Credit Suisse Group 6-K 2006
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of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
For the month of May 3, 2006
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Credit Suisse Group announces the disclosure of European Embedded Value for Winterthur's Life & Pensions business
Zurich, May 3, 2006 Credit Suisse Group today disclosed the European Embedded Value (EEV) for Winterthur, its insurance business. EEV is a quantitative framework providing additional insights on life insurance businesses and their development to complement financial statements.
Winterthur benefited from further operational improvements in the in-force business, profitable New Business generation and favorable equity markets. Lower interest rates and higher capital market volatilities had an adverse impact on EEV, but the effect has been partly mitigated through Winterthur's asset liability management. To provide further transparency, Credit Suisse Group also disclosed relevant EEV sensitivities and a reconciliation to Winterthur's US GAAP equity.
Winterthur's EEV numbers are based on the EEV Principles set by the CFO Forum, a working group representing 19 leading European insurers including Winterthur. The member companies agreed to apply these principles in the form of supplementary reports as of year end 2005 with the goal to improve transparency and comparability of embedded value reporting across Europe. The EEV methodology that has been adopted by Winterthur and on the basis of which Winterthur's EEV will be disclosed annually in the future, uses a bottom-up market consistent approach to set the economic assumptions and to allow explicitly for the risk inherent to the life insurance business.
"The release of Winterthur's EEV on a market-consistent basis will allow our shareholders and stakeholders to properly analyse our Life & Pensions insurance business. By implementing the CFO Forum's principles, we demonstrate our commitment to provide solid, robust and transparent information. The EEV numbers deliver, together with the financial statements, a clear picture on the progress we have made with Winterthur over the last three years," said Renato Fassbind, CFO of Credit Suisse Group.
Media Relations Winterthur, telephone +41 52 261 77 44, firstname.lastname@example.org
Credit Suisse Group
Cautionary Statement Regarding Forward-Looking Information
Cautionary statement regarding non-GAAP financial information
— List of contents
The members of the Board of Directors of Winterthur believe that embedded value information, in conjunction with other publicly disclosed financial information, can provide additional insights for parties interested in the development of the Groups life and pensions businesses as well as its long-term health insurance activities. The EEV disclosure should not be viewed as a substitute for Winterthurs consolidated financial statements. The supplementary EEV information is reported along the same lines as the new segmentation in the consolidated financial statements. To allow for a broader picture, a reconciliation to the Group's US GAAP2 equity is also provided.
A key requirement of the EEV Principles is the inclusion of an appropriate allowance for aggregate risks. Winterthur has chosen a market consistent approach to set the economic assumptions for the majority of the businesses covered by the EEV in order to allow for market risks. This means that the economic assumptions have been calibrated to the market prices of a range of capital market instruments at the valuation date. Furthermore, the Time Value of Options and Guarantees (TVOG) has been valued explicitly and an allowance has also been made for non-market risks.
The Board of Directors has approved the disclosure of the EEV supplementary information which is in accordance with the EEV Principles.
Deloitte & Touche LLP was appointed to review the Groups Life & Pensions segment EEV calculation and disclosure. The scope and the results of its independent review are set out in the Appendix.
The EEV results cover businesses reported in the Life & Pensions segment: Life insurance, savings, pension and annuity, health insurance and disability business written by Winterthurs life and pensions businesses. In addition, the results of businesses providing administration, investment management and other services (including the Corporate Center) have been included to the extent that they are related to the covered business and are reported in the Life & Pensions segment.
For the covered business, more than 99% of technical reserves and pension fund assets under management are included on an EEV basis. The remaining operations in the Life & Pensions segment are included on the basis of their US GAAP equity; segment goodwill is eliminated.
The following geographical areas have been defined within the Life & Pensions segment in accordance with the presentation in the consolidated financial statements:
The Other Activities segment includes all business managed by Closed Portfolio Management, including business which has been placed into run-off or has been divested in transactions where the Group retains some form of liability (including through the reinsurance arrangements of former Group companies).
The Life & Pensions segment EEV as at December 31, 2005, was CHF 6,117 million. It increased by CHF 646 million compared to the 2004 values. An analysis of change explaining the movements from 2004 to 2005 is shown in the relevant section.
The Adjusted Net Asset Value (ANAV) grew by 25% to CHF 2,558 million. This was driven mainly by high current year profits and the increase in unrealized capital gains due to the favorable development of most of the relevant equity markets. Net
capital outflows from the Life & Pensions segment and the new business strain reduced the overall increase in the ANAV.
The Present Value of In-Force (PVIF) increased by 5% to CHF 5,037 million, with substantial variations across the geographical areas. The change in the PVIF was mainly driven by the transfer of current year profits to the ANAV, changes in interest rates and new business written during the year, as well as operating assumption changes. Economic assumption changes due to lower interest rates had a negative impact on the PVIF while on a Group-wide basis operating assumption changes had a positive impact.
The TVOG changed from CHF -470 million as at December 31, 2004, to CHF -686 million as at December 31, 2005, with substantial variations across the geographical areas. Most of the TVOG arises in Switzerland and Germany. The increase in the TVOG was mainly due to the substantial increase in the corresponding interest rate volatilities between the opening and closing valuation dates, although hedging measures implemented during the year partially mitigated this adverse impact.
