Notes to the Financial Annual Statements

1 General Information

The Swiss Life Group is one of Europe’s leading comprehensive life and pensions and financial solutions providers. In its core markets of Switzerland, France and Germany, Swiss Life offers individuals and corporations comprehensive and individual advice plus a broad range of own and partner products through its sales force and distribution partners such as brokers and banks.

Swiss Life Select, tecis, HORBACH, Proventus and Chase de Vere advisors choose suitable products for customers from the market according to the Best Select approach. Swiss Life Asset Managers offers institutional and private investors access to investment and asset management solutions. Swiss Life provides multinational corporations with employee benefits solutions and high net worth individuals with structured life and pensions products.

Distribution out of capital contribution reserve

For the 2014 financial year, a distribution was made to the shareholders of Swiss Life Holding Ltd (hereinafter referred to as “Swiss Life Holding”) from the capital contribution reserve instead of a dividend payment from profit. This amounted to CHF 207 million (CHF 6.50 per registered share) and was paid in 2015.

Approval of financial statements

On 15 March 2016, the Board of Directors approved the annual financial statements and the financial report and authorised them for issue. The financial report, therefore, only reflects events up to that date.

2 Summary of Significant Accounting Policies

The principal accounting policies are set out below. These policies have been applied consistently to all the periods presented unless otherwise stated.

2.1 Basis of preparation

The consolidated financial statements of Swiss Life have been prepared in accordance and comply with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared on a historical cost basis, except for the following assets and liabilities which are stated at their fair value: derivatives, financial assets and liabilities at fair value through profit or loss, financial assets classified as available for sale and investment property.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3.

Figures may not add up exactly due to rounding.

2.2 Changes in accounting policies

No new or revised accounting standards or interpretations were adopted in 2015.

2.3 Consolidation principles

The Group’s consolidated financial statements include the assets, liabilities, income and expenses of Swiss Life Holding and its subsidiaries. A subsidiary is an entity over which Swiss Life Holding has control. Control is achieved if Swiss Life Holding has the power over the subsidiary, is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to use its power to affect its returns. Subsidiaries are consolidated from the date on which effective control is obtained. All intercompany balances, transactions and unrealised gains on such transactions have been eliminated. Unrealised losses have been eliminated unless the transaction provides evidence of an impairment of the asset transferred. A listing of the Group’s subsidiaries is set out in note 35. The financial effect of acquisitions and disposals of subsidiaries is shown in note 28. Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions.

The Swiss Life Group acts as a fund manager for various investment funds. In order to determine if the Group controls an investment fund, aggregate economic interest (including performance fees, if any) is taken into account. Third-party rights to remove the fund manager without cause (kick-out rights) are also taken into account.

Associates for which the Group has significant influence are accounted for using the equity method. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those decisions. The investment is initially recognised at cost and subsequently adjusted to recognise the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. The Group’s share of net income is included from the date on which significant influence begins until the date on which significant influence ceases. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. The carrying amount includes goodwill on the acquisition.

The Group has elected to measure certain associates held by venture capital entities and investmentlinked insurance funds at fair value through profit or loss, as permitted by IAS 28 Investments in Associates and Joint Ventures. Changes in the fair value of such investments are included in net gains/losses on financial instruments at fair value through profit or loss.

A listing of the Group’s principal associates is shown in note 15.

Non-controlling interest is the part of profit or loss and net assets of a subsidiary attributable to equity interest that is not controlled, directly or indirectly, through subsidiaries by the parent. The amount of non-controlling interest comprises the proportion of the net fair value of the identifiable assets, liabilities and contingent liabilities not attributable, directly or indirectly, to the parent at the date of the original acquisition, goodwill attributable to non-controlling interest, if any, and the proportion of changes in equity not attributable, directly or indirectly, to the parent since the date of acquisition. Summarised financial information of subsidiaries with material non-controlling interests is set out in note 26.

2.4 Foreign currency translation and transactions

Functional and presentation currency
Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the Group’s entities operate (the “functional currency”). The consolidated financial statements are presented in millions of Swiss francs (CHF), which is the Group’s presentation currency.

Foreign currency exchange rates

31.12.201531.12.2014Average 2015Average 2014
1 British pound (GBP)1.47291.54851.47181.5082
1 Czech koruna (CZK)0.04020.04340.03920.0441
1 Euro (EUR)1.08631.20261.06891.2163
100 Polish zloty (PLN)25.447028.077225.532729.0058
1 Singapore dollar (SGD)0.70550.75020.70040.7225
1 US dollar (USD)0.99970.99390.96300.9155

Foreign currency translation
On consolidation, assets and liabilities of Group entities denominated in foreign currencies are translated into Swiss francs at year-end exchange rates. Income and expense items are translated into Swiss francs at the annual average exchange rate. Goodwill reported before 1 January 2005 is translated at historical exchange rates. Goodwill for which the acquisition date is on or after 1 January 2005 is carried in the foreign operation’s functional currency and is translated into Swiss francs at year-end exchange rates. The resulting translation differences are recorded in other comprehensive income as cumulative translation adjustments. On disposal of foreign entities, such translation differences are recognised in profit or loss as part of the gain or loss on the sale.

Foreign currency transactions
For individual Group entities, foreign currency transactions are accounted for using the exchange rate at the date of the transaction. Outstanding balances in foreign currencies at year-end arising from foreign currency transactions are translated at year-end exchange rates for monetary items while historical rates are used for non-monetary items. Those non-monetary items in foreign currencies recorded at fair values are translated at the exchange rate on the revaluation date.

2.5 Cash and cash equivalents

Cash amounts represent cash on hand and demand deposits. Cash equivalents are primarily short-term highly liquid investments with an original maturity of 90 days or less. Cash and cash equivalents include cash and cash equivalents for the account and risk of the Swiss Life Group’s customers.

2.6 Derivatives

The Group enters into forward contracts, futures, forward rate agreements, currency and interest rate swaps, options and other derivative financial instruments for hedging risk exposures or for trading purposes. The notional amounts or contract volumes of derivatives, which are used to express the volume of instruments outstanding and to provide a basis for comparison with other financial instruments, do not, except for certain foreign exchange contracts, represent the amounts that are effectively exchanged by the parties and, therefore, do not measure the Group’s exposure to credit risk. The amounts exchanged are calculated on the basis of the notional amounts or contract volumes and other terms of the derivatives that relate to interest or exchange rates, securities prices and the volatility of these rates and prices.

All derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value as assets when favourable to the Group and as liabilities when unfavourable. Gains and losses arising on remeasurement to fair value are recognised immediately in profit or loss, except for derivatives that are used for cash flow hedging.

Derivatives embedded in other financial instruments or in insurance contracts which are not closely related to the host contract are separated and measured at fair value, unless they represent surrender options with a fixed strike price embedded in host insurance contracts and host investment contracts with discretionary participation features. Changes in the fair value are included in profit or loss. Derivatives embedded in insurance contracts which are closely related or which are insurance contracts themselves, such as guaranteed annuity options or guaranteed interest rates, are reflected in the measurement of the insurance liabilities. Options, guarantees and other derivatives embedded in an insurance contract that do not carry any insurance risk are recognised as derivatives.

Derivatives and other financial instruments are also used to hedge or modify exposures to interest rate, foreign currency and other risks if certain criteria are met. Such financial instruments are designated to offset changes in the fair value of an asset or liability and unrecognised firm commitments (fair value hedge), or changes in future cash flows of an asset, liability or a highly probable forecast transaction (cash flow hedge) or hedges of net investments in foreign operations. In a qualifying fair value hedge, the change in fair value of a hedging derivative is recognised in profit or loss. The change in fair value of the hedged item attributable to the hedged risk adjusts the carrying value of the hedged item and is also recognised in profit or loss.

In a qualifying cash flow hedge, the effective portion of the gain or loss on the hedging derivative is recognised in other comprehensive income. Any ineffective portion of the gain or loss is recognised immediately in profit or loss. For a hedged forecast transaction that results in the recognition of a financial asset or liability, the associated gain or loss recognised in other comprehensive income is reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. When a hedging instrument expires or is sold, or a hedge no longer meets the criteria for hedge accounting, any cumulative hedging gain or loss at that time remains in other comprehensive income and is recognised when the forecast transaction is ultimately recognised in profit or loss. However, when a forecast transaction is no longer expected to occur, the cumulative hedging gain or loss is immediately transferred from other comprehensive income to profit or loss.

Hedges of net investments in foreign operations (net investment hedges) are accounted for similarly to cash flow hedges, i.e. the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and any ineffective portion is recognised immediately in profit or loss. On the disposal of the foreign operation, the gains or losses included in other comprehensive income are reclassified to profit or loss.

When a hedge relationship is no longer effective, expires or is terminated, hedge accounting is discontinued from that point on.

2.7 Financial assets

“Regular way” purchases and sales of financial assets are recorded on the trade date. The amortisation of premiums and discounts is computed using the effective interest method and is recognised in profit or loss as an adjustment of yield. Dividends are recorded as revenue on the ex-dividend date. Interest income is recognised on an accrual basis.

A financial asset is derecognised when the contractual rights to the cash flows from the financial asset have expired or substantially all risks and rewards of ownership have been transferred or the risks and rewards have neither been transferred nor retained, but control of the asset has been transferred.

Financial assets at fair value through profit or loss (FVPL)
Financial assets at fair value through profit or loss comprise financial assets held for trading and financial assets designated as at fair value through profit or loss. Financial assets which the Group buys with the intention to resell in the near term are classified as held for trading. Financial assets designated as at fair value through profit or loss are irrevocably designated as such when initially recognised. Financial assets are primarily designated as at fair value through profit or loss in the following instances:

  • Financial assets backing insurance liabilities and liabilities arising from investment contracts for the account and risk of the Swiss Life Group’s customers (contracts with unit-linked features, separate accounts, private placement life insurance) in order to avoid measurement inconsistencies with the corresponding liabilities.
  • Certain equity instruments with a quoted price in an active market which are managed on a fair value basis.
  • Certain financial assets with embedded derivatives which otherwise would have to be separated.
  • Certain financial assets and financial liabilities where a measurement or recognition inconsistency can be avoided (“accounting mismatch”) that would otherwise arise from measuring those assets or liabilities or recognising the gains and losses on them on different bases.

Interest, dividend income and realised and unrealised gains and losses are included in net gains/ losses on financial instruments at fair value through profit or loss.

Financial assets available for sale (AFS)
Financial assets classified as available for sale are carried at fair value. Financial assets are classified as available for sale if they do not qualify as held to maturity, held for trading, loans and receivables or if they are not designated as at fair value through profit or loss. Gains and losses arising from fair value changes, being the difference between fair value and cost/amortised cost, are reported in other comprehensive income. On disposal of an AFS investment, the cumulative gain or loss is transferred from other comprehensive income to profit or loss for the period. Gains and losses on disposal are determined using the average cost method.

Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments. Loans include loans originated by the Group and investments in debt instruments which are not quoted in an active market and for which no intention of sale in the near term exists. Loans are initially recognised at fair value, net of transaction costs, or direct origination costs. Subsequent measurement is at amortised cost using the effective interest method.

Financial assets reclassified from financial assets available for sale to loans due to the disappearance of an active market are not reclassified back to financial assets available for sale if the market becomes active again.

Financial assets pledged as collateral
Transfers of securities under repurchase agreements or under lending agreements continue to be recognised if substantially all the risks and rewards of ownership are retained. They are accounted for as collateralised borrowings, i.e. the cash received is recognised with a corresponding obligation to return it, which is included in other financial liabilities.

Financial assets that have been sold under a repurchase agreement or lent under an agreement to return them, and where the transferee has the right to sell or repledge the securities given as collateral, are reclassified to financial assets pledged as collateral.

Measurement rules are consistent with the ones for corresponding unrestricted financial assets.

2.8 Impairment of financial assets

The Group reviews the carrying value of financial assets regularly for indications of impairment.

Financial assets at amortised cost
The Group assesses at each balance sheet date if there is objective evidence that a financial asset or a group of financial assets is impaired. It is assessed whether there is objective evidence of impairment individually for financial assets that are individually significant and collectively for financial assets that are not individually significant.

A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Held-to-maturity securities and loans and receivables are assessed for impairment when a significant decrease in market value related to credit risk arises, namely after a downgrade of a debtor’s rating below single B– after initial recognition (i.e. CCC or lower according to Standard and Poor’s or equivalent) or when payments of principal and/or interest are overdue by more than 90 days. If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows from groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by the amount that represents the difference between the carrying amount and the new amortised cost value by adjusting the allowance account. The amount of the reversal is recognised in profit or loss.

Financial assets carried at fair value (available for sale)
At each balance sheet date, an assessment is made whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of an equity instrument classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered objective evidence of impairment. In this respect, a decline of 30% or more is regarded as significant, and a period of 12 months or longer is considered to be prolonged. In such a situation, the impairment loss – measured as the difference between the acquisition cost and the current fair value – is removed from other comprehensive income and recognised in profit or loss. After recognition of an impairment loss, any further declines in fair value are recognised in profit or loss, and subsequent increases in fair value are recognised in other comprehensive income.

Available-for-sale debt securities are assessed for impairment when a significant decrease in market value related to credit risk arises, namely after a downgrade of a debtor’s rating below single B– after initial recognition (i.e. CCC or lower according to Standard and Poor’s or equivalent) or when payments of principal and/or interest are overdue by more than 90 days. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event after the impairment loss was recognised, the impairment loss is reversed through profit or loss.

Impairment losses are presented in the income statement as part of net gains and losses on financial assets.

2.9 Investment property

Investment property is property (land or a building or both) held by the Group to earn rentals or for capital appreciation or both, rather than for administrative purposes.

Investment property includes completed investment property and investment property under construction. Completed investment property consists of investments in residential, commercial and mixed-use properties primarily located within Switzerland.

Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for administrative purposes. If these portions could be sold separately, they are accounted for separately. If these portions could not be sold separately, the portion is investment property only if an insignificant portion is held for administrative purposes.

Investment property is carried at fair value and changes in fair values are recognised in profit or loss. Fair values are determined either on the basis of periodic independent valuations or by using discounted cash flow projections. The valuation of each investment property is reviewed by an independent recognised valuer at least once every three years. Rental income is recognised on a straight-line basis over the lease term. The fair value of an investment property is measured based on its highest and best use. The highest and best use of an investment property takes into account the use of the asset that is physically possible, legally permissible and financially feasible.

Investment property under construction is also measured at fair value with changes in fair value being recognised in profit or loss. However, where the fair value is not reliably determinable, theproperty is measured at cost until either its fair value becomes reliably measurable or construction is completed.

Investment property being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be measured at fair value.

If an item of property and equipment becomes an investment property because its use has changed, the positive difference resulting between the carrying amount and the fair value of this item at the date of transfer is recognised in other comprehensive income as a revaluation surplus. However, to the extent a fair value gain reverses a previous impairment loss, the gain is recognised in profit or loss. Any resulting decrease in the carrying amount of the property is recognised in net profit or loss for the period. Upon the disposal of such investment property, any revaluation surplus included in other comprehensive income is transferred to retained earnings; the transfer is not made through profit or loss.

If an investment property becomes owner-occupied, it is reclassified as property and equipment, and its fair value at the date of reclassification becomes its cost for subsequent measurement purposes.

2.10 Insurance operations

Definition of insurance contracts
Insurance contracts are contracts under which one party accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. Significant insurance risk exists if an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction). The classification of contracts identifies both the insurance contracts that the Group issues and reinsurance contracts that the Group holds. As a Group policy, Swiss Life considers those contracts to be insurance contracts that require the payment of additional benefits in excess of 10% of the benefits that would be payable if the insured event had not occurred, excluding scenarios that lack commercial substance.

The Group has assessed the significance of insurance risk on a contract-by-contract basis. Contracts that do not transfer insurance risk at inception but that transfer insurance risk at a later date are classified as insurance from inception unless the Group remains free to price the insurance premium at a later date. In this case, the contract is classified as insurance when the insurance premiums are specified. A contract that qualifies as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire.

Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts.

Investment contracts with and without discretionary participation features
For investment contracts that contain discretionary participation features (see below), the same recognition and measurement principles as for insurance contracts apply. For investment contracts without discretionary participation features, the recognition and measurement rules for financial instruments apply.

Recognition and measurement principles
Subject to certain limitations, the Group uses its existing accounting policies for the recognition and measurement of insurance contracts and investment contracts with discretionary participation features that it issues (including related deferred acquisition costs and related intangible assets) and reinsurance contracts that it holds. The existing accounting policies for recognition and measurement have primarily been based on the requirements of the Generally Accepted Accounting Principles in the United States (status of US GAAP as of the first application of IFRS 4 Phase I).

The accounting policies for insurance contracts and investment contracts with discretionary participation features have been modified as appropriate to be consistent with the IFRS requirements. Guidance dealing with similar and related issues, definitions, recognition and measurement criteria for assets, liabilities, income and expenses as set out in the IASB Framework for the Preparation and Presentation of Financial Statements has been considered.

Discretionary participation features (DPF)
Discretionary participation features are defined in IFRS 4 Insurance Contracts as contractual rights to receive, as a supplement to guaranteed benefits, additional benefits which are likely to be a significant portion of the total contractual benefits and whose amount or timing is contractually at the discretion of the issuer. These DPF are contractually based on the performance of a specified pool of contracts or a specified type of contract or on the realised and unrealised investment returns on a specified pool of assets held by the issuer or on the profit or loss of the company. The unrealised investment returns comprise gains/losses recognised in other comprehensive income.

The bonuses which are allocated to the policyholders in the participating insurance business (insurance and investment contracts) in Switzerland, France, Germany, Luxembourg and Liechtenstein generally follow the definition of DPF as set out in IFRS 4 Insurance Contracts.

