2 Summary of Significant Accounting Policies

The principal accounting policies are set out below. These policies have been applied consistently to all the periods presented unless otherwise stated.

2.1 Basis of preparation

The consolidated financial statements of Swiss Life have been prepared in accordance and compliance with IFRS^® Accounting Standards (IFRS).

The preparation of financial statements in conformity with IFRS Accounting Standards requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3.

Figures may not add up exactly due to rounding.

2.2 Changes in accounting policies

The Swiss Life Group has adopted the following new standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2023.

• IFRS 17 Insurance Contracts
• IFRS 9 Financial Instruments
• Amendments to IAS 12 Income Taxes, International Tax Reform – Pillar Two Model Rules

The new accounting policies relating to IFRS 17, IFRS 9, Amendments to IAS 12 as well as the transition to IFRS 17 and IFRS 9 are described below. IFRS 17 has been applied retrospectively to the extent possible. The comparative periods have been restated. IFRS 9 has been applied re­trospectively without restating the comparative periods.

Other new or amended standards and interpretations did not have a material impact on the Group’s accounting policies.

2.2.1 IFRS 17 Insurance Contracts

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts, reinsurance contracts and investment contracts with discretionary participation features (DPF). It introduces three different models that measure groups of contracts based on the terms of the contracts. The models comprise the Group’s estimates of the present value of future cash flows that are expected to arise as the Group fulfils the contracts, an explicit risk adjustment (RA) for non-financial risk and a contractual service margin (CSM).

Due to the nature of the business, the variable fee approach (VFA) is the predominant model applied at Swiss Life. The building block approach (BBA or the general model) as the default measurement model is applied to all insurance contracts unless the contract is subject to the VFA, or is eligible for, and the Group elects to apply, the simplified model – the premium allocation approach (PAA).

Under IFRS 17, insurance contract liabilities and assets under the BBA and the VFA consist of the present value of the best estimate future cash flows, a RA for non-financial risk and a CSM which represents the unearned profit under the contract. The CSM represents the profit that the company expects to earn as it provides insurance coverage. The CSM release is recognised in profit or loss over the coverage period as the company provides the insurance services or investment-related and investment-return services.

The Group applies the VFA to insurance and investment contracts with direct participation (VFA contracts). VFA contracts are substantially insurance and investment-related services contracts under which the Group expects to pay to the policyholder a return based on underlying items. Under a VFA contract, the Group expects to pay to the policyholders an amount equal in value to specified underlying items minus a variable fee for service. The variable fee is viewed as the compensation that the Group charges to the policyholder for services provided by the VFA contract.

The Swiss Life Group measures the following types of businesses under the VFA:

• Direct participating life insurance contracts
• Unit-linked contracts subject to IFRS 17

The Group exercises judgement when deciding whether a contract contains direct participation features and, therefore, will be eligible to apply the VFA. Participating contracts differ significantly between jurisdictions. Not all participating contracts meet the criteria to be accounted for as direct participating contracts.

The Swiss Life Group measures the following types of businesses under the BBA:

• Certain life insurance contracts without discretionary policyholder participation
• Reinsurance contracts issued and held with a contract boundary of more than one year

The measurement for insurance contract liabilities and assets under the PAA is similar to the unearned premium approach for short-duration contracts. The amounts recognised consist of an asset or liability for remaining coverage which comprises the premiums received under the contracts minus the insurance acquisition cash flows. In addition, a liability for incurred claims is set up.

The Swiss Life Group measures the following types of businesses under the PAA:

• Non-life contracts
• Health and protection contracts
• Death and disability contracts
• Certain reinsurance contracts issued and held

Insurance contracts are contracts under which one party accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. Significant insurance risk exists if an insu­rance event could cause an insurer to pay significant additional benefits in any scenario, exclu­ding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction). The classification of contracts identifies both the insurance contracts the Group issues and reinsurance contracts that the Group holds. By Group policy, Swiss Life considers those contracts to be insurance contracts that require the payment of additional benefits in excess of 10% of the benefits that would be payable if the insured event had not occurred, excluding scenarios that lack commercial substance. The Group has assessed the significance of insurance risk on a contract-by-contract basis. Contracts that do not transfer insurance risk at inception but at a later date are classified as insurance from inception unless the Group remains free to price the insurance premium at a later date. In this case, the contract is classified as insurance when the insurance premiums are specified. A contract that qualifies as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire.

Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts.

For investment contracts that contain discretionary participation features, the same recognition and measurement principles as for insurance contracts apply. For investment contracts without discretionary participation features, the recognition and measurement principles for financial instruments apply.

The Group identifies portfolios of insurance contracts. Each portfolio comprises contracts that are subject to similar risks and that are managed together and is divided into three groups: one­rous contracts, contracts without significant risk of becoming onerous and remaining contracts unless the groups of contracts are mutualised. In case of non-mutualised groups of contracts, to distinguish between the two non-onerous groups of contracts, the Swiss Life Group primarily assesses each portfolio of insurance contracts on a qualitative basis with regard to profitability under reasonably possible scenarios. Additional criteria are taken into account if deemed necessary. Contracts are considered onerous at initial recognition, if the fulfilment cash flows arising from the contracts are a net outflow. For the contracts measured with the PAA, the Group assumes that no contracts are onerous at initial recognition, unless facts and circumstances indicate otherwise.

Each group of insurance contracts is further divided by year of issue. The resulting groups re­present the level at which the recognition and measurement accounting policies are applied. The groups are established on initial recognition and their composition is not reassessed subsequently. Contracts issued more than one year apart are not included in the same group.

The policyholders of some direct participating contracts share with policyholders of other contracts the returns on the same pool of underlying items. The policyholder bears a reduction in his share of the return on the underlying items because of payments to policyholders of other contracts that share in that pool or vice versa. The mutual dependence of cash flows between contracts is commonly referred to as “mutualisation”. This dependence is influenced by regulatory and statutory requirements as well as management views.

The Group recognises a group of insurance contracts issued from the earliest of the following:

• the beginning of the coverage period;
• the date on which the first payment from a policyholder is due; and
• for a group of onerous contracts, when the group becomes onerous.

The Group recognises a group of reinsurance contracts issued that provide proportionate cove­rage at the later of the beginning of the coverage period of the group of reinsurance contracts and the initial recognition of any underlying contract and recognises all other groups of reinsurance contracts from the beginning of the coverage period of the group of reinsurance contracts. The coverage period is the period during which the Group receives coverage for claims arising from the reinsured portions of the underlying insurance contracts.

Subsequently, new contracts are added to the group when they are issued, provided that all contracts in the group are issued in the same year.

Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which the entity can compel the policyholder to pay the premiums or in which the entity has a substantive obligation to provide the policyholder with services.

The substantive rights and obligations end when:

• the entity has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks; or both of the following criteria are satisfied;
• the entity has the practical ability to reassess the risks of the portfolio of insurance contracts that contains the contract and, as a result, can set a price or level of benefits that fully reflects the risk of that portfolio; and
• the pricing of the premiums for coverage up to the date when the risks are reassessed does not take into account the risks that relate to periods after the reassessment date.

The contract boundary is reassessed at each reporting date or when indicated by facts and circumstances. Therefore, it may change over time.

When assessing the practical ability to fully reflect the risk upon renewal of an existing contract, the following restrictions apply:

• restrictions arising from the terms and conditions of the contract;
• legal and regulatory restrictions; and
• commercial and reputational constraints.

However, restrictions are irrelevant if either of the following conditions is met:

• they equally apply to new and existing policyholders in the same market;
• they have no commercial substance (i.e. no discernible effect on the economics of the contract).

Finally, a constraint that limits the ability to reprice contracts differs from pricing choices made, which may not limit the practical ability to fully reflect the risk at renewal date. Pricing choices include, for example, the level of loadings in the premium, or commercial discounts given to policyholders.

The following contract boundaries apply at Swiss Life.

In the Swiss group life business, which comprises full insurance, semi-autonomous and pure risk, i.e. “BVG business”, which is the business under the Federal Act on Occupational Old Age, Survivors’ and Invalidity Pension Provision, the contractual relations are determined by a collective life insurance contract between the insurer and a foundation and an affiliation contract between the foundation and the employer. Regarding contract boundaries, the relevant contract is the insurance contract between the insurer and the foundation.  These contracts are usually open-ended contracts without a defined termination date, i.e. the continuation of the contract is not dependent on active renewal. There are cancellation rights and repricing possibilities.  However, they are restricted due to regulatory and economic constraints. New policies for new employees of an existing affiliation contract are not regarded as new contracts at initial recognition (“new business”). New affiliation contracts to an existing foundation or new foundations are considered as outside of the contract boundary and shown as new business at initial recognition.

Individual life (annuities, endowments, pure risk, unit-linked): for all types of contracts, the contract boundary is the expiration date of the contract.

For most savings and pensions contracts, additional premiums on existing contracts (either re­gular or non-regular) are within the contract boundary. In the case of open group contracts, the boundary of the contracts includes future premiums and annuities of existing affiliations. However, future adhesions to the group contracts are generally outside the contract boundary.

Group risk business, non-life contracts and health and protection contracts generally have a short contract boundary.

Discount rates are applied to adjust the estimates of future cash flows of the insurance contract portfolios.

Discount rates are consistent with observable available current market prices for financial instruments with cash flows whose characteristics are consistent with those of the insurance contracts in terms of timing, currency and liquidity.

The Swiss Life Group determines the appropriate discount rates for portfolios of insurance contracts treated under VFA based on a yield curve that reflects the current market rates of return implicit in a fair value measurement of the reference portfolio of underlying assets. The Swiss Life Group adjusts this yield curve to eliminate the factors, i.e. market and credit risks, that are not relevant to the insurance contracts except for differences in liquidity characteristics of the insurance contracts and of the reference portfolio.

