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30 Fair Value Measurements

For reporting purposes, a fair value hierarchy is established that categorises the inputs to valuation techniques used to measure fair value into level 1, 2 or 3. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1 inputs) and the lowest priority to unobservable inputs (level 3 inputs).

The fair value of assets or liabilities included in level 1 is based on unadjusted quoted prices in active markets for identical assets or liabilities. The fair value of assets or liabilities which are not traded in an active market is determined using valuation techniques. If all significant inputs to these valuation techniques are observable (directly and indirectly) in the market, the assets or liabilities are included in level 2.

If one or more significant inputs to these valuation techniques are not observable in the market, the assets or liabilities are included in level 3. Such inputs may include information that is derived through extrapolation which is not substantiated by observable market data or that reflects own assumptions about what market participants would use in pricing the asset or liability.

30.1 Assets and liabilities measured at fair value on a recurring basis

Financial instruments

As a general rule, fair values of financial instruments are based on quoted prices sourced from well-known independent price providers such as Bloomberg. Model-based level 2 and level 3 valuations of financial instruments are applied to a minority of the assets.

Fair value hierarchy

In CHF million
    Quoted prices (level 1)   Valuation technique -observable inputs (level 2)   Valuation technique -unobservable inputs (level 3)   Total
    31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020
                                 
Financial assets                                
Derivatives                                
Currency     0   891   1 109       891   1 109
Interest rate   3   0   804   1 698       807   1 698
Equity   1 020   168   51   33       1 071   201
Other         0         0
Total derivatives   1 023   168   1 745   2 840       2 768   3 008
Debt instruments                                
Governments and supranationals   51 734   56 675   300   331       52 034   57 006
Corporates   37 707   40 470   521   351   122   156   38 350   40 977
Other   6   39   38   49       44   88
Total debt instruments   89 448   97 184   858   731   122   156   90 428   98 071
Equity instruments                                
Equity securities   9 553   8 416   15   16   641   616   10 209   9 048
Investment funds   7 072   7 270   1 526   2 208   2 970   3 073   11 567   12 552
Alternative investments     0   352   218   3 042   3 159   3 393   3 377
Total equity instruments   16 625   15 686   1 893   2 442   6 652   6 848   25 171   24 976
Assets for the account and risk of the Swiss Life Group's customers   37 736   31 787   1 219   1 145   4 369   3 862   43 324   36 794
Total financial assets   144 831   144 825   5 716   7 158   11 144   10 866   161 691   162 849
                                 
Investments in associates                                
Associates at fair value through profit or loss           67   67   67   67
                                 
Financial liabilities                                
Derivatives                                
Currency     0   413   330       413   330
Interest rate   1   0   652   819       654   819
Equity   676   230   4   9       679   238
Other         0         0
Total derivatives   677   230   1 069   1 158       1 746   1 387
Investment contracts without discretionary participation       613   614       613   614
Unit-linked contracts       27 468   25 567   124   126   27 592   25 693
Third-party interests in consolidated investment funds       826   1 002   3 208   3 062   4 033   4 063
Total financial liabilities   677   230   29 976   28 340   3 331   3 188   33 984   31 758

The fair value hierarchy of assets for the account and risk of the Swiss Life Group’s customers is consistent with the categorisation of assets for the account and risk of the Swiss Life Group.

The following sections outline the valuation techniques and significant inputs used in the fair value measurement of financial instruments categorised within level 2 and level 3 of the fair value hierarchy.

Level 2: Valuation techniques and inputs

Level 2 financial instruments carried at fair value include debt instruments, equity securities, investment funds, alternative investments and over-the-counter derivatives.

Debt instruments: Debt instruments categorised as level 2 of the fair value hierarchy comprise government, supranational and corporate bonds for which prices are only available on an irregular basis or with a significant time lag. The price for such assets is obtained from an independent, acknowledged market data provider, which refers to quotes of recent transactions with the same or similar actively traded bonds and systematically derives a comparable price for those less liquid securities.

Equity securities: Equity securities categorised as level 2 of the fair value hierarchy comprise unlisted equities for which the prices are not available in the exchange market. The instruments are valuated by counterparties or third-party independent agencies based on market consistent valuation parameters.

