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 and lower 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, Swiss Life in 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, Singaporeand Luxembourg. In Luxembourg, Swiss Life also provides group insurance solutions for international and local corporate clients through Corporate Clients.

3.2 Results by Market Unit
MCEV by market unit for the year 2012
In CHF million  
  Switzerland France1 Germany International Total
Net asset value
  1 273 1 171 362 30 2 836
Free surplus
  838 95 –33 –27 873
Required capital
  435 1 076 395 57 1 963
Value of in-force business
  3 780 924 144 204 5 051
Certainty equivalent value
  4 845 1 729 414 267 7 254
Time value of financial options and guarantees
  –579 –419 –161 –13 –1 172
Cost of residual non-hedgeable risks
  –304 –303 –73 –36 –716
Frictional costs of required capital
  –182 –83 –36 –14 –315
MCEV
  5 053 2 094 506 234 7 888
1 The value for France includes CHF 79 million in goodwill and intangible assets originating from the non-life and non-health insurance operations.


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 originating from the non-life and non-health insurance operations.


SWITZERLAND
The MCEV almost doubled. The increase of the value of in-force business is driven by favourable capital market developments as laid out in section 2.5 and better persistency and reduced expenses. The higher net asset value results from a considerable annual profit achieved despite substantial balance sheet strengthening. The free surplus increased by CHF 201 million due to operating earnings after financing the new business production.

FRANCE
The MCEV of Swiss Life in France increased due to operating earnings and was supported by an overall favourable capital market environment with both the net asset value and the value of in-force business contributing positively.

GERMANY
Although the drop in reference rates generally has a strong effect in the German life insurance market with its long-term guarantees, the decrease of MCEV was contained.

INTernational
Private Placement Life Insurance (PPLI) and Corporate Clients account each for about 50% of the closing MCEV. The decrease of 6% is driven by a revised outlook on future new business volumes for the PPLI business, which is partly offset by an improved MCEV of Corporate Clients.

The negative free surplus is explained by not taking into account the goodwill relating to a past acquisition in Liechtenstein.

Chart



Value of new business by market unit – premiums and margins for the year 2012
Amounts in CHF million  
  Switzerland France Germany International Total
Value of new business
  74 50 6 28 158
New business strain 1   –45 –51 –4 1 –99
Value of new business before new business strain   120 101 10 27 257
Annual premiums
  159 304 66 10 539
Single premiums
  1 420 1 363 242 2 578 5 604
Present value of new business premiums (PVNBP)
  3 915 3 669 1 039 2 653 11 276
Average annual premium multiplier
  15.7 7.6 12.0 7.7 10.5
New business annual premium equivalent (APE)
  301 441 91 268 1 100
New business margin (% PVNBP)
  1.9% 1.4% 0.6% 1.0% 1.4%
New business margin (% APE)
  24.7% 11.3% 6.5% 10.4% 14.4%
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 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.


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.

New business volume was overall stable. The very positive development in the value of new business and the new business margin is supported by comprehensive re-pricings and the launch of new guarantee concepts for individual life products. Allowing for some newly modelled products the value of new business for second pillar business remained stable.

FRANCE
Negative effects from economic variances, mainly due to the decrease of the reference rate, and from lower new business volumes were partly counteracted by operating measures.

For life business, the impacts from lower reference rates and lower persistency were partly offset by reduced acquisition expenses.

For health operations, lower volumes and higher future lapse rates assumed led to a lower value of new business. This was partly compensated by efficiency gains, lower commissions paid to the brokers, and higher tariffs, which preserved the profitability.

GERMANY
The value of new business dropped considerably due to a multitude of developments. Substantially lower reference rates negatively affected the profitability of the long-term traditional part of the business which experienced higher volumes due to regulatory changes, while the risk and supplementary disability insurance business incurred lower volumes. Re-pricing measures and the introduction of long-term care products did partly offset the aforementioned effect.

