2 Summary of MCEV Results

All results and components are shown in CHF million. Rounding differences may occur.


The following table shows MCEV key results as at 31.12.2009 compared to the results as at 31.12.2008:

In CHF million 
Net asset value
Value of


Covered business
  2 3241 8084 1323 569
Non-covered business
  2 745n/a12 7452 753
Group MCEV
  5 0691 8086 8776 321
Value of new business
Total MCEV earnings
  651–1 285
1 n/a: not applicable

The Group MCEV includes the covered as well as the non-covered business. The covered business is valued according to the MCEV methodology; the resulting value is the MCEV. The value of the non-covered business included in the Group MCEV is the unadjusted IFRS net asset value.

The Group MCEV increased by 9%. The value of the non-covered business remained at the previous year’s level. The value of covered business increased by 16%, mainly caused by the economic recovery. This increase was weakened by waiving the liquidity premium. For the 2009 calculation, no liquidity premium was assumed, whereas for 2008, liquidity premiums of 65 bps (for Switzerland) and 50 bps (for France, Germany and Luxembourg) were applied.

The change in value of new business by 3% is driven by an increase in new business premiums, combined with lower new business margins.

2.2 MCEV of Covered Business

The following table shows the MCEV by components, together with the previous year’s figures:

In CHF million 
Net asset value
  2 3241 971
Free surplus
Required capital
  2 0051 884
Value of in-force business
  1 8081 598
Certainty equivalent value
  4 8484 007
Time value of financial options and guarantees
  –1 984–1 481
Cost of residual non-hedgeable risks
Frictional costs of required capital
  4 1323 569

The net asset value (NAV) of the covered business is the market value of assets allocated to the covered business, which are not backing liabilities. Goodwill and intangibles are not included in the net asset value. The required capital (RC) is that part of the net asset value whose distribution to shareholders is restricted. The free surplus (FS) is calculated as the difference between the total net asset value and the required capital. The NAV of the operations in France includes goodwill and intangible assets of their non-life and non-health insurance operations (see section 3.2).

The certainty equivalent value (CEV) is the present value of future shareholder profits – net of tax – under the certainty equivalent scenario. This scenario is derived from reference rates as at the respective valuation date. The CEV contains the part of the value of financial options and guarantees which materialises in the certainty equivalent scenario (also called intrinsic value of the financial options and guarantees).

The time value of financial options and guarantees (TVOG) is calculated as the difference between the market consistent expected present value of future shareholder profits with all stochastic economic scenarios and the certainty equivalent value. The TVOG therefore represents the additional market price of financial options and guarantees in excess of the intrinsic value which is already allowed for in the reference scenario. The TVOG also includes the cost of credit risk related to investments in corporate bonds. The amount of credit risk on group level is CHF –476 million for 2009 compared to CHF –234 million for 2008. This change is mainly due to credit spread tightening.

The cost of residual non-hedgeable risks (CNHR) represents the value of risks which cannot be calculated in a market consistent way because there are no liquid markets, such as insurance risks, expense risks, and risks from variances to assumed rules for policyholder decisions. It is calculated under a cost of capital approach.

The frictional costs of required capital (FC) are the present value of costs incurred by shareholders due to investment management expenses and taxes on the investments of restricted assets. They are calculated based on the required capital.

The value of in-force business (VIF) is the sum of the certainty equivalent value, TVOG, CNHR, and FC. Thus MCEV is the sum of net asset value and value of in-force business, or the sum of free surplus, required capital and value of in-force business.

MCEV increased on both components NAV, especially on its free surplus part, and VIF. The main reason is the economic recovery. This is explained in more detail in section 2.5. The increase in cost of non-hedgeable risks is caused by the change of the valuation method for the French health business from the traditional to the market consistent approach, see section 3.2.

2.3 Value of New Business

The value of new business (VNB) represents the value added by new business written in 2009. It is calculated consistently with the methodology and assumptions used for the business in force. The value of new business is calculated as the effect on MCEV from writing new business, i.e., it is the difference between the MCEV at year end and the MCEV which would have resulted, had no new business been written during the year.

The following sections show the premium volumes, measured in annual premium equivalent (APE) and present value of new business premiums (PVNBP), the value of new business and the new business margins on the basis of APE and PVNBP. The annual premium equivalent is defined as new annual premiums plus 10% of new single premiums. The present value of new business premiums is equal to new single premiums plus the present value of new annual premiums which is calculated on the same assumptions as the value of new business.

Additional explanations about new business calculations can be found under section 4.2 later in this report.

This table shows the value of new business together with the new business premium volumes and margins. Within MCEV reporting, PVNBP is used to measure the premium volume of new business. For better comparison with previous disclosures, the traditional measure of APE is also shown.