Investment funds: Some fair value measurements of fund units, including unlisted fixed income funds, are only available on an irregular basis and are therefore categorised as level 2. Prices are provided by independent external market data providers who measure the fair value using market-consistent parameters.

Alternative investments: Alternative investments classified as level 2 assets comprise hedge funds of funds and leveraged loan funds based on third-party quotes substantiated by observable market data, such as recent transactions or valuation techniques that reflect the market participant’s assumptions. The level 2 classification is chosen because those funds maintain an irregular basis of price and are valuated with some time lag.

Over-the-counter derivatives: Level 2 fair values of over-the-counter derivatives on currencies, interest rates and equities are based on theoretical valuations with observable market data from well-known data providers as inputs. The fair value measurement is based on acknowledged, well-established models.

Currency derivatives:

  • Foreign currency options are valued on the basis of the Garman-Kohlhagen model with the spot foreign exchange rate, the interest rates of the underlying currencies and the foreign exchange rate volatility as main inputs.
  • The fair value of foreign currency forwards is derived from the foreign exchange spot rate and actively traded foreign exchange ticks.

Interest rate derivatives:

  • Interest rate swaps are valued on a discounted cash flow basis. Main inputs used to derive the discount factors and forward curves are the overnight index/swap rates.
  • Swaptions are theoretically valued with a model based on normal distributed interest rates. Main inputs are the current par swap rate and the implied volatility that is derived from observable volatility curves.
  • Forward starting bonds are valued on a cost-of-carry basis using the discounted cash flow method. Main inputs to calculate the current forward rate are the spot price of the underlying bond and the discount factors to coupon payment dates /maturity date.

Equity derivatives:

Over-the-counter equity-index options are valued using the Black-Scholes model. Main inputs are the current spot value and the dividend yield of the underlying index. The implied volatility is taken from similar exchange-traded equity index options.

Other derivatives:

Other derivatives mainly comprise credit default swap indices. CDS indices are valued using the discounted cash flow method for the fee and the contingent leg. Main inputs for the valuation are the swap curve and the CDS par spreads quoted in the market.

In the exceptional case that a theoretical valuation of an OTC derivative is not available in Swiss Life’s asset management system, the fair value is provided by counterparties. The appropriate­ness of such quotes is validated by Swiss Life based on established models using observable market data as input.

Level 3: Valuation techniques and inputs

The exposure of level 3 financial instruments primarily consists of alternative investments (private equity, hedge funds) and real estate funds.

Debt instruments: Debt instruments categorised as level 3 of the fair value hierarchy mainly comprise instruments with embedded derivatives to guarantee the participation on a defined underlying (hedge fund of funds or equity basket). The valuation, which is provided by banks, is derived from valuation techniques that take into account the market value of the underlying assets, transaction prices and other information, such as market participants’ assumptions.

Equity securities: The fair values of equity securities, which are not traded in an active market and are determined using unobservable inputs, classify as level 3 within the fair value hierarchy. These fair values are based on generally accepted valuation techniques. Valuation techniques aim at using a maximum of market inputs and include discounted cash flow analysis (e.g. profit situation, investment plans, investment property) and other valuation techniques commonly used by market participants.

Investment funds: Level 3 fair values of investment funds are primarily related to real estate funds. The valuation of the underlying property investments is done by independent appraisers using generally accepted valuation techniques (mainly discounted cash flow). The appraisers consider the general economic situation and the individual condition of the property investments. Main input factors applied in the discounted cash flow method are estimates on rental income and vacancies, projections of non-recoverable running costs (e.g. property taxes), maintenance costs and risk-adjusted discount rates, which are determined individually for each property.

Alternative investments: The fair values of private equity and infrastructure equity investments are based on generally accepted valuation techniques. Valuation techniques use a maximum of market inputs and include the use of comparable recent arm’s length transactions, discounted cash flow analysis and other valuation techniques commonly used by market participants. Because of the inherent valuation uncertainty, those estimated fair values may differ significantly from the values that would be used if a ready market for the financial assets existed, and those differences could be material. The fair values are determined by the general partner in the partnership and reviewed by management. In determining the fair value of fund investments, the partnership considers the funds as transparent holding vehicles. The fair values of the underlying investments are determined using the general partner valuation. These fair value measurements are generally categorised as level 3 within the fair value hierarchy.

