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Notes to the Financial Annual Statements

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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 2015 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 271 million (CHF 8.50 per registered share) and was paid in 2016.

Approval of financial statements

On 13 March 2017, 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 2016.

2.3 Reclassifications in the consolidated balance sheet

In order to improve consistency of presentation of items in the consolidated balance sheet, reclassifications have been made as follows.

As at 1 January 2015, ceded investment contracts with discretionary participation features (DPF) and ceded policyholder participation of CHF 101 million have been reclassified from loans and receivables to reinsurance assets (31.12.2015: CHF 102 million).

As at 1 January 2015, financial liabilities at fair value through profit or loss of CHF 24 325 million relating to unit-linked contracts have been reclassified to investment and unit-linked contracts (31.12.2015: CHF 22 615 million) and CHF 1090 million relating to non-controlling interests in investment funds have been reclassified to other financial liabilities (31.12.2015: CHF 2496 million).

2.4 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.

2.5 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

31.12.201631.12.2015Average 2016Average 2015
1 British pound (GBP)1.25571.47291.33531.4718
1 Czech koruna (CZK)0.03970.04020.04030.0392
1 Euro (EUR)1.07281.08631.09041.0689
100 Polish zloty (PLN)25.447025.5327
1 Singapore dollar (SGD)0.70310.70550.71350.7004
1 US dollar (USD)1.01720.99970.98520.9630
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.

2.6 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.

2.7 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 or for net investment hedges.

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.

2.8 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 designated as at fair value through profit or loss. Financial assets are irrevocably designated as such on initial recognition 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, 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.

2.9 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 instruments 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.

2.10 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, the property 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.

2.11 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 net investment returns less 100% of the minimum guaranteed interest on the policyholder account 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 2.17 Intangible assets).

Administrative and surrender charges are included in policy fee income.

2.12 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.

2.13 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 net income on property development.

2.14 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.

2.15 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.

2.16 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.

2.17 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.

2.18 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.

2.19 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.

2.20 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.

2.21 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.

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.

Financial liabilities at fair value through profit or loss 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.

Financial liabilities relating to non-controlling interests in investment funds are measured at fair value and changes in fair value are recognised in profit or loss.

2.22 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.

2.23 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.

2.24 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.

2.25 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.

2.26 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.

2.27 Forthcoming changes in accounting policies

In December 2016, Annual Improvements to IFRS Standards 2014-2016 Cycle were published. The amendments to IFRS 12 Disclosure of Interests in Other Entities clarify that an entity is not required to disclose summarised financial information for interests classified as held for sale. However, the other disclosure requirements in IFRS 12 apply to interests in entities within the scope of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The Swiss Life Group does currently not have any interests in entities classified as held for sale. An entity shall apply those amendments retrospectively for annual periods beginning on or after 1 January 2017. Additionally, amendments to IAS 28 Investments in Associates and Joint Ventures were issued which clarify that a venture capital organisation, or a mutual fund, unit trust and similar entities may elect, at initial recognition, to measure investments in an associate or joint venture at fair value through profit or loss separately for each associate or joint venture. An entity shall apply those amendments retrospectively for annual periods beginning on or after 1 January 2018.

In December 2016, the Interpretation IFRIC 22 Foreign Currency Transactions and Advance Consideration was issued. This Interpretation addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. The date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. An entity shall apply this Interpretation for annual reporting periods beginning on or after 1 January 2018. The Swiss Life Group is currently not affected by such transactions.

In December 2016, the International Accounting Standards Board issued amendments to IAS 40 Investment Property. The amendments clarify that an entity shall transfer a property to or from investment property when, and only when, there is a change in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. In isolation, a change in management’s intentions of the use of a property does not provide evidence of a change in use. An entity shall apply those amendments for annual periods beginning on or after 1 January 2018. The Swiss Life Group will apply the new requirements.

In September 2016, the International Accounting Standards Board published amendments to IFRS 4 Insurance Contracts “Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts”. The amendments address concerns arising from implementing the new financial instruments standard, IFRS 9, before implementing the replacement standard that the Board is developing for IFRS 4. The amendments introduce an overlay approach which will give all companies that issue insurance contracts the option to recognise in other comprehensive income the volatility that could arise when IFRS 9 is applied before the new insurance contracts standard is issued. The amendments also include a deferral approach which will give companies whose activities are predominantly connected with insurance an optional temporary exemption from applying IFRS 9. Such a deferral is available until the new insurance contracts standard comes into effect. But it cannot be used after 1 January 2021. The Swiss Life Group has assessed that its activities were predominantly connected with insurance on 31 December 2015 (i.e. at the date required by the amendments) and will defer the application of IFRS 9 and continue to apply IAS 39 Financial Instruments: Recognition and Measurement.

In June 2016, the International Accounting Standards Board issued amendments to IFRS 2 Share-based Payment in which they clarify how to account for certain types of share-based payment transactions. The clarifications relate to vesting and non-vesting conditions of cash-settled share-based payments, share-based payment transactions with a net settlement feature for withholding tax obligations and a modification to the terms and conditions of a share-based payment that changes classification from cash-settled to equity-settled. The amendments are applicable to annual periods beginning on or after 1 January 2018. The Swiss Life Group does not expect a material impact of the amendments on its financial statements.

In April 2016, amendments to the IFRS 15 Revenue from Contracts with Customers were issued by the International Accounting Standards Board. The amendments clarify how to identify a performance obligation in a contract, how to determine whether a company is a principal or an agent and how to determine whether revenue from granting a licence should be recognised at a point in time or over time. The amendments are 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 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 will disclose the information required by the amendments.

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 new standard is effective for annual periods beginning on or after 1 January 2019. 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 material impact 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. However, as set out above, the Swiss Life Group will defer the application of IFRS 9 and continue to apply IAS 39 Financial Instruments: Recognition and Measurement as its activities were predominantly connected with insurance on 31 December 2015.

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.

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

  • Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards (Annual Improvements to IFRS Standards 2014-2016 Cycle): Deletion of short-term exemptions for first-time adopters.

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.

In France, life annuities in payment are reserved using the regulatory tables TGH05/TGF05 and non-life annuities in payment are reserved with the regulatory table TD 88/90.

In Germany, mortality tables provided by the German Actuarial Association are in use. They are verified periodically by the Association and updated, if necessary. Best estimate assumptions are deduced from these generally accepted tables.

In Luxembourg, mortality tables are updated when significant changes arise.

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 France, individual and group disability annuities are reserved using tables certified by an independent actuary.

In Germany, disability insurance products for the group life business are based on tables of the German Actuarial Association, which are reviewed periodically. New disability insurance products for the individual life business are developed in close collaboration with reinsurance companies which evaluate pricing and valuation assumptions for disability and morbidity on statistics provided by the database of reinsurance pool results. Furthermore, own company records and occupation classes are considered. Similar to the disability insurance products for the individual life business, assumptions for pricing and valuation of nursing care insurance products are acquired in cooperation with reinsurance companies. In particular, best estimate assumptions are considered with respect to claims experience.

In Luxembourg, pricing reflects industry tables and own company records.

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 France, 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.

In Germany, expenses are divided into the following cost categories based on German regulation: acquisition costs, administration costs, regulatory costs and asset management expenses. They are subdivided into recurring and non-recurring costs. All recurring costs except asset management expenses are allocated to the different lines of business and transformed into cost parameters. An assumption on future inflation is applied to all cost parameters in euro.

In Luxembourg, expense allocation is based on an activity-based cost methodology. Recurring costs are subdivided into the following main cost categories: acquisition costs, administration costs and asset management costs, which are allocated by lines of business.

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. Intersegmental 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.

Interest income from intercompany loans and intercompany guarantee fees charged and received have been excluded from the segment result. The statement of income for the year ended 31 December 2015 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 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 and the Czech Republic as well as Chase de Vere operating in the United Kingdom.

Non-life operations involve operations in France and mainly include property and casualty, liability and motor insurance, accident and health insurance and payment protection insurance.

“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 in the following pages.

Statement of income for the year ended 31 December 2016

In CHF millionSwitzerlandFranceGermanyInter-
national
Asset
Managers
OtherTotal
before
elimi-
nations
Elimi-
nations
Total
INCOME        
Premiums earned on insurance contracts8 6072 6011 16849012 425–2312 402
Premiums earned on investment contracts with discretionary participation985985985
Premiums ceded to reinsurers–8–124–39–100–18123–159
Net earned premiums9 5842 4771 12840013 229013 228
Policy fees earned on insurance contracts68501919
Policy fees earned on investment and unit-linked contracts361405792610261
Net earned policy fees4314810792800280
Commission income1908436813459161 373–3021 071
Investment income2 984628609321344 288–34 285
Net gains/losses on financial assets18023222000425425
Net gains/losses on financial instruments at fair value through profit or loss–3743–2320–28–420–420
Net gains/losses on investment property55712186–1763763
Share of profit or loss of associates14499
Other income4214224375–966
TOTAL INCOME13 2063 4892 4052886191420 021–31419 707
of which intersegment38–1–9–52838314–314 
          
EXPENSES         
Benefits and claims under insurance contracts–10 002–1 836–1 298–260–13 16314–13 149
Benefits and claims under investment contracts with discretionary participation–1 009–1 009–1 009
Benefits and claims recovered from reinsurers4772070108–1494
Net insurance benefits and claims–11 007–1 759–1 278–200–14 0640–14 064
Policyholder participation–463–493–366–12–1 3349–1 325
Interest expense–39–97–13–15–20–1666–160
Commission expense–397–328–267–97–490–1 138296–842
Employee benefits expense–270–184–130–55–215–9–8621–861
Depreciation and amortisation expense–94–242–151–5–11–1–503–503
Impairment of property and equipment and intangible assets–4–3–7–7
Other expenses–125–142–75–36–98–11–4882–486
TOTAL EXPENSES–12 394–3 245–2 280–244–375–24–18 562314–18 248
of which intersegment–217–7–43–5–33–9–314314 
       
SEGMENT RESULT81224412545243–101 4591 459
of which intersegment–179–7–52–11250–1 
         
Unallocated corporate costs        –66
PROFIT FROM OPERATIONS        1 393
Borrowing costs        –178
Income tax expense        –289
NET PROFIT        926
        
Additions to non-current assets1 24919013911341 6241 624

Statement of income for the year ended 31 December 2015

In CHF millionSwitzerlandFranceGermanyInter-
national
Asset
Managers
OtherTotal
before
elimi-
nations
Elimi-
nations
Total
INCOME
Premiums earned on insurance contracts9 2182 5021 20744912 979–7612 903
Premiums earned on investment contracts with discretionary participation1 0091 0091 009
Premiums ceded to reinsurers–10–156–40–100–21776–141
Net earned premiums10 2172 3461 16734813 772013 771
Policy fees earned on insurance contracts710101818
Policy fees earned on investment and unit-linked contracts331301382259259
Net earned policy fees401401482276276
Commission income1599735014256051 313–2971 016
Investment income2 989645605322244 296–54 290
Net gains/losses on financial assets–1366633540–1–57248248
Net gains/losses on financial instruments at fair value through profit or loss385–36–285210398181
Net gains/losses on investment property56567230655655
Share of profit or loss of associates0303077
Other income218–12–18281230–20210
TOTAL INCOME14 4373 3272 2112915912020 877–32320 555
of which intersegment96–50–4–126714323–323 
          
EXPENSES        
Benefits and claims under insurance contracts–11 203–2 095–1 310–131–14 62062–14 558
Benefits and claims under investment contracts with discretionary participation–1 053–1 053–1 053
Benefits and claims recovered from reinsurers6125233–1156–6095
Net insurance benefits and claims–12 251–1 970–1 287–100–15 5182–15 516
Policyholder participation–455–157–283–180–91415–899
Interest expense–39–102–12–15–10–1708–162
Commission expense–402–303–238–102–50–2–1 096299–797
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–160–16–16
Other expenses–114–136–77–40–83–21–472–2–474
TOTAL EXPENSES–13 676–3 093–2 082–250–349–30–19 479323–19 156
of which intersegment–27248–40–13–35–11–323323 
         
SEGMENT RESULT76123413042242–101 3981 398
of which intersegment–176–1–44–152333 
         
Unallocated corporate costs        –70
PROFIT FROM OPERATIONS        1 329
Borrowing costs        –161
Income tax expense        –290
NET PROFIT        878
        
Additions to non-current assets1754664608102 2892 289

Balance sheet as at 31 December 2016

In CHF millionSwitzerlandFranceGermanyInter-
national
Asset
Managers
OtherTotal
before
elimi-
nations
Elimi-
nations
Total
ASSETS    
Cash and cash equivalents2 6271 5632522 5811881237 3337 333
Derivatives1 6132554271 917–321 885
Assets held for sale121212
Financial assets at fair value through profit or loss5 99011 8731 38915 67834 93134 931
Financial assets available for sale72 31817 3327 8491 318491 388100 256100 256
Loans and receivables14 6902 2837 970852441 71426 986–3 03123 955
Financial assets pledged as collateral1 4281 5152 9422 942
Investment property19 8962 1621 74323 80123 801
Investments in associates6810509393
Reinsurance assets33278841120506–6500
Property and equipment21335129340383383
Intangible assets including intangible insurance assets6213721 29223120202 7172 717
Other assets64146142842979–135844
SEGMENT ASSETS120 07637 79620 75020 0119773 246202 855–3 204199 652
Income tax assets        80
TOTAL ASSETS        199 731
          
