The companies falling within the Group’s scope of consolidation are presented in the Consolidated Financial Statements (Note 37). Information on the listing on the SIX Swiss Exchange and market capitalisation can be found on page 76 in the Business Review. The organisational structure of the Group shows the key business markets and areas. The resulting operational responsibilities are reflected in the allocation of responsibilities among the Corporate Executive Board. With regard to insurance operations, one person with responsibility for the market and results is assigned to each specific area.
STAGGERED TERMS OF OFFICE — Due to the staggered terms of office, it is ensured that, in so far as possible, an equal number of members will come up for re-election every year. If a member resigns during his term of office, the successor will serve only for the rest of that term. Thus, with respect to the annual re-elections, an important prerequisite has been established for ensuring continuity on the Board of Directors.
Corporate Internal Audit, which reports directly to the Chairman of the Board, represents a suitable means of independent monitoring and information gathering for the Board of Directors. Regular meetings take place between the Chairman of the Board of Directors and the Head of Corporate Internal Audit, as well as between the Chairman of the Audit Committee and the Head of Corporate Internal Audit. Implementation of the measures recommended by Corporate Internal Audit is monitored by Group Compliance & Operational Risk Management. The Audit Committee regularly receives a report on operational risk management within the Swiss Life Group. Swiss Life’s Internal Control System (ICS) also serves the Board of Directors for information and controlling purposes. Further details on this system are available in the “Risk Management” section on page 36.
The attribution of mid- to long-term compensation components (RSU plan) is deferred for a period of three years from the date of allocation in the same way as the deferred compensation in cash. Likewise, the RSU plan provides for
Board of Directors, Executive Board and persons whose activities have a significant influence on the risk profile: Total sign-on payments made in the financial year 4 0
RESTRICTIONS ON VOTING RIGHTS — In exercising voting rights, no shareholder can collect more than 10% of the total share capital directly or indirectly in respect of his own shares and those he represents. Legal entities and partnerships which are connected through capital, voting rights, uniform management or in any other way, as well as individuals or legal entities and partnerships which act in concert by virtue of agreement, as a syndicate or in any other way, are deemed to be a single person. Any amendment to or revocation of restrictions on voting rights must be approved by at least two thirds of the voting shares represented at the General Meeting of Shareholders and an absolute majority of the share par value represented. The Board of Directors can permit exceptions to this limit on the basis of its discretionary powers; during the year under review, no such exceptions were granted.
Contents 40 1.1 Basis of Preparation 40 1.2 Covered Business and Non-Covered Business 42 2 Summary of MCEV Results 42 2.1 Key Results 43 2.2 MCEV of Covered Business 44 2.3 Value of New Business 45 2.4 Group MCEV – Analysis of Earnings 46 2.5 Covered Business – Analysis of Earnings 49 2.7 Reconciliation of IFRS Net Asset Value to Group MCEV 51 3 Information by Market Unit 51 3.1 Market Units 51 3.2 Results by Market Unit 57 4.1 MCEV Components for Covered Business 59 4.2 New Business 60 4.3 Asset and Liability Data 60 4.4 Economic Scenario Generator 61 4.5 Dynamic Management Actions and Policyholder Behaviour 61 4.6 Look-Through Principle 62 4.8 Employee Pension Schemes and Share-Based Payment Programmes 63 5.1 Economic Assumptions 66 5.2 Taxation and Legislation 66 5.3 Operating Assumptions 67 6 External Auditors’ Statement 68 7 Glossary and List of Abbreviations
The graph and table below show the analysis of earnings for the covered business in 2011:
OTHER OPERATING VARIANCE includes effects from strategic management decisions such as risk premium reductions in Swiss group life business and modelling improvements as well as other reassessments especially with regard to hybrid debt.
CLOSING ADJUSTMENTS represent the transfer of funds into the covered business and currency exchange rate translation effects resulting from the consolidation in Swiss francs.
RECONCILIATION OF IFRS NET ASSETS TO GROUP MCEV AS AT 31 DECEMBER 2011
The assumption changes are due to a favourable experience-driven update of persistency assumptions in group life and the reduced cost base. This is partly offset by an update of assumptions in respect of policyholder behaviour such as earlier future retirements within group life contracts.
Negative economic variances are caused by the significant increase of interest rate volatilities. The setting of the liquidity premiums has a positive impact.
FRICTIONAL COSTS OF REQUIRED CAPITAL (FC) — The frictional costs of required capital for the covered business are defined as the present value of the costs incurred by shareholders due to investment via the structure of an insurance company (compared to direct investment as individuals), such as tax on profits generated by the insurance company or the costs of asset management. Other potential frictional costs such as agency costs or financial distress costs have not been taken into account in the frictional costs of required capital.