To measure the fair value of hedge funds for which no quoted market price is available, valuation techniques are used that take into account the market value of the underlying assets, transaction prices and other information.

Investments in associates: The valuation methods of investments in associates categorised as level 3 of the fair value hierarchy are identical to the methods outlined for level 3 real estate funds.

Financial liabilities

Investment contracts without discretionary participation: The fair value of investment contracts, which are carried at fair value, is measured using market consistent, risk-neutral economic option price models, i.e. Monte Carlo simulations based on scenarios of capital market variables (share price and interest rate indices, interest rates and foreign currency rates). These inputs to fair value measurements are generally categorised as level 2 within the fair value hierarchy.

Unit-linked contracts: The fair value of liabilities arising from unit-linked insurance and investment contracts is measured by reference to the fair value of the underlying assets. Unit-linked contract liabilities are generally categorised as level 2, except for contracts that are backed predominantly by assets categorised within level 3 of the fair value hierarchy.

Investment property

The following table shows the fair value hierarchy of investment property as at 31 December.

In CHF million
    Quoted prices (level 1)   Valuation technique – observable inputs (level 2)   Valuation technique – unobservable inputs (level 3)   Total
    31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020
Commercial           19 775   18 108   19 775   18 108
Residential           11 602   11 176   11 602   11 176
Mixed use           9 858   8 836   9 858   8 836
Total investment property           41 234   38 120   41 234   38 120

Level 3: Valuation techniques and inputs

Discounted cash flow models used for investment property consider the present value of net cash flows to be generated from the property, taking into account expected rent growth rate, vacancy rate, rent-free periods, other costs not paid by tenants, maintenance costs and investment plans. The expected net cash flows are discounted using risk-adjusted discount rates. Location- and property-related criteria are reflected in the discount rate for each property. The criteria reflect the micro- and macro-location characteristics as well as the relevant parameters of the current management situation.

Trends in fair value are determined by various fundamental parameters. A distinction has to be made between property-specific factors and exogenous factors that relate to the real estate and finance market environments. Changes in the property management situation on both the income and the cost side directly trigger an adjustment in the reported market value. Key determinants are new and expiring leases, change in the vacancy situation, as well as movements in running, maintenance and repair costs. Developments in the relevant local real estate market have an impact on the calculation of potential rental values. Changes in the capital or transaction markets have an influence on discount rates. Property ageing is another key factor.

Significant unobservable inputs

    Switzerland   Other countries
    2021   2020   2021   2020
Rent growth p.a.   0.1 – 1.6%   0.1 – 3.9%   -   -
Long-term vacancy rate   3.7 – 6.2%   4.5 – 8.6%   -   -
Discount rate   1.9 – 4.6%   2.05 – 4.7%   2.6 – 5.5%   2.6 – 5.5%
Market rental value p.a. (price/m²/year)   CHF 277 – 309   CHF 267 – 307   EUR 79 – 400   EUR 95 – 400

Significant increases or decreases in estimated rental value and rent growth per annum would result in a higher or lower fair value of investment property. Significant decreases or increases in the discount rate would result in a higher or lower fair value. The following sensitivity information shows how the fair value of investment property would have been affected if changes in certain parameters that are used in the discounted cash flow model for the determination of fair value had occurred. At 31 December 2021, if rental income that can be earned in the long term had decreased by 5%, the fair value of investment property would have been CHF 2811 million lower (2020: CHF 2544 million). At 31 December 2021, if discount rates had been 10 basis points higher, the fair value of investment property would have been CHF 1469 million lower (2020: CHF 1255 million).

Deferred application of IFRS 9

Financial assets that on a specific date give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding meet the SPPI criterion. The fair value of such assets and those that do not meet the SPPI criterion as well as the change in fair value are disclosed in the following table.

