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2 Summary of MCEV Results

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2.1 Key results

Benefitting from strong operating earnings, Swiss Life increased its MCEV in 2016 from CHF 12 509 million to CHF 13 681 million and generated, in an ultra-low interest rate environment, a new business value of CHF 296 million (CHF 268 million in 2015).

Results are shown in CHF million. Rounding differences may occur.

The following tables show key results as at 31 December 2016 compared to the results as at 31 December 2015.

In CHF million20162015
Value of new business296268
Present value of new business premium (PVNBP)13 84215 643
New business margin (%PVNBP)2.1%1.7%

The value of new business and margin increased as a result of active new business steering across the Group, offsetting the overall decreased volumes and the negative effect from capital market interest rate development.

In CHF millionNet asset valueValue of
in-force business
Total 2016Total 2015
Covered business3 5427 85111 39310 564
Non-covered business2 288n/a12 2881 945
GROUP MCEV5 8307 85113 68112 509
Total MCEV earnings1 470329
Operating MCEV earnings1 2131 211

The Group MCEV increased driven by substantial operating MCEV earnings of 10%. This was enhanced by positive non-operating MCEV earnings, leading to total MCEV earnings of 12%.

2.2 MCEV of covered business

The following graph and table show the MCEV by components, together with the previous year’s results.


In CHF million20162015
NET ASSET VALUE3 5423 514
Free surplus1 2991 367
Required capital2 2422 147
VALUE OF IN-FORCE BUSINESS7 8517 050
Certainty equivalent value9 9738 487
Time value of financial options and guarantees–974–363
Cost of residual non-hedgeable risks–819–746
Frictional costs of required capital–329–327
MCEV11 39310 564

The net asset value remained stable despite further reserve strengthening, increased dividends and financing of new business. Goodwill and other intangibles are not included in the net asset value, with the exception of France (see section 4.7).

The value of in-force increased by 11%, driven by new business, operating earnings on in-force business, economic variances and the changed tax law in France.

Following market practice, Swiss Life aligned its definition of the valuation curves with Solvency II principles and specifications. This entailed, among other elements detailed in section 5.1.1), a reduction of the last liquid point for euro from 30 to 20 years, with a positive effect on the MCEV of France and Germany, while for Swiss francs a last liquid point of 15 years has been retained considering the Swiss capital market characteristics.

In view of the sustained low interest rate environment, an interest rate model allowing for negative interest rates has been introduced. In combination with lower capital market interest rates, a negative impact on the TVOG has been observed.

The cost of credit risk amounts to CHF –761 million for 2016 compared to CHF –693 million for the previous year.

2.3 Value of new business

2.3.1 Value of new business, premiums and margins

Amounts in CHF million20162015
VALUE OF NEW BUSINESS296268
New business strain 1–131–165
Value of new business before new business strain428433
Annual premiums719706
Single premiums4 8977 026
PRESENT VALUE OF NEW BUSINESS PREMIUMS (PVNBP)13 84215 643
Average annual premium multiplier12.412.2
New business annual premium equivalent (APE)1 2091 408
NEW BUSINESS MARGIN (% PVNBP)2.1%1.7%
New business margin (% APE)24.5%19.0%

2.3.2 Value of new business — analysis of change

The following graph and table detail the drivers for the change in new business value and margin of the business sold in 2016 compared to the business sold in 2015.


Amounts in CHF millionPVNBPVNBNBM
(% PVNBP)
Change in NBM
(% PVNBP)
VALUE OF NEW BUSINESS 201515 6432681.7%
Economic variances226–53–0.4%
Volume, business mix and pricing variances–2 405420.6%
Expense variances–120.0%
Other variances468390.2%
FX translation effects–88–20.0%
VALUE OF NEW BUSINESS 201613 8422962.1%

Active new business steering led to an overall improved business mix with positive impacts on both the new business value and margin. In combination with continued pricing and cost discipline, these measures more than offset the impacts of the resulting decrease of volumes in Switzerland and lower capital market interest rates. The experience-based update of persistency assumptions, the refined interest rate model together with the move to the Solvency II valuation curve and other reassessments contributed positively overall.

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

2.4 Group MCEV — analysis of earnings

The table below shows the development of Group MCEV split by components from 31 December 2015 to 31 December 2016.

