Telephone +41 43 285 2121 Fax +41 43 285 2999 www.swissre.com 2012 Business Report Working together, achieving the best 2012 Business Report Working together, achieving the best
Return on equity1 in % 9.6 13.4 Return on investments in % 4.4 4.0
Working together, achieving the best 14 One Group, three businesses 16 Reinsurance 20 Corporate Solutions 24 Admin Re® 28 Expert views
Swiss Re at a glance 02 Our mission 04 Message from the Chairman 06 Message from the Group CEO 08 How we operate 10 Our business 12 Board of Directors and Group Executive Committee
About the 2012 Annual Report The Annual Report consists of the Business Report and the Financial Report.
To learn how Reinsurance helped meet health needs in South Korea see page 16
To learn how Admin Re® has transformed its business see page 24 2 Swiss Re 2012 Business Report
Reinsurance Reinsurance is Swiss Re’s largest business in income terms and the foundation of our strength, providing about 80% of gross premiums through two segments — Property & Casualty and Life & Health. The unit aims to extend Swiss Re’s industryleading position with disciplined underwriting, prudent portfolio management and diligent client service.
In Property & Casualty Reinsurance we aim to take advantage of a firming cycle and draw on our underwriting expertise to drive greater returns. We expect to deploy more capital to this segment as profitable opportunities allow. The Life & Health segment faces a more challenging market environment, and is engaged in improving margins going forward and in seizing opportunities in growth areas such as longevity. Corporate Solutions is managing its costs and investing for growth, notably in the expansion of its global footprint. In 2012 Admin Re sold its US business and is now positioned to focus directly on the UK and continental Europe. At Group level we undertook moderate re-risking over the year, allocating more of the asset portfolio to corporate bonds.
Return on equity: 700 basis points above risk-free 13.4% (average over 5 years)1 (9.6% in 2011)
Economic net worth per share growth plus dividends: 10% average annual growth rate over 19.9%4 5 years (in USD, base 2010) (–2.1% in 2011)
I would like to conclude by expressing my thanks to you, our shareholders. We appreciate the trust you have placed in us and we are doing all we can to earn it.
These are my first annual results where I write to you as Group CEO. I am very glad that I can start by sharing such great news. This performance is the result of tireless effort from Swiss Re employees around the globe, to whom I would like to express my most sincere gratitude.
With these excellent results behind us we are moving in the right direction on our 2011–2015 financial targets. They remain our top priority and we are working hard to deliver on them. Return on equity was 13.4%, and our earnings per share were USD 11.85 or CHF 11.13.
By working together we can achieve the best: that is the title of this year’s annual report and effective shorthand for this year’s accomplishments. It is also a good summation of the value Swiss Re provides to its clients.
Across our Group we are harnessing the power of partnership to meet the challenges of business. In South Korea we have worked with Cigna /LINA to develop insurance that covers the cost of cancer treatment for people over the age of sixty. In China we have gone even further, teaming up with local insurers to deliver insurance that covers similar risks for people of all ages — a first in the market. We have become the official insurance provider for Solar Impulse, which aims to become the first solar-powered aircraft to fly around the world. In Vietnam and Mexico we are working together with governments to protect lives and livelihoods.
To continue to perform and grow we will add even more focus to two crucial areas: on talent development and on our high growth markets. And success in the latter depends on success in the first. By 2015 we aim to generate 20%–25% of our revenues from high growth markets. For this endeavour we need talented people — people endowed with the right skills and languages, as well as agility and the passion to perform. The development and management of our human capital in these markets will be key to success.
Our targets are ambitious, and conditions before us are challenging. Nevertheless we remain confident we can meet and exceed our goals, recognising that opportunities for risk management are practically limitless, provided we harness the power of collaboration. If the achievements of 2012 are any indication, we are moving in the right direction.
Low interest rates Persistently low interest rates challenge the profitability of both life and non-life insurers.
Net premiums earned in 2012 by segment 48% P & C Re 36% L & H Re 9% Corporate Solutions 7% Admin Re 19% ASIA-Pacific 39% EMEA
Our oversight body As of 31 December 2012, Swiss Re’s Board of Directors was composed of the 13 members shown below. Collectively they are responsible for setting over-arching policies and for oversight of management. All directors meet our independence criteria.
Group Executive Committee Our executive body As of 31 December 2012, the Group Executive Committee was composed of the 12 members shown below. They are responsible for the day-to-day management of Swiss Re’s businesses.
5 Agostino Galvagni CEO Corporate Solutions 6 Jean-Jacques Henchoz CEO Reinsurance EMEA
Life & Health performance Net income in L&H Re decreased this year to USD 739 million. This was mostly the result of a lower investment result and some poorly performing business that we wrote in the US before 2004. We are addressing those challenges and have aimed to generate new business in high growth markets in Asia and Latin America, particularly in Health. We had strong growth in the Health segment globally this year, and we also booked a number of successful, innovative longevity transactions in Europe. We see strong longer-term growth prospects for life and health protection markets: we estimate a protection gap of USD 80 trillion worldwide.
Admin Re® is a recognised force in closed life business. We take on closed books of in-force life and health insurance business, whole lines of business, or the entire capital stock of life insurance companies. This helps insurers to divest themselves of non-core businesses, reduce administrative costs and release capital in order to realise other opportunities.
For examples of how Corporate Solutions meets client needs, turn to page 20.
“ I was deeply impressed by Swiss Re’s professionalism and commitment. I hope that we can continue to grow together.”
Benjamin Hong CEO, LINA Korea 16 Swiss Re 2012 Business Report
W ho would not wish to live to be a hundred? We naturally desire a long life for ourselves and our loved ones – but every fulfilled desire brings its own unforeseen consequences.
Walk through the restaurant district of Seoul, with its youthful bali bali or “hurry up” culture, and it would be hard to believe that South Korea has the most rapidly ageing society on the planet. From 2000 to 2019, the proportion of South Koreans over 65 will have doubled, from 7% to 14%. That proportion will more than double again, to 33%, by 2050. In just 50 years, South Korea’s youthful tiger economy will turn grey, challenged by a range of social issues currently faced only by the “old” countries of Europe and Japan.
South Koreans today work more hours than anyone else in the industrialised world. Nevertheless, their savings rate is among the lowest – while their life expectancy is among the highest. Medical care is world class, but many procedures and conditions are not fully covered by national health insurance.
ShinOk You is Head of Product of LINA Korea, a subsidiary of the CIGNA Corporation and South Korea’s largest and best-known life and health insurer among direct marketers. She explains the dilemma they face in catering to a rapidly ageing market: “LINA almost always retains its insurance risk, so we take a cautious view. We need to understand every aspect of the risk we’re taking on. In the case of cancer products for people over 60, we knew there was strong demand, but since this is essentially a new customer segment – and one with a wide variation in basic health – we were unsure about the risk profile.” >
“However, while LINA’s disciplined approach was a tremendous endorsement,” he goes on, “it was also an obstacle: since they rarely bought reinsurance, we hadn’t had a business relationship with them for more than 10 years.”
and underwriting process would be simplified – an important requirement for this segment. The product would also manage the increased risk from many pre-existing chronic conditions without excluding the people who suffered from them. “Our simplified underwriting opened the door to new markets without sacrificing sound risk management standards,” says YongSuk. “With this new approach, we developed a first-time product.”
The challenge now was to find the right insurer to introduce it to the market. “Immediately, LINA was the obvious choice,” continues YongSuk; “it has the scale and reach. It has great presence in direct marketing through telephone and television infomercials, which is ideal for an elderly market.”
You can see what your client needs — but it’s something that doesn’t exist. The solution? Invent it.