The Cost of Capital (CoC) changed from CHF -884 million to CHF -792 million despite the general growth of the underlying business. This was mainly driven by a reduction in the required capital (on which frictional costs are incurred) in Switzerland as a result of an increase in the policyholder surplus available to support the solvency capital requirements. In addition to frictional costs, the CoC contained an explicit charge of CHF 447 million for the cost of non-market risks in respect of the businesses that explicitly calculated the TVOG.
The Value of New Business (VoNB) amounted to CHF 260 million, with contributions from all geographical areas. The high contribution from MGI Overseas was driven by the relatively low levels of guarantees embedded in the new business.
The return on EEV reflects the change in the EEV and allows for the dividends paid to shareholders during the year, as well as other capital flows into or out of the Life & Pensions segment or across geographical areas within the segment.
The overall return on EEV amounted to 15%, of which 1% was due to favorable foreign exchange (FX) rate movements. All geographical areas contributed to the positive return on EEV, with the largest relative return of 39% at year-end 2005 exchange rates in MGI Overseas. Overall, the net capital flows of the Life & Pensions segment amounted to CHF -200 million thus being an outflow of the Life & Pensions segment. Capital inflows have generally been used to strengthen the capital base of some businesses in MGI Europe and MGI Overseas. Capital outflows are generally dividend payments out of the segment or a geographical area and transfers out of the Life & Pensions segment.
Switzerland: The return on EEV for Switzerland was 18%. This resulted from the strong 2005 profits and high asset returns (on equities and foreign currency denominated assets), while lower Swiss franc interest rates and increasing volatilities had an adverse impact. The capital outflow was mainly due to the net impact of dividends paid and received and other transfers.
Germany: Germany had a return of 2% at year-end 2005 exchange rates (3% overall return), which mainly reflected the decreasing interest rates during the course of 2005 and increasing interest rate volatilities. Operating assumption changes had a positive overall impact. The capital outflow was driven by dividends payments out of the segment.
MGI Europe: MGI Europe achieved a return of 8% at year-end 2005 FX rates. The UK business contributed most to the return as a result of favorable equity markets that increased the asset base in the unit-linked business and therefore increased future fee income, as well as increasing the value of the participating business. The Central and Eastern European and Spanish businesses achieved positive returns, while the Belgian and Dutch businesses experienced negative returns. The capital inflows were mainly related to funding for the Slovakian business.
MGI Overseas: MGI Overseas achieved a high return of 39%, driven both by new business and strong equity capital markets. Economic assumption changes had different impacts on the individual businesses depending on their product mix. The capital inflows were used to strengthen the capital base of the businesses and to finance new business.
Other: The change in the geographical area Other reflected the net impact of changes in the consolidation effects and centrally managed FX hedges. It also included changes in the value of the consolidated investment companies net of tax and policyholder participation as well as dividends paid by the consolidated investment companies and other transfers.
The following sections describe the components of the Life & Pensions EEV and the methodology adopted, as well as providing detailed results.
The components of the EEV are depicted in the diagram below. An important element of the market consistent approach is the derivation of a market value balance sheet. The market value of the assets is used to fund future policyholder cash flows on the basis of risk-free interest rates (the certainty equivalent value of liabilities), the TVOG and the CoC. The remainder of the market value of assets represents the EEV. The EEV as illustrated below is the total of the ANAV, the PVIF, the TVOG and the CoC.
Bottom-up calculations are performed for each business and are based on the cash flows of that business, allowing for both external and intra-Group reinsurance. Where one part of the covered business has an interest in another part of the covered business, the EEV of that business excludes the EEV of the dependent business. This applies in particular to the Swiss and German businesses, which own several life insurance subsidiaries.
The ANAV is the market value of the shareholders' funds and the after-tax shareholders' interest in the surplus at the valuation date, excluding goodwill. It is presented as the sum of the required capital and free surplus. The level of the required capital for each business is the greater of the EU solvency margin and the local statutory solvency margin, with both items being adjusted for the policyholders surplus (e.g. free reserves for future policyholder profit sharing). The definition of required capital is consistently used for both existing and new business.
Switzerland: The ANAV increased by 64% to CHF 958 million during 2005, reflecting current year profits and the equity market performance. At the same time, the required capital decreased as a result of the increased policyholder surplus that supports solvency requirements. The combined effect was that the free surplus increased from CHF -629 million to CHF 302 million. The negative surplus shown for 2004 is due to the segmental presentation of the geographical area Switzerland in the consolidated financial statements. The legal entity Winterthur Life had solvency margin cover in 2004 and 2005, which exceeded 150%.
Germany: The ANAV increased by CHF 34 million, with a net outflow from the segment (dividends were paid out of the segment). The required capital increased as a result of business growth in the Dutch subsidiary during 2005.
MGI Europe: Overall, the ANAV increased by CHF 155 million. This increase was partly due to capital injections to fund new business in 2005 and future growth. As a result of business growth, required capital increased by 10% to CHF 530 million.
MGI Overseas: The ANAV increased by CHF 70 million, driven by a net inflow of capital into this geographical area. As in the case of MGI Europe, the acquisition expense for new business in MGI Overseas in 2005 placed a substantial strain on the ANAV. As a result of the growth in business volumes, required capital increased from CHF 40 million to CHF 55 million.
Other: As mentioned previously, the change in the geographical area Other reflected the net impact of changes in the consolidation effects and centrally managed FX hedges. It also included changes in the value of the consolidated investment companies net of tax and policyholder participation as well as dividends paid by the consolidated investment companies and other transfers.