In CHF millionCovered
business MCEV
Non-covered
business IFRS
Total Group
MCEV
Total Group
MCEV
20162015
OPENING GROUP MCEV10 5641 94512 50912 901
Opening adjustments–33565–270–211
ADJUSTED OPENING GROUP MCEV10 2282 01012 23812 690
Operating MCEV earnings9133001 2131 211
Non-operating MCEV earnings269–12258–881
TOTAL MCEV EARNINGS1 1822881 470329
Other movements in IFRS net equityn/a 11515–40
Closing adjustments–18–25–43–471
CLOSING GROUP MCEV11 3932 28813 68112 509

The opening adjustments of the Group MCEV represent the distribution in 2016 to shareholders out of the capital contribution reserve of CHF 8.50 per share, corresponding to a total of CHF 271 million as described in the Consolidated Financial Statements (note 26), and foreign currency translation effects of CHF 1 million.

The following comments refer mainly to the non-covered business as the analysis of earnings for the covered business is commented upon in detail in sections 2.5 and 3.2. The operating MCEV earnings for non-covered business correspond mainly to the results from Swiss Life Asset Managers, Swiss Life Holding and distribution and insurance units outside the scope of covered business.

The operating MCEV earnings for non-covered business correspond mainly to the results from Swiss Life Asset Managers, Swiss Life Holding and distribution and insurance units outside the scope of covered business.

The non-operating MCEV earnings relate to borrowing costs and tax effects of the non-covered business. For Group MCEV, the change in non-operating MCEV earnings compared to 2015 arises almost entirely from the covered business.

The other movements in IFRS net equity (non-covered business only) include effects from equitysettled share-based payments, changes in unrealised gains and losses and effects from the sale and purchase of treasury shares.

The closing adjustments result mainly from foreign currency translation effects.

2.5 Covered business — analysis of earnings

The graph and table below show the analysis of earnings for the covered business in 2016.


In CHF millionFree
surplus
Required
capital
VIFMCEVMCEV
 20162015
OPENING MCEV1 3672 1477 05010 56411 071
Opening adjustments–335–335–227
ADJUSTED OPENING MCEV1 0312 1477 05010 22810 844
Value of new business–323192428296268
Expected existing business contribution (reference rate)–12–11–44–67–1
Expected existing business contribution (in excess of reference rate)270373400267
Transfers from VIF and required capital to free surplus644–182–463
Experience variances–13574697128
Assumption changes2–2686839
Other operating variance1222176209259
OPERATING MCEV EARNINGS21593606913960
Economic variances4611121179–866
Other non-operating variances38791–4
TOTAL MCEV EARNINGS2641048141 18290
Closing adjustments4–8–13–18–370
CLOSING MCEV1 2992 2427 85111 39310 564
Opening adjustments

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

Value of new business

Value of new business contributions from free surplus and required capital sum up to the new business strain of CHF –131 million (2015: CHF –165 million). This represents the shareholders’ share in acquisition expenses for new business. The VIF component of CHF 428 million (2015: CHF 433 million) is the value of future profits from new business.

Expected existing business contribution (reference rate)

Expected existing business contribution (reference rate) shows the unwinding of discount on all value of in-force components with reference rates as at start of year. Additionally, the notional interest on the net asset value is included.

Expected existing business contribution (in excess of reference rate)

Expected existing business contribution (in excess of reference rate) represents the additional contribution to MCEV by taking into account investment returns for the reporting period expected at the beginning of the period over and above the initial reference rates for the period. Furthermore, releases from the period’s contribution to the time value of financial options and guarantees and cost of residual non-hedgeable risks are included. The expected existing business contribution is explained to a large extent by spreads expected to be earned on the corporate bond and real estate portfolio.

Transfers from value in force and required capital to free surplus

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

Experience variances

Experience variances aggregate the impact of actual development versus expectations regarding non-economic assumptions such as mortality, expenses, lapses and deviations in handling of additional reserves. Positive effects from reserve strengthening, persistency and demography more than offset the negative expense variance. The reserve strengthening mainly originated from the Swiss business and had a negative impact on the free surplus and a positive effect on the value of in-force business.

Assumption changes

Assumption changes refer to the impact of the change on assumptions such as future expense, surrender, mortality, morbidity and longevity rates. The positive assumption changes were driven by favourable experience of persistency in Switzerland and Germany as well as demography in France.

Other operating variance

Other operating variance includes effects of the aforementioned refinement of the interest rate model and change of the valuation curves as well as true-up effects related to operating experience.

