MARKET RISKS | The market risk arises from fluctuations on the financial markets which influence the value of investments and liabilities. The types of risk significant for Swiss Life primarily include the risk of changes in interest rates, volatile stock markets and fluctuations in foreign exchange rates against the Swiss franc.

Due to the highly volatile financial markets, especially in the fourth quarter of 2008, Swiss Life reduced the consolidated market risk substantially (see chart) in order to minimise potential losses in the current market environment.

The interest rate risk arises from interest rate fluctuations, especially in Swiss francs and euros, that simultaneously affect the value of investments and liabilities (future insurance benefits). The interest rate risk is assessed and steered in the context of asset and liability management. By investing in the appropriate interest-rate-sensitive instruments, and in particular bonds, companies can reduce their interest rate risk. The process also involves the harmonisation of the maturity structures and cash flow patterns of investments and liabilities. In the year under review, Swiss Life kept the sensitivity of economic net worth to interest rate movements low. The duration gap, which measures the different trends in the value of investments and liabilities due to interest rate changes, came to 1.1% on 31 December 2008. This means that with an interest rate increase of 100 basis points the economic net worth would rise by 1.1% of the present value of the liabilities.

Another component of interest rate risk is the change in the spread between corporate borrowing rates against the rates on government bonds. This credit spread widened massively in the third and fourth quarters of 2008, producing a loss in value for corporate bonds. The Investment Management division is tracking these issues closely and closing out positions or hedging them against default where necessary.

The risk on equities arises from fluctuations in international equity markets and price trends for investments similar to equity such as “private equity” holdings and hedge funds. The individual business units steer this risk by setting investment limits governed by the risk capital limits from the risk budgeting process. The Swiss Life Group’s net equity exposure after hedging was sharply reduced in the course of the year under review and stood at 0.8% at the end of 2008 (fair value basis). The risk on the hedge fund portfolio was also significantly lowered by redemptions and hedging operations.

The currency risk comprises fluctuations in foreign currencies against the Swiss franc and is restricted by exchange rate hedges. Foreign currency outstandings on investment positions were strongly reduced in the course of 2008, falling to 0.8% by 31 December 2008 (fair value basis).