The Group’s core business is life insurance and pensions. A life insurance and pensions contract represents a long-term promise to the policyholder. To fulfil its future payment obligations to the policyholders, the insurance entities of the Group must be financially sound over an extended period of time. The ability to remain financially healthy and strong depends on a number of risk factors. The Group risk map can be broadly divided into financial, insurance, strategic and operational risks. All of these risk categories can impact the financial stability of the Group.

Risks must be identified, assessed, managed and monitored locally. Half-yearly reports covering interest rate risk, equity price risk, currency risk, credit risk and insurance risk are prepared on a consolidated basis. Additionally, market risks and financial risk limits are reported on a monthly basis for the largest operations in the insurance business. Strategic and operational risks are assessed and reported on an annual basis.

The risk appetite for the largest operations in the insurance business is defined with the help of local risk budgets which are used as a basis for the determination of the individual risk limits. These limits are used as a framework for the asset and liability management process, the objective of which is to define a strategic asset allocation and distribution scheme for all stakeholders.

Risk management functions are fulfilled at several levels by different bodies within the Swiss Life Group, such as the Investment and Risk Committee at the level of the Board of Directors of the Swiss Life Group and the Group Risk Committee at the level of the Corporate Executive Board of the Swiss Life Group. The risk management functions at the level of the individual operations of the Swiss Life Group are organised accordingly.

Group risk management produces a consolidated risk report which consolidates the main elements of the risk management of the Swiss Life Group’s operations.

The information below focuses first on the risk budgeting and asset and liability management process before covering in an extensive way the principal risk categories faced by the Swiss Life Group.


5.1 Contracts for the account and risk of the Swiss Life Group’s customers

The assets relating to certain life insurance and investment contracts are managed for the account and risk of the Swiss Life Group’s customers (separate account/unit-linked contracts, private placement life insurance). These assets are segregated and managed to meet specific investment objectives of the policyholders. These assets back the insurance liabilities and the financial liabilities arising from these contracts. The fair values of the liabilities reflect the fair values of the assets. Certain contracts with unit-linking features contain guaranteed minimum insurance benefits. The liabilities relating to this part are included in the insurance liabilities.

The assets and liabilities from separate account/unit-linked contracts and private placement life insurance are generally excluded from the Swiss Life Group’s financial risk management considerations to the extent that the risks are borne by the customers.

Assets for the account and risk of the Swiss Life Group’s customers

In CHF millionNotes  31.12.200831.12.2007
Cash and cash equivalents  1 2871 818
Derivatives10  660
Financial assets at fair value through profit or loss 
Debt instruments11  3 1202 825
Equity securities11  8051 794
Investment fund units11  5 7237 028
Other11  1 4842 049
Total assets for the account and risk of the Swiss Life Group's customers  12 42515 574


Liabilities for the account and risk of the Swiss Life Group’s customers

In CHF millionNotes  31.12.200831.12.2007
Financial liabilities at fair value through profit or loss11  9 72711 042
Derivatives10  0
Investment contracts20  1 7253 567
Insurance liabilities23  952931
Total liabilities for the account and risk of the Swiss Life Group's customers  12 40415 540


The financial result for the years ended 31 December for the account and risk of the Swiss Life Group and the Swiss Life Group’s customers was as follows:

In CHF million  200820072008200720082007
 
For the
account and
risk of the
Swiss Life
Group

For the
account and
risk of the
Swiss Life
Group
For the
account and
risk of the
Swiss Life
Group's
customers
For the
account and
risk of the
Swiss Life
Group's
customers





Total





Total
Investment income  4 5634 87804 5634 878
Net gains/losses on financial assets  –6 010–5–6 010–5
Net gains/losses on financial instruments at fair value through profit or loss (FVPL)   1 790 –229 63 50 1 853 –179
Net gains/losses on investment property  194229194229
Share of results of associates  –14912–14912
Financial result  3884 88563504514 935
 
The financial result for the account and risk of the Swiss Life Group's customers consists of        
net gains/losses on financial assets at FVPL  –3 060722
net gains/losses on financial liabilities at FVPL  3 123–672



5.2 Risk budgeting and limit setting

The risk capacity and the risk appetite of the Swiss Life Group’s insurance operations are primarily defined based on economic principles. Consequently, the market values or best estimates of both the assets and the liabilities are obtained by discounting the cash flows generated by these assets and liabilities with an appropriate discount rate. The risk capital available is defined as the positive difference of the economic value of the assets compared to liabilities. The available risk capital is used to cover the different risks to which the Swiss Life Group’s insurance operations are exposed by the nature of their activities. The final decision on the risk appetite for each insurance operation rests with the Corporate Executive Board.

Risk and exposure limits are defined to control and limit the exposure to these risks. The limit systems and processes are set in a way that the sublimits are not utilised simultaneously in full.

The main focus of these limits is on overall market risk, credit risk and, more specifically, on interest rate risk as well as on currency risk and equity price risk.


5.3 Asset and liability management (ALM)

The main objective of the ALM process is to ensure that the Swiss Life Group’s insurance operations can meet their commitments to policyholders at all times while also adequately compensating shareholders for making risk capital available. Based on the economic principles of risk management and on the risk appetite definition applied in the risk budgeting process, ALM comprises the following main activities: strategic asset allocation and distribution policy with regard to surplus generated on investments.

The ALM process is centrally coordinated at Group level by means of local asset and liability management committees with representatives from local senior management and representatives from Group level. The local units are in charge of implementing the decisions. The process requires the involvement of investment management, finance, actuarial and risk functions.

Compliance with external constraints | Aspects other than the purely economic view must also be considered in the ALM process, such as regulatory requirements including statutory minimum distribution ratios (“legal quote”), funding ratios, solvency, local accounting rules and International Financial Reporting Standards, liquidity requirements and rating targets. Some of these views may lead to results that are not aligned with the economic approach, but nevertheless need to be taken into account.

Depending on the regulatory framework in which the Swiss Life Group’s insurance operations evolve, the asset portfolios might need to be split to reflect the different categories of insurance products. The asset portfolios of the insurance operations in Switzerland have been separated to distinguish between individual life and group life. As a consequence, such separation is also reflected in the ALM process.

