Swiss Life Group . Review of Operations 2005 . Letter to Shareholders 8 Further improving efficency In our business the overall result is made up of three components: the risk result, the cost result and the financial result. In order to realise our profit target of CHF 1 billion by 2008 we cannot simply assume that we will continue to achieve a high financial result as in the past two years. We must continue to improve our risk and cost results. These two components are fundamental to the basic insurance result. We can have a direct influence on this result. Therefore this must be an important objective for us. The growth of this figure is a very effective indication of where progress is being achieved operationally, and where it is not.
Ronny Simon from Client Services in Luxembourg provides support to corporate clients.
The French market offers further growth opportunities due to heightened awareness of retirement savings as an important concern and the corresponding change in legislation; Swiss Life will enjoy an above-average benefit from this due to its positioning. The company is concentrating primarily on self-employed individuals with above-average incomes and on small and medium-sized companies. Cost management continues to have a high priority.
Liechtenstein Swiss Life (Liechtenstein) AG was founded in November 2004 to take advantage of growth opportunities in the attractive market for structured life insurance products for high net worth individuals. In its first business year, Swiss Life already managed to achieve a premium volume of CHF 163 million.
Swiss Life announced in September 2005 that it was streamlining the Group’s management structures and making slight adjustments to the assignment of responsibilities within the Corporate Executive Board in connection with the Group’s strategic targets. The tasks at Head Office, the international business and the market organisation in Switzerland and abroad are thus being unbundled. The company is also reducing interfaces and intends to take better account of the different priorities in Switzerland (boosting profitability) and abroad (profitable growth). The new International Division fills out the operational Group structure. The new management structure came into effect as of 1 January 2006.
about exceeding or dropping below the limits in accordance with Art. 20 of the Swiss Stock Exchange Act. Subsequent to the balance sheet date, on 16 January 2006, Premafin Finanziaria S.P.A. reported that it had fallen below the 5% limit and indicated that its group no longer held any Swiss Life Holding shares.
Swiss Life Group . Review of Operations 2005 . Corporate Governance from conditional capital. Ordinary share capital thus expanded by CHF 79 304 900 to CHF 1 251 702 050, divided into 25 034 041 fully paid registered shares of CHF 50 par value each, while conditional capital fell to CHF 103 260 950 or 2 065 219 registered shares.
Staggered terms of office When the Board of Directors was reconstituted at the General Meeting of Shareholders in 2003, the new members were given staggered terms of office to ensure that, as far as possible, an equal number of members will come up for re-election every year. If a member steps down during his or her term of office, the successor will serve only for the rest of that term. This ensures that the continuity of the Board of Directors is maintained.
The Chairman’s Committee meets at least six times a year. It held thirteen meetings during the year under review. The average time per meeting was around two half hours.
Bruno Pfister Born 1959, Swiss national Group Chief Financial Officer (Group CFO) up to
Other appointments: – Castle Alternative Invest AG, Freienbach, Member of the
Swiss Life Group . Review of Operations 2005 . Corporate Governance he moved to Credit Suisse where his many executive roles included that of Regional Treasurer for Europe and Turnaround Manager with a mandate to restructure and reposition all legal entities of the Credit Suisse Group in Japan. A member of the Credit Suisse Executive Board, he was appointed Head of its Trading and Investment Services Division in 2001. Mr Senn is honorary counsel for the Republic of Korea.
Swiss Life Group . Review of Operations 2005 . Corporate Governance
Convocation of the General Meeting of Shareholders and agenda The rules set out in the Articles of Association for convening a General Meeting of shareholders and drawing up the agenda encompass the stipulations of the law. Shareholders representing shares with a par value of at least one million francs can submit a written request within a time limit published in advance by Swiss Life Holding for the inclusion on the agenda of an item for discussion, together with the relevant motions. The written application must he accompanied by a certificate issued by a bank to confirm that the shares are deposited with it until after the general meeting of shareholders is held.