The PVIF for the main businesses is determined by projecting cash flows under the assumption that the future investment returns on all assets are equal to the rates
implied by the risk-free interest curve at the valuation date. The other assumptions (including expenses, surrender rates, mortality and morbidity rates, shareholder participation rates and tax rates) are generally set on a best estimate basis that reflects each business recent experience and expected future trends. The projection models allow, where appropriate, for the effect of management actions and/or anticipated policyholder behavior. Depending on the economic conditions, future assumptions such as bonus rates, asset mix, surrender rates or annuity option take-up rates may vary. For example, the best estimate surrender and annuity take-up rates are varied, depending on the difference between the total interest rate credited to policyholders and the returns from a benchmark portfolio. The resulting statutory shareholder profits are discounted at the risk-free interest rates and this is defined as the certainty equivalent" PVIF. This value takes account of the intrinsic value of the options.
The PVIF for the German health insurance business which is characterized by the absence of long-term interest rate guarantees in the products and some of the smaller businesses is determined by projecting cash flows using best estimate investment assumptions. The resulting projected shareholder profits are discounted at risk discount rates that include a margin to cover aggregate risks.
The following table shows the PVIF by geographical area.
Overall, the PVIF increased by 5% to CHF 5,037 million at end-2005. The change is driven by the transfer of current year profits to the ANAV and changes in economic and operating assumptions, as well as by the new business written during the reporting period.
Switzerland: The PVIF for Switzerland decreased to CHF 2,638 million at end-2005. The market consistent roll-forward increases the PVIF and it is reduced by the expected transfer to the ANAV. However, the actual transfer was higher than expected due to changes to the bond portfolio. This effect coupled with the reduction in interest rates during 2005 led to a lower PVIF at the end of the year.
Germany: Germany's PVIF decreased marginally from CHF 523 million in 2004 to CHF 517 million in 2005 as a result of a number of opposite effects in its businesses. While the interest rate decrease during 2005 had a negative impact on the PVIF of the businesses, changes to the operating assumptions as well as new business increased the PVIF for Germany.
MGI Europe: MGI Europe recorded an increase in the PVIF of 15% to CHF 1,409 million at end-2005. New business sold in the reporting period contributed to this increase, while economic variances had differing impacts on the businesses. The UK business, with its large unit-linked book, and the businesses in Central and Eastern Europe had a generally positive variance due to higher funds under management at the end of the year. The businesses operating in the euro zone had a negative economic variance due to lower interest rates. Generally, operating assumption changes contributed to the increase in the PVIF.
MGI Overseas: MGI Overseas recorded an increase in the PVIF of 50% to CHF 473 million at end-2005. This increase was driven by the new business sold during the reporting period, while changes in the economic environment had differing impacts on the businesses, depending on their product mix.
Other: The Other geographical area does not include any insurance business and therefore has no PVIF.
The TVOG is determined explicitly for the major businesses as the difference between the stochastic PVIF and the certainty equivalent PVIF or is determined directly using closed form formulas. The stochastic" PVIF is defined as the average over hundreds of economic scenarios of the deflated value of the projected after-tax statutory shareholder profits. The economic scenarios that represent possible future outcomes for market variables such as interest rates and equity returns and the corresponding deflators (i.e. scenario-specific discount rates) are market consistent, i.e. they have been calibrated to the market prices of a range of capital market instruments at the valuation date.
The calibration process is carried out as follows:
Deflators are calibrated to a range of different financial instruments such as interest rate swaps, interest rate swaptions, equity options and bonds. This is a prerequisite for the market consistent valuation of shareholder cash flows.
The following table shows the TVOG for the businesses that have determined these values explicitly (the TVOG for the smaller businesses and the German health business is implicitly allowed for within the risk margin in the risk discount rates). The TVOG is divided by the corresponding statutory technical reserves to provide an indication of the relative importance of the options and guarantees in the portfolios.
Overall, the TVOG changed from CHF -470 million at end-2004 to CHF -686 million at end-2005 due to an increase in the implied market volatilities between the valuation dates. Furthermore, depending on the level of interest rate guarantees, the change in interest rates moved the options in some portfolios closer to the money, which leads to a higher TVOG.
Switzerland: Switzerland accounted for CHF -471 million of the TVOG at end-2005. This represented a change of CHF -133 million compared to 2004. The reasons for the relatively high ratio of the TVOG as a percentage of the reserves (0.9% at end-2005) were the significant increase in Swiss franc interest rate volatility over the year as well as a high proportion of participating business with interest rate guarantees. A further contributor to the TVOG was the fact that a proportion of the assets were held in foreign currencies. The change in the TVOG
was partly mitigated by the interest rate hedging programs established during 2005.
Germany: The TVOG for the German life business reflects the impact of the inherent smoothing of policyholder bonus reserves in the local statutory accounts. It allows for management actions to vary future policyholder profit sharing and asset allocation depending on the level of free assets and investment returns. The TVOG changed from CHF -43 million to CHF -95 million and relates to the traditional participating business with interest rate guarantees. The increase is explained by higher interest rate volatilities and the decrease in the market interest rates.