Strategic asset allocation | Strategic asset allocation is the first major task of the ALM process and aims at achieving an efficient risk capital allocation, i.e. optimising the returns on the asset portfolio for the available risk capital defined within the risk budgeting process, taking into account all known constraints.

The liabilities are largely predefined in terms of amount and timing of the payments and the associated assumptions are regularly reviewed. The corresponding asset portfolios mainly comprise fixed-income instruments. This way, the impact of interest rate fluctuations and the risk capital consumption are strategically optimised under a risk/return point of view, thus ensuring that the policyholders receive the benefits they were promised. Policyholders benefit from the ensuing investment returns in the form of discretionary participation, while shareholders benefit from an increase in the value of their investment in the Swiss Life Group.

The strategic asset allocation is therefore determined on the basis of the individual existing commitments and the risk capacity of the Swiss Life Group’s insurance operations. The strategic asset allocation is reviewed at least once a year and adjusted if necessary.

The ALM process has been applied in all relevant insurance operations of the Swiss Life Group.

Distribution policy | The distribution policy seeks to harmonise the interests of the different groups of stakeholders. Policyholders favour a guaranteed minimum interest rate coupled with regular and appropriate discretionary participation whereas shareholders place greater emphasis on returns commensurate with the level of risk they are exposed to. Internal guidelines have been developed which define the policies for the allocation of policyholder participation with regard to annual bonus and terminal bonus. The focus of the Swiss Life Group lies on the sustainability of the business model and should balance the policyholders’ and shareholders’ expectations.

External constraints must be considered in the definition of the distribution policy. Important elements which influence such policy are minimum guaranteed interest rates and the statutory minimum distribution ratio (“legal quote”), which strongly depend on the regulatory environments of the Swiss Life Group’s insurance operations.

Product design | Product design defines which guarantees and benefits are built into a specific product to respond to the demand from and expectations of customers. The actuarial bases used for this purpose should ensure that each individual product generates a sufficient contribution margin. To ensure that the Group’s principles are observed, guidelines on product management and underwriting have been introduced to harmonise the local guidelines and to ensure that they are in line with the guidelines of the Group. As the Group’s insurance entities operate in a number of different countries, the local regulatory constraints may have an impact on the business unit organisation and product range. These constraints must always be obeyed.


5.4 Financial risk management objectives and policies

The Group is exposed to financial risk through its financial assets, financial liabilities (primarily investment contracts and borrowings), reinsurance assets and insurance liabilities. In particular, the key financial risk is that the proceeds from the financial assets are not sufficient to fund the obligations arising from the insurance and investment contracts, as well as from borrowings and other liabilities. The most important components of the financial risk are interest rate risk, equity price risk, credit risk, currency risk and liquidity risk.

The risk budgeting and limit setting described above ensure that interest rate risk, equity price risk, currency risk and credit risk remain under control. The corresponding market risk capital, interest rate risk capital, currency risk capital and credit risk capital limits as well as exposure limits for currencies and net equity for each relevant insurance operation are defined based on the risk appetite. These limits are assessed and reported on a regular basis.

Insurance liabilities with embedded derivatives not separated and fair valued

In CHF million  31.12.200831.12.2007
Interest rate risk  84 74485 583
Total insurance liabilities with embedded derivatives not separated and fair valued  84 74485 583
Other insurance liabilities  5 3287 978
Insurance liabilities for the account and risk of the Swiss Life Group's customers  952931
Total insurance liabilities  91 02494 492


Hedging | The Swiss Life Group uses derivatives within the strict limits set by the applicable insurance legislation and by internal guidelines. Derivatives are primarily used to manage the exposure to equity securities, interest rates, counterparties and foreign exchange rates. The main instruments include index futures and option structures in stock markets, bond futures and swaps in order to manage duration, currency forwards in order to manage currency risk and credit default swaps in order to manage counterparty risk. Within certain limits, derivatives are used to enhance returns on the existing portfolio. The types of derivatives generally permitted for usage within the Swiss Life Group as well as the list of allowed over-the-counter trading partners have been approved by the Group Chief Risk Officer and Group Chief Investment Officer.

Hedging strategies involve hedge accounting as well as “economic hedging”. “Economic hedges” comprise financial assets and financial liabilities which share a risk with derivatives and give rise to opposite changes in fair value that tend to offset each other.

Interest rate risk relating to financial instruments and insurance contracts | The Group’s primary interest rate exposure is to contracts with guaranteed benefits and the risk that the interest rates of the financial assets purchased with the consideration received from the contract holders is insufficient to fund the guaranteed benefits and expected discretionary participation payable to them.

Interest-SENSITIVE insurance liabilities

In CHF million  31.12.200831.12.2007
 
Interest-sensitive insurance liabilities 
Minimum guaranteed interest rate 0 – < 2%  4 9922 193
Minimum guaranteed interest rate 2 – < 3%  39 20238 254
Minimum guaranteed interest rate 3 – < 4%  30 15233 423
Minimum guaranteed interest rate 4 – < 5%  10 36911 672
Minimum guaranteed interest rate 5 – < 6%  2031
Minimum guaranteed interest rate 6 – 8%  910
Minimum guaranteed interest rate > 8%  0
Total interest-sensitive insurance liabilities  84 74485 583
Non-interest-sensitive insurance liabilities  5 3287 978
Insurance liabilities for the account and risk of the Swiss Life Group's customers  952931
Total insurance liabilities  91 02494 492


The insurance liabilities with minimum guaranteed interest rates between 0% and 4% are primarily denominated in Swiss francs and euros, and the insurance liabilities with minimum guaranteed interest rates between 4% and 8% are primarily denominated in euros.

Most life insurance products with a savings component and investment contracts are subject to minimum guaranteed interest rates. The guaranteed rate differs according to the type of contract.

In addition to these fixed and guaranteed payments which are exposed to interest rate risk, contractual rights exist for certain contracts to receive additional benefits whose amount and/or timing is contractually at the discretion of the issuer. The determination of the discretionary participation is highly dependent on future investment returns.