For the business accounted for under the BBA and PAA, the Swiss Life Group determines discount rates by adjusting a liquid yield curve with a credit risk adjustment if the curve is not sufficiently secured. Liquid yield curves are based on market swap rates. The most relevant currencies for Swiss Life insurance liabilities are the Swiss franc and the euro. The liquid yield curve for Swiss francs is based on SARON rates and for euro on EURIBOR.

Beyond terms where the market for swap rates is assessed as not sufficiently deep, liquid and transparent, an extrapolation is performed to derive the yield curve. For the extrapolation the Smith-Wilson method is applied. The relevant characteristics are the so-called last liquid point (LLP) at which the extra­polation starts and the ultimate forward rate (UFR) to which the extrapolated yield curves converge.

Last liquid point (LLP) and ultimate forward rate (UFR) for the year 2023

The same LLP and UFR have been applied for all periods presented.

The liquidity premium for VFA portfolios can be calculated as the difference between the relevant rate for discounting the liabilities and the liquid yield curve, i.e. before the LLP. The following table shows the liquidity premiums for the relevant VFA portfolios.

Liquidity premium

The following spot rates have been applied for the discounting of the insurance and investment contracts with DPF under VFA in Swiss francs and euro.

Discount rates for insurance and investment contracts with DPF under VFA

Inflation assumptions have been derived for the euro from inflation-swap data. For Swiss francs where no such instruments are traded, inflation assumptions over the next few years have been derived from forecasts of the Swiss National Bank. The Smith-Wilson method is applied for extrapolation.

Where future cash flows vary with the returns on the underlying items and the effects of options and guarantees are relevant, the Swiss Life Group uses stochastic modelling techniques to value future cash flows. A risk-neutral valuation approach based on market-consistent and arbitrage-free stochastic economic scenarios is used. The calibration of the economic scenarios, e.g. regar­ding volatilities, is based on traded market instruments at the valuation date where available.

Non-economic assumptions such as mortality, morbidity and lapse rates that are used in estimating future cash flows are derived by product type at local level, reflecting recent experience and the profiles of policyholders within a group of insurance contracts. Experience analyses for each of these factors are undertaken on a regular basis with a particular focus on the most recent experience as well as longer term trends. Adjustments are made where the experience or trends are not expected to continue in the long term. Lapse rates from policyholders have been dyna­mically modelled. Lapse parameters depend on the country and product line as well as on the credited rates to the policyholders.

The Swiss Life Group assesses the rights and obligations arising from the groups of contracts and reflects them net on its balance sheet on a discounted basis. All insurance contracts are initially measured as the total of the fulfilment cash flows and the contractual service margin, unless the contracts are onerous.

At initial recognition of the contracts, the CSM is the present value of the future cash inflows less the present value of future cash outflows, i.e. it is the amount that, when added to the fulfilment cash flows, prevents the immediate recognition of unearned profit when a group of contracts is first recognised.

If contracts are onerous, losses are recognised immediately in profit or loss. No contractual service margin is recognised on the balance sheet at initial recognition for such contracts.

The fulfilment cash flows are the current estimates of the amounts that the Group expects to collect from premiums and pay out for claims, benefits and expenses, adjusted to reflect the ti­ming and the uncertainty in those amounts. For the majority of Swiss Life’s contracts under VFA and BBA, the fulfilment cash flows are derived from actuarial projections up to 40 years with closed formula approximations for the remaining contract terms. The future coverage units are determined consistently. The adjustment for uncertainty is called the risk adjustment (RA). For direct participating contracts the benefit cash flows are modelled in the actuarial projection tools reflecting legal and regulatory constraints as well as crediting and investment policies. The cash flows of a group of contracts may be affected by cash flows of other groups of contracts. This aspect, sometimes referred to as “mutualisation between contracts”, is considered in the measurement of the fulfilment cash flows (see 2.2.4).

The measurement of the fulfilment cash flows of a group of insurance contracts does not reflect non-performance risk, which is the risk that the obligation will not be fulfilled. This includes, but may not be limited to, the entity’s own credit risk.

The RA for non-financial risk for a group of insurance contracts is the compensation required for bearing uncertainty about the amount and timing of the cash flows that arises from non-financial risk. The RA for non-financial risk is determined using the quantile method based on value at risk and a Group confidence level of 70%. The RA includes an allowance for diversification on portfolio level, reporting segment level and Group level. The considered risk factors comprise mortality, longevity, disability, recovery, surrender, expenses and capital option. The aggregation across risk factors is performed using the delta-normal approach. An allocation of corresponding diversification benefits to sub-risks is performed in line with the breakdown into group of contracts. The change in the RA due to diversification on Group level positively impacts the CSM. Changes in the RA in one group of contracts impact the RA and therefore also the CSM of other businesses.

Fulfilment cash flows generally include only expenses that are attributable to insurance contracts and investment contracts with DPF (insurance service expenses). For insurance contracts and investment contracts with DPF accounted for under VFA, projected profit-sharing cash flows also reflect the impact of non-attributable expenses on the profit sharing. Future expenses are taken into account in the cash flow projections by using best estimate assumptions based on current and past experienced cost levels. The best estimate assumptions are based on functional cost areas and cost centres allocated to groups of contracts according to appropriate keys and projected using suitable cost drivers. Best estimate expense assumptions are modelled subject to inflation.

The following costs qualify as insurance service expenses, e.g.:

• the costs of accounting, human resources, information technology and support, building depreciation, rent and maintenance and utilities directly attributable to fulfilling insurance contracts;
• policy administration and maintenance costs;
• claims and claims handling costs; and
• insurance acquisition cash flows that are directly attributable to the portfolio to which the contract belongs.

The following costs do not qualify as insurance service expenses, e.g.:

• payments to and from reinsurers;
• insurance acquisition cash flows that are not directly attributable to a portfolio of insurance contracts;
• general overhead (e.g. product development costs and training costs);
• asset investment returns; and
• income taxes.

Such costs are recognised in profit or loss as incurred.

Insurance acquisition cash flows arise from the costs of selling, underwriting and initiating a group of insurance contracts that are directly attributable to the portfolio of insurance contracts to which the group belongs. Such cash flows include cash flows that are not directly attributable to individual contracts or groups of insurance contracts within the portfolio. Cash flows that are not directly attributable to a group of contracts are allocated on a reasonable and consistent basis to measure the group of insurance contracts. Insurance acquisition cash flows reduce the CSM of a group of contracts to which they relate when that group is recognised.

Insurance acquisition cash flows that the Group pays before the related group of contracts is re­cognised are presented in the portfolio of insurance contracts to which they relate. When the group of contracts is recognised, these cash flows are included in the measurement of the group and the previously recognised asset is derecognised. At the end of each reporting period, the recoverability of the asset for insurance acquisition cash flows is assessed if facts and circumstances indicate the asset may be impaired. If an impairment loss is identified, the impairment loss is recognised in profit or loss.

The fulfilment cash flows of groups of insurance contracts are measured at the reporting date using current estimates of future cash flows, current discount rates and current estimates of the RA for non-financial risk. The CSM of each group of contracts subsequent to initial recognition is calculated on a half-yearly basis. The Group has elected to change the accounting estimates made in the first half of the year for the annual reporting period. Changes in estimates of future cash flows and of the RA for non-financial risk related to future services are recognised in the CSM until the CSM is exhausted, with any excess recognised as a liability for onerous contracts in profit or loss. Changes in estimates of future cash flows and of the RA for non-financial risk related to current and past services are recognised in the insurance service result. The Group releases the CSM to profit or loss in each period on the basis of the identified units of coverage in each group of contracts that reflects the services provided in the period.

The carrying amount of a group of insurance contracts at each reporting date is the sum of the liability for remaining coverage (LRC) and the liability for incurred claims (LIC). The LRC includes the fulfilment cash flows related to services that will be provided under the contracts in future periods and any remaining CSM at that date. The liability for incurred claims comprises the fulfilment cash flows for incurred claims and other insurance expenses that have not yet been paid, including claims that have been incurred but not yet reported.

The Group establishes a loss component of the LRC for onerous groups of insurance contracts. The loss component determines the amounts of fulfilment cash flows that are subsequently excluded from insurance revenue when they occur. When the fulfilment cash flows occur, they are allocated between the loss component and the LRC excluding the loss component on a systematic basis. The systematic basis is determined by the proportion of the loss component relative to the total estimate of the present value of the future cash outflows plus the RA for non-financial risk at the beginning of each period (or on initial recognition if a group of contracts is initially recognised in the period). Changes in estimates of cash flows relating to future services and changes in the Group’s share of the fair value of any underlying items are allocated solely to the loss component. If the loss component is reduced to zero, then any excess over the amount allocated to the loss component creates a new CSM for the group of contracts.

VFA contracts are contracts under which the Group expects to pay to the policyholder the net of:

• an amount equal to the fair value of the underlying items; and
• a variable fee in exchange for future services provided by the contracts, being the Group’s share of the fair value of the underlying items less fulfilment cash flows that do not vary based on the returns on underlying items.

When measuring a group of direct participating contracts, the Group adjusts the fulfilment cash flows for the whole of the changes of the amounts related to changes in the fair value of the underlying items. These changes do not relate to future services and are recognised in profit or loss. The Group then adjusts any CSM for changes in the Group’s share of the fair value of the underlying items, which relate to future services, as explained below.