Amounts in CHF million 
Value of new business
New business strain 1
Value of new business before new business strain
Annual premiums
Single premiums
  8 1464 791
  14 39010 935
Average annual premium multiplier
New business annual premium equivalent (APE)
  1 4931 122
New business margin (% APE)
1 New business strain represents the effect on the net asset value from writing new business.

The increase in single premiums and subsequently in PVNBP is mainly generated by Private Placement Life Insurance (PPLI). The changes in economic assumptions together with waiving of liquidity premiums lowered the overall new business margin.

2.4 Group MCEV — Analysis of Earnings

The table below shows the change in market consistent embedded value split by components from the MCEV as at 31 December 2008 to the MCEV as at 31 December 2009.

In CHF million 
  Covered business
business IFRS

Total Group MCEV

Total Group MCEV
Opening Group MCEV
  3 5692 7536 3219 312
Opening adjustments
Adjusted opening Group MCEV
  3 5672 5936 1618 756
Operating MCEV earnings
  194–751203 123
Non-operating MCEV earnings
  568–37531–4 408
Total MCEV earnings
  763–112651–1 285
Other movements in IFRS net equity
Closing adjustments
Closing Group MCEV
  4 1322 7456 8776 321
1 n/a: not applicable

The opening adjustments represent dividend payments from the covered and non-covered business, resulting in the reduction of par value of CHF 5 per share as shown in the Consolidated Financial Statements (Note 1).

The operating MCEV earnings for non-covered business correspond mainly to gains and losses from Swiss Life Holding, AWD, Swiss Life Property Management and from the discontinued banking segment. The operating MCEV earning for covered business are explained in the next section. The comparatively very high operating earnings in 2008 are based on two effects: First, gains resulting from divestments and second, de-risking of strategic asset allocation mainly in Switzerland.

The non-operating MCEV earnings include positive economic variances on covered business (see next section). For non-covered business they relate to borrowing costs for the non-covered business. For 2008, the highly negative non-operating MCEV earnings originated from the economic developments in that year.

The other movements in IFRS net equity (non-covered business only) are mainly due to the sale of treasury shares, as well as the change in unrealised capital gains and losses and the change in minority interest.

The closing adjustments result mainly from a restructuring concerning the Swiss and French businesses. After the restructuring of the French business in 2008, the remaining French branch was left as a holding company without insurance activity and included in non-covered business for the Group MCEV 2008. During 2009, this branch – with a negative IFRS NAV – was integrated into the Swiss business. The effect on Group MCEV is neutral. In addition, the closing adjustments relate to the change in currency exchange rates during 2009.

2.5 Covered Business — Analysis of Earnings

The table below shows the analysis of earnings for the covered business in 2009:

In CHF million 
  Free surplusRequired capitalVIFMCEVMCEV
Opening MCEV
  871 8841 5983 5696 572
Opening adjustments
Adjusted opening MCEV
  861 8841 5983 5676 360
Value of new business
Expected existing business contribution (reference rate) 1
Transfers from VIF and required capital to free surplus
Experience variances
Assumption changes
  1–11801801 174
Other operating variance
Operating MCEV earnings
  –1 0478114301941 700
Economic variances
  1 512–706–225581–4 247
Other non-operating variances
Total MCEV earnings
  455105203763–2 541
Closing adjustments
Closing MCEV
  3192 0051 8084 1323 569
1 This presentation of the analysis of earnings for the covered business is compliant with MCEV Principles, except that no indication of the expected existing business contribution in excess of the reference rate has been provided by Swiss Life.

OPERATING MCEV EARNINGS — The value of new business contributions from free surplus and required capital sum up to the new business strain of CHF –133 million. This represents the shareholders’ share in acquisition expenses for new business. The VIF-component of CHF 255 million is the value of future risk-adjusted profits from new business.

Expected existing business contribution (reference rate) assumes average market performance of all assets at the reference rate during the reporting period. Shareholders’ results from this step are shown here, including the release from costs of residual non-hedgeable risks and look-through contributions.

Transfers from value in force and required capital to free surplus include the shifts of the results of the preceding step to free surplus and shifts between free surplus and required capital. The total effect in this line is zero. Transfer from free surplus to required capital is due to the depressed economic conditions as of 31.12.2008, leading to a projected reduction of buffers eligible for covering the solvency requirements.

Experience variances aggregate the impact of actual performance versus expectations on insurance contracts regarding non-economic assumptions such as mortality, expenses, lapses, as well as the deviations in handling of additional reserves. A strengthening of additional reserves in the Swiss business and their subsequent partial release over time leads to a decrease in NAV and an increase in VIF. Within the NAV, the shift from free surplus to required capital originates from the higher than anticipated projected policyholder participation in the German operations.