The Group manages interest rate risk by managing the interest rate sensitivity of key rate exposures of its investment portfolio against the interest sensitivity of key rate exposures of liabilities issued. The key rate exposure of the liabilities is determined by projecting the expected cash flows from the contracts using best estimates of mortality, disability, expenses, surrender and exercise of policyholder options. The ALM process defines the strategic asset allocation optimising the net interest rate sensitivity of the investment and liability portfolios. To the extent that this is not practicable, swap contracts and other instruments are used to hedge interest rate risk. In certain markets receiver swaptions are used to hedge the risk of interest rates decreasing below guaranteed interest rates. Payer swaptions are used to hedge the risk of fair value changes of interest-sensitive financial assets. Strategically, a minimum interest rate risk will remain, since a perfect interest rate hedge can either not be achieved or would not be targeted.

Exposure to interest rate risk

  Earlier of contractual repricing or maturity dates

In CHF million
 




Up to 1 year





1–5 years





5–10 years




More than
10 years
For the
account and
risk of the
Swiss Life
Group's
customers





Total
 
Carrying amounts as at 31 December 2008 
Financial assets 
Fixed-rate  8 06611 69124 75732 42276 936
Variable-rate  9 7344 68214 416
Non-interest-bearing  8 0332534572 50411 247
Assets for the account and risk of the Swiss Life Group's customers   – – – – 12 425 12 425
Total financial assets  25 83316 62625 21434 92612 425115 024
 
Financial liabilities 
Fixed-rate  –1 086–4 850–7 933–1 046–14 915
Variable-rate  –2 902–796–3 698
Non-interest-bearing  –1 903–1530–35–2 091
Liabilities for the account and risk of the Swiss Life Group's customers   – – – – –11 452 –11 452
Total financial liabilities  –5 891–5 799–7 933–1 081–11 452–32 156
 
Balance sheet interest rate sensitivity gap  19 94210 82717 28133 84597382 868


Carrying amounts as at 31 December 2007 
Total financial assets  21 57731 93122 87529 47615 574121 433
Total financial liabilities  –9 464–2 364–6 361–1 342–14 609–34 140
Balance sheet interest rate sensitivity gap  12 11329 56716 51428 13496587 293


In addition to the strategic optimisation of the net interest rate risk exposure at an economic level, the Group has designated a portion of assets to be held to maturity and matching the maturity profile of the associated liabilities to minimise the interest risk arising from these positions. The assets to be held to maturity fund the insurance and investment contracts that will not be surrendered or will not require the payment of a death benefit.

In Switzerland, the Swiss occupational pensions (BVG) segment of the group life insurance business is subject to guaranteed minimum interest and annuity conversion rates. The guaranteed interest rate for the mandatory BVG business stood at 2.75% in 2008 and was lowered to 2% with effect from 2009. For 2009, the guaranteed annuity conversion rate for the mandatory BVG business is set at 7.05% for men and 7.00% for women. Based on a recent amendment of the legislation and subject to a referendum, the guaranteed annuity conversion rate will be reduced to 6.40% for men and women within five years.

Regarding interest rate risk exposure existing on contracts with guaranteed benefits where the risk is that the interest rates earned on the assets are insufficient to fund the guaranteed payments, puttable bonds are used to counter the impact of falling interest rates. To increase the convexity of interest-rate-sensitive assets, which is generally lower than the convexity of the insurance liabilities, receiver bonds are part of the asset portfolios in certain countries.

In certain businesses, a large part of the impact of interest rate changes is for the account and risk of the policyholders based on the specific profit-sharing systems.

Equity price risk | A decline in the equity market led in 2008, and may lead in the future, to a further reduction of the Swiss Life Group’s realised and unrealised gains/losses, which also negatively affects the Swiss Life Group’s results of operations and financial condition.

Hedges in place with respect to the Swiss Life Group’s equity investments are designed to reduce the exposure to declines in equity values but would not prevent an impairment loss in the event that the impairment criteria were met.

A portion of Swiss Life’s investment portfolio comprises investments in funds which hold securities issued by non-public companies (private equity). These investments may be illiquid or may only be disposed of over time or at a loss, and they may not produce adequate returns or capital gains. If Swiss Life were required to liquidate some or all of the investments in its private equity portfolio, the proceeds of such liquidation may be significantly less than the amount paid for, or the carrying amount of, such investments.

Swiss Life’s investment portfolios also include investments in hedge funds. The liquidity of such investments can vary according to market conditions, and the investment styles of such hedge funds could amplify any factors affecting the performance of any particular class of funds or investments.

The Group monitors the investment portfolio risks by establishing mandatory risk limits. The investment portfolio is adequately diversified and there was no investment exceeding 10% of shareholders’ equity as at 31 December 2008 (2007: none).

Credit risk | The Group is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the Group is exposed to credit risk are:
  • Counterparty risk with respect to bonds purchased

  • Counterparty risk with respect to loans and mortgages granted

  • Counterparty risk with respect to money market and cash positions

  • Counterparty risk with respect to derivative transactions

  • Reinsurance share of insurance liabilities

  • Amounts due from reinsurers in respect of claims already paid

  • Amounts due from insurance contract holders

  • Amounts due from insurance intermediaries

To reduce the credit exposure relating to derivatives a collateral management process has been established. Contractually all outstanding positions must be fully collateralised if they reach a very low agreed minimum transfer amount. The collateral is called at least weekly, but in times of turbulent markets the frequency is increased. As leverage is not permitted, certain coverage rules apply with regard to cash or long positions. Counterparties for derivative transactions, over-the-counter and exchange-traded, have to be approved by both the Group Chief Risk Officer and the Group Chief Investment Officer. The minimum rating for a counterparty is A– (Standard & Poor’s or equivalent) for the Swiss Life Group’s insurance operations. During the ongoing period of market turmoil reliance on ratings is of limited value; therefore an additional qualitative and quantitative counterparty monitoring process has been established to allow for immediate proactive measures.

Counterpary risk is managed through the holding of credit default swaps or credit default swap indices. A credit default swap provides insurance to the debt holder against a default of the debt issuer. It is traded over-the-counter and underlies itself the collateral management process described above. The credit default swap index is a hedge on credit risk of a basket of counterparties and is an exchange-traded derivative.

The Group is also exposed to credit risk associated with reinsurance recoverables. As a consequence, the financial strength of reinsurers is monitored. The creditworthiness of reinsurers is considered on an annual basis by reviewing their financial strength prior to any contract being signed. The general policy of the Swiss Life Group is to reinsure its insurance risks only with counterparties rated A– or above (Standard & Poor’s or equivalent). In exceptional cases, reinsurers with a lower rating may be considered. Additionally, the Group holds substantial collateral under related reinsurance agreements in the form of deposited funds and securities.

