - Net profit of CHF 233 million and operating income of
Prospects. “This was an offer I simply couldn’t refuse. It’s one of our company’s most important current research projects in the field of diagnostics. The project is being managed from our branch in Lille and they really want me there. I’ll be working alongside our people, as well as biologists and chemists from the Institut Pasteur. Such an exciting opportunity! I have signed a three-year contract for the time being. My family is, of course, coming with me. In fact, my daughter would fly there tomorrow if she could - she thinks Lille is close to the sea. My wife is also really looking forward to the change. She has always been fascinated by France and its culture. It will be something totally new for all of us. We’ll be leaving Zurich in two months. I’ve never looked forward to any challenge as much as this.”
The Swiss Life Group achieved a profit of CHF 233 million in 2003, after recording a loss of CHF 1.7 billion the previous year. This gratifying result is attributable to operational improvements in all areas and a determined focus on boosting profitability. All the core markets contributed to the good overall result, including our domestic market, Switzerland, which is of particular importance to us. After experiencing a substantial loss in 2002 it returned to the profit zone in 2003, although conditions for Swiss group business are still unsatisfactory and remain unpredictable.
As to cutting costs and jobs, by the end of 2003 we had already reached the targets we set for the end of 2004. Operating expenses declined by 16% compared with the previous year. The improved financial result also contributed here. We furthermore adjusted our product conditions and bonus policy in line with economic realities.
As a consequence of our systematic focus on profitability, we were prepared for a decline in volume. Gross written premiums, at CHF 18.8 billion, were 4% lower than the preceding year. Premium volume in Switzerland decreased by 19%, while the other markets showed growth.
We have further bolstered the financial strength of the Swiss Life Group. Equity totalled CHF 5.0 billion on 31 December 2003, 19% higher than the previous year. Balance sheet risks were diminished further. As a result, our organisation is now less exposed to turbulence on the financial markets. Our newly-defined asset and liability management process is a valuable foundation for coordinating both sides of the balance sheet. We can thereby ensure that the promised benefits are covered by returns which can actually be achieved and that core capital will be able to absorb fluctuations in the value of assets.
We have already achieved the goals set for the end of 2004 in our cost-cutting programme, but we know that we are still not among the best in our business when it comes to costs. This is something we will continue to work on. To accomplish this we need to manage costs rigorously and consistently in all areas and at all levels.
However, politicians have missed their chance to deal expeditiously with the issue of an appropriate conversion rate.
This has repercussions for us: as of 1 January 2005 we will be distinguishing between the mandatory portion of occupational benefits, for which the conversion rate is currently set at 7.2%, and the supplementary portion, where rates can be set on a discretionary basis. We want to do this in a way that is as fair and accommodating as possible, considering the economic situation, to underscore our efforts to achieve secure and calculable occupational provisions.
Swiss Life announced its new strategic direction in September 2002 and has been concentrating on its life insurance and pensions business ever since. Operational excellence, which involved an economy drive aimed at saving CHF 515 million in operating costs and reducing the headcount by 1500 positions by the end of 2004, formed an important cornerstone of the strategy. These targets had already been surpassed by the end of 2003. But even though these goals have been reached, operational excellence and strict cost management still represent principles which underpin corporate management at Swiss Life. The other strategic cornerstones are: strict business focus, streamlined structure, financial strength and performance-oriented corporate culture.
Multinational corporations around the world are served with a comprehensive range of pension solutions through the Swiss Life Network, which has 49 partners in 43 countries. Swiss Life moved to strengthen its competitive position at the beginning of 2004, announcing that a clear and straightforward brand architecture under the “Swiss Life” umbrella brand would replace the previous complex brand structure involving many different names and logos. The new corporate identity is designed to ensure that Swiss Life can position itself internationally as a leading provider of pensions and long-term savings.
8 Strategy Swiss Life is aiming for a leading position in private and occupational provisions for the future. It focuses on markets which promise attractive growth and where it has a strong existing or potential position.
Functional organisation for streamlined management Swiss Life is functionally organised and run as an integrated enterprise. This is reflected in the division of responsibilities on the Corporate Executive Board and can be seen in the core markets. Along with the allocation of functional responsibilities across borders, each country has one person with market responsibility who is also responsible for results. This management structure ensures proximity to customers and a focus on results while facilitating risk management and Group-wide sharing of knowledge and resources.
Sustainable risk and investment policy enhances financial strength Swiss Life’s asset and liability management (ALM) concept as redefined in 2003 ensures that promised benefits are covered by returns which can actually be achieved and that core capital will always be able to absorb any fluctuations in the value of assets. The investment portfolio is accordingly split, with one segment invested in such a way that guaranteed benefits are always covered when due. An “absolute return” strategy is pursued with the other segment. This procedure, combined with the application of strictly economic criteria in the setting of product conditions, ensures the sustainable generation of added value and at the same time keeps Swiss Life from becoming dependent on rising stock markets.
Strong corporate culture based on clear goals and common values Clear goals for returns and value creation are the foundation upon which a performance-oriented corporate culture can be built. In the medium term Swiss Life intends to generate a 10% return on equity (under International Financial Reporting Standards, IFRS) with growth above the market average. A catalogue of qualitative and quantitative performance indicators closely attuned to the strategy will support the process of managing and monitoring achievement of these goals. The common values defined in 2003 and serving as guidance for employees’ actions are also an important element in the corporate culture. The five values: expertise, proximity, openness, clarity and commitment.
Voyages of discovery. “I am a postman, which means that I know Munich like the back of my hand. That gave me the idea that I could work as a tourist guide at weekends–simply as something to do in my spare time. I’ll avoid the tourist trail and take visitors places no coaches go. The City Hall, Frauenkirche and Hofbräuhaus are all sights that people can see on their own. I want to show visitors the Munich I know–the living city: the hidden treasures that you won’t come across on your own, the shops that are not featured in any guidebooks, the small beer gardens frequented only by locals, and much more. I have already contacted several hotels and their reactions have all been positive. I am sure that you would recommend my city tour to your guests.”
The measures to restore profitability began to have an impact in 2003. Following a loss of CHF 1.7 billion in the previous year, the Swiss Life Group generated a profit of CHF 233 million in 2003. Operating income stood at CHF 557 million (prior-year loss: CHF 801 million). The Life Core segment (Switzerland, France, Germany, the Netherlands and Belgium/Luxembourg) contributed CHF 341 million to this figure.
The financial result improved 24% from the previous year, where high losses had to be realised in the process of reducing the company’s equity exposure, to stand at CHF 5.8 billion. In the year under review investment maturities were extended, resulting in the duration gap between assets and liabilities being narrowed, and the interest-rate risk thus being reduced. The return on insurance portfolio investments came to 4.7% after costs (previous year: 3.3%).
Benefits paid including changes in insurance reserves fell 4% to CHF 15.5 billion. However, there was actually a 12% rise in insurance benefits paid, which came to CHF 14.5 billion. This increase is primarily attributable to contract terminations in Switzerland. Changes in insurance reserves for future benefits, on the other hand, dropped from CHF 2.6 billion to CHF 693 million as a consequence of the lower premium volume and the contract terminations. The outlay on policyholder bonuses and participation in surplus rose by more than 150% to CHF 871 million, owing to the rise in investment income.
Total equity stood at CHF 5.0 billion on 31 December 2003. The 19% increase compared to the end of 2002 resulted, above all from the mandatory convertible securities issued in December (CHF 320 million, net) and the increase in unrealised gains on investments (CHF 177 million), as well as from profit. Core capital for capital adequacy purposes, which includes deferred Group-related funds in addition to core capital, improved by 17% to stand at CHF 8.8 billion. Additional write-downs were taken on investments totalling CHF 735 million along with reductions in goodwill and tax-loss carryforwards of CHF 468 million.
CHF 341 million in operating income from the Life Core segment in 2003. Measures to restore profitability were a key feature of the 2003 financial year. While gross premium income edged down 2 % to CHF 16.1 billion, operating expenses were reduced by 7 %.
Switzerland Premium income for the Swiss life insurance market as a whole went down 4% in 2003 according to estimates by the Swiss Insurance Association, to stand at around CHF 33 billion. Market volumes receded for individual business in particular, especially where single-premium business was concerned. Swiss Life did experience a reduction in market share, related to its concentration on profitability, but still ranks as market leader in individual insurance and holds second place for group business.
Net earned premiums and policy fees 6 460 7 848 –17.7%
Total benefits, losses and interest expenses –7 961 –9 876 –19.4%
Swiss Life Group . Review of Operations 2003 . Life Core Segment 17The company saw a 14% decline in group premiums over the year, bringing the figure to CHF 4914 million. While income from periodic premiums went up 3%, single premiums decreased by 26% to CHF 2452 million. The reduction in premium income despite the stable performance of the market as a whole was due to the focus on business profitability referred to above. The favourable impact of the measures to boost profitability is also revealed in the generation of new business; in contrast to the two previous years this figure turned positive again in 2003.
Swiss Life’s written premiums for individual insurance dropped 31% from the prior-year figure to stand at CHF 1663 million, while the shrinkage in volume for the market as a whole came to 12%. Single premium business in particular suffered from the historically low interest rates, which made this product category unattractive to customers concerned about their returns. Swiss Life continued to feel the influence of the previous year’s loss of confidence. In addition, a large number of contracts dating back to promotional campaigns in 1998 reached the end of their terms and expired. It only proved possible to arrange for reinvestment of a very limited portion of these funds.
Moreover, the reduction to 6.8% by 2014 as foreseen by the lawmakers does not correspond to reality at all.
In 2003, Swiss Life’s emphasis in France was on boosting profitability and carrying out a restructuring. As a consequence, premium income came in 1% lower in the local currency than the previous year’s level even though the market was growing. Premium volume came to CHF 4760 million in Swiss francs, amounting to a rise of 2% against 2002. Products with periodic premiums recorded virtually no change in volume against the prior year, while unit-linked products showed an increase.
Bolstered by the higher financial result, reflecting the positive influence of the financial market recovery (in contrast to the large losses that had to be taken in the previous year), Swiss Life’s revenue increased by 13% to stand at CHF 3257 million. Operating expenses rose 10% from their prior-year level (up 6% in local currency), chiefly due to the higher outlay on commissions. This produced an operating result of CHF 123 million (+16%).
Swiss Life proceeded systematically with the implementation of its new strategy and the matrix organisation in France in 2003. The distribution organisation was streamlined and simplified. Additional highlights of the period under review included moving into the new head office on Boulevard Haussmann in Paris and transferring the chairmanship from Jean-Antoine Chabannes to Jacques Richier, who was already responsible for Swiss Life’s business operations in France as CEO.