The carrying amount of the CSM at the end of each annual period is the carrying amount at the start of the reporting period, adjusted for:

• the CSM of any new contracts that are added to the group in the period;
• the Group’s share of the change in the fair value of the underlying items and changes in fulfilment cash flows that relate to future services, except to the extent that the Group has chosen to exclude from the CSM changes in the effect of financial risk on its share of the underlying items;
• the Group’s share of a decrease in the fair value of the underlying items, or an increase in the fulfilment cash flows that relate to future services, exceeding the carrying amount of the CSM, giving rise to a loss (included in insurance service expenses) and creating a loss component; or
• the Group’s share of an increase in the fair value of the underlying items, or a decrease in the fulfilment cash flows that relate to future services, as allocated to the loss component, reversing losses previously recognised in profit or loss (included in insurance service expenses);
• the effect of any currency exchange differences on the CSM; and
• the amount recognised as insurance revenue because of the services provided in the period.

Changes in fulfilment cash flows that relate to future services include the changes relating to future services specified above for contracts without direct participation features (measured at current discount rates) and the effect of the time value of money and financial risks — e.g. the effect of financial guarantees.

The underlying items include all assets associated with the IFRS 17 insurance contracts and investment contracts with DPF, and represent the fair value of those assets. Thus, the underlying items consist of all tied assets of the group and individual life business including assets covering surplus funds and other insurance technical reserves associated with these portfolios. The fair values of the underlying items are affected by changes in the cost process, risk process and saving process: all premiums, guaranteed benefits and expenses flow to or from the underlying items. All bonus payments and all risk and expense payments exceeding their respective guaranteed part are also paid out from the underlying items and all returns exceeding the guaranteed inte­rest rate flow into the underlying items (into the surplus funds). All cash flows, including those generating experience adjustments, impact the underlying item and thus flow through the CSM.

Underlying items consist of a quota share of the invested assets backing the direct participating insurance business, other insurance business as well as the shareholders’ equity.

The underlying items are defined by the current and future cash flows of the Swiss Life branch in Germany. Therefore, in addition to the current and future gross surplus – related to investment-return services, insurance coverage and other services – the underlying items consist of the equivalent of the shareholders’ equity as well as financial guarantees less future premium re­ceivables.

The underlying items consist of a quota share of the invested assets backing the direct participating insurance business and other insurance business.

The insurance service result comprises insurance revenue and insurance service expenses.

Insurance revenue excludes any investment components and is measured as follows:

The Group recognises insurance revenue as it satisfies its performance obligations – i.e. as it provides coverage or other services under groups of insurance contracts. For contracts not measured under the PAA, insurance revenue relating to services provided for each period represents the total of the changes in the LRC that relate to services for which the Group expects to receive consideration.

In addition, the Group allocates a portion of premiums that relates to recovering insurance acquisition cash flows to each period in a systematic way based on the passage of time. The Group recognises the allocated amount as insurance revenue and an equal amount as insurance service expenses.

The amount of the CSM of a group of insurance contracts that is recognised as insurance revenue in each reporting period is determined by identifying the coverage units in the group of contracts, allocating the CSM remaining at the end of the reporting period (before any allocation) equally to each coverage unit provided in the reporting period and expected to be provided in future periods, and recognising in profit or loss the amount of the CSM allocated to coverage units provided in the reporting period. The number of coverage units is the quantity of coverage provided by the contracts in the group, determined by considering for each contract the quantity of benefits provided and its expected coverage duration. In line with the future profits in the CSM, the coverage units are discounted. As a consequence, depending on the IFRS yield curve, a higher weight is assigned to the coverage units of the current period compared to future periods.

For the determination of the coverage units, the Swiss Life Group takes into account the volume and quantity of various services provided while considering all types of services provided, i.e. insu­rance and investment-related services. For this purpose, the respective volume measures for the different services such as mathematical reserves or sum assured are weighted. The weighting of the service components is based on the net charge paid by the policyholder which provides a reasonable and natural quantification of the value of a service provided. It is ensured that the weighting factors also reflect changes in the relationship between the different service components over time.

Coverage units are reassessed at the end of each reporting period before any allocation of CSM to profit or loss, as allocating the amount of the CSM adjusted for the most up-to-date assumptions provides the most relevant information about the profit earned from services provided in the period and the profit to be earned in the future from future services.

Changes in the RA for non-financial risk that relate to release from risk are recognised in the insurance service result.

Insurance service expenses comprise incurred claims (excluding investment components), amortisation of insurance acquisition cash flows, changes in the LIC that relate to past services and losses on onerous contracts or changes thereof.

Insurance finance income and expenses comprise changes in the carrying amounts of groups of insurance and reinsurance contracts arising from the effects of the time value of money, financial risk and changes therein, unless any such changes for groups of direct participating contracts are allocated to a loss component and included in insurance service expenses.

The Group has chosen to disaggregate insurance finance income and expenses between profit or loss and OCI.

For direct participating contracts, the investment returns on underlying assets as well as other returns on underlying items arising from the risk or cost result included in profit or loss for the period are assessed and matching amounts of insurance finance income or expenses in profit or loss are recognised. The amount reflected in profit or loss eliminates the accounting mismatch with income or expenses included in profit or loss on the underlying investment assets and other underlying items arising from the risk and cost result.

For other insurance contracts, the amount included in profit or loss is determined by a systematic allocation of the expected total insurance finance income and expenses over the duration of the group of contracts. The systematic allocation is determined using the discount rates determined on initial recognition of the group of contracts.

If the Group derecognises a contract as a result of a transfer to a third party or a contract modification, then any remaining amounts of accumulated OCI for the contract are reclassified to profit or loss as a reclassification adjustment.

In the non-life, health, protection and reinsurance business as well as for certain group risk contracts, the Group chooses to apply the PAA to simplify the measurement of groups of contracts on the following bases:

• insurance contracts: the coverage period of each contract in the group of contracts is one year or less; and
• reinsurance contracts: the Group reasonably expects that the resulting measurement would not differ materially from the result of applying the accounting policies applicable to the BBA.

However, certain groups of insurance contracts are acquired in their claims settlement period. The claims from some of these groups are expected to develop over more than one year. The Group measures these groups under the accounting policies for BBA described above.

On initial recognition of each group of contracts, the carrying amount of the LRC is measured as the premiums received on initial recognition, net of acquisition costs paid. Insurance acquisition cash flows are recognised in the LRC and amortised over the coverage period. On initial recognition of each group of contracts, the Group expects that the time between providing each part of the coverage and the related premium due date is not more than a year. Accordingly, the Group has chosen not to adjust the LRC to reflect the time value of money and the effect of financial risk.

Subsequently, the carrying amount of the LRC is increased by any premiums received and decreased by the amount recognised as insurance revenue for coverage provided and acquisition costs paid. Insurance revenue in each reporting period represents the changes in the LRC that relate to services for which the Group expects to receive consideration and an allocation of premiums that relate to recovering insurance acquisition cash flows.

If at any time during the coverage period, facts and circumstances indicate that a group of contracts is onerous, then the Group recognises a loss and increases the LRC to the extent that the current estimates of the fulfilment cash flows that relate to remaining coverage (including the RA for non-financial risk) exceed the carrying amount of the LRC.

The LRC consists of the amount of premiums received less the acquisition cash flows paid, plus/minus the amount of premiums and acquisition cash flows that have already been recognised in profit or loss over the already completed portion of the coverage period. The LIC is measured in the same way under both the PAA and the BBA model.

Insurance acquisition cash flows are recognised in the LRC and amortised as insurance service expenses over the coverage period.

The insurance revenue in each period is the amount of expected premium receipts for providing coverage in the period. The Group allocates the expected premium receipts to each period on the following bases:

• certain property contracts: the expected timing of incurred insurance service expenses; and
• other contracts: the passage of time.

Reinsurance contracts held are insurance contracts where the Swiss Life Group is the policyholder.

The Group applies the same accounting policies as for insurance contracts issued under BBA and PAA to measure a group of reinsurance contracts held, with the following modifications.

The carrying amount of a group of reinsurance contracts held at each reporting date is the sum of the remaining coverage component and the incurred claims component. The remaining coverage component consists of the fulfilment cash flows that relate to services that will be received under the contracts in future periods and where applicable any remaining CSM at that date.

The Group measures the estimates of the present value of future cash flows using assumptions that are consistent with those used to measure the estimates of the present value of future cash flows for the underlying insurance contracts, with an adjustment for any risk of non-performance by the reinsurer. The effect of the non-performance risk of the reinsurer is assessed at each reporting date and the effect of changes in the non-performance risk is recognised in profit or loss.

The RA for non-financial risk is the amount of the risk transferred by the Group to the reinsurer.

On initial recognition, the CSM of a group of reinsurance contracts held represents a net cost or net gain on purchasing reinsurance. It is measured as the equal and opposite amount of the total of the fulfilment cash flows, any derecognised assets for cash flows occurring before the recognition of the group and any cash flows arising at that date. However, if any net cost on purchasing reinsurance coverage relates to insured events that occurred before the purchase of the group of contracts, then the Group recognises the cost immediately in profit or loss as an expense.

On subsequent measurement, net expenses from reinsurance contracts comprise reinsurance service expenses less amounts recovered from reinsurers. The Group recognises reinsurance service expenses as it receives coverage or other services under groups of reinsurance contracts. For contracts not measured under the PAA, the reinsurance service expenses relating to services received for each reporting period represent the total of the changes in the remaining coverage component that relate to services for which the Group expects to pay consideration.

For contracts measured under the PAA, the reinsurance service expenses for each period are the amount of expected premium payments for receiving coverage in the period.

The Group derecognises a contract when it is extinguished – i.e. when the specified obligations in the contract expire or are discharged or cancelled.

The Group also derecognises a contract if its terms are modified in a way that would have changed the accounting for the contract significantly had the new terms always existed, in which case a new contract based on the modified terms is recognised. If a contract modification does not result in derecognition, then the Group treats the changes in cash flows caused by the modification as changes in estimates of fulfilment cash flows.