No single reinsurer is a material reinsurer to the Group, nor is the Group’s business substantially dependent upon one single reinsurer.

For fixed-income assets the total exposure per counterparty is aggregated and reported to the Group Risk Committee. The individual operations maintain records of the payment history for the significant contract holders with whom they conduct regular business. Ratings and single positions above a certain level with regard to fixed-income assets are reported to management on a regular basis. The exposure to individual counterparties is also managed by other mechanisms such as the right to offset where counterparties are both debtors and creditors of the Group. In addition, limits regarding single counterparty exposure are in place which depend on the rating and amount of exposure in relation to total investments. Information reported to management includes assessment of bad debts. Where there exists a certain exposure to individual policyholders, or homogenous groups of policyholders, a financial analysis equivalent to that conducted for reinsurers is carried out.

The non-rated loans primarily comprise mortgages and policy loans. In certain countries, specific additional guidelines and rules have been defined locally to monitor credit risk. Such guidelines cover investments in fixed-income securities whereby the average rating of the fixed-income portfolio (calculated by weighting in accordance with the Standard & Poor’s method) must be AA– or higher (Standard & Poor’s or equivalent). Minimum and maximum thresholds apply with regard to permitted investments in non-government bonds. For these investments additional exposure limits are in place. For certain businesses, credit risk is monitored and controlled with a risk limit framework whereby maximum limits are reviewed and at least approved annually. The majority of the bond portfolio is invested in government bonds (including supranational and sovereigns) and in bonds issued by the financial sector (generally covered by collateral or government guarantees).

Maximum exposure to credit risk

In CHF million  31.12.0831.12.0731.12.0831.12.0731.12.0831.12.07
 
For the
account and
risk of the
Swiss Life
Group

For the
account and
risk of the
Swiss Life
Group
For the
account and
risk of the
Swiss Life
Group's
customers
For the
account and
risk of the
Swiss Life
Group's
customers





Total





Total
 
Debt instruments 
Debt instruments at fair value through profit or loss  3 2271 8143 1202 8256 3474 639
Debt instruments available for sale  38 27354 77138 27354 771
Loans and receivables  37 02924 80437 02924 804
Financial assets held to maturity  7 1593 6247 1593 624
Total debt instruments  85 68885 0133 1202 82588 80887 838
 
Other assets 
Cash and cash equivalents  8 1212 7371 2871 8189 4084 555
Derivatives  1 3434036601 349463
Reinsurance assets  447975447975
Total other assets  9 9114 1151 2931 87811 2045 993
 
Unrecognised items 
Financial guarantees  446152446152
Loan commitments  118164118164
Total unrecognised items  564316564316
 
Total exposure to credit risk  96 16389 4444 4134 703100 57694 147


Exposure to credit risk of debt instruments


In CHF million
  At fair value
through
profit or loss

Available
for sale

Loans and
receivables

Held to
maturity

Pledged as
collateral


Total
 
Categories by counterparty as at 31 December 2008 
Governments  36420 0543 8945 56629 878
Sovereign/supranational  1 4521 452
Corporates  2 69911 71417 9541 59333 960
Collateralised debt  9477911 31112 184
Other debt  705 7262 4188 214
Total  3 22738 27337 0297 15985 688


Categories by counterparty as at 31 December 2007 
Governments  15622 8015 8062 08130 844
Sovereign/supranational  103 9461334 089
Corporates  1 30419 6964 64174326 384
Collateralised debt  3188 30712 18266621 473
Other debt  26212 17512 223
Total  1 81454 77124 8043 62485 013


Exposure to credit risk of debt instruments


In CHF million
 
AAA

AA

A

BBB
Below BBB
or not rated
Past due or
impaired

Total
 
Credit rating by counterparty as at 31 December 2008         
Governments  26 0622 896853491829 878
Sovereign/supranational  823208132371 452
Corporates  4 2575 29813 1756 0334 99520233 960
Collateralised debt  5 62273442436 05714512 184
Other debt  4 0818379251232 227218 214
Total  40 0229 18615 3177 26113 53436885 688
 
Credit rating by counterparty as at 31 December 2007         
Governments  23 9955 3101 2963620730 844
Sovereign/supranational  2 5084616942861404 089
Corporates  3 4277 6257 6724 0603 5524826 384
Collateralised debt  12 3971 8552331736 60521021 473
Other debt  13121282 0432 223
Total  42 45815 2729 9234 55512 54725885 013


Financial assets past due (not impaired)


In CHF million
  Up to
3 months

3–6 months

6–12 months
More than
1 year

Total
 
Age analysis by counterparty as at 31 December 2008 
Corporates 
Collateralised debt  231033
Total  231033
Fair value of collateral and credit enhancements  14


Age analysis by counterparty as at 31 December 2007 
Corporates 
Collateralised debt  63041353
Total  63041353
Fair value of collateral and credit enhancements  67


Financial assets individually determined as impaired

In CHF million  31.12.0831.12.0731.12.0831.12.0731.12.0831.12.07
  Gross
amount
Gross
amount
Impairment
losses
Impairment
losses
Carrying
amount
Carrying
amount
 
Analysis by counterparty 
Governments  00
Corporates  989700–787–65220248
Collateralised debt  146205–34–48112157
Other debt  24–321
Total  1 159905–824–700335205
Fair value of collateral and credit enhancements  109217


Financial assets individually determined as impaired


In CHF million
 

Balance as at
1 January

Impairment
losses
recognised


Write-offs
and disposals
Effect of
classification
as assets
held for sale
Changes
from
discontinued
operations
Foreign
currency
translation
differences


Balance as at
31 December
 
Impairment loss allowance by counterparty 2008 
Governments  000
Corporates  652149–7–7787
Collateralised debt  48–12–1–134
Other debt  3003
Total  700140–8–8824
 
Impairment loss allowance by counterparty 2007 
Corporates  165629–20–82–411652
Collateralised debt  682–3–234048
Other debt  000–25250
Total  233631–23–130–121700