IFRS 4 Insurance Contracts is silent on the measurement of the amounts identified as DPF. This topic will be solved in phase II of the project of the International Accounting Standards Board on insurance contracts.

The accounting for the amounts identified as DPF has been done as follows:

In jurisdictions where no statutory minimum distribution ratio (“legal quote”) exists, the contractual right to receive, as a supplement to guaranteed benefits, additional benefits which are likely to be a significant portion of the total contractual benefits arises when management ratifies the allocation of policyholder bonuses. When ratified by management, a corresponding liability is set up. To the extent discretion with regard to amount and/or timing is involved, these amounts are included within policyholder participation liabilities. In that respect the policyholder bonus reserve set up in the statutory accounts for these contracts is regarded as discretionary. For these contracts the entire DPF is classified as a liability.

In other jurisdictions, a statutory minimum distribution ratio (“legal quote”) exists for certain types of business. Geographical areas in which the Swiss Life Group is present and in which such a statutory minimum distribution ratio (“legal quote”) exists are as follows: Switzerland (only group business subject to “legal quote”), France (life insurance business) and Germany. For these contracts the Swiss Life Group defines DPF as the policyholder bonus reserve set up in the statutory accounts and the amount of temporary valuation differences between the IFRS basis and statutory basis on the assets and liabilities relating to the respective insurance portfolio measured using the statutory minimum distribution ratio (“legal quote”). The policy of the Swiss Life Group is to classify as a liability the entire DPF as defined.

When such temporary valuation differences disappear (e.g. management decides to realise certain unrealised gains and losses on assets), additional benefits which arise from the application of the statutory minimum distribution ratio (“legal quote”) are allocated to the policyholders and become part of their guaranteed benefits. These amounts are always accounted for as liabilities.

Because there is a direct effect on the measurement of DPF liabilities when asset gains or losses are realised, changes in these liabilities are recognised in other comprehensive income when, and only when, the valuation differences on the assets arise from gains or losses recognised in other comprehensive income (“shadow accounting”).

As the liabilities to policyholders arising from the insurance business are fully recognised, no further liabilities relating to the rights arising from DPF have been set up.

The statutory minimum distribution ratios (“legal quote”) relating to the Swiss Life Group’s operations are as follows:

Switzerland
Group business subject to “legal quote”: At least 90% of the calculated income on the savings, risk and cost components minus the expenses thereof must be allocated to the policyholders. All other business: No “legal quote”.

France
In life insurance business, 85% of the investment result and 90% of any other results are allocated to the policyholders as a minimum.

Germany
A minimum of 90% of the net investment returns less 100% of the minimum guaranteed interest on the policyholder account (“interest result”), a minimum of 90% of the risk result and a minimum of 50% of the positive expense result are allocated to the policyholder. A negative investment result can be offset with positive other profit sources.

Luxembourg/Liechtenstein
No statutory minimum distribution ratios are in place.

Non-discretionary participation features
Certain policyholder participation systems do not satisfy the criteria for discretionary participation features. These policyholder bonuses might be guaranteed elements. Some policyholder bonuses are based on benchmark interest rates which are credited to the policyholders. For certain products, policyholder bonuses are based on the development of biometric parameters such as mortality and morbidity. These policyholder bonuses are allocated based on the risk result of the contracts involved. The amount and timing of these bonuses are not subject to management discretion and are accrued to the policyholders’ liabilities based on the relevant contractual terms and conditions.

For investment-type products bonuses are only accrued on deposits under policyholder accounts if the policyholders were entitled to receive those bonuses upon surrender at the balance sheet date.

Income and related expenses from insurance contracts and investment contracts with discretionary
participation features

Premiums from traditional life insurance contracts are recognised when due from the policyholder. Insurance liabilities are established in order to recognise future benefits and expenses. Benefits are recognised as an expense when due.

Amounts collected as premiums from investment-type contracts such as universal life and unitlinked contracts are reported as deposits. Only those parts of the premiums used to cover the insured risks and associated costs are treated as premium income. These include fees for the cost of insurance, administrative charges and surrender charges. Benefits recognised under expenses include claims for benefits incurred in the period under review that exceed the related deposits under policyholder contracts and interest that is credited to the appropriate insurance policy accounts.

For contracts with a short duration (e.g. most non-life contracts), premiums are recorded as written upon inception of the contract and are earned primarily on a pro-rata basis over the term of the related policy coverage. The unearned premium reserve represents the portion of the premiums written relating to the unexpired terms of coverage.

Insurance liabilities and liabilities from investment contracts with discretionary participation
features

Future life policyholder benefit liabilities
These liabilities are determined by using the net-level-premium method. Depending on the type of profit participation, the calculations are based on various actuarial assumptions as to mortality, interest rates, investment returns, expenses and persistency, including a margin for adverse deviation. The assumptions are initially set at contract issue and are locked in except for deficiency.

Policyholder deposits
For investment-type contracts, savings premiums collected are reported as deposits (deposit accounting). The liabilities relating to these contracts comprise the accumulation of deposits received plus interest credited less expenses, insurance charges and withdrawals.

Liability adequacy test
If the actual results show that the carrying amount of the insurance liabilities together with anticipated future revenues (less related deferred acquisition costs (DAC) and related intangible assets) are not adequate to meet the future obligations and to recover the unamortised DAC or intangible assets, the entire deficiency is recognised in profit or loss, either by reducing the unamortised DAC or intangible assets or by increasing the insurance liabilities. The liability adequacy test is performed at portfolio level at each reporting date in accordance with a loss recognition test considering current estimates of future cash flows including those resulting from embedded options and guarantees.

Liabilities for claims and claim settlement costs
Liabilities for unpaid claims and claim settlement costs are for future payment obligations under insurance claims for which normally either the amount of benefits to be paid or the date when payments must be made is not yet fixed. They include claims reported at the balance sheet date, claims incurred but not yet reported and claim settlement expenses. Liabilities for unpaid claims and claim settlement costs are calculated at the estimated amount considered necessary to settle future claims in full, using actuarial methods. These methods are continually reviewed and updated. Claim reserves are not discounted except for claims with determinable and fixed payment terms.

Embedded options and guarantees in insurance contracts
Insurance contracts often contain embedded derivatives. Embedded derivatives which are not closely related to their host insurance contracts are separated and measured separately at fair value. Exposure to embedded options and guarantees in insurance contracts which are closely related or which are insurance contracts themselves, such as guaranteed annuity options or guaranteed interest rates, is reflected in the measurement of the insurance liabilities.

Reinsurance
The Group assumes and/or cedes insurance in the normal course of business. Reinsurance assets principally include receivables due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable or due under reinsurance contracts are recognised in a manner consistent with the reinsured risks and in accordance with the terms of the reinsurance contract. Reinsurance is presented in the consolidated balance sheet and income statement on a gross basis unless a right and the intention to offset exist.

Reinsurance contracts that do not transfer insurance risk are accounted for as financial reinsurance and are included in financial assets or liabilities. A deposit asset or liability is recognised based on the consideration paid or received, less any explicitly identified premiums or fees retained by the reinsured. These contracts are primarily measured at amortised cost using the effective interest method with future cash flows being estimated to calculate the effective interest rate.

If a reinsurance asset is impaired, the impairment loss is recognised in profit or loss and the carrying amount is reduced accordingly.

Separate account/unit-linked contracts/private placement life insurance
Separate account contracts represent life insurance contracts with a separated part that is invested in assets managed for the account and risk of the Swiss Life Group’s customers according to their specific investment objectives. Separate account liabilities are included in insurance liabilities. Separate account liabilities include the right of the policyholder to participate in the performance of the underlying assets.

Unit-linked contracts are insurance or investment contracts where the insurance benefits are linked to the unit values of investment funds. Certain unit-linked contracts contain guaranteed minimum insurance benefits. The deposit components of unit-linked liabilities are included in financial liabilities designated as at fair value through profit or loss (“unbundling of deposit components”). The components of the unit-linked liabilities that cover insurance risk, if any, are carried under insurance liabilities.

Liabilities relating to private placement life insurance are included in financial liabilities designated as at fair value through profit or loss.

Assets associated with separate account/unit-linked contracts and private placement life insurance are included in financial assets designated as at fair value through profit or loss, derivatives and cash and cash equivalents. The related income and gains or losses are included in the income statement under the respective line items. The Group has allocated on a rational basis the proportion of acquisition costs related to the insurance and deposit components. The accounting policy for deferred acquisition costs applies to the portion of acquisition costs associated with the insurance component, and the policy for deferred origination costs applies to the other portion (see 2.16 Intangible assets).

Administrative and surrender charges are included in policy fee income.

2.11 Property and equipment

Property and equipment are carried at cost less accumulated depreciation. Land is carried at cost and not depreciated. Depreciation is principally calculated using the straight-line method to allocate their cost to their residual values over the assets’ estimated useful life as follows: buildings 25 to 50 years; furniture and fixtures five to ten years; computer hardware three to five years.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repair and maintenance costs are charged to the income statement during the financial period in which they are incurred. Borrowing costs directly attributable to the construction or acquisition of a qualifying asset are capitalised as part of the cost of that asset. Realised gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in profit or loss.

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.

2.12 Inventory property

Inventory property comprises land and buildings that are intended for sale in the ordinary course of business or in the process of construction or development for such a sale, primarily property acquired with a view to subsequent disposal in the near future or for development and resale. Such property is included in other assets.

Inventory property is measured at the lower of cost and net realisable value. Acquisition costs comprise the purchase price and other costs directly attributable to the acquisition of the property (notary fees, etc.). Construction costs include costs directly related to the process of construction of a property. Construction and other related costs are included in inventory property until disposal.

The estimated net realisable value is the proceeds expected to be realised from the sale in the ordinary course of business, less estimated costs to be incurred for renovation, refurbishment and disposal.

Revenue from sales is recognised when construction is complete and legal title to the property has been transferred to the buyer. Revenue and related costs of sales are presented in other income as realised gains/losses from sales of inventory property.

2.13 Leases

Operating lease
The Group primarily enters into operating leases for the rental of equipment and property. The total payments made under operating leases are charged to the income statement on a straightline basis over the period of the lease.

When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period the lease becomes onerous.

Finance lease
If the lease agreement transfers the risks and rewards of the assets, the lease is recorded as a finance lease and the related asset is capitalised. At inception, the asset is recognised at the lower of the present value of the minimum lease payments or fair value and is depreciated over its estimated useful life. The corresponding finance lease obligations are recorded as liabilities.

2.14 Investment management

Revenue consists principally of investment management fees, commission revenue from distribution and sales of investment fund units. Such revenue is recognised when earned, i.e. when the services are rendered.

Incremental costs that are directly attributable to securing an investment management contract are recognised as an asset if they can be identified separately and measured reliably and if it is probable that they will be recovered. Such deferred origination costs are included in intangible assets. Deferred investment management fees are included in other liabilities.

2.15 Commission income and expense

Revenue consists principally of brokerage fees, recurring fees for existing business and other fees. Such revenue is recognised when earned, i.e. when the services are rendered. Cancellations are recorded as a deduction of fee income.

Costs primarily comprise commissions paid to independent financial advisors, fees for asset management and other (advisory) services.

2.16 Intangible assets

Present value of future profits (PVP) arising from acquired insurance contracts and investment
contracts with discretionary participation features

On acquisition of a portfolio of insurance contracts or a portfolio of investment contracts with discretionary participation features (DPF), either directly from another insurer or through the acquisition of a subsidiary undertaking, the Group recognises an intangible asset representing the present value of future profits (PVP) embedded in the contracts acquired. The PVP represents the difference between the fair value of the contractual rights acquired and insurance obligations assumed and a liability measured in accordance with the accounting policies for insurance contracts and investment contracts with DPF. The PVP is determined by estimating the net present value of future cash flows from the contracts in force at the date of acquisition. For acquired insurance and investment contracts with DPF, future positive cash flows generally include net valuation premiums while future negative cash flows include policyholders’ benefits and certain maintenance expenses.

PVP is amortised in proportion to gross profits or gross margins over the effective life of the acquired contracts, which generally ranges from 20 to 30 years. Realised gains/losses are thereby taken into account as well as gains/losses recognised in other comprehensive income (unrealised gains/losses). If these unrealised gains/losses were to be realised, the gross profits or gross margins used to amortise PVP would be affected. Therefore, an adjustment relating to these unrealised gains/losses is recognised in other comprehensive income and is also reflected in the amount of PVP in the balance sheet (“shadow accounting”).

PVP is subject to impairment tests. The effect of changes in estimated gross profits or margins on unamortised PVP is reflected as an expense in the period in which such estimates of expected future profits or margins are revised.

Deferred acquisition costs (DAC)
Costs that vary with and are directly related to the acquisition of new and renewed insurance contracts and investment contracts with discretionary participation features, including commissions, underwriting costs, agency and policy issue expenses, are deferred. Deferred acquisition costs are periodically reviewed to ensure that they are recoverable from future revenues.

For participating life insurance contracts, where the contribution principle applies to the allocation of the policyholder bonus, the deferred acquisition costs are amortised over the life of the contract based on the present value of the estimated gross margin amounts expected to be realised. Expected gross margins include expected premiums and investment results less expected benefit claims and administrative expenses, anticipated changes to future life policyholder benefit liabilities and expected annual policyholder bonuses.

Deferred acquisition costs for other traditional life insurance contracts and annuities with life contingencies are amortised in proportion to the expected premiums.

Deferred acquisition costs for investment-type contracts such as universal life contracts are amortised over the life of the contract based on the present value of the estimated gross profits or gross margins expected to be realised. The estimated gross profits are made up of margins available from mortality charges and contract-administration costs, investment earnings spreads, surrender charges and other expected assessments and credits.

When DAC is amortised in proportion to gross profits or gross margins on the acquired contracts, realised gains/losses are taken into account as well as gains/losses recognised in other comprehensive income (unrealised gains/losses). If these gains/losses were to be realised, the gross profits or gross margins used to amortise DAC would be affected. Therefore, an adjustment relating to these unrealised gains/losses is recognised in other comprehensive income and is also reflected in the amount of DAC in the balance sheet (“shadow accounting”).

Assumptions used to estimate the future value of expected gross margins and profits are evaluated regularly and adjusted if estimates change. Deviations of actual results from estimated experience are reflected in profit or loss.

For short-duration contracts acquisition costs are amortised over the period in which the related premiums written are earned, in proportion to premium revenue.

Deferred origination costs (DOC)
Incremental costs directly attributable to securing rights to receive fees for asset management services sold with investment contracts without DPF are recognised as an asset if they can be identified separately and measured reliably and if it is probable that they will be recovered. These incremental costs are costs that would not have been incurred if the Group had not secured the investment contracts. All other origination costs are recognised as an expense when incurred.

Deferred origination costs are generally amortised on a straight-line basis over the life of the contracts.

Goodwill
The Group’s acquisitions of other companies are accounted for under the acquisition method.

Goodwill represents the excess of the fair value of the consideration transferred and the amount of any non-controlling interest recognised, if applicable, over the fair value of the assets and liabilities recognised at the date of acquisition. The Group has the option for each business combination in which control is achieved without buying all of the equity of the acquiree to recognise 100% of the goodwill in business combinations, not just the acquirer’s portion of the goodwill (“full goodwill method”). Goodwill on acquisitions of subsidiaries is included in intangible assets. Acquisition-related costs are expensed. Goodwill on associates is included in the carrying amount of the investment.

For the purpose of impairment testing, goodwill is allocated to cash-generating units. Goodwill is tested for impairment annually and whenever there is an indication that the unit may be impaired. Goodwill is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed in subsequent periods.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Negative goodwill is immediately recognised in profit and loss.

Customer relationships
Customer relationships consist of established relationships with customers through contracts that have been acquired in a business combination or non-contractual customer relationships that meet the requirement for separate recognition. They have a definite useful life of generally 5 to 20 years. Amortisation is calculated using the straight-line method over their useful lives.

Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on a straight-line basis for the expected useful life up to three years. Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Development costs that are directly associated with identifiable software products controlled by the Group and that will probably generate future economic benefits are capitalised. Direct costs include the software development team’s employee costs. Computer software development costs recognised as assets are amortised using the straight-line method over their useful lives, not exceeding a period of three years.

Brands and other
Brands and other intangible assets with a definite useful life of generally 5 to 20 years are amortised using the straight-line method over their useful lives.

2.17 Impairment of non-financial assets

For non-financial assets the recoverable amount is measured as the higher of the fair value less costs of disposal and its value in use. Fair value less costs of disposal is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, less the costs of disposal. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit from its continuing use.

Impairment losses and reversals on non-financial assets are recognised in profit or loss.

2.18 Income taxes

Current and deferred income taxes are recognised in profit or loss except when they relate to items recognised directly in equity. Income taxes are calculated using the tax rates enacted or substantively enacted as of the balance sheet date.

Deferred income taxes are recognised for all temporary differences between the carrying amounts of assets and liabilities in the consolidated balance sheet and the tax bases of these assets and liabilities using the balance sheet liability method. Current income taxes and deferred income taxes are charged or credited directly to equity if the income taxes relate to items that are credited or charged in the same or a different period, directly to equity.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which they can be used. For unused tax losses a deferred tax asset is recognised to the extent that it is probable that these losses can be offset against future taxable profits. Deferred tax liabilities represent income taxes payable in the future in respect of taxable temporary differences.

A deferred tax liability is recognised for taxable temporary differences relating to investments in subsidiaries, branches and associates, except where the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Where the entity has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority, the corresponding assets and liabilities are presented on a net basis.

