3 Information by Market Unit

3.1 Market Units

Swiss Life’s covered business is subdivided according to market units as follows:

Life, pension and assumed external reinsurance business in Switzerland
All businesses in France, mainly life, health and pension business
Life and pension business in Germany
Life and pension business in Luxembourg, Liechtenstein, and Singapore (together referred to as International)

This breakdown by market unit essentially coincides with the IFRS insurance segments in the annual report. There are minor differences since the MCEV classification generally follows the legal structure in order to ensure a correct modelling of the profit sharing. A divergence from the IFRS insurance segment reporting is the treatment of Swiss Life Asset Management in France, which is reported for MCEV purposes under France.

SWITZERLAND — Swiss Life’s main business in the Swiss market is group life business with a full range of offerings. The individual business includes traditional savings, risk and annuity products, as well as modern savings and retirement products with flexible guarantees. Swiss Life’s own sales force plays the major role in distribution, followed by brokers and AWD. The business for assumed external reinsurance is included here.

FRANCE — Insurance products include savings, annuity, and risk products as well as health insurance products. New business for life insurance focuses on multi-support products, combining traditional savings and unit-linked components. The main distribution channels are brokers, tied agents and own sales force. Additionally, France has developed strong relations with independent financial advisors and private banks.

GERMANY — Swiss Life sells traditional and modern products within 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.

INternational — Swiss Life offers private placement life insurance (PPLI) through its carriers 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 2011
In CHF million  
  Switzerland France1 Germany International Total
Net asset value
  1 096 1 082 353 –6 2 525
Free surplus
  637 57 28 –56 666
Required capital
  459 1 025 325 50 1 859
Value of in-force business
  1 593 815 173 255 2 836
Certainty equivalent value
  4 071 1 467 520 318 6 376
Time value of financial options and guarantees
  –1 991 –367 –235 –8 –2 601
Cost of residual non-hedgeable risks
  –280 –194 –74 –37 –584
Frictional costs of required capital
  –207 –91 –37 –18 –354
MCEV
  2 689 1 897 526 249 5 361
1 The value for France includes CHF 81 million in goodwill and intangible assets orginating from the non-life and non-health insurance operations.


MCEV by market unit for the year 2010
In CHF million  
  Switzerland France1 Germany International Total
Net asset value
  557 1 056 335 –20 1 928
Free surplus
  103 43 –43 –68 35
Required capital
  454 1 013 378 48 1 892
Value of in-force business
  1 655 824 271 282 3 032
Certainty equivalent value
  3 485 1 431 536 346 5 797
Time value of financial options and guarantees
  –1 407 –315 –180 –10 –1 912
Cost of residual non-hedgeable risks
  –234 –195 –38 –40 –507
Frictional costs of required capital
  –188 –97 –47 –14 –346
MCEV
  2 212 1 879 606 262 4 959
1 The value for France includes CHF 72 million in goodwill and intangible assets orginating from the non-life and non-health insurance operations.


SWITZERLAND — The increase in net asset value and free surplus is a consequence of the strong annual profit of 2011 and non-recurring items. The time value of financial options and guarantees increased due to increased interest rate volatilities.

Hybrid debt, all of which is allocated to Switzerland, includes the 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 as described in section 4.3. This difference was allocated to the net asset value in 2010 and is allocated to the value of in-force business in 2011.

FRANCE — The MCEV of France slightly increased despite the adverse capital market environment. Free surplus increased from the profit of the year despite a considerable new business strain and dividend payment.

The slightly higher TVOG of France at 31 December 2011 compared to the one reported a year ago, is mainly a consequence of higher interest rate volatilities partly offset by a de-risking of the strategic asset allocation. The health business does not offer financial options and guarantees and therefore does not contribute to the time value of financial options and guarantees.

GERMANY — While the net asset value increased in Germany despite a capital outflow, the VIF decreased because of the adverse capital market environment, especially due to the increased interest rate volatilities. Furthermore, an increase in free surplus was achieved for various reasons including lower policyholder bonuses in 2011.