LIABILITIES AND EQUITY         
LIABILITIES         
Derivatives1 47452105491 680–321 648
Investment and unit-linked contracts6 49110 61879519 01736 921036 920
Other financial liabilities8 2266 46787618229720616 255–1 05615 200
Insurance liabilities80 22914 93915 6001980110 966–32110 935
Policyholder participation liabilities6 9793 1551 8892112 044012 043
Employee benefit liabilities1 6947119412962 0682 068
Provisions15112020817575
Other liabilities17912241763357–3355
SEGMENT LIABILITIES105 28635 43619 52119 457407260180 367–1 123179 244
Borrowings        4 627
Income tax liabilities        2 120
EQUITY        13 739
TOTAL LIABILITIES AND EQUITY        199 731

Balance sheet as at 31 December 2015

In CHF millionSwitzerlandFranceGermanyInter-
national
Asset
Managers
OtherTotal
before
elimi-
nations
Elimi-
nations
Total
ASSETS
Cash and cash equivalents1 2626882212 7371662245 297–15 296
Derivatives1 75131135462 144–312 113
Assets held for sale444
Financial assets at fair value through profit or loss5 31610 5271 26116 485033 59033 590
Financial assets available for sale69 76816 3947 5021 246481 06896 02696 026
Loans and receivables14 6072 3578 3632072471 65027 431–3 19924 232
Financial assets pledged as collateral5081 59552 1092 109
Investment property18 1221 8841 548321 55721 557
Investments in associates8560206767
Reinsurance assets32357731051566–89478
Property and equipment218351353213407407
Intangible assets including intangible insurance assets6154021 40623518212 8402 840
Other assets38314122202622–150471
SEGMENT ASSETS112 59434 62120 54421 0728662 961192 659–3 471189 188
Income tax assets        64
TOTAL ASSETS        189 252
          
LIABILITIES AND EQUITY         
LIABILITIES         
Derivatives8631010411321 020–31989
Investment and unit-linked contracts5 87910 14585919 84736 73036 730
Other financial liabilities6 9675 45976736822122014 002–1 22212 780
Insurance liabilities77 97714 31815 77419212108 273–116108 157
Policyholder participation liabilities6 0502 3851 60426010 065010 065
Employee benefit liabilities1 63670167139001 9761 976
Provisions16113625104101101
Other liabilities15971451072294–2293
SEGMENT LIABILITIES99 54732 46919 35720 492328269172 463–1 370171 092
Borrowings        4 078
Income tax liabilities        1 824
EQUITY        12 258
TOTAL LIABILITIES AND EQUITY        189 252

Premiums and policy fees from external customers

In CHF millionNet earned premiumsNet earned policy fees
2016201520162015
LIFE
Individual life3 3353 469268266
Group life9 5499 9571110
TOTAL LIFE12 88313 426280276
NON-LIFE
Accident and health1111
Property, casualty and other334334
TOTAL NON-LIFE345345
TOTAL13 22813 771280276

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
2016201531.12.201631.12.2015
Switzerland13 13714 45120 22218 503
France3 5153 3942 5392 269
Germany2 5352 3062 5372 316
Liechtenstein2832151149
Luxembourg3151802146
Other countries17619110378
TOTAL19 70720 55525 57323 361

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 contract represents 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 may affect 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 by the local insurance units and consolidated at Swiss Life Ltd level and at Group level. Strategic and operational risks are assessed and reported on an annual basis.

The risk appetite is defined by the Board of Directors and expressed as an SST ratio limit. Furthermore, it is allocated by the Group Risk Committee of the Corporate Executive Board to the largest operations in the insurance business. These limits at unit level 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 scenario-based 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.

Since the Group’s core business is insurance, its risk management is in line with the two main regulatory solvency frameworks in Switzerland (SST) and throughout Europe (Solvency II). In addition to general governance aspects and extensive reporting requirements, this includes an annual Own Risk and Solvency Assessment (ORSA) on Group level covering a comprehensive risk assessment as well as the integration of risk and solvency aspects in the overall management 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 Risk budgeting and limit setting

The risk capacity and the determination of the risk appetite of the Swiss Life Group and its insurance operations as outlined above are primarily defined based on economic principles. As a result, 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 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.

5.2 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 insurance liabilities 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.

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 observed.

5.3 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 millionNotes31.12.201631.12.2015
Cash and cash equivalents 2 4892 625
Derivatives 00
Financial assets at fair value through profit or loss 
Debt securities105 7385 785
Equity securities104 1134 751
Investment funds1017 62616 756
Other1021
TOTAL ASSETS FOR THE ACCOUNT AND RISK OF THE SWISS LIFE GROUP’S CUSTOMERS 29 96829 918

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

In CHF millionNotes31.12.201631.12.2015
Unit-linked contracts1921 94822 615
Investment contracts194 1923 995
Insurance liabilities223 6923 167
TOTAL LIABILITIES LINKED TO ASSETS FOR THE ACCOUNT AND RISK OF THE SWISS LIFE GROUP’S CUSTOMERS29 83329 777

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 millionAssets and liabilities for the account and risk of the Swiss Life GroupAssets and liabilities for the account and risk of the Swiss Life Group's customersTotal
Notes201620152016201520162015
Investment income84 2854 2904 2854 290
Net gains/losses on financial assets8426228–221425248
Net gains/losses on financial instruments at fair value through profit or loss8–4339513–15–42081
Net gains/losses on investment property763655763655
Share of profit or loss ofassociates9797
FINANCIAL RESULT5 0515 2751165 0625 281

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.

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 millionCHFEUROtherTotal
CARRYING AMOUNTS AS AT 31 DECEMBER 2016
Minimum guaranteed interest rate 0 - < 2%42 0196 1591048 187
Minimum guaranteed interest rate 2 - < 3%8 8515 5762214 449
Minimum guaranteed interest rate 3 - < 4%20 1125 7512425 887
Minimum guaranteed interest rate 4 - < 5%675 773245 864
Minimum guaranteed interest rate 5 - < 6%22
TOTAL INTEREST-SENSITIVE INSURANCE LIABILITIES71 04923 2588294 390
Insurance liabilities with no minimum guaranteed interest rate12 853
Insurance liabilities linked to assets for the account and risk of the Swiss Life Group's customers3 692
TOTAL INSURANCE LIABILITIES110 935
     
     
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 customers3 167
TOTAL INSURANCE LIABILITIES108 157

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 1.25% in 2016 and will be reduced to 1.00% for 2017 (2015: 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, hedge funds). 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.

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 counterparty 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 over the-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 GroupFor the account and risk of the Swiss Life Group's customersTotal
31.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
DEBT SECURITIES
Debt securities at fair value through profit or loss5816355 7385 7856 3196 421
Debt securities available for sale85 89584 88485 89584 884
Debt securities pledged as collateral2 9422 1092 9422 109
Debt securities classified as loans3 4434 3923 4434 392
TOTAL DEBT SECURITIES92 86192 0205 7385 78598 59997 805
       
LOANS AND RECEIVABLES
Senior loans available for sale2 0582 058
Mortgages7 5737 0737 5737 073
Corporate and other loans2 1201 7322 1201 732
Note loans6 4616 7586 4616 758
Receivables4 3584 2774 3584 277
TOTAL LOANS AND RECEIVABLES22 57019 84022 57019 840
       
OTHER ASSETS
Cash and cash equivalents48442 6712 4892 6257 3335 296
Derivatives1 8852 113001 8852 113
Reinsurance assets500478500478
TOTAL OTHER ASSETS7 2295 2612 4892 6259 7187 886
       
UNRECOGNISED ITEMS
Financial guarantees28292829
Loan commitments208320208320
TOTAL UNRECOGNISED ITEMS236349236349
 
TOTAL EXPOSURE TO CREDIT RISK122 897117 4708 2278 410131 124125 880

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 2016

In CHF millionDebt
securities
Loans
and
receivables
Cash and
cash
equivalents
Derivatives
(assets)
Reinsurance
assets
Financial
guarantees
and loan
commitments
Total
SECURED BY
Cash collateral11 1191361 256
Securities collateral48729463844
Mortgage collateral8 9299 61117118 712
Other collateral2 2602 260
Guarantees5785373351 450
Netting agreements1 47135411 826
TOTALSECURED9 50714 3673351 47443023426 347
        
UNSECURED
Governments and supranationals48 5243 98677153 282
Corporates34 7151 1133 73741170240 048
Other1163 1043 219
TOTAL UNSECURED83 3558 2034 50941170296 549
 
TOTAL92 86122 5704 8441 885500236122 897

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

In CHF millionDebt
securities
Loans
and
receivables
Cash and
cash
equivalents
Derivatives
(assets)
Reinsurance
assets
Financial
guarantees
and loan
commitments
Total
SECURED BY
Cash collateral1 939902 029
Securities collateral44418169694
Mortgage collateral9 2139 29427418 781
Other collateral2984302
Guarantees6245542121 389
Netting agreements14711159
TOTAL SECURED9 83710 7362121 95027234723 353
 
UNSECURED
Governments and supranationals46 6124 10335051 065
Corporates35 4512 1432 109163206240 075
Other1202 8582 978
TOTALUNSECURED82 1839 1042 459163206294 117
 
TOTAL92 02019 8402 6712 113478349117 470

To mitigate specific credit risk, the Group purchases credit risk protection in the form of credit default swaps and credit default swap indices. As at 31 December 2016, these derivative contracts provided a notional principal protection of CHF 4554 million (2015: CHF 3811 million).

Exposure to credit risk of debt instruments – credit rating by class as at 31 December 2016

In CHF millionAAAAAABBBBelow BBBNot ratedPast due
or impaired
Total
DEBT SECURITIES
Supranationals2 30664719333 005
Governments19 54019 3472 318826233442 268
Sovereigns2398757681 2521183 251
Covered/guaranteed8 109972331959 507
Corporates5773 72313 90814 5971 9091034 715
Other5833168116
TOTAL DEBT SECURITIES30 77225 62217 37516 8192 2685092 861
         
MORTGAGES
Commercial2 55812 558
Residential4 997195 015
TOTAL MORTGAGES7 554207 573
         
OTHER LOANS AND RECEIVABLES
Governments and supranationals1 9241 84112286303 976
Corporates1 3156491 4261 1661 6671 11517 339
Other215102573 542533 681
TOTAL OTHER LOANS AND RECEIVABLES3 2422 5051 5581 2541 7274 6575314 997

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

In CHF millionAAAAAABBBBelow BBBNot ratedPast due or impairedTotal
DEBT SECURITIES
Supranationals2 00043618322 486
Governments21 11716 5602 2017532793-40 914
Sovereigns1927821 1639261493 212
Covered/guaranteed7 9831 2354481709 837
Corporates5234 32914 53713 8502 17203935 451
Other6333168120
TOTAL DEBT SECURITIES31 81523 40618 40015 7482 60833992 020
 
MORTGAGES
Commercial2 53712 537
Residential4 519174 536
TOTAL MORTGAGES7 056177 073
 
OTHER LOANS AND RECEIVABLES
Governments and supranationals1 8201 999138733404 063
Corporates1 361754870773631 13204 953
Other46197413 600483 751
TOTAL OTHER LOANS AND RECEIVABLES3 1842 7591 027920984 7314812 767

Financial assets past due (not impaired) – age analysis as at 31 December 2016

In CHF millionUp to 3
months
3-6 months6-12 monthsMore than
1 year
Total
MORTGAGES
Residential1021317
TOTAL1021317
      
OTHER LOANS AND RECEIVABLES
Other19361038
TOTAL19361038
 

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

In CHF millionUp to 3 months3-6 months6-12 monthsMore than
1 year
Total
MORTGAGES
Residential712516
TOTAL712516
 
OTHER LOANS AND RECEIVABLES
Other766928
TOTAL766928

Financial assets individually determined as impaired

In CHF millionGross amountImpairment lossesCarrying amount
31.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
DEBT SECURITIES
Corporates31103–31–63039
TOTAL31103–31–63039
       
MORTGAGES
Commercial110011
Residential210021
TOTAL32–1032
       
OTHER LOANS AND RECEIVABLES
Corporates100010
Other2631–11–111520
TOTAL2631–11–111620

Financial assets individually determined as impaired – impairment loss allowance for the year 2016

In CHF millionBalance as at 1 JanuaryImpairment losses/ reversalsWrite-offs and disposalsForeign currency translation differencesBalance as at end of period
      
DEBT SECURITIES
Corporates632–34031
TOTAL632–34031
      
MORTGAGES
Commercial000
Residential0000
TOTAL0001
      
OTHER LOANS AND RECEIVABLES
Corporates00000
Other1100011
TOTAL1100011

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

In CHF millionBalance as at 1 JanuaryImpairment losses/ reversalsWrite-offs and disposalsForeign currency translation differencesBalance as at end of period
 
DEBT SECURITIES
Corporates690–6063
TOTAL690–6063
 
MORTGAGES
Commercial000
Residential00000
TOTAL10000
 
OTHER LOANS AND RECEIVABLES
Corporates000
Other830–111
TOTAL830–111

The criteria used for the assessment of financial assets for impairment are described in note 2.9.