2.19 Assets held for sale and associated liabilities

A disposal group consists of a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with these assets. Non-current assets classified as held for sale and disposal groups are measured at the lower of the carrying amount and the fair value less costs to sell. The carrying amount will be recovered through a highly probable sale transaction rather than through continuing use. Assets held for sale and the associated liabilities are presented separately in the balance sheet.

2.20 Financial liabilities

Financial liabilities are recognised in the balance sheet when the Swiss Life Group becomes a party to the contractual provisions of the instrument. A financial liability is derecognised when the obligation specified in the contract is discharged or cancelled or expires.

Financial liabilities at fair value through profit or loss
Financial liabilities at fair value are irrevocably designated as at fair value at initial recognition. Financial liabilities are designated as at fair value through profit or loss in the following instances:

  • Financial liabilities where the insurance benefits are linked to unit values of investment funds or relate to private placement life insurance.
  • Financial liabilities related to assets measured at fair value in order to reduce or eliminate a measurement or recognition inconsistency.
  • Financial liabilities with embedded derivatives.

Borrowings
Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest method. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings.

Based on the terms and conditions, such as repayment provisions and contractual interest payments, hybrid instruments are considered financial liabilities.

Debt instruments with embedded conversion options to a fixed number of shares of the Group are separated into a debt and an equity component. The difference between the proceeds and fair value of the debt component at issuance is recorded in equity. The fair value of the debt component at issuance is determined using a market interest rate for similar instruments with no conversion rights. The Group does not recognise any change in the value of these options in subsequent reporting periods.

Borrowing costs presented in the consolidated statement of income relate to the interest expense on the financial liabilities classified as borrowings whilst interest expense presented in the consolidated statement of income relates to interest expense on insurance and investment contract deposits and other financial liabilities.

Other financial liabilities
For deposits with fixed and guaranteed terms the amortised cost basis is used. Initial recognition is at the proceeds received, net of transaction costs incurred. Subsequently, they are stated at amortised cost using the effective interest method. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the deposits. For repurchase agreements, initial recognition is at the amount of cash received, net of transaction costs incurred. Subsequently, the difference between the amount of cash initially received and the amount of cash exchanged upon maturity is amortised over the life of the agreement using the effective interest method.

2.21 Employee benefits

Post-employment benefits
The Swiss Life Group provides post-employment benefits under two types of arrangement: defined benefit plans and defined contribution plans.

The assets of these plans are generally held separately from the Group’s general assets in trusteeadministered funds. Defined benefit plan contributions are based upon regulatory requirements and/or plan terms. The Group’s defined benefit obligations and the related defined benefit costs are determined at each balance sheet date by a qualified actuary using the Projected Unit Credit Method.

The amount recognised in the consolidated balance sheet represents the present value of the defined benefit obligations reduced by the fair value of plan assets. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans.

Remeasurements, comprising actuarial gains and losses, the effect of the changes of the asset ceiling and the return on plan assets (excluding interest) are reflected immediately in the consolidated balance sheet and in other comprehensive income in the period in which they occur. Such remeasurements recognised in other comprehensive income will subsequently not be reclassified to profit or loss. Past service cost is recognised in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit asset or liability. Defined benefit costs comprise service costs and net interest expense, which are presented in the income statement under employee benefits expense.

Insurance contracts issued to a defined benefit pension plan covering own employees have generally been eliminated. However, certain assets relating to these plans qualify as plan assets and are therefore not eliminated.

The Group recognises the contribution payable to a defined contribution plan in exchange for the services of the employees rendered during the period as an expense.

Healthcare benefits
Some Group companies provide healthcare benefits to their retirees. The entitlement to these benefits is usually based on the employee remaining in service up to the retirement age and the completion of a minimum service period. The expected costs of these benefits are accounted for in the same manner as for defined benefit plans.

Share-based payments
The Group operates equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of the shares is recognised in profit or loss with a corresponding increase in equity. As the fair value of the services received cannot reliably be measured, the value is measured by reference to the fair value of the equity instruments granted and the price the employees are required to pay.

2.22 Provisions and contingent liabilities

Provisions are liabilities with uncertainties as to the amount or timing of payments. Provisions are recognised if there is a present obligation that probably requires an outflow of resources and a reliable estimate can be made at the balance sheet date and be measured on a best estimate basis. Contingent liabilities are disclosed in the Notes if there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources or the amount of the obligation cannot be measured with sufficient reliability.

2.23 Treasury shares

Treasury shares are presented in the consolidated balance sheet as a deduction from equity and are recorded at cost. The difference between the purchase price and the sales proceeds is included in share premium.

2.24 Earnings per share

Basic earnings per share are calculated by dividing net profit or loss available to shareholders by the weighted average number of shares in issue during the reporting period, excluding the average number of shares purchased by the Group and held as treasury shares.

For diluted earnings per share the profit and the weighted average number of shares in issue are adjusted to assume conversion of all dilutive potential shares, such as convertible debt and share options issued. Potential or contingent share issuance is treated as dilutive when conversion to shares would decrease earnings per share.

2.25 Offsetting

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

2.26 Forthcoming changes in accounting policies

In January :2016, the International Accounting Standards Board published amendments to IAS 7 Statement of Cash Flows in order to improve information provided to users of financial statements about an entity’s financing activities. The amendments are effective for annual periods beginning on or after 1 January 2017. The Swiss Life Group is currently analysing the effect of the amendments on its financial statements.

In January 2016, IFRS 16 Leasing was issued by the International Accounting Standards Board. The new Standard eliminates the classification of leases as either operating leases or finance leases for lessees. Instead all leases are treated in a way similar to finance leases applying the current Standard IAS 17 Leases. The new Standard brings leases on-balance sheet for lessees, the effect being that reported assets and liabilities increase. IFRS 16 Leases replaces the straight-line operating lease expense with a depreciation charge for the lease asset and an interest expense on the lease liability. This change aligns the lease expense treatment for all leases. As a practical expedient, short-term and low-value leases are exempt from this treatment. The exemption permits a lessee to account for qualifying leases in the same manner as existing operating leases (IAS 17 Leases). For lessors, the accounting treatment from IAS 17 Leases is substantially carried forward. The Swiss Life Group is currently analysing the effect of the adoption of IFRS 16 on its financial statements.

In January 2016, the International Accounting Standards Board issued amendments to IAS 12 Income Taxes. The amendments, Recognition of Deferred Tax Assets for Unrealised Losses, clarify how to account for deferred tax assets related to debt instruments measured at fair value. The amendments apply for annual periods beginning on or after 1 January 2017. The Swiss Life Group does not expect a major effect of the amendments on its financial statements.

In December 2014, the International Accounting Standards Board issued amendments to IAS 1 Presentation of Financial Statements. The amendments are part of the initiative to improve presentation and disclosure in financial statements. They are designed to encourage companies to apply professional judgement in determining what information to disclose in their financial statements. They clarify that materiality applies to the whole of financial statements and that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. The amendments become mandatory for annual periods beginning on or after 1 January 2016. The Swiss Life Group does not expect a major effect of the amendments on its financial statements.

In September 2014, Annual Improvements to IFRSs 2012–2014 Cycle was issued. These amendments are effective for annual periods beginning on or after 1 January 2016. The Swiss Life Group does not expect a major effect of the amendments on its financial statements.

The International Accounting Standards Board published in September 2014 amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures. The amendments relate to sale or contribution of assets between an investor and its associate or joint venture. A full gain or loss is recognised when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. The amendments apply prospectively for annual periods beginning on a date to be determined by the International Accounting Standards Board.

In July 2014, the International Accounting Standards Board completed IFRS 9 Financial Instruments. The new standard replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 covers classification and measurement of financial instruments, impairment of financial assets and hedge accounting. Classification determines how financial assets and financial liabilities are accounted for in financial statements and how they are measured on an ongoing basis. Financial assets are classified on the basis of the business model within which they are held and their contractual cash flow characteristics. An expected-loss impairment model is introduced. Under the new model, it is no longer necessary for a credit event to have occurred before an impairment loss is recognised. The new model for hedge accounting aligns accounting treatment more closely with risk management activities. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. In December 2015, the International Accounting Standards Board published for public comment proposals to amend the existing insurance contracts Standard, IFRS 4. This is to address the temporary consequences of the different effective dates of IFRS 9 Financial Instruments and the new insurance contracts Standard. The proposals include an optional temporary exemption from applying IFRS 9 that would be available to companies whose predominant activity is to issue insurance contracts (deferral approach). Such a deferral would be available until the new insurance contracts Standard comes into effect. But it could not be used after 1 January 2021. The Swiss Life Group is currently analysing the effect of the adoption of IFRS 9 on its financial statements.

IFRS 15 Revenue from Contracts with Customers was published in May 2014. The core principle is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 also introduces disclosure requirements that provide comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. IFRS 15 is effective for annual periods beginning on or after 1 January 2018. The Swiss Life Group does not expect a material impact from the adoption of the new standard on its financial statements.

In May 2014, the International Accounting Standards Board issued Amendments to IFRS 11 Joint Arrangements. The amendments provide guidance on the accounting for acquisitions of interests in joint operations in which the activity constitutes a business. The amendment is effective prospectively for annual periods beginning on or after 1 January 2016.

The following amended Standards and Interpretations are not relevant to the Swiss Life Group:

  • Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures (Investment Entities: Applying the Consolidation Exception)
  • Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests
  • IFRS 14 Regulatory Deferral Account
  • Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets (Clarification of Acceptable Methods for Depreciation and Amortisation)
  • Amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture – Bearer Plants
  • Amendments to IAS 27 Separate Financial Statements (Equity Method in Separate Financial Statements)

3 Critical Accounting Estimates and Judgements in Applying Accounting Policies

Certain reported amounts of assets and liabilities are subject to estimates and assumptions. Estimates and judgements by management are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The sensitivity analysis with regard to insurance risk and market risk is set out in note 5.

Estimates and judgements in applying fair value measurement to financial instruments and investment property are described in note 30.

Impairment of held-to-maturity and available-for-sale debt instruments and loans and receivables

As a Group policy, held-to-maturity and available-for-sale debt securities and loans and receivables are assessed for impairment when a significant decrease in market value related to credit risk arises, namely after a downgrade of a debtor’s rating below single B– after initial recognition (i.e. CCC or lower according to Standard and Poor’s or equivalent) or when payments of principal and/or interest are overdue by more than 90 days.

Impairment of available-for-sale equity instruments

At each balance sheet date, an assessment is made whether there is objective evidence that an available-for-sale equity instrument is impaired. A significant or prolonged decline in the fair value of the security below its cost is considered objective evidence of impairment. In this respect, a decline of 30% or more is regarded as significant, and a period of 12 months or longer is considered to be prolonged.

Insurance liabilities

Past experience, adjusted for the effect of current developments and probable trends, is assumed to be an appropriate basis for predicting future events. Actuarial estimates for incurred but not reported losses are continually reviewed and updated and adjustments resulting from this review are reflected in income.

For insurance contracts and investment contracts with discretionary participation features with fixed and guaranteed terms, the definition of estimates occurs in two stages. At inception of the contract, estimates of future deaths, surrender, exercise of policyholder options, investment returns and administrative expenses are made and form the assumptions used for calculating the liabilities during the life of the contract. A margin for risk and uncertainty (adverse deviation) is added to these assumptions. These assumptions are “locked-in” for the duration of the contract. Subsequently, new estimates are made at each reporting date in order to determine whether the values of the liabilities so established are adequate in the light of these latest estimates (liability adequacy test). If the valuation of the liabilities is deemed adequate, the assumptions are not altered. However, if the valuation of the liabilities is deemed inadequate, the assumptions underlying the valuation of the liabilities are altered (“unlocked”) to reflect the latest estimates; no margin is added to the assumptions in this event.

For insurance contracts and investment contracts with discretionary participation features without fixed and guaranteed terms, future premiums can be increased in line with experience. The assumptions used to determine the liabilities do not contain margins and are not locked-in but are updated at each reporting date to reflect the latest estimates.

Mortality and longevity
Pricing and valuation assumptions for mortality and longevity are generally based on the statistics provided by national insurance associations and complemented with internal claims experience reflecting own company records.

In Switzerland, mortality tables are usually reviewed every five years when new statistics from the Swiss Insurance Association become available. The tables are updated for significant changes.

Morbidity and disability
For the individual and group life business in Switzerland internal tables are in place. In the individual life business, the internal disability rates are based on the Swiss Insurance Association statistics and reflect the average situation of the past in the Swiss market. In the individual life business, only reactivation is considered, whereas increased mortality is also taken into account in group life business. In the individual life business, disability tables are usually reviewed every five years when new statistics from the Swiss Insurance Association become available.

In the group life business, tariffs can be adjusted due to loss experience with regard to disability each year. In the group life business, the tables are based on own company records reflecting loss experience. Especially in the group life business, changes in the labour market may have a significant influence on disability. The tables are updated for significant changes.

In other markets, standard industry disability tables, national statistics and own company records are applied. Standard valuation pricing principles are typically validated against the client-specific disability experience.

Policyholder options
Policyholders are typically offered products which include options such as the right to terminate the contract early or to convert the accumulated funds into a life annuity at maturity. In case of early termination the policyholder receives a specified surrender value or a value which varies in response to the change in financial variables such as an equity price or an index. In the case of the conversion option, the policyholder has the right to convert an assured sum into a fixed life annuity. The option values typically depend on both biometric assumptions and market variables such as interest rates or the value of the assets backing the liabilities. In certain countries and markets, policyholder behavioural assumptions are based on own company records. The assumptions vary by product type and policy duration.

Expenses and inflation
In Switzerland, expenses are taken into account in the pricing of the contracts using internal statistics. Such calculated amounts are allocated to the different lines of business. Inflation is reflected in these calculations.

In certain markets, expense allocation is based on an activity-based cost methodology. Recurrent costs are subdivided into the following main cost categories: acquisition costs, administration costs and asset management costs.

Investment returns
Assumptions relating to investment returns are based on the strategic asset allocation. From this gross investment return, projected asset management fees are deducted to obtain a net investment return.

The interest rates used in actuarial formulae to determine the present value of future benefits and contributions caused by an insurance contract are called technical interest rates. The technical interest rates have to be approved by the regulator. In certain countries, the insurance liabilities are based on the technical interest rates.

Impairment of goodwill

Goodwill is tested for impairment annually (in autumn), or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The recoverable amounts of the business relating to the goodwill have been determined based on value-in-use calculations. These calculations require the use of estimates which are set out in note 17.

Defined benefit liabilities

The Swiss Life Group uses certain assumptions relating to the calculation of the defined benefit liabilities. These assumptions comprise future salary increases and future pension increases, which have been derived from estimates based on past experience. Assumptions are also made for mortality, employee turnover and discount rates. In determining the discount rate, the Swiss Life Group takes into account published rates of well-known external providers. The discount rates reflect the expected timing of benefit payments under the plans and are based on a yield curve approach.

The assumptions are set out in note 23.

Income taxes

Deferred tax assets are recognised for unused tax-loss carryforwards and unused tax credits to the extent that realisation of the related tax benefit is probable. The assessment of the probability with regard to the realisation of the tax benefit involves assumptions based on the history of the entity and budgeted data for the future.

Provisions

The recognition of provisions involves assumptions about the probability, amount and timing of an outflow of resources embodying economic benefits. A provision is recognised to the extent that an outflow of resources embodying economic benefits is probable and a reliable estimate can be made.

4 Segment Information

Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by management (corporate executive board) in deciding how to allocate resources and in assessing performance.

The accounting policies for the segments are the same as those described in the Summary of Significant Accounting Policies section. Inter-segmental services and transfers of assets and liabilities are treated as if the transactions were with third parties, i.e. at market prices applicable at the time of the transaction.

Intercompany trademark fees charged and received for the use of the Swiss Life brand have been excluded from the segment result. The statement of income for the year ended 31 December 2014 has been adjusted accordingly.

Corporate costs were not allocated to the individual segments as they consist of general administrative expenses and head office expenses that relate to the Swiss Life Group as a whole.

The reportable segments have been identified based on information about the components of the entity that management uses to make decisions about operating matters. The business is managed based on IFRS results.

The information provided to management focuses on product lines and services. The organisational and management structure within the insurance business is geographical. The reportable segments have therefore been identified as follows:

  • Switzerland
  • France
  • Germany
  • International
  • Asset Managers
  • Other

Switzerland, France, Germany and International primarily consist of life insurance operations and distribution units. The life insurance operations offer a broad range of life, pension, health, annuity and investment-type policies to both groups and individuals, including disability coverage. The Group’s strategy focuses primarily on life and pensions in Switzerland, France and Germany, health insurance in France and on cross-border business from Liechtenstein, Luxembourg and Singapore. These segments also include a number of companies which hold investments mainly pertaining to life insurance.

“International” comprises the cross-border insurance operations in Liechtenstein, Luxembourg and Singapore, the Swiss Life Select units operating in Austria, the Czech Republic and Poland as well as Chase de Vere operating in the United Kingdom.

Non-life operations involve operations in France and Luxembourg and mainly include property and casualty, liability and motor insurance, accident and health insurance and payment protection insurance. These operations are included in the segments “France” and “Other”.

“Asset Managers” refers to the management of assets for institutional clients and the Group’s insurance business, as well as the provision of expert advice for such clients.

“Other” refers principally to various finance and service companies, as well as payment protection insurance.

The statement of income and the balance sheet for the segments are provided on the following pages.

