3 Information by Market Unit
3.1 Market Units
Swiss Life’s covered business is subdivided according to market units as follows:
– Life and pension business in Switzerland
– Life, health and pension business in France
– Life and pension business in Germany
– Life and pension business in Luxembourg and Liechtenstein (together referred to as Insurance Other)
This breakdown by market units essentially coincides with the IFRS insurance segments in the annual report. There are minor differences since the MCEV classification follows the legal structure in order to ensure a correct modelling of the profit sharing. A significant discrepancy from the IFRS insurance segment reporting is the treatment of Swiss Life Asset Management in France, which belongs in this report to the MCEV of Swiss Life in France.
SWITZERLAND — Swiss Life’s main business in the Swiss market is group life business. The individual business includes all the typical traditional savings, risk and annuity products, as well as modern savings and retirement products with flexible guarantees. The share of the modern products is steadily increasing. Swiss Life’s own sales force plays the major role in distribution, followed by AWD.
FRANCE — The life insurance products sold through Swiss Life Assurance et Patrimoine consist mainly of savings and annuity products, while risk products play a minor role. New business focuses on multi-support products, combining traditional savings and unit-linked components. The main distribution channels are independent financial advisors and private banking. The health business is sold through Swiss Life Prévoyance et Santé.
GERMANY — Swiss Life sells traditional and modern products for individual and group life business. Disability insurance plays an important role. The main distribution channel is independent brokers, followed by financial advisors such as AWD.
INSURANCE OTHER — Swiss Life supplies private placement life insurance (PPLI) in Liechtenstein, Singapore and Luxembourg. In Luxembourg, Swiss Life also provides group insurance solutions for international and local corporate clients through Corporate Solutions.
3.2 Results by Market Unit
MCEV by market unit for the year 2009
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Net asset value | |
| 741 | | 1 247 | | 379 | | –43 | | 2 324 | |
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Free surplus | |
| 300 | | 134 | | –28 | | –87 | | 319 | |
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Required capital | |
| 441 | | 1 114 | | 407 | | 45 | | 2 005 | |
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Value of in-force business | |
| 772 | | 678 | | 125 | | 233 | | 1 808 | |
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Certainty equivalent value | |
| 2 884 | | 1 153 | | 513 | | 298 | | 4 848 | |
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Time value of financial options and guarantees | |
| –1 602 | | –148 | | –227 | | –7 | | –1 984 | |
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Cost of residual non-hedgeable risks | |
| –267 | | –222 | | –99 | | –44 | | –631 | |
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Frictional costs of required capital | |
| –243 | | –105 | | –63 | | –14 | | –425 | |
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MCEV | |
| 1 513 | | 1 926 | | 503 | | 190 | | 4 132 | |
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MCEV by market unit for the year 2008
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Net asset value | |
| 383 | | 1 272 | | 356 | | –40 | | 1 971 | |
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Free surplus | |
| –40 | | 171 | | 37 | | –82 | | 87 | |
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Required capital | |
| 423 | | 1 101 | | 319 | | 41 | | 1 884 | |
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Value of in-force business | |
| 818 | | 410 | | 169 | | 201 | | 1 598 | |
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Certainty equivalent value | |
| 2 403 | | 838 | | 521 | | 246 | | 4 007 | |
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Time value of financial options and guarantees | |
| –1 051 | | –182 | | –242 | | –6 | | –1 481 | |
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Cost of residual non-hedgeable risks | |
| –275 | | –30 | | –62 | | –32 | | –398 | |
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Frictional costs of required capital | |
| –259 | | –216 | | –48 | | –7 | | –530 | |
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MCEV | |
| 1 201 | | 1 682 | | 525 | | 161 | | 3 569 | |
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SWITZERLAND — The relatively high amount of time value of financial options and guarantees results from a combination of a small spread between market and guaranteed interest rates, the high volatility of interest rates and relatively large costs of credit risk due to the significant share of corporate bonds in the Swiss asset portfolio. The “legal quote” rules (statutory minimum policyholder distribution ratio) applying to the profit sharing of the Swiss group life business also add to the time value of financial options and guarantees.
The net asset value is influenced by the hybrid debt. It includes the – negative – difference between the market value of assets covering the hybrid debt in the statutory balance sheet and the marked-to-model value of the hybrid debt which is calculated as described in section 4.3. The increase in NAV is mainly a consequence of the annual operational profit and the increase in value of the assets covering equity and hybrid debt.
FRANCE — The MCEV of Swiss Life in France consists of the following three components:
– The life business, which is concentrated in Swiss Life Assurance et Patrimoine
– The health insurance business of Swiss Life Prévoyance et Santé
– Other companies in France which are accounted for by their IFRS net asset value
For the French health insurance business, the methodology of the market consistent embedded value has been applied in 2009, whereas in 2008 the traditional embedded value methodology was used. The difference in value resulting from the transition from traditional embedded value as at the beginning of 2009 is CHF –5 million. While the traditional embedded value accounted for risk by means of a spread in the discount rate, the market consistent embedded value of the French health insurance business accounts for risk through the cost of non-hedgeable risk. As this business does not contain any financial options and guarantees, it does not contribute to the time value of financial options and guarantees.