Exposure to credit risk of other assets

In CHF millionAAAAAABBBBelow BBBNot ratedTotal
 
CREDIT RATING AS AT 31 DECEMBER 2016
Cash and cash equivalents7811 8741 9561410924 844
Derivatives334650713143451 885
Reinsurance assets28317938500
TOTAL1 1152 8072 84828401757 229
        
CREDIT RATING AS AT 31 DECEMBER 2015       
Cash and cash equivalents3587371 3331550872 671
Derivatives369717855131402 113
Reinsurance assets2122151437478
TOTAL7271 6662 40330001655 261

At 31 December 2016 and 2015, no reinsurance assets were past due or impaired.

Exposure to credit risk of unrecognised items

In CHF millionAAAAAABBBBelow BBBNot ratedTotal
  
CREDIT RATING AS AT 31 DECEMBER 2016 
Financial guarantees2828
Loan commitments208208
TOTAL236236
        
CREDIT RATING AS AT 31 DECEMBER 2015       
Financial guarantees2929
Loan commitments320320
TOTAL349349
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
20162015
EUR/CHF–1–1
USD/CHF–5–11
GBP/CHF0–4
CAD/CHF–10

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 38 million (2015: 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 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 2016

In CHF millionCash flowsCarrying amount
 Up to 1 month1–3 months3–12 months1–5 years5–10 yearsMore than 10 yearsTotal 
         
FINANCIAL LIABILITIES
Derivatives designated as cash flow hedges212579363751 20394
Investment contracts with discretionary participation22392102 4361 7146 15910 58010 580
Investment contracts without discretionary participation00000200200200
Borrowings0198162 2091 9776735 6944 627
Other financial liabilities5 4221 1974 11136646536011 92111 830 1
TOTAL5 4441 2545 3505 5904 1927 76729 59827 332
         
INSURANCE AND POLICYHOLDER PARTICIPATION LIABILITIES
Insurance liabilities3093293 2518 64615 35079 358107 243107 243
Policyholder participation liabilities1041684 2255 752851 70912 04312 043
TOTAL4134977 47514 39815 43581 067119 286119 286
         
GUARANTEES AND COMMITMENTS
Financial guarantees260228
Loan commitments33541041701208
Capital commitments1 2910111031 404
TOTAL1 35054115122011 641

Exposure to liquidity risk as at 31 December 2015

In CHF millionCash flowsCarrying amount
Up to
1
month
1-3
months
3-12
months
1-5
years
5-10
years
More
than
10
years
Total
 
FINANCIAL LIABILITIES
Derivatives designated as cash flow hedges163713916253
Investment contracts with discretionary participation22382032 2721 6835 7119 9299 929
Investment contracts without discretionary participation00023185190190
Borrowings156196681 7662 2484 8564 078
Other financial liabilities3 6977794 86434823037410 29210 2161
TOTAL3 8758365 8994 4584 1636 66225 89324 417
 
INSURANCE AND POLICYHOLDER
PARTICIPATION LIABILITIES
Insurance liabilities2162092 5896 27912 57183 126104 990104 990
Policyholder participation liabilities861263 4064 876291 54210 06510 065
TOTAL3023355 99511 15512 60084 669115 056115 056
 
GUARANTEES AND COMMITMENTS
Financial guarantees2929
Loan commitments96721222802320
Capital commitments54496640
TOTAL6697212212402989
Current and non-current assets and liabilities

The table below shows the expected realisation 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 expected 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-currentFor the account and risk of the Swiss Life Group's customersTotal
 31.12.201631.12.201531.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
         
ASSETS
Cash and cash equivalents4 8442 6712 4892 6257 3335 296
Derivatives4836231 4021 490001 8852 113
Assets held for sale124124
Financial assets at fair value through profit or loss3 9693 0953 4833 20227 47927 29334 93133 590
Financial assets available for sale8 8016 17791 45489 848100 25696 026
Loans and receivables7 6496 52516 30717 70723 95524 232
Financial assets pledged as collateral16222 9262 0862 9422 109
Investment property23 80121 55723 80121 557
Investments in associates93679367
Reinsurance assets318310183167500478
Property and equipment383407383407
Intangible assets including intangible insurance assets2 7172 8402 7172 840
Current income tax assets41174117
Deferred income tax assets39473947
Other assets276179568292844471
TOTAL ASSETS26 40819 624143 355139 71029 96829 918199 731189 252
         
LIABILITIES
Derivatives8693897806011 648989
Investment and unit-linked contracts27226410 5099 85626 14026 61036 92036 730
Borrowings6656903 9633 3884 6274 078
Other financial liabilities10 96810 7594 2322 02115 20012 780
Insurance liabilities3 8883 014103 354101 9773 6923 167110 935108 157
Policyholder participation liabilities4 4983 6187 5466 44712 04310 065
Employee benefit liabilities1441431 9231 8342 0681 976
Current income tax liabilities122104122104
Deferred income tax liabilities1 9981 7201 9981 720
Provisions2037566575101
Other liabilities3342712022355293
TOTAL LIABILITIES21 77919 288134 380127 93029 83329 777185 992176 994
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.

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 designs 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 million31.12.201631.12.2015
Life annuities - in payment566586
Life annuities - deferred491529
Annuities certain - in payment66
Annuities certain - deferred3941
Disability income and other annuities - in payment221219
Disability income and other annuities - deferred6 8777 045
TOTAL INDIVIDUAL LIFE8 2008 427

Annuities payable per annum by type of annuity – group life

In CHF million31.12.201631.12.2015
Retirement annuities - in payment910847
Retirement annuities - deferred379376
Survivors' annuities - in payment138135
Survivors' annuities - deferred2 6772 599
Disability income and other annuities - in payment310369
Disability income and other annuities - deferred15 46014 979
TOTAL GROUP LIFE19 87419 305

Life benefits insured by type of insurance – individual life

In CHF million31.12.201631.12.2015
Whole life and term life23 28424 277
Disability lump-sum payment2626
Other4 7204 594
TOTAL INDIVIDUAL LIFE28 03028 897

Life benefits insured by type of insurance – group life

In CHF million31.12.201631.12.2015
Term life53 44454 671
Disability lump-sum payment473479
Other1 2961 069
TOTAL GROUP LIFE55 21356 219
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 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 of ultimate claim costs by year of loss occurrence
2007200820092010201120122013201420152016Total
At end of year of loss occurrence416345392323311303335342296267n/a
1 year later383387373369362330361346322n/a
2 years later353310320314324331296309n/a
3 years later296275293286336285281n/a
4 years later272259276301300276n/a
5 years later261242297265293n/a
6 years later239232263257n/a
7 years later260225253n/a
8 years later228221n/a
9 years later226n/a
CURRENT ESTIMATE OF CUMULATIVE CLAIMS2262212532572932762813093222672 705
Cumulative payments to date–209–205–226–231–229–218–222–216–190–113–2 058
LIABILITIES BEFORE DISCOUNTING1717282665585993131154647
Effect of discounting
LIABILITIES FOR THE CURRENT AND 9 PREVIOUS YEARS1717282665585993131154647
Liabilities for prior years204
TOTAL GROSS CLAIMS UNDER NON-LIFE INSURANCE CONTRACTS851

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 are 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.

Monitoring of the risks taken is done 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 1.2% in terms of earned insurance premiums was ceded as at 31 December 2016 (2015: 1.0%).

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 13.7 billion as at 31 December 2016 (2015: CHF 12.5 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, is as a consequence 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 2016, if mortality rates (annuities) had decreased by 5%, the embedded value would have been CHF 147 million lower (2015: CHF 163 million lower).

At 31 December 2016, if morbidity had been 5% higher, the embedded value would have been CHF 46 million lower (2015: CHF 41 million lower).

At 31 December 2016, if morbidity had been 5% lower, the embedded value would have been CHF 45 million higher (2015: CHF 40 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 2016, if the interest rates had been 100 basis points higher, the embedded value would have been CHF 740 million higher (2015: CHF 987 million higher).

At 31 December 2016, if the interest rates had been 100 basis points lower, the embedded value would have been CHF 1788 million lower (2015: CHF 1428 million lower).

At 31 December 2016, if the swaption implied volatilities (interest rates) had been 10% higher, the embedded value would have been CHF 52 million higher (2015: CHF 37 million higher).

At 31 December 2016, if the swaption implied volatilities (interest rates) had been 10% lower, the embedded value would have been CHF 24 million lower (2015: CHF 121 million lower).

At 31 December 2016, if the market value of equity securities and property had been 10% higher, the embedded value would have been CHF 763 million higher (2015: CHF 811 million higher).

At 31 December 2016, if the market value of equity securities and property had been 10% lower, the embedded value would have been CHF 882 million lower (2015: CHF 958 million lower).

At 31 December 2016, if the equity securities and property implied volatilities had been 25% higher, the embedded value would have been CHF 286 million lower (2015: CHF 338 million lower).

At 31 December 2016, if the equity securities and property implied volatilities had been 25% lower, the embedded value would have been CHF 221 million higher (2015: CHF 273 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)20162015
   
BASIC EARNINGS PER SHARE
Net result attributable to equity holders of Swiss Life Holding922872
Weighted average number of shares outstanding31 879 42231 829 018
BASIC EARNINGS PER SHARE FOR THE NET RESULT ATTRIBUTABLE TO EQUITY HOLDERS OF SWISS LIFE HOLDING (IN CHF)28.9227.41
   
DILUTED EARNINGS PER SHARE
Net result attributable to equity holders of Swiss Life Holding922872
Elimination of interest expense on convertible bonds77
RESULT USED TO DETERMINE DILUTED EARNINGS PER SHARE929880
   
Weighted average number of shares outstanding31 879 42231 829 018
Adjustments (number of shares)
Assumed conversion of convertible bonds2 100 0182 071 173
Equity compensation plans101 154122 528
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING FOR DILUTED EARNINGS PER SHARE34 080 59434 022 719
DILUTED EARNINGS PER SHARE FOR THE NET RESULT ATTRIBUTABLE TO EQUITY HOLDERS OF SWISS LIFE HOLDING (IN CHF)27.2725.85

7 Premiums, Policy Fees and Deposits Received

Written premiums

In CHF million20162015
Direct13 03213 587
Assumed352330
GROSS WRITTEN PREMIUMS13 38413 917
Ceded–159–141
NET WRITTEN PREMIUMS13 22513 775

Earned premiums

In CHF million20162015
Direct13 03713 586
Assumed351326
GROSS EARNED PREMIUMS13 38713 912
Ceded–159–141
NET EARNED PREMIUMS13 22813 771

Written policy fees

In CHF million20162015
Direct281278
GROSS WRITTEN POLICY FEES281278
Ceded
NET WRITTEN POLICY FEES281278

Earned policy fees

In CHF million20162015
Direct280276
GROSS EARNED POLICY FEES280276
Ceded
NET EARNED POLICY FEES280276

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 million20162015
Gross written premiums and policy fees13 66514 195
Deposits received under insurance and investment contracts3 7014 658
GROSS WRITTEN PREMIUMS, POLICY FEES AND DEPOSITS RECEIVED17 36618 853

8 Details of Certain Items in the Consolidated Statement of Income

Commission income

In CHF million20162015
Brokerage commissions530496
Asset management commissions354341
Other commissions and fees187179
TOTAL COMMISSION INCOME1 0711 016

Investment income

In CHF millionNotes20162015
Interest income on financial assets available for sale 2 5542 605
Interest income on loans and receivables 659709
Other interest income 52
Dividend income on financial assets available for sale 398299
Net income on investment property 669675
TOTAL INVESTMENT INCOME54 2854 290

Net gains/losses on financial assets

In CHF millionNotes20162015
Sale of
financial assets available for sale504561
loans10387
Net gains/losses from sales607647
Impairment losses on
debt instruments available for sale–20
equity instruments available for sale–60–34
loans and receivables13–3–18
Impairment losses on financial assets–65–52
Foreign currency gains/losses–118–348
TOTAL NET GAINS/LOSSES ON FINANCIAL ASSETS5425248

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

In CHF millionNotes20162015
Currency derivatives–382–250
Interest rate derivatives–1352
Equity derivatives–17116
Other derivatives–2231
Financial assets designated as at fair value through profit or loss 118218
Associates at fair value through profit or loss 1–13
Investment contracts without discretionary participation1–77
Non-controlling interests in investment funds–4018
Financial liabilities at fair value through profit or loss–10
Assets for the account and risk of the Swiss Life Group's customers 1747–315
Liabilities linked to assets for the account and risk of the Swiss Life Group's customers–734300
TOTAL NET GAINS/LOSSES ON FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS5–42081

Other income

In CHF million20162015
Realised gains/losses on sales of subsidiaries and other assets01
Net income on property development 13726
Other foreign currency gains/losses21193
Other8–9
TOTAL OTHER INCOME66210