INternational
Both PPLI and Corporate Clients contributed substantially to the value of new business of International which accounts for CHF 28 million. PPLI’s revised outlook on future new business led to a substantial reduction of its value of new business and, overall, to a margin reduction for International. Corporate Clients’ value of new business improved substantially. It shows a strong margin due to higher volumes and a favourable business mix. 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 2012
In CHF million  
  Switzerland France Germany International Total
Opening MCEV
  2 689 1 897 526 249 5 361
Opening adjustments
  74 –18 56
Adjusted opening MCEV
  2 763 1 897 508 249 5 417
New business value
  74 50 6 28 158
Expected existing business contribution (reference rate)
  14 9 4 3 30
Expected existing business contribution (in excess of reference rate)
  370 187 64 9 629
Experience variances
  64 –46 3 –17 5
Assumption changes
  386 –39 97 5 449
Other operating variance
  –110 –71 –5 –92 –279
Operating MCEV earnings
  799 89 169 –65 992
Economic variances
  1 514 108 –160 6 1 468
Other non-operating variances
  –22 –12 –14 1 –47
Total MCEV earnings
  2 290 185 –5 –59 2 412
Closing adjustments
  12 3 44 59
Closing MCEV
  5 053 2 094 506 234 7 888


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

SWITZERLAND
Opening adjustments reflect dividend payments from Germany and Swiss Life Investment Management.

Strong operating earnings of CHF 799 million correspond to a return of 30% on MCEV.

The positive experience variances include effects from balance sheet strengthening measures such as a reduction of technical interest rates, and effects from persistency and demographic experience.

Better persistency experience, both in group and individual life, and a further reduced expense base drive the positive assumption changes while a slightly negative effect results from updated demographic assumptions.

The negative other operating variances are mainly attributable to the issuance of new and restructuring of existing hybrid debt leading to an increase of hybrid debt with extended maturity profile. Additional effects stem from refinements and updates of management rules.

The positive economic variances are explained in section 2.5.

FRANCE
The operating MCEV earnings of CHF 89 million result mainly from the strong contribution of existing business and profitable new business in life and health, whereas changed policyholder behaviour in the French health market led to negative variances.

Experience variances include improvements in claims ratios, especially in health and disability business, which were offset by higher lapse rates, both in life and health business.

The higher lapse rates in health business mentioned are assumed to remain higher than previously anticipated and therefore result in negative assumptions changes, which were partially mitigated by achieved efficiency gains projected.

The other operating variances relate to model refinements covering inflation and other elements, as well as increased cost of credit risk.

In 2010, insurance companies were subject to an “exit tax” of 10% on the specific French GAAP “réserve de capitalisation”. An additional contribution of 7% has become applicable for 2012, which is reflected in other non-operating variances.

Economic variances are explained in section 2.5.

Closing adjustments are the effects of the difference between the closing euro exchange rate and its opening forward rate.

GERMANY
Germany had a capital outflow of CHF 18 million.

The operating MCEV earnings of CHF 169 million result mainly from the contribution of existing business and from an update of anticipated policyholder behaviour based on experience in the continued low interest rate environment.

The substantially decreased reference rates – liquidity premium in euro dropped by 59 bp – led to a negative economic variance due to the long-term nature of the German in-force business, which was partly offset by the benefits of lower capital market volatilities.

Closing adjustments are the effects of the difference between the closing euro exchange rate and its opening forward rate.

INternational
The operating MCEV earnings of CHF –65 million are driven by a reassessment of PPLI’s outlook, given the new focus for new business on the two carriers in Luxembourg and Singapore and the continuing uncertainties in private banking. On the other hand, the business with corporate clients had a considerably positive effect on the operating earnings.

The value of new business contributed strongly to the MCEV earnings with CHF 28 million or 12% of the total closing MCEV of International.

Efficiency gains on expenses were achieved in the corporate clients business and led to positive assumptions changes. The aforementioned revised outlook for PPLI’s future new business drives the negative other operating variance.

By reason of the type and composition of International’s business, changes in economic conditions have a limited impact compared to other market units.

Closing adjustments include capital transfers for PPLI and currency exchange rate effects.

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