GERMANY — The size of the cost of residual non-hedgeable risks comes from disability contracts which play an important role in the German business mix.
The time value of financial options and guarantees is relatively high. The reason is the high level of guarantees applicable to the German business together with the “legal quote” enforced in Germany. This effect is increased by high interest volatilities and low long-term interest rates.
The observed increase in required capital can be explained by a noticeable decrease in the free part of the policyholder bonus fund (RfB). The negative free surplus stems from the assumed required coverage of 150% of statutory solvency. Free surplus would be positive at a 100% requirement of statutory solvency.
INSURANCE OTHER — The contributions of PPLI business to the total MCEV of Insurance Other accounts for about two thirds of the value.
The products of PPLI contain only very small financial guarantees, so the TVOG is negligible. The negative net asset value is explained by not taking into account the goodwill for the former insurance company CapitalLeben as part of Liechtenstein.
Value of new business by market unit for the year 2009
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Value of new business | |
| 11 | | 43 | | 21 | | 48 | | 123 | |
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New business strain 1 | |
| –55 | | –54 | | –9 | | –15 | | –133 | |
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Value of new business before new business strain | |
| 65 | | 96 | | 30 | | 63 | | 255 | |
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Annual premiums | |
| 161 | | 360 | | 154 | | 3 | | 678 | |
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Single premiums | |
| 1 352 | | 1 867 | | 193 | | 4 734 | | 8 146 | |
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PRESENT VALUE OF NEW BUSINESS PREMIUMS (PVNBP) | |
| 3 396 | | 4 652 | | 1 587 | | 4 755 | | 14 390 | |
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Average annual premium multiplier | |
| 12.7 | | 7.7 | | 9.1 | | 6.2 | | 9.2 | |
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New business annual premium equivalent (APE) | |
| 296 | | 547 | | 173 | | 477 | | 1 493 | |
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NEW BUSINESS MARGIN (% PVNBP) | |
| 0.3% | | 0.9% | | 1.3% | | 1.0% | | 0.9% | |
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New business margin (% APE) | |
| 3.6% | | 7.8% | | 12.2% | | 10.1% | | 8.2% | |
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Value of new business by market unit for the year 2008
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Value of new business | |
| 48 | | 47 | | 12 | | 12 | | 119 | |
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New business strain 1 | |
| –33 | | –66 | | –9 | | –16 | | –125 | |
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Value of new business before new business strain | |
| 81 | | 114 | | 21 | | 28 | | 244 | |
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Annual premiums | |
| 146 | | 355 | | 137 | | 5 | | 643 | |
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Single premiums | |
| 1 167 | | 1 523 | | 155 | | 1 947 | | 4 791 | |
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PRESENT VALUE OF NEW BUSINESS PREMIUMS (PVNBP) | |
| 3 824 | | 3 767 | | 1 356 | | 1 987 | | 10 935 | |
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Average annual premium multiplier | |
| 18.2 | | 6.3 | | 8.7 | | 8.7 | | 9.6 | |
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New business annual premium equivalent (APE) | |
| 262 | | 507 | | 153 | | 199 | | 1 122 | |
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NEW BUSINESS MARGIN (% PVNBP) | |
| 1.2% | | 1.3% | | 0.9% | | 0.6% | | 1.1% | |
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New business margin (% APE) | |
| 18.2% | | 9.4% | | 7.9% | | 5.8% | | 10.6% | |
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SWITZERLAND — New business consists of new contracts and new coverages on existing contracts. Within group life business, replacements and newly hired persons for existing contracts are not accounted for as new business.
The value of new business written in 2009 dropped considerably to a mere 22% of the previous year’s value. This is mainly caused by the removal of the liquidity premium, narrowing the spread between market and guaranteed interest rates. Higher assumed volatilities also contributed to this decline.
In accordance with the strategy, there is a shift towards modern savings and retirement products with flexible guarantees and risk products. This shift did not result in a noticeable overall change of new business margin. Whereas the margin for modern products has been increasing, the margin for traditional business decreased due to a shift from products with regular premiums to single premium products, which are less profitable.
For the 2009 MCEV closure, the recognition of new business premiums for Swiss group life business was changed: Incoming reserves for new insured individuals (“eingebrachte Freizügigkeitsleistungen”) replacing exiting ones are no longer recognised as premiums, as these reserves only compensate partly for outgoing reserves. This reduced the PVNBP for 2008 by roughly CHF 900 million. The increase in PVNBP starting from the adjusted 2008 value amounts to 15%. This also explains the decrease of the average annual premium multiplier.
FRANCE — The value of new business for Swiss Life in France is determined as the sum of the value of new business for the life business and that for the health business.