Net insurance benefits and claims

In CHF million20162015
Benefits and claims under insurance contracts
Life benefits and claims paid, gross10 2399 794
Change in liability for future life policyholder benefits, gross2 6994 532
Non-life claims paid, gross221222
Change in reserve for non-life claims, gross–1010
Benefits and claims recovered from reinsurers–94–95
Net benefits and claims under insurance contracts13 05514 463
Benefits and claims under investment contracts with discretionary participation
Life benefits and claims paid, gross611565
Change in liability for future life policyholder benefits, gross398488
Benefits and claims recovered from reinsurers
Net benefits and claims under investment contracts with discretionary participation1 0091 053
 
TOTAL NET INSURANCE BENEFITS AND CLAIMS14 06415 516

Interest expense

In CHF millionNotes20162015
Interest expense on deposits1212
Interest expense on investment contracts7775
Interest expense on deposits under insurance contracts225256
Other interest expense1920
TOTAL INTEREST EXPENSE160162

Commission expense

In CHF million20162015
Insurance agent and broker commissions725685
Asset management and banking commissions6968
Other commissions and fees4845
TOTAL COMMISSION EXPENSE842797

Employee benefits expense

In CHF million20162015
Wages and salaries623600
Social security127119
Defined benefit plans10284
Defined contribution plans11
Other employee benefits5467
TOTAL EMPLOYEE BENEFITS EXPENSE907871

Depreciation and amortisation expense

In CHF millionNotes20162015
Depreciation of property and equipment162424
Amortisation of present value of future profits (PVP)1731
Amortisation of deferred acquisition costs (DAC)17437401
Amortisation of deferred origination costs (DOC)171014
Amortisation of other intangible assets172828
TOTAL DEPRECIATION AND AMORTISATION EXPENSE503468

Other expenses

In CHF million20162015
Marketing and advertising5557
Information technology and systems8873
Rental, maintenance and repair6666
Professional services167158
Premium taxes and other non-income taxes5455
Other7787
TOTAL OTHER EXPENSES506497

9 Derivatives and Hedge Accounting

In CHF millionFair value assetsFair value liabilitiesNotional amount/exposure
 Notes31.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
        
CURRENCY DERIVATIVES 
Forward contracts 33436666020746 31430 005
Futures 10008537
Options (over-the-counter) 8501321681 7853 730
TOTAL CURRENCY DERIVATIVES 34241679237548 18433 773
        
INTEREST RATE DERIVATIVES 
Forward contracts 142147112767624
Swaps 1 2391 25970057037 02636 423
Futures 0002526
Options (over-the-counter) 3116285521
TOTAL INTEREST RATE DERIVATIVES 1 4131 42171157138 10437 594
        
EQUITY/INDEX DERIVATIVES 
Futures 13137164 4952 120
Options (over-the-counter) 1089
Options (exchange-traded) 100248613461 731
Other 1713111 362895
TOTAL EQUITY/INDEX DERIVATIVES 1302757886 2104 755
        
OTHER DERIVATIVES 
Credit derivatives 66353 7402 186
TOTAL OTHER DERIVATIVES 66353 7402 186
 
DERIVATIVES FOR THE ACCOUNT AND RISK OF THE SWISS LIFE GROUP'S CUSTOMERS50000
 
TOTAL DERIVATIVES 1 8852 1131 64898996 23878 308
of which derivatives designated and accounted for as hedging instruments 
Derivatives designated as fair value hedges 97291135011 7469 582
Derivatives designated as cash flow hedges 4443939433 9222 110
Derivatives designated as net investment hedges 5192 057

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 2016

In CHF millionFair valueNotional amountHedging instrumentsHedged items
AssetsLiabilitiesGainsLossesGainsLosses
Interest rate risk
Interest rate swaps to hedge bond portfolios83867 53692727593
Foreign currency risk
Currency forwards to hedge non-monetary investments14274 210370232232370
TOTAL DERIVATIVES DESIGNATED AS FAIR VALUE HEDGES9711311 746462304307462

Derivatives designated as fair value hedges as at 31 December 2015

In CHF millionFair valueNotional amountHedging instrumentsHedged items
AssetsLiabilitiesGainsLossesGainsLosses
Interest rate risk
Interest rate swaps to hedge available-for-sale bond portfolios11274 54053322853
Foreign currency risk
Currency forwards to hedge non-monetary investments18235 043522599616539
TOTAL DERIVATIVES DESIGNATED AS FAIR VALUE HEDGES29509 582575632644592

The Swiss Life Group used interest rate swaps to hedge available-for-sale fixed-rate bonds and bonds classified as loans in Swiss francs, euro, British pounds and US dollars against changes in the fair value attributable to interest rate risk. The nominal amount of these bonds as at 31 December 2016 was CHF 7.0 billion (2015: CHF 4.5 billion).

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).

Foreign currency debt designated as fair value hedge as at 31 December 2016

In CHF million (if not noted otherwise)Fair valueNominal amount Hedging instrumentsHedged items
EURGainsLossesGainsLosses
  
FOR THE YEAR 2016
Foreign currency borrowing to hedge currency risk of non-monetary investments2382257–22–7

In 2016, hybrid debt denominated in euro was used to protect non-monetary investments (hedge funds, equity securities and real estate funds) against adverse movements in euro exchange rates. No such hedges were in place as at 31 December 2015.

Derivatives designated as cash flow hedges as at 31 December 2016

In CHF million (if not noted otherwise)Fair valueContract/ notional amountFair value
gains (+)/losses (-)
Hedged cash flows
AssetsLiabilitiesEffective portion recognised in other comprehensive incomeIneffective portion recognised in profit or lossYears expected to occurYears expected to affect profit or loss
        
INTEREST RATE RISK
Forward starting swaps/bonds
Swiss franc291602 565142017–20262017–2047
Euro153351 357522017–20212017–2047
Total interest rate risk444943 92266n/an/a
 
TOTAL DERIVATIVES DESIGNATED AS CASH FLOW HEDGES444943 92266n/an/a

Derivatives designated as cash flow hedges as at 31 December 2015

In CHF million (if not noted otherwise)Fair valueContract/ notional amountFair value
gains (+)/losses (-)
Hedged cash flows
 AssetsLiabilitiesEffective portion recognised in other comprehen- sive incomeIneffective portion recognised in profit or lossYears expected to occurYears expected to affect profit or loss
        
INTEREST RATE RISK
Forward starting swaps/bonds
Swiss franc2171 2151272016–20222016–2047
Euro1753895202016–20202016–2047
Total interest rate risk39332 110146n/an/a
 
TOTAL DERIVATIVES DESIGNATED AS CASH FLOW HEDGES39332 110146n/an/a

In 2016 and 2015, 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 2016, a gain of CHF 26 million was reclassified from other comprehensive income to profit or loss (2015: gain of CHF 8 million), of which CHF 17 million were included in investment income (2015: CHF 8 million), and CHF 9 million in net gains/losses on financial assets (2015: nil).

Derivatives designated as net investment hedges of foreign operations

In CHF millionFair value assets Fair value liabilities Gains (+)/losses (-) recognised in other comprehensive income Ineffectiveness recognised in profit or loss Notional amount 
31.12.201631.12.201531.12.201631.12.201531.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
Currency forwards519–852 057
TOTAL DERIVATIVES DESIGNATED AS NET INVESTMENT HEDGES519–852 057

Investments in senior secured loan funds of USD 2104 million were hedged in 2016. No such hedges were in place as at 31 December 2015.

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

In CHF millionNotes31.12.201631.12.2015
Debt securities581635
Money market instruments0
Equity securities97
Investment funds - debt3 2142 606
Investment funds - equity683718
Investment funds - balanced266173
Real estate funds1 5141 373
Infrastructure investments1 179780
Private equity and hedge funds65
Financial assets for the account and risk of the Swiss Life Group's customers527 47927 293
TOTAL FINANCIAL ASSETS DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS34 93133 590

11 Financial Assets Available for Sale

In CHF millionCost/amortised costNet unrealised gains/lossesFair value (carrying amount)
31.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
Debt securities75 48876 03010 4078 85485 89584 884
Senior secured loans2 033252 058
Equity securities46573 4317272325 3843 663
Investment funds - debt3 5704 436109–693 6794 367
Investment funds - equity1 5751 384175771 7511 461
Investment funds - balanced1730001629
Real estate funds8148813633850914
Private equity376412173189550601
Hedge funds4876263074106
TOTAL FINANCIAL ASSETS AVAILABLE FOR SALE88 57886 68011 6779 345100 25696 026

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
31.12.201631.12.2015
Debt securities reclassified from
financial assets available for sale2 9422 109
TOTAL DEBT SECURITIES PLEDGED AS COLLATERAL2 9422 109
 
TOTAL FINANCIAL ASSETS PLEDGED AS COLLATERAL2 9422 109

Financial assets that have been sold under a repurchase agreement or lent under an agreement to return them are not derecognised when all the risks and rewards of ownership are retained substantially 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)
Notes31.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
       
LOANS
Mortgages7 5877 086–14–127 5737 073
Corporate and other loans2 1241 735–4–42 1201 732
Note loans6 4616 7586 4616 758
Debt securities previously classified as available for sale3 0083 9593 0083 959
Other debt securities classified as loans435433435433
TOTAL LOANS3019 61519 971–18–1619 59719 955
       
RECEIVABLES
Insurance receivables1 3621 413–21–181 3411 395
Reinsurance receivables 1297265297265
Accrued income1 4811 5301 4811 530
Settlement accounts743341743341
Other receivables499757–2–9496747
TOTAL RECEIVABLES3043824 305–24–284 3584 277
 
TOTAL LOANS AND RECEIVABLES23 99724 276–42–4423 95524 232

Allowance for impairment losses

In CHF millionIndividual evaluation of impairmentCollective evaluation of impairmentTotal
201620152016201520162015
       
LOANS
Balance as at 1 January4912111620
Impairment losses/reversals022234
Write-offs and disposals0–70–7
Foreign currency translation differences0000
BALANCE AS AT END OF PERIOD5414121816
       
RECEIVABLES
Balance as at 1 January7620162822
Impairment losses/reversals01113014
Write-offs and disposals01-4–7–4–6
Foreign currency translation differences0–10–10–2
BALANCE AS AT END OF PERIOD7717202428
 
TOTAL ALLOWANCE FOR IMPAIRMENT LOSSES111130324244

Interest income accrued on impaired loans was CHF 0.02 million as at 31 December 2016 (2015: CHF 0.3 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 million20162015
Carrying amount as at 31 December3 0083 959
Fair value as at 31 December3 4094 375
Gains (+)/losses (-) that would have been recognised in other comprehensive income if the assets had not been reclassified (before policyholder and income tax effect)30–449
Gains (+)/losses (-) recognised in profit or loss (including impairment)1372
Interest income200261

14 Investment Property

In CHF million20162015
Balance as at 1 January21 55719 596
Additions1 4282 160
Capitalised subsequent expenditure12784
Classification as assets held for sale and other disposals–3–623
Gains/losses from fair value adjustments763655
Transfers to inventory property–19–13
Foreign currency translation differences–52–302
BALANCE AS AT END OF PERIOD23 80121 557
   
Investment property consists of
completed investment property23 26221 242
investment property under construction539315
TOTAL INVESTMENT PROPERTY23 80121 557

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 920 million for the period ended 31 December 2016 (2015: CHF 868 million). Operating expenses arising from investment property that generated rental income amounted to CHF 251 million for the period ended 31 December 2016 (2015: CHF 193 million).

The future minimum rental payments to be received under non-cancellable operating leases were as follows.

In CHF million31.12.201631.12.2015
Not later than 1 year594377
Later than 1 year and not later than 5 years1 2841 159
Later than 5 years1 0081 114
TOTAL2 8862 650
 
Contingent rents recognised in profit or loss00

15 Investments in Associates

Summarised financial information for the year 2016

Amounts in CHF millionOwnership interestCarrying amountDividends receivedShare of profit or lossShare of other comprehensive incomeShare of total comprehensive income
       
EQUITY METHOD ASSOCIATES
Credit et services financiers (CRESERFI), Paris33.4%44122
Groupe Assuristance, Paris34.0%1422
Other associatesn/a12055
TOTALn/a70199
       
ASSOCIATES AT FAIR VALUE THROUGH PROFIT OR LOSS
SCI Tour LM, Marseille33.3%22n/an/an/a
Other associatesn/a0n/an/an/a
TOTALn/a23n/an/an/a

Summarised financial information for the year 2015

Amounts in CHF millionOwnership interestCarrying amountDividends receivedShare of profit or lossShare of other comprehensive incomeShare of total comprehensive income
 
EQUITY METHOD ASSOCIATES
Credit et services financiers (CRESERFI), Paris33.4%4411
Groupe Assuristance, Paris34.0%12122
Other associatesn/a5233
TOTALn/a61477
 
ASSOCIATES AT FAIR VALUE THROUGH PROFIT OR LOSS
DEPFA Holding Verwaltungsgesellschaft mbH, Dusseldorf20.4%1177n/an/an/a
Other associatesn/a5n/an/an/a
TOTALn/a6177n/an/an/a

Summarised financial information relating to material associates was as follows.