The pension reform passed by the French parliament in August 2003 opens up new possibilities for insurers in that market. A tax deduction of up to 10% of income (EUR 23 769 maximum) can be claimed for individual supplementary pensions under the “Plan d’épargne-retraite populaire” (PERP). Among the main priorities for Swiss Life in 2004 are launching and marketing insurance solutions in connection with the pension reform, strengthening the cross-selling of health and life insurance products and instituting further measures to raise efficiency.
Net earned premiums and policy fees 2 107 1 934 8.9%
Product quality is a big factor in Swiss Life’s success in the German market. In the “bAV Product Awards 2003” the company emerged the winner as the best provider of occupational pension products. In addition Swiss Life ranks with the very best in the “occupational disability insurance” product category, according to a study by Morgen & Morgen GmbH, a company specialising in peer comparisons.
Given the continued uncertainty about state social security benefits, Swiss Life expects new business to show another significant rise in 2004. Service quality is to be steadily increased, the position as the brokers’ provider of choice is to be built up further and the remaining potential for boosting efficiency is to be utilised.
Swiss Life Group . Review of Operations 2003 . Life Core Segment 20 Netherlands Swiss Life ranks eighth in volume terms in the Netherlands life insurance market, giving it a position among the most important providers. It represents an interesting alternative to Dutch providers and enjoys a very high recognition factor with its Zwitserleven brand. The market in the Netherlands is heavily concentrated, with the five largest companies accounting for two-thirds of the business. Market volume remained flat in 2003, but a slight upturn is expected again for the years ahead. Half the premium volume in the Netherlands is transacted via independent brokers, and Swiss Life concentrates on this distribution channel.
Swiss Life introduced a number of measures in the year under review to align its processes and systems even better with customer requirements and to reinforce customer loyalty. Key elements were the introduction of a software package for customer relationship management and the launching of an extranet for brokers.
Key figures for the Netherlands in CHF million 2003 2002 +/-%
Net earned premiums and policy fees 2 020 1 074 88.1%
Swiss Life Group . Review of Operations 2003 . Life Core Segment 21Belgium/Luxembourg With a volume of EUR 6 billion, Belgium is a medium-sized life insurance market with interesting growth prospects. Luxembourg is an important centre for cross-border insurance business. In Belgium Swiss Life ranks in eighth position in volume terms and in Luxembourg, ninth. Swiss Life offers a wide and varied range of employee benefits solutions in both countries. A number of different sales channels are employed: general agents, brokers, direct sales and banks. For the sake of efficiency the two countries together constitute the core market of Belgium/Luxembourg.
Business in Belgium was hampered in the first half of 2003 by the streamlining of the distribution structures conducted during that period and by the still-perceptible loss of confidence from the previous year. The sale of the equity stake in Crédit Acricole S.A. (Belgium) also had a negative impact because the turnover generated via this sales channel declined. The uncertainty occasioned by the sale of this participation with regard to collaboration with Crédit Agricole was cleared away by new agreements between the parties involved. Swiss Life is looking for further such distribution partnerships in Belgium. The second half of the year saw an increase in premium volume brought about by confidence-building measures and also thanks to greater effectiveness on the sales front. Swiss Life also achieved a modest upturn in premium volume in Luxembourg.
«La Suisse» «La Suisse» Vie, which operates in Switzerland, saw premium income climb 14% to CHF 780 million in 2003. This was the result of growth in new business and the successful sale of a combined product for health, accident and occupational benefits (TOTEM). Lower costs and higher volumes boosted profitability. The decision to no longer include «La Suisse» in core business was reviewed and confirmed in the course of 2003.
United Kingdom Because of its special focus on risk insurance, a capital-intensive market niche, Swiss Life (UK) is no longer classified as belonging to the Group’s core business. To get the best possible value in pulling out of the UK market, Swiss Life decided in July 2003 to stop writing new business in the capital-intensive individual insurance segment. After examining various scenarios for group business, Swiss Life finally settled on an agreement with UnumProvident in the fourth quarter of 2003. As of 1 January 2004 Swiss Life (UK)’s Group Income Protection portfolio will be reinsured with UnumProvident, and Claims Services International Ltd., a subsidiary of UnumProvident, will process the claims. In addition, UnumProvident will become a Swiss Life Network partner.
Italy Swiss Life’s focus in Italy is on group risk business. In this respect, the Swiss Life network in particular is still maintaining a presence in that country. The Group no longer writes new individual business. Combined with a stagnating group portfolio, this led to a decline in premiums in the Italian market during the period under review.
Life Non-Core Swiss Life achieved an operating result of CHF 67 million in non-core life business, after posting a loss of CHF 157 million the previous year. Gross premium income decreased 20 % to CHF 1646 million.
Net earned premiums and policy fees 1 322 1 592 –17.0%
Total benefits, losses and interest expenses –1 534 –1 716 –10.6%
Swiss Life Group . Review of Operations 2003 . Non-Life Segment
Conservative underwriting practices and the restructuring of the insurance portfolio led premium volume of CHF 1075 million to remain at practically the same level as the previous year. An improved claims ratio and costcutting measures both contributed to the better operating result of CHF 23 million, as against the previous year’s loss of CHF 95 million.
«La Suisse» At «La Suisse» premium income remained the same as the year before at CHF 399 million. Higher prices and lower agents’ commissions (especially in motor insurance ) led to a significantly improved result, but had a negative impact on the volume of business.
France In France non-life premium income totalled CHF 601 million, gross. This is equivalent to a decline of 1%, or 4% in the local currency. Conservative underwriting practices and strict attention to reorganising the portfolio brought about an improvement of 13 percentage points in the claims ratio.
Benefits paid and changes in insurance reserves – 726 – 868 –16.4%
«La Suisse» At «La Suisse» premium income remained the same as the year before at CHF 399 million. Higher prices and lower agents’ commissions (especially in motor insurance) led to a significantly improved result, but had a negative impact on the volume of business.
Swiss Life Group . Review of Operations 2003 . Private Banking Segment
Private Banking The loss on the sale of STG Schweizerische Treuhandgesellschaft resulted in an overall loss of CHF 19 million for the Private Banking segment.
Swiss Life Group . Review of Operations 2003 . Investment Management Segment
The investment management segment manages the insurance assets of Swiss Life, amounting to CHF 83.0 billion, as well as third-party assets of CHF 16.4 billion.
For its insurance assets, Swiss Life uses an integrated asset and liability management approach (ALM). This approach forms the basis for determining asset allocation and ensures that assets are congruent with obligations and that the requisite risk capital is compatible with the organisation ’s risk appetite. To achieve this, and for monitoring purposes, investments have been divided into two portfolios: an ALM portfolio and an absolute return portfolio. In the ALM portfolio, cash flows on either side of the balance sheet should match one another as closely as possible. The second group of assets is invested in a portfolio with an absolute return approach. Policyholders profit from the ensuing investment returns in the form of bonuses, while equity also receives a boost, thus benefiting the shareholders.
In 2003, in the course of concentrating on core business, Swiss Life Asset Management Spain was dissolved and Swiss Life Asset Management UK was sold. Fund business was also reorganised. Swiss Life Funds AG is now focusing exclusively on its core function of managing the funds governed by Swiss law. Activities related to fund strategy and product management, also for foreign funds, were transferred to the newly-established company Swiss Life Funds Business AG at the end of 2003.
The 17% decline in fee income to CHF 188 million is principally a consequence of the concentration on core business. All in all, the CHF 238 million in income is 14% lower than in the preceding year. On the other hand, operating costs decreased by 17% to CHF 142 million. The cost-reduction programme introduced in 2002 had a positive impact, as did the various divestments. The investment management segment had 413 employees on 31 December 2003, a staff reduction of 26%.
The Swiss Life Network is present in 43 countries either through members of the Swiss Life Group or partnerships with leading local insurers, and can thus provide ideal coverage for the needs of multinational corporations.
The Swiss Life Network was able to uphold its leading position in a difficult economic environment. There is a clear tendency for multinationals to demand more service level agreements in which the scope and quality of services and guarantees are set down in binding form in writing. Entering into such agreements, delivering an outstanding cost/benefit performance for the client and maintaining excellent personal relations at all levels are increasingly becoming key success factors and will remain so in the competitive marketplace of the near future.
Swiss Life Group . Review of Operations 2003 . Swiss Life Network
Equity attributable to shareholders in the future – the statutory equity, essentially adjusted for the shareholders’ interest in the revaluation reserves – produces the ANAV.
Change in 2003 Embedded value for the Swiss Life Group came to CHF 6911 million as of 31 December 2003. This represents a rise of CHF 851 million against the previous year. The improvement was driven primarily by cost savings in all areas as well as the price adjustments for insurance products, which led to an increase of CHF 600 million and CHF 473 million, respectively, in the embedded value figure. Investment income came in clearly above the assumptions in the period under review and led to an increase of CHF 578 million. On the other hand, a reduction of approximately CHF 1 billion resulted from a decrease in projected investment returns. Factoring in the planned introduction in Switzerland of a minimum policyholder participation in surplus laid down by law for group business (the statutory payout ratio or so-called “Legal Quote”) reduced the embedded value by another CHF 941 million. A compilation of other changes in embedded value is given in the “analysis of change” table on the next page.
28 Embedded value Embedded value is an indicator of the economic value of the existing insurance portfolio. The figure for embedded value at the Swiss Life Group came to
costs costs Total Total 1) Present Value of Future Profits 2) Adjusted Net Asset Value
Impact of 50 bp increase in investment return 315 303 – 618
Impact of 10% decrease in asset values (equity only) – 18 – 36 – – 54
Impact of 10% decrease in asset values (property only) – 497 – 30 – – 527
Embedded value of Swiss Life Holding at year end 2002 6 060
Embedded value of Swiss Life Holding at year end 2003 6 911
Group in the calculation of its embedded value results. Deloitte have reported to Swiss Life that they consider the methodology is appropriate, the assumptions are together reasonable and that the embedded value results have been properly compiled on the basis of the methodology and assumptions chosen. For the purpose of this report,
Change of scene. “It was love at first sight. Part of an old town house, relatively close to the centre. Eight small rooms spread over three stories, with lots of nooks and crannies and windows onto both the street and the courtyard. It’s very romantic–but is actually the exact opposite to how we originally imagined our ideal home. We dreamt of living in a converted loft– just one single, enormous room with everything as light and airy as possible. But it’s difficult to find proper lofts in old factory buildings and the prices are often astronomical. The situation is now different and we have no regrets about the loft. In fact, we don’t have any time for regrets as we go about renovating our house. A few walls are coming out and part of the floor needs to be renewed. We are also putting in a new bath and new kitchen. It’s so much fun planning and discussing different possibilities, as well as visiting home exhibitions. But one thing is maddening: why is it that the things we like best are also the most expensive?”
