2 Summary of MCEV Results

2.1 Key results
During 2012, the capital markets were characterised by a continued decline of the relevant interest rates, a tightening of corporate credit spreads from their extraordinary high levels at year-end 2011 and generally lower volatilities of interest rates and equities.

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

The following tables show key results as at 31 December 2012 compared to the results as at 31 December 2011:

In CHF million  
  2012 2011
Value of new business
  158 150
Present value of new business premium (PVNBP)
  11 276 12 914
New business margin (%PVNBP)
  1.4% 1.2%

Overall profitability of new business improved due to pricing measures taken, particularly in Switzerland, while the change in the economic conditions had a minor negative effect. As a consequence, the value of new business increased despite lower volume.

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


  2012 2011
Covered business   2 836 5 051 7 888 5 361
Non-covered business   1 741 n/a1 1 741 2 367
Group MCEV
  4 577 5 051 9 628 7 728
Total MCEV earnings
  2 035 347
Operating MCEV earnings
  644 772
1 n/a: not applicable

The value of covered business increased by 47%. Operating MCEV earnings contributed to this increase by profitable new business and a strong operating return on the in-force business enhanced by positive persistency experience and expense reductions. The improved capital market environment also contributed significantly to the earnings. Due to adjustments relating to AWD intangibles and the distributions to shareholders, the value of the non-covered business decreased.

The Group MCEV increased by 25% in total.

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  
  2012 2011
Net asset value
  2 836 2 525
Free surplus
  873 666
Required capital
  1 963 1 859
Value of in-force business
  5 051 2 836
Certainty equivalent value
  7 254 6 376
Time value of financial options and guarantees
  –1 172 –2 601
Cost of residual non-hedgeable risks
  –716 –584
Frictional costs of required capital
  –315 –354
  7 888 5 361

The net asset value went up by 12% mostly due to the operating profit of the year and economic effects. Free surplus – after financing new business – increased by CHF 208 million. The biggest contribution to free surplus generation results from Switzerland. Goodwill and other intangibles are not included in the net asset value, with the exception of France (see section 4.7).

The value of in-force business increased by 78%. This improvement is due to a higher certainty equivalent value and a notably lower TVOG. The reduction in TVOG is related to lower capital market volatilities and diversification effects from the inclusion of additional currencies in the economic scenarios as well as operating effects. The TVOG includes the cost of credit risk related to investments in bonds. The cost of credit risk amounts to CHF –653 million for 2012 compared to CHF –517 million for 2011.

2.3 Value of New Business
2.3.1 VALUE OF NEW BUSINESS, premiums and margins

Amounts in CHF million  
  2012 2011
Value of new business
  158 150
New business strain 1   –99 –127
Value of new business before new business strain   257 277
Annual premiums
  539 659
Single premiums
  5 604 6 101
Present value of new business premiums (PVNBP)
  11 276 12 914
Average annual premium multiplier
  10.5 10.3
New business annual premium equivalent (APE)
  1 100 1 269
New business margin (% PVNBP)
  1.4% 1.2%
New business margin (% APE)
  14.4% 11.9%
1 New business strain represents the effect on the net asset value from writing new business.

The following graph and table detail the drivers for the change in new business value and margin of the business sold in 2012 compared to the business sold in 2011.


Amounts in CHF million  

Change in NBM
Value of new business 2011
  12 914 150 1.2%
Economic variances
  415 –5 -0.1%
Volume, business mix and pricing variances
  –1 602 26 0.4%
Expense variances
  0 –1 0.0%
Other variances
  –413 –12 0.0%
FX variances
  –38 0 0.0%
Value of new business 2012
  11 276 158 1.4%

The new business volume in Switzerland remains stable, the French and German units experienced lower volumes in challenging insurance markets. Overall, the new business volume measured in PVNBP decreased by 13%. Despite this reduction in volume, the new business margin improved due to continued margin management.

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

2.4 Group MCEV — Analysis of Earnings
The table below shows the development of Group MCEV split by components from 31 December 2011 to 31 December 2012.

In CHF million  
  Covered business
business IFRS

Total Group MCEV

Total Group MCEV
  2012 2011
Opening Group MCEV
  5 361 2 367 7 728 7 595
Opening adjustments
  56 –200 –144 –142
Adjusted opening Group MCEV
  5 417 2 168 7 584 7 453
Operating MCEV earnings
  992 –349 644 772
Non-operating MCEV earnings
  1 420 –28 1 392 –424
Total MCEV earnings
  2 412 –377 2 035 347
Other movements in IFRS net equity
  n/a1 –2 –2 –6
Closing adjustments
  59 –48 11 –67
Closing Group MCEV
  7 888 1 741 9 628 7 728
1 n/a: not applicable

The opening adjustment of the Group MCEV represents the distribution to shareholders out of the capital contribution reserve of CHF 4.50 per share or a total of CHF 144 million as described in the Consolidated Financial Statements (Note 27).

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 main driver for this year’s negative operating MCEV earnings is the impairment loss on the AWD intangibles of CHF 578 million as described in the Consolidated Financial Statements (Note 18).

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 2011 originates almost entirely from the covered business.

The other movements in IFRS net equity (non-covered business only) include the sale and purchase of treasury shares, effects from changes in unrealised gains and losses and currency exchange rate effects on goodwill.

The closing adjustments result mainly from transfer of funds between covered and non-covered business and currency exchange rate developments.