The MCEV is calculated using a risk-neutral valuation, based on market consistent and arbitrage-free stochastic economic scenarios. Under this approach, the key economic assumptions are: – the reference rates – interest rate and equity-type volatilities – correlations between the economic risk factors – inflation rates
For the calculation of the MCEV and the value of the new business as at valuation date, 2000 economic scenarios (also referred to as simulations) are used, ensuring convergence of the results for all market units. For the calculation of the sensitivities and some steps in the movement analysis, some market units use fewer scenarios in connection with variance reduction techniques.
Economy 1 year 2 year 5 year 10 year 15 year 30 year 5.1.4.2 FORWARD INFLATION RATES USED FOR THE CALCULATION AS AT 31 DECEMBER 2010
Tax assumptions have been set in line with the local tax regime. Tax losses carried forward are considered in the projections. Taxation rules are based on individual companies’ total results. Tax impact of future new business has not been allowed for. The following table 5.2.1 shows the corporate tax rates applied.
The Board of Directors is responsible for the preparation of the MCEV Report, including the applied methodology and the assumptions used. Our responsibility is to express an opinion on whether the MCEV Report has been properly prepared in accordance with the MCEV Principles.
NEW BUSINESS MARGIN — The value of new business divided by the present value of new business premiums (PVNBP) or divided by the annual premium equivalent (APE), respectively.
Financial liabilities at fair value through profit or loss 10 18 782 17 571
The accounting for the amounts identified as DPF has been done as follows: In jurisdictions where no statutory minimum distribution ratio (“legal quote”) exists, the contractual right to receive, as a supplement to guaranteed benefits, additional benefits which are likely to be a significant portion of the total contractual benefits arises when management ratifies the allocation of policyholder bonuses. When ratified by management, a corresponding liability is set up. To the extent discretion with regard to amount and/or timing is involved, these amounts are included within policyholder participation liabilities. In that respect the policyholder bonus reserve set up in the statutory accounts for these contracts is regarded as discretionary. For these contracts the entire DPF is classified as a liability.
CRETIONARY PARTICIPATION FEATURES — Premiums from traditional life insurance contracts are recognised when due from the policyholder. Insurance liabilities are established in order to recognise future benefits and expenses. Benefits are recognised as an expense when due.
EMBEDDED OPTIONS AND GUARANTEES IN INSURANCE CONTRACTS — Insurance contracts often contain embedded derivatives. Embedded derivatives which are not closely related to their host insurance contracts are separated and measured separately at fair value. Exposure to embedded options and guarantees in insurance contracts which are closely related or which are insurance contracts themselves, such as guaranteed annuity options or guaranteed interest rates, is reflected in the measurement of the insurance liabilities.
Goodwill represents the excess of the fair value of the consideration transferred and the amount of any non-controlling interest recognised, if applicable, over the fair value of the assets and liabilities recognised at the date of acquisition. The Group has the option for each business combination, in which control is achieved without buying all of the equity of the acquiree, to recognise 100% of the goodwill in business combinations, not just the acquirer’s portion of the goodwill (“full goodwill method”). Goodwill on acquisitions of subsidiaries is included in intangible assets. Acquisition -related costs are expensed. Goodwill on associates is included in the carrying amount of the investment.
– The fair value of liabilities arising from insurance and investment contracts for the account and risk of the Swiss Life Group’s customers is calculated based on the valuation of the underlying assets.
The fair value of investment property is based on current prices in an active market for properties of a similar nature, condition or location – suitably adjusted. Recent prices for similar properties on less active markets, with suitable adjustments for differences, are also used for the estimation of the fair values. Furthermore, investment property is valued using discounted cash flow projections if reliable estimates and reasonable assumptions (such as rental income and operating expenses) can be made, based on external evidence. Future expenditure that will improve the property is not included in the fair value. The risk-adjusted discount rates used in the cash flow projections reflect the specific nature and location of the individual properties. The cash flows used in the projections are based on actual rental income on a sustainable basis. Cost is reflected in the cash flows based on experience and budgets approved by management. The cash flows include inflation. External valuations for individual real estate assets are performed on a rotating basis, but at a minimum each property is evaluated every three years.
Commission expense –313 –363 –69 –29 –29 –474 –8 –1 285 302 –983
Premiums ceded to reinsurers –26 –171 –20 –8 – – –25 -250 24 –226
ASSETS FOR THE ACCOUNT AND RISK OF THE SWISS LIFE GROUP’S CUSTOMERS
Investment contracts without discretionary participation 85 4 5 13 14 8 41
LIABILITIES FOR THE CURRENT AND 9 PREVIOUS YEARS 33 39 37 47 45 62 70 99 157 206 795
OTHER RISK TRANSFER — Risk transfer primarily takes the form of reinsurance. Alternative forms of risk transfer (such as securitisation) require the formal approval of the Group Risk Committee. No significant alternative form of risk transfer is used by the Group at present.