On the derecognition of a contract from a group of contracts:

• the fulfilment cash flows allocated to the group are adjusted to eliminate those that relate to the rights and obligations derecognised;
• the CSM of the group is adjusted for the change in the fulfilment cash flows, except where such changes are allocated to a loss component; and
• the number of coverage units for the expected remaining coverage is adjusted to reflect the coverage units derecognised from the group.

If a contract is derecognised because it is transferred to a third party, then the CSM is also adjusted for the premium charged by the third party, unless the group is onerous.

If a contract is derecognised because its terms are modified, then the CSM is also adjusted for the premium that would have been charged had the Group entered into a contract with the new contract’s terms at the date of modification, less any additional premium charged for the modification. The new contract recognised is measured assuming that, at the date of modification, the Group received the premium that it would have charged less any additional premium charged for the modification.

Assets and liabilities related to insurance contracts issued are presented separately from the assets and liabilities related to reinsurance contracts held.

Portfolios of insurance contracts that are assets and those that are liabilities, and portfolios of reinsurance contracts held that are assets and those that are liabilities, are presented separately in the balance sheet.

The Group disaggregates amounts recognised in profit or loss and OCI into an insurance service result, comprising insurance revenue and insurance service expenses, and insurance finance income (expense).

Investment components represent amounts that are repaid to the policyholder in all circumstances, regardless of whether an insured event occurs. If the investment components are non-distinct, i.e. highly interrelated with the insurance components, the amounts expected to be paid are excluded from insurance revenue and insurance service expenses but included in the measurement of the insurance liabilities. The Group identifies the investment component of a contract as part of its product governance process by determining the amount that it would be required to repay to the policyholder even if an insured event does not occur.

Income and expenses from reinsurance contracts held are presented separately from income and expenses from insurance contracts. Income and expenses from reinsurance contracts held, other than insurance finance income (expense), are presented on a net basis as net expenses from re­insurance contracts in the insurance service result.

All changes in the RA for non-financial risk are included in the insurance service result except for changes in the discount rate, which are presented in insurance finance income (expense) and disaggregated between profit or loss and OCI according to the disaggregation policy applied to the portfolios.

The Group no longer applies shadow accounting to insurance-related assets and liabilities.

Changes in accounting policies resulting from the adoption of IFRS 17 have been applied retrospectively to the extent practicable. As at the transition date, 1 January 2022, the Group:

• identified, recognised and measured each group of insurance contracts as if IFRS 17 had always applied;
• derecognised any existing balances that would not exist had IFRS 17 always applied; and
• recognised any resulting net difference in equity.

Notwithstanding the above, the following items have not been applied retrospectively:

For most groups of contracts in the life insurance business, it was impracticable for the Group to apply IFRS 17 fully retrospectively, because data had not been collected in a way that allowed full retrospective application or because of legal changes that occurred after inception of the contracts. In these cases, the Group applied the modified retrospective approach as set out in IFRS 17 as at 1 January 2022. The purpose of applying the modified retrospective approach is to achieve the closest outcome possible to the full retrospective approach. In line with the modified retrospective approach, the following simplifications have been applied for the transition:

Groups of contracts were aggregated for the calculation of the transitional amounts where some historical information, e.g. cash flows or discount rates, were not fully available in the required granularity and format. These aggregated groups of contracts contained contracts issued more than a year apart. For portfolios without mutualisation, a combination of the full retrospective approach and the modified retrospective approach was applied where for earlier groups of contracts the modified retrospective approach was applied and for later groups of contracts the full retrospective approach was applied. For portfolios with mutualisation, the modified retrospective approach was generally applied.

Certain assessments regarding portfolios of contracts were done at transition rather than at inception date e.g. identification of portfolios with similar risks and managed together or the application of VFA versus BBA.

For some groups of contracts, the RA for non-financial risk on initial recognition was determined by adjusting the amount at 1 January 2022 for the expected release of risk before 1 January 2022. The expected release of risk was determined with reference to the release of risk for similar insurance contracts that the Group issued at 1 January 2022 or after.

When any of these modifications were used to determine the CSM (or the loss component) on initial recognition, the amount of the CSM recognised in profit or loss before 1 January 2022 was determined by comparing the coverage units on initial recognition and the remaining coverage units at 1 January 2022; and the amount allocated to the loss component before 1 January 2022 was determined using the proportion of the loss component relative to the total estimate of the present value of the future cash outflows plus the RA for non-financial risk on initial recognition.

For all groups of direct participating contracts issued or acquired before 1 January 2022, the Group determined the CSM (or the loss component) as at 1 January 2022 by calculating a proxy for the total CSM for all services to be provided under the group as follows:

The fair value of the underlying items at 1 January 2022 minus the fulfilment cash flows at 1 January 2022, adjusted for:

• amounts charged to the policyholders before 1 January 2022;
• amounts paid before 1 January 2022 that would not have varied based on the underlying items; and
• the change in the RA for non-financial risk caused by the release from risk before 1 January 2022.

If the calculation resulted in a CSM, then the Group measured the CSM as at 1 January 2022 by deducting the CSM related to services provided before 1 January 2022. The CSM related to services provided before 1 January 2022 was determined by comparing the coverage units on initial recognition and the remaining coverage units at 1 January 2022. If the calculation resulted in a loss component, then the Group adjusted the loss component to zero and increased the liability for remaining coverage excluding the loss component by the same amount as at 1 January 2022.

Generally, the longer the contracts had been in force, the less information was available for the past.

The full retrospective approach was applied to most groups of contracts under BBA that were initially recognised after 1 January 2020, as IFRS 17 was known and interpreted by that time so that models could be developed and the required data collected.

The fair value approach was not applied by the Swiss Life Group.

In accordance with the amendment to IFRS 17 Initial Application of IFRS 17 and IFRS 9 Comparative Information issued in December 2021, the Swiss Life Group has decided to measure the following items at fair value (classification overlay): note loans with a fair value of CHF 6.1 billion (previously measured at amortised cost) and certain loan commitments with a fair value of CHF 45 million as at 1 January 2022. In addition, the Swiss Life Group has decided to measure certain owner-occupied properties at fair value as at 1 January 2022 as they represent underlying items in direct participating contracts. The fair value as at 1 January 2022 amounted to CHF 701 million.

The above remeasurements led to an increase of accumulated other comprehensive income of CHF 1.1 billion and retained earnings of CHF 0.5 billion after taxes.

The Group has applied the transition provisions in IFRS 17 and has disclosed the impact of the adoption of IFRS 17 on a cumulative basis. The cumulative effect of adopting IFRS 17 on the consolidated financial statements as at 1 January 2022 is presented in the consolidated statement of changes in equity.

2.2.2 IFRS 9 Financial Instruments

The Group elected to defer the application of IFRS 9 to the date of initial application of IFRS 17 and has adopted IFRS 9 as at 1 January 2023 retrospectively without restating financial information presented for 2022 in accordance with the transition requirements of IFRS 9.

IFRS 9 introduces new requirements for the classification and measurement of financial assets and financial liabilities, impairment for financial assets and hedge accounting with principal features as follows:

Classification of a financial asset is determined based on the model in which the financial asset is managed and the contractual characteristics of whether the asset comprises solely of payment of principal and interest (SPPI).

The business model reflects how the Group manages the assets in order to generate cash flows. That is, whether the Group’s objective is solely to collect the contractual cash flows from the assets or to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are measured at fair value through profit or loss. Factors considered by the Group in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the asset’s performance is evaluated and reported to key management personnel, how risks are assessed and managed and how management is compensated.

Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Group assesses whether the financial instrument’s cash flows represent solely payments of principal and interest (the SPPI test). In making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement, i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic len­ding arrangement, the related financial asset is classified and measured at FVPL.

The Swiss Life Group uses three classification and measurement categories for financial assets:

Financial assets with terms that give rise to interest and principal cash flows only and which are held in a business model whose objective is to hold financial assets to collect their contractual cash flows are measured at AmC.

The amortised cost is the value at which the financial asset is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial value and the maturity value and adjusted for any impairment allowance.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset to the gross carrying value. The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired financial assets (i.e. assets that are credit-impaired at initial recognition), the Group calculates the credit-adjusted effective interest rate, which is calculated based on the amortised cost of the financial asset instead of its gross carrying value and incorporates the impact of expected credit losses in estimated future cash flows.

When the Group revises the estimates of future cash flows, the carrying value of the respective financial asset or financial liability is adjusted to reflect the new estimated discount using the original effective interest rate. Any changes are recognised in profit or loss.

Debt instruments that are held for the collection of contractual cash flows and for selling the assets, where the asset’s cash flows represent solely payments of principal and interest, and that are not designated at FVPL, are measured at FVOCI. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of loss allowance, gains or losses, interest revenue and foreign exchange gains and losses on the instrument’s amortised cost, which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss and recognised in net gains/losses on financial assets.

Interest income from these financial assets is included in investment income using the effective interest rate method.

Certain equity instruments not backing VFA contracts have been selected to be classified as FVOCI. Subsequent changes in the fair value are presented in other comprehensive income and are never reclassified to profit or loss. Upon derecognition of these equity instruments, the gains or losses in other comprehensive income are reclassified to retained earnings.

Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. Also measured at FVPL are certain financial assets and liabilities where a measurement or recognition inconsistency, that would otherwise arise from measuring those assets or liabilities or recognising the gains and losses on them on different bases, can be avoided or reduced (“accounting mismatch”).

All investment funds as well as equity securities not designated at fair value through other comprehensive income and certain debt instruments are measured at FVPL.

Interest, dividend income and realised and unrealised gains and losses are included in net gains /losses on financial instruments at FVPL.