2.5 Covered Business — Analysis of Earnings
The graph and table below show the analysis of earnings for the covered business in 2012:


In CHF million  
  Free surplus Required capital VIF MCEV MCEV
  2012 2011
Opening MCEV
  666 1 859 2 836 5 361 4 959
Opening adjustments
  56 56 –98
Adjusted opening MCEV
  721 1 859 2 836 5 417 4 861
Value of new business
  –272 172 257 158 150
Expected existing business contribution (reference rate)
  25 –15 19 30 14
Expected existing business contribution (in excess of reference rate)
  14 0 615 629 802
Transfers from VIF and required capital to free surplus
  686 –214 –473
Experience variances
  –319 116 209 5 –53
Assumption changes
  –1 –5 455 449 79
Other operating variance
  –69 –4 –206 –279 –282
Operating MCEV earnings
  66 50 876 992 710
Economic variances
  51 43 1 373 1 468 –507
Other non-operating variances
  –10 3 –41 –47 102
Total MCEV earnings
  106 97 2 209 2 412 305
Closing adjustments
  46 7 6 59 195
Closing MCEV
  873 1 963 5 051 7 888 5 361

Opening adjustments represent dividend payments from non-covered to covered business.

Value of new business contributions from free surplus and required capital sum up to the new businessstrain of CHF –99 million (2011: CHF –127 million). This represents the shareholders’ share in acquisition expenses for new business. The VIF-component of CHF 257 million (2011: CHF 277 million) is the value of future 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 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. The expected business contribution is explained to a large extent by spreads expected to be earned on the corporate bond and real estate portfolio.

Transfers from value in force and required capital to free surplus include the transfer of the results of the preceding step from value in force to free surplus. Also, the required capital is normally reduced after this step, resulting in an equal increase of free surplus. The total effect in this line is zero. In the context of a life insurer’s business model, this should be seen in combination with effects from new business which partly reverses this effect by an increase of required capital and a reduction of net asset value.

Experience variances aggregate the impact of actual development versus expectations regarding non-economic assumptions such as mortality, expenses, lapses, as well as the deviations in handling of additional reserves. In total the effect is small with CHF 5 million. A variety of effects including reserve strengthening had overall almost opposite impacts on the net asset value and the value of in-force business. The largest contributions originate from the Swiss business.

Assumption changes refer to the impact of the change on assumptions such as future expense, surrender, mortality, morbidity, longevity rates. The positive contribution is driven by an overall very favourable persistency experience and a further reduced expense base while a minor negative contribution stems from updated demographic assumptions.

Other operating variance includes the effects from the issuance of new and restructuring of existing hybrid debt and PPLI’s revised outlook on future new business.

Economic variances represent the change in embedded value by replacing the starting economic scenarios by the closing ones. Effects from deviations between actual and expected investment returns are included here. Lower swaption implied volatilities and lower credit spreads had a positive impact on MCEV overall as had the inclusion of British pound and Canadian dollar in economic scenarios (section 4.4) in Switzerland. On the other hand, lower reference rates including lower liquidity premiums had a negative effect.

Other non-operating variances encompass effects relating to government-set parameters, such as taxes.

Closing adjustments represent the transfer of funds into the covered business and currency exchange rate translation effects resulting from the consolidation in Swiss francs.

2.6 Sensitivities
Sensitivities for MCEV with regard to reference rate levels are further reduced while operational and demographic sensitivities as well as economic sensitivities with regard to implied volatilities of equity/property and their market values remained overall stable compared to the ones for 2011.

The economic sensitivities are assumed to occur after the new business contracts have been sold, indicating how the value of in-force business and the value of new business written would be affected by the economic shocks.

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 2012
Amounts in CHF million  
Change in MCEV

Change in value
of new business

Base value
  7 888 158
100 bp increase of interest rates (reference rates)
  166 2% 16 10%
100 bp decrease of interest rates (reference rates)
  –567 –7% –40 –25%
10% increase in equity / property market values
  653 8% 1 1
10% decrease in equity / property market values
  –732 –9% 1 1
25% increase in equity / property implied volatilities
  –261 –3% –6 –4%
25% decrease in equity / property implied volatilities
  211 3% 6 4%
25% increase in swaption implied volatilities
  –444 –6% –11 –7%
25% decrease in swaption implied volatilities
  –15 –0% –1 –1%
10% increase in maintenance expenses
  –252 –3% –20 –13%
10% decrease in maintenance expenses
  249 3% 21 13%
10% proportionate increase in lapse rates
  –141 –2% –16 –10%
10% proportionate decrease in lapse rates
  159 2% 19 12%
5% proportionate increase in mortality rates (death cover)
  –22 –0% –5 –3%
5% proportionate decrease in mortality rates (annuities)
  –128 –2% –3 –2%
5% increase of longevity driver (annuities)
  –60 –1% –2 –1%
5% proportionate increase in morbidity rates
  –61 –1% –6 –4%
5% proportionate decrease in morbidity rates
  54 1% 5 3%
Required capital 100% statutory solvency capital
  144 2% 10 6%
1 not available

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 policyholder bonuses 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 2012
In CHF million  
IFRS net assets
  10 253
  –5 676
Reserve and investment valuation differences   –3 550
DAC / DOC and other intangible assets   –1 668
Goodwill 1   –458
Net asset value
  4 577
Value of in-force business
  5 051
Group MCEV 2
  9 628
1 Goodwill adjustments correspond to goodwill of covered business with the exception of CHF 79 million from French operations (see section 3.2).
2 Group MCEV includes CHF 767 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.