SENSITIVITY ANALYSIS — The Swiss Life Group uses the market consistent embedded value (MCEV) following the guidelines of the European Insurance CFO Forum Market Consistent Embedded Value Principles©1, as one of the main management tools, for its sensitivity analysis with regard to insurance risk and market risk. From the shareholders’ point of view, the embedded value serves as an indicator of the value of the existing insurance portfolios. It is composed of two components: the net asset value (NAV) attributable to shareholders and the value of in-force business (VIF). Future new business is not included.
The market consistent embedded value calculations are based on economic scenarios which are calibrated to market conditions at valuation date. Best estimate assumptions were made regarding a number of factors, in particular asset allocation, policyholder participation, development of costs and claims, policyholder behaviour, mortality and morbidity. Business is assumed to be continuing at the same level (going concern) and the current cost ratios – adjusted for inflation – are thus assumed to hold good for the future as well. Future costs for maintaining classic solvency capital funded by the shareholders and which underpins the insurance business are charged to the MCEV. The Swiss Life Group calculates the embedded value for all its life and health insurance companies. All other companies are taken into account at their IFRS net asset value. As a consequence, embedded value sensitivities do not affect the value of these companies.
At 31 December 2011, if the euro had weakened by 10% against the Swiss franc, the embedded value of the foreign life and health insurance companies would have been CHF 251 million lower (2010: CHF 254 million lower).
Financial instruments for the account and risk of the Swiss Life Group’s customers –17 1
In 2011 and 2010, the Group entered into interest rate swaps to hedge euro-denominated fixed-rate note loans carried at amortised cost against changes in the fair value attributable to interest rate risk. The fair value of the hedged assets was EUR 442 million as at 31 December 2010. In 2011 hedge accounting was discontinued with regard to the interest rate risk of fixed-rate loans.
Classification as assets held for sale and other disposals 2 9 7 1 19
Classification as assets held for sale and other disposals – – – 0 8 7 8 7
Claims incurred, benefits paid and surrenders –8 182 –7 738 –50 –246 –8 132 –7 492
Effect of changes in actuarial assumptions and other movements 998 938 11 108 987 830
The major part of the defined benefit liability arises from plans covering employees in Switzerland. The primary benefit of those plans is an old-age pension paid out after reaching retirement age. There are options for early retirement (with reduction of the pension amount determined with actuarial methods) and for choosing to receive a lump-sum payment instead of a pension. Other benefits comprise survivors’/orphans’ pensions in case of death as well as disability pensions (if disabled before retirement age). The plans are funded by the employer through ordinary contributions determined with actuarial methods where, under Swiss law, a part (generally less than 50% of the total contribution ) is deducted from the employee’s gross salary. Further funding comprises mandatory transfers of funds made by new employees from plans of former employers, discretionary contributions by employees (within plan restrictions) and the earnings on the plan assets.
The net defined benefit asset/liability consists of gross defined benefit liabilities –1 173 –1 965 gross defined benefit assets 133 168
Related expenses in 2011 were CHF 9 million (2010: CHF 10 million).
Under the MILESTONE initiative, provisions for restructuring were set up in Switzerland, Germany and AWD in 2009. The outflow of the amounts is expected within the following one to two years.
Gains/losses transferred to the income statement 8, 9 – –321 – 232 –89
As at 31 December 2011, financial assets of CHF 975 million were included in level 3 of the fair value hierarchy (excluding financial assets for the account and risk of the Swiss Life Group’s customers). The exposure primarily consists of alternative investments such as hedge funds, private equity, infrastructure and real estate funds. These investments are valued based on regular reports from the issuing funds. Fair values are reviewed by a team of in-house investment professionals and may be adjusted based on their understanding.
BALANCE AS AT END OF PERIOD – 187 2 28 758 246
Swiss Life — Financial Statements 2011 36 Future Minimum Lease Payments under Non-Cancellable Operating Leases – Lessor
Swiss Life Asset Management (France), Paris IM 100.0% 100.0% EUR 3 000
Swiss Life Banque Privée, Paris Ins. FR 60.0% 60.0% EUR 37 902
AWD – Versicherungsmakler und -beratungs GmbH, Hannover AWD until 15.02.2011 – –
Swiss Life Partner Service- und Finanzvermittlungs GmbH, München Ins. DE 100.0% 100.0% EUR 300
Swiss Life Pensionskasse AG, München Ins. DE 100.0% 100.0% EUR 3 000
AWD Chase de Vere Direct Limited, Manchester AWD until 10.05.2011 – –
Swiss Life Products (Luxembourg) S.A., Branch Austria, Wien Ins. Int. from 01.01.2010 100.0% 100.0% – –
Adroit Investment (Offshore) Ltd., Grand Cayman Ins. CH 100.0% 100.0% CHF 0
AWD Spólka z ograniczona odpowiedzialnoscia, Warszawa AWD 100.0% 100.0% PLN 250
The annual profit was largely generated from the dividend payouts by subsidiaries. These fell slightly from CHF 197 million in 2010 to approximately CHF 191 million in 2011.