Interior designer, Rebekka T. (34), and sales manager, Philipp T. (37), are renovating their home.
Besides underwriting risks, Swiss Life’s risk management techniques involve measuring and controlling investment risks and operational risks so that the Group’s exposure structure matches its capacity for risk. Accordingly, guidelines exist in relation to risk categories, processes, responsibilities and reporting obligations vis-à-vis the Board of Directors.
Investment risks Investment risks are a life insurer’s largest quantifiable risks and are found on the asset side of the balance sheet. Investment risks are subdivided into market risks, credit risks and liquidity risks.
Market risk Market risk encompasses the risk of changes in the value of securities such as stocks and bonds or of real estate holdings, as well as fluctuations in foreign exchange rates. The losses resulting from high stock market volatility in recent years provide a perfect example of the impact of market risk.
Swiss Life applies very strict guidelines to the risk structure of its bond portfolio, which must be widely diversified and of a very high quality. As of 31 December 2003, some 90% of all bond investments had a double “A” or better rating. Over 70% of bond investments had either a triple “A” rating or consisted of government bonds.
35Risk management Risk management for a life insurance company means covering risks such as old age, death and disability on behalf of its clients while generating a reasonable return on invested funds.
Liquidity risk Liquidity risk management should ensure that sufficient liquidity is available at all times to meet payments becoming due (endowment sums or pensions and annuities). To this end, Swiss Life continuously forecasts its expected cash flows on both sides of the balance sheet. As an additional precaution, the greater part of the company’s investments are placed in securities which are readily realisable.
Underwriting risks In the life business a distinction is made between the risk types of longevity, death and disability. The actuaries’ primary task is to design insurance products and set prices/rates properly as well as ensuring that reserves are sufficient for the immediate fulfilment of future insurance obligations. Swiss Life reviews and analyses the mortality structure of its customer portfolio annually to stay abreast of demographic changes. If it is established that a portfolio of pensioners does not have sufficient reserves, for example due to a significant drop in mortality, the necessary additional reserves are calculated and set aside.
Life insurers also offer risk cover for the event of disability. The frequency of disability claims rises during economic slumps and is connected to the unemployment rate, making disability subject to greater fluctuation than mortality rates. To control disability risk and improve risk performance, individual evaluations are used along with portfolio analyses for disability risk to allow a better assessment of the exposure structure. This enables finetuning of premium rates and pricing for customers which is more in line with their specific risk profile.
Operational risks Alongside the financial risks outlined above, there are additional risks of operational deficiencies and limitations, human error or moral hazard risks, process risks, technology risks and risks resulting from changes in the economic, fiscal or legal environment. In order to pre-empt such problems, a qualitative review based on uniform criteria is carried out periodically throughout the Group. During this review, estimates are compiled on a local basis of the probability that these risks will lead to material losses. The consolidated report should indicate at an early stage in which areas action may become necessary.
Swiss Life Group . Review of Operations 2003 . Asset and Liability Management
The ALM concept at Swiss Life is based on the following principles: Fair valuation of assets and liabilities The liabilities side of the balance sheet of any life insurance company mainly consists of long-term commitments towards policyholders.
These commitments are principally matched against fixed-income investments on the asset side. An economic approach dictates that the value of both these positions will change, depending on interest-rate trends. Since the assets and liabilities of a life insurer are not equally sensitive to interest rates, each will clearly react differently to interest-rate changes. Interest-rate sensitivity can be measured in terms of duration, the weighted average time left to maturity. As a rule, the assets of a life insurance company will have a five to seven-year duration–significantly shorter than the term to maturity of the liabilities, which can exceed ten years. Thus, if interest rates change, the value of commitments on the liabilities side will fluctuate much more wildly than the economic value of investments on the assets side. When interest rates rise, the value of liabilities will drop more steeply than the value of investments. Economic equity will go up, thus increasing the value of the enterprise as a whole. Conversely, when interest rates fall, the value of liabilities will rise more steeply than that of investments. Economic capital will be reduced. The greater the duration gap between the two sides of the balance sheet, the higher the volatility of economic equity and thus the greater the balance sheet risk for the enterprise. Consistent ALM aims to reduce this balance sheet risk as much as possible.
Optimal risk/return profile The targeted returns must be in keeping with the company’s risk capacity and risk appetite.
For example the economic approach is not consistent with the international accounting standards currently in force (International Financial Reporting Standards, IFRS). Under the current accounting treatment liabilities are not carried at fair value. Valuations are not adjusted following interest-rate changes, although the value of future commitments will obviously have changed. However, the focus on managing assets and liabilities according to economic criteria really does make sense since accounting standards are clearly moving in the direction of fair-value accounting for liabilities. Moreover, it is anticipated that new, riskbased solvency tests will be introduced, another factor in favour of an economic approach.
37Asset and Liability Management Matching assets and liabilities is one of the most important aspects of risk management in life insurance. It ensures that benefits payable are covered and that core capital will always be able to absorb fluctuations in the value of assets.
Asset allocation On the asset side the portfolio is managed in such a way that economic risk capital consumption is consistent with Swiss Life’s risk appetite. To achieve this goal, assets are divided into two blocks: an ALM portfolio and an absolute return portfolio. The idea behind the ALM portfolio is to ensure that the assets, and the income generated by these assets, will always meet the contractual or statutory commitments towards policyholders. Cash flows on either side of the balance sheet should match one another as closely as possible. Since the majority of the liabilities are long-term in nature, the ALM portfolio is mainly composed of fixed-income instruments. In this way the economic impact of interest-rate fluctuations on the enterprise is kept to a minimum, thus ensuring that policyholders will receive the benefits they were promised.
The remaining block of assets is invested following an absolute return strategy. The aim behind this particular portfolio is to generate a positive return irrespective of market conditions. Policyholders profit from the ensuing investment returns in the form of bonuses, while equity also receives a boost, thus benefiting the shareholders.
Duration of loans originated by the enterprise 3.3 years 2.8 years
Asset allocation therefore no longer adheres to the strategic approach of the past, with a set percentage of equity and fixed-income investments. It is now determined on the basis of the Group’s existing commitments and its risk capacity. The asset allocation is hence reviewed twice a year and adjusted where necessary.
For new business, the product parameters are set in such a way that the costs, including capital costs, are covered and both a positive risk result and net interest result will be achieved. In addition, premium levels must either reflect the value of embedded options, such as policy surrender or waiver of premium, or eliminate these altogether. Alternatively, products can be designed in such a way that the costs associated with exercising such options are negligible.
Process management The ALM process, which was redefined in 2003, is managed centrally. The Asset and Liability Management Committee (ALCO), composed of members of the Corporate Executive Board and presided over by the Chief Financial Officer (CFO), sets the parameters. The CFO has ultimate responsibility for the Group-wide ALM process. At local level, the competent bodies implement the decisions reached at Group level in collaboration with the ALCO at their business unit. All the relevant functions are represented in the ALM process: investments, actuarial services, product management, distribution and finances.
The process should lead to value creation from all these areas. Investment decisions should be coordinated with the contractual obligations towards policyholders. Products and their prices should be in line with the investment returns that can actually be achieved, so that the promises to policyholders can be fulfilled and the expectations of shareholders met.
Achievements in 2003 Significant progress was made regarding ALM in 2003. The concept and organisational structure were both established in the first half of the year. Once these were in place, objective ALM targets were set in the fields of asset allocation, distribution policy and product design and the concept was integrated into the corporate strategy.
Moving forward, in 2004 Swiss Life will establish the ALM process in all business units as an integral part of the corporate calendar. Information from the risk budgeting process will flow into the ALM process and the conclusions from ALM will in turn feed into the planning process.
Shooting stars. “The sky is our world. Nothing is more fascinating than watching the heavens and the stars. Or Mars, when it appears as a light, reddish celestial body; Saturn with its glowing ring; the Orion nebula and the Andromeda nebula. If conditions are right they look close enough to touch. Nadine, François and I met several years ago through an Internet forum for amateur stargazers. We have been in contact ever since, exchanging tips and comparing notes. We are mainly observing exoplanets at the moment, planets outside our solar system. There is an international research programme that astronomy enthusiasts can take part in. You have to be well equipped, of course–and astronomy is an expensive hobby if you want to do it properly. But we all agree that it is also very fulfilling. Who knows, maybe one fine day–or rather one clear night–we will make a special discovery and become famous.”
Clarity. People with clear ideas see further. With the increasingly complicated range of insurance and financial products on offer today, pensions and long-term savings products are a mystery to many people. This makes it all the more important to present complex scenarios in easily comprehensible terms. Swiss Life strives to create transparency when dealing with customers and partners. Clear information and simply structured products are therefore indispensable.
In order to clearly delineate the various internal competencies and responsibilities and create an optimum structure for cooperation between the Board of Directors, management and internal control bodies, the Board of Directors revised the Organisational Regulations along with the regulations for each Board of Directors committee and for the Corporate Executive Board as of 1 December 2003.
The information that follows is provided and structured in accordance with the Directive on Information Relating to Corporate Governance issued by the SWX Swiss Exchange with effect from 1 July 2002.
One of the measures to implement the holding structure in 2003 involved the sale under market conditions of the Group’s asset management business (Swiss Life Asset Management) to Swiss Life Holding by Swiss Life/Rentenanstalt.
The asset management company Threadneedle Asset Management Ltd., Station Road, Swindon, UK, disclosed a 5.31% interest (1 245 370 shares) in Swiss Life Holding on 10 November 2003.
In its capacity as trustee for the “MCS Share Trust”, established in the context of the “MCS II (2003-2004)” convertible bond issue in 2003, Queensgate Bank and Trust Company Ltd., P.O. Box 30464 SMB, Grand Cayman, Harbour Place, 103 South Church St., Grand Cayman, Cayman Islands, reported holding 6.76% of the Swiss Life Holding shares entered in the share register as of 31 December 2003.
The increase in capital by 1 586 098 registered shares to CHF 1 251 702 050 divided into 25 034 041 registered shares as of 30 December 2003, effected in conjunction with the issue of the MCS II (2003-2004) mandatory convertible securities, had not yet been recorded in the commercial register on the balance sheet date. Their registration will lead to a marginal change in the percentage shareholdings reported.