Assumption changes refer to the impact of the change on assumptions such as future mortality, morbidity, longevity rates, changes in surrender rates, expense rates, and rules for future profit sharing. These are commented on in section 3.2.

Other operating variance refers to any other changes that differ from the expected values not captured by the items above. This includes effects of an improved approach for cost of credit risk as well as a refinement of interest rate modelling.

ECONOMIC VARIANCES — These are by far the biggest effects on free surplus, required capital, and VIF. They originate from:

a much better corporate bond investment income for the reporting period than assumed at 31.12.2008 and a reduction of credit spreads on the bond portfolio over the amount implied by the liquidity premiums applied at 31.12.2008
correspondingly higher credit risk exposure and therefore higher costs of credit risk
lower reference rates due to waiving the liquidity premiums and only little changes in swap rates for both Swiss francs and euro
a better equity-type asset performance than assumed for the expected business contribution (reference rate)
higher assumed (swaption) implied volatilities, where it has to be noted that the assumptions for the valuation at 31.12.2008 were based on market averages over 2008. For 2009, implied volatilities as at the valuation date were applied.

CLOSING ADJUSTMENTS — These represent raising or pay-back of capital and currency exchange rate fluctuation. The major part is related to the integration of the French branch into the Swiss operation as described in section 2.4.

2.6 Sensitivities

The table below shows sensitivities of the MCEV and the value of new business to important financial market parameters and to operational and demographic assumptions.

Sensitivities as at 31 December 2009
Amounts in CHF million 
Change in MCEV

Change in value
of new business

Base value
  4 132123
100 bp increase of interest rates (reference rates)
100 bp decrease of interest rates (reference rates)
  –1 535–37%–82–67%
10% increase in equity / property market values
10% decrease in equity / property market values
25% increase in equity / property implied volatilities
25% decrease in equity / property implied volatilities
25% increase in swaption implied volatilities
25% decrease in swaption implied volatilities
10% increase in maintenance expenses
10% decrease in maintenance expenses
10% proportionate increase in lapse rates
10% proportionate decrease in lapse rates
5% proportionate increase in mortality rates (death cover)
5% proportionate decrease in mortality rates (annuities)
5% increase of longevity driver (annuities)
5% proportionate increase in morbidity rates
5% proportionate decrease in morbidity rates
Required capital 100% statutory solvency capital 2
1 not available
2 For the base value, a solvency requirement of 150% is assumed.

As can be seen in the table above, the sensitivities with the biggest impact on the MCEV and the value of new business are the economic sensitivities: interest rates, equity/property market values, and their corresponding volatilities. Operational sensitivities such as expenses, lapse rates and required capital also have a significant impact. The same sensitivities are also relevant to the value of new business.

2.7 Reconciliation of IFRS Net Asset Value to Group MCEV

Swiss Life’s MCEV for covered business reflects the value of the shareholders’ interest in the life, health and pension business of the Swiss Life Group. This value includes the determination of best estimate liabilities for bonus and tax payments, which are derived from results based on local statutory accounting rather than on IFRS. Therefore local balance sheets and profit and loss accounts are the starting point for the projections. The net asset value (of assets not backing liabilities) is based on the local balance sheet, but adjusted at market value.

For the other parts of the Swiss Life Group, i.e., the non-covered business, the shareholder value is derived from its contribution to the Group’s IFRS net asset value.

Reconciliation of IFRS net assets to Group MCEV as at 31 December 2009
In CHF million 
IFRS net assets
  7 208
  –2 139
Reserves and investments valuation differences
DAC / DOC and other intangible assets
  –2 407
Goodwill 1
Net asset value
  5 069
Value of in-force business
  1 808
Group MCEV 2
  6 877
1 Goodwill adjustments correspond to goodwill of covered business with the exception of CHF 93 million from French operations (see section 3.2).
2 Group MCEV includes CHF 1 718 million of goodwill and intangible assets as part of the unadjusted IFRS net assets for non-covered business.

Starting with the total IFRS net assets, there are valuation differences between IFRS and MCEV regarding the net asset value for the covered business. In the reconciliation these valuation differences are shown under “adjustments”. The main elements that have been adjusted are deferred acquisition costs (DAC), goodwill and other intangible assets, differences between statutory and IFRS balance sheet items reflecting different reserving bases, and different treatment of the investments and unrealised gains (that form part of the IFRS net assets but are projected on MCEV as part of the value of in-force business in the MCEV calculations).

The adjusted IFRS net asset value corresponds to the MCEV net asset value of the Swiss Life Group. Adding the value of in-force business leads to the Group MCEV.