Transfers of securities under repurchase agreements or under lending agreements continue to be recognised if substantially all the risks and rewards of ownership are retained. They are accounted for as collateralised borrowings, i.e. the cash received is recognised with a corresponding obligation to return it, which is included in other financial liabilities.

Financial assets that have been sold under a repurchase agreement or lent under an agreement to return them, and where the transferee has the right to sell or repledge the securities given as collateral, are reclassified to financial assets pledged as collateral.

Measurement rules are consistent with the ones for corresponding unrestricted financial assets.

The following table summarises the category and the carrying amounts of financial assets in accordance with IFRS 9 as at 1 January 2023. It also reconciles the carrying amounts of financial assets from their previous measurement category in accordance with IAS 39 Financial Instruments: Recognition and Measurement as at 31 December 2022 to their new measurement categories upon transition to IFRS 9 on 1 January 2023:

Financial assets

Losses recognised in other comprehensive income of financial assets reclassified to amortised cost at the transition to IFRS 9 would have amounted to CHF 5 million in 2023.

As at 1 January 2023, debt instruments of CHF 90 million previously designated at FVPL were elected to be reclassified to fair value through OCI.

Upon adoption of IFRS 9, the classification of financial liabilities remained unchanged. Financial liabilities continue to be measured at either amortised cost or FVPL.

An expected credit loss impairment model has been introduced. Under the new model, it is no longer necessary for a credit event to have occurred before an impairment loss is recognised.

Credit risk refers to the possibility that a financial loss will occur as a result of a borrower’s or counterparty’s deteriorating creditworthiness and/or inability to meet its financial obligations. The Group’s credit risk exposure is low because its primary credit exposures relate to rated bonds with investment grade ratings issued by rated financial institutions, sovereigns and corporates and to loans collateralised by securities portfolios and/or to mortgages collateralised by residential or commercial property.

The Group recognises ECL on the following types of financial instruments that are not measured at FVPL:

• financial assets that are debt instruments;
• financial guarantees and loan commitments issued; and
• receivables.

No ECL is recognised on equity instruments.

The Group applies the “three-stage” approach introduced by IFRS 9 for impairment measurement based on changes in credit quality of the financial assets since initial recognition:

• Stage 1: Comprises financial assets that have not had a significant increase in credit risk since initial recognition. The Group recognises ECL which represents an amount equal to the portion of the lifetime expected credit loss that results from default events possible within the next 12 months.
• Stage 2: Comprises financial assets which are considered to have experienced a significant increase in credit risk since initial recognition but do not have objective evidence of impairment. The Group recognises ECL at an amount equal to the lifetime expected credit loss allowance. This requires a computation of the ECL based on the lifetime probability of default (LTPD) of the financial asset.
• Stage 3: Comprises financial assets which are considered to be credit-impaired and the Group recognises the lifetime ECL using a probability of default (PD) of 100% reduced by the cash flows which the Group deems to be recoverable.

In all cases the maximum period considered when estimating ECL is the maximum contractual period over which the Group is exposed to credit risk. For measuring ECL and determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort including forward-looking information.

A simplified approach is applied for receivables. Under this approach, loss allowances are always measured at an amount equal to lifetime ECL.

A financial asset is credit-impaired if one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Credit-impaired financial assets are referred to as stage 3 assets. Evidence that a financial asset is credit-impaired include observable data about the following events:

• (a) significant financial difficulty of the issuer or the borrower;
• (b) a breach of contract such as a default or past due event;
• (c) concessions relating to the borrower’s financial difficulty are granted that otherwise would not be considered;
• (d) it becomes probable that the borrower will enter bankruptcy or other financial reorganisation;
• (e) the disappearance of an active market for that financial asset because of financial difficulties; or
• (f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

It may not be possible to identify a single discrete event. The combined effect of several events may have caused financial assets to become credit-impaired. To assess if rated debt instruments are credit-impaired, the specific asset is determined as credit-impaired if the asset falls below investment grade and the asset continues to demonstrate significant deterioration in credit quality including indicators such as days past due and breaches of covenant.

In assessing whether there has been a significant increase in the credit risk of a financial asset since initial recognition, the Group considers all information which is reasonable and substantiated and that is relevant and available without undue cost and effort. This includes both qualitative and quantitative information based on the Group’s historical experience and expert credit risk assessment as well as forward-looking information. The Group’s assessment is aligned with the Swiss Life Group credit risk management processes and procedures. The Group primarily identifies per investment whether a significant increase in credit risk has occurred.

Cash flows expected from collateral and other credit enhancements are reflected in the ECL calculation. The Group employs a range of policies and practices to mitigate credit risk. The most traditional is securities collateral. The Group has implemented guidelines on the acceptability of specific classes of collateral for credit risk mitigation. The principal collateral types for loans are charges on financial instruments such as debt securities and equity instruments and residential and commercial property for mortgages.

The Group’s policies regarding collateral have not significantly changed during the reporting period and there has been no significant change in the overall quality of collateral held by the Group since the prior period.

If available, the Swiss Life Group uses external credit ratings to assess the creditworthiness of its portfolios. Internal credit assessments are used in exceptional cases when external ratings are not available. To determine a significant increase in credit risk for this class of assets, the Group assumes that the “low credit risk simplification” applies at the reporting date in case rated debt instruments have an investment grade rating. Hence, the credit risk for rated debt instruments with an investment grade rating is not assumed to have increased significantly since initial recognition, and therefore the loss allowance is measured at an amount equal to twelve-month ECL.

In assessing an increase in credit risk for rated debt instruments with a high-yield rating at the reporting date, the Group relies on the magnitude of the downgrade since initial recognition. Thereby, the lower the credit rating at initial recognition, the lower the tolerated magnitude of downgrades until a significant increase in credit risk is assumed to have occurred.

The Group does not apply the rebuttable assumption that the credit risk on rated debt instruments has increased significantly since initial recognition when contractual payments are more than 30 days past due. The determination of a significant increase in credit risk is principally based on ratings. Updated external ratings are received as soon as they have been published by the rating agencies. Updates of internal credit assessments are done when there is evidence of significant deterioration in the creditworthiness of an issuer. In specific circumstances, the Group preserves the right to base the decision regarding a significant increase in credit risk on expert judgement.

The Group considers a rated debt instrument to be in default when the assigned rating is “CC” (S&P notation) or lower.

The ECL for debt instruments are estimated via three individual components:

• Probability of default (PD): PD constitutes a key input in measuring ECL and is estimated for a twelve-month and lifetime period. PD is derived using credit ratings, as well as default rates and forward-looking information. The data used considers credit risk of borrowers or instruments by giving each issuance a specific credit rating, which is monitored on an ongoing basis.
• Loss given default (LGD): The LGD is the magnitude of the likely loss if there is a default. The Group decided to base the modelling of LGDs on external credit risk information adjusted by forward-looking information. Historically observed global market data is used for ECL computations broken down by seniority of the instrument, geographic area and industry.
• Exposure at default (EAD): EAD represents the expected exposure in case of a default and is based on discounted contractual cash flows reflecting expected payments of principal and interest.

The Group incorporates forward-looking information in its measurement of ECL as described above. The effect of macroeconomic downturns for corporate exposure is considered as part of the SICR assessment during which an expert panel considers relevant market information including macroeconomic factors.

For the assessment of a significant increase in credit risk of mortgages no external rating information is available. Each mortgage is assigned to a dedicated risk class on the basis of client-specific parameters, which take for instance the financial strength or the payment history of the clients into account. Unfavourable parameters result in assignment to a higher risk class. The definition of a significant increase in credit risk is thereby based on the currently assigned risk classes.

The Swiss Life Group rebuts the presumption that the credit risk for mortgages increases significantly if contract payments are more than 30 days past due. Payment information for mortgages is often available only with a certain delay. In any case, a significant increase in credit risk for mortgages is assumed if contractual payments are more than 90 days past due.

Mortgages are considered to be in default if payments are past due for 365 days or more or in case of foreclosure procedures.

The ECL for mortgages are estimated by allocation of loans to rating grades and estimation of cumulative probabilities of default (CPD). For each rating grade, the macroeconomic conditioning of default probabilities, projection of EAD including prepayments and losses on defaulted loans that do not cure are considered.

• PD: In estimating the probability of default the Group relies on the same statistical technique that is used for PD computations for rated debt instruments. However, there is no credit rating information including a default rate readily available for modelling. Hence, this is modelled using the available historical data incorporating credit quality features such as overdue contract payments.
• LGD: Is based on the observation of historical loss data.
• EAD: Is an estimate of the exposure at a future default date taking into account expected changes in the exposure after the reporting date, including contractual repayments.

The Group incorporates forward-looking information into its measurement of ECL as described above.

The general model as described above is also applied to loans and loan commitments. This approach requires that the relevant PD and LGD data similar to that which is currently in place for rated debt instruments is prepared. The Group relies on credit rating information and PD and LGD curves which are obtained externally. The Group has adopted the “low credit risk simplification” for the loan population. Hence, it is assumed that all investment grade loans and loan commitments are in stage 1.

The Group has adopted a simplified approach to calculating expected credit losses for receivables. Therefore, losses allowances are always measured at an amount equal to a lifetime ECL since initial recognition regardless of factors that indicate significant increase in credit risk.

The ECL for receivables are calculated by using historical credit loss experience for groups sharing similar credit risk characteristics and adjusted as appropriate to reflect current conditions and estimates of future economic conditions that may exist during the period in which the receivables are expected to be outstanding.

The Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since initial recognition and its measurement of ECL.

For measuring ECL, Swiss Life uses three different scenarios of future economic developments. The baseline scenario is regarded as the most likely scenario, while the other scenarios have a lower probability of occurrence.