Swiss Life Holding is not aware of any other parties, apart from those mentioned above, who directly or indirectly held more than 5% of the registered shares in issue as of the balance sheet date.
Capital structure Capital and changes in capital Swiss Life Holding was established on 17 September 2002 with a share capital of CHF 250 000, divided into 5000 registered shares with a par value of CHF 50 each. On 23 September 2002, Swiss Life/Rentenanstalt shareholders were presented with an offer to exchange their registered shares for Swiss Life Holding registered shares on a 1:1 basis. Due to the acceptance of the public exchange offer by around 92% of Swiss Life/Rentenanstalt shareholders, on 18 November 2002 the Swiss Life Holding share capital increased, through taking delivery of 10 834 704 Swiss Life/Rentenanstalt registered shares with a par value of CHF 50 each, by 10 834 704 registered shares with a par value of CHF 50 each to CHF 541 985 200 (divided into 10 839 704 registered shares).
On 2 December 2002, Swiss Life Holding successfully completed an ordinary capital increase of CHF 541 985 200, divided into 10 839 704 registered shares of CHF 50 par value each, in which existing shareholders were granted negotiable subscription rights for each share. As a result, the share capital increased to CHF 1 083 970 400, divided
The Swiss Life Holding General Meeting of Shareholders on 18 November 2002 approved the creation of conditional capital of no more than CHF 270 992 600 through the issuance of a maximum number of 5 419 852 registered shares to be paid in full, with a par value of CHF 50 per share. 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 new loan debentures or similar bonds issued by the company or companies belonging to the Group. The existing shareholders are excluded from subscription rights, however their advance subscription rights remain safeguarded.
registered shares with a par value of CHF 50 per share were created from this conditional capital. As a result, the ordinary share capital rose by CHF 88 426 750 from CHF 1 083 970 400 to CHF 1 172 397 150, divided into 23 447 943 registered shares, while conditional capital decreased to CHF 182 565 850.
Key figures as of 31 Decenber in CHF 2003 2002 +/-%
Swiss Life Group . Review of Operations 2003 . Corporate Governance
Convertible bonds and options Two mandatory convertible securities issued by Swiss Life Cayman Finance Ltd. for conversion into Swiss Life Holding registered shares, the MCS I (2002-2005) and the MCS II (2003-2004) remained outstanding on the balance sheet date. The scope of the MCS I (2002-2005) issue of December 2002 amounts to CHF 250 000 000. The total amount of MCS II (2003-2004) issued in December 2003 comes to CHF 341 011 000. The specific conditions attached to these mandatory convertible securities as well as further details can be found in note 31 to the Financial Statements and in the issue prospectuses of 9 December 2002 and 22 December 2003, respectively.
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 at the General Meeting of Shareholders on 27 May 2003, the new members were given staggered terms of office to guarantee that, as far as possible, an equal number of members will come up for re-election each year. If a member steps down during his or her term of office, a successor will serve for the rest of that term.
The Organisational Regulations stipulate that a member of the Board of Directors shall automatically resign from the Board at the Annual General Meeting of Shareholders in the year in which he or she reaches age 70.
The members of the Board of Directors of Swiss Life Holding also make up the Board of Directors of Swiss Life/Rentenanstalt.
Bruno Gehrig received his Doctorate in Economics (Dr. rer. pol) in 1975 from the University of Bern where, following studies at the University of Rochester, New York, USA, he also qualified as a lecturer in 1978 with a paper on monetary policy. From 1971 to 1980 he was an assistant and lecturer at the University of Bern, becoming Assistant Professor in 1978.
From 1981 to 1984 Bruno Gehrig was head of the Economics Section at the Union Bank of Switzerland. In 1985 he spent a year studying international banking. In 1988 he was promoted to Head of Stock Markets and Securities Sales Division for the UBS Group. Between 1989 and 1991 he was Chairman of the Executive Board of Bank
Cantrade. From 1992 to 1996 he held the chair as Professor of Business Administration at the University of 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.
Board of Directors at the General Meeting of Shareholders of Roche Holding AG, Basel, on 6 April 2004. If elected he will assume the position of Independent Lead Director.
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 as a 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 an independent economic consultant.
Member of the Board of Directors – Cellere AG, St. Gallen, Member of the Board of Directors – Georg Fischer AG, Schaffhausen, Member of the Board of Directors – Employee benefits foundations for Swiss
Volker Bremkamp will be put forward for re-election at the Swiss Life Holding Annual General Meeting of Shareholders on 18 May 2004.
Advisory Committee – Dresdner Bank AG, Member of the Advisory Committee for Northern Germany – Everpublic AG, Hamburg, Chairman of the Supervisory
Board – WAVE Management AG, Hamburg, Deputy Chairman of the Supervisory Board – UKE University Clinic Hamburg, Member of the
Paul Embrechts received his Master’s Degree in Mathematics from the University of Antwerp (Belgium) in 1975 and his Doctorate (Dr. sc. [Math.]) from the Catholic University of Leuven (Belgium) in 1979. Between 1975 and 1983 he held a post as Research Assistant at the Catholic University of Leuven. From 1983 to 1985 he was Lecturer in Statistics at Imperial College, University of London, moving to a position as Lecturer at the University of Limburg (Belgium), which he held from 1985 to 1989. In 1989 Paul Embrechts was appointed Professor of Mathematics at the Swiss Federal Institute of Technology (ETH) in Zurich.
Other appointments: – Julius Bär Holding AG, Zurich, Member of the Board of Directors – Bank Julius Bär & Co. AG, Zurich, Member 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
Rudolf Kellenberger will be put forward for re-election at the Swiss Life Holding Annual General Meeting of Shareholders on 18 May 2004.
Cologne), Cologne, Chairman of the Supervisory Board – Wüstenrot & Württembergische AG, Stuttgart,
University of St. Gallen, Member – Swiss Pool for Aviation Insurance, Chairman – Employee benefits foundations for Swiss
Georges Muller Born 1940, Swiss national Member of the Board of Directors
Georges Muller joined the Swiss Tax Administration in 1964 and has been a partner with the law office Bourgeois, Muller, Pidoux & Associés since 1975. Between 1984 and 2000, he was also a Professor of Law at the University of Lausanne. He has been an Honorary Professor since 2000.
Directors – «La Suisse» Accidents, Lausanne, Chairman of the Board of Directors – Serono SA, Coinsins, Chairman of the Board of
Directors – Swiss-American Chamber of Commerce, Member of the Board – SWICO, Swiss Association for Information,
– economisuisse, Zurich, Member of the Board – Zurich Chamber of Commerce, Member of the Board
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.
Ulrich Oppikofer (Member of the Board of Directors 19861)–2003, Vice Chairman of the Board of Directors 1996–2003)
These regulations apply to the internal organisation and delineate the tasks and competencies of the Board of Directors, the Board of Directors’ committees, the Chairman of the Board of Directors and the Corporate Executive Board. As opposed to before, the tasks and responsibilities of the Chairman of the Board of Directors are now included in the Organisational Regulations. The Chairman coordinates the work of the Board and the committees, and is responsible for ensuring reporting from the Corporate Executive Board to the Board of Directors.
In urgent situations, the Chairman may also determine the necessary measures and steps falling within the scope of competencies of the Board until it takes a decision. If a timely decision cannot be reached by the Board of Directors, the Chairman is empowered to take a decision.
The Board of Directors meets as often as business requires, but 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, normally attend the meetings or parts of meetings in an advisory capacity.
The Audit Committee meets at least four times a year. The frequency of meetings depends on the financial budgeting and reporting process.
The Corporate Executive Board bears responsibility in particular for the implementation of corporate strategy, for the conditions governing business operations and for financial guidance. It is further responsible for the preparation of the resolutions for the Board of Directors and its committees, and for monitoring the implementation of these decisions in the Group. It is vested with the authority to rule on business referred to it by the Board of Directors, the Board of Directors’ committees and the Chairman of the Board of Directors insofar as decision or approval is not reserved exclusively to the delegating body.
Information and control instruments vis-à-vis the Corporate Executive Board The Board of Directors is kept continually and comprehensively informed regarding the activities of the Corporate Executive Board. The Chief Executive Officer, as chairman of the Corporate Executive Board, keeps the Chairman of the Board of Directors and the Board of Directors and its committees regularly informed about the conduct of business, new business activities and significant projects. Internal auditing procedures represent an efficient means of independent monitoring and information gathering for the Board of Directors, whereby the Corporate Internal Audit department reports directly to the Chairman of the Board.
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 Reto 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 Switzerland at UBS Warburg in August 2001.
Michael Koller studied Mathematics at the Swiss Federal Institute of Technology (ETH), Zurich, receiving his Diploma in 1988 and his Doctorate in 1993. He also qualified as an accredited pension actuary, gaining his Swiss Federal Diploma in 1998. He was an Assistant in the Mathematics Department of the ETH Zurich, before joining Swiss Life in 1993, since when he has held a number of leading actuarial positions within the company.
Rolf Dörig has been CEO of the Swiss Life Group since
Paul Müller studied at the University of St. Gallen. After graduating with a Master’s Degree in Economics and Law in 1975 he launched his career by joining Wintherthur Versicherungen. In 1982 he moved to Baloise Insurance where he held a number of leading positions. As a member of the Corporate Executive Board he was responsible for the German, Austrian, French, Belgium and Luxembourg markets. From 1995 Paul Müller served as CEO of Helvetia Patria Assurances’ Swiss Division in Basel.
Martin Senn has been Chief Investment Officer (CIO) of the Swiss Life Group since January 2003.
Board of Directors – Castle Alternative Invest Ltd., Freienbach, Member of the
René van der Smeede Born 1948, Dutch national Head of International Markets
He has served as Vice President of the Netherlands Actuarial Association, President of the Netherlands Association of Life Insurers and was a Board Member of the Dutch Association of Insurers from 1993 to 1998.
Transfer of manangement tasks No management tasks have been contractually assigned to third parties by Swiss Life Holding.
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 1 168 540 1)
The following compensation was received by incumbent members of the Board of Directors of Swiss Life Holding (as of 31 December 2003) subsequent to their election at the General Meeting of Shareholders on 27 May 2003.
Compensation paid to former members of governing bodies No compensation was paid to former members of the Board of Directors. Four former members of the Corporate Executive Board received compensation totalling CHF 2 528 442 in accordance with contractual agreements for payment of salary which ended in 2003.