From top left to bottom right: Bruno Gehrig, Peter Quadri, Gerold Bührer, Volker Bremkamp, Pierfranco Riva, Georges Muller, Franziska Tschudi, Paul Embrechts, Rudolf Kellenberger
Swiss Life Group . Review of Operations 2005 . Corporate Executive Board
Swiss Life Group . Review of Operations 2005 . Embedded Value
ANAV of Swiss Life Holding1,2) 1 813 1 516 of which cost of capital –1 864 –1 480 1) Adjusted Net Asset Value 2) Equity of Swiss Life Holding less book value of Swiss Life/Rentenanstalt 3) Present Value of Future Profits
In 2005 Swiss Life consolidated the gains achieved in the ALM process at country level and developed them further. The ALM and risk budgeting processes are an integral part of the Swiss Life Group’s medium-term planning.
Net cash flows from financial instruments at fair value through profit or loss –1 330 –2 321 financial assets available for sale 4 007 –2 704 financial assets held to maturity –77 –230 investment property 139 –204 deferred acquisition and origination costs –572 –576 reinsurance assets 7 248 deposits under investment contracts with discretionary participation 2 797 1 420 investment contracts and deposits at amortised cost 105 –57 other operating assets and liabilities 568 –310
Disposals of subsidiaries, net of cash and cash equivalents 30 18 –142
Insurance liabilities and liabilities from investment contracts with discretionary participation features
– The fair value of investment contracts and deposits, which are carried at amortised cost, is estimated using discounted cash flow calculations based upon interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. The fair values of demand or savings deposits are equal to the amount payable on demand or the carrying amount. The carrying amounts of variable-rate deposits approximate their fair values at the reporting date.
Fair value of non-financial instruments 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 can be made, based on external evidence. Future expenditure that will improve the property is not included in the fair value. The riskadjusted 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.
The mortality and annuity tables used generally reflect the experience in the market or reflect own company records. Recent historical mortality experience as well as expected future trends in mortality are reflected. For longevity, the trend of the recent decades is considered.
Financial assets available for sale 76 946 1 023 11 0 –2 77 978
Insurance benefits, claims and claim settlement costs ceded to reinsurers 22 117 68 4 5 423 –1 638
Strategic asset allocation Strategic asset allocation is the first major task of the ALM process and aims at minimising risk exposure while optimising the returns on the asset portfolio for the risk defined within the risk budgeting process, taking into account all known constraints.
Insurance liabilities with interest rate risk borne by the policyholder 1 531 1 205
Financial assets held to maturity 42 4 203 11 – – – 4 256
Insurance payables and other payables –1 994 –1 593 –854 –3 –11 – –4 455
Investment contracts with discretionary participation –597 –23 009 –43 –3 – – –23 652
The Group’s insurance entities neither generally accept nor generally deny insurance coverage to applicants, but ensure that all the insurance risks are identified and thoroughly assessed, and that the insurance premiums accurately reflect the costs for the risk taken among other things. The amount of risk taken must be in line with the Group’s strategy and risk policy. They must also meet the profitability targets.
Life benefits insured – per type of insurance for the year ended 31 December 2005 – individual life
Non-life The Swiss Life Group has non-life operations in France and Belgium covering risks associated with accident and health (disability) as well as property and casualty.
As far as non-life insurance is concerned, the reinsurance arrangement includes mostly non- proportional coverage on any single risk and/or event, adapted to the specifications of each contract. This includes excess, stop-loss and catastrophe coverage. Facultative reinsurance is also written for protection against specific risks.
At 31 December 2005, if the longevity improvement parameter had increased by 10%, the insurance liabilities would have been CHF 200 million higher in Switzerland and CHF 37 million higher in the other countries.
Interest rate risk The overall limit at Banca del Gottardo for the interest risk exposure of structural positions is set by the board of directors of Banca del Gottardo at 6% of the bank’s eligible equity. In order to respect this limit and for bank management purposes, the ALCO Committee has the authority to undertake hedging transactions to minimise the impact of adverse interest rate movement on such positions.