MGI Europe: The TVOG in MGI Europe amounted to CHF -100 million at end-2005, representing a change of CHF -33 million compared to 2004. This was again driven by higher interest rate volatilities and relates primarily to the technical interest rate guarantees associated with traditional participating business in the Benelux businesses and Spain.
MGI Overseas: The TVOG in MGI Overseas of CHF -20 million at end-2005 is mainly related to the guaranteed death benefits for the whole of life unit-linked products. The value changed by CHF 2 million compared to the value for the prior year.
Other: The Other geographical area does not include any insurance business and therefore has no TVOG.
The CoC is defined as the present value of the frictional costs on required capital plus an allowance for the cost of non-market risks. Frictional costs include:
Frictional costs are incurred on required capital defined as the greater of the projected EU solvency margin or local solvency margin requirements after allowing for policyholder surplus. For the German life and health insurance businesses, frictional costs are also assumed to be incurred on the shareholders funds which exceed the required capital because the investment returns on the shareholders' funds are currently shared with the policyholders.
Market risks and the impact of anticipated policyholder behavior are explicitly valued in the stochastic projections used to determine the TVOG. The cost of non-market risks is determined as an annual charge on the Economic Risk Capital (ERC) for non-market risks. This annual charge of 3% p.a. is capitalized during the run-off of the business at the prevailing risk-free rates. The ERC is determined using the Groups integrated internal ERC framework and reflects insurance, operational and expense risks3, allowing for diversification.
The CoC in respect of the businesses that have used a single risk margin to determine the risk discount rate have been calculated as the present value of the difference between the risk discount rate and the after-tax investment return.
The following table shows the CoC for 2005 and 2004.
The CoC changed from CHF -884 million at end-2004 to CHF -792 million at end-2005. This positive development was mainly driven by a reduction in frictional costs in the geographical area Switzerland as a result of an increased policyholder surplus that reduced required capital. The CoC in the other geographical areas did not change substantially despite business growth.
The VoNB represents the value generated by new business sold during the reporting period. It is determined on the basis of the following new business premiums:
For products sold to individuals, new business generally includes policies where a new contract is signed or underwriting is carried out. Renewal premiums include contractual renewals, non-contractual premium changes that are reasonably predictable and recurrent single premiums that are predefined and reasonably predictable.
For group business, new business only includes new contracts. Renewal premiums (in respect of both the new business and the in-force business) allow for premium changes due to new entrants to replace exiting active members and expected salary inflation. Renewal premiums also include the premiums expected to be received due to the renewal of the existing contracts at the end of the contract term.
The following table shows the present value of new business sold during the reporting period after TVOG based on year-end assumptions allowing for acquisition expenses. The VoNB is then determined by deducting the CoC.
An acquisition expense overrun is recorded in some businesses because the critical scale has not yet been achieved or investments have been made in developing new sales channels. For the financial year 2005, total acquisition expenses of CHF 9 million after tax have been excluded mainly in respect of MGI Overseas.
All geographical areas contributed to the Life & Pensions VoNB of CHF 260 million in 2005. Overall, this corresponds to a margin of 17.8% on the annual premium equivalent (APE).
Switzerland: Switzerland contributed CHF 74 million of VoNB, which is equivalent to a margin of 26.1% on APE or 1.8% on the present value of premiums. The new
business volumes in terms of APE in 2005 were similar to 2004. The Swiss business predominantly sells traditional business.
Germany: Germany contributed CHF 12 million, which corresponds to a margin of 4.9% on APE. The German life insurance market in general and the volumes written by Winterthur in this market were lower in 2005 compared to the strong environment in 2004, when the market was driven by changes in tax regulation. The Dutch operations increased their new business volumes compared to 2004. While the German life business mainly writes traditional business, the share of unit-linked new business is larger in the Dutch business.
MGI Europe: The VoNB of MGI Europe amounted to CHF 84 million, with an average margin of 11.8% on APE. The new business mix varies across the businesses within the geographical area. The UK business sells predominantly unit-linked business and achieved strong volume growth in 2005.
The Benelux businesses viewed collectively have a more balanced volume mix between traditional and unit-linked business. New business volume growth for the businesses in the Benelux businesses varied, with a reduction in volumes in Belgium and substantial growth in Luxembourg. Central and Eastern European (CEE) new business volumes increased in 2005, driven by the Group's pension fund businesses in these markets. They now account for about 75% of the new business APE of CEE. The new business volume in Spain increased compared to 2004 and was balanced between traditional and unit-linked business. Most of the unit-linked volume was written by the pension fund business.
MGI Overseas: MGI Overseas VoNB of CHF 90 million accounted for about one third of the overall Life & Pensions VoNB, with an APE margin of 39.8%. New business volumes increased significantly compared to 2004. Viewed as a whole, this geographical area has a balanced mix between unit-linked and traditional business with protection products dominating the latter.
Other: There was no new business written in Other.
The following analysis of change shows a breakdown of the change in the EEV separately for the ANAV and PVIF net of TVOG and CoC.
Change in FX rate: This quantifies the impact of the change in FX rates relative to the Swiss franc.
Capital flows: Capital flows include dividends paid to shareholders, capital injections and other transfers into or out of the Life & Pensions segment. Dividends paid carry a negative sign.