Exposure to credit risk OF OTHER ASSETS


In CHF million
 
AAA

AA

A

BBB
Below BBB
or not rated

Total
 
Credit rating as at 31 December 2008 
Cash and cash equivalents  2 5709264 42961908 121
Derivatives  31 20313611 343
Reinsurance assets  39453447
Total  2 5732 5234 56562449 911
of which collateralised  4


Credit rating as at 31 December 2007 
Cash and cash equivalents  1 6127253013962 737
Derivatives  742418422403
Reinsurance assets  2991630975
Total  1 7151 88238551284 115


Exposure to credit risk OF UnRECOGNISED ITEMS


In CHF million
 
AAA

AA

A

BBB
Below BBB
or not rated

Total
 
Credit rating as at 31 December 2008 
Financial guarantees  10263710363446
Loan commitments  118118
Total  102637103181564
of which collateralised  75


Credit rating as at 31 December 2007 
Financial guarantees  7181152
Loan commitments  164164
Total  71245316
of which collateralised  114


Currency risk | The Swiss Life Group operates internationally and its exposures to currency risk primarily arise with respect to the euro, US dollar and British pound. Most of the investments and liabilities are denominated in Swiss francs, euros and US dollars, the values of which are subject to exchange rate fluctuations. The Group operates with various functional currencies (predominantly Swiss francs and euros). Its financial position and earnings could be significantly affected by a weakening of said foreign currencies against the Swiss franc.

The Swiss Life Group’s European insurance and investment operations (excluding Switzerland) generally invest in assets denominated in the same currency as their insurance and investment liabilities, which mitigates the currency risk for these operations. As a result, currency risk arises from recognised assets and liabilities denominated in other currencies and net investments in foreign operations. Although the Swiss Life Group actively engages in currency management to reduce the effect of exchange rate fluctuations on its assets and liabilities, particularly by hedging against the risk of such movements in relation to part of its investments denominated in euros and in US dollars, significant movements in exchange rates could adversely affect the Swiss Life Group’s earnings and financial position, including the value of its investment portfolio. Foreign exchange exposure is hedged to a large extent in line with the strategic asset allocation. The Group’s hedging arrangements are directed at covering its exposure from an economic perspective. The instruments which the Swiss Life Group uses to hedge exposure may not be perfectly correlated to the related assets, so the Group will still be exposed to losses if the value of the hedge and the value of the underlying asset or liability do not correspond appropriately.

The Swiss Life Group is further required to bear expenses and costs in establishing such hedging arrangements.

Exposure to currency risk


In CHF million
 




CHF





EUR





USD





GBP





Other
For the
account and
risk of the
Swiss Life
Group's
customers





Total
 
Carrying amounts as at 31 December 2008 
Monetary assets 
Cash and cash equivalents  6 4431 35822152471 2879 408
Insurance and other receivables  8412 75133114133 950
Derivatives  2747546272161 349
Debt instruments at fair value through profit or loss  1643 0633 1206 347
Debt instruments available for sale  15 42321 3111 4508938 273
Loans  8 00718 3866 576268433 079
Financial assets held to maturity  7 1597 159
Reinsurance assets  29418447
Total monetary assets  30 90955 1939 1242081654 413100 012
 
Monetary liabilities 
Insurance and other payables  –1 802–1 621–1–29–12–3 465
Derivatives  –108–217–180–3–346
Debt instruments at fair value through profit or loss  –9 727–9 727
Investment contracts  –1 032–8 331–45–2–1 725–11 135
Deposits  –2 165–1 115–200–3 282
Borrowings  –414–2 709–3 123
Insurance liabilities  –61 099–28 835–73–650–952–91 024
Policyholder participation liabilities  –713–7090–1 422
Total monetary liabilities  –67 333–43 537–139–96–15–12 404–123 524
 
Balance sheet currency gap  –36 42411 6568 985112150–7 991–23 512
 
Carrying amounts as at 31 December 2007 
Total monetary assets  28 07154 8515 1561798714 70393 831
Total monetary liabilities  –68 381–47 394–201–105–14–15 540–131 635
Balance sheet currency gap  –40 3107 4574 95574857–10 837–37 804


Due to the limitations of the Swiss capital market with regard to liquidity, investments in Switzerland are also made in currencies other than the Swiss franc. The balance sheet currency gap is to a large extent hedged on an economic basis using foreign currency derivatives. In the other countries, the assets are normally denominated in euros, which is the same currency as the insurance liabilities.

Liquidity risk | Liquidity risk is the risk that not enough cash resources may be available to pay obligations when due (primarily obligations arising from the insurance business and debt) at a reasonable cost. The Swiss Life Group is exposed to liquidity risk which primarily arises on calls on its cash resources from claims, amounts payable at maturity and surrenders arising from insurance and investment contracts. The Swiss Life Group faces the risk of not being able to refinance its debt obligations due to unexpected long-term market disruptions.

At operational level, rolling forecasts are in place to address situational liquidity risk, which primarily arises on unexpected calls on cash resources from claims, amounts payable at maturity and surrenders arising from insurance and investment contracts. The investment portfolio of the Swiss Life Group consists to a large extent of liquid assets, which can be sold at any time. To overcome unexpected liquidity shortfalls at times asset disposals are not desired, repurchase agreements are used to ensure short-term refinancing at minimal cost.

Liquidity risk is considered in the strategic asset allocation. At a strategic level, the Swiss Life Group holds sufficient liquidity and uses proactive debt maturity planning to ensure full financial flexibility and efficient liquidity management.

The liquidity analysis of financial liabilities and commitments is based on undiscounted cash flows by remaining contractual maturities, whereas insurance and policyholder participation liabilities are analysed by estimated timing of net cash outflows. The analysis is made for amounts for the account and risk of the Swiss Life Group.