Amounts in CHF millionCredit et services financiers (CRESERFI), ParisGroupe Assuristance ParisSCI Tour LM MarseilleDEPFA Holding Verwaltungs-gesellschaft mbH, Dusseldorf
20162015201620152016201520162015
SUMMARISED FINANCIAL INFORMATION
Current assets171168322370
Non-current assets12123836984
Current liabilities-12-32-27-23-160
Non-current liabilities-38-17-1-1-23-
 
Revenue36335250174
 
Profit or loss4377168
Other comprehensive income-4
Total comprehensive income4377164
         
RECONCILIATION
Net assets1321314135n/an/an/an/a
Ownership interest33.4%33.4%34.0%34.0%n/an/an/an/a
Share of net assets (carrying amount)44441412n/an/an/an/a

SCI Tour LM, Marseille, a real estate company, was acquired in 2016.

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 2016

In CHF millionNotesLand and buildingsFurniture and fixturesHardwareOther equipmentTotal
       
COST 
Balance as at 1 January 553516026690
Additions 366419
Additions from business combinations28000
Disposals 1 –15–4–7–3–29
Foreign currency translation differences –2–1–10–4
BALANCE AS AT END OF PERIOD 539515827676
       
ACCUMULATED DEPRECIATION AND IMPAIRMENT 
Balance as at 1 January –186–34–48–15–283
Depreciation –12–4–6–2–24
Impairment losses –3–3
Disposals 1 525215
Foreign currency translation differences 01102
BALANCE AS AT END OF PERIOD –196–35–48–14–293
  
TOTAL PROPERTY AND EQUIPMENT AS AT END OF PERIOD 344161013383
of which asset s held under a finance lease 00

Property and equipment for the year 2015

In CHF millionNotesLand and buildingsFurniture and fixturesHardwareOther equipmentTotal
 
COST
Balance as at 1 January570546127713
Additions245113
Additions from business combinations28000
Disposals 10–5–3–1–9
Foreign currency translation differences–19–3–4–2–28
BALANCE AS AT END OF PERIOD553516026690
 
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 103206
Foreign currency translation differences22217
BALANCE AS AT END OF PERIOD–186–34–48–15–283
 
TOTAL PROPERTY AND EQUIPMENT AS AT END OF PERIOD367171211407
of which asset s held under a finance lease11

No borrowing costs were capitalised in property and equipment in 2016 and 2015.

17 Intangible Assets including Intangible Insurance Assets

In CHF million31.12.201631.12.2015
Intangible insurance assets1 3431 464
Other intangible assets1 3741 376
TOTAL INTANGIBLE ASSETS2 7172 840

Intangible insurance assets

In CHF millionPresent value of future profits from acquired insurance portfolios (PVP)Deferred acquisition costs (DAC)Deferred origination costs (DOC)Total
 20162015201620152016201520162015
Balance as at 1 January12141 4311 45021331 4641 497
Additions40042955405434
Amortisation–3–1–437–401–10–14–451–415
Impairment00
Effect ofshadow accounting00–6549–6549
Disposals00
Foreign currency translation differences0–1–11–960–3–11–101
BALANCE AS AT END OF PERIOD9121 3191 43115211 3431 464
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 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 Switzerland, Luxembourg and Singapore.

Other intangible assets for the year 2016

In CHF millionNotesGoodwillCustomer relationshipsComputer softwareBrands and otherTotal
       
COST 
Balance as at 1 January 1 754136181212 092
Additions 013014
Additions from business combinations281713131
Additions from internal software development 00
Disposals 1 –2–4–6
Foreign currency translation differences –17–1–30–21
BALANCE AS AT END OF PERIOD 1 754147188222 110
       
ACCUMULATED AMORTISATION AND IMPAIRMENT 
Balance as at 1 January –520–66–1300–716
Amortisation –13–150–28
Impairment losses –4–4
Disposals 1 245
Foreign currency translation differences 41207
BALANCE AS AT END OF PERIOD –516–76–1430–736
  
TOTAL OTHER INTANGIBLE ASSETS AS AT END OF PERIOD 1 2387044221 374

Other intangible assets for the year 2015

In CHF millionNotesGoodwillCustomer relationshipsComputer softwareBrands and otherTotal
 
COST
Balance as at 1 January1 843191190232 247
Additions1111
Additions from business combinations2815116
Disposals 1–39–4–43
Foreign currency translation differences–104–16–18–2–140
BALANCE AS AT END OF PERIOD1 754136181212 092
 
ACCUMULATED AMORTISATION AND IMPAIRMENT
Balance as at 1 January–542–99–1310–772
Amortisation–13–150–28
Impairment losses–15–15
Disposals 139442
Foreign currency translation differences37712057
BALANCE AS AT END OF PERIOD–520–66–1300–716
 
TOTAL OTHER INTANGIBLE ASSETS AS AT END OF PERIOD1 2347051211 376
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 acquisition of subsidiaries is included in intangible assets. Goodwill on associates is included in the carrying amount of the investment.

The acquisition of MAYFAIR CAPITAL INVESTMENT MANAGEMENT LIMITED, London, in November 2016 led to the recognition of goodwill of CHF 17 million. The goodwill has been allocated to the “Asset Managers” segment.

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.

Goodwill relating to Lloyd Continental has been allocated to the “France” segment. Goodwill relating to CapitalLeben has been allocated to the “International” segment. Goodwill relating to Corpus Sireo has been allocated to the “Asset Managers” segment. Of the goodwill relating to other acquisitions, CHF 18 million (31.12.2015: CHF 19 million) have been allocated to the “France” segment and CHF 25 million (31.12.2015: CHF 8 million) to the “Asset Managers” segment as at 31 December 2016.

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 ContinentalCapitalLebenCorpus SireoOther
31.12.201631.12.201531.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
Net carrying amount of goodwill2872871491491041054327
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 rate8.3%9.3%6.4%6.4%7.9%8.7%8.1-8.3%9.3%

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
31.12.201631.12.201531.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
Net carrying amount of goodwill1521524334387076655666
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%6.9%7.9%8.7%7.6%8.1%n/an/a
Customer relationships

The acquisition of MAYFAIR CAPITAL INVESTMENT MANAGEMENT LIMITED, London, in November 2016 led to the recognition of customer relationships of CHF 13 million.

As at 31 December 2016, customer relationships comprise customer relationships relating to Swiss Life Select: CHF 4 million (31.12.2015: CHF 4 million), which were allocated to the “Switzerland” segment. The “France” segment comprises customer relationships of CHF 15 million (31.12.2015: CHF 20 million) and the “Asset Managers” segment of CHF 51 million (31.12.2015: CHF 46 million). Customer relationships were included in the impairment test of the respective cash-generating unit.

Brands and other

Comprises the brands Corpus Sireo and Mayfair.

18 Other Assets and Liabilities

Other assets

In CHF million31.12.201631.12.2015
Deferred charges and prepaid expenses6879
Employee benefit assets5997
Inventory property 1619214
VAT and other tax receivables9072
Sundry assets78
TOTAL OTHER ASSETS844471

Other liabilities

In CHF million31.12.201631.12.2015
Deferred income209188
VAT and other tax payables143103
Sundry liabilities22
TOTAL OTHER LIABILITIES355293

19 Investment and Unit-Linked Contracts

In CHF millionGrossCededNet
Notes31.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
Unit-linked contracts3021 94822 61521 94822 615
Investment contracts with discretionary participation features (DPF)1464213 76210510014 53713 662
Investment contracts without DPF at fair value through profit or loss30330343330343
Investment contracts without DPF at amortised cost300909
TOTAL INVESTMENT AND UNIT-LINKED CONTRACTS36 92036 73010510036 81536 630
of which for the account and risk of the Swiss Life Group's customers
unit-linked contracts521 94822 61521 94822 615
investment contracts54 1923 9954 1923 995

Unit-linked contracts

In CHF million20162015
Balance as at 1 January22 61524 325
Deposits received1 9732 783
Fair value changes406–581
Policy fees and other charges–103–108
Deposits released–2 779–2 423
Other movements–24–1
Reclassifications26
Foreign currency translation differences–167–1 381
BALANCE AS AT END OF PERIOD21 94822 615

Investment contracts with discretionary participation – gross

In CHF million20162015
Balance as at 1 January13 76213 797
Premiums and deposits received2 9053 051
Interest and bonuses credited274267
Policy fees and other charges–143–131
Liabilities released for payments on death, surrender and other terminations–1 725–1 625
Effect ofchanges in actuarial assumptions and other movements333171
Reclassifications–625–711
Foreign currency translation differences–139–1 058
BALANCE AS AT END OF PERIOD14 64213 762

Investment contracts without discretionary participation – gross

In CHF million20162015
Balance as at 1 January352273
Deposits received2526
Fair value changes–485
Interest and bonuses credited00
Policy fees and other charges–1–1
Deposits released–28–12
Other movements00
Reclassifications–12–1
Foreign currency translation differences–1–18
BALANCE AS AT END OF PERIOD330352

In the case of contracts that do not have significant insurance risk but contain discretionary participation features, the Swiss Life Group primarily bases its accounting policies 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).

In the case of traditional contracts in the life insurance business, future life policy benefit liabilities are determined by using the net-level-premium method on the basis of actuarial assumptions as to mortality, persistency, expenses and investment return, including a margin for adverse deviation. For participating contracts where the contribution principle applies to the allocation of the policyholder bonus, future life policy benefit liabilities are determined by using the net-level-premium method on the basis of appropriate mortality and interest rate assumptions. These amounts relate to contracts issued in Switzerland.

Certain contracts that do not contain significant insurance risk and do not have discretionary participation features are carried at amortised cost or fair value.

20 Borrowings

In CHF millionNotes31.12.201631.12.2015
Hybrid debt 3 6332 916
Convertible debt 467459
Senior bonds 423423
Mortgage loans 103278
Other 12
TOTAL BORROWINGS304 6274 078

Hybrid debt

On 27 September 2016, Elm B.V., a Dutch repackaging vehicle, issued EUR 600 million in fixed to floating rate subordinated perpetual notes (at an issue price of 99.707%) secured by loan notes granted to Swiss Life Ltd, which are guaranteed by Swiss Life Holding. Swiss Life Ltd may repay the loan notes in full on 19 May 2027 or on any interest payment date thereafter, upon notice and subject to the consent of the Swiss Financial Market Supervisory Authority. The interest has been fixed at 4.50% p.a. until 19 May 2027. If the notes are not redeemed on 19 May 2027, the interest will be the aggregate of the three-month Euribor and a margin of 5.10% p.a.

On 24 March 2016, Swiss Life Ltd issued subordinated dated callable bonds in the amount of CHF 150 million. The bonds are guaranteed by Swiss Life Holding, have their maturity date on 24 September 2046 and are first callable on 24 September 2026 or at each interest payment date thereafter at the option of the issuer, upon notice and subject to the consent of the Swiss Financial Market Supervisory Authority. The interest has been fixed at 4.375% p.a. until 24 September 2026. If the bonds are not redeemed on 24 September 2026, the interest resets at a rate fixed for the subsequent five years, consisting of the aggregate of the then-prevailing five-year CHF swap rate and the initial margin of 4.538% p.a.

On 24 March 2016, Swiss Life Ltd issued subordinated perpetual callable bonds in the amount of CHF 450 million. The bonds are guaranteed by Swiss Life Holding, have no fixed maturity date and are first callable on 24 September 2021 or at each interest payment date thereafter at the option of the issuer, upon notice and subject to the consent of the Swiss Financial Market Supervisory Authority. The interest has been fixed at 3.75% p.a. until 24 September 2021. If the bonds are not redeemed on 24 September 2021, the interest resets at a rate fixed for the subsequent five years, consisting of the aggregate of the then-prevailing five-year CHF swap rate and the initial margin of 4.392% p.a.

On 16 June 2015, Demeter Investments B.V., a Dutch repackaging vehicle, issued EUR 750 million in fixed to floating rate subordinated perpetual notes (at an issue price of 99.105%) secured by loan notes granted to Swiss Life Ltd, which are guaranteed by Swiss Life Holding. Swiss Life Ltd may repay the loan notes in full on 16 June 2025 or on any interest payment date thereafter, upon notice and subject to the consent of the Swiss Financial Market Supervisory Authority. The interest has been fixed at 4.375% p.a until 16 June 2025. If the notes are not redeemed on 16 June 2025, the interest will be the aggregate of three-month Euribor and a margin of 4.30% p.a.

In November 2012, Swiss Life Insurance Finance Ltd. offered to existing lenders under the subordinated perpetual step-up loan placed in 1999 by Swiss Life Ltd to purchase their loan holdings against a consideration consisting of both a cash component and a credit component. Altogether, EUR 265 million and CHF 290 million were purchased from lenders. The cash component amounted to a total of CHF 139 million. The credit component consists of a tranche of a subordinated dated step-up loan newly issued by Swiss Life Ltd. The subordinated dated step-up loan placed in connection with the offer amounts to CHF 471 million, is guaranteed by Swiss Life Holding, has a tenor of thirty years and is first repayable on 30 November 2022 at the option of the issuer, upon notice and subject to the consent of the Swiss Financial Market Supervisory Authority. The interest rate is six-month Libor plus a margin of 4.20% p.a. until 30 November 2022. If the loan is not redeemed on 30 November 2022, the margin increases by 1%.