Franziska Tschudi CHF 36 200 40 1) c.f. also the section on share allotment 2) for activities as Chairman of the Board of Directors of «La Suisse»
Corporate Executive Board 42 124 shares allocated at an average value of CHF 76.00 and CHF 116.40. 27 124 shares are subject to a three-year vesting period.
Additional honorariums and remuneration During the period under review there were no additional honorariums or remunerations paid to members of the Board of Directors or the Executive Board that would have been subject to disclosure requirements.
Loans On the balance sheet date, there were no loans outstanding to members of the Board of Directors. Three loans to members of the Corporate Executive Board were outstanding in the form of mortgages, as follows: Shareholders’ participation rights Restriction 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/her own shares and those he/she 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.
Convocation of the General Meeting of Shareholders and agenda The rules set out in the Articles of Association for convening a General Meeting of Shareholders and drawing up the agenda encompass the stipulations of the law.
Compensation CHF 277 500 equivalent to an annual compensation of CHF 555 000
Highest total compensation The highest total compensation for a member of the Board of Directors in 2003 was paid to Bruno Gehrig as Chairman of the Board.
The total compensation paid since he assumed this position on 1 July 2003, after being elected at the General Meeting of Shareholders of 27 May 2003, is as follows: Convocation of the General Meeting of Shareholders and agenda The rules set out in the Articles of Association for convening a General Meeting of Shareholders and drawing up the agenda encompass the stipulations of the law.
Entry in the share register Entries can be made in the share register up to, but not including, the day before the General Meeting of Shareholders. In all cases, however, the company reserves the right to adhere to the legal maximum period of 20 days for refusal to recognise entries in the share register in accordance with Art. 685g of the Swiss Code of Obligations. For administrative reasons (mail delivery times) the deadline for registering to participate in the General Meeting of Shareholders is usually seven calendar days before the meeting takes place.
Voting system and procedures Voting at Swiss Life Holding is by show of hands; a written vote may be requested by the presiding officer at the General Meeting of Shareholders, or by shareholders who together represent at least 10% of the entire share capital. The presiding officer may use electronic voting for a written vote. Swiss Life Holding uses a certified electronic voting system, which it helped develop, to permit balloting with remotecontrolled handsets and to record the exact number of proxy votes.
Change of control, defence measures Duty to make an offer Swiss Life Holding’s Articles of Association provide for neither an “opting up” nor an “opting out” clause within the meaning of Art. 22 and 32 of the Swiss Stock Exchange Act.
Supervisory and control instruments vis-à-vis the auditors The Audit Committee assists the Board of Directors in its supervision of the accounting function and financial reporting activities as well as the Group’s compliance with the legal requirements. It reviews the appropriateness of the internal control structures and processes used to comply with the legal requirements.
The Audit Committee does not itself carry out any auditing, but rather supervises the activities of the internal and external auditors. The Audit Committee has the following remit: – verifying that the appropriateness, reliability and effectiveness of the accounting policies and financial control mechanisms are suitably monitored
– verifying that the functioning and effectiveness of the processes and procedures for ensuring compliance with the legal and regulatory requirements (compliance processes) are suitably monitored; – preparing recommendations for the Board of Directors concerning the election or re-election of the external statutory auditors for Swiss Life/Rentenanstalt and Swiss Life Holding as well as the Group Auditor
– ascertaining the independence of the statutory auditors, identifying possible conflicts of interest affecting them and agreeing on their fee
Information policy In addition to its comprehensive review of operations and financial statements, Swiss Life Holding also reports its half-year results. All Swiss Life annual reports and half-year reports from 1997 onwards can be accessed via the website www.swisslife.com. Twice a year, a report with important facts and figures is sent to all those recorded in the share register. The first Investors’ Day event was held in December 2003. On this occasion, Swiss Life informed financial analysts and institutional investors about the progress made in realising its new strategy and offered an in-depth look at its concepts, methods and processes with reference to asset and liability management, risk management and investment management. The Investors’ Day will be instituted as an annual event focusing on various topics and issues.
Corporate Executive Board (from left to right): Michael Koller, Bruno Pfister, Reto Himmel, Rolf Dörig, Paul Müller,
Inspiration. “I am totally hooked again. My dream of having my own artist’s studio is turning into a reality. Finding this room was a real stroke of luck. The rent is affordable and it is close enough for me to cycle there–simply ideal. But the best thing of all is that the studio is right on the coast. Even before we were married, I had always enjoyed being creative–but I simply didn’t have time afterwards, when I was bringing up three children. That’s the way things are. Once the children left home, I started sketching and painting again– just simple subjects, still life, landscapes. The main thing was doing something with my hands. I had done some painting when I was a student in The Hague but after so many years I was out of practice. It is up to others to decide whether I have any talent– it doesn’t really matter to me. I can hardly wait to be standing in my studio, gazing out through that huge window at the sea. I think there is nothing more inspiring than the surge of the sea, the waves, and the clouds repeatedly forming new images in the sky.”
Commitment. You can achieve more if you enjoy what you do. Trying something new can totally transform your life. It can also have implications for your pension and long-term savings. Swiss Life will provide you with easily comprehensible answers to complex questions. Advice that gives you a clear picture. Products and services that inspire confidence because you understand them. Transparency creates trust.
Benefits paid and changes in insurance reserves 8 –15 726 –16 329
Net earned premiums and policy fees as reported 24 14 822 15 265
Net earned premiums, policy fees and deposits 18 204 18 981
Gross written premiums, policy fees and deposits under investment contracts 18 760 19 473
Deferred Group-related funds after deduction of minority interests 1 964 1 268
Total core capital for capital adequacy purposes 32 8 820 7 540
Total net cash flow from operating activities 2 342 2 838
Swiss Life Group . Financial Statements 2003 . Consolidated Statement of Cash Flow 75Consolidated statement of cash flow for the years ended 31 December
Net change in demand deposits, savings deposits and time deposits –929 –1 295
Cash and cash equivalents as of 1 January 4 217 6 374
Total change in cash and cash equivalents 2 033 –2 157
Cash and cash equivalents as of 31 December 6 250 4 217
Swiss Life Group . Financial Statements 2003 . Consolidated Statement of Changes in Equity 76 Consolidated statement of changes in equity for the years ended 31 December
In CHF million (except for per share data) 2003 2002 2003 2002 2003 2002
Issuance of shares in form of MCS 1 586 098 1 768 535 – –
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 79Note
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 80 The Swiss Life Group is a multinational insurance and financial services group registered in Zurich, Switzerland. Swiss Life is a diversified organisation offering a wide range of services in areas such as insurance, investment management, risk management and banking. Swiss Life is a major life and pension insurer in Switzerland and has operations in various European countries through branch offices, subsidiaries and affiliates. The Group also provides for individualised investment forms of employee benefit plans for large clients and offers solutions in long-term savings protection. The Group offers a broad line of life, pension, annuity, accident and health and investment-type products to both individuals and groups and delivers additional banking services through its banking subsidiaries.
Multinational companies are serviced with tailor-made solutions by a network of partners in over 40 countries.
On 29 March 2004, the Board of Directors approved the annual financial statements and the financial report and authorised them for issue. The financial report therefore only reflects events up to this date.
Currently, IFRS has no insurance industry guidelines for the technical areas. Swiss Life has based the accounting for the insurance (technical) areas on the requirements of Generally Accepted Accounting Principles in the United States (US GAAP).
Foreign currency translation and transactions The reporting currency of the Group is the Swiss franc (CHF).
Foreign currency transactions For individual Group entities, foreign currency transactions are accounted for using the approximate exchange rate at the date of the transaction. Outstanding balances in foreign currencies at year-end arising from foreign currency transactions are translated at year-end exchange rates for monetary items while historical rates are used for non-monetary items. Those non-monetary items in foreign currencies recorded at fair values are translated at the exchange rate on the revaluation date.
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, administration 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.
Average Jan.-Dec. 2003 Jan.-Dec. 2002 2 Summary of Significant Accounting Policies (continued)
Future life policy benefit liabilities for other traditional life insurance contracts are calculated using a net-levelpremium method based on actuarial assumptions as to mortality, persistency, expenses and investment return, including a margin for adverse deviation. These assumptions are based on figures at the time the policy is issued.
Reserves for unpaid losses and loss adjustment expenses are for future payment obligations under insurance claims, where normally either the amount of benefits to be paid or the date when payments must be made is not yet fixed. They include claims reported at the balance sheet date, claims incurred but not yet reported and claim settlement expenses. Reserves for unpaid losses and loss adjustment expenses are calculated at the estimated amount considered necessary to settle future claims in full, using actuarial methods. These methods are continually reviewed and updated. Claim reserves are not discounted except for claims with determinable and fixed payment terms.
Policyholder bonuses Policyholder bonus liabilities are recognised in accordance with legal or contractual requirements. Policyholder bonuses are mostly based on the agreed insured amounts and on the statutory net income.
For IFRS adjustments, which impact either the result or the gains/losses recognised directly in equity, net, an additional deferred bonus liability is accrued. In countries without legal or contractual requirements, such as Switzerland, there are typically consistent patterns of profit sharing driven by market practice and policyholder expectations. However, these amounts are not accrued until ratified by management.
Reinsurance contracts that do not transfer insurance risk are accounted for as financial reinsurance and included in reinsurance assets or liabilities. A deposit asset or liability is recognised based on the consideration paid or received, less any explicitly identified premiums or fees to be retained by the reinsured. These contracts are primarily accounted for using the effective interest method with future cash flows being estimated to calculate the effective interest rate.
Financial investments Financial assets which the Group has the ability and positive intent to hold to maturity (HTM) are carried at amortised cost. Financial instruments which the Group buys with the intention to resell in the near term are classified as held for trading and carried at fair value. Realised and unrealised gains and losses are recognised in net trading income. Financial assets classified as available-forsale (AFS) are carried at fair value. Gains and losses arising from fair value changes of available-for-sale investments are reported in equity, net of certain policyholder bonuses and other policyholder liabilities and deferred acquisition costs, deferred income taxes and minority interests. On disposal of an AFS investment, the cumulative gain or loss is transferred from equity to profit or loss for the period.
Gains and losses on disposal are determined using the average cost method.
Goodwill is recorded net of negative goodwill. Negative goodwill is amortised into income over the remaining average useful life of the non-monetary assets acquired, which normally ranges from 1 to 10 years. Negative goodwill in excess of the fair value of non-monetary assets acquired is recognised as income immediately.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 86 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.