Russell McGuire of the Regional and National team invited Richard Pennay and Vincent Myers of the Insurance-Linked Securities team to meet with the two companies. Russ, Richard and Vince first met with COUNTRY to suggest that they might find capacity in the capital market through an insurance-linked security – specifically, a catastrophe or ‘cat’ bond. Then they met with NCFB and suggested the same. COUNTRY asked Swiss Re to structure an aggregate cat bond in November 2011. Three days later NCFB followed suit.
Indeed, the LINA/Swiss Re agreement is envisioned for the long term, so that both partners can meet the critical needs of a changing South Korean society. “This is what our strategy calls for: extending our risk appetite and broadening our business,” concludes YongSuk; “We don’t want to wait for opportunities to come to us; we want to create those opportunities and find partners who share our vision to bring them to the market.”
“ We don’t rest until we’ve found the best solutions for our customers. We were pleased to work with a company that looked at things the same way.”
Corporate Solutions has built up the capacity, product design skills and underwriting expertise to provide contingency cover for some of the most well-known sports and entertainment events in the world.
SInsuring your summer There’s a lot to making sure your favourite concert, movie or sporting event goes off without a hitch — and Corporate Solutions plays a starring role
Tom explains further: “Our clients put on very big, very complicated events that absolutely have to happen. They can’t just decide to start a week late because one of their venues is behind schedule. The organisers need insurance partners with the capacity to match the scale of their projects, as well as the knowledge base to structure covers that accurately reflect the risks on the ground.”
01 tom phillipson, corporate Solutions Head of contingency 02 Spectators at a rock concert > With events on the world stage, terrorism is an unfortunate but ever-present concern. Of course this is a special concern for host governments, who already run a reputational risk if the events they host aren’t ready on time. Some will take out their own insurance to make sure everything stays on track. Emerging markets are arguably under even more pressure to show that, as emerging economies, they can still host successful events on the world stage.
Ultimately Tom takes a positive view. “These events do typically go ahead and the preparations manage to get completed,” he says. “As underwriters, we take a huge amount of comfort from the experience that our clients have in hosting the events that they put on, whether they are private companies or government entities.”
Musical acts flip the script once again. Rather than concentrating all the pressure in one small area over a few days, musicians and their promoters are asked to put on an equally complex and high quality performance night after night, city after city. Today bands put on ever-more spectacular and more tightly orchestrated performances, often playing to millions of fans across dozens of cities in the course of their world tour. Lights, staff, machinery and other attractions drive operating costs up and up, sometimes approaching nearly USD 1 million per day. Transport, 22 Swiss Re 2012 Business Report
From variable weather to fluctuating prices, the greatest challenge facing farmers everywhere is uncertainty. Farmsecure, South africa’s biggest integrated agribusiness company, is looking to ease that pressure.
And where uncertainty is still a factor, insurance can play a critical role. So when Jerome Yazbek, Farmsecure’s CEO and founder, attended a presentation by Bernard Belk, Swiss Re Corporate Solutions’ Global Head Food & Agriculture Business, he knew he had found a partner who could help Farmsecure achieve its mission. Bernard explains: “The deal involves 80,000 hectares, which would be expected to produce around 400,000 tonnes of grain in a normal year. We provide yield index cover: if production falls below a given level, for whatever reason, we pay out.”
The result is cover that is innovative in scale, simplicity, and customisation. By taking on the yield risk, Corporate Solutions helps reduce uncertainty — and thus helps Farmsecure support farmers and food security.
Right Farmsecure's operations include large-scale maize production in the Free State province, South africa.
cancellations and failures (whether of performers or their equipment) can all undermine the most best-laid plans. Such instances provide classic illustrations of how the insurance industry can play a backstage but critical role in entertaining millions.
For Tom, ensuring enjoyment can take on a personal touch. An avid concert goer himself, he says he’s proud to be associated with events that bring so much pleasure. “There’s a little sprinkling of stardust over my department generally, which makes it fun to be in and attracts talent.”
Admin Re® has long been a recognised force in the closed life business – a position it strengthened during 2012. The sector offers significant opportunities over the medium term as banks and insurers seek to refocus on core business lines.
A year of transformation Admin Re® strengthens its operational platform, preparing for further growth in Europe, and especially the UK
S hifting demographic trends, regulatory changes, and varying financial returns prompt insurers to sell their legacy life insurance portfolios to third parties, thereby reducing administrative costs and freeing up capital. Admin Re® acquires and integrates closed and legacy books of life insurance, administering them efficiently as a single business with a single IT system. This business model is inherently cash generative, delivering consistent returns for shareholders. Admin Re® has long been a recognised force in the closed life business — a position it strengthened during 2012.
Jackson wished to increase its share of underwriting-based earnings relative to its spread and fee-based business lines; acquiring an in-force life insurance portfolio therefore made good sense. Admin Re®, as the owner of one of the largest life closed books of mortality risk in the US market, was a natural fit. And since Jackson is the US subsidiary of UK insurer Prudential plc, a major client of Swiss Re, the two companies already enjoyed a close and longstanding relationship.
Over the last year, Admin Re® has upgraded its core actuarial, finance, and IT capabilities and systems, boosting the efficiency and effectiveness of its portfolio risk management. The Business Unit is well prepared for changes in the regulatory environment such as Solvency II and Basel III.
The deal closed in September 2012, allowing Swiss Re to unlock the capital from its US business and redeploy it to other areas. Swiss Re received a total of USD 933 million in proceeds: USD 589 million paid by Jackson for the acquired businesses (with an additional USD 74 million deferred until 2013) and USD 270 million in pre-closing dividends. In exchange, Admin Re® transferred 1.6 million policies and USD 10 billion in statutory reserves to Jackson.
Admin Re® is well placed to build on this streamlined and scalable operational platform, as well as its strong UK market presence. Its focus is on increasing the scale of its operations, potentially raising third-party capital to help fund future growth in Europe while continuing to generate cash for reinvestment, servicing debt obligations, and paying dividends to the Group. It is the strongly held conviction that the predictable, long-term dividends that emerge from Admin Re® will be highly attractive to investors in today’s market environment.
Life insurance and pension obligations are long-term in nature. For the company responsible, these obligations represent liabilities that should be funded by assets that match them as far as possible in value and duration.
The investment strategy for Admin Re® is therefore governed by deep insight into the dynamics of assets and liabilities, along with their associated diversification effects.
In China, for instance, a Swiss Re study revealed that people still expect to retire at age 58 and live, on average, a further 31 years. But during those years, demographic trends generated by a lower birth rate mean that only one employed person will be contributing to the state pension scheme while up to six – two parents and four grandparents — are drawing from it. This is obviously unsustainable.
Swiss Re is working with the World Economic Forum to define the problems that longevity poses for social security and to propose new approaches. Along with changes to retirement ages and benefits and a greater emphasis on individual savings, there is clearly a significant role for reinsurers — because they hold mortality risk that can balance longevity risk. They also have the capacity to structure the insurance-linked securities that allow financial markets to participate in longevity risk, as Swiss Re did in 2012 with its GBP 1.4 billion longevity swap for AkzoNobel’s employee pension scheme.
These approaches depend critically on intelligent modelling of future risks, incorporating both best estimates and extreme scenarios for longevity and mortality to create a detailed picture of capital needs. That is one reason why our department spends much of their time consulting and working with researchers outside our industry — because experience shows that the insurer who relies only on actuarial modelling will find it insufficient. >
Daniel Ryan: In developed and developing countries alike, average lifespan has increased dramatically over the past four decades — indeed, at a rate consistently underestimated by actuarial forecasts. Longevity is a global challenge that is transforming our industry. Swiss Re’s new cancer care product for South Koreans over 60 is one good example of how we are meeting that challenge.
This year, we are right in the middle of one of the busiest periods of financial regulation in the last half-century, with new regimes coming into force in the US and EU governing capital markets, solvency, national and regional supervision, and “systemically-important institutions” (also known as “too big to fail”).