On 22 October 2012, Swiss Life Ltd issued subordinated perpetual callable bonds in the amount of CHF 300 million. The bonds are guaranteed by Swiss Life Holding, have no fixed maturity date and are first callable on 22 August 2018 or at each interest payment date thereafter at the option of the issuer, upon notice and subject to the consent of the Swiss Financial Market Supervisory Authority. The interest has been fixed at 5.50% p.a. until 22 August 2018. If the bonds are not redeemed on 22 August 2018, the interest resets at a rate fixed for the subsequent five years, consisting of the aggregate of the then-prevailing five-year CHF swap rate and the initial margin of 5.091% p.a.

On 4 April 2011, Swiss Life Ltd issued subordinated perpetual callable bonds in the amount of CHF 325 million. CHF 75 million were additionally issued in June 2011 and CHF 100 million in October 2011. The bonds were guaranteed by Swiss Life Holding, had no fixed maturity date and were first callable on 4 October 2016 upon notice and subject to the consent of the Swiss Financial Market Supervisory Authority. The interest has been fixed at 5.25% p.a. until 4 October 2016. The bonds were redeemed on the first call date on 4 October 2016.

On 12 April 2007, ELM B.V., a Dutch repackaging vehicle, issued EUR 700 million in fixed to floating rate subordinated perpetual notes to finance loan notes granted to Swiss Life Ltd, which are guaranteed by Swiss Life Holding. Swiss Life Ltd may repay the loan notes in full on 12 April 2017 or on any interest payment date thereafter, upon notice and subject to the consent of the Swiss Financial Market Supervisory Authority. The notes bear interest from 12 April 2007 to 12 April 2017 at a rate of 5.849% p.a. If the notes are not redeemed on 12 April 2017, the interest will be the aggregate of three-month Euribor and a margin of 2.50% p.a.

In March 1999, Swiss Life Ltd privately placed a subordinated perpetual step-up loan comprising three simultaneous advances of EUR 443 million (at a rate of interest of Euribor plus a margin of 1.05% p.a., increased by 100 basis points as from April 2009), CHF 290 million (at a rate of interest of Libor plus a margin of 1.05% p.a., increased by 100 basis points as from April 2009) and EUR 215 million (at a rate of interest of Euribor plus a margin of 1.05% p.a., increased by 100 basis points as from October 2009). In 2009, Swiss Life Ltd renounced the right to call the loan on its first call date. Following the purchase offer by Swiss Life Insurance Finance Ltd. in 2012, EUR 192 million remain outstanding. Swiss Life Ltd renounced the right to call the loan on the second optional call date in April 2014 and can next call it in 2019 or at five-year intervals thereafter, at its discretion, upon notice and subject to the consent of the Swiss Financial Market Supervisory Authority.

Amounts in CHF million (if not noted otherwise)Nominal value in year of issueNominal value at 31.12.2016Interest rateYear of issueOptional redemptionCarrying amountCarrying amount
Borrower     31.12.201631.12.2015
Swiss Life AGEUR 600EUR 6004.500%20162027637
Swiss Life AGCHF 150CHF 1504.375%20162026149
Swiss Life AGCHF 450CHF 4503.750%20162021447
Swiss Life AGEUR 750EUR 7504.375%20152025793802
Libor
Swiss Life AGCHF 471CHF 471+4.200%20122022468468
Swiss Life AGCHF 300CHF 3005.500%20122018299298
Swiss Life AGCHF 5005.250%20112016499
Swiss Life AGEUR 700EUR 5905.849%20072017633640
Euribor
Swiss Life AGEUR 443EUR 192+2.050%19992019207209
TOTAL3 6332 916

Convertible debt

In December 2013, Swiss Life Holding issued CHF 500 million in senior unsecured convertible bonds due in 2020. The coupon was set at 0%. The bonds may be converted into registered shares of Swiss Life Holding at the option of the holder. The initial conversion price was set at CHF 243.97 (in 2016 adjusted to CHF 236.80, valid since 28 April 2016). The proceeds from the issue of the convertible bonds have been split between a liability component and an equity component. The fair value of the liability component at issue date amounted to CHF 450 million and was calculated using a market interest rate for an equivalent non-convertible bond. The residual amount of CHF 50 million represented the value of the option to convert the instrument into Swiss Life Holding shares and was included in share premium. Transaction costs of CHF 6 million were deducted from the liability and costs of CHF 1 million were recognised in share premium.

In 2016, convertible bonds with a nominal value of CHF 35 000.00 were converted into 147 Swiss Life Holding shares with a corresponding increase in share capital of CHF 749.70 and an increase in share premium of CHF 31 552.91.

Senior bonds

In May 2013, Swiss Life Holding raised CHF 425 million debt through the issuance of a CHF public bond dual tranche transaction, split into a CHF 225 million tranche with a tenor of six years and a CHF 200 million tranche with a tenor of ten years. The unsecured senior bonds bear coupons of 1.125% p.a. and 1.875% p.a., respectively. Settlement took place on 21 June 2013.

Amounts in CHF million (if not noted otherwise)Nominal valueInterest rateYear of issueRedemptionCarrying amountCarrying amount
Issuer31.12.201631.12.2015
Swiss Life Holding AGCHF 2251.125%20132019224224
Swiss Life Holding AGCHF 2001.875%20132023199199
TOTAL423423

Mortgage loans

In January 2016, the mortgage loan of CHF 156 million granted to GENBLAN AG matured and was redeemed.

Amounts in CHF million (if not noted otherwise)Loan currencyInterest rateFixed or variable rateMaturityCarrying amountCarrying amount
Borrower    31.12.201631.12.2015
GENBLAN AGCHF3.165%fixed2016156
Swiss Life AGCHF0.500%variable201611
TECHNOPARK Real Estate LTDCHF1.500%fixed20171818
Swiss Life AGCHF3.975%fixed20181213
Swiss Life AGCHF2.786%fixed20202532
Swiss Life AGCHF1.894%fixed20203232
Swiss Life AGCHF2.007%fixed20211616
TOTAL103278

21 Other Financial Liabilities

In CHF millionNotes31.12.201631.12.2015
Insurance payables2 4832 753
Policyholder deposits1 2011 266
Reinsurance deposits137129
Customer deposits1 881948
Repurchase agreements2 9702 146
Amounts due to banks1 4821 919
Non-controlling interests in investment funds303 2952 496
Accrued expenses396341
Settlement accounts739121
Other617662
TOTAL OTHER FINANCIAL LIABILITIES15 20012 780

22 Insurance Liabilities

In CHF millionGrossCededNet
31.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
Claims under non-life insurance contracts851872164170687702
Unearned premiums non-life5356115255
Claims under life insurance contracts6 0786 10297845 9816 018
Future life policyholder benefits96 93294 48113112296 80094 359
Unearned premiums life3745003745
Deposits under insurance contracts6 9846 6026 9846 602
TOTAL INSURANCE LIABILITIES110 935108 157393376110 542107 782
of which for the account and risk of the Swiss Life Group's customers3 6923 1673 6923 167

Unearned premiums

Unearned premiums represent the portion of the premiums written relating to the unexpired terms of coverage.

Claims under life insurance contracts

Claims under life insurance contracts represent the liability for unpaid portions of claims incurred. It includes an estimate of the liability for claims incurred but not reported (IBNR). The measurement at reporting date is a best estimate of ultimate future claim payments.

Claims under non-life insurance contracts – gross

In CHF million20162015
Balance as at 1 January872953
Claims and claim settlement costs incurred
Reporting period270290
Prior reporting periods–47–44
Claims and claim settlement costs paid
Reporting period–115–111
Prior reporting periods–119–124
Foreign currency translation differences–11–92
BALANCE AS AT END OF PERIOD851872

Claims under non-life insurance contracts represent the liability needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the financial reporting date. The estimated liability includes the amount that will be required for future payments on both claims that have been reported to the insurer and claims relating to insured events that have occurred but have not been reported to the insurer as at the date the liability is estimated. Loss development tables are generally used to make these estimates.

Future life policyholder benefits and claims – gross

In CHF million20162015
Balance as at 1 January100 58398 519
Premiums received9 0989 610
Interest credited1 9312 067
Claims incurred, benefits paid and surrenders–8 990–8 521
Effect ofchanges in actuarial assumptions and other movements6451 355
Reclassifications5122
Foreign currency translation differences–307–2 469
BALANCE AS AT END OF PERIOD103 010100 583

For participating contracts where the contribution principle applies to the allocation of the policyholder bonus, future life policy benefit liabilities are determined by using the net-level-premium method on the basis of appropriate mortality and interest rate assumptions.

The valuation of other long-duration contracts is also based on the net-level-premium method with actuarial assumptions as to mortality, persistency, expenses and investment returns including provisions for adverse deviation.

Deposits under insurance contracts – gross

In CHF million20162015
Balance as at 1 January6 6026 559
Deposits received177225
Interest credited5256
Participating bonuses1513
Policy fees and insurance charges-23-19
Deposits released for payments on death, surrender and other terminations during the year-333-401
Other movements716
Reclassifications567688
Foreign currency translation differences-80-535
BALANCE AS AT END OF PERIOD6 9846 602

For investment-type contracts with significant insurance risk, savings premiums collected are reported as deposits (deposit accounting).

Insurance liabilities with and without discretionary participation

In CHF million31.12.201631.12.2015
Insurance liabilities with discretionary participation95 03992 867
Insurance liabilities without discretionary participation12 20312 123
Insurance liabilities linked to assets for the account and risk of the Swiss Life Group's customers3 6923 167
TOTAL INSURANCE LIABILITIES110 935108 157

23 Employee Benefits

Employee benefit liabilities

In CHF million31.12.201631.12.2015
Employee benefit liabilities consist of
gross defined benefit liabilities1 9121 823
other employee benefit liabilities155153
TOTAL EMPLOYEE BENEFIT LIABILITIES2 0681 976

Defined benefit plans

Employees are covered under various funded and unfunded pension plans which operate under local regulations and practice. The major part of the defined benefit liability recognised arises from the plans covering employees in Switzerland. The impact on the consolidated financial statements arising from the plans covering employees in Germany and France is far less significant. Generally, the level of benefits is based on years of service and average compensation preceding retirement, and the main benefit is a pension after retirement or a lump-sum payment at the time of retirement. Most plans are funded and the funding is governed by local requirements and with respect to the liability (determined based on actuarial methods) based on the plans’ benefit promises. For several plans, contributions are not only made by the employer, but also by the employee (generally as a part of gross salaries).

In Switzerland, France and Germany, insurance contracts have been issued to defined benefit plans covering own employees, which reinsure a part of the benefit promises made by the plans. Due to the requirements of IFRS 4 Insurance Contracts in combination with IAS 19 Employee Benefits, such insurance contracts are eliminated (self-insurance, non-eligibility as plan asset). To the extent the affected plans are funded by self-insurance, the defined benefit liabilities are backed by the investments relating to the eliminated insurance contracts. These investments are part of the investments presented in the consolidated balance sheet of the Swiss Life Group.

Plan descriptions

Switzerland
Pension plans in Switzerland are governed by the Swiss Federal Law on Occupational Retirement (BVG). Pension plans must be managed by independent, legally autonomous entities and are under regulatory supervision. The plans covering the Group’s employees in Switzerland are set up as foundations. The foundation board as the most senior governing body must be composed of equal numbers of employee and employer representatives. Main responsibilities of the foundation board are the definition of plan benefits, funding system, setting of actuarial parameters and investment policies for the plan assets. The BVG defines minimum levels with regard to benefits (including conversion rate for old-age pensions), employer/employee contributions as well as the interest rate for the accrual of the employees’ pension account. An annual actuarial report according to BVG requirements is prepared which shows the funding level of the respective plan. The measurement basis for the plan’s assets and benefit obligations for this purpose is in accordance with BVG rules.

The primary benefit of Swiss Life’s plans is an old-age pension after reaching retirement age. The level of the old-age pension is determined by the plan’s conversion rate applied to the employees’ individual pension account accumulated at retirement age. There are options for early retirement (with actuarially determined reduction of the conversion rate) and for choosing to receive a lumpsum payment instead of a pension. This old-age pension is funded by monthly contributions from the employer and the employee (deducted from salary) to an individual pension account which in addition is increased by a yearly interest accrual. The contributions are based on age and on a percentage of the contributory salary. Further funding of an individual pension account comprises mandatory transfers of funds made by new employees from plans of his/her former employers and discretionary contributions from the employee (with restrictions to maximum amounts). As a consequence of plan amendments in the past, certain age groups are granted guarantees of a minimum level of old-age pensions in case of early retirement. The cost with respect to early retirement of members from these age groups is borne by the employer.