Exposure to liquidity risk as at 31 December 2008

  Cash flows

In CHF million
  Carrying
amount

Up to 1 month

1–3 months

3–12 months

1–5 years
More than
5 years
 
Financial liabilities 
Insurance and other payables  3 4656691142 5601638
Derivatives  34633481629119
Financial liabilities at fair value through profit or loss  1 0781 254
Investment contracts with discretionary participation  9 05530522832 1186 572
Investment contracts without discretionary participation  3553413917237
Deposits  3 2826841 980654576
Borrowings  3 1237232252 0372 011
Total financial liabilities  20 7048102456 6035 2359 223
 
Insurance and policyholder participation liabilities 
Insurance liabilities  90 0723142873 3417 99378 137
Policyholder participation liabilities  1 4223213239543316
Total insurance and policyholder participation liabilities  91 4946352903 5808 53678 453
 
Commitments 
Loan commitments  33769
Capital commitments  3821534590
Total commitments  4152294599


Exposure to liquidity risk as at 31 December 2007

  Cash flows

In CHF million
  Carrying
amount

Up to 1 month

1–3 months

3–12 months

1–5 years
More than
5 years
 
Financial liabilities 
Insurance and other payables  3 3502762092 46238123
Derivatives  2130451362222
Financial liabilities at fair value through profit or loss  385385
Investment contracts with discretionary participation  8 901133563192 9465 446
Investment contracts without discretionary participation  439009229751
Deposits  2 6228266894141 431
Borrowings  3 6213276961 8482 164
Total financial liabilities  19 5314943434 7795 9089 137
 
Insurance and policyholder participation liabilities 
Insurance liabilities  93 5612932863 7018 16781 114
Policyholder participation liabilities  3 38847646481 2951 334
Total insurance and policyholder participation liabilities  96 9493403504 3499 46282 448
 
Commitments 
Loan commitments  4011410
Capital commitments  3999820118
Total commitments  43921220128


Current and Non-Current Assets and Liabilities | The table below shows the expected recovery or settlement of assets and liabilities. Assets are classified as current if they are expected to be realised within twelve months after the balance sheet date. Liabilities are classified as current if they are due to be settled within twelve months after the balance sheet date. All other assets and liabilities are classified as non-current.

In CHF million  31.12.0831.12.0731.12.0831.12.0731.12.0831.12.07
  CurrentCurrentNon-currentNon-currentTotalTotal
 
Assets 
Cash and cash equivalents  9 4084 5559 4084 555
Insurance and other receivables  3 8113 8961392563 9504 152
Derivatives  1 275289741741 349463
Assets held for sale  440 468440 468
Financial assets at fair value through profit or loss  11 39714 2615 5195 13816 91619 399
Financial assets available for sale  4 3754 15438 78864 43443 16368 588
Loans  3 1823 92629 89716 72633 07920 652
Financial assets held to maturity  6745596 4853 0657 1593 624
Investment property  12 66312 25212 66312 252
Investments in associates  4377243772
Reinsurance assets  40185246123447975
Property and equipment  802864802864
Intangible assets including intangible insurance assets  4 6513 1514 6513 151
Current income tax assets  111111
Deferred income tax assets  9711897118
Other assets  490265165158655423
Total assets  35 02873 22699 763106 531134 791179 757
 
Liabilities 
Insurance and other payables  3 2973 299168513 4653 350
Derivatives  3011634550346213
Liabilities associated with assets held for sale  37 50237 502
Financial liabilities at fair value through profit or loss  7 7907 7033 0153 72410 80511 427
Investment contracts  59062610 54512 28111 13512 907
Deposits  2 0467741 2361 8483 2822 622
Borrowings  9745372 1493 0843 1233 621
Insurance liabilities  9 51712 06681 50782 42691 02494 492
Policyholder participation liabilities  5714078512 9811 4223 388
Employee benefit liabilities  2 0101 9802 0101 980
Current income tax liabilities  229245229245
Deferred income tax liabilities  648485648485
Provisions  4660475693116
Other liabilities  5097448155775
Total liabilities  25 87063 456102 269108 967128 139172 423



5.5 Insurance risk management objectives and policies

Insurance contracts are contracts under which one party (the insurer) agrees to compensate the other party (the policyholder) if a specified uncertain future event affects the policyholder. 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 risk taken. The amount of risk taken must be in line with the Group’s strategy and risk policy, and must also meet the profitability targets.

Nature of insurance risk | When designing a new product or reviewing an existing one, care has to be taken that the product neither includes systemic risk nor provides incentives for adverse selection. The product should meet the market’s needs. The Swiss Life Group generally favours transparent and simple product design with minimised model risk and a reliable pricing basis with sufficient statistical data available. Insurance risk arises when biometric and demographic trends or administrative costs deviate adversely from expectations and the premium rates agreed with the policyholder. The uncertainty in the estimation of future benefit payments and premium receipts for long-term insurance contracts is due to the unpredictability of long-term changes in overall levels of mortality and disability, for instance. However, there are random fluctuations, such as variability in policyholder behaviour, which cause deviations from the expected outcome of a portfolio. The impact of random fluctuations depends on the extent of diversification within a portfolio of contracts, that is, on the size of the portfolio.

The quantification of life insurance risk is based on a sensitivity analysis. Insurance risk is thus measured as the deviation of (the realisations of) the insurance risk factors from the corresponding best estimate values. Life insurance risk factors include mortality rates, disability rates and longevity, among others.

The nature of insurance risk can be summarised as follows:

Mortality and longevity | Increasing mortality rates result in higher benefits for contracts where death is the insured risk. On the other hand, decreasing mortality rates lead to higher annuity payments (longevity risk). The most significant factors resulting in an increase of longevity are continued improvement in medical science and social conditions.

The BVG business (Swiss occupational plans) is a significant part of the Group’s life insurance business in Switzerland. It is mandatory for salaried persons with an annual income of at least CHF 20 520. It provides benefits in the event of old age, death and disability. Old age insurance is based on the individual’s savings. The savings process comes to an end when the insured person reaches retirement age. For 2009, the guaranteed annuity conversion rate for the mandatory BVG business was set at the rate of 7.05% for men and 7.00% for women. Based on a recent amendment of the legislation and subject to a referendum, the guaranteed annuity conversion rate will be reduced to 6.40% for men and women within five years.

