2 Summary of MCEV Results

During 2010, the capital markets were characterised by strong movements of the relevant interest rates and a decline of the euro and the US dollar against the Swiss franc. While interest rates recovered from their historic lows in the third quarter, they are still below their levels as per end of year 2009 while their volatilities increased. In the context of the ongoing margin management and to preserve current and future margins, the company has, among various reassessments performed during 2010, adjusted its approach to policyholder participation.

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


The following table shows MCEV key results as at 31.12.2010 compared to the results as at 31.12.2009:

In CHF million  
Net asset value
Value of
in-force business


  2010 2009
Covered business   1 928 3 032 4 959 4 132
Non-covered business   2 636 n/a1 2 636 2 745
Group MCEV
  4 563 3 032 7 595 6 877
Value of new business
  209 123
Total MCEV earnings
  1 424 651
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 value of the non-covered business included in the Group MCEV is the unadjusted IFRS net asset value.

The Group MCEV increased by 10%. The value of the non-covered business is slightly below the previous year's level. Despite the adverse economic environment and the weakened euro, the value of covered business increased by 20%. Drivers for the increase are the profitable new business, margin management measures and favourable demographic experience.

The increase in value of new business by 70% and of the new business margin from 0.9% to 1.4% is driven by change in business mix, change to the profit sharing approach and the continuous margin management.

2.2 MCEV of Covered Business

The following graph and table show the MCEV by components, together with the previous year's figures:

In CHF million  
  2010 2009
Net asset value
  1 928 2 324
Free surplus
  35 319
Required capital
  1 892 2 005
Value of in-force business
  3 032 1 808
Certainty equivalent value
  5 797 4 848
Time value of financial options and guarantees
  –1 912 –1 984
Cost of residual non-hedgeable risks
  –507 –631
Frictional costs of required capital
  –346 –425
  4 959 4 132

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, with the exception of France (see section 4.7). 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 decrease in free surplus is mainly a consequence of reassessments performed during 2010. These include reserve strengthening in Switzerland (driven by low interest rate environment) and France (retirement age reform).

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. Despite lower interest rates and higher interest rate volatilities, the value of in-force business increased strongly. This reflects the company's approach to profit sharing, margin management, improved demographic assumptions, and other reassessments.

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 that part of the value of financial options and guarantees which materialises in the underlying 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 cost of financial options and guarantees in excess of the intrinsic value which is already allowed for in the certainty equivalent scenario. As a consequence of the measures mentioned, the TVOG decreased slightly despiteadverse changes in the economic environment. 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 –469 million for 2010 compared to CHF –476 million for 2009.

The cost of residual non-hedgeable risks (CNHR) represents the value of risks which is calculated by way of a cost of capital approach because there are no liquid markets, such as insurance risks, expense risks, and risks from variances to assumed rules for policyholder decisions.

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

2.3 Value of New Business

The value of new business (VNB) represents the value added by new business written in 2010. 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 present value of new business premiums (PVNBP) and annual premium equivalent (APE), the value of new business and the new business margins on the basis of PVNBP and APE. Furthermore there is an analysis of change showing the development of value of new business from last year to the current year.

Additional explanations about new business calculations are given in section 4.2 of this report.

2.3.1 VALUE OF NEW BUSINESS, premiums and margins

Amounts in CHF million  
  2010 2009
Value of new business
  209 123
New business strain 1   –124 –133
Value of new business before new business strain   333 225
Annual premiums
  706 678
Single premiums
  7 798 8 146
Present value of new business premiums (PVNBP)
  14 607 14 390
Average annual premium multiplier
  9.6 9.2
New business annual premium equivalent (APE)
  1 486 1 493
New business margin (% PVNBP)
  1.4% 0.9%
New business margin (% APE)
  14.0% 8.2%
1 New business strain represents the effect on the net asset value from writing new business.

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 measure of APE is also shown. 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.