Clarence Wong is Chief Economist Asia, based in Hong Kong. He has been with Swiss Re since 1999. Clarence has authored several studies on regional and international trends in insurance. He participates in a wide range of research and consulting projects on the relationship between the general economy, capital markets and the insurance and reinsurance markets. His latest sigma study, “partnering for food security in emerging markets,” is available on swissre.com /sigma.
We address the specific needs of the agricultural sector through single and multiperil crop insurance, parametric index covers, area yield covers, micro-insurance products and public-private partnerships. Many solutions, but the aim throughout is simple: to reduce uncertainty, cushion the impact of disaster, provide for future investment, and help secure the world’s food supply.•
Food security remains a stubbornly persistent problem, says Clarence Wong, and re /insurance can make a vital contribution.
“ Just to keep up with our growing population, world agricultural production will have to rise by as much as 60% between now and 2050 — a period in which a changing climate will bring ever more frequent and severe weather events.”
Vietnam relies on the success of its farmers. As the world’s largest exporter of farm-raised fish, and the secondlargest exporter of both rice and coffee, agriculture accounts for about one-fifth of the nation’s economic output. The government has been investing heavily to enhance the sector’s productivity through irrigation, pest control, farmer outreach and other means. Nevertheless there is no amount of investment that can eliminate the risk of cyclones and floods — though there is insurance.
Swiss Re and the government of Vietnam are working together on a pilot insurance scheme that seeks to protect millions of Vietnamese farmers from the risks from natural disasters, epidemics and disease. The programme’s first policies were sold in the middle of 2012.
The scheme is a bold example of publicprivate partnership in the financial sector in an emerging market setting. The Ministry of Finance designed the overall programme and is responsible for regulating it. Swiss Re offers the technical support of its agriculture experts and reinsures the scheme through its strategic partner the Vietnam National Reinsurance Corporation (Vina Re), in which it retains a 25% equity stake. The Ministry of Agriculture takes on the farmer outreach work and is responsible for declaring when an outbreak of disease or epidemic has occurred. Distribution of the policies is in the hands of two local insurers.
The MultiCat bond pays out automatically when agreed triggers are reached. Such coverage provides speedy funding in the immediate aftermath of a catastrophe. In effect, the Mexican government has locked in the funding for disaster relief before the disaster happens.
Reto Schnarwiler, Head Americas, Europe, Middle East and Africa at Swiss Re Global Partnerships, added: “The Mexican government has designed the most advanced, comprehensive public approach to catastrophe risk management we have seen anywhere. We are honoured to work with them.”
Every year brings new headlines about how devastating natural catastrophes have put a country’s resilience to the test. Developing countries — which have suffered an average of roughly USD 55 billion in economic damage from catastrophes every year over the past ten years — are particularly vulnerable.
Partnering for a secure future schemes for immediate disaster relief to insurance for shortfalls in food production. Participants especially valued the session on climate change adaptation as the methodology presented is readily available and highly practical.
For more information on Swiss Re’s engagement with the public sector go to: www.swissre.com/globalpartnerships
Eight-thousand times more energy hits the earth in a single hour than all of humanity uses in an entire year. The challenge is developing the means to capture it.
In addition to the sun, energy sources like wind and water are abundant and clean. Any one of them would be a better source of energy than fossil fuels — at least as far as the climate and the environment are concerned. But with nearly the entire global economy running on sources like gas, coal and oil, how can we steer away from traditional fuels and toward renewable energy? And can we do it quickly enough to meet the energy needs of a rapidly growing population?
The Scenarios for Climate Change (SCC) project, a research initiative supported by Swiss Re, has laid out six different scenarios. Under all of them, the global energy system will shift towards a greener power mix, with higher demand for low-carbon technologies. These include renewable energy sources like solar energy as well as adaptations to traditional sources, such as modifying coal-burning power plants so that the carbon they emit is safely captured and stored. In the most likely scenario, characterised by a “slow greening” of the world economy,
The future takes flight Renewable energy pioneers — like pioneers in countless industries before them — will need the help of the re/insurance industry to manage the inherent risk of developing solar, wind and hydro power. The new partnership between Corporate Solutions and Solar Impulse, the world’s first solar-powered airplane able to fly day and night, is one amazing example.
climate change, population growth or pandemics. The Foundation provides grants for education and training, research and innovation, development aid and the promotion of social responsibility. It also supports community projects where Swiss Re has offices and encourages volunteering by Swiss Re employees.
People are what make a company unique. So rather than talking for them, we asked three of Swiss Re’s more than eleven thousand people to tell us about their impressions and experiences.
Q What experiences at Swiss Re do you value most? A Christina: What I’m doing, micro-risk in sub-Saharan Africa, is something that didn’t exist — we created it. So I had the chance to be an entrepreneur, develop a whole business, invent new contracts, and work in a place that always fascinated me. It’s pretty cool.
Christina Ulardic works for Corporate Solutions in Environmental & Commodity Markets. She develops weather index and crop yield shortfall risk transfer solutions. Africa is her main geographic focus; the clients are investors, financial service companies, corporate and public sector entities. Before joining Swiss Re she worked for the Chilean geological survey, the climate change programme of the United Nations Institute of Training and Research in Geneva, and the German Federal Ministry for the Environment in Berlin. Christina joined Swiss Re in 2004.
Neil: I’ve worked in Europe, in Asia, and now in America — I’ve met Swiss Re people with all sorts of experiences, but the consistent thing about them to me is quality and integrity. They’re bright, trustworthy people. The business culture may be completely different, but the way we do business is the same.
̤̤ changes̤in̤Swiss̤Re’s̤investment̤ result̤as̤a̤result̤of̤changes̤in̤its̤ investment̤policy̤or̤the̤changed̤ composition̤of̤its̤investment̤assets,̤ and̤the̤impact̤of̤the̤timing̤of̤any̤ such̤changes̤relative̤to̤changes̤in̤ market̤conditions; ̤̤ uncertainties̤in̤valuing̤credit̤default̤ swaps̤and̤other̤credit-related̤ instruments; ̤̤ possible̤inability̤to̤realise̤amounts̤on̤ sales̤of̤securities̤on̤Swiss̤Re’s̤ balance̤sheet̤equivalent̤to̤their̤markto -market̤values̤recorded̤for̤ accounting̤purposes; ̤̤ the̤outcome̤of̤tax̤audits,̤the̤ability̤to̤ realise̤tax̤loss̤carryforwards̤and̤the̤ ability̤to̤realise̤deferred̤tax̤assets̤ (including̤by̤reason̤of̤the̤mix̤of̤ earnings̤in̤a̤jurisdiction̤or̤deemed̤ change̤of̤control),̤which̤could̤ negatively̤impact̤future̤earnings; ̤̤ the̤possibility̤that̤Swiss̤Re’s̤hedging̤ arrangements̤may̤not̤be̤effective; ̤̤ the̤lowering̤or̤loss̤of̤one̤of̤the̤ financial̤strength̤or̤other̤ratings̤of̤ one̤or̤more̤Swiss̤Re̤companies,̤and̤ developments̤adversely̤affecting̤ Swiss̤Re’s̤ability̤to̤achieve̤improved̤ ratings; ̤̤ the̤cyclicality̤of̤the̤reinsurance̤ industry; ̤̤ uncertainties̤in̤estimating̤reserves; ̤̤ uncertainties̤in̤estimating̤future̤
Swiss̤Re’s̤clients̤and̤other̤ counterparties,̤such̤as̤bankruptcies,̤ liquidations̤and̤other̤credit-related̤ events; Certain̤statements̤and̤illustrations̤ contained̤herein̤are̤forward-looking.̤ These̤statements̤(including̤as̤to̤plans,̤ objectives,̤targets̤and̤trends)̤provide̤ current̤expectations̤of̤future̤events̤ based̤on̤certain̤assumptions̤and̤include̤ any̤statement̤that̤does̤not̤directly̤relate̤ to̤a̤historical̤fact̤or̤current̤fact.