The value of new business remained stable compared to 2008, in spite of a volume increase. The lower new business margin mostly resulted from two effects. First, the business mix was less favourable, namely a higher share of traditional vs. unit-linked saving. Second, the change from traditional embedded value to market consistent embedded value for the health business resulted in an increase of PVNBP and thus in a decrease in the new business margin.
GERMANY — The value of new business as well as the new business margin for the German operations have increased when compared with the values reported for 2008. The higher volume of risk and supplementary disability insurance contracts written contributed substantially to this enhancement.
INSURANCE OTHER — As the most important line of business in Insurance Other is private placement life insurance (PPLI), by far the biggest share of new business premiums consists of single premiums. This business generated almost the entire massive increase in single premium volume. The new business margin increased considerably compared to the previous year. This is related to pricing initiatives and higher average premium amounts.
Analysis of earnings by market unit for the year 2009
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Opening MCEV | |
| 1 201 | | 1 682 | | 525 | | 161 | | 3 569 | |
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Opening adjustments | |
| 40 | | –38 | | –3 | | – | | –1 | |
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Adjusted opening MCEV | |
| 1 241 | | 1 644 | | 522 | | 161 | | 3 567 | |
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New business value | |
| 11 | | 43 | | 21 | | 48 | | 123 | |
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Expected existing business contribution (reference rate) | |
| 22 | | 52 | | 2 | | 5 | | 80 | |
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Experience variances | |
| –22 | | –95 | | –43 | | –15 | | –174 | |
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Assumption changes | |
| 51 | | 99 | | 39 | | –9 | | 180 | |
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Other operating variance | |
| –66 | | 52 | | 12 | | –12 | | –15 | |
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Operating MCEV earnings | |
| –4 | | 150 | | 30 | | 18 | | 194 | |
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Economic variances | |
| 465 | | 157 | | –55 | | 15 | | 581 | |
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Other non-operating variances | |
| 37 | | –46 | | – | | –4 | | –13 | |
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Total MCEV earnings | |
| 498 | | 261 | | –25 | | 29 | | 763 | |
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Closing adjustments | |
| –227 | | 21 | | 6 | | 1 | | –198 | |
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Closing MCEV | |
| 1 513 | | 1 926 | | 503 | | 190 | | 4 132 | |
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The predominant effects in the analysis of earnings for every market unit are the economic variances – which are explained in section 2.5.
SWITZERLAND — Almost the entire opening and closing adjustments result from restructuring concerning the Swiss and French businesses. This was described in section 2.4.
The experience variances stem mainly from a higher than assumed build-up of additional reserves with an overall slightly negative impact on the MCEV.
The assumption changes are dominated by group life persistency variances and individual life expense assumption variances.
Most significantly, other operating variance reflects the impact of enhancements in the crediting and investment rules for individual business and the valuation model for modern products.
The dominant effect in the economic variances for the operations in Switzerland results from the narrowing of credit spreads. Economic variances also include a negative impact of a more risky strategic asset allocation. This is in accordance with the higher risk capacity at 31.12.2009 following the financial recovery during the reporting year.
Other non-operating variances are tax variances.
FRANCE — The introduction of the new strategic asset allocation for the life insurance business led to positive assumption changes.
In the economic variances for the French operations, the positive equity-type asset performance overcompensates for the negative effect from not accounting for liquidity premiums.
The main drivers behind experience variances were higher taxes and higher than anticipated bonuses to the policyholders due to competition.
In other operating variance, the effect of changing the model applied to the French health business from traditional embedded value to market consistent embedded value is included. The remaining impact comes mainly from the updated value of the French non-insurance companies.
The effects of exchange rate fluctuations of the euro against the Swiss franc are shown in the closing adjustments.
GERMANY — The non-accounting for liquidity premiums and the comparatively lower decrease of credit spreads are the main reasons for the negative economic variance.
Higher than anticipated policyholder participation resulted in negative experience variances.
The deviation in assumption changes has been mainly caused by updated persistency assumptions for group business as well as revised assumptions for profit sharing.
The deviations in other operating variance are related to a higher part of the total business in-force being modelled together with an enhanced modelling of the policyholder surrender behaviour and the integration of the use of free policyholder reserves (Freie RfB) in emergency situations.
The closing adjustments show a slight positive effect from the exchange rate fluctuation of the euro against the Swiss franc.
INSURANCE OTHER — Higher than anticipated surrender rates are the main reason behind the negative experience variance. This is related to the tax discussion between Liechtenstein and Germany and the recent economic environment.
The higher basis for assumed recurring expenses for Corporate Solutions decreased the MCEV and is included in the assumption variances. A negative effect included here is related to the decreased assumed persistency rates for PPLI.
Reviewed expense allocations within Corporate Solutions as well as an enhanced bonus fund projection are the main reasons for the other operating variance.
The higher than anticipated investment return in 2009 due to the recovering market conditions resulted in higher assets under control. This is one of the main drivers for PPLI’s value in force and is reflected in the economic variances.