For each scenario, five-year forecasts of macroeconomic and financial market variables are used for determining forward-looking PD and LGD figures. The forecasts of the macroeconomic and financial market variables are regularly prepared by the Swiss Life Group. The economic scenarios and their weightings are reviewed by Swiss Life Group’s Economic Scenario Committee.

For the purpose of determining ECL, the weights of the three scenarios – as confirmed by the Economic Scenario Committee – are adjusted to take the credit loss distributions into account. Thereby, a higher weight is generally attributed to the negative scenario, which results in higher overall expected credit losses to account for.

Regarding the determination of forward-looking PD and LGD figures, macroeconomic and financial market variables are selected that are statistically relevant for the transformation of point-in-time to forward-looking PD and LGD figures. The relevant macroeconomic and financial variables are assigned to the financial instruments on the basis of country and issuer-specific information. The Swiss Life Group prepares forecast figures for the most relevant countries and applies meaningful mappings in case the country of origination of a financial instrument is not covered by these forecast figures. The selection of the statistically relevant macroeconomic and financial market variables is reviewed on an annual basis.

The tables below provide an overview of the scenario weightings as well as the ECL per scenario for the rated debt instruments.

Scenario weightings and ECL as at 31.12.2023

Re-acceleration of growth and inflation scenario: In this positive growth scenario, developed market economies are expected to withstand the past tightening of monetary policy much better than in the baseline scenario, leading to a re-acceleration of investment activities. Fiscal policy is a potential additional tailwind in this scenario, especially in the United States. However, the re-acceleration of economic growth is assumed to lead to higher inflation pressures, ultimately causing a second wave of monetary policy tightening and a deeper recession than in the baseline scenario later over the forecast horizon.

Baseline scenario: The baseline scenario assumes subdued global economic growth especially in the first half of 2024 due to the absence of growth drivers. Developed markets are mostly affected by the repercussions of past monetary policy tightening, a tightening of fiscal policy into 2024 especially in Europe, a negative global industrial cycle and the absence of a growth boost out of China, where domestic demand continues to suffer from the real estate crisis. Inflation is expected to continue its moderation due to weak economic growth, which should allow developed market central banks to reduce policy rates in the course of 2024. This is assumed to lead to a moderate re-acceleration of global growth thereafter.

Deeper global recession scenario: In this negative growth scenario, the repercussions of the past increases in policy rates are higher than in the baseline scenario. It is assumed that higher policy rates will lead to systemic stress in financial markets and the banking sector, ultimately causing a pronounced global recession. Potential triggers are for example a credit crisis in the United States or a real estate crisis in Europe. China is assumed to be in a prolonged “growth recession”. Inflation and central bank rates would recede swiftly in this scenario, leading to a recovery of global economic growth after the recession.

Scenario weightings and ECL as at 01.01.2023

Soft landing scenario: This positive scenario assumed that energy prices would recede swiftly and that a productivity boost in developed markets would reduce wage pressures. This in turn would allow central banks to ultimately reduce policy rates. A recession could thus be avoided and growth in developed market economies would stabilise at around long-term averages. The better-than-expected growth picture in developed markets would also be mirrored by solid growth in emerging markets, where central banks would be in a position to reduce policy rates swiftly.

Baseline scenario: The baseline scenario assumed that tightening financial conditions and negative wealth effects would lead to a mild recession in the United States in late 2023. The assumption was that a recession would occur earlier in 2023 in Europe as a result of the energy crisis, followed by a modest recovery due to easing supply chain issues and a re-acceleration of demand in China after the termination of its “zero-Covid” policy. Regarding inflation, energy prices were expected to remain volatile at elevated levels. Second-round effects were expected to keep inflation above central bank targets in 2023 in developed markets, with a softening towards central bank targets thereafter expected.

Stagflation scenario: This is a negative, high-inflation scenario in which the US Federal Reserve would be forced to tighten monetary policy more than expected, ultimately triggering a deeper recession than in the baseline scenario. Europe would experience outright stagflation, a combination of continuously high inflation due to the energy crisis and a recession. China was not assumed to be a tailwind for Europe in this scenario, as a prolonged “growth recession” in China was assumed in this scenario.

A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renegotiated or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the amount and/or timing of the contractual cash flows either immediately or at a future date. The Group modifies the terms of loans provided to customers due to commercial renegotiations or for distressed loans with a view of maximising recovery. Such restructuring activities include extended payment term arrangements, payment holidays and payment forgiveness. Restructuring policies and practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue.

The risk of default of such assets after modification is assessed at the reporting date and compared with the risk under the original terms at initial recognition, when the modification is not substantial and so does not result in derecognition of the original asset.

If the financial asset is derecognised, the ECL is remeasured at the date of derecognition to determine the net carrying amount of the asset at that date. The difference between this revised carrying amount and the fair value of the new financial asset with the new terms will lead to a gain or loss on derecognition. The new financial asset will have a loss allowance measured based on twelve-month ECL except on rare occasions where the new loan is considered to be originated credit-impaired.

If the Group determines that the credit risk has significantly improved after restructuring, the assets are moved from stage 3 or 2 to stage 2 or 1 in accordance with the new terms for the six consecutive months or more.

The Group writes off financial assets, in whole or in part, when it has exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovering the financial asset. Indicators that there is no reasonable expectation of recovery include ceasing enforcement activity, and where the Group’s recovery method is foreclosing on collateral and the value of the collateral is such that there is no reasonable expectation of recovering in full.

The Group may write-off financial assets that are still subject to enforcement activity. The Group still seeks to recover amounts it is legally owed in full, but which have been partially written off due to no reasonable expectations of full recovery.

The following table reconciles the loan loss allowances in accordance with IAS 39 as at 31 December 2022 with the respective expected credit losses (ECL) calculated under IFRS 9 as at 1 January 2023:

The Group enters into forward contracts, futures, forward rate agreements, currency and interest rate swaps, options and other derivative financial instruments for hedging risk exposures or for trading purposes. The notional amounts or contract volumes of derivatives, which are used to express the volume of instruments outstanding and to provide a basis for comparison with other financial instruments, do not, except for certain foreign exchange contracts, represent the amounts that are effectively exchanged by the parties and, therefore, do not measure the Group’s exposure to credit risk. The amounts exchanged are calculated on the basis of the notional amounts or contract volumes and other terms of the derivatives that relate to interest or exchange rates, securities prices and the volatility of these rates and prices.

All derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value as assets when favourable to the Group and as liabilities when unfavourable. Gains and losses arising on remeasurement to fair value are recognised immediately in profit or loss, except for derivatives that are used for cash flow hedging, for net investment hedges and hedges of equity instruments at fair value through other comprehensive income.

Derivatives embedded in other financial instruments or in insurance contracts which are not closely related to the host contract are separated and measured at fair value, unless they represent surrender options with a fixed strike price embedded in host insurance contracts and host investment contracts with discretionary participation. Changes in the fair value are included in profit or loss. Derivatives embedded in insurance contracts which are closely related or which are insurance contracts themselves, such as guaranteed annuity options or guaranteed interest rates, are reflected in the measurement of the insurance contract liabilities. Options, guarantees and other derivatives embedded in an insurance contract that do not carry any insurance risk are recognised as derivatives.

Hedge requirements have been designed to improve the decision–usefulness of the financial statements by better aligning hedge accounting with risk management activities of the Group, permitting a greater variety of hedging instruments and simplifying certain rules-based requirements from the previous standard. The Group adopted the hedge accounting requirements of IFRS 9, and this change allowed the Group to consider a wider range of hedging options, with the ability to continue with the existing hedging relationships. In particular, the new standard removed the prescribed range for hedge effectiveness purposes to allow greater flexibility for an entity to apply hedge accounting.

Derivatives and other financial instruments are also used to hedge or modify exposures to interest rate, foreign currency and other risks if certain criteria are met. Such financial instruments are designated to offset changes in the fair value of an asset or liability and unrecognised firm commitments (fair value hedge), or changes in future cash flows of an asset, liability or a highly probable forecast transaction (cash flow hedge) or hedges of net investments in foreign operations. In a qualifying fair value hedge, except for hedges of equity instruments measured at fair value through other comprehensive income, the change in fair value of a hedging derivative is recognised in profit or loss. The change in fair value of the hedged item attributable to the hedged risk adjusts the carrying value of the hedged item and is also recognised in profit or loss.

In a cash flow hedge, the effective portion of the gain or loss on the hedging derivative is recognised in OCI. Any ineffective portion of the gain or loss is recognised immediately in profit or loss. For a hedged forecast transaction that results in the recognition of a financial asset or liability, the associated gain or loss recognised in other comprehensive income is reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. When a hedging instrument expires or is sold, any cumulative hedging gain or loss at that time remains in other comprehensive income and is recognised when the forecast transaction is ultimately recognised in profit or loss. However, when a forecast transaction is no longer expected to occur, the cumulative hedging gain or loss is immediately transferred from other comprehensive income to profit or loss.

Hedges of net investments in foreign operations (net investment hedges) are accounted for similarly to cash flow hedges, i.e. the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and any ineffective portion is recognised immediately in profit or loss. On the disposal of the foreign operation, the gains or losses included in other comprehensive income are reclassified to profit or loss.

When there is an imbalance in the hedge ratio that would create ineffectiveness, the hedge relationship is rebalanced. Rebalancing comprises changes to the hedge ratio to reflect expected changes in the relationship between the hedged item and the hedging instrument.

When a hedge relationship is no longer effective, expires, is terminated or if there is no longer an economic relationship between the hedged item and the hedging instrument, hedge accounting is discontinued from that point on.