Forward-looking̤statements̤typically̤are̤ identified̤by̤words̤or̤phrases̤such̤as̤ “anticipate”,̤“assume”,̤“believe”,̤ “continue”,̤“estimate”,̤“expect”,̤“foresee”,̤ “intend”,̤“may̤increase”̤and̤“may̤ fluctuate”̤and̤similar̤expressions̤or̤by̤ future̤or̤conditional̤verbs̤such̤as̤“will”,̤ “should”,̤“would”̤and̤“could”.̤These̤ forward-looking̤statements̤involve̤ known̤and̤unknown̤risks,̤uncertainties̤ and̤other̤factors,̤which̤may̤cause̤ Swiss̤Re’s̤actual̤results̤of̤operations,̤ financial̤condition,̤solvency̤ratios,̤ liquidity̤position̤or̤prospects̤to̤be̤ materially̤different̤from̤any̤future̤results̤ of̤operations,̤financial̤condition,̤ solvency̤ratios,̤liquidity̤position̤or̤ prospects̤expressed̤or̤implied̤by̤such̤ statements̤or̤cause̤Swiss̤Re̤to̤not̤ achieve̤its̤published̤targets.̤Such̤ factors̤include,̤among̤others: ̤̤ further̤instability̤affecting̤the̤global̤
financial̤system̤and̤developments̤ related̤thereto,̤including̤as̤a̤result̤of̤ concerns̤over,̤or̤adverse̤ developments̤relating̤to,̤sovereign̤ debt̤of̤euro̤area̤countries; ̤̤ further̤deterioration̤in̤global̤ economic̤conditions; ̤̤ Swiss̤Re’s̤ability̤to̤maintain̤sufficient̤ liquidity̤and̤access̤to̤capital̤markets,̤ including̤sufficient̤liquidity̤to̤cover̤ potential̤recapture̤of̤reinsurance̤ agreements,̤early̤calls̤of̤debt̤or̤debtlike ̤arrangements̤and̤collateral̤calls̤ due̤to̤actual̤or̤perceived̤deterioration̤ of̤Swiss̤Re’s̤financial̤strength̤or̤ otherwise; ̤̤ the̤effect̤of̤market̤conditions,̤ including̤the̤global̤equity̤and̤credit̤ markets,̤and̤the̤level̤and̤volatility̤of̤ equity̤prices,̤interest̤rates,̤credit̤ spreads,̤currency̤values̤and̤other̤ market̤indices,̤on̤Swiss̤Re’s̤ investment̤assets; ̤̤ current,̤pending̤and̤future̤legislation̤ and̤regulation̤affecting̤Swiss̤Re̤or̤its̤ ceding̤companies̤and̤the̤ interpretation̤of̤legislation̤or̤ regulations̤by̤regulators; ̤̤ legal̤actions̤or̤regulatory̤ investigations̤or̤actions,̤including̤ those̤in̤respect̤of̤industry̤ requirements̤or̤business̤conduct̤ rules̤of̤general̤applicability; ̤̤ changes̤in̤accounting̤standards; ̤̤ significant̤investments,̤acquisitions̤or̤
Group Net income attributable to common shareholders 2 626 4 201 60 Premiums earned and fee income 22 176 25 446 15 Earnings per share in CHF 6.79 11.13 64
Combined ratio in % 107.9 96.2 Return on equity1 in % 3.7 7.4
Financial statements 120 Group financial statements 128 Notes to the Group financial statements 222 Report of the statutory auditor 224 Group financial years 2002–2012 226 Swiss Re Ltd
Financial year 14 Market environment 20 Group results 24 Summary of financial statements 26 Reinsurance 32 Corporate Solutions 34 Admin Re®
Corporate governance 58 Overview 60 Group structure and shareholders 63 Capital structure 66 Board of Directors 80 Executive management 86 Shareholders’ participation rights 87 Changes of control and defence measures 88 Auditors 90 Information policy
Swiss Re at a glance 02 Our mission 04 Message from the Chairman 06 Message from the Group CEO 08 How we operate 10 Our business
To learn how Corporate Solutions supports sports and entertainment see page 20
To learn how Admin Re® has transformed its business see page 24 in the 2012 Business Report in the 2012 Business Report in the 2012 Business Report 2 Swiss Re 2012 Financial Report
Earnings per share growth: 10% average annual growth rate 54.5%3 over 5 years, adjusted for special dividends 2 (in USD, base 2010) (16% in 2011)
Based on this performance and in line with our commitment to active capital management, the Board of Directors will recommend a dividend of CHF 3.50 per share at this year’s Annual General Meeting. Additionally we will propose a special dividend of CHF 4.00 per share. This translates to a total return of capital to shareholders of approximately USD 2.8 billion.
These excellent results have been earned in a difficult environment. Low interest rates are a challenge for all our business lines. The regulatory landscape is also changing, in particular the regulations related to solvency, capital markets, and national and global supervision. These changes are happening in a number of jurisdictions simultaneously and will have a cumulative and cross-sector impact. In early 2013, the G-20 is expected to approve a list of re/insurance companies designated as globally systemically important. As a leading re/insurer, we play an important role in the financial system and the economy. However our core activities are neither a source nor an amplifier of systemic risk, as has been acknowledged by many regulatory bodies.
What would such a designation mean in practical terms for Swiss Re? Regulators are in the early stages of defining the policy measures that would apply to the companies appearing on this list. They are focusing on three areas — enhanced supervision, effective resolution, and loss absorption capacity. Swiss Re believes that it is well prepared to respond to requirements along these lines.
We expect the global economy to be less turbulent in the coming year. The US and European economies are expected to improve slightly, and growth in emerging markets is expected to remain quite robust. In 2012 we saw several positive developments in the euro area.
* Swiss withholding tax exempt distribution out of legal reserves from capital contributions 4 Swiss Re 2012 Financial Report
Swiss Re has been a key innovator in the area of reinsurance. Today we are carrying this tradition forward with insurance-linked securities, longevity swaps and partnerships with governments. For 150 years we have been expanding the boundaries of the insurance solution, not only by innovation but also by reaching out to new clients. This year when we turn 150 is the right moment to commemorate these achievements. We will have a number of events in locations around the globe for clients, media and other stakeholders, not to mention the employees who make it all possible, as well as the families who support them.
“ I am confident that our Group is well positioned for 2013. This confidence comes from our strong capital position and the long-term relationships we have with our clients.”
Message from the Group CEO Performance and growth by the Swiss Re Group in 2012, demonstrated by net income of USD 4.2 billion
Let me run you quickly through their achievements: The Property & Casualty Reinsurance segment delivered a very strong net income of USD 3.0 billion, represented by a combined ratio of USD 80.7%. The Life & Health Reinsurance segment turned a profit of USD 739 million, though we recognise we still have some work to do on the profitability of this segment. I am pleased by Corporate Solutions’ net income of USD 196 million, or 142% higher than in 2011, making good on the growth aspirations we had for this segment when we put a stronger emphasis on the direct corporate business. Admin Re® underwent significant structural changes in 2012 with the sale of its US business, demonstrating the capital agility that was one of the key ideas of our corporate reorganisation. Admin Re® delivered net income of USD 183 million.
Advocating a smart response We support a range of measures that will help financial industries to continue conducting business effectively and sustainably — indeed, we make it our business.
To see how our capital strength allows us to turn regulatory uncertainty into good business, read the Admin Re® story beginning on page 24 of the Business Report.
Renewing trust Many factors, weak growth and high unemployment among them, are putting pressure on private sector institutions to prove their social value.