Market consistent roll-forward: The market consistent roll-forward is the difference between the EEV at the start of the year and the implied EEV at the end of the year, assuming that the actual experience for the year is in line with the assumptions. The EEV at the start of year is taken after FX movements and capital flows. On the basis of the market consistent roll-forward, the implied returns on the different components of the EEV are as follows: The implied returns on the required capital after allowing for the unwinding and release of the frictional costs and the PVIF is equal to the one-year risk-free forward rates. Additionally, there is an unwinding and release from risk in respect of the TVOG and the cost of non-market risks. The expected return on the free surplus is equal to the one-year risk-free rates after tax and investment expenses.
The roll-forward for the smaller businesses and the German health company, which use the risk discount rate approach, has been determined by applying the risk discount rates to their EEV at the start of the year.
Expected transfer: The expected transfer from the PVIF to the ANAV is the expected after-tax profit from the in-force business on the basis of the assumptions used for the market consistent roll-forward.
Operating variance: The operating variance shows the impact of the deviations between the actual operating experience and the assumptions.
Economic variance: The economic variance allows for the deviations between the actual and implied investment returns during the year and the resulting impact on the stochastic economic scenarios (e.g. changes in interest rate or equity price volatilities) at the valuation date.
Operating assumption changes: The operating assumption changes show the impact of changes to operating assumptions, management actions or anticipated policyholder behavior.
Value of New Business: The VoNB is shown after allowing for acquisition expenses and the CoC based on end of year assumptions.
The following table shows the analysis of the change in the EEV. The PVIF is shown net of the TVOG and the CoC.
*PVIF net of TVOG and CoC
The opening EEV amounted to CHF 5,471 million and, at end-2005 FX rates, to CHF 5,554 million. This increase was due to the favorable development of most foreign currencies.
Net capital flows of CHF -200 million out of the Life & Pensions segment were recorded during 2005. The market consistent roll-forward amounted to CHF 287 million and represented the expected EEV if markets had evolved as implied by the financial market parameters at end-2004. The market consistent roll-forward of the PVIF net of the TVOG and the CoC was significantly above the corresponding risk-free rates due to the release of the TVOG and the CoC. A transfer of CHF 450 million from the PVIF to the ANAV was expected on the basis of the methodology described above.
Variances occurred during the year that substantially increased the ANAV and led to a corresponding reduction in the PVIF:
Changes to the operating assumptions increased the EEV by CHF 247 million, with the main impacts emerging from:
The VoNB added CHF 260 million to the EEV with a strain on the ANAV of CHF -194 million, reflecting the expenses related to the acquisition of the new business, while the PVIF (net of the TVOG and the CoC) increased by CHF 454 million.
Sensitivities provide an indication of the impact on the EEV of changes in selected assumptions. Winterthur has decided to disclose the sensitivities recommended by the CFO Forum that are relevant in the context of a market consistent valuation approach focusing on the EEV impact. The sensitivities relating to the risk-free yield curves and the increase in market volatilities exclude the German health insurance company and the smaller businesses that use the risk discount approach to determine the EEV. Some additional sensitivities are provided because they are used as a part of the Groups Asset Liability Management (ALM) strategy. At this point in time, Winterthur has not prepared or disclosed sensitivities with regard to VoNB as recommended by the CFO Forum.
The sensitivities recommended by the CFO Forum have been calculated by focusing on changing one assumption at a time. As a result of management actions and policyholder behavior this can lead to corresponding effects to other assumptions. It is likely that the impact of simultaneously changing more than one assumption will be different from the sum of the individual sensitivities.
The following table shows the above-mentioned sensitivities as at December 31, 2005.
the Groups internal risk management framework, it has been assumed that the investment companies in the Other geographical area are not sensitive to interest rate changes.
Shown below are additional sensitivities that are considered to be useful additional information with regard to Winterthurs EEV results.
investment returns to the extent that they are not included in the guaranteed liabilities (e.g. a change in the surrender cash flows due to anticipated policyholder behavior).
For risk management purposes, it is essential to allow for the shortening of the liability duration and the addition of convexity due to the options embedded in the traditional products and leads to the effective duration of the total liabilities. The link between EEV reporting and ALM is discussed further in the section on EEV as a basis for ALM decisions.
The following table shows the results of the duration analysis by geographical area for the Life & Pensions segment.
Switzerland: The effective duration is 7.8 years, while guaranteed liabilities have a duration of 8.5 years. The shortening of the duration by 0.7 years relative to the guaranteed liabilities is driven by embedded options including the guaranteed annuity options. Further examples include future bonuses that are reduced in value when interest rates decrease or policyholders who are more likely to surrender their policies in case interest rates rise. To manage the risks inherent in the duration dynamics arising from the embedded options, mitigating measures were taken using payer (group life) and receiver (individual life) swaptions to reflect the risks in the respective business lines.
Germany: The effective duration is 7.4 years, while the guaranteed liabilities have a considerably longer duration of 11.5 years. The substantial shortening of the duration by 4.1 years is driven by embedded options such as policyholder profit participation and includes the effect of the guaranteed annuity options. Risk-mitigating measures were also implemented in Germany to manage the risks inherent in the portfolios of the German life business by restructuring the asset portfolio.
MGI Europe: The effective duration is 10.5 years, with a limited duration shortening relative to the guaranteed liabilities. Measures to mitigate risk have been implemented in a selected number of businesses within this geographical area.
MGI Overseas: Liabilities are characterized by the long duration of the total liabilities of 23.7 years, with no material shortening of the duration relative to the guaranteed liabilities.