INTernational — The business of private placement life insurance (PPLI) accounted for 80% of the opening MCEV. While assets under control increased during the reporting period, a revised outlook on future new business volumes for the PPLI business led to a decrease of the MCEV.

The negative free surplus of CHF –56 million is explained by not taking into account the goodwill relating to a past acquisition in Liechtenstein. The low TVOG reflects the absence of substantial financial options and guarantees across most business lines of International and a de-risking of the asset allocation in Corporate Solutions.

Chart



Value of new business by market unit – premiums and margins for the year 2011
Amounts in CHF million  
  Switzerland France Germany International Total
Value of new business
  10 80 30 30 150
New business strain 1   –52 –62 –8 –5 –127
Value of new business before new business strain   62 142 38 35 277
Annual premiums
  164 375 117 4 659
Single premiums
  1 437 1 550 323 2 791 6 101
Present value of new business premiums (PVNBP)
  3 875 4 478 1 739 2 822 12 914
Average annual premium multiplier
  14.9 7.8 12.1 7.8 10.3
New business annual premium equivalent (APE)
  307 530 150 283 1 269
New business margin (% PVNBP)
  0.3% 1.8% 1.7% 1.1% 1.2%
New business margin (% APE)
  3.4% 15.2% 19.8% 10.7% 11.9%
1 New business strain represents the effect on the net asset value from writing new business.


Value of new business by market unit – premiums and margins for the year 2010
Amounts in CHF million  
  Switzerland France Germany International Total
Value of new business
  30 84 41 54 209
New business strain 1   –41 –66 –9 –7 –124
Value of new business before new business strain   71 150 50 61 333
Annual premiums
  189 382 129 6 706
Single premiums
  1 164 2 099 333 4 202 7 798
Present value of new business premiums (PVNBP)
  3 819 4 838 1 707 4 242 14 607
Average annual premium multiplier
  14.0 7.2 10.7 6.7 9.6
New business annual premium equivalent (APE)
  306 592 163 426 1 486
New business margin (% PVNBP)
  0.8% 1.7% 2.4% 1.3% 1.4%
New business margin (% APE)
  9.8% 14.2% 25.0% 12.7% 14.0%
1 New business strain represents the effect on the net asset value from writing new business.


SWITZERLAND — New business consists of new contracts and new coverages on existing contracts. Within group life business, replacements and newly insured persons entering existing group life contracts are not accounted for as new business.

An increase in new business volume of modern products in individual life and single premiums in group life was partly offset by lower production for traditional products in individual life and assumed re-insurance business. The decline in value of new business and new business margin is caused by the low level of risk-free interest rates in combination with high interest rate volatilities and the level of interest rate guarantees. The strongly adverse impacts from the financial market environment could not fully be counteracted by positive operating impacts from re-pricing measures for individual life products, successfully launched new pension products and favourable persistency and expense assumption variances in group life.

FRANCE — The new business margin increased due to management actions such as pushing unit-linked and risk business, de-risking the strategic asset allocation and efficiency gains. These actions offset the negative capital market environment as well as the overall volume reduction and increased the new business margin.

The value of new business for the health business increased significantly compared to 2010 as a consequence of the increase of volumes and the higher share of death and disability business sold. In life business, a higher share and volume of unit linked business than in 2010 was achieved.

GERMANY — The new business margin of Germany has been negatively affected by economic conditions as well as market pressure on disability business. The share of risk and supplementary disability insurance contracts written remains at a high level, but slightly lower than in the previous year. As a result the value of new business is lower than in 2010.

INternational — The PPLI business is the main driver for the value of new business of International which accounts for CHF 30 million. The change in value compared to 2010 can be attributed to the performance of the PPLI business, where the reorientation in private banking led to a weakened demand and lower new business volumes. Pricing pressure and lower persistency assumptions reduced the margin by 20 bp. Because of the weight of PPLI within International, by far the biggest share of new business premiums consists of single premiums.