Broad resilience and sustainability We embrace our role in supporting resilience against natural catastrophes and other perils. In 2012 we were named the most sustainable company in the insurance sector for the fifth year in a row by SAM, provider of one of the world’s leading corporate sustainability benchmarks.
Our business Swiss Re is a leader in wholesale reinsurance, insurance and risk transfer solutions. Our clients include insurance companies, mid-sized and multinational corporations and public sector bodies. Our capital strength and knowledge enable the risk-taking on which economies depend.
Financial year Swiss Re delivered an excellent net income of USD 4.2 billion. The underlying business performance of the Group was clearly very strong. Overall the year was characterised by ongoing economic weakness in developed countries and an uneven pattern of growth in developing countries, with significant financial market volatility led primarily by developments in Europe.
Global economy The recession in many European economies continued or even intensified in 2012. Tight fiscal policies, restrictive credit conditions and high uncertainty weighed on economic activity, particularly in Europe’s periphery, where fears of a euro exit or break-up also led to capital flight. Moderate growth continued in Germany, supported by extremely low interest rates and robust exports to emerging markets. In the UK, the economy contracted further before growth resumed in the second half of the year. Growth was more robust in the US, but remained fairly moderate despite support in the second half from a recovery in the housing market. Uncertainty regarding the “fiscal cliff” weighed on sentiment and likely affected hiring and investment. Reconstruction spending from the 2011 earthquake and tsunami continued to support the Japanese economy during the first half of the year, but weak global demand hampered economic activity in the second half. Growth in emerging markets remained relatively robust, although it was burdened by sluggish demand in Europe and the US and a slowdown in China due to a tightening of credit conditions (see economic indicators table on page 15).
Spreads for 10-year government bond yields versus German benchmark 2012 in % points
– Ireland – Italy – Portugal – Spain Source: Datastream 14 Swiss Re 2012 Financial Report
Consumer price inflation declined during the first half of the year, mainly because oil prices stabilised. By year-end, inflation was close to central banks’ target rates both in the eurozone and the US. Inflation moderated in most emerging markets, with the main exception of India.
Interest rates Extremely loose monetary policies continued in 2012. The US Federal Reserve (the Fed) and the Bank of England kept interest rates close to zero, while the European Cental Bank (ECB) lowered rates to 0.75% in July. The Bank of England also increased the size of its government bond purchase programme, while the Fed increased its purchases of longer-dated government bonds at the expense of shorter securities (“Operation Twist”). In September, the Fed also started to purchase mortgage-backed securities to support mortgage markets. Yields on US, UK, and
German government bonds increased slightly during the first few months of the year, but then fell sharply as increased risk aversion and central banks’ commitment to maintain low interest rates boosted demand for relatively creditworthy government bonds. During the second half of the year, bond yields rose slightly with improving market sentiment, but ended the year well below their January levels (see interest rates chart).
Risk appetite diminished in the second quarter as European economic indicators deteriorated and elections in Greece favoured radical parties that opposed the adjustment programme that had been agreed with the EU, the IMF and the ECB. This aggravated fears of a Greek exit from the euro, leading to widespread contagion and capital flight from Europe’s peripheral economies. Only the ECB’s forceful commitment at the end of July to do “whatever it takes” to preserve the single currency managed to contain the turmoil. Political agreement on increased fiscal and banking sector integration and the ECB’s commitment to act as governments’ “lender of last resort” restored market confidence. The major stock markets showed positive 2012 performance ranging from 6% (FTSE 100) to 18% (TOPIX).
Market overview The global non-life industry generated around USD 2 000 billion of premium income in 2012, of which around 18% was generated in emerging markets. Non-life insurance extends from standardised motor and household insurance to sophisticated tailor-made liability and property covers, including specialty commercial and industrial risk insurance.
Market performance Growth in non-life insurance business further accelerated in 2012. In advanced markets this was due primarily to moderate rate increases in some countries, with exposure growth generally weakening with the slowing global economy. In emerging markets growth remained at a much higher level than in advanced markets, though moderating slightly compared to 2011.
The demand for re/insurance cover for natural catastrophes has risen significantly in the past ten years. It is likely to increase further as economic development continues in emerging markets and as property and commercial values accumulate in high-risk coastal areas.
Emerging markets represent a rising proportion of insured assets, reflecting their growing share of the global economy and increasing risk awareness.
As demand for property catastrophe treaties is rising, the global reinsurance business is also increasingly exposed to the performance volatility associated with extreme weather events which, evidence suggests, may be aggravated by climate change going forward.
Market overview Global non-life reinsurance premiums in 2012 totalled about USD 180 billion, 25% of which stemmed from ceding companies in emerging markets. In general, reinsurance demand is a function of the size and capital resources of primary insurance companies, as well as of the risk profile of the insurance products provided.
Nevertheless, underwriting profitability in reinsurance markets held up better than in many primary markets. The industry still benefits from the hard market years of 2002 and 2003, and from the more benign claims of the 2009 and 2010 recession years. Releases from loss reserves in prior years are currently helping to improve underwriting results.
Assuming average catastrophe losses, we expect the combined ratio to be around 97% in 2013. This estimate is based on a scenario that assumes a moderate rate increase, a less benign claims environment than the last three years and declining reserve releases. The overall profitability outlook for 2013 and 2014 is moderate: we expect an average return on equity for the reinsurance industry of 8% to 9%.
The current low interest rate environment has reduced profitability throughout the industry, particularly in longterm business where investment income is a major source of earnings.
Sales of protection products are traditionally much less volatile than insurance savings products. Protection products held up relatively well during the crisis, with stable premiums in the UK and US after years of contraction, and increased volumes of new business in other important markets, particularly in Asia.
Most companies reported respectable results, but the situation remains challenging. Low interest rates, volatile financial markets, regulatory changes and weak demand — especially for life insurance savings and accumulation products — have created a demanding business environment. Nevertheless opportunities remain for life insurers able to generate sales from the large and persistent protection gap.
During 2012, clients transferred more than USD 20 billion in longevity liabilities through publicly disclosed longevity reinsurance and swap transactions; this compares to USD 9 billion for the full year in 2010 and USD 15 billion for 2011. The market is most active in the UK, although there have been large deals in continental Europe and transactions with Australian and Canadian insurers.
Market overview Global life reinsurance premiums totalled slightly over USD 50 billion, 70% of which came from the US, Canada and the UK. Ceding companies from emerging countries accounted for only 6% of global demand. Life reinsurers are increasingly diversifying away from traditional mortality business, which is currently flat.
Group results Swiss Re reported annual net income of USD 4.2 billion in 2012, compared to net income of USD 2.6 billion in 2011. Earnings per share were CHF 11.13 or USD 11.85, compared to CHF 6.79 or USD 7.68 in 2011.
Property & Casualty Reinsurance reported net income of USD 2 990 million driven by strong underwriting performance, a continuation of strong underlying margins and favourable development of prior-year reserves. Life & Health Reinsurance delivered net income of USD 739 million, compared to USD 1 664 million in 2011. The result for 2012 reflects lower investment income and a continuation of the negative performance of business written in the Americas prior to 2004. In 2011 the result included exceptionally large mark-to-market gains on the foreign exchange portfolio that was designated as trading.
The Group’s combined ratio improved significantly to 83.1% in 2012, compared to 104.7% in 2011. The net impact from natural catastrophes on the combined ratio in 2012 was 8.0 percentage points, which is 0.6 percentage points below the expected level. In 2011, natural catastrophe experience was approximately 19.4 percentage points higher than expected.
Both periods benefited from better than expected development of prior accident years, amounting to a 7.4 percentage point impact for the 2012 combined ratio, after 11.0 percentage points in 2011.
The return on investments for 2012 was 4.0%, compared to 4.4% in 2011. Excluding the impact of foreign exchange, return on investments was 4.2% in 2012, compared to 3.7% in 2011. On a full year basis, the Group running yield declined to 3.2%, compared to 3.6% during 2011.