Fair value of debt instruments

In CHF million
    Change in the fair value   Fair value
    2021   2020   31.12.2021   31.12.2020
                 
Debt instruments that meet the SPPI criterion
Governments and supranationals   –4 644   2 948   55 881   61 678
Corporates   –1 431   –349   45 435   48 071
Other   –444   39   13 118   12 887
Total   –6 519   2 638   114 435   122 635
                 
Debt instruments that do not meet the SPPI criterion
Governments and supranationals   –12   14   129   145
Corporates   –60   –7   1 551   1 338
Other   –1   0   38   87
Total   –73   6   1 717   1 570
                 
Debt instruments at fair value through profit or loss
Debt instruments managed on a fair value basis   –2   1   527   674
Debt instruments for the account and risk of the Swiss Life Group's customers   735   –139   7 256   7 683
Total   733   –138   7 784   8 358

The fair value and gross carrying amount of debt instruments that meet the SPPI criterion and have a credit rating below investment grade are disclosed in the following table.

Debt instruments SPPI below investment grade

In CHF million
    Gross carrying amount   Fair value
    31.12.2021   31.12.2020   31.12.2021   31.12.2020
                 
Debt securities
Governments and supranationals   229   47   229   47
Corporates   918   1 069   919   1 071
Total   1 148   1 116   1 148   1 117
                 
Mortgages
Residential   4   6   4   5
Total   4   6   4   5
                 
Other loans and receivables
Governments and supranationals   0   0   0   0
Corporates   4 582   3 812   4 579   3 812
Other   66   60   37   31
Total   4 648   3 872   4 616   3 844

Reconciliation of fair value measurements categorised within level 3

The following tables show a reconciliation from the opening balances to the closing balances for fair value measurements categorised within level 3 of the fair value hierarchy.

Assets measured at fair value based on level 3 for the year 2021

In CHF million
    Derivatives   Debt instruments   Equity instruments   Financial assets for the account and risk of the Swiss Life Group's customers   Investment property   Total
        At fair value through profit or loss   Available for sale   At fair value through profit or loss 1   Available for sale            
Balance as at 1 January       156   5 677   1 238   3 862   38 120   49 053
Total gains/losses recognised in profit or loss       1   332   11   349   1 505   2 198
Total gains/losses recognised in other comprehensive income       0     59       59
Additions         928   84   598   3 051   4 661
Disposals       –32   –1 296   –116   –313   –1 004   –2 761
Foreign currency translation differences       –3   –154   –43   –127   –439   –766
Balance as at end of period       122   5 487   1 232   4 369   41 234   52 445
                                 
Unrealised gains/losses recognised in profit or loss for assets held at the end of the period       0   247   –4   349   1 481   2 073
1 including associates at fair value through profit or loss

Assets measured at fair value based on level 3 for the year 2020

In CHF million
    Derivatives   Debt instruments   Equity instruments   Financial assets for the account and risk of the Swiss Life Group's customers   Investment property   Total
        At fair value through profit or loss   Available for sale   At fair value through profit or loss 1   Available for sale            
Balance as at 1 January       238   4 570   1 032   4 275   34 866   44 981
Total gains/losses recognised in profit or loss       –5   –29   –9   –71   847   733
Total gains/losses recognised in other comprehensive income       1     88       88
Additions         2 039   190   625   3 786   6 641
Disposals       –16   –906   –64   –815   –1 351   –3 152
Transfers out of level 3       –61       –66     –127
Foreign currency translation differences       –1   4   –1   –86   –28   –110
Balance as at end of period       156   5 677   1 238   3 862   38 120   49 053
                                 
Unrealised gains/losses recognised in profit or loss for assets held at the end of the period       0   –7   –21   –84   844   731
1 including associates at fair value through profit or loss

During 2021, debt securities of CHF 264 million (2020: CHF 60 million) were transferred from level 1 into level 2 as prices are based on a model, or due to reduced frequency of price quotations. In addition, debt securities of CHF 56 million (2020: CHF 60 million) were transferred from level 2 into level 1 due to new liquid price sources. Assets for the account and risk of the Swiss Life Group’s customers of CHF 35 million (2020: CHF 75 million) were transferred from level 2 into level 1 due to available quoted prices.

During 2020 only, debt securities of CHF 61 million were transferred from level 3 into level 2 as valuation as at 31 December 2020 was based on observable market data. Assets for the account and risk of Swiss Life Group’s customers of CHF 66 million were transferred from level 3 into level 1 due to available quoted prices.

The transfers between the levels of the fair value hierarchy were made at the end of the reporting period.