Additionally, new hedge relationships have been set up by the Group to hedge fair value changes of equity securities at FVOCI. In this respect, currency forward contracts are used as hedging instruments to protect these investments against adverse movements in euro, British pound, US dollar and Japanese yen exchange rates, and equity derivatives are used as hedging instruments to protect these instruments against adverse fluctuations in the capital market. Changes in the fair value of a hedging derivative that is used to hedge equity instruments measured at fair value through other comprehensive income are recognised in other comprehensive income including hedge ineffectiveness. The time value of options used for hedging such equity instruments at fair value through other comprehensive income is recognised in other comprehensive income and amortised to profit or loss during the hedging period.

In a cash flow hedge, the effective portion of the gain or loss on the hedging derivative is recognised in OCI. Any ineffective portion of the gain or loss is recognised immediately in profit or loss. For a hedged forecast transaction that results in the recognition of a financial asset or liability, the associated gain or loss recognised in other comprehensive income is reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. When a hedging instrument expires or is sold, any cumulative hedging gain or loss at that time remains in other comprehensive income and is recognised when the forecast transaction is ultimately recognised in profit or loss. However, when a forecast transaction is no longer expected to occur, the cumulative hedging gain or loss is immediately transferred from other comprehensive income to profit or loss.

2.2.3 Amendments to IAS 12 Income Taxes

The Amendments to IAS 12 relating to the International Tax Reform Pillar Two Model Rules have been implemented retrospectively with effect from 1 January 2023.

The Swiss Life Group is in the scope of the Organisation for Economic Co-operation and Development (OECD) Pillar Two model rules. The Pillar Two legislation was enacted in Switzerland, the jurisdiction in which the top holding company of the Swiss Life Group is incorporated as well as in a number of additional jurisdictions in which the Swiss Life Group has a presence. The Pillar Two legislation enacted in these jurisdictions is effective from 1 January 2024. Since the Pillar Two legislation was not effective at the reporting date, the Group has no related current tax exposure. The Swiss Life Group applies the exception to recognising and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes, as provided in the amendments to IAS 12 issued in May 2023.

Under the legislation, the Group is liable to pay a top-up tax in implementing jurisdictions for the difference between its GloBE effective tax rate per jurisdiction and the 15% minimum rate. The Group operates in some jurisdictions with a nominal tax rate below 15%. However, although the nominal tax rate is below 15%, Swiss Life might not be exposed to paying a material amount of Pillar Two income taxes due to the impact of specific adjustments envisaged in the Pillar Two legislation which give rise to different effective tax rates compared to those calculated in accordance with IAS 12 and/or local tax legislation.

The Swiss Life Group is in the process of assessing its exposure to the Pillar Two legislation for when it comes into effect. Due to the complexities in applying the legislation and calculating the GloBE effective tax rate, the quantitative impact of the enacted or substantively enacted legislation is not yet reasonably estimable. The Swiss Life Group is currently engaged with tax specialists to assist with applying the legislation.

2.3 Consolidation principles

The Group’s consolidated financial statements include the assets, liabilities, income and expenses of Swiss Life Holding and its subsidiaries. A subsidiary is an entity over which Swiss Life Holding has control. Control is achieved if Swiss Life Holding has the power over the subsidiary, is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to use its power to affect its returns. Subsidiaries are consolidated from the date on which effective control is obtained. All intercompany balances, transactions and unrealised gains on such transactions have been eliminated. Unrealised losses have been eliminated unless the transaction provides evidence of an impairment of the asset transferred. A listing of the Group’s significant subsidiaries is set out in note 31. The financial effect of acquisitions and disposals of subsidiaries is shown in note 24. Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions.

The Swiss Life Group acts as a fund manager for various investment funds. In order to determine if the Group controls an investment fund, aggregate economic interest (including performance fees, if any) is taken into account. Third-party rights to remove the fund manager without cause (kick-out rights) are also considered.

Associates for which the Group has significant influence are accounted for using the equity method. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those decisions. The investment is initially recognised at cost and subsequently adjusted to recognise the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. The Group’s share of net income is included from the date on which significant influence begins until the date on which significant influence ceases. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. The carrying amount includes goodwill on the acquisition.

The Group has elected to measure the performance of certain associates that are held by the insurance business at fair value through profit or loss instead of applying the equity method. Changes in the fair value of such investments are included in net gains /losses on financial instruments at fair value through profit or loss.

A listing of the Group’s principal associates is shown in note 11.

Non-controlling interest is the part of profit or loss and net assets of a subsidiary attributable to equity interest that is not controlled, directly or indirectly, through subsidiaries by the parent. The amount of non-controlling interest comprises the proportion of the net fair value of the identifiable assets, liabilities and contingent liabilities not attributable, directly or indirectly, to the parent at the date of the original acquisition, goodwill attributable to non-controlling interest, if any, and the proportion of changes in equity not attributable, directly or indirectly, to the parent since the date of acquisition. Summarised financial information of subsidiaries with material non-controlling interests is set out in note 22.

2.4 Foreign currency translation and transactions

2.4.1 Functional and presentation currency

Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the Group’s entities operate (the “functional currency”). The consolidated financial statements are presented in millions of Swiss francs (CHF), which is the Group’s presentation currency.

Foreign currency exchange rates

2.4.2 Foreign currency translation

On consolidation, assets and liabilities of Group entities denominated in foreign currencies are translated into Swiss francs at year-end exchange rates. Income and expense items are translated into Swiss francs at the annual average exchange rate. Goodwill reported before 1 January 2005 is translated at historical exchange rates. Goodwill for which the acquisition date is on or after 1 January 2005 is carried in the foreign operation’s functional currency and is translated into Swiss francs at year-end exchange rates. The resulting translation differences are recorded in other comprehensive income as cumulative translation adjustments. On disposal of foreign entities (loss of control), such translation differences are recognised in profit or loss as part of the gain or loss related to the sale.

2.4.3 Foreign currency transactions

For individual Group entities, foreign currency transactions are accoun­ted for using the exchange rate at the date of the trans­action. Outstanding balances in foreign currencies at year-end arising from foreign currency transactions are translated at year-end exchange rates for monetary items such as insurance contracts, while historical rates are used for non-monetary items. Those non-monetary items in foreign currencies recorded at fair values are translated at the exchange rate on the revaluation date.

2.5 Cash and cash equivalents

Cash amounts represent cash on hand and demand deposits. Cash equivalents are primarily short-term highly liquid investments with an original maturity of 90 days or less. Cash and cash equivalents include cash and cash equivalents for the account and risk of the Swiss Life Group’s customers.

2.6 Investment property

Investment property is property (land or a building or both) held by the Group to earn rentals or for capital appreciation or both, rather than for administrative purposes.

Investment property includes completed investment pro­perty and investment property under construction. Completed investment property consists of investments in residential, commercial and mixed-use properties primarily located within Switzerland.

Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for administrative purposes. If these portions could be sold separately, they are accounted for separately. If these portions could not be sold separately, the portion is investment property only if an insignificant portion is held for administrative purposes.

Investment property is carried at fair value and changes in fair values are recognised in profit or loss. Fair values are determined either on the basis of periodic independent valuations or by using discounted cash flow projections. The valuation of each investment property is reviewed by an independent recognised valuer at least once every three years. Rental income is recognised on a straight-line basis over the lease term. The fair value of an investment property is measured based on its highest and best use. The highest and best use of an investment property takes into account the use of the asset that is physically possible, legally permissible and financially feasible.

Investment property under construction is also measured at fair value with changes in fair value being recognised in profit or loss. However, where the fair value is not reliably deter­min­able, the property is measured at cost until either its fair value becomes reliably measurable or construction is completed.

Investment property being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be measured at fair value.

If an item of property and equipment becomes an investment property because its use has changed, the positive difference resulting between the carrying amount and the fair value of this item at the date of transfer is recognised in other comprehensive income as a revaluation surplus. However, to the extent a fair value gain reverses a previous impairment loss, the gain is recognised in profit or loss. Any resulting decrease in the carrying amount of the property is recognised in net profit or loss for the period. Upon the disposal of such investment property, any revaluation surplus included in other comprehensive income is transferred to retained earnings; the transfer is not made through profit or loss.

If an investment property becomes owner-occupied, it is reclassified as property and equipment, and its fair value at the date of reclassification becomes its cost for subsequent measurement purposes.

2.7 Property and equipment

Property and equipment are carried at cost less accumulated depreciation. Land is carried at cost and not depreciated. Depreciation is principally calculated using the straight-line method to allocate the cost of assets to their residual values over the assets’ estimated useful life as follows: buildings 25 to 50 years; furniture and fixtures five to ten years; computer hardware three to five years.

Certain items of property and equipment represent underlying items for direct participating insurance or investment contracts (VFA) and are carried at fair value through profit or loss.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repair and maintenance costs are charged to the income statement during the financial period in which they are incurred. Borrowing costs directly attributable to the construction or acquisition of a qualifying asset are capitalised as part of the cost of that asset. Realised gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in profit or loss.

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.

2.8 Inventory property

Inventory property comprises land and buildings that are intended for sale in the ordinary course of business or in the process of construction or development for such a sale or for development and resale. Such property is included in other assets.

Inventory property is measured at the lower of cost and net realisable value. Acquisition costs comprise the purchase price and other costs directly attributable to the acquisition of the property (notary fees etc.). Construction costs include costs directly related to the process of construction of a property. Construction and other related costs are included in inventory property until disposal.

The estimated net realisable value is the proceeds expected to be realised from the sale in the ordinary course of business, less estimated costs to be incurred for renovation, refurbishment and disposal.

Revenue from sales is recognised when construction is complete and legal title to the property has been transferred to the buyer.

2.9 Leases

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses the incremental borrowing rate as the discount rate. The lease liability is subsequently increased by the interest expense on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index rate, a change in the estimate of the amount expected to be payable under a residual value guarantee or changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option reasonably certain not to be exercised. The Group applies judgement to determine the lease term for some lease contracts with renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of the lease liabilities and right-of-use assets recognised.