During the year non-controlling interests decreased by USD 1.7 billion reflecting the sale of Swiss Re Private Equity Partners AG and the acquisition of the ownership interest in New California Holdings, Inc.
Excellent net income of USD 4.2 billion driven by very strong underlying business performance 20 Swiss Re 2012 Financial Report
48% P & C Re 36% L & H Re 9% Corporate Solutions 7% Admin Re
Net premiums earned by Business Unit, 2012 (Total: USD 25.4 billion)
Full-year 2012 Group operating results Property & Casualty Reinsurance reported USD 12.3 billion in premiums earned, an increase of 22% compared to the prior-year period. The increase reflects successful renewals in 2012 and continued earnings from large quota share treaties written in 2011. Life & Health Reinsurance premiums earned and fee income increased 9%, driven by health business growth in Europe and Asia, new longevity transactions and higher rates in the Americas. Corporate Solutions premiums earned increased 18% to USD 2.3 billion, reflecting successful organic growth across all major lines of business.
The Property & Casualty Reinsurance claims and claim adjustment expenses decreased 15% in 2012 compared to 2011. This reflects natural catastrophe experience within expected levels for 2012, despite the impact from Hurricane Sandy in the last quarter of 2012. Both reporting periods benefited from reserve releases due to favourable development of prior accident years.
Returns credited to policyholders reflect the investment performance on the underlying assets, mainly backing unitlinked and with-profit policies, which are passed through to policyholders. In 2012, returns credited to policyholders were USD 3.0 billion, compared to USD 61 million in the prior year.
Acquisition costs for the Group increased 13% to USD 4.5 billion, reflecting higher business volumes.
Interest expenses were USD 0.7 billion, a decrease of 14% over 2011, mainly due to lower average debt outstanding during the year compared to 2011.
The Group reported a tax expense of USD 1.1 billion on a pre-tax income of USD 5.5 billion in 2012, compared to an expense of USD 77 million on a pre-tax income of USD 2.9 billion in 2011. The results reflect an effective tax rate in the current and prior year of 20.4% and 2.7%, respectively. The higher effective tax rate in the current year was a result of lower tax benefits from reductions in the local statutory valuations of investments in subsidiaries and changes in local country tax rates.
Financial markets overview for 2012 Concerns over the global economic outlook and the eurozone debt crisis dominated financial markets. In the first quarter, sentiment was positive as a result of additional liquidity provided by the ECB in the form of three-year long-term refinancing operations (LTROs). Greece also completed its private sector debt restructuring and secured a second bailout programme. Later in the year, political and banking sector risks in Europe as well as a continued weak global economic growth environment were the key market drivers. Market risk appetite improved substantially as global central banks took an even more accommodative stance, as with the ECB’s conditional bond-buying plan. Following US President Obama’s re-election in November, attention shifted to the uncertainty around the looming US “fiscal cliff”.
The environment in 2012 was supportive for core sovereign bond markets: US Treasury and “core” European government bond yields declined further with US 10year Treasury yields reaching a new all-time low of 1.39% in July 2012. Equities had a good start into the year: the S&P 500 was up 12% in the first quarter, followed by a market correction in the spring. After a renewed “risk-on” period, volatility increased again somewhat in the fourth quarter. Once more, credit risk proved to deliver very strong total returns thanks to both tightening spreads and falling government bond yields.
Net investment income from investments was USD 3.6 billion for 2012, compared to USD 4.0 billion for 2011. This was mainly due to lower yields and the impact of a lower asset base from the sale of Admin Re® US business. On a full year basis, the Group running yield declined to 3.2%, compared to 3.6% during 2011.
Building the investment case Demographics — a key factor that drives financial markets over the longer-term — are favourable in HGM, with relatively younger populations in most countries. Barring HGM where population aging already is or will be a challenge over the next decade (notably China, Russia and Eastern Europe), these countries will experience an increase in the working age population that, combined with effective public policies, would facilitate even more rapid economic growth.
to Swiss Re, which aims to earn 20%–25% of premiums in these markets by 2015. The need to align HGM investments with our insurance liabilities will be fundamental to meeting these targets.
Investing in HGM is not without risks and challenges. Financial assets in these markets are likely to exhibit higher volatility and be more exposed to the risk of contagion from global economic shocks despite improvements in risk perception by market participants. Also, lower liquidity of HGM assets, higher transaction costs and restrictions placed on foreign investors are further potential deterrents for some investors.
Despite these risks, the merits of investing in HGM assets cannot be ignored. The macro outperformance, yield enhancement and diversification benefits, as well as a widening investor base make the longerterm case for investing in HGM assets strong.
Summary of financial statements Income statement USD millions 2011 2012 Change in %
Fee income from policyholders 876 785 –10 Net investment income – non-participating 4 626 4 473 –3 Net realised investment gains/losses – non-participating 1 634 947 –42 Net investment result – unit-linked and with-profit –403 2 570 –
Income before income tax expense 2 875 5 523 92 Income tax expense –77 –1 125 – Net income before attribution of non-controlling in-
Total shareholders’ equity as of 1 January 25 342 29 590 17 Net income attributable to common shareholders 2 626 4 201 60 Change in unrealised gains/losses on securities, net 3 181 184 –94 Change in other-than-temporary impairment, net of tax 51 90 76 Change in foreign currency translation –199 332 –
Policy loans, mortgages and other loans 5 640 2 299 –59 Investment real estate 645 777 20 Short-term investments, at amortised cost which approximates fair value 13 660 18 645 36
Investments for unit-linked and with-profit business 22 349 25 501 14
Deferred acquisition costs and other intangible assets 8 149 7 062 –13
Income taxes payable 442 604 37 Deferred and other non-current taxes 2 853 3 724 31
Excellence in our core businesses is predicated on underwriting as a key differentiator based on industry leading cycle management and portfolio steering. This includes the steering of peak perils, our risk transformation capabilities, and research and development. As a few examples, in Property, we have our own research team and models for storm, earthquake and flood. In Casualty, we are developing a forward-looking ‘nat-cat-like’ model based on a systematic assessment of risk drivers. In Life & Health our unparalleled mortality experience data allow us to better quantify the underlying risk.
Our key value drivers are large capacity, technical expertise and the ability to develop tailored solutions to meet clients’ needs, for example in the area of solvency relief. In addition we have a market-leading position in transferring both property and life risks to the capital markets.
Reinsurance consists of two segments, Property & Casualty and Life & Health. The Business Unit operates globally, both through brokers and directly with clients, and provides a large range of solutions for risk and capital management.
Loss activity in 2011 drove natural catastrophe rates up in 2012, especially in loss-affected markets, and we were able to capture profitable growth. Property and specialty reinsurance continued to deliver excellent earnings, each with a relatively high economic profit margin. Due to the prolonged period of low interest rates, profitability in casualty continued to be challenging around the world, particularly in the US. However, we saw a slowing of reserve releases and some positive price signals at the primary level, indicating some improvement in the market. We focused on large capital relief transactions as well as external run-off deals. As for the Reinsurance Business Unit overall, capturing opportunities in growth markets remained a key priority in P&C. Notable examples of this focus include our reinsurance cover for the Hong KongZhuhai -Macau Bridge, as well as the tailormade solutions and products we delivered in 2012 to reinsure China’s growing number of vehicles.
Our Life & Health growth strategy focuses on longevity and health. Longevity represents a very large risk pool that is expected to grow further as demographics shift. Swiss Re is a natural and efficient holder of longevity risk as it is a partial hedge against our large mortality portfolio and does not correlate with property and casualty risks. And given our unique ability to deploy large net capacity, we are well positioned to achieve significant growth in this area, as shown by the GBP 800 million (USD 1.3 billion) longevity insurance contract we closed in 2012 covering over 5,000 members of the pension fund of UK insurer LV=. The transaction confirms our position as the leader in the longevity swap market, having transferred over USD 12 billion in longevity liability to our own books. Our substantial investment into research and development is aimed at continually improving our ability to predict mortality and longevity trends.