Risk concentration per product category with regard to mortality and longevity is as follows:

Annuities payable per annum by type of annuity – individual life

In CHF million  31.12.200831.12.2007
Life annuities – in payment  562563
Life annuities – deferred  876870
Annuities certain – in payment  2023
Annuities certain – deferred  5159
Disability income and other annuities – in payment  306272
Disability income and other annuities – deferred  7 6798 109
Total individual life  9 4949 896


Annuities payable per annum by type of annuity – group life

In CHF million  31.12.200831.12.2007
Retirement annuities – in payment  540545
Retirement annuities – deferred  486427
Survivors' annuities – in payment  104114
Survivors' annuities – deferred  2 0512 085
Disability income and other annuities – in payment  368450
Disability income and other annuities – deferred  14 04014 511
Total group life  17 58918 132


Life benefits insured by type of insurance – individual life

In CHF million  31.12.200831.12.2007
Pure endowment  2 0172 172
Mixed endowment  49 27553 939
Whole life  443563
Term life  13 85014 241
Universal life  1012
Unit-linked contracts  6 6356 401
Disability lump-sum payment  2832
Other  5 6519 497
Total individual life  77 90986 857


Life benefits insured by type of insurance – group life

In CHF million  31.12.200831.12.2007
Endowment and related  14 05615 621
Term life  85 37587 197
Swiss BVG  135 275132 240
Disability lump-sum payment  739740
Other  2 0293 294
Total group life  237 474239 092


Morbidity and disability | An increase in morbidity results in higher benefits for contracts where disability is the insured risk. The most significant factors which could increase the frequency of such claims are epidemics, such as avian flu, and widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in more claims than expected. Additionally, the termination rate with regard to disability (death or reactivation) has a significant impact on the benefits paid.

Claims arising from the accident and health business primarily cover refunds for medical treatment, daily allowances in the case of sick leave, annuities and long-term medical care. The most significant factors that could increase the overall liabilities in health insurance are the increase in the claim frequency due to an increase in the average age of the insured persons and negative economic and social factors. The insurance liabilities arising from accident and health insurance contracts must consider outstanding claims and claims incurred but not reported (IBNR). A large part of the insurance liabilities arising from these contracts relates to IBNR, and experience shows that health insurance contracts are sensitive to late reporting of claims (both number of claims and amounts).

Embedded Options | The ability of a policyholder to pay reduced or no future premiums under a contract, to terminate the contract completely or to exercise a guaranteed annuity option means that the insurer’s liability is also subject to policyholder behaviour to a certain extent. On the assumption that a certain part of policyholders will make decisions rationally, overall insurance risk can be assumed to be aggravated by such behaviour. For example, it is likely that policyholders whose health has deteriorated significantly will be less inclined to terminate contracts insuring disability or death benefits than those policyholders remaining in good health, thus resulting in an increasing trend in the expected mortality of policyholders, as the portfolio of insurance contracts is reduced due to surrender (adverse selection).

Underwriting strategy | Underwriting is the process of selecting and classifying insurable risks. The underwriting strategy attempts to ensure that the risks underwritten are well diversified in terms of type of risk and level of insured benefits. Life insurance underwriting is performed to ensure that the premiums and the general conditions of the insurance policies are consistent with the risks to be insured. The first step in the underwriting process is to determine which individual risks can be accepted. The second step is to place the accepted risks into groups of roughly equivalent levels of risk. Both processes must be conducted objectively and consistently. The Group sets limits for the acceptance of insurance coverage arising from new and renewal business. Medical selection is part of the Group’s underwriting procedures, whereby premiums are charged to reflect the health condition and family medical history of the applicants. The limits relate to sums at risk, maximum insured losses or present value of premiums at the contract or insured person level. Depending on the type of business and the limit exceeded, the new or renewed contract must be approved by a specific investment and risk committee or senior management. Contracts exceeding the set limits must be tested for profitability according to predefined procedures before approval. Certain contracts which include specific risks relating to derivatives or demographic risk factors for which no reliable data is available must be submitted for approval irrespective of the amount of coverage offered. Insurance coverage exceeding set limits is subject to regular internal reporting requirements. Additionally, it must be ensured that the underwriting practices are in line with local laws.

For certain group life business, local law is relevant with regard to medical examinations required before any business is written. For certain individual life business, agreements exist with regard to medical examinations of applicants before business is written. If the risk is assessed as high, exclusion of specific risks, premium adjustments and reinsurance are considered.

In the accident and health business, the underwriting strategy comprises biometric and financial data of the persons to be insured, type of contract and experience.

Non-life | The Swiss Life Group has non-life operations in France covering risks associated with accident and health (disability) as well as property and casualty.

The Group manages the risks arising from these contracts by means of its underwriting strategy and reinsurance arrangements.

Development of claims under non-life insurance contracts

  Estimate of ultimate claim costs by accident year
In CHF million  20012002200320042005200620072008Total
At end of accident year  535447454467427546501416n. a.
1 year later  586496472443481457438n. a.
2 years later  565481446468440424n. a.
3 years later  550468476447409n. a.
4 years later  548480563380n. a.
5 years later  581470465n. a.
6 years later  530450n. a.
7 years later  492n. a.
Current estimate of cumulative claims  4924504653804094244384163 474
Cumulative payments to date  –428–371–354–286–293–296–268–174–2 470
Liabilities before discounting  6479111941161281702421 004
Effect of discounting 
Liabilities for the current and 7 previous years   64 79 111 94 116 128 170 242 1 004
Liabilities for prior years  177
Total gross claims under non-life insurance contracts           1 181


The development of claims under non-life insurance contracts comprises the non-life business in France.

Acceptance rules for risks are consistent with both the Code des Assurances and the French regulations. Underwriting guidelines and tariffs are reviewed on an annual basis.

The monitoring of the risks taken is made on a monthly basis with regard to related premiums and claims. An automated claims supervision system is used for the adjustment of tariffs for risks with loss ratios above a certain level.

Reinsurance | Reinsurance is used to limit the Group’s exposure to insurance risk. This does not, however, discharge the Group’s liability as a primary insurer, and, if a reinsurer fails to pay a claim, the Group remains liable for the payments to the policyholder. A loss allowance would be recognised for any estimated unrecoverable reinsurance.

In addition, the Group holds substantial collateral under related reinsurance agreements in the form of deposited funds and securities. Amounts recoverable from reinsurers are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented in the balance sheet as a component of the reinsurance assets.

Management reviews reinsurance programmes covering treaty, type, risks covered and retention on a regular basis. A process, competencies and limits are set up for the approval of reinsurance programmes and their modification. To ensure that the Group’s principles are observed, guidelines on reinsurance have been introduced.