The counterparty risk assumed with regard to banks and financial institutions is monitored separately. A line of credit is granted to each group of related counterparties, which is subsequently allocated according to individual operational needs. Lines of credit are granted and renewed periodically based on a system of approval. For banking counterparties, an IT-based internal rating system has been developed. Limits, particularly for forward transactions, are calculated according to market prices. The add-on parameters used are set cautiously. To reduce exposure to over-the-counter positions, the bank concludes related netting contracts (ISDA). Nearly all financial counterparties (mainly banks) are domiciled in OECD countries (mostly in Western Europe). The bank manages a portfolio of fixed-income securities, which exposes it to counterparty risks. Investments in the capital market and the euro commercial paper market (euro commercial paper, certificates of deposit) are subject to specific limits with regard to maturity, liquidity, minimum/average ratings and exposure to the economic sector.
In October and November 2005 the Group entered into interest rate swaps to hedge the available-for-sale fixed-rate bond portfolios in USD and EUR against changes in the fair value attributable to interest rate risk. The fair value of the bond portfolios as at 31 December 2005 was CHF 5.6 billion.
Assets pledged that can be sold or repledged by transferee 813 313 – – 813 313
Transfers from/to investment property 16 –17 –55 – – – –72
Reclassification of computer software from property and equipment – – – – – 205 205
In May 2005, the remaining outstanding GEMMS matured and were repaid.
Total gross claims under non-life insurance contracts 1 386 2 083 24 Insurance Liabilities and Reinsurance Assets (continued)
Amounts recognised in the consolidated balance sheet as at 31 December
Number of employees The Group had 8979 full time equivalents as at 31 December 2005 (2004: 9419).
Due to the reduction in par value of CHF 4 per registered SLH share in 2005, an amount of CHF 9 million was credited to share premium in respect of treasury shares.
Issuance of shares in form of MCS (adjustment) – 397 078
Impairment losses transferred to the income statement 9 103 – – 103
In December 2004, the Swiss Life Group sold its UK life business. The life insurance business in the UK was reported within the insurance segment. The sales price amounted to CHF 401 million. The cash-related part thereof amounted to GBP 128 million and was received in March 2005. The realised loss on the sale amounted to CHF 122 million. The guarantees related to this transaction are described in note 36. The UK life business contributed CHF 58 million in net income to the Group result for the period from 1 January 2004 to
Operating lease commitments The Group has entered into various operating leases as a lessee. Rental expenses recognised in income for these items totalled CHF 72 million for the year ending 31 December 2005 (2004: CHF 68 million). Minimum lease payments totalled CHF 73 million in 2005 (2004: CHF 68 million), while contingent rents totalled CHF 0.03 million in 2005 (2004: CHF 0.05 million). Sublease payments received in 2005 amounted to CHF 1 million (2004: nil).
Swiss Life Group . Financial Statements 2005 . Notes to the Consolidated Financial Statements 40 Changes in Accounting Policies (continued)
Financial assets at fair value through profit or loss 39 39
Derivatives designated and accounted for as hedging instruments previously carried under other liabilities totalling CHF 49 million and trading derivatives totalling CHF 744 million were reclassified to derivatives. Derivatives embedded in separate account contracts totalling CHF 214 million were reclassified to derivatives.
Mainly due to the designation of financial assets as financial assets at fair value through profit or loss, the financial result increased by CHF 120 million.
Renum, München – from 18.10.2004 – – full EUR 250 until 19.01.2005
Swiss Life Immo-Cross Roads, Bruxelles Insurance 100.0% 100.0% full EUR 64
Swiss Life Immo-Techno Center III, Bruxelles – until 01.01.2004 – – full EUR 500
ZELIA, Bruxelles Insurance 100.0% 100.0% full EUR 32 227 1) Segment (IM = Investment Management)
Gotam Umbrella Fund (Lux) Advisory Company (formerly Gottardo Money Market Fund (Lux) Management), Luxembourg Banking 100.0% 100.0% full CHF 200
Supplementary funding of CHF 12 million was necessary to finance the rapid growth of business for the Swiss Life Liechtenstein subsidiary.
Swiss Life Asset Management, Zürich – – – CHF 250 100.0%
In 2005, convertible bonds of CHF 55 000 were converted into 260 SLH shares with a corresponding increase of share capital and share premium.
Own shares In the year under review the companies in the Swiss Life Group purchased a total of 718 685 Swiss Life shares at an average price of CHF 184.90. In the same period, they sold 716 026 shares at an average price of CHF 182.07. As at 31 December 2005, Swiss Life Group had 261 713 own shares.