Analysis of earnings by market unit for the year 2011
In CHF million  
  Switzerland France Germany International Total
Opening MCEV
  2 212 1 879 606 262 4 959
Opening adjustments
  –46 –30 –22 –98
Adjusted opening MCEV
  2 166 1 849 584 262 4 861
New business value
  10 80 30 30 150
Expected existing business contribution (reference rate)
  3 8 1 3 14
Expected existing business contribution (in excess of reference rate)
  517 209 62 14 802
Experience variances
  –34 10 –17 –12 –53
Assumption changes
  124 –20 –23 –3 79
Other operating variance
  –240 7 –7 –41 –282
Operating MCEV earnings
  379 293 46 –9 710
Economic variances
  –166 –217 –95 –29 –507
Other non-operating variances
  101 1 1 102
Total MCEV earnings
  314 77 –49 –37 305
Closing adjustments
  209 –29 –10 24 195
Closing MCEV
  2 689 1 897 526 249 5 361


All market units contributed to the value creation with a positive value of new business.

SWITZERLAND — Strong operating earnings of CHF 379 million correspond to 18% of the adjusted opening MCEV.

The observed experience variances are a combination of effects from deviations in persistency and demographic experience relative to opening assumptions as well as reserve strengthening in the light of the low interest rate environment.

The assumption changes are due to a favourable experience-driven update of persistency assumptions in group life and the reduced cost base. This is partly offset by an update of assumptions in respect of policyholder behaviour such as earlier future retirements within group life contracts.

Other operating variances are mainly attributable to group life business, in particular due to a reduction in risk premiums from 2012 onwards. Further negative effects on other operating variances come from an increased real estate share in the strategic asset allocation. With regard to hybrid debt an adjustment and a positive revaluation had a negative impact overall, which is also included in other operating variance.

Negative economic variances are caused by the significant increase of interest rate volatilities. The setting of the liquidity premiums has a positive impact.

Other non-operating variances reflect changes to future taxation.

Closing adjustments are almost fully due to capital transfers to the Swiss market unit.

FRANCE — The operating MCEV earnings of CHF 293 million corresponds to 16% of the adjusted opening MCEV. France has a significant contribution from new business production. The expected existing business contribution, combined with a disciplined policyholder profit sharing allowed a strengthening of the bonus fund and an increase in free surplus despite dividend payments.

The expense reductions achieved contributed positively to the assumption variances while other effects, including anticipated increases of health claims ratios more than offset this.

Closing adjustments reflect the lower euro exchange rate in 2011.

GERMANY — The operating MCEV earnings of CHF 46 million correspond to 8% of the adjusted opening MCEV. Besides the strong new business contribution, operating expense reductions also contributed positively. This was offset by ongoing investments into new asset management and policy administration systems as well as other measures to strengthen the sustainability of the business.

Germany had a capital outflow of CHF 22 million.

Closing adjustments reflect the lower euro exchange rate in 2011.

INternational — The operating MCEV earnings of CHF –9 million represent –4% of the opening MCEV. This is driven by a reassessment of PPLI’s volume outlook given the reorientation in private banking and the new business premiums in 2011. On the other hand the business with corporate clients had a stabilising effect on the value.

Despite a substantial volume reduction, the value of new business still contributed strongly to the result with CHF 30 million or 12% of the total embedded value of International.

Experience variances and other operating variances are positively influenced by mortality and disability, while strong negative effects arise from the situation of the PPLI business, which still shows some characteristics of a start-up.

Substantial cost reductions were achieved in the corporate clients business: however, the revised new business outlook for PPLI more than compensated the impact on the MCEV.

Main driver for negative economic variances is the investment performance of assets under control and currency exchange effects, whereas the closing adjustments reflect a capital transfer to PPLI.

 

The future starts here.