Other benefits comprise survivors’/orphans’ pensions and/or lump-sum payments in case of death as well as disability pensions (if disabled before retirement age) and transfer of vested benefits in case of job changes. In these plans, which cover nearly all of the Group’s employees in Switzerland, the cost of the benefits is funded by payment of insurance premiums to group insurance contracts issued by Swiss Life Ltd (self-insurance) and is borne by the employer. In addition, the administration expenses of the plans are also borne by the employer since the personnel managing the plans are Swiss Life employees.

France
Pension plans in France are covered by various national agreements. Defined benefit plans in France cover retirement benefits for employees, including executive officers, based on the last salary, length of service, cause of termination and the respective national agreement. Furthermore, service anniversary bonuses are paid based on employee category and length of service.

Germany
Pension plans in Germany are governed by the Law on Occupational Retirement (BetrAVG). The BetrAVG is part of the general labour legislation, which means that the BetrAVG establishes no rules on funding benefit obligations. It only describes the different possible ways of funding benefit obligations without further details on the practice of funding.

There are various defined benefit plans in place. They provide pension benefits after reaching retirement age.

For some plans, the level of the pension benefits is determined by the years of service and the last salary before retirement according to the benefit formula as defined in the pension plan. Other benefits comprise widows’/widowers’ pensions in case of death as well as disability pensions (if disabled before retirement age). The levels of these benefits are determined similar to the old-age pensions assuming service up to normal retirement age. Widows’/widowers’ pensions are 60% of the old age/disability pension benefits.

For some plans, the level of old-age pensions is determined by yearly amounts. Contributions are made in the form of premiums to an individual insurance contract with Swiss Life Germany. The premium is a fixed amount, determined by the rules of the pension plan, and depends on the employee’s status. Every three years, there is an adjustment of the contribution amount due to the general development of salaries in the German insurance industry. There is a risk that the employer has to make additional payments in case the benefits of the individual insurance contract do not cover the benefits promised by the plan. Other benefits comprise lump-sum payments in case of death as well as disability pensions (if disabled before retirement age). The levels of these benefits are determined as fixed amounts by the plan depending on the employee’s status. This part of the plan is also covered by insurance contracts with Swiss Life Germany.

For some plans, a lump-sum benefit is provided when reaching retirement age. The capital benefit amount depends on the contributions and the performance of an underlying portfolio of assets. The benefit payable is the amount originally paid in plus interest.

Risks covered
With respect to its defined benefit plans the Group faces the risks of adverse development of the prominent actuarial/financial assumptions such as discount rates, mortality assumptions and future salary growth inherent in the measurement of plan liabilities. If the high-quality corporate bond yields (which are the basis for assessing the discount rate) decrease, the present value of the defined benefit obligation would increase, which would lead to a higher defined benefit liability in the consolidated balance sheet. However, this effect would be partly offset by the increase in the value of bonds in the plan assets. A higher defined benefit obligation would also result if the average life expectancy (longevity) or the rate of future salary growth were higher than the corresponding values reflected in the financial/actuarial parameters.

With respect to funded plans, the Group faces investment risk. In general, the return of plan assets – together with contributions – must be sufficient to cover the plan’s benefit promises. In particular, if the return is below the discount rate, an actuarial loss would be created with negative impact on the net benefit liability/asset and other comprehensive income. The mitigation of this risk depends on the nature of the benefit promises and the regulatory/legal framework of the plan, and is therefore country-specific.

Switzerland
The responsibility for maintaining a sufficient funding status lies with the foundations. In the case of underfunding (as assessed according to BVG rules, not IFRS) the foundations are required to take appropriate measures to restore a sufficient funding status. Potential measures that could be taken are adjustments to the pension accounts’ interest rate, benefit levels and regular employer/employee contributions. Furthermore, the foundations could require additional contributions from the employer and the employees. Because the funding status of the foundations in Switzerland is sufficient, it is not expected that any such additional contributions will be required in the near future.

The investment risk inherent in achieving an adequate return on the plan assets covering the pension accounts of active employees is borne by the foundations. In addition, the investment risk and actuarial risk relating to old-age pensions lie with the foundations. However, for the two major plans, all pensions which were already in payout before 1 January 2011 are fully covered under a group insurance contract issued by Swiss Life Ltd. Furthermore, all insurance risk relating to death/survivors’/disability benefits is fully covered by several group contracts issued by Swiss Life Ltd.

The objective of the investment process is to ensure that the return on the plan assets – together with the contributions – will be sufficient to fulfil the benefit promises. The investment strategy must be in line with the related BVG rules and regulations (e.g. requirements regarding diversification). The foundations are responsible for defining the investment strategy taking into account the objectives, benefit obligations and risk capacity. The implementation of the investment policy is delegated to an investment committee.

France
The investment risk inherent in achieving an adequate return on the plan assets in order to pay the promised benefits to employees as well as the mortality risk are borne by the company.

Germany
According to the German BetrAVG there are no specific rules regarding funding of pension obligations. The defined benefit plans are funded by individual insurance contracts with Swiss Life Germany that cover the promised benefits. Because of tax limitations, the individual insurance contracts do not cover the whole level of the benefit promises. Therefore, Swiss Life Germany has established a contractual trust arrangement to cover the additional risks from the pension plan. Plan risks mainly arise from salary increases and from an increase in pension payments.

For the plans that provide lump-sum benefits based on separate asset portfolios, the most significant but low risk is from capital markets fluctuations. The asset portfolios are broadly diversified with corporate bonds, German government bonds, covered bonds and exchanged-traded funds.

Amounts recognised as defined benefit assets/liabilities

In CHF million31.12.201631.12.2015
Present value of defined benefit obligation–3 537–3 325
Fair value of plan assets1 6841 599
NET DEFINED BENEFIT LIABILITY–1 853–1 726
 
Insurance contracts not eligible as plan assets under IFRS1 4771 459
NET DEFINED BENEFIT SURPLUS (+)/DEFICIT(-) (ECONOMIC VIEW)–376–267
 
The net defined benefit liability consists of
gross defined benefit liabilities–1 912–1 823
gross defined benefit assets5997

To assess the funding situation of the defined benefit plans in total, plan assets as well as insurance contracts not eligible as plan assets under IFRS must be set off against the present value of the defined benefit obligation. The total deficit taking into consideration insurance contracts not eligible as plan assets under IFRS amounted to CHF 376 million as at 31 December 2016 (2015: deficit of CHF 267 million).

Amounts recognised in profit or loss

In CHF million20162015
Current service cost11499
Past service cost2–7
Net interest cost1720
Settlements0
Employee contributions–31–27
TOTAL DEFINED BENEFIT EXPENSE10284

Defined benefit expense in 2015 comprises negative past service cost of CHF 7 million due to plan amendments in Switzerland.

Amounts recognised in other comprehensive income

In CHF million20162015
Actuarial gains and losses on the defined benefit obligation–193–216
Return on plan assets excluding interest income233
TOTAL REMEASUREMENTS OF THE NET DEFINED BENEFIT LIABILITY–191–183

Defined benefit plans

In CHF million20162015
   
CHANGES IN THE PRESENT VALUE OF THE DEFINED BENEFIT OBLIGATION
Balance as at 1 January–3 325–3 097
Current service cost–114–99
Past service cost incl. gains/losses from settlements–27
Interest cost–32–39
Contributions by plan participants–68–78
Actuarial gains (+)/losses (-) arising from
experience adjustments–75–91
changes in demographic assumptions541
changes in financial assumptions–123–166
Benefit payments191176
Settlement payments0
Effect ofbusiness combinations–14
Effect ofreclassifications and other disposals5
Foreign currency translation differences431
BALANCE AS AT END OF PERIOD–3 537–3 325
   
of which amounts owing to
active plan participants–1 756–1 650
retired plan participants–1 781–1 675
   
CHANGES IN THE FAIR VALUE OF PLAN ASSETS
Balance as at 1 January1 5991 519
Interest income1519
Return on plan assets excluding interest income233
Contributions by the employer10576
Contributions by plan participants6677
Benefit payments–96–82
Effect ofbusiness combinations11
Transfer to intragroup insurance contracts, reclassifications and other disposals–5–44
Foreign currency translation differences–1–12
BALANCE AS AT END OF PERIOD1 6841 599

Plan assets

In CHF millionQuoted market priceOtherTotal
31.12.201631.12.201531.12.201631.12.201531.12.201631.12.2015
Cash and cash equivalents30493049
Debt securities
Governments814814
Corporates1515
Equity securities
Oil and gas11
Industrials22
Consumer goods/services55
Health care44
Telecommunications00
Utilities00
Financials1414
Technology22
Investment funds
Debt616596616596
Equity430394430394
Balanced71697169
Other454369454369
Derivatives
Currency00
Property
located in Switzerland119119
Qualifying insurance policies62636263
TOTAL PLAN ASSETS1 1261 1085584911 6841 599
       
Plan assets include
own equity instruments1111

Principal actuarial assumptions

 Switzerland/LiechtensteinOther countries
2016201520162015
Discount rate0.6-0.7%0.6-1.0%1.5-1.8%1.9-2.4%
Future salary increases1.0-1.5%0.9-1.5%1.0-2.5%1.0-2.5%
Future pension increases0.0%0.0%1.0-1.8%1.0-2.0%
 
Ordinary retirement age (women)646463-6563-65
Ordinary retirement age (men)6564-6563-6563-65
Average life expectation at ordinary retirement age (women)25.324.8-24.923.2-29.823.2-28.8
Average life expectation at ordinary retirement age (men)22.3-23.221.5-22.419.8-27.719.8-25.6

A sensitivity analysis was performed for each significant actuarial assumption which shows the impact on the defined benefit obligation of changes in the respective actuarial assumptions that were reasonably possible at the balance sheet date. The calculation is done by leaving all other assumptions unchanged (i.e. at their value used in the calculation of the defined benefit obligation implicit in the net defined benefit asset/liability in the consolidated balance sheet as at end of period). In reality, it is unlikely that a change in assumption would happen in isolation. Some assumptions may well be correlated. In addition, the net effect in the consolidated balance sheet would also be driven by the change in the value of the plan assets.

At 31 December 2016, if the discount rate had been 50 basis points higher (lower), the defined benefit obligation would have decreased by CHF 258 million (increase CHF 293 million). At 31 December 2015, if the discount rate had been 50 basis points higher (lower), the defined benefit obligation would have decreased by CHF 240 million (increase CHF 272 million).

At 31 December 2016, if the future expected salary growth had increased (decreased) by 50 basis points, the defined benefit obligation would have increased by CHF 20 million (decrease CHF 19 million). At 31 December 2015, if the future expected salary growth had increased (decreased) by 50 basis points, the defined benefit obligation would have increased by CHF 18 million (decrease CHF 18 million).

At 31 December 2016, if the average life expectancy had increased by one year (for both men and women), the defined benefit obligation would have increased by CHF 113 million. At 31 December 2015, if the average life expectancy had increased by one year (for both men and women), the defined benefit obligation would have increased by CHF 105 million.

Expected benefit payments

Amounts in CHF million (if not noted otherwise)20162015
Duration ofthe defined benefit obligation (weighted average no. ofyears)15.615.5
   
Benefits expected to be paid (undiscounted amounts)
within 12 months150142
between 1 and 2 years148141
between 3 and 5 years430409
between 6 and 10 years662644

The contributions expected to be paid for the year ending 31 December 2017 are CHF 66 million. These contributions include amounts payable under insurance contracts issued to defined benefit plans covering own employees.

Defined contribution plans

Certain subsidiaries sponsor various defined contribution plans. Participation in the various plans is based either on completion of a specific period of continuous service or on the date of hire. The plans stipulate contributions by both employers and employees. The expenses under these plans amounted to CHF 1 million in 2016 (2015: CHF 1 million).

Equity compensation plans

For 2016, 2015, 2014, 2013 and 2012 participants in the share-based payment programme are allocated restricted share units (RSUs). RSUs grant the holder future subscription rights, entitling him or her to receive Swiss Life Holding shares free of charge after a three-year period has elapsed and if certain conditions are fulfilled.

The 2016 equity compensation plan is based on the new Group-wide programme “Swiss Life 2018”. For the purpose of supporting the achievement of the respective corporate goals, performance criteria have been determined by the Board of Directors analogously to the previous year’s objectives: IFRS profit (50% weighting), the risk and fee result (25% weighting) and cash to Swiss Life Holding for further strengthening of the financial substance and payout capacity (25% weighting).

The 2013–2015 equity compensation plans are based on the Group-wide programme “Swiss Life 2015”, which was announced at the Swiss Life Group’s Investors’ Day on 28 November 2012. On the basis of the medium-term planning 2013–2015 (2013 equity compensation plan) and 2014–2016 (2014 equity compensation plan), performance criteria relating to cost efficiency (50% weighting), the risk and fee result (25% weighting) and IFRS profit (25% weighting) have been determined by the Board of Directors. With regard to the 2015 equity compensation plan, the Board of Directors has set the following performance criteria on the basis of the medium-term planning 2015–2017: IFRS profit (50% weighting), the risk and fee result (25% weighting) and cash to Swiss Life Holding for further strengthening of the financial substance and payout capacity (25% weighting). After expiry of the three-year period of the RSU plan, the target value for each performance criterion according to the medium-term planning is compared with the actual result achieved. The share allocation corresponds to the number of allocated RSUs (1 RSU = 1 share) if all three performance criteria have been achieved or exceeded after the three-year period has elapsed; overperformance does not lead to a higher share allocation. If the targets are only partly achieved, the share allocation is correspondingly reduced in accordance with the weighting of the performance target concerned, or the RSUs expire worthless.