We believe that the main factors driving reinsurance market prices — interest rates, regulatory changes, inflation, reserve adequacy, industry capitalisation and natural catastrophes — indicate higher prices for reinsurance and we aim to benefit from this trend in Property & Casualty. In Life & Health we will continue to actively manage our in-force book to increase profitability and develop new solutions to grow, particularly in longevity and health.
Natural catastrophe experience for 2012 was within expectations, while 2011 was heavily impacted by the large Asian natural catastrophe events.
Major natural catastrophe losses in 2012 were caused by Hurricane Sandy, earthquakes in Northern Italy, droughts in the US, Typhoon Bolaven in South Korea and hailstorms in Alberta, Canada.
The mix between proportional and non-proportional reinsurance changed only slightly in 2012. Based on gross written premiums (before intragroup retrocession), the share of proportional business increased to 61% in 2012, compared to 59% in 2011, mainly as a result of a large capital relief transaction written in 2012.
Combined ratio The 2012 combined ratio improved to 80.7%, compared to 104.0% in 2011.
The net impact from natural catastrophes on the 2012 combined ratio was 1.3 percentage points below the expected level of 9.4 percentage points. In 2011, natural
Both periods benefited from better than expected development of prior accident years, amounting to an 8.1 percentage point improvement for the 2012 combined ratio, compared to about 11 percentage points in 2011.
The specialty combined ratio improved slightly to 68.0% in 2012, compared to 68.8% in 2011, reflecting favourable claims experience in prior years across all lines.
Property & Casualty results USD millions 2011 2012 Change in %
Interest expenses –155 –111 –28 Income before income tax expenses 1 324 4 076 208 Income tax expense –65 –934 – Income attributable to non-controlling interests –160 –134 –16 Interest on contingent capital instruments –18 – Net income attributable to common shareholders 1 099 2 990 172
Outlook If natural catastrophe risks continue to grow faster than GDP, as we expect, our property business will continue to grow. In the Special Lines business, volume and profit are expected to increase at a marginally higher rate than GDP, with a disproportionately large contribution from high growth markets in Asia and Latin America.
Profit margins in casualty reinsurance are expected to increase modestly from the current low base. We expect to deploy more capital to this segment when this occurs. New solvency regimes will continue to drive demand for capital relief solutions and we are well positioned to support those clients. Starting in January 2013, we will also see an increase in retained premiums due to the expiry of a 20% quota share treaty with Berkshire Hathaway.
Premiums earned by line of business, 2012 (Total USD 12.3 billion)
Our Agriculture reinsurance solutions address the financial risks triggered by perils such as drought, hail, flood, frost, pest and disease. Revenue covers help mitigate commodity price risk. In many less developed countries agricultural productivity is still quite low, and a lot of investment is needed to meet rising demand. We help establish and reinsure new primary insurance schemes, thus providing a financial safety net for those investments.
We expect growth in the Marine business from increasing transport volume from growth markets to the rest of the world (low at present due to subdued economic conditions in the developed world). Marine reinsurance addresses the physical damage and liability associated with such shipments.
Net premiums earned Premiums earned and fee income increased 9% to USD 9.1 billion in 2012, compared to USD 8.4 billion in 2011. The increase was primarily a result of increased health premiums due to business growth in Europe and Asia, new longevity transactions, and higher rates related to the Americas business.
Lines of business A diversified geographical business mix and a continued disciplined pricing approach provided for a stable result; however, volatile financial markets and changes in the interest rate environment impacted the Life and Health results.
Operating income for traditional life business decreased to USD 415 million in 2012 from USD 543 million in the previous year. The decrease was driven primarily by lower investment income, unfavourable
Life & Health results USD millions 2011 2012 Change in %
Income before income tax expenses 1 749 1 008 –42 Income tax expense –85 –231 172 Interest on contingent capital instruments –38 – Net income attributable to common shareholders 1 664 739 –56
Management expense ratio in % 7.2 7.9 Benefit ratio1 in % 74.5 75.5 1 The benefit ratio is calculated as life and health benefits in relation to premiums earned, both of which exclude unit-linked and with-profit business. Additionally, the impact of guaranteed minimum death benefit (GMDB) products is excluded, as this ratio is not indicative of the operating performance of such products.
Return on equity The return on equity was 8.9% in 2012, compared to 21.2% in 2011. The very high return on equity in the prior year was primarily due to exceptionally high realised gains on government bonds and foreign exchange.
While the reach of our health propositions is global, our strategic focus for incremental growth is in high growth markets in Asia. There we project healthcare costs will increase by 8.2% annually, reaching USD 2.7 trillion by 2020. We are also focused on the Americas, where demographic and socio-economic trends are driving higher demand.
In mature markets, reinsurance opportunities for long-term health risks predominate, mainly disability and critical illness. The US is a notable exception: there, the bulk of the market for health re/insurance is in major medical expense risks. The US health market is expected to expand further with the implementation of healthcare reforms. In developing insurance markets, much of the insured health risk is meant to protect against out-of-pocket healthcare costs. Our clients typically seek reinsurance protection to reduce their exposure to pricing uncertainty and to access Swiss Re’s risk management capabilities.
In response to opportunities in high growth markets in Asia — where we calculate that the health protection gap could reach USD 197 billion by 2020 — we are committing significant additional resources to expand our health reinsurance business segments. For an example from South Korea, see the 2012 Business Report.
The property combined ratio improved by 32.3 percentage points to 100.7% in 2012, reflecting significantly lower natural catastrophe losses.
The credit combined ratio was 82.8% in 2012, compared to 57.8% in 2011, primarily driven by a single loss in Australia, a large profit commission effect related to a reinsurance contract and an increased allocation of operating expenses.
Expenses Claims and claim adjustment expenses –1 461 –1 448 –1 Acquisition costs –180 –300 67 Other expenses –442 –449 2 Interest expenses –2 0 –100
Income before income tax expense 168 339 102 Income tax expense –87 –143 64 Net income attributable to common shareholders 81 196 142
Claims ratio in % 75.7 63.4 Expense ratio in % 32.2 32.8 Combined ratio in% 107.9 96.2 32 Swiss Re 2012 Financial Report
Return on equity Return on equity increased to 7.4% in 2012, compared to 3.7% in the prior year.
Total financial contribution The total financial contribution (TFC) of Corporate Solutions accounts for business written within the Swiss Re Group and includes development of historical loss reserves remaining in Reinsurance for the combined ratio and return on equity, as well as related investment income and an additional USD 0.5 billion shareholders’ equity for return on equity. The combined ratio on the TFC basis was 69.6% and return on equity 25.8%.
Weather Risk Management Transaction of the Year Award Environmental Finance, a leading trade publication, acknowledged Corporate Solutions for structuring the first insurance transaction for a Chinese energy company, Guangdong Meiyan Hydropower, based on a precipitation index. The jury of environmental finance experts considered the transaction a milestone toward accessing the world’s largest hydropower market. The structure of the deal is both simple and effective: Corporate Solutions helps protect the client’s revenues through a contract based on actual rainfall levels, paying out if it rains less than a given amount in a particular place, over a defined period. By using precipitation data from meteorological offices, the solution reduces the insurer’s administrative costs and moral hazard risk. For the client, it guarantees fast pay-outs and stable revenues.