The life insurance operations limit exposure to loss on any single life. Retention limits vary by country. For the coverage of loss accumulation in the life insurance business, reinsurance contracts covering catastrophe risk are in place. This type of reinsurance cover is organised at Group level. In the non-life insurance business, reinsurance coverage of loss accumulation is organised at the level of the individual insurance operations.

As far as non-life insurance is concerned, the reinsurance arrangements mostly include non-proportional coverage on any single risk and/or event, adapted to the specifications of each contract. This includes excess of loss, stop-loss and catastrophe coverage. Facultative reinsurance is also written for protection against specific risks.

No single reinsurer is a material reinsurer to the Group, nor is the Group’s business substantially dependent upon one single reinsurer.

Approximately 2.2% of insurance in force from continuing operations in terms of earned insurance premiums was ceded as at 31 December 2008 (2007: 1.8%).

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.

Insurance risks are regularly reported to the Group Risk Committee.

Sensitivity analysis | The Swiss Life Group uses the traditional embedded value, 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 three components: the adjusted net asset value (ANAV) attributable to shareholders and the present value of future profits (PVFP), minus the present value of the cost of holding capital (CoHC). Future new business is not included.

The embedded value of the Swiss Life Group amounted to CHF 8.5 billion as at 31 December 2008 (2007: CHF 12.8 billion). Due to different valuation principles, changes in the embedded value are typically not reflected to the same extent in the consolidated balance sheet and consolidated statement of income of the Swiss Life Group and vice versa.

The embedded value has certain limitations mainly arising from the fact that it is calculated as a single best estimate that does not reflect the full range of possible outcomes (e.g. to address embedded options and guarantees).

For the model PVFP calculations, the best possible assumptions were made regarding a number of factors, in particular returns on investment, development of costs and claims, policyholder participation and risk discount rate. Business is also 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 PVFP. The Swiss Life Group calculates the embedded value for all its life insurance companies. All other companies are taken into account at their statutory carrying amount. As a consequence, risk factors applied to these types of business have no effect on the value.

An analysis of sensitivity indicates to what extent the embedded value is affected by variations in risk factors. The analysis is based on changes in the assumptions used in the embedded value calculation whereby a specific risk factor is changed while holding all other assumptions constant. In practice, this is unlikely to occur and changes in some of the assumptions may be correlated. In the event of a change in a specific risk factor, the effect of different allocations to policyholder participation as a consequence is considered in the analysis. The changes in a specific risk factor are applied to the entire projection period.

The sensitivity analysis relating to continuing operations with regard to insurance risk is as follows:

Higher overall mortality would have a significant positive effect on the embedded value of life annuities (survival risk) whereas the negative effect on the embedded value of contracts with mortality risk is comparatively limited due to respective reductions in policyholder bonuses. Therefore, this sensitivity is considered not significant as a risk for the embedded value.

At 31 December 2008, if the longevity improvement parameter had increased by 10%, the embedded value would have been CHF 48 million lower in Switzerland (2007: CHF 31 million lower) and CHF 8 million lower in the other countries (2007: CHF 27 million lower).

At 31 December 2008, if the longevity improvement parameter had decreased by 10%, the embedded value would have been CHF 44 million higher in Switzerland (2007: CHF 33 million higher) and CHF 7 million higher in the other countries (2007: CHF 26 million higher).

At 31 December 2008, if morbidity had been 10% higher, the embedded value would have been CHF 32 million lower in Switzerland (2007: CHF 29 million lower) and CHF 16 million lower in the other countries (2007: CHF 30 million lower).

At 31 December 2008, if morbidity had been 10% lower, the embedded value would have been CHF 32 million higher in Switzerland (2007: CHF 29 million higher) and CHF 16 million higher in the other countries (2007: CHF 30 million higher).

The sensitivity analysis with regard to market risk is as follows:

The Swiss Life Group assumes in the embedded value calculation that all bonds are held to maturity. Upon maturity, the redemption amounts are reinvested in new bonds at rates applicable at that point in time (“new money rate”). At 31 December 2008, if the new money rate with regard to bonds had been 100 basis points higher, the embedded value would have been CHF 41 million higher in Switzerland (2007: CHF 151 million higher) and CHF 207 million higher in the other countries (2007: CHF 255 million higher).

At 31 December 2008, if the new money rate with regard to bonds had been 100 basis points lower, the embedded value would have been CHF 216 million lower in Switzerland (2007: CHF 162 million lower) and CHF 197 million lower in the other countries (2007: CHF 247 million lower).

At 31 December 2008, if the fair value of equity securities and property had been 10% higher, the embedded value would have been CHF 304 million higher in Switzerland (2007: CHF 307 million higher) and CHF 45 million higher in the other countries (2007: CHF 84 million higher).

At 31 December 2008, if the fair value of equity securities and property had been 10% lower, the embedded value would have been CHF 447 million lower in Switzerland (2007: CHF 377 million lower) and CHF 46 million lower in the other countries (2007: CHF 83 million lower).

At 31 December 2008, if the investment returns for equity securities and property had been 100 basis points higher, the embedded value would have been CHF 171 million higher in Switzerland (2007: CHF 181 million higher) and CHF 65 million higher in the other countries (2007: CHF 119 million higher).

At 31 December 2008, if the investment returns for equity securities and property had been 100 basis points lower, the embedded value would have been CHF 267 million lower in Switzerland (2007: CHF 206 million lower) and CHF 67 million lower in the other countries (2007: CHF 118 million lower).

At 31 December 2008, if the foreign currencies had strengthened by 10% against the Swiss franc, the embedded value would have been CHF 11 million lower in Switzerland (2007: CHF 4 million lower). If the foreign currencies had strengthened by 10% against the euro, the embedded value would not have changed in the other countries (2007: CHF 2 million higher).

At 31 December 2008, if the foreign currencies had weakened by 10% against the Swiss franc, the embedded value would have been CHF 11 million higher in Switzerland (2007: CHF 4 million higher). If the foreign currencies had weakened by 10% against the euro, the embedded value would not have changed in the other countries (2007: CHF 2 million lower).

The sensitivity of insurance liabilities is also analysed on an economic basis for internal risk management purposes and to satisfy regulatory requirements (Swiss Solvency Test).




 
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