Statement of income for the year ended 31 December 2015

In CHF million
Switzer-
land
FranceGermany
Inter-
national
Asset ManagersOther
Total
before
elimii-
nations
Elimi-
nations
Total
INCOME
Premiums earned on insurance contracts9 2182 5021 20744-912 979-7612 903
Premiums earned on investment contracts
with discretionary participation
1 009-----1 009-1 009
Premiums ceded to reinsurers-10-156-40-10-0-21776-141
Net earned premiums10 2172 3461 16734-813 772013 771
Policy fees earned on insurance contracts71010--18-18
Policy fees earned on investment and
unit-linked contracts
331301382--259-259
Net earned policy fees401401482--276-276
Commission income15997350142560481 357-3411 016
Investment income3 004645605322674 353-634 290
Net gains/losses on financial assets-1366633540-1-57248-248
Net gains/losses on financial instruments
at fair value through profit or loss
385-36-285-2103981-81
Net gains/losses on investment property5656723--0655-655
Share of profit or loss ofassociates030-307-7
Other income218-12-18281230-20210
TOTAL INCOME14 4523 3272 21129159110620 979-42420 555
ofwhich inter-segment112-50-4-1267100424-424
EXPENSES
Benefits and claims under
insurance contracts
-11 203-2 095-1 310-13-1-14 62062-14 558
Benefits and claims under investment
contracts with discretionary participation
-1 053------1 053--1 053
Benefits and claims recovered
from reinsurers
6125233--1156-6095
Net insurance benefits and claims-12 251-1 970-1 287-10-0-15 5182-15 516
Policyholder participation-455-157-283-18-0-91415-899
Interest expense-39-102-12-15-10-1708-162
Commission expense-444-303-238-102-50-2-1 139342-797
Employee benefits expense-249-178-129-61-204-4-8251-824
Depreciation and amortisation expense-149-246-55-4-12-2-468--468
Impairment of property and equipment
and intangible assets
-16-0----16--16
Other expenses-114-136-77-40-83-22-472-2-474
TOTAL EXPENSES-13 718-3 093-2 082-251-349-30-19 522366-19 156
ofwhich inter-segment-31548-41-13-35-11-366366
SEGMENT RESULT73423412941242761 457-581 398
of which inter-segment-203-1-45-152339058-58
Unallocated corporate costs-70
PROFIT FROM OPERATIONS1 329
Borrowing costs-1750-6-1-7-29-21958-161
Income tax expense-290
NET PROFIT878
Additions to non-current assets1 754664608102 289-2 289

 

Statement of income for the year ended 31 December 2014

In CHF million
Switzer-
land
FranceGermany
Inter-
national
Asset Managers
Other
Total
before
eliminations
Elimi-
nations
Total
INCOME
Premiums earned on insurance contracts8 7892 8151 49149-1113 156-8113 075
Premiums earned on investment contracts
with discretionary participation
893-----893-893
Premiums ceded to reinsurers-28-190-44-11-0-27381-192
Net earned premiums9 6542 6251 44738-1113 776013 776
Policy fees earned on insurance contracts91500--24-24
Policy fees earned on investment and
unit-linked contracts
401322388--284-284
Net earned policy fees491472388--308-308
Commission income133113401152450481 298-301998
Investment income3 064688666352604 516-684 448
Net gains/losses on financial assets2 025112463160152 631-2 631
Net gains/losses on financial instruments
at fair value through profit or loss
-1 80415-19820-25-2 009--2 009
Net gains/losses on investment property2174327--0288-288
Share of profit or loss ofassociates040--103-3
Other income3112-118839-731
TOTAL INCOME13 3703 7502 83232145911820 850-37620 474
ofwhich inter-segment102-4957-75238103376-376
EXPENSES
Benefits and claims under insurance contracts-10 418-2 413-1 613-11-5-14 45065-14 385
Benefits and claims under investment
contracts with discretionary participation
-932------932--932
Benefits and claims recovered from reinsurers16125222--3163-6598
Net insurance benefits and claims-11 333-2 288-1 591-9-2-15 2180-15 218
Policyholder participation-427-139-557-26-0-1 1504-1 146
Interest expense-56-124-14-1700-2116-205
Commission expense-400-382-298-117-45-2-1 243304-940
Employee benefits expense-254-198-150-65-152-5-8232-821
Depreciation and amortisation expense-118-235-18-4-6-2-383--383
Impairment of property and equipment
and intangible assets
0--12----12--12
Other expenses-114-162-94-47-67-24-508-3-512
TOTAL EXPENSES-12 702-3 528-2 735-284-270-31-19 549311-19 238
ofwhich inter-segment-28450-39-3-26-10-311311
SEGMENT RESULT6692229737189871 301-651 236
ofwhich inter-segment-182118-772129365-65
Unallocated corporate costs-66
PROFIT FROM OPERATIONS1 169
Borrowing costs-1760-5-2-4-35-22265-157
Income tax expense-194
NET PROFIT818
Additions to non-current assets1 080300163420601 754-1 754

 

Balance sheet as at 31 December 2015

In CHF million
Switzer-
land
FranceGermany
Inter-
national
Asset
Managers
Other
Total
before
elimi-
nations
Elimi-
nations
Total
ASSETS
Cash and cash equivalents1 2626882212 7371662245 297-15 296
Derivatives1 7513113546--2 144-312 113
Assets held for sale4-----4-4
Financial assets at fair value through
profit or loss
5 31610 5271 26116 4850-33 590-33 590
Financial assets available for sale69 76816 3947 5021 246481 06896 026-96 026
Loans and receivables14 6082 3578 3633082471 65027 533-3 19924 334
Financial assets pledged as collateral5081 595-5--2 109-2 109
Investment property18 1221 8841 548--321 557-21 557
Investments in associates8560-2067-67
Reinsurance assets31357734-1465-89376
Property and equipment218351353213407-407
Intangible assets including
intangible insurance assets
6154021 40623518212 840-2 840
Other assets38314122202622-150471
SEGMENT ASSETS112 59434 62120 54421 0728662 961192 659-3 471189 188
Income tax assets64
TOTAL ASSETS189 252
LIABILITIES AND EQUITY
LIABILITIES
Derivatives8631010411-321 020-31989
Financial liabilities at fair value through
profit or loss
3 7161 58590418 907--25 111-25 111
Investment contracts3 3009 8740940--14 115-14 115
Other financial liabilities5 8304 14572236822122011 506-1 22210 284
Insurance liabilities77 97714 31815 774192-12108 273-116108157
Policyholder participation liabilities6 0502 3851 60426-010 065010 065
Employee benefit liabilities1 63670167139001 976-1 976
Provisions16113625104101-101
Other liabilities15971451072294-2293
SEGMENT LIABILITIES99 54732 46919 35720 492328269172 463-1 370171 092
Borrowings4 078
Income tax liabilities1 824
EQUITY12 258
TOTAL LIABILITIES AND EQUITY189 252

 

Balance sheet as at 31 December 2014

In CHF million
Switzer-
land
FranceGermany
Inter-
national
Asset Managers
Other
Total
before
elimi-
nations
Elimi-
nations
Total
ASSETS
Cash and cash equivalents1 8196426292 4891603226 06206 062
Derivatives1 76943911368--2 389-302 358
Assets held for sale---------
Financial assets at fair value through
profit or loss
4 1338 4781 17218 6070-32 389-32 389
Financial assets available for sale68 17918 7498 0801 2194589197 162-97 162
Loans and receivables15 9033 2929 8152721571 58831 027-3 07927 948
Financial assets pledged
as collateral
1 6821 081----2 763-2 763
Investment property16 3852 0261 182--319 596-19 596
Investments in associates960202-311284-284
Reinsurance assets31389644-2490-93397
Property and equipment225411562315442-442
Intangible assets including
intangible insurance assets
6064291 48423921332 972-2 972
Other assets33140531241504-73431
SEGMENT ASSETS111 07235 66722 90022 9017052 836196 081-3 275192 807
Income tax assets48
TOTAL ASSETS192 854
LIABILITIES AND EQUITY
LIABILITIES
Derivatives1 865182478-572 195-302 165
Financial liabilities at
fair value through profit or loss
3 23365184720 684--25 415-25 415
Investment contracts2 71410 4441911--14 070-14 070
Other financial liabilities7 2464 1678813849914912 925-86912 056
Insurance liabilities74 20214 54717 277209-18106 253-117106 136
Policyholder participation liabilities6 8383 2172 06336-012 154-212 152
Employee benefit liabilities1 5047714958601 821-1 821
Provisions1813573092128-128
Other liabilities15374451081290-1289
SEGMENT LIABILITIES97 77333 20721 56622 276203227175 251-1 018174 233
Borrowings3 798
Income tax liabilities1 991
EQUITY12 831
TOTAL LIABILITIES AND EQUITY192 854

 

Premiums and policy fees from external customers

In CHF millionNet earned premiumsNet earned policy fees
2015201420152014
LIFE
Individual life3 4693 857266297
Group life9 9579 5241010
TOTAL LIFE13 42613 381276308
NON-LIFE
Accident and health1114--
Property, casualty and other334381--
TOTAL NON-LIFE345395--
TOTAL13 77113 776276308

The Swiss Life Group operates in selected countries. The Group’s income and non-current assets by geographical location are detailed below.

In CHF millionTotal incomeNon-current assets
2015201431.12.201531.12.2014
Switzerland14 45113 22818 50316 773
France3 3943 8112 2692 430
Germany2 3062 8072 3162 052
Liechtenstein3237149149
Luxembourg1803864658
Other countries1912057884
TOTAL20 55520 47423 36121 546

Non-current assets for this purpose consist of investment property, property and equipment and intangible assets (except for intangible assets arising from insurance contracts).

Information about major customers

No revenue from transactions with a single external customer amounted to 10% or more of the Group’s revenue.

5 Risk Management Policies and Procedures

The Group’s core business is life insurance and pensions. A life insurance and pensions contractrepresents a long-term promise to the policyholder. To fulfil its future payment obligations to the policyholders, the insurance entities of the Group must be financially sound over an extended period of time. The ability to remain financially sound and strong depends on a number of risk factors. The Group’s risk map can be broadly divided into financial, insurance, strategic and operational risks. All of these risk categories can impact the financial stability of the Group.

Risks must be identified, assessed, managed and monitored locally and aggregated at Group level. Monthly reports covering interest rate risk, equity and real estate price risk, currency risk, credit risk and insurance risk are prepared on a consolidated basis. Strategic and operational risks are assessed and reported on an annual basis.

The risk appetite for the largest operations in the insurance business is defined with the help oflocal risk budgets, which are used as a basis for the determination of the individual risk limits. These limits are used as a framework for the asset and liability management process, the objective of which is to define a strategic asset allocation. From this strategic asset allocation a scenariobased expected return is calculated, which forms the basis for the mid-term planning of the Group.

Risk management functions are performed at several levels by corresponding bodies within the Swiss Life Group, such as the Investment and Risk Committee at the level of the Board of Directors of the Swiss Life Group and the Group Risk Committee at the level of the Corporate Executive Board of the Swiss Life Group. The risk management functions at the level of the individual operations of the Swiss Life Group are organised accordingly.

Group risk management is responsible for the definition of the Group-wide methodology for the measurement of the risks and produces a consolidated risk report which consolidates the main quantitative elements of the risk management of the Swiss Life Group’s operations. Furthermore, Group risk management also produces consolidated views on the operational and strategic risks of the Swiss Life Group.

The information below focuses first on the risk budgeting and asset and liability management process before covering in an extensive way the principal risk categories faced by the Swiss Life Group.

5.1 Contracts for the account and risk of the Swiss Life Group’s customers

The assets relating to certain life insurance and investment contracts are managed for the account and risk of the Swiss Life Group’s customers (separate account/unit-linked contracts, private placement life insurance). They are segregated and managed to meet specific investment objectives of the policyholders. The assets back the insurance liabilities and the financial liabilities arising from these contracts. The fair values of the liabilities reflect the fair values of the assets. Certain contracts with unit-linking features contain financial and insurance guarantees. The liabilities relating to these guarantees are included in financial liabilities and insurance liabilities, respectively.

The assets and liabilities from separate account/unit-linked contracts and private placement life insurance are generally excluded from the Swiss Life Group’s financial risk management considerations to the extent that the risks are borne by the customers.

Assets for the account and risk of the Swiss Life Group’s customers

In CHF million
 
31.12.201531.12.2014
Cash and cash equivalents2 6252 309
Financial assets at fair value through profit or loss
Debt securities5 7856 240
Equity securities4 7516 154
Investment funds16 75616 580
Other11
TOTAL ASSETS FOR THE ACCOUNT AND RISK OF 
THE SWISS LIFE GROUP'S CUSTOMERS
29 91831 284

 

Liabilities linked to assets for the account and risk of the Swiss Life Group’s customers

In CHF million
 
Notes31.12.201531.12.2014
Unit-linked contracts1022 61524 325
Investment contracts193 9954 107
Insurance liabilities223 1672 760
TOTAL LIABILITIES LINKED TO ASSETS FOR THE ACCOUNT AND RISK
OF THE SWISS LIFE GROUP'S CUSTOMERS
29 77731 192

The financial result for the years ended 31 December for the account and risk of the Swiss Life Group and the Swiss Life Group’s customers was as follows.

In CHF millionFor the account and risk of the
Swiss Life Group
For the account and risk of the
Swiss Life Group's customers
Total
 Notes201520142015201420152014
Investment income84 2904 448--4 2904 448
Net gains/losses on financial assets82282 63121-2482 631
Net gains/losses on financial
instruments at fair value through profit or loss
895-2 016-15781-2 009
Net gains/losses on investment property655288--655288
Share of profit or loss of associates 73--73
FINANCIAL RESULT 5 2755 354675 2815 361

5.2 Risk budgeting and limit setting

The risk capacity and the risk appetite of the Swiss Life Group’s insurance operations are primarily defined based on economic principles. Consequently, the market values or best estimates of both the assets and the liabilities are obtained by discounting the cash flows generated by these assets and liabilities by direct observation of market values or with another appropriate discount rate. The available economic capital is defined as the difference of the economic value of the assets compared to liabilities. The available economic capital is used to cover the different risks to which the Swiss Life Group’s insurance operations are exposed by the nature of their activities. The final decision on the risk appetite for each insurance operation rests with the Corporate Executive Board.

To control and limit exposure to risks, capital and exposure limits are defined. They include overall market risk capital, credit risk capital and, more specifically, interest rate risk capital and credit spread risk capital as well as net equity and foreign currency exposure.

5.3 Asset and liability management (ALM)

The main objective of the ALM process is to ensure that the Swiss Life Group’s insurance operations can meet their commitments to policyholders at all times while also adequately compensating shareholders for making risk capital available. Based on the economic principles of risk management and on the risk appetite definition applied in the risk budgeting process, ALM comprises the following main activity: the determination of the strategic asset allocation and of the risk capital and exposure sublimits.

The ALM process is centrally coordinated and steered at Group level by means of local asset and liability management committees with representatives from local senior management and representatives from the Group. The local units are in charge of implementing the decisions. The process requires the involvement of investment management, finance, actuarial and risk functions.

Compliance with external constraints
Aspects other than the purely economic view must also be considered in the ALM process, such as regulatory requirements including statutory minimum distribution ratios (“legal quote”), funding ratios, solvency, local accounting rules and International Financial Reporting Standards, liquidity requirements and rating targets. Some of these views may lead to results that are not aligned with the economic approach, but nevertheless need to be taken into account.

Depending on the regulatory framework in which the Swiss Life Group’s insurance operations evolve, the asset portfolios might need to be split to reflect the different categories of insurance products. The asset portfolios of the insurance operations in Switzerland have been separated to distinguish between individual life and group life. As a consequence, such separation is also reflected in the ALM process. Insurance companies are generally obliged to hold tied assets in view of claims arising from insurance contracts. Special rules apply to investments in tied assets. They specify the eligible asset classes as well as requirements to be met in terms of investment organisation and processes.

Strategic asset allocation
Defining the strategic asset allocation is the first major task of the ALM process and aims at achieving an efficient risk capital allocation, i.e. optimising the returns on the asset portfolio for the available risk capital defined within the risk budgeting process, taking into account all known constraints.

The liabilities are largely predefined in terms of amount and timing of the payments and the associated assumptions are regularly reviewed. The corresponding asset portfolios mainly comprise fixed-income instruments. This way, the impact of interest rate fluctuations and the risk capital consumption are strategically optimised under a risk/return point of view, thus ensuring that the policyholders receive the benefits consistent with their products. Policyholders may benefit from the ensuing investment returns in the form of discretionary participation, while shareholders may benefit from an increase in the value of their investment in the Swiss Life Group.

The strategic asset allocation is therefore determined on the basis of the individual existing commitments and the risk capacity of the Swiss Life Group’s insurance operations. The strategic asset allocation is reviewed at least once a year and adjusted if necessary.

The ALM process has been applied in all large insurance operations of the Swiss Life Group.

Distribution policy
The distribution policy seeks to align the interests of the different groups of stakeholders. Holders of traditional life insurance policies favour a guaranteed minimum interest rate coupled with regular and appropriate discretionary participation, whereas shareholders place greater emphasis on returns commensurate with the level of risk they are exposed to. The focus of the Swiss Life Group lies on the sustainability of the business model and should balance the policyholders’ and shareholders’ expectations.

External constraints must be considered in the definition of the distribution policy. Important elements which influence such policy are minimum guaranteed interest rates and the statutory minimum distribution ratio (“legal quote”), which depend on the regulatory environments of the Swiss Life Group’s insurance operations.

Product design
The targets of risk management are supported by product management principles. Product design defines among other things which guarantees and benefits are built into a specific product to respond to the demand from and expectations of customers. The actuarial bases used for this purpose support each individual product generating a sufficient contribution margin. To ensure that the Group’s principles are observed, guidelines and directives on product management and underwriting are in place. As the Group’s insurance entities operate in a number of different countries, the local regulatory constraints may have an impact on the business units’ product range. These constraints must always be obeyed.