The calculation of embedded values necessarily makes assumptions with respect to economic conditions, operating conditions, taxes and other matters, many of which are beyond Winterthurs control. Although the assumptions used represent estimates which the Group believes are together reasonable, future experience may vary from that which is assumed and such variations could have a significant impact on future profits. Deviations from the assumed experience are normal and are to be expected.
A stochastic capital market model (The Smith Model developed and provided by Deloitte & Touche LLP) is used to generate economic scenarios for five currencies (Swiss franc, Euro, US Dollar, Japanese Yen and the Great Britain Pound). These scenarios and the corresponding deflators have been calibrated to a range of observable market prices at the valuation dates. Where insufficient market data were available e.g. to estimate correlations between asset classes historical data have been used.
This section sets out the key parameters for the stochastic economic scenarios.
Equity market volatilities
Cost for non-market risks
FX rates used
Assumptions used for businesses applying a risk discount rate approach
In the framework of the stochastic projections, some assumptions are varied dynamically to reflect both anticipated policyholder behavior and management actions in response to financial market volatility. Examples of dynamic assumptions are surrender and annuity take-up rates as well as profit sharing and asset allocation strategies. Where applicable, the regulatory and contractual restrictions on profit sharing have been taken into account.
Swiss group life business
In line with current practice, the annuity conversion rates for the Swiss group life business are set separately for the mandatory and non-mandatory components. The Swiss Federal Council has indicated that it intends to review the annuity conversion rates for the mandatory element every five years, and this is reflected in the projections. In line with the greater flexibility in the non-mandatory part, more frequent reviews of the conversion rates for the non-mandatory component are assumed. The conversion rate for the mandatory component is assumed to be set in the future such that a loss is generally made on conversion. The conversion loss on the mandatory component is met by the active members of the group scheme and the Swiss business in accordance with the legal quote. The assumed parameters for the non-mandatory annuity conversion lead to breakeven.
Expense assumptions: General assumptions and one-off expenses
One-off expenses6 in 2005 of CHF 40 million mainly in MGI Europe (CHF 36 million) were excluded from the projections. These one-off expenses comprise exceptional expenses relating to development projects and other activities not related to maintaining the in-force business, as well as other one-off expenses.
The expenses of businesses providing administration, investment management and other services (including Head Office expenses relating to the Corporate Center) have been included to the extent that they are related to the covered business and are included in the Life & Pensions segment.
Expense inflation assumptions
Pension scheme deficits
The tables below show a reconciliation of the Groups US GAAP equity to the ANAV for Life & Pensions, Non-Life, and for the Other Activities segments as well as Corporate Center (CC)/Eliminations. In respect of the Life & Pensions segment this is presented into the following steps:
Where applicable, the intangible items and other valuation differences are netted against the corresponding deferred bonus reserve (DBR). For the Life & Pensions segment, the reconciliation is extended to include the EEV of this segment.
For the Non-life segment, Other Activities segment and CC/Eliminations the following adjustments are made to the US-GAAP equity to determine their ANAV:
For all segments, the intangible items are presented before minorities. The minorities on these items are eliminated as part of the other valuation differences.
The previous sections of this report provide a detailed presentation of Winterthur's EEV results. However, EEV is not used solely for value reporting purposes within Winterthur; it is also an important aspect of risk management. One such area of application is in the Group's ALM.
ALM for life portfolios
Policyholders expect to participate in profits when the financial markets perform well. If their profit participation falls short of their expectations, policyholders may potentially exercise their surrender options. A modern ALM approach must therefore not only take account of guarantees but also of embedded options and policyholder expectations.
ALM, the alignment of the investment strategy to the respective liabilities, is recognized as a key driver of sustained profitability in the life business and has become one of the main areas of focus for supervisory bodies in the insurance sector. Over the past few years, Winterthur's risk management and asset management functions have implemented a comprehensive and innovative approach to ALM by linking it to market consistent EEV models.
The EEV explicitly prices the value of the guarantees and options and helps the Group to evaluate the interdependencies of future financial market dynamics, policyholder behavior and management decisions. This holistic view enables Winterthur to further optimize both policyholder benefits and the Group's value in the long term.
Mitigation of convexity risks
The duration analysis and related commentary disclosed in this EEV report shows how the Group applies the EEV as a powerful tool to mitigate the convexity risks embedded in the Group's life insurance portfolio. Winterthur uses interest rate options as well as dynamic hedging strategies for this purpose.
Appendix 1: Disclaimer
Cautionary statements regarding forward-looking statements
Words such as believes, anticipates, expects, "intends and plans and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. We do not intend to update these forward-looking statements except as may be required by applicable laws.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other outcomes described or implied in forward-looking statements will not be achieved. We caution you that a number of important factors could cause results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include (i) market and interest rate fluctuations; (ii) the strength of the global economy in general and the strength of the economies of the countries in which we conduct our operations in particular; (iii) the ability of counterparties to meet their obligations to us; (iv) the effects of, and changes in, fiscal, monetary, trade and tax policies, and currency fluctuations; (v) political and social developments, including war, civil unrest or terrorist activity; (vi) the possibility of foreign exchange controls, expropriation, nationalization or confiscation of assets in countries in which we conduct our operations; (vii) the ability to maintain sufficient liquidity and access capital markets; (viii) operational factors such as systems failure, human error, or the failure to properly implement procedures; (ix) actions taken by regulators with respect to our business and practices in one or more of the countries in which we conduct our operations; (x) the effects of changes in laws, regulations or accounting policies or practices; (xi) competition in geographic and business areas in which we conduct our operations; (xii) the ability to retain and recruit qualified personnel; (xiii) the ability to maintain our reputation and promote our brands; (xiv) the ability to increase market share and control expenses; (xv) technological changes; (xvi) the timely development and acceptance of our new products and services and the perceived overall value of these products and services by users; (xvii) acquisitions, including the ability to integrate successfully acquired businesses; (xviii) the adverse resolution of litigation and other contingencies; and (xix) our success at managing the risks involved in the foregoing.