The RSU programmes also provide for adjustment and reclaiming mechanisms (clawback).

In 2012, the number of RSUs granted under this programme amounted to 94 040. The fair value at the measurement date amounted to CHF 93.77. The date of grant was 1 April 2012.

In 2013, the number of RSUs granted under this programme amounted to 74 630. The fair value at the measurement date amounted to CHF 127.34. The date of grant was 1 April 2013.

In 2014, the number of RSUs granted under this programme amounted to 58 800. The fair value at the measurement date amounted to CHF 203.54. The date of grant was 1 March 2014.

In 2015, the number of RSUs granted under this programme amounted to 51 660. The fair value at the measurement date amounted to CHF 205.87. The date of grant was 1 March 2015.

In 2016, the number of RSUs granted under this programme amounted to 51 270. The fair value at the measurement date amounted to CHF 215.66. The date of grant was 1 March 2016.

The fair value of the RSUs granted for each programme is determined at the grant date. The fair value was determined by an independent consulting company using the Black-Scholes formula. The associated expense during the vesting period is recognised under employee benefits expense with a corresponding increase in share premium.

The expense recognised for share-based payment amounted to CHF 12 million in 2016 (2015: CHF 12 million).

Share-based payment programmes (restricted share units)

Number of restricted share unitsBalance as at
1 January
IssuedEmployee departuresVestedBalance as at end of period
 
2016
Granted in 201373 010–380–72 630-
Granted in 201457 271–1 22956 042
Granted in 201549 735–1 31248 423
Granted in 201651 270–1 29949 971
 
2015
Granted in 201294 040–1 080–92 960
Granted in 201374 630–1 62073 010
Granted in 201458 800–1 52957 271
Granted in 201551 660–1 92549 735
 
2014
Granted in 201294 04094 040
Granted in 201374 63074 630
Granted in 201458 80058 800
 
2013
Granted in 201294 04094 040
Granted in 201374 63074 630
 
2012
Granted in 201294 04094 040

24 Income Taxes

Income tax expense

In CHF million20162015
Current income tax expense205208
Deferred income tax expense8381
TOTAL INCOME TAX EXPENSE289290

The expected weighted-average tax rate for the Group in 2016 was 23.5% (2015: 24.2%). This rate was derived by obtaining a weighted average of the expected income tax rates in the various jurisdictions in which the Group operates. The change of the weighted-average tax rate is due to the geographical allocation of the profits and the different tax rates in these jurisdictions. The actual income tax expense differs from the expected amount as follows.

Reconciliation of income tax expense

In CHF million20162015
   
PROFIT BEFORE INCOME TAX1 2151 168
 
Income tax calculated using the expected weighted-average tax rate285283
Increase/reduction in taxes resulting from
lower taxed income–91–41
non-deductible expenses6536
other income taxes (incl. withholding taxes)128
change in unrecognised tax losses–20–16
adjustments for current tax ofprior periods–5–16
changes in tax rates14–1
intercompany effects3119
other8–3
INCOME TAX EXPENSE289290

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same tax authority.

Deferred income tax assets and liabilities

In CHF millionDeferred tax assetsDeferred tax liabilities
31.12.201631.12.201531.12.201631.12.2015
Financial assets2462771 3651 153
Investment property84788696
Intangible assets5043171167
Property and equipment131410
Financial liabilities3544232926
Insurance liabilities2833145152
Employee benefits1321118279
Deferred income2300
Other1341116846
Tax losses238
DEFERRED INCOME TAX ASSETS/LIABILITIES9896462 9482 319
Offset–950–599–950–599
TOTAL DEFERRED INCOME TAX ASSETS/LIABILITIES39471 9981 720

The movements in net deferred income tax assets/liabilities during the period were as follows.

In CHF millionBalance as at 1 JanuaryRecognised in profit or lossRecognised in other comprehensive incomeAcquisitions and disposals of subsidiariesForeign currency translation differencesBalance as at end of period
       
MOVEMENTS BY TYPE OF TEMPORARY DIFFERENCE DURING THE YEAR 2016
Financial assets–8761–2462–1 119
Investment property–692–9111–780
Intangible assets–124–510–31–121
Property and equipment14–1012
Financial liabilities16–616025
Insurance liabilities–119101–117
Employee benefits32117050
Deferred income3–102
Other651066
Tax losses815–123
NET DEFERRED INCOME TAX ASSETS/LIABILITIES–1 673–83–203–33–1 959
 
MOVEMENTS BY TYPE OF TEMPORARY DIFFERENCE DURING THE YEAR 2015
Financial assets–1 153–9262024–876
Investment property–628–6906–692
Intangible assets–1251–44–124
Property and equipment16–2014
Financial liabilities16200–316
Insurance liabilities–108–1403–119
Employee benefits180161–332
Deferred income2103
Other6517–14–265
Tax losses18–8–28
NET DEFERRED INCOME TAX ASSETS/LIABILITIES–1 879–81260127–1 673

Deferred tax liabilities have not been recognised on the aggregate amount of temporary differences with consolidated investments in subsidiaries to the extent the Group considers such undistributed earnings as being indefinitely reinvested. The amount of such temporary differences was approximately CHF 8.7 billion as at 31 December 2016 (2015: CHF 7.4 billion). If such amounts from entities controlled by the Group are ever distributed, no material tax liabilities would be incurred due to participation exemption rules, unrecognised tax loss carryforwards and applicable double taxation treaties.

Deferred tax assets are recognised for tax-loss carryforwards only to the extent that realisation of the related tax benefit is probable. Swiss tax assets are calculated in accordance with cantonal and municipal tax legislation. The uncertainty of the utilisation of tax losses is taken into account in establishing the valuation allowance. For the following tax-loss carryforwards, which will expire as follows, no deferred tax asset has been recognised.

Unrecognised tax losses

Amounts in CHF millionTax lossesTax rate
31.12.201631.12.201531.12.201631.12.2015
20172221.2%15.5%
20183221.2%15.5%
20192021.2%15.5%
Thereafter32342117.6%17.5%
TOTAL330425n/an/a

25 Provisions

In CHF millionRestructuringLitigationOtherTotal
20162015201620152016201520162015
Balance as at 1 January182866841816101128
Additional provisions made69411571527
Amounts used–11–17–6–10–1–3–18–29
Unused amounts reversed–30–14–13–6–1–23–15
Unwinding of discount and effect of change in discount rate000000
Reclassifications and other disposals000
Foreign currency translation differences0–2–1–70–1–1–10
BALANCE AS AT END OF PERIOD11184966161875101

Restructuring

Provisions for restructuring were set up in Switzerland, Germany, Liechtenstein and Luxembourg in 2016 and 2015. The outflow of the amounts is expected within the following one to two years.

Litigation

“Litigation” relates to several proceedings in several jurisdictions with uncertain outcome including customer claims relating to the distribution units in Germany. Litigation provisions have been set up to cover legal and administrative proceedings that arise in the ordinary course of business. These provisions concern numerous cases that are not of public knowledge or whose detailed disclosure could prejudice the interests of the Group.

Other

“Other” comprises various liabilities of uncertain timing or amount (e.g. indemnification provision relating to property development and management).

26 Equity

Share capital

As at 31 December 2016, the share capital of Swiss Life Holding consisted of 32 081 201 fullypaid shares with a par value of CHF 5.10 each (2015: 32 081 054 fully-paid shares with a par value of CHF 5.10 each). In exercising voting rights, no shareholder can collect more than 10% of the total share capital directly or indirectly in respect of own shares or shares they represent. Conditional share capital was CHF 30 599 250.30 as at 31 December 2016 (2015: CHF 30 600 000.00).

In 2016, convertible bonds were converted into 147 Swiss Life Holding shares with a corresponding increase in share capital of CHF 749.70 and an increase in share premium of CHF 31 552.91.

Share premium

Share premium comprises additional paid-in capital in excess of the par value (net of transaction costs), gains/losses on own equity instruments and equity compensation benefits.

In 2016, a distribution to shareholders out of the capital contribution reserve of CHF 271 million (CHF 8.50 per registered share) was made (2015: CHF 207 million, CHF 6.50 per registered share).

Number of shares

The following table shows the development of Swiss Life Holding shares issued and treasury shares held by the Swiss Life Group during the period.

Number of shares20162015
   
SHARES ISSUED
Balance as at 1 January32 081 05432 081 054
Conversion of convertible debt147
SHARES ISSUED AS AT END OF PERIOD32 081 20132 081 054
   
TREASURY SHARES
Balance as at 1 January254 495192697
Purchases of treasury shares11 472158 001
Sales of treasury shares–7
Allocation under equity compensation plans–76 090-96 203
BALANCE AS AT END OF PERIOD189 870254 495

Foreign currency translation differences

Foreign currency translation differences comprise the resulting differences arising on the translation of assets, liabilities, income and expenses of Group entities denominated in foreign currencies into Swiss francs.

Accumulated other comprehensive income

Accumulated other comprehensive income comprises items of income and expense that are recognised directly in equity rather than in profit or loss, as required or permitted by certain IFRSs.

Items presented in other comprehensive income are grouped on the basis of whether they will be reclassified subsequently to profit or loss when specific conditions are met, and those that will not be reclassified.

The amounts are presented net of certain policyholder bonuses and other policyholder liabilities, deferred acquisition costs, deferred income taxes and non-controlling interests.

Items that may be reclassified to profit or loss comprise:

  • Foreign currency translation differences arising on the translation of assets, liabilities, income and expenses of Group entities denominated in foreign currencies into Swiss francs.
  • Gains and losses from fair value changes of financial assets available for sale.
  • Effective portion of gains and losses on hedging instruments in qualifying cash flow hedges.
  • Other items consisting of unrealised losses on financial assets reclassified from available for sale to loans in 2008 due to the disappearance of an active market, and the Group’s share of other comprehensive income of investments in associates accounted for using the equity method.

Items that will not be reclassified to profit or loss comprise:

  • Revaluation surplus on the transfer of owner-occupied property to investment property following a change in use evidenced by the end of owner-occupation.
  • Remeasurements of the net defined benefit liability relating to employee benefit plans.

The following table provides information relating to amounts recognised in accumulated other comprehensive income.

Accumulated other comprehensive income for the year 2016

In CHF million    Items that may be reclassified to the income statement   Items that will not be reclassified to the income statement Total
 NotesForeign currency translation differencesGains/ losses financial assets available for saleGains/ losses cash flow hedgesOther itemsTotalRevaluation surplus investment propertyRemeasurements net defined benefit liabilityOther itemsTotal 
Net balance as at 1 January –1 1572 853436–532 07966–296–2301 849
Reclassification of policyholder participation and income tax effects 22–2–2
Net other comprehensive income 08312823882–1–59–59824
NET BALANCE AS AT END OF PERIOD –1 1573 685464–302 96264–353–2892 673
            
NET OTHER COMPREHENSIVE INCOME IS COMPOSED OF THE FOLLOWING: 
Revaluation - gross9383 076663 181–191–1912 990
Net investment hedges - gross9–85–85–85
Reclassification to profit or loss - gross8, 9–433–26451–414–414
Effects of 
policyholder participation 34–1 5220–15–1 5040117117–1 387
shadow accounting –65–5–1–6900–69
income tax 11–218–6–6–21901717–203
foreign currency translation differences –7–10–8–100–9
Net other comprehensive income before non-controlling interests –18322823883–1–59–59824
Non-controlling interests 100010001
NET OTHER COMPREHENSIVE INCOME 08312823882–1–59–59824

Accumulated other comprehensive income for the year 2015

In CHF million    Items that may be reclassified to the income statement   Items that will not be reclassified to the income statement Total
 NotesForeign currency translation differencesGains/ losses financial assets available for saleGains/ losses cash flow hedgesOther itemsTotalRevaluation surplus investment propertyRemeasurements net defined benefit liabilityOther itemsTotal 
Net balance as at 1 January –8663 852378–1323 23271–236–1653 067
Reclassification of policyholder participation and income tax effects –5353
Net other comprehensive income –291–9475827–1 153–5–60–65–1 218
NET BALANCE AS AT END OF PERIOD –1 1572 853436–532 07966–296–2301 849
   
NET OTHER COMPREHENSIVE INCOME IS COMPOSED OF THE FOLLOWING: 
Revaluation - gross9–294–2 439146–2 587–183–183–2 770
Reclassification to profit or loss - gross8, 90–527–8641–471–471
Effects of 
policyholder participation 1 746–46–291 67101041041 775
shadow accounting 66–6–1590059
income tax 270–20–724401616260
foreign currency translation differences –64–80–71–52–3–74
Net other comprehensive income before non-controlling interests –294–9475827–1 156–5–60–65–1 221
Non-controlling interests 300030003
NET OTHER COMPREHENSIVE INCOME –291–9475827–1 153–5–60–65–1 218