Amounts in CHF million  

Change in NBM
Value of new business 2009
  14 390 123 0.9%
Economic variances
  –450 –97 -0.7%
Volume, business mix and pricing variances
  967 72 0.5%
Expense variances
  –2 14 0.1%
Other variances
  741 109 0.7%
FX variances
  –1 039 –12 0.0%
Value of new business 2010
  14 607 209 1.4%

New business values as well as new business margins are significantly higher than in the previous year. Main drivers are pricing measures, changes in business mix, expense reductions, experience driven changes to demographic assumptions, and changes to the profit sharing approach. Negative effects resulted from capital market conditions and currency effects, notably the weakened euro.

2.4 Group MCEV — Analysis of Earnings

The table below shows the change in Group MCEV split by components from 31 December 2009 to 31 December 2010.

In CHF million  
  Covered business
business IFRS

Total Group MCEV

Total Group MCEV
  2010 2009
Opening Group MCEV
  4 132 2 745 6 877 6 321
Opening adjustments
  –139 64 –75 –161
Adjusted opening Group MCEV
  3 993 2 809 6 803 6 161
Operating MCEV earnings
  2 301 52 2 353 120
Non-operating MCEV earnings
  –904 –25 –929 531
Total MCEV earnings
  1 397 27 1 424 651
Other movements in IFRS net equity
  n/a1 1 1 43
Closing adjustments
  –431 –202 –633 22
Closing Group MCEV
  4 959 2 636 7 595 6 877
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 2.40 per share or a total of CHF 77 million as shown in the Consolidated Financial Statements (Note 1) and currency exchange rate effects of CHF –2 million.

The following commentaries refer mainly to the non-covered business as the analysis of earnings for the covered business is commented in sections 2.5 and 3.2 in detail.

The operating MCEV earnings for non-covered business correspond mainly to results from Swiss Life Holding, AWD, Investment Management and insurance business not within the scope of covered business. The strong operating earnings compared to 2009 originate mainly from covered business. Non-covered business also contributed to the increase.

The non-operating MCEV earnings relate to borrowing costs and tax effects for the non-covered business. The change in non-operating MCEV earnings compared to 2009 originates almost entirely from the covered business.

The other movements in IFRS net equity (non-covered business only) include the change in unrealised capital gains and losses and currency exchange rate effects on goodwill.

The closing adjustments result mainly from currency exchange rate developments.

2.5 Covered Business — Analysis of Earnings

The table below shows the analysis of earnings for the covered business in 2010:

In CHF million  
  Free surplus Required capital VIF MCEV MCEV
  2010 2009
Opening MCEV
  319 2 005 1 808 4 132 3 569
Opening adjustments
  –139 –139 –1
Adjusted opening MCEV
  180 2 005 1 808 3 993 3 567
Value of new business
  –380 256 333 209 123
Expected existing business contribution (reference rate)
  10 17 27 80
Expected existing business contribution (in excess of reference rate)
  9 –5 833 837
Transfers from VIF and required capital to free surplus
  666 –162 –504
Experience variances
  –376 60 45 –271 –174
Assumption changes
  –47 1 125 1 077 180
Other operating variance
  –328 72 677 421 –15
Operating MCEV earnings
  –456 230 2 527 2 301 194
Economic variances
  258 –119 –1 117 –979 581
Other non-operating variances
  86 –12 75 –13
Total MCEV earnings
  –112 111 1 398 1 397 763
Closing adjustments
  –32 –224 –174 –431 –198
Closing MCEV
  35 1 892 3 032 4 959 4 132

OPENING ADJUSTMENTS represent dividend payments from covered to non-covered business.

VALUE OF NEW BUSINESS contributions from free surplus and required capital sum up to the new business strain of CHF –124 million (2009: CHF –133 million). This represents the shareholders' share in acquisition expenses for new business. The VIF-component of CHF 333 million (2009: CHF 255 million) is the value of future risk-adjusted profits from new business.

EXPECTED EXISTING BUSINESS CONTRIBUTION (REFERENCE RATE) shows the unwinding of discount on all value of in-force components with reference rates as at start of year. Additionally the notional interest on the components of the net asset value is included.