Deferred income taxes are recognised for all temporary differences between the carrying amounts of assets and liabilities in the consolidated balance sheet and the tax bases of these assets and liabilities, using the liability method.
For the diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of all dilutive potential shares, such as convertible debt and stock options issued. Potential or contingent share issuance is treated as dilutive when conversion to shares would decrease earnings per share.
Employee benefits The Swiss Life Group provides post-employment benefits under two types of arrangement: defined benefit plans and defined contribution plans. The assets of these plans are generally held separately from the Group’s general assets in trustee-administered funds. Defined benefit plan contributions are calculated based upon regulatory requirements and/or plan terms. The Group’s defined benefit obligations and the related service costs are determined at each balance sheet date by a qualified actuary, using the Projected Unit Credit Method.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 87The amount recognised in the balance sheet represents the present value of the defined benefit obligations, reduced by the fair value of plan assets and adjusted for unrecognised actuarial gains and losses and unrecognised past service costs. The recognition of a resulting asset is limited to the total of any cumulative unrecognised net actuarial losses and past service costs or the present value of any future refunds from the plans or reductions in future contributions to the plans, if lower.
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 proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings.
Debt instruments with embedded conversion options on shares of the Group are bifurcated into a debt and an equity component. The difference between the proceeds and fair value of the debt at issuance is recorded in equity. The fair value of the debt is determined using a market interest rate for similar instruments with no conversion rights. The Group does not recognise any change in the value of these options in subsequent reporting periods.
Fair value of financial instruments The fair value of financial instruments is determined based on quoted market prices, where available, or on estimates using present values or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. Where market prices are not readily available, fair value is either based on estimates obtained from independent experts or quoted market prices of comparable instruments. In that regard, the derived fair value estimates cannot be substantiated by comparison with independent markets and, in many cases, could not be realised immediately.
3 Effect of Changes in Accounting Policies 2 Summary of Significant Accounting Policies (continued)
– The fair value of loans is estimated using discounted cash flows based upon the Group’s current lending rates for similar loans. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values equal the carrying values.
– The majority of the private equity investments are classified as available-for-sale. Investments are normally valued at market if the market value represents the fair value. If no market value is available, fair value is estimated using various methods, such as discounted cash flow analysis or reference to recent comparable transactions.
– The fair value of financial reinsurance assets and liabilities is estimated using discounted cash flow calculations.
Offsetting Financial assets and liabilities are offset with the net amount being reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Cash used for acquisitions (-)/received from disposals (+) –13 –21 266 186
Under the new strategy primary segmentation is split into six categories: Life Core, Life Non-Core, Non-Life, Private Banking, Investment Management and Other.
– “Non-Life” products principally include property and casualty, liability and motor insurance. As a consequence of the new strategy, non-life operations are generally regarded as non-core business.
– “Investment Management” refers to the management of assets for institutional clients, as well as the provision of expert advice for such clients. “Investment Management ” is mainly core business.
Net earned premiums and policy fees 12 532 1 322 962 – – – 6 14 822
Net realised and unrealised gains/losses on investments 376 58 24 –148 9 15 0 334
Benefits paid and changes in insurance reserves –13 557 –1 445 –726 – – – 2 –15 726
Total benefits, losses and interest expenses –15 303 –1 534 –747 –103 –1 –8 45 –17 651 of which inter-segment –97 66 –6 –2 0 –6 45
Total operating expenses –1 876 –189 –316 –420 –142 –68 131 –2 880 of which inter-segment –86 –12 –13 –4 –3 –13 131 of which inter-segment –128 15 –14 –7 88 46 –
Profit/loss on investments in associates 17 – – 1 – 0 – 18
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 93Statement of income for the year ended 31 December 2002
Net earned premiums and policy fees 12 661 1 592 1 004 – – – 8 15 265
Net realised and unrealised gains/losses on investments –2 210 –93 –8 –148 89 66 0 –2 304
Investment management and banking expenses –223 –6 –2 –582 –170 –48 114 –917
Insurance-underwriting and policy-acquisition costs –1 246 –232 –227 – – –3 18 –1 690
Total operating expenses –2 018 –365 –351 –586 –173 –116 173 –3 436 of which inter-segment –90 –15 –14 –10 –36 –8 173
Profit/loss on investments in associates 152 – – –5 –3 1 – 145
Expenses for depreciation and amortisation 516 99 34 61 3 7 – 720 5 Segment Information (continued)
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 94 Balance sheet as of 31 December 2003
Loans originated by the enterprise 18 199 1 573 148 5 691 191 423 –625 25 600
Separate account (unit-linked) liabilities 7 623 1 051 – – – – – 8 674
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 95Balance sheet as of 31 December 2002 in CHF million InvestLife ment
Loans originated by the enterprise 23 300 1 953 153 6 366 0 184 –306 31 650
Financial liabilities held for trading 332 – – 1 291 – – –38 1 585
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 5 Segment Information (continued)
Due to cross-border activities and the nature of operations the Group is unable to break down revenues and assets according to the location of the customers.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 97Statement of income Life Core segment for the year ended 31 December 2003
Investment management and banking expenses –112 –15 –18 –1 –6 1 –151
Benefits paid and changes in insurance reserves –9 158 –1 498 –1 580 –1 307 –262 0 –13 805
Policyholder bonuses and participation in surplus –288 –153 –22 129 –15 0 –349
Total benefits, losses and interest expenses –9 876 –2 226 –1 631 –1 217 –316 42 –15 224
Investment management and banking expenses –172 –26 –21 – –4 – –223
Insurance-underwriting and policy-acquisition costs –619 –365 –145 –57 –62 2 –1 246
Net result for the period 232 987 881 –1 693 503 186
Weighted average number of shares for diluted earnings per share 21 987 337 16 186 778
Diluted earnings per share 1) 10.6 –104.6 1) Due to the negative net result in 2002 the effect of additional potential shares was antidilutive, as their conversion would decrease loss per share. Therefore, as of 31 December 2002 basic earnings per share equalled diluted earnings per share.
Dividend income on equity securities, investment fund units, private equity and hedge funds 491 465
Total net investment income 5 552 5 505 8 Details for Certain Items in the Income Statement
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 100 Net realised and unrealised gains/losses on investments
Total net realised and unrealised gains/losses on investments 334 –2 304
Loss adjustment expenses and change in reserves for losses and loss adjustment expenses 505 793
The amount of foreign currency differences recognised in income represented a gain of CHF 63 million for 2003 and a loss of CHF 705 million for 2002.
Total other operating and administrative expenses 699 829 8 Details for Certain Items in the Income Statement (continued)
The Group monitors the investment portfolio risks by establishing mandatory risk limits. The investment portfolio is adequately diversified and there was only one investment exceeding 10% of shareholders’ equity: HSBC totalling CHF 1.1 billion. Debt securities with a fair value of CHF 1.7 billion had a BBB rating or lower at 31 December 2003 and at 31 December 2002, respectively.
Amortised Amortised gains/ gains/ Fair Fair cost cost losses losses value value
Total held-to-maturity securities, net of impairment losses 5 252 4 416 259 280 5 511 4 696
Total impairment losses at the end of the reporting period –1 –1
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: 10 Financial Assets and Liabilities Held for Trading
Interest rate options (over-the-counter) – liabilities 979 1 595 9 12
Total interest-related derivative instruments – liabilities 7 830 7 318 191 310
Total equity and equity-index-related derivative instruments – liabilities 4 293 4 406 168 338
Total precious-metal-related derivative instruments – liabilities 110 93 9 7 11 Trading Account Assets and Liabilities by Type of Derivative (continued)
Investment property consists of investments in residential, commercial and mixed-use properties primarily located within Switzerland. Property held for investment purposes comprises land and buildings owned by the Group to earn rentals and/or for capital appreciation. Property that is used by the Group itself or leased to, and occupied by, another entity of the Group is classified as owner-occupied property. Property acquired with a view to its subsequent disposal in the near future is classified as sundry assets.
Operating expenses arising from investment property that did not generate rental income during the period stood at CHF 15 million and CHF 0 million for the periods ended 31 December 2003 and 2002, respectively.
Later than 5 years 148 164 13 Future Minimum Lease Payments under Non-Cancellable Operating Leases – Lessor
Accrued interest of CHF 22 million and CHF 23 million on impaired loans was recognised but not yet received in cash as of 31 December 2003 and 2002, respectively. Property acquired through foreclosure with the intent to sell in the near future is included in sundry assets and was CHF 10 million and CHF 13 million for the years ended 31 December 2003 and 2002. The Group’s loan portfolio is monitored closely through the review of information such as debt service, annual reports and assessments. This information is evaluated in light of current economic conditions and other factors such as diversification of the property portfolio. This evaluation is part of the regular review to determine whether the allowance for potential loan losses is warranted. Management believes the allowance for loan losses is sufficient. However, management cannot predict with assurance the impact of future economic circumstances or how the mortgage and real estate portfolios would be affected by various economic circumstances. It is the Group’s policy to generally obtain a first mortgage on properties for which the loan-to-value ratio is less than 75%. The geographical risk concentrations correlate with the risks associated with the foreign currency risks (note 38).
The Group leases equipment to third parties under finance leases. The average contractual period of leasing arrangements is between four and five years. The average interest rate is 5%. Finance lease receivables are included in other loans.
Later than 1 year and not later than 5 years 363 310 337 291
Future finance income 48 34 14 Loans Originated by the Enterprise (continued)
Impairment losses at the end of the reporting period –1 –1 15 Investments in Associates
On 31 July 2003, the Swiss Life Group sold its 22.9% stake in Tuxedo Invest Ltd, Zug. The gain recognised on the sale amounted to CHF 11.7 million. On 7 July 2003, the Swiss Life Group announced the sale of its 33.3% stake in Crédit Agricole S.A. (Belgium) for a price of EUR 48 million.