Liabilities measured at fair value based on level 3

In CHF million
    Derivatives   Unit-linked contracts   Third-party interests in consolidated investment funds   Total
    2021   2020   2021   2020   2021   2020   2021   2020
Balance as at 1 January       126   136   3 062   2 582   3 188   2 719
Total gains/losses recognised in profit or loss       1   0   213   46   213   46
Additions       4   2   427   886   431   888
Disposals       –6   –13   –409   –450   –415   –463
Foreign currency translation differences       –1   0   –85   –3   –86   –3
Balance as at end of period       124   126   3 208   3 062   3 331   3 188
                                 
Unrealised gains/losses recognised in profit or loss for liabilities held at the end of the period       1   0   201   39   201   40

Gains /losses recognised in profit or loss

Gains /losses on level 3 fair value measurements recognised in profit or loss are presented in the income statement as follows.

In CHF million
    Financial assets   Financial instruments at fair value through profit or loss   Investment property
    2021   2020   2021   2020   2021   2020
                         
Assets
Total gains/losses recognised in profit or loss   12   –14   681   –100   1 505   847
Unrealised gains/losses recognised in profit or loss for assets held at the end of the period   –4   –21   596   –91   1 481   844
                         
Liabilities
Total gains/losses recognised in profit or loss       –213   –46    
Unrealised gains/losses recognised in profit or loss for liabilities held at the end of the period       –201   –40    
30.2 Fair value of financial instruments carried at amortised cost

The following table shows the carrying amounts and fair values of those financial assets and liabilities not measured at fair value in the Group’s balance sheet.

In CHF million
    Carrying amount   Fair value
    31.12.2021   31.12.2020   31.12.2021   31.12.2020
                 
Assets
Loans   19 821   19 226   21 812   22 677
Receivables 1   4 439   4 131   4 439   4 131
                 
Liabilities
Investment contracts without discretionary participation 1   5   0   5   0
Borrowings   4 099   3 949   4 406   4 327
Other financial liabilities 1,2   16 705   15 819   16 705   15 819
1 Carrying amount approximates fair value.
2 Excluding third-party interests in consolidated investment funds

Fair value hierarchy

In CHF million
    Quoted prices (level 1)   Valuation technique – observable inputs (level 2)   Valuation technique – unobservable inputs (level 3)   Total fair value
    31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020
                                 
Assets
Loans   1 224   1 261   6 952   8 449   13 636   12 968   21 812   22 677
                                 
Liabilities                                
Borrowings   3 720   3 624   687   703       4 406   4 327

Receivables, investment contracts and other financial liabilities

The carrying amounts of receivables and other financial liabilities represent a reasonable estimate of fair value as the effect of discounting is immaterial and changes in credit risk are not significant. Such instruments include insurance receivables and payables, demand and short-term deposits and repurchase agreements. The carrying amount of investment contracts without discretionary participation approximates the fair value at reporting date. The disclosure of the fair value hierarchy is not applicable for these instruments.

Loans

Level 1: This category consists of debt securities reclassified from financial assets available for sale due to the disappearance of an active market and where the market has become active again. Additionally, debt securities not quoted in an active market at initial recognition and where the market has become active again are included in this category.

Level 2: This category mainly consists of note loans (Schuldscheindarlehen) classified as loans. The fair values are measured on a discounted cash flow basis with zero coupon yield curves and credit spreads as main inputs.

Level 3: The fair values of mortgages and other loans are estimated using the discounted cash flow method.

For mortgages, the discount factors are derived from the SARON-swap curve and a flat spread. Contract-specific spreads are based on an internal model that covers both risk and administration costs. Main inputs to that model are characteristics of the underlying property, the financial situation of the debtor and the duration of the contract. If no contract-specific spread is available a standard spread is applied that shall cover the marketability disadvantages and the administration costs, as mortgages are less standardised and tradable than exchange-traded bonds.

The discount factors for other loans are derived from the Group’s current lending rates for similar loans. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values equal the carrying values.

Borrowings

Level 1: This category consists of senior bonds and hybrid debt listed on the stock exchange.

Level 2: Privately placed hybrid debt is categorised as level 2. The fair value of Swiss Life’s privately placed hybrid debt (subordinated step-up loans) is calculated as the present value of the prospective cash flows to the lenders. The discount rate used for the calculation consists of a relevant government bond rate plus a credit spread.