EXPECTED EXISTING BUSINESS CONTRIBUTION (IN EXCESS OF REFERENCE RATE) represents the additional contribution to MCEV by taking into account investment returns for the reporting period expected at the beginning of the period over and above the initial reference rates for the period. Also releases from the period's contribution to the time value of financial options and guarantees and cost of residual non-hedgeable risks are included. In Swiss Life's previous MCEV reporting, this step was not separated; its effects were part of economic variances. The expected business contribution depends on asset allocation and capital market conditions at start of the year.

TRANSFERS FROM VALUE IN FORCE AND REQUIRED CAPITAL TO FREE SURPLUS include the transfer of the results of the preceding step to free surplus and subsequent split between free surplus and required capital. The total effect in this line is zero. As this step is carried out after taking into account the contributions in excess of reference rates the effect on free surplus is positive.

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. As a result of the low interest rate environment the situation in Switzerland was reassessed and subsequently reserves were strengthened.

ASSUMPTION CHANGES refer to the impact of the change on assumptions such as future mortality, morbidity, longevity rates, changes in anticipated surrenders and expenses, and the approach to future profit sharing. These are commented on in section 3.2.

OTHER OPERATING VARIANCE includes effects from strategic management decisions, modelling improvements and other reassessments. Comments are provided in the section 3 (results per market unit).

ECONOMIC VARIANCES represent the change in embedded value by replacing the starting economic scenarios by the closing ones. The effects from expected investment income over and above the reference rates are no longer included here – as was the case in Swiss Life's previous MCEV reporting – but in a preceding step. These do not contribute directly to economic variances anymore. Therefore, effects from deviations between actual and expected investment returns are included here. Drivers are lower reference rates and higher swaption implied volatilities compared to the 2009 closing. Foreign exchange rate fluctuations from a market unit's assets and liabilities in foreign currencies also contribute to economic variances.

OTHER NON-OPERATING VARIANCES consists mainly of tax variances.

CLOSING ADJUSTMENTS represent mainly currency exchange rate translation effects resulting from the consolidation in Swiss francs.

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 2010
Amounts in CHF million  
Change in MCEV

Change in value
of new business

Base value
  4 959 209
100 bp increase of interest rates (reference rates)
  473 10% 28 13%
100 bp decrease of interest rates (reference rates)
  –824 –17% –56 –27%
10% increase in equity / property market values
  723 15% 1
10% decrease in equity / property market values
  –808 –16% 1
25% increase in equity / property implied volatilities
  –276 –6% –14 –7%
25% decrease in equity / property implied volatilities
  227 5% 10 5%
25% increase in swaption implied volatilities
  –247 –5% –6 –3%
25% decrease in swaption implied volatilities
  397 8% 13 6%
10% increase in maintenance expenses
  –251 –5% –22 –11%
10% decrease in maintenance expenses
  249 5% 22 11%
10% proportionate increase in lapse rates
  –145 –3% –26 –12%
10% proportionate decrease in lapse rates
  156 3% 28 13%
5% proportionate increase in mortality rates (death cover)
  –14 –0% –3 –1%
5% proportionate decrease in mortality rates (annuities)
  –118 –2% –5 –2%
5% increase of longevity driver (annuities)
  –28 –1% –1 –0%
5% proportionate increase in morbidity rates
  –78 –2% –6 –3%
5% proportionate decrease in morbidity rates
  81 2% 6 3%
Required capital 100% statutory solvency capital
  157 3% 15 7%
1 not available

Overall, sensitivities are significantly reduced with respect to the ones for 2009. Management actions such as duration measures, cost reductions, strengthening of buffers and changes to the profit sharing approach contributed to this effect.

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 as well as assumed external reinsurance 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 2010
In CHF million  
IFRS net assets
  7 404
  –2 841
Reserves and investments valuation differences   –302
DAC / DOC and other intangible assets   –2 090
Goodwill 1   –449
Net asset value
  4 563
Value of in-force business
  3 032
Group MCEV 2
  7 595
1 Goodwill adjustments correspond to goodwill of covered business with the exception of CHF 72 million from French operations (see section 3.2).
2 Group MCEV includes CHF 1 443 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.