The realised gain on the sale amounted to CHF 0.5 million. The realised gains on sales in 2002 mainly related to the disposal of the investment in RMF. A listing of major investments in associates accounted for under the equity method is set out in note 43.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 111In CHF million 2003 2002
Land and construc- and and Other buildings tion fixtures software equipment Total Total
Transfers from/to investment property –3 –117 – – – –120 –239
Revaluation surplus on transfers to investment property 31 – – – – 31 –
Splitting-up of assets under finance lease by class –2 – – –19 21 – –
Foreign currency translation differences –3 – –2 –12 –1 –18 6
Recognition of impairment losses – – – –4 –1 –5 –1
Total property and equipment as of 31 December 1 065 196 64 122 21 1 468 1 625 of which assets under finance leases 44 – – 8 1 53 56 18 Property and Equipment
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 112 In CHF million 2003 2002
Total goodwill and other intangible assets as of 31 December 1 048 –4 25 2 1 071 1 386
The carrying amount of positive goodwill of CHF 1048 million includes goodwill on the following acquisitions: – Banca del Gottardo CHF 560 million – Lloyd Continental CHF 437 million – Other CHF 51 million
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 114 Insurance reserves as of 31 December
Reserves for future life policyholder benefits 22, 25 88 743 86 516
Reserves for policyholder bonuses and other reserves 25 4 845 4 406 22 Insurance Reserves
Total losses and loss adjustment expenses incurred 2 450 2 542
Total gross reserves for losses and loss adjustment expenses 9 896 9 330
Total liabilities for future life policyholder benefits 88 743 86 516
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 24 Premiums
Gross written premiums and policy fees 3 124 3 110 12 254 12 647
Net written premiums and policy fees 2 761 2 732 12 085 12 531
Defined benefit pension plans Employees are covered under various funded and unfunded pension plans. When a third party will reimburse some or all of the expenditure for employee benefits and the rights to reimbursement do not qualify as plan assets, they are treated as a separate asset rather than as a deduction from the obligation. In all other respects the treatment is the same as for plan assets.
Participation in the various plans is based either on completion of a specific period of continuous service or on the date of hire. Benefits are based on the employee’s credited years of service and average compensation in the years preceding retirement. Annual funding requirements are determined based on actuarial methods or local requirements.
Defined contribution pension plans Certain subsidiaries sponsor various defined contribution plans. Participation in the various plans is based either on completion of a specific period of continuous service or on the date of hire. The plans stipulate contributions by both employers and employees. The Group’s expenses under these plans amounted to CHF 1 million and CHF 8 million in 2003 and 2002, respectively.
Equity compensation plan In the income statement the Group recognises compensation at the measurement date as the difference between fair value and the price at which the shares are allocated. The average fair value of the shares allocated amounted to CHF 83 in 2003 and CHF 378 in 2002, respectively. Shares allocated under the plans are repurchased on the SWX Swiss Exchange.
Hybrid debt In March 1999, Swiss Life privately placed a subordinated perpetual step-up loan comprising three simultaneous advances of EUR 442.5 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 (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 and the fixed-rate loan at the earliest on 30 September 2009 or at five-year intervals thereafter, upon notice and subject to the consent of the Federal Office of Private Insurance.
No interest may be paid on the loans if at the time, or as a result of the payment of interest, the solvency margin of Swiss Life would be at, or would fall below, the threshold of 150% of the applicable minimum solvency margin which Swiss Life is required to maintain under the Swiss regulatory regime.
Repurchase agreements Securities sold under agreements to repurchase the same or substantially the same securities at a specific future date at a fixed price are generally treated as collateralised borrowing. Securities pledged as collateral under repurchase agreements are not derecognised from the balance sheet unless control of these securities is transferred. As of 31 December 2003 securities to a value of CHF 1177 million were provided as collateral in respect of repurchase agreements and CHF 1054 million in respect of securities lending arrangements.
As of 31 December 2003 and 2002, respectively, other debentures with the following terms were outstanding: 27 Borrowings (continued)
Interest amount amount Issuer Currency rate Year of issue Maturity 2003 2002
Euribor SwAFE B.V. - Junior Class C mortgage-backed notes EUR +1.200 % 2002 2079 5 9
Banca del Gottardo - bond CHF 3.25 % 1998 2005 72 67
Euribor SwAFE B.V. - Senior Class A1 mortgage-backed notes EUR +0.24 % 2002 2032 614 740
SwAFE B.V. - Senior Class A2 mortgage-backed notes EUR 5.32 % 2002 2079 11 10 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 2003, the average interest was 2.9% and the average remaining time to maturity 24 months.
Later than 1 year and not later than 5 years 28 31 25 28
Medium and long-term bank loans include various mortgage loans with the following terms and maturities: Bank loans Bank loans outstanding as of 31 December 2003 and 2002, respectively, are repayable as follows: In CHF million Carrying amount Carrying amount
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 123Income tax expenses
The expected weighted-average tax rates for the Group were 19.37% and 24.22% in 2003 and 2002, respectively. These rates were derived by obtaining a weighted average of the expected income tax rates in the various jurisdictions in which the Group operates. The actual income tax expenses differ from the expected amounts as follows: Actual tax expenses
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 29 Insurance and Other Receivables and Payables
Amounts due to agents, brokers and policyholders 2 792 2 673
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 126 In 2003, the Swiss Life Group simplified its shareholder structure by reducing the minority stake in its Swiss Life/ Rentenanstalt subsidiary following the exchange of Swiss Life/Rentenanstalt shares (SL/RA shares) for Swiss Life Holding shares (SLH shares) which took place in 2002.
As of 31 December 2003, Swiss Life Holding had 25 034 041 registered shares with a nominal value of CHF 50 per share. Conditional share capital was CHF 103 260 950 as of 31 December 2003.
In 2002, Swiss Life/Rentenanstalt established a holding structure and created a company for this purpose as a wholly-owned subsidiary on 17 September 2002. This company, Swiss Life Holding, had an initial share capital of CHF 250 000 (5000 shares at a nominal value of CHF 50 per share) owned by Swiss Life/Rentenanstalt. On 23 September 2002, Swiss Life Holding launched an exchange offer to the holders of SL/RA shares to exchange SL/RA shares for an equal number of SLH shares. As at the end of the exchange offer period, a total of 10 834 704 SL/RA shares or 92.23% of the total SL/RA shares had been tendered and were transferred on 18 November 2002 to Swiss Life Holding by way of a contribution in kind. The share capital of Swiss Life Holding following the exchange offer amounted to CHF 541 985 200 as of 18 November 2002 (10 839 704 shares with a nominal value of CHF 50 each). The 912 296 non-exchanged SL/RA shares represented minority interests in the consolidated financial statements of the Swiss Life Group.
On 19 December 2002, the Group issued mandatory convertible securities (MCS I, 2002-2005) totalling CHF 250 million. 250 000 mandatory convertible securities (MCS I) were issued in denominations of CHF 1000 each. The MCS I may at the option of the holder be converted into Swiss Life Holding shares at any time from 27 December 2002 to 19 December 2005. Holders exercising such early conversion rights are entitled to initially receive 7.07414 shares, subject to adjustment, for each MCS.
Revaluation surplus on owner-occupied property transferred to investment property – – 31 31 –
Gains reclassified to the income statement –1 146 –19 – –1 165 –1 576
Losses reclassified to the income statement 261 – – 261 2 898
Impairment losses reclassified to the income statement 601 – – 601 620
Net gains/losses included in the carrying amount of hedged assets and liabilities – – – – –
Change during the period, net of taxes and other items 177 190 31 Equity (continued)
Reserves and appropriations As of 31 December 2003 and 2002, respectively, the Swiss Life Group was in substantial compliance with all applicable regulatory capital adequacy requirements.
Apart from equity and minority interests, total core capital also includes hybrid debt, subordinated debt, theoretical policyholder participation in surplus under consideration of additional DAC amortisation and deferred taxes.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 33 Related-Party Transactions
The repurchase of the shares was disclosed as acquired shares from related parties/related institutions and amounted to CHF 5 million for the year 2002.
– assets stated in the balance sheet as separate account (unit-linked) investments
– assets managed for third parties by the Group – minus insurance assets managed by third parties and alternative investments managed by third parties
Commitments to extend credit The Group has also entered into irrevocable commitments to extend credit in the form of loans and other instruments. They represent undrawn credit lines which are available to clients to secure their liquidity needs. With respect to credit risk, these commitments are contingent upon clients maintaining certain credit standards, and the Group monitors its exposure on a regular basis.
Capital commitments As of 31 December 2003, the Group had commitments to purchase investments of CHF 55 million (excluding private equity). Contractual obligations to purchase or construct investment property amounted to CHF 26 million.
Later than 1 year and not later than 5 years 42 51
Other contingencies and commitments Contractual obligations for repairs and maintenance of investment property amounted to CHF 8 million as of 31 December 2003, which are included in this line item.
The outcome of such current legal proceedings, claims and litigation could have a material effect on operating results or cash flows when resolved in a future period.
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 38 Risk Management Activities
Total instruments held for fair value hedging purposes – assets 1 932 2 180 97 229
Total instruments held for fair value hedging purposes – liabilities – 750 – 24
Total instruments held for cash flow hedging purposes 5 166 73 120 –24 –3 n. a. n. a.
Not later Later than Non-interest than 1 year 1-5 years 5 years bearing Total
Non-interest bearing financial instruments – – – 22 679 22 679
Fixed-rate financial instruments –6 773 –20 022 –2 890 – –29 685
In addition, the Group is exposed to the risk of prepayment on loans; however, management believes the information provided is a reasonably reliable prediction of contractual maturities and repricing based on management’s expectations related to prepayment risk.
Foreign currency risk As the Group operates internationally, it is exposed to risks associated with changes in foreign exchange rates. The Group had the following significant currency balance sheet items: Currency positions
Financial assets held for trading 835 1 413 601 165 4 6 3 024
Financial liabilities held for trading –705 –367 –25 –113 –14 –1 –1 225
Net balance sheet currency gap –10 173 7 646 1 077 6 382 116 131 5 179
Liquidity risk The Group has formal asset/liability matching practices and monitors liquidity on a regular basis. There are no options or individual contracts or policyholders with the potential to prompt an outflow of liquidity through cancellation or early termination which would be material for the Group as a whole.
Non-interest bearing financial instruments 750 0 4 619 31 54 15 492 20 946
Non-interest bearing financial instruments –2 897 –404 –2 387 –1 589 –1 150 –110 –8 537
Non-financial liabilities – – – – – –107 516 –107 516
The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented in the Group’s balance sheet at fair value as of 31 December:
Swiss Life Group . Financial Statements 2003 . Notes to the Consolidated Financial Statements 40 Reclassifications in the Statement of Income
Impairment losses on other assets have been reclassified from other operating and administrative expenses to other income.
On 20 February 2004 the Swiss Life Group announced the spin-off of the third-party private equity business. Existing mandates are taken over by ALPHA Associates, a new company established by the former management of Swiss Life Private Equity Partners.
The Swiss Federal Council aims to introduce a new model in the Swiss BVG business (second pillar) for the participation of policyholders (minimum payout ratio) with effect from 1 January 2004. The enactment of this new regulation will result in a decrease in the shareholders’ equity. The effect of this expected change has not been determined.