As a practical expedient, short-term and low-value leases are exempt from this treatment. The exemption permits a lessee to account for qualifying leases in the same manner as former operating leases under IAS 17 Leases, i.e. the total payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.

The Group acts as a lessor in various operating lease agreements and lease income is recognised over the lease term based on a pattern reflecting a constant periodic rate of return on the net investment in the lease.

2.10 Investment management

Revenue consists principally of investment management fees, commission revenue from distribution and sales of investment fund units. Such revenue is recognised when earned, i.e. when the services are rendered.

Incremental costs of obtaining investment management contracts and investment contracts without DPF are recognised as an asset if they are expected to be recovered. The asset represents the contractual right to benefit from providing investment management services and is amortised on a straight-line basis consistent with the transfer to the customer of the investment management services. Contract costs are included in other assets and reviewed for impairment regularly. Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained are recognised as an expense when incurred.

Deferred investment management fees are included in other liabilities.

2.11 Commission income and expense

Revenue consists principally of brokerage fees, recurring fees for existing business and other fees. Such revenue is recognised when earned, i.e. when the services are rendered. Cancellations are recorded as a deduction of fee income.

Costs primarily comprise commissions paid to independent financial advisors, fees for asset management and other (advisory) services.

2.12 Intangible assets

2.12.1 Goodwill

The Group’s acquisitions of other companies are accounted for under the acquisition method.

Goodwill represents the excess of the fair value of the consideration transferred and the amount of any non-controlling interest recognised, if applicable, over the fair value of the assets and liabilities recognised at the date of acquisition. The Group has the option for each business combination in which control is achieved without buying all of the equity of the acquiree to recognise 100% of the goodwill in business combinations, not just the acquirer’s portion of the goodwill (“full goodwill method”). Goodwill on acquisitions of subsidiaries is included in intangible assets. Acquisition-related costs are expensed. Goodwill on associates is included in the carrying amount of the investment.

For the purpose of impairment testing, goodwill is allocated to cash-generating units. Goodwill is tested for impairment annually and whenever there is an indication that the unit may be impaired. Goodwill is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed in subsequent periods.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Negative goodwill is immediately recognised in profit and loss.

2.12.2 Customer relationships

Customer relationships consist of established relationships with customers through contracts that have been acquired in a business combination or non-contractual customer relationships that meet the requirement for separate recognition. They have a definite useful life of generally 5 to 20 years. Amortisation is calculated using the straight-line method over their useful lives.

2.12.3 Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on a straight-line basis for the expected useful life up to three years. Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Development costs that are directly associated with identifiable software products controlled by the Group and that will probably generate future economic benefits are capitalised. Direct costs include the software development team’s employee costs. Computer software development costs recognised as assets are amortised using the straight-line method over their useful lives, not exceeding a period of three years.

2.12.4 Brands and other

Brands and other intangible assets with a definite useful life of generally 5 to 20 years are amortised using the straight-line method over their useful lives.

2.13 Impairment of non-financial assets

For non-financial assets the recoverable amount is mea­sured as the higher of the fair value less costs of disposal and its value in use. Fair value less costs of disposal is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, less the costs of disposal. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit from its continuing use.

Impairment losses and reversals on non-financial assets are recognised in profit or loss.

2.14 Income taxes

Current and deferred income taxes are recognised in profit or loss except when they relate to items recognised directly in equity. Income taxes are calculated using the tax rates enacted or substantively enacted as of the balance sheet date.

Deferred income taxes are recognised for all temporary differences between the carrying amounts of assets and liabilities in the consolidated balance sheet and the tax bases of these assets and liabilities using the balance sheet liability method. Current income taxes and deferred income taxes are charged or credited directly to equity if the income taxes relate to items that are credited or charged in the same or a different period, directly to equity.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which they can be used. For unused tax losses a deferred tax asset is recognised to the extent that it is probable that these losses can be offset against future taxable profits. Deferred tax liabilities represent income taxes payable in the future in respect of taxable temporary differences.

A deferred tax liability is recognised for taxable temporary differences relating to investments in subsidiaries, branches and associates, except where the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Where the entity has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority, the corresponding assets and liabilities are presented on a net basis.

2.15 Assets held for sale and associated liabilities

A disposal group consists of a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with these assets. Non-current assets classified as held for sale and disposal groups are measured at the lower of the carrying amount and the fair value less costs to sell. The carrying amount will be recovered through a highly probable sale transaction rather than through continuing use. Assets held for sale and the associated liabilities are presented separately in the balance sheet.

2.16 Financial liabilities

Financial liabilities are recognised in the balance sheet when the Swiss Life Group becomes a party to the contractual provisions of the instrument. A financial liability is derecognised when the obligation specified in the contract is discharged or cancelled or expires.

2.16.1 Borrowings

Borrowings are recognised initially at the value of the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest method. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings.

Based on the terms and conditions, such as repayment provisions and contractual interest payments, certain hybrid instruments are considered financial liabilities.

Debt instruments with embedded conversion options to a fixed number of shares of the Group are separated into a debt and an equity component. The difference between the proceeds and fair value of the debt component at issuance is recorded in equity. The fair value of the debt component at issuance is determined using a market interest rate for similar instruments with no conversion rights. The Group does not recognise any change in the value of these options in subsequent reporting periods.

Borrowing costs presented in the consolidated statement of income relate to the interest expense on the financial liabilities classified as borrowings, whilst interest expense presented in the consolidated statement of income relates to interest expense on insurance and investment contract deposits and other financial liabilities.

2.16.2 Other financial liabilities

For deposits with fixed and guaranteed terms the amortised cost basis is used. Initial recognition is at the value of the proceeds received, net of transaction costs incurred. Subsequently, they are stated at amortised cost using the effective interest method. Any difference between the proceeds (net of trans­action costs) and the redemption value is recognised in profit or loss over the period of the deposits. For repurchase agreements, initial recognition is at the amount of cash received, net of transaction costs incurred. Subsequently, the difference between the amount of cash initially received and the amount of cash exchanged upon maturity is amortised over the life of the agreement using the effective interest method.

Financial liabilities at fair value through profit or loss are irrevocably designated as at fair value at initial recognition. Financial liabilities are designated as at fair value through profit or loss in the following instances:

• Financial liabilities that relate to private placement life insurance
• Financial liabilities related to assets measured at fair value in order to reduce or eliminate a measurement or recognition inconsistency
• Financial liabilities with embedded derivatives

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

2.17 Employee benefits

2.17.1 Post-employment benefits

The Swiss Life Group provides post-employment benefits under two types of arrangement: defined benefit plans and defined contribution plans.

The assets of these plans are generally held separately from the Group’s general assets in trustee-administered funds. Defined benefit plan contributions are based upon regulatory requirements and/or plan terms. The Group’s defined benefit obligations and the related defined benefit costs are determined at each balance sheet date by a qualified actuary using the Projected Unit Credit Method.

The amount recognised in the consolidated balance sheet represents the present value of the defined benefit obligations reduced by the fair value of plan assets. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans.

Remeasurements, comprising actuarial gains and losses, the effect of the changes of the asset ceiling and the return on plan assets (excluding interest), are reflected immediately in the consolidated balance sheet and in other comprehensive income in the period in which they occur. Such remea­surements recognised in other comprehensive income will subsequently not be reclassified to profit or loss. Past service cost is recognised in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit asset or liability. Defined benefit costs comprise service costs and net interest expense, which are presented in the income statement under employee benefits expense.

Insurance contracts issued to a defined benefit pension plan covering own employees have generally been elim­inated. However, certain assets relating to these plans qualify as plan assets and are therefore not eliminated.

The Group recognises the contribution payable to a defined contribution plan in exchange for the services of the employees rendered during the period as an expense.

2.17.2 Healthcare benefits

Some Group companies provide healthcare benefits to their retirees. The entitlement to these benefits is usually based on the employee remaining in service up to the retirement age and the completion of a minimum service period. The expected costs of these benefits are accounted for in the same manner as for defined benefit plans.

2.17.3 Share-based payments

The Group operates equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of the shares is recognised in profit or loss with a correspond­ing increase in equity. As the fair value of the services received cannot reliably be measured, the value is measured by reference to the fair value of the equity instruments granted and the price the employees are required to pay.

2.18 Provisions and contingent liabilities

Provisions are liabilities with uncertainties as to the amount or timing of payments. Provisions are recognised if there is a present obligation that probably requires an outflow of resources and a reliable estimate can be made at the balance sheet date and be measured on a best estimate basis. Contingent liabilities are disclosed in the notes if there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources or the amount of the obligation cannot be measured with sufficient reliability.

2.19 Treasury shares

Treasury shares are presented in the consolidated balance sheet as a deduction from equity and are recorded at cost. The difference between the purchase price and the sales proceeds is included in share premium.

2.20 Earnings per share

Basic earnings per share are calculated by dividing net profit or loss available to shareholders by the weighted average number of shares in issue during the reporting period, excluding the average number of shares purchased by the Group and held as treasury shares.

For diluted earnings per share, the profit and the weighted average number of shares in issue are adjusted to assume conversion of all dilutive potential shares, such as convertible debt and share options issued. Potential or contingent share issuance is treated as dilutive when conversion to shares would decrease earnings per share.

2.21 Offsetting

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

2.22 Forthcoming changes in accounting policies

In October 2022, the International Accounting Standards Board issued an amendment to IAS 1 Non-current Liabilities with Covenants. The amendments to IAS 1 specify that covenants to be complied with after the reporting date do not affect the classification of debt as current or non-current at the reporting date. Instead, the amendments require a company to disclose information about these covenants in the notes to the financial statements. The amendments are effective for annual reporting periods beginning on or after 1 January 2024. No impact is expected from the adoption of this amendment.