5.4 Financial risk management objectives and policies

The Group is exposed to financial risk through its financial assets, financial liabilities (primarily investment contracts and borrowings), reinsurance assets and insurance liabilities. In particular, the key financial risk is that the proceeds from the financial assets are not sufficient to fund the obligations arising from the insurance and investment contracts, as well as from borrowings and other liabilities. The most important components of the financial risk are interest rate risk, equity and real estate price risk, credit risk, currency risk and liquidity risk.

The risk budgeting and limit setting described above ensure that the corresponding risks remain under control. The market risk capital, interest rate risk capital, credit spread risk capital and credit risk capital limits, as well as exposure limits for currencies and net equity for each large insurance operation, are defined based on the risk appetite per operation. These limits are assessed and reported on a monthly basis.

Hedging
The Swiss Life Group uses derivatives within the strict limits set by the applicable insurance legislation and by internal guidelines. Derivatives are primarily used to manage the exposure to foreign exchange rates, interest rates, equity securities and counterparties. The main instruments include index futures and option structures in stock markets, bond futures and swaps in order to manage duration, currency forwards and options in order to manage currency risk and credit default swaps or credit default swap indices and options on credit default swap indices in order to manage counterparty risk. Within certain limits, derivatives are used to enhance returns on the existing portfolio. The types of derivatives generally permitted for usage within the Swiss Life Group as well as the list of allowed over-the-counter trading partners have been approved by the Group Risk Committee.

Hedging strategies involve hedge accounting in accordance with International Financial Reporting Standards as well as “economic hedging”. “Economic hedges” comprise derivatives in combination with financial assets and financial liabilities which have a common risk factor and give rise to opposite changes in fair value that tend to offset each other.

Interest rate risk relating to financial instruments and insurance contracts
The Group’s primary interest rate exposure is to contracts with guaranteed benefits and the risk that the interest rates of the financial assets purchased with the consideration received from the contract holders is insufficient to fund the guaranteed benefits and expected discretionary participation payable to them.

Interest-sensitive insurance liabilities

In CHF million
 
CHFEUROtherTotal
CARRYING AMOUNTS AS AT 31 DECEMBER 2015
Minimum guaranteed interest rate 0 - < 2%39 0805 676644 762
Minimum guaranteed interest rate 2 - < 3%9 1185 4973114 645
Minimum guaranteed interest rate 3 - < 4%20 9726 1882527 184
Minimum guaranteed interest rate 4 - < 5%706 054256 149
Minimum guaranteed interest rate 5 - < 6%--22
TOTAL INTEREST-SENSITIVE INSURANCE LIABILITIES69 23923 4148892 742
Insurance liabilities with no minimum guaranteed interest rate12 249
Insurance liabilities linked to assets for the account and risk of the 
Swiss Life Group's customers
3 167
TOTAL INSURANCE LIABILITIES108 157
 
CARRYING AMOUNTS AS AT 31 DECEMBER 2014
Minimum guaranteed interest rate 0 - < 2%34 9255 954540 884
Minimum guaranteed interest rate 2 - < 3%11 4866 2103217 729
Minimum guaranteed interest rate 3 - < 4%19 5116 7242326 259
Minimum guaranteed interest rate 4 - < 5%726 713266 812
Minimum guaranteed interest rate 5 - < 6%--22
TOTAL INTEREST-SENSITIVE INSURANCE LIABILITIES65 99525 6028991 686
Insurance liabilities with no minimum guaranteed interest rate11 690
Insurance liabilities linked to assets for the account and risk of the Swiss Life Group's customers2 760
TOTAL INSURANCE LIABILITIES106 136

Some life insurance products with a savings component and investment contracts are subject to minimum guaranteed interest rates. The guaranteed rate differs according to the type of contract. In Switzerland for instance the minimum guaranteed interest rate for the occupational pensions segment (mandatory BVG savings account) stood at 1.75% in 2015 and will be reduced to 1.25% for 2016 (2014: 1.75%).

In addition to these fixed and guaranteed payments, which are exposed to interest rate risk, contractual rights exist for certain contracts to receive additional benefits whose amount and/or timing is contractually at the discretion of the issuer.

The Group manages interest rate and interest rate volatility risk by managing the interest rate sensitivity of its investment portfolio against the corresponding sensitivity of liabilities issued. The interest rate and volatility exposure of the liabilities is determined by projecting the expected cash flows from the contracts using best estimates of mortality, disability, expenses, surrender and exercise of policyholder options in combination with interest rate and volatility scenarios. The ALM process defines the strategic asset allocation optimising the net interest rate sensitivity of the investment and liability portfolios. Where this is not practicable, swap contracts and other instruments are used to hedge interest rate risk. In certain markets payer swaptions are used to hedge the risk of fair value changes of interest-sensitive financial assets. A minimum interest rate risk is accepted, since a perfect interest rate hedge can either not be achieved or may not be targeted.

Regarding interest rate risk exposure existing on contracts with guaranteed benefits where the risk is that the interest rates earned on the assets are insufficient to fund the guaranteed payments, puttable bonds are used to counter the impact of increasing interest rates.

In certain businesses, a large part of the impact of interest rate changes is for the account and risk of the policyholders based on the specific profit-sharing systems.

Equity price risk
A decline in the equity market may lead to a reduction of the Swiss Life Group’s realised and unrealised gains/losses, which also negatively affects the Swiss Life Group’s results of operations and financial condition.

Hedges in place with respect to the Swiss Life Group’s equity investments are designed to reduce the exposure to declines in equity values but would not prevent an impairment loss in the event that the impairment criteria were met.

A portion of Swiss Life’s investment portfolio comprises investments in funds which hold securities issued by non-public companies (private equity, infrastructure). These investments may be illiquid or may only be disposed of over time or at a loss, and they may not produce adequate returns or capital gains. If Swiss Life were required to liquidate some or all of the investments in its private equity portfolio, the proceeds of such liquidation may be significantly less than the amount paid for, or the carrying amount of, such investments.

Swiss Life’s investment portfolios also include investments in hedge funds. The liquidity of such investments can vary according to market conditions, and the investment styles of such hedge funds could amplify any factors affecting the performance of any particular class of funds or investments.

Credit risk
The Group is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the Group is exposed to credit risk are:

  • Counterparty risk with respect to bonds purchased
  • Counterparty risk with respect to loans and mortgages granted
  • Counterparty risk with respect to money market and cash positions
  • Counterparty risk with respect to derivative transactions
  • Reinsurance share of insurance liabilities
  • Amounts due from reinsurers in respect of claims already paid
  • Amounts due from insurance contract holders
  • Amounts due from insurance intermediaries

To reduce the credit exposure relating to derivatives a collateral management process is in place. Contractually all outstanding positions must be fully collateralised if they reach a very low agreed minimum transfer amount. The collateral is called daily. Counterparties for derivative transactions, over-the-counter and exchange-traded, have to be approved by both the Group Chief Risk Officer and the Group Chief Investment Officer. The minimum rating for a counter party is generally A– (Standard & Poor’s or equivalent) for the Swiss Life Group’s insurance operations. During periods of market turmoil reliance on ratings is of limited value; therefore an additional qualitative and quantitative counterparty monitoring process has been established to allow for immediate proactive measures.

Counterparty risk is primarily managed by counterparty exposure limits and diversification in a broad debtor universe. The specific credit risk is managed through the holding of credit default swaps or credit default swap indices and options on credit default swap indices. A credit default swap provides insurance to the debt holder against a default of the debt issuer. It is traded overthe- counter and itself underlies the collateral management process described above. The credit default swap index is a hedge on credit risk of a basket of counterparties and is an over-the-counter derivative. A put option on a credit default swap index provides protection against adverse credit spread movements in the underlying basket of counterparties and is traded over-the-counter.

The Group is also exposed to credit risk associated with reinsurance recoverables. As a consequence, the financial strength of reinsurers is monitored. The creditworthiness of reinsurers is considered on an annual basis by reviewing their financial strength and also prior to any contract being signed. The general policy of the Swiss Life Group is to reinsure its insurance risks only with counterparties rated A– or above (Standard & Poor’s or equivalent). In exceptional cases, reinsurers with a lower rating may be considered. Additionally, the Group holds substantial collateral under related reinsurance agreements in the form of deposited funds and securities.

No single reinsurer is a material reinsurer to the Group, nor is the Group’s business substantially dependent upon one single reinsurer.

For fixed-income assets the total exposure per counterparty is aggregated and reported to the Group Risk Committee. Ratings and single positions above a certain level with regard to fixedincome assets are reported to management on a regular basis. The exposure to individual counterparties is also managed by other mechanisms, such as the right to offset where counterparties are both debtors and creditors of the Group. In addition, limits regarding single counterparty exposure are in place which depend on the rating and amount of exposure in relation to total investments. Information reported to management includes assessment of bad debts. Where there exists a certain exposure to individual policyholders due to size of the contract, or homogenous groups of policyholders, a financial analysis equivalent to that conducted for reinsurers is carried out.

The non-rated loans primarily comprise mortgages and policy loans. For the bulk of the mortgages a risk class system is in place which allows the company to identify, measure, monitor and manage the risks at the level of portfolios, borrowers and loans at all times. The risk class system also enables a risk-adequate pricing of the loans. Implementation, parametrisation and control of the system are set out in an internal directive which has been approved by the Group Chief Investment Officer.

In certain countries, specific additional guidelines and rules have been defined locally to monitor credit risk. Such guidelines cover investments in fixed-income securities which are mostly based on the average rating of the issuers (calculated by weighting default probabilities). Minimum and maximum thresholds apply with regard to permitted investments in non-government bonds. For investments in government bonds with a rating lower than AA– (according to Standard & Poor’s or equivalent) and non-government bonds, additional exposure limits are in place. For certain businesses, credit risk is monitored and controlled with a risk limit framework whereby maximum limits are reviewed and approved at least annually. The majority of the bond portfolio is invested in government bonds (including supranational and sovereigns) and bonds issued by the financial sector covered by collateral or government guarantees.

Maximum exposure to credit risk

In CHF millionFor the account and risk of the
Swiss Life Group
For the account and risk of the
Swiss Life Group's customers
Total
31.12.201531.12.201431.12.201531.12.201431.12.201531.12.2014
DEBT SECURITIES
Deb securities at fair value through profit or loss6355955 7856 2406 4216 835
Debt securities available for sale84 88490 038--84 88490 038
Debt securities pledged as collateral2 1092 763--2 1092 763
Debt securities classified as loans43926 088--4 3926 088
TOTAL DEBT SECURITIES92 02099 4835 7856 24097 805105 723
LOANS AND RECEIVABLES
Mortgages7 0736 145--7 0736 145
Corporate and other loans1 7323 171--1 7323 171
Note loans6 7587 944--6 7587 944
Receivables4 3794 600--4 3794 600
TOTAL LOANS AND RECEIVABLES19 94221 860--19 94221 860
OTHER ASSETS
Cash and cash equivalents2 6713 7532 6252 3095 2966 062
Derivatives2 1132 358--2 1132 358
Reinsurance assets376397--376397
TOTAL OTHER ASSETS5 1596 5092 6252 3097 7848 818
UNRECOGNISED ITEMS
Financial guarantees2942--2942
Loan commitments320242--320242
TOTAL UNRECOGNISED ITEMS349283--349283
TOTAL EXPOSURE TO CREDIT RISK117 470128 1358 4108 549125 880136 684

The following table shows the extent to which collateral and other credit enhancements mitigate credit risk in respect of the maximum exposure to credit risk.

Credit risk mitigation – collateral held and other credit enhancements as at 31 December 2015

In CHF million
 
Debt securities
Loans and receivables
Cash and cash equivalents
Derivatives (assets)
Reinsurance assets
Financial
guarantees
and loan
commitment
Total
SECURED BY
Cash collateral---1 93990-2 029
Securities collateral-444--18169694
Mortgage collateral9 2139 294---27418 781
Other collateral-298---4302
Guarantees624554212---1 389
Netting agreements-147-11--159
TOTAL SECURED9 83710 7362121 95027234723 353
UNSECURED
Governments and 
supranationals
46 6124 103350---51 065
Corporates35 4512 2452 109163104240 075
Other1202 858----2 978
TOTAL UNSECURED82 1839 2062 459163104294 117
TOTAL92 02019 9422 6712 113376349117 470

 

Credit risk mitigation – collateral held and other credit enhancements as at 31 December 2014

In CHF million
Debt securities
Loans and receivables
Cash and cash equivalents
Derivatives (assets)
Reinsurance assets
Financial
guarantees
and loan
commitments
Total
SECURED BY
Cash collateral---1 75695-1 851
Securities collateral-479--23074782
Mortgage collateral9 9918 511---20218 703
Other collateral-254---4258
Guarantees7791 179600---2 558
Netting agreements-134-571--706
TOTAL SECURED10 76910 5576002 32732428024 858
UNSECURED
Governments and 
supranational
46 6714 444634---51 749
Corporates41 8813 7762 5193173448 284
Other1613 084----3 245
TOTALUNSECURED88 71311 3043 15331734103 277
TOTAL99 48321 8603 7532 358397283128 135

 

Exposure to credit risk of debt instruments – credit rating by class as at 31 December 2015

In CHF millionAAA AAA BBBBelow BBBNot ratedPast due or impairedTotal
DEBT SECURITIES
Supranational2 0004361832---2 486
Governments21 11716 5602 2017532793-40 914
Sovereign1927821 163926149--3 212
Covered/guaranteed7 9831 235448170---9 837
Corporates5234 32914 53713 8502 17203935 451
Other-6333168--120
TOTAL DEBT SECURITIES31 81523 40618 40015 7482 60833992 020
MORTGAGES
Commercial-----2 53712 537
Residential-----4 519174 536
TOTAL MORTGAGES-----7 056177 073
OTHER LOANS AND RECEIVABLES
Governments and supranationals1 8201 99913873340-4 063
Corporates1 361754972773631 13205 055
Other46197413 600483 751
TOTAL OTHER LOANS AND RECEIVABLES3 1842 7591 128920984 7324812 869

 

Exposure to credit risk of debt instruments – credit rating by class as at 31 December 2014

In CHF million
 
AAAAAABBBBelow BBBNot ratedPast due or impairedTotal
DEBT SECURITIES
Supranational2 091160-32---2 283
Governments16 27720 0922 9151 1511762-40 613
Sovereign2101 1568161 486107--3 775
Covered/guaranteed8 0931 721662248422-10 769
Corporates4944 76317 92316 4962 17113341 881
Other226261-15--161
TOTAL DEBT SECURITIES27 18627 95622 37719 4132 51263399 483
MORTGAGES
Commercial-----2 30612 307
Residential-----3 816233 838
TOTAL MORTGAGES-----6 122236 145
OTHER LOANS AND RECEIVABLES
Governments and supranationals1 7692 34121284360-4 444
Corporates1 4421 1642 493492681 64917 309
Other3760503 813733 962
TOTAL OTHER LOANS AND RECEIVABLES3 2153 5122 7665811045 4637415 715

 

Financial assets past due (not impaired) – age analysis as at 31 December 2015

In CHF million
 
Up to
3 months
3-6 months6-12 monthsMore than
1 year
Total
MORTGAGES
Residential712516
TOTAL712516
OTHER LOANS AND RECEIVABLES
Other766928
TOTAL766928

 

Financial assets past due (not impaired) – age analysis as at 31 December 2014

In CHF million
 
Up to
3 months
3-6 months6-12 monthsMore than
1 year
Total
MORTGAGES
Residential1122420
TOTAL1122420
OTHER LOANS AND RECEIVABLES
Other11861742
TOTAL11861742

 

Financial assets individually determined as impaired

In CHF millionGross amountImpairment lossesCarrying amount
31.12.201531.12.201431.12.201531.12.201431.12.201531.12.2014
DEBT SECURITIES
Corporates103102-63-693933
TOTAL103102-63-693933
MORTGAGES
Commercial110011
Residential130013
TOTAL240-123
OTHER LOANS AND RECEIVABLES
Corporates010001
Other3139-11-82031
TOTAL3140-11-82032

 

Financial assets individually determined as impaired – impairment loss allowance for the year 2015

In CHF million
Balance as at
1 January
Impairment
losses/
reversals
Write-offs
and disposals
Foreign
currency
translation
differences
Balance as at
end ofperiod
DEBT SECURITIES
Corporates690-6063
TOTAL690-6063
MORTGAGES
Commercial00--0
Residential00000
TOTAL10000
OTHER LOANS AND RECEIVABLES
Corporates0--00
Other830-111
TOTAL830-111

 

Financial assets individually determined as impaired – impairment loss allowance for the year 2014

In CHF million
Balance as at
1 January
Impairment
losses/
reversals
Write-offs
and disposals
Foreign
currency
translation
differences
Balance as at
end ofperiod
DEBT SECURITIES
Corporates5118--69
TOTAL5118--69
MORTGAGES
Commercial1-1--0
Residential10-100
TOTAL20-101
OTHER LOANS AND RECEIVABLES
Corporates0--00
Other73-108
TOTAL73-108

The criteria used for the assessment of financial assets for impairment are described in note 2.8.

Exposure to credit risk of other assets

In CHF million       
AAAAAABBBBelow BBBNot ratedTotal
CREDIT RATING AS AT
31 DECEMBER 2015
Cash and cash equivalents3587371 3331550872 671
Derivatives369717855131-402 113
Reinsurance assets-21211414-36376
TOTAL7271 6662 30230001645 159
CREDIT RATING AS AT
31 DECEMBER 2014
       
Cash and cash equivalents6401 1821 86140683 753
Derivatives5437268943-1922 358
Reinsurance assets-22811518-35397
TOTAL1 1832 1362 8702502956 509

At 31 December 2015 and 2014, no reinsurance assets were past due or impaired.