Adroit Investment, Zürich Life l 99.7% 100.0% full CHF 5 000
Adroit Private Equity, Zürich Life l 99.7% 100.0% full CHF 5 000
Banca del Gottardo, Lugano PB ° 99.5% 99.7% full CHF 170 000
Eaux-Vives 2000, Zürich Life l 99.7% 100.0% full CHF 1 000
Kuhn & Seal Services, Nyon Other l 99.7% 100.0% full CHF 100
«La Suisse» Accidents, Lausanne Non-Life ° 99.7% 100.0% full CHF 50 000
Neue Warenhaus AG, Zürich Life l 99.7% 100.0% full CHF 5 000
Redsafe Bank, Zürich Other – until 23.12.2002 – – full CHF 30 000
Rentenanstalt Holding, Zürich Other l 99.7% 100.0% full CHF 25 000
RMF, Pfäffikon – – until 23.05.2002 – – equity CHF 1 350
STG Management, Basel PB ° until 25.06.2003 – – full CHF 250
Swiss Life Asset Management, Zürich IM l 100.0% 100.0% full CHF 250
Swiss Life Capital Holding, Zürich IM l 99.7% 100.0% full CHF 5 514
Swiss Life General Partners, Zürich IM l 99.7% 100.0% full CHF 100
Swiss Life Holding, Zürich Other l from 17.09.2002 – – full CHF 1 251 702
Swiss Life/Rentenanstalt, Zürich Life l 99.7% 99.7% full CHF 587 350 1) Segment (IM = Investment Management, PB = Private Banking)
Method Authorised Core = l of con- share Non- l Consolidation Group Direct soli- Cur- capital in
Swissville Centers Holding, Zürich Life l 99.7% 100.0% full CHF 7 100
Swissville Commerce, Zürich Life l 99.7% 100.0% full CHF 150 900
Swissville Commerce Holding, Zürich Life l 99.7% 100.0% full CHF 147 100
Swissville Europe Holding, Zürich Life l 99.7% 100.0% full CHF 11 500
Swissville Private, Zürich Life l 99.7% 100.0% full CHF 50 000
Carte Blanche TP, Paris – – from 25.11.2003 43.5% 44.0% equity EUR 40
Daunou Investissements, Paris – – until 28.09.2002 – – equity EUR 153
Domical Santé, Paris Other ° 94.3% 95.1% full EUR 2 300
Garantie Assistance, Paris Non-Life ° 99.2% 100.0% full EUR 1 850
Premium Consulting SAS, Paris – – from 27.07.2003 19.9% 20.0% equity EUR 40
Sociafrance, Lille Non-Life – until 01.07.2002 – – full EUR 8 400
Société financière de dépôts et de placements (SOFIDEP), Paris PB ° until 01.01.2002 – – full EUR 8 000
Société suisse Banque, Paris PB ° 99.5% 100.0% full EUR 20 000
Société suisse de gestion immobilière, Paris Other l 99.6% 100.0% full EUR 22 860
Swiss Life Asset Management (France) (formerly Société suisse de gestion financière), Paris IM l 99.5% 100.0% full EUR 3 000 1) Segment (IM = Investment Management, PB = Private Banking)
Swiss Life Assurances de Biens (formerly Société suisse Accidents), Paris Non-Life ° 99.6% 100.0% full EUR 135 000
Münchner Tor, München Life l 99.7% 100.0% full EUR 61 735
Swiss Life Asset Management, Unterföhring IM l 99.7% 100.0% full EUR 5 250
Swiss Life Beteiligungs GmbH, München Other l from 18.10.2002 99.7% 100.0% full EUR 25
Swiss Life Grundstücksmanagement, München Life l 99.7% 100.0% full EUR 26
Swiss Life Partner Service und Finanzvermittlung, München Other l 99.7% 100.0% full EUR 1 800
Swiss Life Pensionsfonds, München Life l from 08.05.2002 99.7% 100.0% full EUR 3 000
Swiss Life Pensionskasse, München Life l from 08.05.2002 99.7% 100.0% full EUR 3 000
Demoisy & Cie, Montigny le Tilleul – – from 01.01.2003 24.9% 25.0% equity EUR 31
Swiss Life Immo-Techno Center III, Bruxelles Other l from 01.01.2003 99.7% 100.0% full EUR 500
Swiss Life Informations Systems, Sint-Genesius-Rode Other l from 22.01.2002 99.7% 100.0% full EUR 62
Swiss Life Invest (Belgium), Bruxelles Other l 99.7% 100.0% full EUR 646
Swissville Europe (Belgium), Bruxelles Life l 99.7% 100.0% full EUR 8 087
ZELIA, Bruxelles Life l 99.7% 100.0% full EUR 32 227 Non-Life °
Banque du Gothard (Luxembourg), Luxembourg PB ° 99.5% 100.0% full CHF 14 000
Gottardo Money Market Fund (Lux) Management, Luxembourg PB ° 99.5% 100.0% full CHF 200
Gottardo Tower Fund Management, Luxembourg PB ° 99.5% 100.0% full EUR 125
SLGB Management, Luxembourg Other l from 17.01.2002 99.7% 100.0% full EUR 125
Swiss Life (Luxembourg), Strassen Life l 99.7% 100.0% full EUR 15 000
Dom-James in liquidation, Sevenoaks Other ° 99.7% 100.0% full GBP 5 016
Swiss Life (UK), Sevenoaks Life ° 99.7% 100.0% full GBP 200 000
Swiss Life (UK) Services, Sevenoaks Life ° 99.7% 100.0% full GBP 100
Banca del Gottardo Italia, Bergamo PB ° 70.6% 71.0% full EUR 50 000
Fafid, Milano PB ° from 11.03.2003 79.6% 80.0% full EUR 20
Swiss Life (Italia) Infortuni e Malattie, Milano Non-Life ° 99.7% 100.0% full EUR 2 500
Swiss Life Investment Management, Dublin IM l until 19.12.2002 – – full IEP 10 000
Gottardo Asset Management, Wien PB ° until 01.05.2003 – – full EUR 363 1) Segment (IM = Investment Management, PB = Private Banking)
Gottardo Trust Company, Nassau PB ° 99.5% 100.0% full USD 3 000
Swiss Life Cayman Finance, Grand Cayman Other l from 12.09.2002 100.0% 100.0% full CHF 0 USD 50
Swiss Life Financial Services (formerly SLPEP CI), Grand Cayman IM l 99.7% 100.0% full CHF 50
Swiss Life Private Equity Partners (Cayman), Grand Cayman IM l 99.7% 100.0% full CHF 60
Gottardo A.E.P.E.Y, Athens PB ° from 15.05.2002 95.8% 96.3% full EUR 2 100
Gottardo Forex (H.K.), Hong Kong PB – until 26.03.2002 – – full HKD 30 000
Banque du Gothard, Monaco PB ° 99.5% 100.0% full EUR 40 000
N.V. Pensioen ESC, Willemstad Life l 99.7% 100.0% full ANG 1 000
Report of the Group Auditors to the General Meeting of Shareholders, Swiss Life Holding, Zurich
Income for the 2003 financial year largely came from interest on loans made to Group companies and fees generated within the Group. Offsetting this income, the company incurred management expenses and capital taxes.
On 30 December 2003 the Swiss Life Group issued mandatory convertible securities (MCS II) with a total value of CHF 341 million. Given the exchange ratio, this resulted in a capital increase of 1 586 098 Swiss Life Holding shares.
Swiss Life Holding has also purchased 878 978 Swiss Life/Rentenanstalt shares, thereby increasing its equity interest from 92.23% to 99.72% as of 31 December 2003.
Swiss Life/Rentenanstalt, Zurich CHF 587 350 99.716% CHF 587 350 92.234 %
Swiss Life Asset Management (Nederland), Amstelveen EUR 250 100.000% EUR – –
Own shares In the final quarter of the year under review the companies in the Swiss Life Group purchased a total of 1 365 921 Swiss Life shares at an average price of CHF 126.01. In the same period, they sold 1 369 571 shares at an average price of CHF 127.60.
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 1306 million at the balance sheet date.
In 2003, the Swiss Life Group simplified its shareholder structure by reducing the minority stake in its Swiss Life/ Rentenanstalt subsidiary following the exchange of Swiss Life/Rentenanstalt shares (SL/RA shares) for Swiss Life Holding shares (SLH shares) which took place in 2002. Swiss Life Holding acquired an additional 878 978 SL/RA shares and increased the equity stake held in its subsidiary Swiss Life/Rentenanstalt from 92.23% as of 31 December 2002 to 99.72% as of 31 December 2003. This transaction was financed through the issuance of mandatory convertible securities (MCS II, 2003-2004) totalling CHF 341 million on 30 December 2003. 341 011 MCS II were issued in denominations of CHF 1000 each with a maturity date of 30 December 2004.
Share capital, capital increase In accordance with the agreement dated 15 November 2002 concerning contributions in kind, Swiss Life Holding acquired 10 822 084 shares of Swiss Life Insurance and Pension Company, Zurich, at a par value of CHF 50 each. 10 834 704 Swiss Life Holding registered shares were issued in return. Thus, 10 839 704 registered shares were issued prior to the capital increase.
Withdrawal from legal reserves in accordance with the General Meeting –225 479 735 –
Total reserve for own shares 27 800 000 35 800 000
Total result shown in the balance sheet 29 346 454 –2 188 276
Bruno Gehrig Gerold Bührer accordance with the table below. No dividend is proposed to be paid out for 2003.
Swiss Life Holding . Financial Statements 2003 . Report of the Statutory Auditors
As statutory auditors, we have audited the accounting records and the financial statements (statement of income, balance sheet and notes, pages 147 to 151) of Swiss Life Holding for the year ended 31 December 2003.
This Annual Report contains forward-looking statements about Swiss Life which involve certain risks and uncertainties. The reader should be aware that such statements represent projections which could differ materially from actual outcomes and results. All forward-looking statements are based on the data available to Swiss Life at the time the present Annual Report was compiled.
The Annual Report is also available in German and French. The German text is definitive.
Publisher: Swiss Life Holding, Zurich Concept: Tolxdorff & Eicher Consulting, Horgen Design: MetaDesign, Zurich Photography: Anita Affentranger, Rainer Wolfsberger Production: Management Digital Data AG, Schlieren ZH Printers: NZZ Fretz AG, Schlieren ZH
Further information can be obtained from: Swiss Life General-Guisan-Quai 40 CH-8022 Zurich