For comparison purposes, the corresponding details of the compensation for 2010, as published in the Annual Report 2010, are shown in a separate table below the compensation table for 2011.
As statutory auditor, we have audited the financial statements of Swiss Life Holding Ltd, which comprise the statement of income, balance sheet and notes to the financial statements (pages 186 to 202), for the year ended
2 Shareholders’ Letter 4 CEO Interview 21 Strategy and Brand 25 Summary of Group Results 28 Segment Reporting 28 Insurance Switzerland 30 Insurance France 31 Insurance Germany 32 Insurance International 33 Investment Management 34 AWD 35 Responsible Corporate Conduct 35 Employees 38 Values 38 Society 39 Environment 43 Products and Innovations 45 Corporate Governance 47 Board of Directors 53 Corporate Executive Board 59 Compensation 70 Extract from the Financial Statements 76 Share Performance and Historical Comparison 78 Contacts and Publishing Details
That’s why I’m a voluntary fireman. We attend regular drills and training sessions to improve safety for ourselves and others.”
DISTINCT BRAND ENVIRONMENT — Swiss Life has been represented Group-wide since 2004 by a uniform corporate identity and a brand architecture at four levels. The Swiss Life umbrella brand also encompasses two subbrands: Swiss Life Asset Management and Swiss Life Banque Privée. The German subsidiary SLPM Schweizer Leben PensionsManagement GmbH has an independent market presence as what is called an endorsement brand. The fourth level of the brand architecture is occupied by independently managed brands such as AWD and Livit (exclusively in Switzerland).
Swiss Life increases net profit by 8% to CHF 606 million defying challenging market conditions.
With a 10% increase in the adjusted operating result for the AWD Group compared to the previous year, AWD is on a solid profitable footing. AWD will continue to invest in processes and measures which help cut costs, further improve advisor productivity and, as a result, boost the company’s profitability on a sustainable basis.
In Switzerland, outstanding group performance was once again rewarded with the “Team Award My Milestone”, as in previous years. This award was presented three times during the year under review – for instance to an interdisciplinary project team which worked for several months on different growth options for the Swiss business.
In Switzerland the MILESTONE programme also entails a reduction of 520 positions between 2010 and 2012. Accompanying the reduction process, Swiss Life is implementing a programme of measures which were worked out with the social partners and have been in force since 2005. 314 employees in Switzerland underwent professional reorientation. They were individually supported and assisted by a team of specialists. 7% were able to find a new position internally and 63% externally. 14% of those released were given early retirement and 16% were referred to regional employment agencies (RAV).
Swiss Life is convinced that raising the social competence of individual employees increases the competitiveness of the company. It is therefore strongly in favour of employees’ commitment to the community. The staff regulations explicitly approve the involvement of employees in political and military committees and associations. The company offers all reasonable support for such involvement, for example through a flexible approach to working hours.
The future is all about perspectives: they are a motivating influence and a source of security and confidence. That is why Swiss Life’s Perspectives Foundation supports charitable initiatives in the areas of health, science, education, culture and sport as a means of giving people new perspectives.
This report describes the essential features of corporate governance within the Swiss Life Group. The structure below largely follows the Directive on Information Relating to Corporate Governance issued by the SIX Swiss Exchange, which came into force on 1 July 2002, and was revised on 1 January 2007 and 1 July 2009, and also takes into consideration the regulations on transparency stipulated in the Swiss Code of Obligations with regard to the compensation of members of the Board of Directors and the Corporate Executive Board and FINMA circular 2010/1 on minimum standards for remuneration schemes of financial institutions. Further information on the Code of Conduct and the values of the Swiss Life Group can be found in the “Values” section on page 38.
SHAREHOLDERS — The relevant disclosures of significant shareholdings can be found on the publication platform of the SIX Swiss Exchange’s disclosure office at www.six-exchange-regulation.com, “Obligations” area, “Disclosure of Shareholdings” section and “Significant Shareholders” subsection (www.six-exchange-regulation. com/obligations/disclosure/major_shareholders_en.html).
Total compensation 2010 in cash and shares 1 262 399 including regular contribution to occupational provisions of CHF 195 656 1 458 054 1 Allocation and valuation was effected on 23.06.2011 and 15.12.2011 at an economic value of CHF 111.0817 and CHF 73.3828, which is equal to the tax value, taking into account the blocking period of three years. The share prices on the days of allocation were CHF 132.30 and CHF 87.40 respectively.
The Financial Statements are available in German and English, and contain additional information on risk management, market consistent embedded value (in English only), corporate governance and the annual accounts. The English text is definitive for the Consolidated Financial Statements.