1 Introduction

1.1 Basis of Preparation

Market consistent embedded value (MCEV) is a measure of the consolidated value of shareholders’ interests in the in-force covered business of the Swiss Life Group. Covered business includes life, health and pension business of the company. The Group MCEV is a measure of the consolidated value of shareholders’ interest in the covered and non-covered business in force of the company. Business in force includes business written as at 31 December 2009; future new business is not included. The notion of market consistent embedded value (MCEV) will alternatively refer within the course of this report to the MCEV of Swiss Life’s covered business, of one of its market units, or to the Swiss Life’s Group MCEV.

Swiss Life’s market consistent embedded value reporting follows the European Insurance CFO Forum Market Consistent Embedded Value Principles©1. The cost of credit risk from bonds is calculated and disclosed in addition to mandatory requirements from the Principles. Further details on the MCEV methodology are given in section 4.

1 Copyright © Stichting CFO Forum Foundation 2008

PricewaterhouseCoopers have audited this market consistent embedded value report. Their opinion is part of this report and can be found in section 6.

1.2 Covered Business and Non-Covered Business

Covered business includes all of Swiss Life’s life, health and pension business, with the exception of Swiss Life Insurance Solutions AG and Swiss Life Products (Luxembourg) S.A. which are not yet material for MCEV purposes. Included are namely life businesses in Switzerland, France, Germany, Luxembourg and Liechtenstein. All other businesses such as investment management and AWD are included in the non-covered business at their IFRS net asset values. In the case of France, all business is included in covered business; the value of non-life insurance and non-health insurance business is their IFRS net asset value.

MCEV (and Group MCEV) are net of external reinsurance.

1.3 Definitions

Swiss Life’s Group MCEV consists of the MCEV for covered business and of the IFRS net asset value for non-covered business.

According to MCEV Principle 3, the MCEV represents the present value of shareholders’ interests in the earnings distributable from assets allocated to the covered business after sufficient allowance for the aggregate risks in the covered business. It is calculated on a post-tax basis taking into account current legislation and known future changes.

The MCEV for covered business is broken down into the net asset value (NAV), i.e., the value of assets not backing liabilities, and the value of in-force business (VIF), i.e., the value of future profits emerging from operations and assets backing liabilities.

The net asset value is split between:

The required capital (RC), i.e., the amount of capital provided by shareholders necessary to run the business
The free surplus (FS): additional capital allocated to the covered business above the required capital

The value of in-force covered business is defined as the sum of:

The certainty equivalent value of future profits from in-force covered business (CEV)
The time value of financial options and guarantees (TVOG), including the cost of credit risks
The cost of residual non-hedgeable risks (CNHR)
The frictional costs of required capital (FC)

The IFRS net asset value (IFRS NAV) is defined as the unadjusted IFRS net asset value allocated to the non-covered business. For more details about the MCEV components, see section 4 on methodology. Please note that the notion of certainty equivalent value is equivalent to the notion of present value of future profits in the CFO Forum Principles.