Exposure to credit risk of unrecognised items

In CHF million       
AAAAAABBBBelow BBBNot ratedTotal
CREDIT RATING AS AT 31 DECEMBER 2015
Financial guarantees-----2929
Loan commitments-----320320
TOTAL-----349349
CREDIT RATING AS AT 31 DECEMBER 2014  
Financial guarantees-----4242
Loan commitments-----242242
TOTAL-----283283

Currency risk
The Swiss Life Group operates internationally and its exposures to currency risk primarily arise with respect to the euro, US dollar, British pound and Canadian dollar. Most of the investments and liabilities are denominated in Swiss francs, euros and US dollars, the values of which are subject to exchange rate fluctuations. The Group operates with various functional currencies (predominantly Swiss francs and euros). Its financial position and earnings could be significantly affected by a weakening of said foreign currencies against the Swiss franc.

The following table shows the Group’s sensitivity of monetary items to foreign currency exchange rate fluctuations.

1% decrease in rate

In CHF millionGain (+)/loss (-)1
20152014
EUR/CHF-1-1
USD/CHF-11-10
GBP/CHF-4-2
CAD/CHF00

Additionally, foreign currency translation of the Group’s equity would be affected by a strengthening/ weakening of foreign currency exchange rates. If at the balance sheet date the euro exchange rate had been 1% higher/lower, total equity would have been higher/lower by approximately CHF 34 million.

The Swiss Life Group’s European insurance and investment operations (excluding Switzerland) generally invest in assets denominated in the same currency as their insurance and investment contract liabilities, which mitigates the currency risk for these operations. As a result, currency risk arises from recognised assets and liabilities denominated in other currencies and net investments in foreign operations. Although the Swiss Life Group actively engages in currency management to reduce the effect of exchange rate fluctuations on its assets and liabilities, particularly by hedging against the risk of such movements in relation to part of its investments denominated in euros and in US dollars, significant movements in exchange rates could adversely affect the Swiss Life Group’s earnings and financial position, including the value of its investment portfolio. Foreign exchange exposure is hedged to a large extent in line with the strategic asset allocation. The instruments which the Swiss Life Group uses to hedge exposure may not be perfectly correlated to the related assets, so the Group will still be exposed to losses if the value of the hedge and the value of the underlying asset or liability do not correspond appropriately.

Due to the limitations of the Swiss capital market with regard to liquidity and duration, investments in Switzerland are also made in currencies other than the Swiss franc.

The balance sheet currency exposure is to a large extent hedged using foreign currency derivatives. Hedging is done on an overall basis for monetary and non-monetary items.

Liquidity risk
Liquidity risk is the risk that not enough cash resources may be available to pay obligations when due (primarily obligations arising from the insurance business and debt) at a reasonable cost. The Swiss Life Group is exposed to liquidity risk which primarily arises on calls on its cash resources from claims, amounts payable at maturity and surrenders arising from insurance and investment contracts. The Swiss Life Group faces the risk of not being able to refinance its debt obligations due to unexpected long-term market disruptions.

At the operational level, rolling forecasts are in place to address situational liquidity risk, which primarily arises on unexpected calls on cash resources from claims, amounts payable at maturity and surrenders arising from insurance and investment contracts. To overcome unexpected liquidity shortfalls at times asset disposals are not desired, repurchase agreements are used to ensure short-term refinancing at minimal cost.

At the strategic level, the Swiss Life Group holds substantial liquidity and uses active debt maturity planning to ensure financial flexibility and efficient liquidity management.

The liquidity analysis of financial liabilities and commitments is based on undiscounted cash flows by remaining contractual maturities, whereas insurance and policyholder participation liabilities are analysed by estimated timing of net cash outflows. Cash outflows of derivative liabilities designated as cash flow hedging instruments are analysed on the basis of expected settlement dates for forward starting swaps, and on the basis of contractual maturity for forward starting bonds. The analysis is made for amounts for the account and risk of the Swiss Life Group.

Exposure to liquidity risk as at 31 December 2015

In CHF million
        
 Cash flows
Carrying
amount
Up to 1 month1-3 months3-12 months1-5 years5-10 years
More than
10 years
Total
FINANCIAL LIABILITIES
Derivatives designated as
cash flow hedges
--16371-3916253
Investment contracts with
discretionary participation
22382032 2721 6835 7119 9299 929
Investment contracts without
discretionary participation
00023185190190
Borrowings156196681 7662 248-4 8564 078
Other financial liabilities3 697779486434823037410 29210 216 1
TOTAL3 8758365 8994 4584 1636 66225 89324 417
INSURANCE AND
POLICYHOLDER
PARTICIPATION LIABILITIES
Insurance liabilities2162092 5896 27912 57183 126104 990104 990
Policyholder
participation liabilities
861263 4064 876291 54210 06510 065
TOTAL3023355 99511 15512 60084 669115 056115 056
GUARANTEES AND
COMMITMENTS
Financial guarantees29-----29-
Loan commitments96721222802320-
Capital commitments544--96--640-
TOTAL6697212212402989-

 

Exposure to liquidity risk as at 31 December 2014

In CHF million        
Cash flowsCarrying
amount
Up to 1 month1-3 months3-12 months1-5 years5-10 yearsMore than
10 years
Total
FINANCIAL LIABILITIES
Derivatives designated as cash flow hedges--301612--913-
Investment contracts with discretionary participation24412292 3221 8185 4359 8699 869
Investment contracts without
discretionary
participation00134879594
Borrowings1205852 4781 291-4 3763 798
Other financial liabilities3 3962 0675 64335324540812 11312 0001
TOTAL3 4212 1296 7595 7683 3575 93127 36625 761
INSURANCE AND POLICYHOLDER
PARTICIPATION LIABILITIES
Insurance liabilities2412212 7796 63212 79680 707103 376103 376
Policyholder participation liabilities1161703 6996 145361 98612 15212 152
TOTAL3583916 47812 77712 83282 693115 529115 529
GUARANTEES AND COMMITMENTS
Financial guarantees42-----42-
Loan commitments765898802242-
Capital commitments453-427932-606-
TOTAL5715813987322889-

Current and non-current assets and liabilities
The table below shows the expected recovery or settlement of assets and liabilities. Assets are classified as current if they are expected to be realised within twelve months after the balance sheet date. Liabilities are classified as current if they are due to be settled within twelve months after the balance sheet date. All other assets and liabilities are classified as non-current.

In CHF million       
CurrentNon-current
For the account and
risk of the Swiss Life
Group's customers
Total
31.12.201531.12.201431.12.201531.12.201431.12.201531.12.201431.12.201531.12.2014
ASSETS
Cash and cash equivalents2 6713 753--2 6252 3095 2966 062
Derivatives6235771 4901 781--2 1132 358
Assets held for sale4-----4-
Financial assets at fair value through profit
or loss
3 0951 4203 2021 99427 29328 97533 59032 389
Financial assets available for sale6 1776 30689 84890 857--96 02697 162
Loans and receivables6 5339 04117 80118 907--24 33427 948
Financial assets pledged as collateral22722 0862 691--2 1092 763
Investment property--21 55719 596--21 55719 596
Investments in associates--67284--67284
Reinsurance assets3033337364--376397
Property and equipment--407442--407442
Intangible assets including intangible
insurance assets
--2 8402 972--2 8402 972
Current income tax assets1714----1714
Deferred income tax assets--4734--4734
Other assets179203292228--471431
TOTAL ASSETS19 62421 719139 710139 85129 91831 285189 252192 854
LIABILITIES
Derivatives3891 288601876--9892 165
Financial liabilities at fair value through profit
or loss
1 3594681 13762222 61524 32525 11125 415
Investment contracts2642969 8569 6673 9954 10714 11514 070
Borrowings6904613 3883 338--4 0783 798
Other financial liabilities9 40111 135884921--10 28412 056
Insurance liabilities3 0143 241101 9771001353 1672 760108157106 136
Policyholder participation liabilities3 6183 9856 4478 167--10 06512 152
Employee benefit liabilities1431401 8341 681--1 9761 821
Current income tax liabilities10478----10478
Deferred income tax liabilities--1 7201 913--1 7201 913
Provisions37526576--101128
Other liabilities2712652225--293289
TOTAL LIABILITIES19 28821 408127 930127 42229 77731 192176 994180 023

5.5 Insurance risk management objectives and policies

Insurance contracts are contracts under which one party (the insurer) agrees to compensate the other party (the policyholder) if a specified uncertain future event affects the policyholder. The Group’s insurance entities neither generally accept nor generally deny insurance coverage to applicants, but ensure that all the insurance risks are identified and thoroughly assessed, and that the insurance premiums accurately reflect the risk taken. The amount and type of risk taken must be in line with the Group’s risk policy and strategy, and must also meet the profitability targets.

Nature of insurance risk
When designing a new product or reviewing an existing one, care has to be taken that the product neither includes systemic risk nor provides incentives for adverse selection. The product should meet the market’s needs. The Swiss Life Group favours transparent and simple product design with a reliable pricing basis with sufficient statistical data available. Insurance risk arises when biometric parameters deviate adversely from expectations. The uncertainty in the estimation of future benefit payments and premium receipts for long-term insurance contracts is due to the unpredictability of long-term changes in overall levels of mortality and disability, for instance. Furthermore, deviations from the expected outcome of a portfolio can also arise because of random fluctuations. The impact of random fluctuations depends on the extent of diversification within a portfolio of contracts: that is, on the size of the portfolio.

The quantification of life insurance risk is based on a sensitivity analysis. Insurance risk is thus measured as the deviation of (the realisations of) the insurance risk factors from the corresponding best estimate values. Life insurance risk factors include mortality rates, disability rates and longevity, among others.

The nature of insurance risk can be summarised as follows:

Mortality and longevity
Mortality and longevity risks reflect the financial consequences of insured people dying sooner or living longer than expected, respectively. For example, a life insurer with an annuity portfolio making payments to the policyholders until their death is financially exposed to those individuals who live longer than expected. Conversely, an insurer writing life insurance business that pays out amounts contingent on death of the policyholders is exposed to increases in mortality levels.

The Swiss occupational pensions (BVG) segment of the group life insurance business in Switzerland is a significant part of the Group’s overall life insurance business. The BVG business provides an example of a minimum return guarantee. The guarantee takes the form of the right to convert an assured sum into a life annuity at a guaranteed conversion rate: The prevalent annuity conversion rate for the mandatory part of the BVG business is set at 6.8% for men (retirement age 65) and 6.8% for women (retirement age 64).

With regard to mortality, morbidity and longevity risk, the most important annuities payable (annuities in payment phase) or insured (annuities in deferral phase) as well as sums insured are as follows.

Annuities payable per annum by type of annuity – individual life

In CHF million  
31.12.201531.12.2014
Life annuities - in payment586593
Life annuities - deferred529604
Annuities certain - in payment68
Annuities certain - deferred4141
Disability income and other annuities - in payment219237
Disability income and other annuities - deferred7 0457 526
TOTAL INDIVIDUAL LIFE8 4279 008

 

Annuities payable per annum by type of annuity – group life

In CHF million  
31.12.201531.12.2014
Retirement annuities - in payment847778
Retirement annuities - deferred376410
Survivors' annuities - in payment135126
Survivors' annuities - deferred2 5992 537
Disability income and other annuities
in payment
369368
Disability income and other annuities
-deferred
14 97915 000
TOTAL GROUP LIFE19 30519 219

 

Life benefits insured by type of insurance – individual life

In CHF million  
31.12.201531.12.2014
Whole life and term life24 27725 571
Disability lump-sum payment2630
Other4 5945 046
TOTAL INDIVIDUAL LIFE28 89730 647

 

Life benefits insured by type of insurance – group life

In CHF million  
31.12.201531.12.2014
Term life54 67160 760
Disability lump-sum payment479465
Other1 0691 119
TOTAL GROUP LIFE56 21962 344

Morbidity and disability
Disability risk reflects the financial consequences of groups of individuals getting disabled more often and/or recovering less quickly than expected. With regard to morbidity, the most significant risk factors are epidemics, widespread changes in lifestyle, such as eating, smoking and exercise habits, and economic effects.

Embedded options
The ability of a policyholder to pay reduced or no future premiums under a contract, to terminate the contract completely or to exercise a guaranteed annuity option means that the insurer’s liability is also subject to policyholder behaviour to a certain extent. On the assumption that a certain group of policyholders will make decisions rationally, overall insurance risk can be aggravated by such behaviour. For example, it is conceivable that policyholders whose health has deteriorated significantly will be less inclined to terminate contracts insuring disability or death benefits than those policyholders remaining in good health, thus resulting in an increasing trend in the expected mortality of policyholders, as the portfolio of insurance contracts is reduced due to surrender.

Underwriting strategy
Underwriting is the process of selecting and classifying insurable risks. The underwriting strategy attempts to ensure that the risks underwritten are profitable and well diversified in terms of type of risk and level of insured benefits. Life insurance underwriting is performed to ensure that the premiums and the general conditions of the insurance policies are adequate for the risks to be insured. The first step in the underwriting process is to determine which individual risks can be accepted. The second step is to place the accepted risks into groups of similar levels of risk. Both processes must be conducted objectively and consistently. The Group sets limits for the acceptance of insurance coverage arising from new and renewal business. Medical selection is part of the Group’s underwriting procedures, whereby premiums are charged to reflect the health condition and family medical history of the applicants. The limits relate to sums at risk, maximum insured losses or present value of premiums at the contract or insured person level. Depending on the type of business and the limit exceeded, the new or renewed contract must be approved by the corresponding risk committee or senior management. Contracts exceeding the set limits are tested individually for profitability according to predefined procedures before approval. Certain contracts which include specific risks relating to derivatives or demographic risk factors for which no reliable data is available must be submitted for approval irrespective of the amount of coverage offered. Insurance coverage exceeding set limits is subject to regular internal reporting requirements. Additionally, the underwriting practices must be in line with local laws.

For certain group life business, local law is relevant with regard to medical examinations required before any business is written. For certain individual life business, agreements exist with regard to medical examinations of applicants before business is written. If the risk is assessed as high, exclusion of specific risks, premium adjustments and reinsurance are considered or the application may be rejected.

In the accident and health business, the underwriting strategy comprises biometric and financial data of the persons to be insured, type of contract and experience.

Non-life
The Swiss Life Group has non-life operations, mainly in France, covering risks associated with accident and health (disability) as well as property and casualty.

Claims arising from the accident and health business primarily cover refunds for medical treatment, daily allowances in the case of sick leave, annuities and long-term medical care. The most significant factors that could increase the overall liabilities in health insurance are the increase in the claim frequency due to an increase in the average age of the insured persons and negative economic and social factors. The insurance liabilities arising from accident and health insurance contracts must consider outstanding claims and claims incurred but not reported (IBNR). A large part of the insurance liabilities arising from these contracts relates to IBNR, and experience shows that health insurance contracts are sensitive to late reporting of claims in both number of claims and amounts.

The Group manages the risks arising from these contracts by means of its underwriting strategy and reinsurance arrangements.

Development of claims under non-life insurance contracts

In CHF millionEstimate ofultimate claim costs by year of loss <occurrence
            
2006200720082009201020112012201320142015Total
At end ofyear of loss occurrence447416345392323311303335342296n/a
1 year later403383387373369362330361346-n/a
2 years later365353310320314324331296--n/a
3 years later350296275293286336285---n/a
4 years later292272259276301300----n/a
5 years later266261242297265-----n/a
6 years later256239232263------n/a
7 years later231260225-------n/a
8 years later268228--------n/a
9 years later240---------n/a
CURRENT ESTIMATE OF CUMULATIVE CLAIMS2402282252632653002852963462962 746
Cumulative payments to date-225-211-206-227-232-228-217-217-203-113-2 080
LIABILITIES BEFORE DISCOUNTING1518193633726779143182666
Effect ofdiscounting-----------
LIABILITIES FOR THE CURRENT AND 9 PREVIOUS YEARS1518193633726779143182666
Liabilities for prior years206
TOTAL GROSS CLAIMS UNDER NON-LIFE INSURANCE
CONTRACTS
872

The development of claims under non-life insurance contracts comprises the non-life business in France. A minor part of the non-life business is very short-tailed. The claims incurred for this minor part are almost completely settled within one year. The amount of unpaid claims as at the balance sheet date is therefore not material and does not underlie any significant variation in its temporal development. The claims data regarding this type of business is not included in the figures above.

Acceptance rules for risks are consistent with both the Code des Assurances and the French regulations. Underwriting guidelines and tariffs are reviewed on an annual basis.

The monitoring of the risks taken is made on a monthly basis with regard to related premiums and claims. An automated claims supervision system is used for the adjustment of tariffs for risks with loss ratios above a certain level.

Reinsurance
Reinsurance is used to limit the Group’s exposure to insurance risk. This does not, however, discharge the Group’s liability as a primary insurer, and, if a reinsurer fails to pay a claim, the Group remains liable for the payments to the policyholder. A loss allowance would be recognised for any estimated unrecoverable reinsurance.

In addition, the Group holds substantial collateral under related reinsurance agreements in the form of deposited funds and securities. Amounts recoverable from reinsurers are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented in the balance sheet as a component of the reinsurance assets.

Management reviews reinsurance programmes covering treaty, type, risks covered and retention on a regular basis. A process, competencies and limits are set up for the approval of reinsurance programmes and their modification. To ensure that the Group’s principles are observed, guidelines on reinsurance are in place.

In accordance with its retention policy for mortality and disability benefits, the Group limits its exposure to CHF 5 million per life. Retention limits can be lower for other products (e.g. critical illness or long-term care) or for exposure in international markets. In addition, catastrophe reinsurance is in place to protect against accumulation of losses from a single event or a series of connected events.