We caution you that the foregoing list of important factors is not exclusive; when evaluating forward-looking statements, you should carefully consider the foregoing factors and other uncertainties and events, as well as the risks identified in Credit Suisse Groups most recently filed Form 20-F and reports on Form 6-K furnished to the US Securities and Exchange Commission.
Cautionary statements regarding European Embedded Value as a non-GAAP measure
Appendix 2: Deloitte opinion
Appendix 3: Glossary
European Embedded Value (EEV)
London, May 3, 2006
Cautionary statement regarding forward-looking information
This presentation contains forward-looking statements within the meaning
Forward-looking statements involve inherent risks and uncertainties, and
A number of important factors could cause results to differ materially from
We do not intend to update these forward-looking statements except as
John R. Dacey
Head of Strategy
Chief Risk Officer
Appendix on Methodology
Winterthur's approach to EEV
Commitment given to
EEV as robust and consistent industry standard
Winterthur to provide EEV 2004 / 2005 and analysis of change
Bottom-up stochastic calculation values cash flows the way
Allows for anticipated policyholder behavior and management
Stabilize and create value measured in terms of EEV
Transparency by valuing options and guarantees
Risk-based product design
Optimized capital utilization
Deliver on policyholder expectations
Strong link into
Market consistent basis
Approach and methodology to EEV discussed in January
Life & pensions business managed on the basis of EEV
1) ALM = Asset Liability Management
Winterthur's business in Life & Pensions
Total business volume 2005
(CHF 19.3 bn)
Diversified business portfolio in
Continental Europe, UK and Asia
II. Central risk,
tied together by strong central risk, ALM
Winterthur's financial accounts
1) Including corporate center costs
2) Individual health business Switzerland classified under
LP = Life & Pensions; NL = Non-Life; OA = Other Activities;
EEV disclosure consistent with new financial disclosure
Total benefits, claims and dividends
Total operating expenses
Income from continuing
operations before taxes2)
Return on equity (%)
Total business volume
Shareholder's Equity 2005
Shareholder's Equity 2004
in CHF bn, except where indicated
John R. Dacey
Head of Strategy
European Embedded Value Disclosure
Chief Risk Officer
Appendix on Methodology
Summary of Winterthur's
Strong 15% Return on EEV achieved
Strong 2005 new business in volume
Key economic parameters
Negative impact on EEV
+ Positive impact on EEV
Covered business: Life insurance, savings, pensions
1) VoNB = Value of New Business
2) RoEEV = Return on EEV, including FX impact (14% RoEEV on a local
3) APE = Annual Premium Equivalent
4) See appendix for further information on covered business
Impact from lower risk free rates,
Life & Pensions EEV
Favorable development of most currencies
Strong new business contribution
Dividends to Winterthur parent company, and
Expected development if markets had evolved
Strong equity and FX capital markets (ANAV
Lower assumed surrender rates for Swiss group
1) Equals PVIF net of TVOG and CoC; PVIF = Present Value of Inforce; TVOG = Time Value of Options and Guarantees; CoC = Cost of Capital
Includes provisioning (e.g. for endowment
Summary of methodology1)
Bottom-up stochastic calculation values
Market risks are incorporated
Allows for anticipated management actions
Cost of capital includes both
Market consistent bottom-up approach, with minimum level of subjectivity in
Methodology and disclosure compliant with CFO Forum's Principles
Deloitte & Touche reviewed EEV calculations, methodology and underlying assumptions
1) See appendix for details
Life & Pensions EEV
Free surplus up by CHF 1bn
PVIF solely based on risk-free returns; no benefit taken for risk premiums
TVOG partly contained through ALM initiatives
Life & Pensions
1) ANAV = Adjusted Net Asset Value; PVIF = Present Value of Inforce; TVOG = Time Value of Options and Guarantees; CoC = Cost of Capital
Net asset value
Life & Pensions EEV
Life & Pensions
@ 2005 FX rates
Life & Pensions
@ 2004 FX rates
Return on EEV
Strong returns across geographical areas
European businesses contribute 90% of EEV
Overseas business provides strong RoEEV
1) At year end 2005 FX-rate, unless otherwise stated
Life & Pensions EEV
Strong technical results in Group Life business
Improved surrender rates
Favorable equity and FX markets
Lower Interest rates and higher volatility impacting
"WinFuture" program on track
Efficiency improvements (mainly Spain)
Equity market performance with impact on UK business
Strong growth in CEE1) pension fund business
Strong new business and Nikkei rebound in JP
Strong new business and favorable economic environment Hong Kong
Interest rate decline in Taiwan Dollar with negative impact on Taiwan
1) CEE = Central and Eastern Europe
Value created across geographies
Life & Pensions EEV
Strong business franchise across geographies
Considerable VoNB given low interest
Positive VoNB given lower new bu-
High growth in CEE pension fund
Strong positive contributions from JP
Life & Pensions EEV
10 year risk free rate
Interest rate volatility1)
Exposure to key economic parameters addressed through tailored ALM initiatives
1) Implied volatility of 10-year into 10-year swaption at-the-money
2) Implied volatility of long-dated at-the-money put options
Falling risk free rates
Higher implied volatilities increase TVOG
