Market Consistent Embedded Value (MCEV) - Swiss Life - Online ...

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Market Consistent Embedded Value37The MCEV for covered business is broken down into thenet asset value (NAV), i.e., the value of assets not backingliabilities, and the value of in-force business (VIF), i.e., thevalue of future profits emerging from operations andassets backing liabilities.The net asset value is split between:– the required capital (RC): the amount of capitalprovided by shareholders deemed necessary to run thebusiness under the chosen definition (see section 4.1)– the free surplus (FS): additional capital allocated to thecovered business above the required capitalThe value of in-force covered business is defined as thesum of:– the certainty equivalent value of future profits (CEV)– the time value of financial options and guarantees(TVOG), including the cost of credit risks– the cost of residual non-hedgeable risks (CNHR)– the frictional costs of required capital (FC)The IFRS net asset value (IFRS NAV) is defined as theunadjusted IFRS net asset value allocated to the non-coveredbusiness.For more details about the MCEV components, see section4 on methodology. Please note that the notion of certaintyequivalent value is equivalent to the notion of presentvalue of future profits in the CFO Forum Principles.Swiss Life — Financial Statements 2010
38Market Consistent Embedded Value2 Summary of MCEV ResultsDuring 2010, the capital markets were characterised bystrong movements of the relevant interest rates and adecline of the euro and the US dollar against the Swissfranc. While interest rates recovered from their historiclows in the third quarter, they are still below their levels asper end of year 2009 while their volatilities increased. Inthe context of the ongoing margin management and topreserve current and future margins, the company has,among various reassessments performed during 2010,adjusted its approach to policyholder participation.All results and components are shown in CHF million.Rounding differences may occur.2.1 GROUP MCEVThe following table shows MCEV key results as at31.12.2010 compared to the results as at 31.12.2009:In CHF millionValue ofNet asset value in-force business Total Total2010 2009Covered business 1 928 3 032 4 959 4 132Non-covered business 2 636 n/a 1 2 636 2 745GROUP MCEV 4 563 3 032 7 595 6 877Value of new business 209 123Total MCEV earnings 1 424 6511 n/a: not applicableThe Group MCEV includes the covered as well as the noncoveredbusiness. The covered business is valued accordingto the MCEV methodology. The value of the noncoveredbusiness included in the Group MCEV is theunadjusted IFRS net asset value.The Group MCEV increased by 10%. The value of the noncoveredbusiness is slightly below the previous year’s level.Despite the adverse economic environment and the weakenedeuro, the value of covered business increased by 20%.Drivers for the increase are the profitable new business,margin management measures and favourable demographicexperience.The increase in value of new business by 70% and of thenew business margin from 0.9% to 1.4% is driven bychange in business mix, change to the profit sharingapproach and the continuous margin management.2.2 MCEV OF COVERED BUSINESSThe following graph and table show the MCEV by components,together with the previous year’s figures:MCEV of Covered Business 2010CHF million5 797CEV1 892RC35 FS–1 912TVOGNAV–507CNHR–346FC3 032VIF1 928NAV4 959MCEVCEV Certainty equivalent valueTVOG Time value of options and guaranteesCNHR Cost of non-hedgeable risksFC Frictional costsVIF Value of in-force businessRC Required capitalFS Free surplusNAV Net asset valueMCEV Market consistent embedded valuescaling only indicative
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Market Consistent Embedded Value (MCEV) - Swiss Life - Online ...

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