Report of the Statutory Auditor
to the General Meeting of
Swiss Life Holding Ltd
We have audited the consolidated financial statements of Swiss Life Holding Ltd and its subsidiaries (the Group), which comprise the consolidated balance sheet as at 31 December 2016 and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2016 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.Basis for opinion
We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report.
We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.Our audit approach
We designed our audit by determining materiality and assessing the risks of material misstatement in the consolidated financial statements. In particular, we considered where subjective judgements were made; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.Materiality
The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the consolidated financial statements as a whole.
We agreed with the Audit Committee that we would report to them misstatements above CHF 3 million identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
As set out in note 22 – Insurance Liabilities and Reinsurance Assets – Net future life policyholder benefits amount to CHF 96 800 million.
Policyholders’ benefits represent the estimated future benefit liability for traditional life insurance policies and include the value of accumulated declared bonuses or dividends that have vested to policyholders. The reserves for life benefits for participating traditional life insurance policies are calculated using a net level premium valuation method. The calculation of reserves depends on the type of profit participation and is based on actuarial assumptions, such as guaranteed mortality benefits, interest rates, persistency, expenses and investment return, plus a margin for adverse deviations.
We focused our audit on these liabilities due to their significance to the consolidated financial statements, the sensitivity to changes in the economic conditions, and the level of management judgment involved in setting assumptions. Management’s process for updating assumptions varies by territory and product.
Further, our audit procedures focused on the Swiss future life policyholder benefits as with 78% they make up the majority of the future life policyholder benefits on the Group’s balance sheet.
Management assesses the appropriateness of the main assumptions used for the calculation of these liabilities at each reporting date.
Our audit procedures relating to actuarially determined liabilities primarily consist of testing the models used in developing these balances, reviewing management’s assumptions in light of current market conditions, industry developments and policyholder behaviour, and obtaining comfort over the completeness and accuracy of underlying data used in the calculations. We examined the biometric assumptions, such as mortality and disability and additional assumptions, such as investment return in light of the current market environment, the expected development within the industry as well, as the behaviour of insurers.
The future life policyholder benefits are calculated using a discount rate. We have reviewed significant assumption changes made during the year with a focus on the interest rate used in the traditional life insurance policies. In assessing the interest rate used, we confirmed that the interest rates are supported by the anticipated economic performance of the assets backing the liability when considering any planned changes in asset strategy and reinvestment. In particular, we assessed the different components of the discount rate on a portfolio level (“individual life” and “group life”). We were supported by actuarial specialists in our audit work of all full scope units. Our audit procedures for the discount rate included, but were not limited to:
Unsere Arbeiten im Zusammenhang mit dieser Prüfung beinhalteten unter anderem:
Based on the work performed, we determined that the methodologies and assumptions used in the valuation of actuarially determined future life policyholder benefits are reasonable and in line with financial reporting requirements and industry accepted practice.
As elaborated in note 17 – Intangible Assets including Intangible Insurance Assets – 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 existing goodwill amounts to CHF 1238 million as a result of various business combinations, mainly Swiss Life Select, Lloyd Continental, CapitalLeben and Corpus Sireo. Goodwill is subject to management testing, at least annually, for impairment at the cash generating unit level.
The recoverable amounts have been determined on a value-in-use basis and use cash flow projections based on financial budgets approved by the management and the board of directors. The calculations are based on present values that traditionally use a single set of estimated cash flows and a single discount rate. The cash flow projections cover a three-year, or five-year period, respectively, and consider a terminal value after such period, based on long-term growth assumptions in the various geographical markets, which is material to the overall value-in-use.
As the actual cash flows naturally vary from planned projections, management have created detailed sensitivity analyses. The sensitivity analyses provide insights as to the recoverability of goodwill when the assumptions used in the planned projections, individually or as a whole, are not met.
We focused on goodwill, since the cash flow projections extend into the future and are based on significant management judgement, as to the development of the acquired businesses.
In addition, a significant driver of the value-in-use is the discount rate, which is based on the weighted average cost of capital. Our focus was on the determination of the discount rate used.
We obtained the mid-term planning documents for the individual cash generating units, as approved by management and the board of directors, including details on certain planned activities supporting the expected development. In particular, we challenged management as to the feasibility of reaching the planned cash flows. As part of our procedures, we have been supported by our valuation experts.
An element of placing trust in planned cash flows is the extent they were reached in the past. Where actual results varied from planned results, we inquired as to the reasons and potential impact they may have, in reaching future goals.
We also reviewed management’s sensitivity analyses to ascertain the level of prudency used.
As for the long-term growth rate used at the end of the mid-term planning period, we compared it to the economic environment and industry trends.
In addition, we assessed the main parameters used in the calculation of the weighted average cost of capital, from which the discount rate is derived. In particular, we identified the market data inputs used by the Group and tested these against independent data.
Overall we found the value of goodwill for all businesses acquired to be supportable.
As set out in note 14 – Investment Property – property held for investment purposes amount to CHF 23 801 million.
We focused on the investment property due to the size of such property with respect to the total amount of invested assets and the fact that there is management judgement involved in determining the fair value. Further, we focused our audit procedures performed on Swiss Life Switzerland, as the value of investment property provides for 83% of the investment property on the Group’s balance sheet.
The valuation of investment property is determined either on the basis of periodic independent valuations or by using discounted cash flow projections. Ordinarily the valuation of each investment property is determined by an independent recognised valuation expert on an annual basis. The fair value of an investment property is measured based on its highest and best use.
The fair value is ordinarily derived using the generally accepted discounted cash flow method. Consideration is given to the assumed expected rental revenue, over the period in use of the investment property, and discounted using a rate which reflects the risk assessment of the investment property. The fair value of investment property is sensitive to a) the development of the real estate market for residential, commercial, and mix-use properties in general, to b) the expected rental revenue, and c) the discount rate.
We assessed the overall portfolio structure, compared the current portfolio to the prior year, and assessed the overall process of determining the fair values.
Based on the overall risk assessment, we selected individual investment properties for an individual valuation review. Our sample selection was conducted using specified criteria, such as location, market value, market value deviation compared to the previous year, type of use, and acquisitions of investment property during the reporting period.
During the audit we have been supported by our real estate valuation experts. In particular, our valuation review included the following:
In addition, we assessed the average discount rate resulting from valuing the investment property portfolio and compared it to market data.
We compared the booked values with the valuation results of the valuation experts. We examined if the carrying values as well as the valuation adjustments (if applicable) were correctly booked.
We consider the valuation methodology, and the underlying valuation parameters used, to be reasonable.Other information in the annual report
The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements and the remuneration report of Swiss Life Holding Ltd and our auditor’s reports thereon.
Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.Responsibilities of the Board of Directors for the consolidated financial statements
The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law, ISAs and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
A further description of our responsibilities for the audit of the consolidated financial statements is located at the website of EXPERTsuisse. This description forms part of our auditor’s report.
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.We recommend that the consolidated financial statements submitted to you be approved.
Auditor in charge
Zurich, 13 March 2017