Winterthur's approach to ALM
Winterthur established risk mitigating strategies early-on, and continues to do so
EEV sensitivities reflect ALM measures
1) After TVOG
CHF 10yr zero coupon rate
No risk mitigation
With risk mitigation
From Credit Suisse Analyst Day on Winterthur
Case study Linking ALM and EEV
Downside in case of a 100bp fall in
Assets better match convexity of
Reduced sensitivity of EEV to implied
Key messages from case study
Impact of 100bp inter-
Life & Pensions EEV
Risk free rates
Impact on EEV in CHF million
Interest rate sensitivities reduced through ALM initiatives
EEV allows quantification of embedded options (incl. profit sharing) on the
Duration of guarantees
1) Includes guaranteed liabilities as well as embedded options and profit sharing
Life & Pensions EEV
1) Equities and Interest Rates
2) ppt = percentage points. Base case: 3%
Additional sensitivities provide further transparency on relevant aspects of business
Impact on EEV
+90 / -92
Surrender rates -10%
Maintenance expense -10%
Mortality and morbidity -5%
Further CFO Forum
Relevant sensitivities disclosed
Selected additional sensitivities
No dynamic lapse rates
CoC charge for non-
Sensitivity to volatility contained
CoC contains explicit charge of
Assumed dynamic policyholder lapse
Reconciliation to US GAAP equity
Life & Pen-
Reconciliation of EEV to both Life & Pensions and Winterthur US-GAAP equity provided
Net assets of remaining segments also provided
ANAV / Net assets
1) OA = Other Activities; CC/E = Corporate Center/Eliminations
2) US-GAAP equity, net of goodwill, allowing for the funded status of pension plans, and external debt marked-to-market
How EEV facilitates
EEV values options and guarantees on the basis of management
Integral part of ALM and value management
Enables management to assess the value impact of changing profit
EEV plays a key role in Winterthur's target setting and performance
Creates incentive to reduce guarantees and embedded options not
Provides framework to price options and guarantees
Minimizes subjectivity in economic assumption setting
Transparent valuation through a market consistent approach
(launched April 1, 2006 in
Annual premium product;
Increasing guarantee with
Full transparency on
Tailored ALM strategy for this product
ALM objective: All key-rate durations close to zero
Low ERC and low capital requirement under SST
EEV of product locked-in at inception
Allocation of savings premium to zero bonds and equity
Winterthur as product innovator from a customer and from an economic perspective
As of 1.1.2006, the Swiss Insurance
Allows for a more efficient and
Winterthur is the first insurance
Product design based on a new
Product innovation facilitated through
Single/regular premium or annuities
Various levels of guarantees
Product design allows efficient risk
serving as basis for a range of new
1) Previously, only EBK-approved funds have been permitted
Strong 15% Return on EEV during 2005 for Life & Pension
EEV increase largely driven by increasing net assets
Tailored ALM initiatives implemented
Value creation across geographies
Strong CHF 260m new business value generation
Strong business franchise across geographies
Two thirds of new business generated across Europe
Business managed based on EEV
ALM linked to EEV
New product generations launched with more to come
John R. Dacey
Head of Strategy
European Embedded Value Disclosure
Chief Risk Officer
Appendix on Methodology
Focus of disclosure: Winterthur's Life & Pensions business
Life insurance, savings, pensions and disability business
German health business
Consistent with new consolidated financial statements
Included are relevant businesses providing administration, investment management, and
More than 99% of technical reserves and pension fund assets under management are
Smaller businesses included on basis of their US GAAP equity
Full reconciliation to Life & Pensions as well as overall Winterthur US GAAP equity
Winterthur's EEV disclosure solid and robust to provide increased transparency
Winterthur complies with EEV principles
Incorporation of risks in valuation
Cost of capital/ non-
Time value of
Based on implied future risk
Discounting at risk-free rate
Intrinsic value of all
time value of
PVIF after time value of
Cash flows are valued market
Allows for anticipated dynamic
Difference between PVIF before
Time value of options
Market risks are incorporated including an explicit deduction
1) Present value of in-force business 3) Based on up to 5,000 stochastic real world scenarios with scenario dependent, market consistent discount rates
2) At the valuation date
Cost of capital includes both
frictional cost on locked-in capital
1) Net of policyholder surplus to support these requirements 3) Possibly prior to publication of results
2) For German business, statutory equity is used as locked-in capital
Required capital is greater of
Frictional cost of locked-in capital
Tax and investment expenses on
Policyholder share of investment
Economic risk capital (after
Annual percentage charge (level
Approach might be amended
Components of EEV in line with CFO forum principles and Winterthur's
primary financial statements
1) Life companies for which no EV has been calculated are included on the basis of US GAAP equity
Based on statu-
Allowing explicitly for time value
PVIF before time
Time value of
Cost of capital
Frictional cost on
Plus cost of non-
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.