The reinsurance team at Group level is responsible for implementing the retention policy by way of intra-group reinsurance. Intra-group reinsurance is transacted at arm’s length.

As far as property and casualty insurance is concerned, the reinsurance arrangements mostly include non-proportional coverage on any single risk and/or event, and are adapted to the specific exposure. This includes excess of loss, stop-loss and catastrophe coverage, as well as facultative reinsurance for protection against specific risks.

Approximately 1.0% in terms of earned insurance premiums was ceded as at 31 December 2015 (2014: 1.4%).

Other risk transfer
Risk transfer primarily takes the form of reinsurance. Alternative forms of risk transfer (such as securitisation) require the formal approval of the Group Risk Committee. No significant alternative form of risk transfer is used by the Group at present.

Insurance risks are regularly reported to the Group Risk Committee.

Sensitivity analysis
The Swiss Life Group uses the market consistent embedded value (MCEV) following the guidelines of the European Insurance CFO Forum Market Consistent Embedded Value Principles©1, as an important management tool, for its sensitivity analysis with regard to insurance risk and market risk. From the shareholders’ point of view, the embedded value serves as an indicator of the value of the existing insurance portfolios. It is composed of two components: the net asset value (NAV) attributable to shareholders and the value of in-force business (VIF). Future new business is not included.

The market consistent embedded value of the Swiss Life Group amounted to CHF 12.5 billion as at 31 December 2015 (2014: CHF 12.9 billion). Due to different valuation principles, changes in the embedded value are typically not reflected to the same extent in the consolidated balance sheet and consolidated statement of income of the Swiss Life Group and vice versa.

The market consistent embedded value calculations are based on economic scenarios which are calibrated to market conditions at valuation date. Best estimate assumptions were made regarding a number of factors, in particular asset allocation, policyholder participation, development of costs and claims, policyholder behaviour, mortality and morbidity. Business is assumed to be continuing at the same level (going concern) and the current cost ratios – adjusted for inflation – are thus assumed to hold good for the future as well. Future costs from taxation and investment management expenses on assets backing solvency capital funded by the shareholders and which underpins the insurance business are charged to the MCEV. The Swiss Life Group calculates the embedded value for all its life and health insurance companies. All other companies are taken into account at their IFRS net asset value. As a consequence, embedded value sensitivities do not affect the value of these companies.

An analysis of sensitivity indicates to what extent the embedded value is affected by variations in risk factors. The analysis is based on changes in the assumptions used in the embedded value calculation whereby a specific risk factor is changed while holding all other assumptions constant (unless they are directly associated). In practice, this is unlikely to occur and changes in some of the assumptions may be correlated. In the event of a change in a specific risk factor, the effect of anticipated management actions, such as different allocations to policyholder participation and dynamic policyholder behaviour, as a consequence is considered in the analysis. The changes in a specific risk factor are applied to the entire projection period.

The sensitivity analysis with regard to insurance risk is as follows:

Higher mortality would have a significant positive effect on the embedded value of life annuities (survival risk), whereas the negative effect on the embedded value of contracts with death cover (mortality risk) is comparatively limited due to corresponding reductions in policyholder bonuses. Therefore, this sensitivity is considered not significant as an adverse risk for the embedded value.

At 31 December 2015, if mortality rates (annuities) had decreased by 5%, the embedded value would have been CHF 163 million lower (2014: CHF 118 million lower).

At 31 December 2015, if morbidity had been 5% higher, the embedded value would have been CHF 41 million lower (2014: CHF 59 million lower).

At 31 December 2015, if morbidity had been 5% lower, the embedded value would have been CHF 40 million higher (2014: CHF 54 million higher).

The sensitivity analysis with regard to market risk is as follows:

The MCEV calculations of the Swiss Life Group are based on economic scenarios which are calibrated to market conditions at valuation date.

At 31 December 2015, if the interest rates had been 100 basis points higher, the embedded value would have been CHF 987 million higher (2014: CHF 530 million higher).

At 31 December 2015, if the interest rates had been 100 basis points lower, the embedded value would have been CHF 1428 million lower (2014: CHF 1068 million lower).

At 31 December 2015, if the swaption implied volatilities (interest rates) had been 10% higher, the embedded value would have been CHF 37 million higher (2014: CHF 61 million lower).

At 31 December 2015, if the swaption implied volatilities (interest rates) had been 10% lower, the embedded value would have been CHF 121 million lower (2014: CHF 79 million lower).

At 31 December 2015, if the market value of equity securities and property had been 10% higher, the embedded value would have been CHF 811 million higher (2014: CHF 722 million higher).

At 31 December 2015, if the market value of equity securities and property had been 10% lower, the embedded value would have been CHF 958 million lower (2014: CHF 818 million lower).

At 31 December 2015, if the equity securities and property implied volatilities had been 25% higher, the embedded value would have been CHF 338 million lower (2014: CHF 322 million lower).

At 31 December 2015, if the equity securities and property implied volatilities had been 25% lower, the embedded value would have been CHF 273 million higher (2014: CHF 263 million higher).

The sensitivity of insurance liabilities is also analysed on an economic basis for internal risk management purposes and to satisfy regulatory requirements (Swiss Solvency Test).

6 Earnings per Share

Basic earnings per share (EPS) are calculated on the weighted average number of shares outstanding during the reporting period, excluding the average number of shares purchased by the Group and held as treasury shares.

Diluted earnings per share include the dilutive effect of convertible bonds and share options issued. In the diluted EPS calculation, the convertible debt is assumed to have been converted into shares and the profit attributable to shareholders is adjusted for the applicable interest expense minus the related taxes. Share options are dilutive when they would result in the issuance of shares for less than the average market price during the period. Dilutive share options are assumed to have been exercised. The assumed proceeds are regarded as having been received from the issuance of shares at the average market price during the period. The difference between the number of shares issued and the number of shares that would have been issued at the average market price during the period is considered as an issuance of shares for no consideration.

In CHF million (if not noted otherwise)  
20152014
BASIC EARNINGS PER SHARE
Net result attributable to equity holders of Swiss Life Holding872814
Weighted average number of shares outstanding31 829 01831 904 630
BASIC EARNINGS PER SHARE FOR THE NET RESULT
ATTRIBUTABLE TO EQUITY HOLDERS OF SWISS LIFE HOLDING (IN CHF)
27.4125.52
DILUTED EARNINGS PER SHARE
Net result attributable to equity holders of Swiss Life Holding872814
Elimination of interest expense on convertible bonds77
RESULT USED TO DETERMINE DILUTED EARNINGS PER SHARE880821
Weighted average number of shares outstanding31 829 01831 904 630
Adjustments (number ofshares)
Assumed conversion of convertible bonds2 071 1731 998 862
Equity compensation plans122 528162 271
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING FOR DILUTED EARNINGS PER SHARE
34 022 71934 065 763
DILUTED EARNINGS PER SHARE FOR THE NET RESULT
ATTRIBUTABLE TO EQUITY HOLDERS OF SWISS LIFE HOLDING (IN CHF)
25.8524.11

7 Premiums, Policy Fees and Deposits Received

Written premiums

In CHF million
20152014
Direct13 58713 633
Assumed330332
GROSS WRITTEN PREMIUMS13 91713 965
Ceded-141-192
NET WRITTEN PREMIUMS13 77513 774

 

Earned premiums

In CHF million
20152014
Direct13 58613 636
Assumed326332
GROSS EARNED PREMIUMS13 91213 968
Ceded-141-192
NET EARNED PREMIUMS13 77113 776

 

Written policy fees

In CHF million  
20152014
Direct278306
GROSS WRITTEN POLICY FEES278306
Ceded--
NET WRITTEN POLICY FEES278306

 

Earned policy fees

In CHF million  
20152014
Direct276308
GROSS EARNED POLICY FEES276308
Ceded--
NET EARNED POLICY FEES276308

Under the accounting principles adopted, deposits received under insurance and investment contracts for which deposit accounting is used are not recognised as income.

In CHF million  
20152014
Gross written premiums and policy fees14 19514 271
Deposits received under insurance and investment contracts4 6584 831
GROSS WRITTEN PREMIUMS, POLICY FEES AND DEPOSITS RECEIVED18 85319 102

8 Details of Certain Items in the Consolidated Statement of Income

Commission income

In CHF million  
201520141
Brokerage commissions496539
Asset management commissions341277
Other commissions and fees179182
TOTAL COMMISSION INCOME1 016998

 

Investment income

In CHF million   
Notes20152014
Interest income on financial assets available for sale2 6052 812
Interest income on loans and receivables709836
Other interest income23
Dividend income on financial assets available for sale299119
Net income on investment property675677
TOTAL INVESTMENT INCOME54 2904 448

 

Net gains/losses on financial assets

In CHF million   
Notes20152014
Sale of
financial assets available for sale26561264
loans87168
Net gains/losses from sales647432
Impairment losses on
debt securities available for sale260-18
equity securities available for sale26-34-23
loans and receivables13-18-6
Impairment losses on financial assets-52-47
Foreign currency gains/losses-3482 246
TOTAL NET GAINS/LOSSES ON FINANCIAL ASSETS52482 631

 

Net gains/losses on financial instruments at fair value through profit or loss

In CHF million   
Notes20152014
Currency derivatives-250-2 306
Interest rate derivatives352168
Equity derivatives16-18
Other derivatives31-8
Financial assets designated as at fair value through profit or loss 118169
Financial liabilities designated as at fair value through profit or loss 2-59-50
Associates at fair value through profit or loss 1-1328
Assets for the account and risk of the Swiss Life Group's customers 1-3151 897
Unit-linked contracts300-1 890
TOTAL NET GAINS/LOSSES ON FINANCIAL INSTRUMENTS
AT FAIR VALUE THROUGH PROFIT OR LOSS
581-2 009

 

Other income

In CHF million  
20152014
Realised gains/losses on sales of subsidiaries and other assets10
Net income on inventory property2614
Other foreign currency gains/losses19312
Other-96
TOTAL OTHER INCOME21031

 

Net insurance benefits and claims

In CHF million  
20152014
Benefits and claims under insurance contracts
Life benefits and claims paid, gross9 7949 648
Change in liability for future life policyholder benefits, gross4 5324 484
Non-life claims paid, gross222262
Change in reserve for non-life claims, gross10-9
Benefits and claims recovered from reinsurers-95-98
Net benefits and claims under insurance contracts14 46314 287
Benefits and claims under investment contracts with discretionary participation
Life benefits and claims paid, gross565475
Change in liability for future life policyholder benefits, gross488457
Benefits and claims recovered from reinsurers--
Net benefits and claims under investment contracts with discretionary participation1 053932
 
TOTAL NET INSURANCE BENEFITS AND CLAIMS15 51615 218

 

Interest expense

In CHF million   
Notes20152014
Interest expense on deposits1225
Interest expense on investment contracts197581
Interest expense on deposits under insurance contracts225669
Other interest expense2029
TOTAL INTEREST EXPENSE162205

 

Commission expense

In CHF million  
20152014
Insurance agent and broker commissions685839
Asset management and banking commissions6864
Other commissions and fees4537
TOTAL COMMISSION EXPENSE797940

 

Employee benefits expense

In CHF million 
Notes20152014
Wages and salaries 600588
Social security 119133
Defined benefit plans238486
Defined contribution plans 11
Other employee benefits 6760
TOTAL EMPLOYEE BENEFITS EXPENSE 871867

 

Depreciation and amortisation expense

In CHF million 
Notes20152014
Depreciation of property and equipment162426
Amortisation of present value of future profits (PVP)1711
Amortisation of deferred acquisition costs (DAC)17401314
Amortisation of deferred origination costs (DOC)171411
Amortisation of other intangible assets172832
TOTAL DEPRECIATION AND AMORTISATION EXPENSE 468383

 

Other expenses

In CHF million
20152014
Marketing and advertising5758
Information technology and systems7380
Rental, maintenance and repair6666
Professional services158185
Premium taxes and other non-income taxes5554
Other8788
TOTAL OTHER EXPENSES497532

9 Derivatives and Hedge Accounting

In CHF millionFair value assetsFair value liabilitiesNotional amount/exposure
 31.12.201531.12.201431.12.201531.12.201431.12.201531.12.2014
CURRENCY DERIVATIVES      
Forward contracts366162071 10430 00534 728
Futures010237155
Options (over-the-counter)5048168813 7301 895
TOTAL CURRENCY DERIVATIVES416663751 18733 77336 778
INTEREST RATE DERIVATIVES 
Forward contracts1472662-624913
Swaps1 2591 57757086836 42348 617
Futures0---26-
Options (over-the-counter)1637--5211 611
TOTAL INTEREST RATE DERIVATIVES1 4211 88057186837 59451 142
EQUITY/INDEX DERIVATIVES 
Futures1336122 120803
Options (over-the-counter)0---9-
Options (exchange-traded)2484051707003 561
Other1341176154
TOTAL EQUITY/INDEX DERIVATIVES2754128832 9054 517
OTHER DERIVATIVES 
Credit derivatives--35275 4351 911
TOTAL OTHER DERIVATIVES--35275 4351 911
TOTAL DERIVATIVES2 1132 3589892 16579 70894 348
of which derivatives designated and accounted for as hedging instruments
Derivatives designated as fair value hedges29-50469 5821 312
Derivatives designated as cash flow hedges3937443-2 1103 584
Derivatives held for risk management

Derivatives held for risk management primarily comprise derivatives that share a risk with other financial instruments and give rise to opposite changes in fair value that tend to offset each other (“economic hedges”). The timing of the offset does not match in all cases.

To manage the risks associated with derivative activity, the Group establishes risk levels and monitors these exposures. Exposure to price risk on both derivatives and their underlyings is managed in accordance with risk limits set by management for buying or selling instruments or closing out positions. The risks arise from open positions in interest rates, currencies and equity instruments, all of which are exposed to general and specific market movements.

Derivatives designated and accounted for as hedging instruments

Derivatives designated and accounted for as hedging instruments comprise derivatives associated with fair value hedges, cash flow hedges and net investment hedges that qualify for hedge accounting.

Derivatives designated as fair value hedges as at 31 December 2015

In CHF millionFair valueHedging instrumentsHedged itemsNotional
amount
AssetsLiabilitiesGainsLossesGainsLosses 
Interest rate risk 
Interest rate swaps to hedge available-for-sale bond portfolios1127533228534 540
Foreign currency risk
Currency forwards to hedge non-monetary investments18235225996165395 043
TOTAL DERIVATIVES DESIGNATED AS FAIR VALUE HEDGES29505756326445929 582

 

Derivatives designated as fair value hedges as at 31 December 2014

In CHF millionFair valueHedging instrumentsHedged itemsNotional
amount
AssetsLiabilitiesGainsLossesGainsLosses 
Interest rate risk 
Interest rate swaps to hedge available-for-sale bond portfolios---96101--
Foreign currency risk
Currency forwards to hedge non-monetary investments-4622160153171 312
TOTAL DERIVATIVES DESIGNATED AS FAIR VALUE HEDGES-4622256255171 312

The Swiss Life Group used interest rate swaps to hedge available-for-sale fixed-rate bonds in Swiss francs, euro and US dollars against changes in the fair value attributable to interest rate risk. The nominal amount of these bonds as at 31 December 2015 was CHF 4.5 billion (2014: nil).

Forward contracts are used as hedging instruments to protect non-monetary investments against adverse movements in euro, British pound and US dollar exchange rates. Such investments include equity securities, hedge funds and investment funds (equity funds, real estate funds and corporate loan funds).

Derivatives designated as cash flow hedges as at 31 December 2015

In CHF million (if not noted otherwise)
Fair value
assets
Fair value
liabilities
Amounts
recognised
in other
comprehensive
income
Ineffective-
ness
recognised in
profit or loss
Amounts
transferred to
profit or loss
Contract/
notional
amount
Cash flows
expected
to occur
(year)
Cash flows
expected
to affect
profit or loss
(year)
INTEREST RATE RISK
Forward starting swaps/bonds
Switzerland217-127--11 2152016-20222016-2047
France175319--68952016-20202016-2038
Germany--1--1-n/a2016-2047
Total interest rate risk3933146--82 110n/an/a
TOTAL DERIVATIVES DESIGNATED AS
CASH FLOW HEDGES
3933146--82 110n/an/a

 

Derivatives designated as cash flow hedges as at 31 December 2014

In CHF million (if not noted otherwise)
Fair value
assets
Fair value
liabilities
Amounts
recognised
in other
comprehensive
income
Ineffective-
ness
recognised in
profit or loss
Amounts
transferred to
profit or loss
Contract/
notional
amount
Cash flows
expected
to occur
(year)
Cash flows
expected
to affect
profit or loss
(year)
INTEREST RATE RISK
Forward starting swaps/bonds
Switzerland371-464002 2502015–20212015–2047
France299-3050-11 0942015–20182015–2038
Germany74-840-2412015–20172015–2047
Total interest rate risk744-8530-13 584n/an/a
TOTAL DERIVATIVES DESIGNATED AS
CASH FLOW HEDGES
744-8530-13 584n/an/a

In 2015 and 2014, the Group used forward starting swaps and forward starting bonds to hedge the exposure to variability in interest cash flows arising on the highly probable purchase of bonds in order to achieve an adequate yield level for reinvestments.

In 2015, a gain of CHF 8 million was reclassified from other comprehensive income to profit or loss and included in investment income (2014: gain of CHF 1 million).