Economic variances

Economic variances represent the change in embedded value by replacing the starting economic scenarios by the closing ones. Effects from deviations between actual and expected investment returns are included here. Overall, the economic variances had a positive impact on MCEV, driven by a strong real estate performance and tightened credit spreads, partly offset by lower interest rates.

Other non-operating variances

Other non-operating variances encompass effects relating to government-set parameters, tax impacts and changes in the regulatory environment. The main effect stems from the French tax reform of 2016.

Closing adjustments

Closing adjustments mainly represent foreign currency translation effects resulting from the consolidation in Swiss francs.

2.6 Sensitivities

Operational and demographic sensitivities for MCEV remained stable overall.

The sensitivities with regard to reference rates exhibit an asymmetry in line with the traditional participating business in the in-force business, which also increased due to the refined interest rate model and the reduced capital market interest rates. The sensitivities for interest rates reflect a ±100bp parallel shift of the entire valuation curve also covering negative interest rates and the extrapolated part.

Sensitivities relating to swaption implied volatilities are influenced by the Swiss group life business, where continued operating improvements have contained the cost of policyholder options and guarantees, such that business-inherent shareholder options contribute to the time value of options and guarantees. As in the previous years, we disclose corresponding sensitivities of ±10%, which now relate to absolute instead of relative swaption implied volatilities.

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

The table below shows sensitivities of the MCEV and the value of new business to important financial market parameters as well as to operational and demographic assumptions.

Sensitivities as at 31 December 2016

Amounts in CHF millionChange in
MCEV
+/–Change in value of
new business
+/–
BASE VALUE11 393296
Economic
100 bp increase of interest rates (reference rates)7406%4816%
100 bp decrease of interest rates (reference rates)–1 78816%–121–41%
10% increase in equity / property market values7637%11
10% decrease in equity / property market values–882–8%11
25% increase in equity / property implied volatilities–286–3%–8–3%
25% decrease in equity / property implied volatilities2212%52%
10% increase in swaption implied volatilities520%10%
10% decrease in swaption implied volatilities–24–0%10%
Operational
10% increase in maintenance expenses–224–2%–17–6%
10% decrease in maintenance expenses2212%176%
10% proportionate increase in lapse rates–188–2%–20–7%
10% proportionate decrease in lapse rates2042%207%
Demographic
5% proportionate increase in mortality rates (death cover)–31–0%–7–3%
5% proportionate decrease in mortality rates (annuities)–147–1%–14–5%
5% increase of longevity driver (annuities)–26–0%–4–1%
5% proportionate increase in morbidity rates–46–0%–7–2%
5% proportionate decrease in morbidity rates450%72%
Other
Required capital 100% statutory solvency capital1521%93%

2.7 Reconciliation of IFRS net asset value to Group MCEV

Swiss Life’s MCEV for covered business reflects the value of the shareholders’ interest in the life, health and pension business of the Swiss Life Group. This value includes the determination of best estimate liabilities for policyholder bonuses and tax payments, which are derived from results based on local statutory accounting rather than on IFRS. Therefore local balance sheets and profit and loss accounts are the starting point for the projections. The net asset value (of assets not backing liabilities) is based on the local balance sheet, and adjusted to market value.

For the other parts of the Swiss Life Group, i.e. the non-covered business, the shareholder value is derived from their contribution to the Group’s IFRS net asset value.


Reconciliation of IFRS net assets to Group MCEV as at 31 December 2016

In CHF million2016
IFRS NET ASSETS13 657
Adjustments–7 827
Reserve and investment valuation differences–5 964
DAC / DOC and other intangible assets–1 401
Goodwill1–462
Net asset value5 830
Value of in-force business7 851
GROUP MCEV213 681

Starting with the total IFRS net assets, there are valuation differences between IFRS and MCEV regarding the net asset value for the covered business. In the reconciliation these valuation differences are shown under “adjustments”. The main elements that have been adjusted are deferred acquisition costs (DAC), goodwill and other intangible assets, differences between statutory and IFRS balance sheet items reflecting different reserving bases, and different treatment of the investments and unrealised gains (that form part of the IFRS net assets but are projected on MCEV as part of the value of in-force business in the MCEV calculations).

The adjusted IFRS net asset value corresponds to the MCEV net asset value of the Swiss Life Group. Adding the value of in-force business leads to the Group MCEV.

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