10 Financial Assets and Liabilities at Fair Value through Profit or Loss

In CHF million   
Notes31.12.201531.12.2014
FINANCIAL ASSETS DESIGNATED AS AT FAIR VALUE
THROUGH PROFIT OR LOSS
Debt securities635595
Money market instruments00
Equity securities76
Investment funds – debt1 499642
Investment funds – equity257266
Investment funds – balanced8359
Real estate funds696389
Hedge funds56
Infrastructure investments619361
Assets attributable to non-controlling interests of investment funds2 4961 090
Financial assets for the account and risk of the Swiss Life Group’s customers527 29328 975
TOTAL FINANCIAL ASSETS DESIGNATED AS AT FAIR VALUE
THROUGH PROFIT OR LOSS
 33 59032 389
FINANCIAL LIABILITIES DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS 
Unit-linked contracts522 61524 325
Share of net assets of investment funds attributable to non-controlling interests 2 4961 090
TOTAL FINANCIAL LIABILITIES DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS 25 11125 415

11 Financial Assets Available for Sale

In CHF millionCost/amortised costNet unrealised gains/lossesFair value (carrying amount)
 31.12.201531.12.201431.12.201531.12.201431.12.201531.12.2014
Debt securities76 03078 1268 85411 91284 88490 038
Equity securities3 4311 7272322363 6631 963
Investment funds - debt44362 351-69734 3672 424
Investment funds - equity1 3841 118771391 4611 257
Investment funds - balanced3014002914
Real estate funds8816753355914730
Private equity412463189138601601
Hedge funds76933044106137
TOTAL FINANCIAL ASSETS AVAILABLE FOR SALE86 68084 5679 34512 59596 02697 162

Financial assets available for sale that have been sold under a repurchase agreement or lent under an agreement to return them, and where the transferee has the right to sell or repledge the financial assets given as collateral, were reclassified to financial assets pledged as collateral.

12 Financial Assets Pledged as Collateral

In CHF millionCarrying amount
31.12.201531.12.2014
Debt securities reclassified from
financial assets available for sale2 1092 763
TOTAL DEBT SECURITIES PLEDGED AS COLLATERAL2 1092 763
TOTAL FINANCIAL ASSETS PLEDGED AS COLLATERAL2 1092 763

Financial assets that have been sold under a repurchase agreement or lent under an agreement to return them are not derecognised when substantially all the risks and rewards of ownership are retained by the Swiss Life Group. If the transferee has the right to sell or repledge the financial assets given as collateral, they are reclassified in the balance sheet as financial assets pledged at their respective carrying amounts.

13 Loans and Receivables

In CHF millionGross amountAllowance for impairment lossesCost/amortised cost (carrying amount)
Notes31.12.201531.12.201431.12.201531.12.201431.12.201531.12.2014
LOANS
Mortgages7 0866 157-12-117 0736 145
Corporate and other loans1 7353 173-4-21 7323 171
Note loans6 7587 944--6 7587 944
Debt securities previously classified as available for sale3 9595 617--63 9595 611
Other debt securities classified as loans433477--433477
TOTAL LOANS3019 97123 368-16-2019 95523 348
RECEIVABLES
Insurance receivables1 4131 323-18-191 3951 304
Reinsurance receivables367356--367356
Accrued income1 5301 668--1 5301 668
Settlement accounts341534--341534
Other757740-9-3747737
TOTAL RECEIVABLES304 4074 622-28-224 3794 600
TOTAL LOANS AND RECEIVABLES24 37827 990-44-4224 33427 948

 

Allowance for impairment losses

In CHF millionIndividual
evaluation of impairment
Collective
evaluation of impairment
Total
201520142015201420152014
LOANS
Balance as at 1 January9811102018
Impairment losses/reversals232043
Write-offs and disposals-7-1---7-1
Foreign currency translation differences00--00
BALANCE AS AT END OF PERIOD4912111620
RECEIVABLES
Balance as at 1 January6716162223
Impairment losses/reversals11133143
Write-offs and disposals1-1-7-3-6-4
Foreign currency translation differences-10-10-20
BALANCE AS AT END OF PERIOD7620162822
TOTAL ALLOWANCE FOR IMPAIRMENT LOSSES111532264442

Interest income accrued on impaired loans was CHF 0.3 million as at 31 December 2015 (2014: CHF 0.4 million). The Group’s loan portfolio is monitored closely through the review of information such as debt service, annual reports and assessments. This information is evaluated in light of current economic conditions and other factors such as diversification of the property portfolio. This evaluation is part of the regular review to determine whether the allowance for potential loan losses is warranted. Management believes that the allowance for loan losses is sufficient. However, management cannot predict with assurance the impact of future economic circumstances or how the mortgage and real estate portfolios would be affected by various economic circumstances.

As at 1 July 2008, certain financial assets were reclassified from financial assets available for sale to loans due to the disappearance of an active market. The financial assets reclassified primarily consist of corporate debt instruments and debt instruments relating to emerging markets. The fair value as at 1 July 2008 of the financial assets reclassified amounted to CHF 14 966 million. At the date of reclassification the effective interest rate ranged from 0.8% to 9.7%, and the amount of cash flows expected to be recovered was estimated at CHF 32 658 million. In 2008, unrealised losses of CHF 740 million were recognised in other comprehensive income in respect of these assets.

Further details with regard to the financial assets reclassified are as follows.

Debt securities previously classified as available for sale

In CHF million
20152014
Carrying amount as at 31 December3 9595 611
Fair value as at 31 December4 3756 539
Gains (+)/losses (-) that would have been recognised in other comprehensive income if the assets had not been reclassified (excluding adjustments for income tax and policyholder participation)-449136
Gains (+)/losses (-) recognised in profit or loss (including impairment)720
Interest income261330

14 Investment Property

In CHF million   
Notes20152014
Balance as at 1 January19 59618 517
Additions1 9171 219
Capitalised subsequent expenditure327232
Classification as assets held for sale and other disposals-623-654
Gains/losses from fair value adjustments655288
Transfers from own-use property16-54
Transfers to inventory property-13-
Foreign currency translation differences-302-58
BALANCE AS AT END OF PERIOD21 55719 596
Investment property consists of
completed investment property21 24219 166
investment property under construction315430
TOTAL INVESTMENT PROPERTY21 55719 596

Investment property held by the Group includes residential, commercial and mixed-use properties primarily located within Switzerland, and comprises both completed investment property and investment property under construction. Property held for investment purposes comprises land and buildings owned by the Group to earn rentals and/or for capital appreciation. Property that is used by the Group itself or leased to, and occupied by, another entity of the Group is classified as owner-occupied property under property and equipment. Property acquired with a view to its subsequent disposal in the near future is carried under assets held for sale.

Rental income from investment property was CHF 868 million for the period ended 31 December 2015 (2014: CHF 850 million). Operating expenses arising from investment property that generated rental income stood at CHF 193 million for the period ended 31 December 2015 (2014: CHF 173 million).

15 Investments in Associates

Summarised financial information for the year 2015

Amounts in CHF million
Ownership
interest
Carrying
amount
Dividends
received
Share of
profit or
loss
Share ofother
comprehensive
income
Share of total
comprehensive
income
EQUITY METHOD ASSOCIATES
Crédit et services financiers (CRESERFI), Paris33.4%44-1-1
Groupe Assuristance, Paris34.0%1212-2
Other associatesn/a523-3
TOTALn/a6147-7
ASSOCIATES AT FAIR VALUE THROUGH
PROFIT OR LOSS
DEPFA Holding Verwaltungsgesellschaft mbH, Düsseldorf20.4%1177n/an/an/a
Other associatesn/a5-n/an/an/a
TOTALn/a6177n/an/an/a

 

Summarised financial information for the year 2014

Amounts in CHF million
Ownership
interest
Carrying
amount
Dividends
received
Share of
profit or
loss
Share of other
comprehensive
income
Share of total
comprehensive
income
EQUITY METHOD ASSOCIATES
Crédit et services financiers (CRESERFI), Paris33.4%4701-1
Groupe Assuristance, Paris34.0%122303
Other associatesn/a61-1--1
TOTALn/a653303
ASSOCIATES AT FAIR VALUE THROUGH
PROFIT OR LOSS
DEPFA Holding Verwaltungsgesellschaft mbH, Düsseldorf20.4%2127n/an/an/a
Other associatesn/a7-n/an/an/a
TOTALn/a2197n/an/an/a

Summarised financial information relating to material associates was as follows.

Amounts in CHF millionCrédit et services financiers
(CRESERFI), Paris
Groupe Assuristance
Paris
DEPFA Holding Verwaltungs-
gesellschaft mbH, Dusseldorf
 201520142015201420152014
SUMMARISED FINANCIAL
INFORMATION
Current assets16818523190130
Non-current assets121436414483
Current liabilities-32-37-23-230-15
Non-current liabilities-17-20-1-2--
Revenue334250531742
Profit or loss3478168150
Other comprehensive income---0-40
Total comprehensive income3478164149
RECONCILIATION
Net assets1311423535n/an/a
Ownership interest33.4%33.4%34.0%34.0%n/an/a
Share of net assets
(carrying amount)
44471212n/an/a

Due to dividend distribution of CHF 177 million, the fair value of DEPFA Holding Verwaltungsgesellschaft mbH, Düsseldorf, decreased significantly in 2015.

16 Property and Equipment

Property and equipment for the year 2015

In CHF million      
NotesLand and
buildings
Furniture
and fixtures
HardwareOther
equipment
Total
COST 
Balance as at 1 January 570546127713
Additions 245113
Additions from business combinations28-0-00
Disposals 1 0-5-3-1-9
Foreign currency translation differences -19-3-4-2-28
BALANCE AS AT END OF PERIOD 553516026690
ACCUMULATED DEPRECIATION AND IMPAIRMENT 
Balance as at 1 January -177-35-46-14-271
Depreciation -12-4-6-2-24
Impairment losses --1---1
Disposals 1 03206
Foreign currency translation differences 22217
BALANCE AS AT END OF PERIOD -186-34-48-15-283
TOTAL PROPERTY AND EQUIPMENT AS AT
END OF PERIOD
 367171211407
of which assets held under a finance lease --1-1
of which buildings in the course of construction -

 

Property and equipment for the year 2014

In CHF million      
NotesLand and
buildings
Furniture
and fixtures
HardwareOther
equipment
Total
COST
Balance as at 1 January603535927742
Additions561111180
Additions from business combinations28-1101
Disposals 1-3-10-9-1-23
Transfers to investment property14-81----81
Revaluation in respect of transfers to investment property0---0
Foreign currency translation differences-40-10-5
BALANCE AS AT END OF PERIOD570546127713
ACCUMULATED DEPRECIATION AND IMPAIRMENT
Balance as at 1 January-196-39-46-12-294
Depreciation-12-5-7-2-26
Impairment losses-0--0
Disposals 1397119
Transfers to investment property1427---27
Foreign currency translation differences10001
BALANCE AS AT END OF PERIOD-177-35-46-14-271
TOTAL PROPERTY AND EQUIPMENT AS
AT END OF PERIOD
394201613442
of which assets held under a finance lease--1-1
of which buildings in the course of construction0

No borrowing costs were capitalised in property and equipment in 2015 and 2014.

17 Intangible Assets including Intangible Insurance Assets

In CHF million
31.12.201531.12.2014
Intangible insurance assets1 4641 497
Other intangible assets1 3761 475
TOTAL INTANGIBLE ASSETS2 8402 972

 

Intangible insurance assets

In CHF million
Present value offuture profits
from acquired insurance
portfolios (PVP)
Deferred acquisition costs
(DAC)
Deferred origination costs
(DOC)
Total
20152014201520142015201420152014
Balance as at 1 January14161 4501 56733351 4971 618
Additions--42939459434403
Amortisation-1-1-401-314-14-11-415-326
Impairment--0-1--0-1
Effect ofshadow accounting0049-177--49-178
Foreign currency translation
differences
-10-96-18-3-1-101-19
BALANCE AS AT END OF PERIOD12141 4311 45021331 4641 497

Present value of future profits (PVP)
The present value of future profits relates to portfolios of insurance contracts and investment contracts with discretionary participation acquired in a business combination or transfer of portfolios. It relates to contracts acquired in Germany and France and is amortised in proportion to gross profits or margins over the effective life of the acquired insurance and investment contracts.

Deferred acquisition costs (DAC)
Certain acquisition costs relating to new and renewed insurance contracts and investment contracts with discretionary participation are deferred.

Deferred origination costs (DOC)
These costs are recoverable and are directly attributable to securing the right to investment management services within investment contract policies. They relate to contracts in Luxembourg and Switzerland.

Other intangible assets for the year 2015

In CHF millionNotesGoodwillCustomer
relationships
Computer
software
Brands and
other
Total
COST 
Balance as at 1 January 1 843191190232 247
Additions --11-11
Additions from
business combinations
2815-1-16
Disposals 1 --39-4--43
Foreign currency
translation differences
 -104-16-18-2-140
BALANCE AS AT END OF PERIOD 1 754136181212 092
ACCUMULATED AMORTISATION
AND IMPAIRMENT
 
Balance as at 1 January -542-99-1310-772
Amortisation --13-150-28
Impairment losses -15----15
Disposals 1 -394-42
Foreign currency
translation differences
 37712057
BALANCE AS AT END OF PERIOD -520-66-1300-716
TOTAL OTHER INTANGIBLE ASSETS
AS AT END OF PERIOD
 1 2347051211 376

 

Other intangible assets for the year 2014

In CHF millionNotesGoodwillCustomer
relationships
Computer
software
Brands and
other
Total
COST
Balance as at 1 January1 74322318332 151
Additions--10-10
Additions from
business combinations
2811762120201
Additions from
internal software development
--2-2
Disposals 1--91-2--93
Foreign currency translation differences-17-3-30-24
BALANCE AS AT END OF PERIOD1 843191190232 247
ACCUMULATED AMORTISATION AND IMPAIRMENT
Balance as at 1 January-550-164-1200-833
Amortisation--17-150-32
Impairment losses--110--11
Disposals 1-912-93
Foreign currency
translation differences
722011
BALANCE AS AT END OF PERIOD-542-99-1310-772
TOTAL OTHER INTANGIBLE ASSETS AS AT
END OF PERIOD
1 3019159231 475

Goodwill
Goodwill represents the excess of the fair value of the consideration transferred and the amount of any non-controlling interest recognised, if applicable, over the fair value of the assets and liabilities recognised at the date of acquisition. Goodwill includes amounts relating to both the Swiss Life Group’s interest and the non-controlling interest in the business acquired in the case where non-controlling interest is measured at fair value. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on associates is included in the carrying amount of the investment.

In 2015, Actuaires & Associés, Petit-Lancy, ABCON AG, Bern, and Sobrado Software AG, Cham, were acquired. The goodwill amounted to CHF 15 million in total. The goodwill of all three acquisitions has been allocated to the “Switzerland” segment and was fully impaired in 2015.

In October 2014, the acquisition of Corpus Sireo Holding GmbH & Co. KG, Cologne, led to the recognition of goodwill of CHF 117 million. The goodwill has been allocated to the “Asset Managers” segment.

Goodwill relating to Lloyd Continental has been allocated to the “France” segment. Goodwill relating to CapitalLeben has been allocated to the “International” segment. Of the goodwill relating to other acquisitions, CHF 19 million (31.12.2014: CHF 21 million) has been allocated to the “France” segment and CHF 8 million (31.12.2014: CHF 9 million) to the “Asset Managers” segment as at 31 December 2015.

The calculations relating to the recoverable amounts, which have been determined on a value-inuse basis, use cash flow projections based on financial budgets approved by management. The projection covers a three-year period for Lloyd Continental and Corpus Sireo. Due to the duration of the insurance and investment contracts a five-year period was used for CapitalLeben. The calculations for Lloyd Continental, Corpus Sireo and CapitalLeben are based on present values that traditionally use a single set of estimated cash flows and a single discount rate.

In CHF millionLloyd ContinentalCapital LebenCorpus SireoOther
31.12.201531.12.201431.12.201531.12.201431.12.201531.12.201431.12.201531.12.2014
Net carrying amount of
goodwill
2872871491491051162730
Impairment losses--------
KEY ASSUMPTIONS USED FOR
IMPAIRMENT TESTS
Growth rate2.0%2.0%1.0%1.0%2.0%2.0%2.0%2.0%
Discount rate9.3%9.7%6.4%7.0%8.7%9.1%9.3%9.7%

The discount rates used for the value-in-use calculations are based on weighted average cost of capital (WACC) derived from the Capital Asset Pricing Model. Peer group comparisons and the beta of the Swiss Life Group are used for determining the beta used in the calculation. Capital structure reflected in the WACC calculation is in line with the actual and target capital structure of the Swiss Life Group.

The growth rates reflect the long-term inflation expectations of the International Monetary Fund for Switzerland and Liechtenstein and of the European Central Bank for the euro zone.

Goodwill relating to “Swiss Life Select” (acquisitions of AWD Holding AG and Deutsche Proventus AG) has been allocated to the “Switzerland”, “Germany” and “International” segments. The recoverable amounts have been determined on a value-in-use basis and use cash flow projections based on financial budgets approved by management. The projection covers a three-year period for Switzerland, Germany and International (AT/CEE, UK). The calculations are based on present values that traditionally use a single set of estimated cash flows and a single discount rate. The key assumptions used for the impairment testing on the carrying amount of goodwill are as follows.

Goodwill relating to Swiss Life Select

In CHF millionSwitzerlandGermanyInternationalTotal
31.12.201531.12.201431.12.201531.12.201431.12.201531.12.201431.12.201531.12.2014
Net carrying amount of goodwill1521524384857682666719
Impairment losses--------
KEY ASSUMPTIONS USED FOR IMPAIRMENT
TESTS
Growth rate1.0%1.0%2.0%2.0%2.0%2.0%n/an/a
Discount rate6.9%7.5%8.7%