Best Trade Credit Underwriter Excellence Award Trade & Forfaiting Review, a leading trade and supply chain finance publication, gave Corporate Solutions its Best Trade Credit Underwriter Excellence Award. The award is granted based on votes of industry experts, underlining the reputation of the Corporate Solutions’ Credit team. With its innovative Structured Trade and Project Finance solutions, the team supports clients in a business environment marked by challenges such as the European debt crisis as well as regulatory developments (eg Basel III, Solvency II). These solutions allow financial institutions and commercial banks to manage their capital more efficiently and benefit from Corporate Solutions as a stable and reliable source of capacity in trade, commodity and project finance.
Strategy and priorities Admin Re® implemented a transformation programme starting in 2011 which resulted in a three-pronged strategy leveraging its core competencies: portfolio steering, management actions and transactions.
Management actions include cost management and increasing capital efficiency. The Alico transaction in the UK, which concluded in 2012, enhanced capital efficiency by transferring the individual policies from the previous carrier to an Admin Re® subsidiary.
The running yield on investments declined to 4.3% in 2012 from 4.5% in 2011, mainly as a result of lower yields on new purchases. The reduction was partially offset by the Admin Re® US sale, with the investment portfolio supporting the continuing Admin Re® operations providing
USD 0.9 billion and recognising a USD 399 million loss on the disposal.
Fee income from policyholders 789 713 –10 Net investment income – non-participating 1 611 1 548 –4 Net realised investment gains/losses – non-participating 205 –89 – Net investment result – unit-linked and with-profit –378 2 348 – Other revenues 3 –
Income before income tax benefit 218 89 –59 Income tax benefit 123 101 –18 Income attributable to non-controlling interests –12 –7 –42 Net income attributable to common shareholders 329 183 –44 34 Swiss Re 2012 Financial Report
a higher yield than the portfolio that was disposed of as part of the transaction.
Shareholders’ equity Common shareholders’ equity, which excludes non-controlling interests, was USD 6 662 million as of 31 December 2012, a decrease of USD 716 million compared
Gross cash generation in USD millions, 2012 to 2011. The decrease was mainly due to the loss on the sale of the Admin Re® US business and payment of a USD 881 million dividend to the Swiss Re Group on completion of the sale, with a further USD 175 million of dividends paid in the first half of 2012. The reduction was partially offset by an increase in unrealised gains arising in the year as a result of tighter credit spreads, together with business shifts from the Reinsurance segment as part of the restructuring following the sale of the Admin Re® US business. The realisation of previously unrealised gains on the disposal of Admin Re® US had no impact on shareholders’ equity.
Share price performance Swiss Re shares opened the year at CHF 47.87 and on the same day also experienced the year’s intra-day low of CHF 47.25. An intra-day high of CHF 68.10 was achieved on 8 November 2012 when the third quarter results were published. The year-end share price was CHF 65.90.
In 2012 the STOXX Europe 600 Insurance index (SXIP) increased by 32.9% and the broader index of Swiss blue chips (SMI) by 14.9%. Both indices were outperformed by the Swiss Re share, which increased by 37.7% during 2012.
Share trading The average on-exchange daily trading volume for 2012 was 1.0 million shares, down from the average of 1.5 million shares in 2011. Trading volume peaked at 3.9 million shares on 16 March 2012, the day the 2011 Annual Report and 2011 EVM Report were published.
Weighting in indices As of 31 December 2012 Index weight (in %)
1 Swiss Re’s ADR are not listed but traded over the counter; one ADR corresponds to one Swiss Re share.
Price per share year-end 50.30 49.91 50.30 47.87 65.90 Price per share year high (intra-day) 93.95 53.10 53.75 60.75 68.10 Price per share year low (intra-day) 35.38 11.88 42.10 35.12 47.25 Daily trading volume (in CHF millions) 214 98 86 73 58 Market capitalisation6 (in CHF millions) 18 285 18 502 18 646 17 746 24 430 ADR price at year-end (in USD) 47.80 48.19 53.72 50.55 72.30 1 Due to the implementation of a new holding structure as of 23 May 2011, references to Swiss Re shares refer to shares of Swiss Reinsurance Company Ltd (ticker symbol: RUKN) to the period until 20 May 2011 and to shares of Swiss Re Ltd (ticker symbol: SREN) as of 23 May 2011 2 Nominal value of CHF 0.10 per share 3 Dividend divided by year-end share price of corresponding year 4 Calculated by dividing net income by the weighted average number of common shares outstanding 5 Based on shareholders’ equity (excluding convertible perpetual capital instruments) divided by the number of external common shares entitled to dividend 6 Based on shares outstanding
Swiss Re 2012 Financial Report 39 41 Capital management 43 Economic Value Management 45 Liquidity management 46 Risk management 48 Risk assessment
Overview We continue to hold excess capital under all relevant capital adequacy requirements, including Standard & Poor’s AA rating level, Group Solvency I, and the Swiss Solvency Test (SST). We continue to follow and implement the requirements of the forthcoming Solvency II regime for our European entities, which are broadly in line with SST. Swiss Re’s capital management aims to ensure our ability to continue operations following an extremely adverse year of losses from insurance and/or financial market events.
Swiss Re’s Risk Management function is core to our business model. Risk Management is involved in all of Swiss Re’s risk-taking activities and is mandated and structured to support and control both the Group and the Business Units. It thus ensures that our strategic planning and limit setting conforms to our Group-wide risk tolerance. In addition, our risk experts are involved in capital cost assessment, large transaction approvals, portfolio monitoring and performance measurement. Risk Management is embedded throughout our business through dedicated risk functions and CROs for each Business Unit. These functions have a strong mandate to challenge the business and their independence is maintained by a direct reporting line to the Group CRO. As part of our Group-wide Risk management, they apply a consistent Enterprise Risk Management approach and ensure a fully integrated view of risk and thus support long-term stability and growth.
Sound risk management enables us to optimise our strategic planning, capital allocation and risk-taking, and align them to Swiss Re’s Groupwide risk tolerance.
Main Capital Management actions in 2012: ̤ We improved the Group financial flexibility by actively returning free funds to the parent holding company, Swiss Re Ltd. A total of USD 4 billion was returned to Swiss Re Ltd in 2012.
̤ On 31 May 2012 we agreed to sell our Admin Re® US business. The transaction resulted in a dividend of USD 0.9 billion in cash to Swiss Re Ltd, thus unlocking capital for re-deployment across the Swiss Re Group.
̤ Swiss Reinsurance Company Ltd issued two Perpetual Subordinated Capital Instruments with stock settlement features in 2012, with a face value of CHF 320 million and USD 750 million, respectively. Both instruments may be settled, at the option of the issuer, for Swiss Re Ltd shares either at any time through at market conversion using the five-day Volume Weighted Average Share Price with a 3% discount, or within six months following a breach of 100% SST ratio at a pre-set floor price. The capital instruments are fully eligible for regulatory capital credit at Group level and thus increase the Group’s capital resources and flexibility.
We actively manage our capital to ensure that the Group and all Group companies are adequately capitalised at all times.
Based on our improved capital position and retained earnings of USD 26.3 billion for 2012, Swiss Re proposes a regular dividend of CHF 3.50 per share for 2012 compared to the previous year’s dividend of CHF 3.00 per share. In addition, Swiss Re proposes to pay an additional special dividend of CHF 4.00 per share. This translates to a total return of capital to shareholders of approximately USD 2.8 billion.
Regulated subsidiaries are subject to local regulatory requirements. Our EU subsidiaries will be required to comply with Solvency II. Similar to the SST, Solvency II is based on economic principles for the measurement of assets and liabilities, and sets out requirements for governance, risk management, and supervision, as well as for disclosure and transparency. We continue to follow the developments of the forthcoming Solvency II for the European entities and are implementing its requirements, which are broadly in line with SST.
Rating agency capital requirements Rating agencies assign credit ratings to the obligations of Swiss Reinsurance Company Ltd and its rated subsidiaries. The agencies evaluate Swiss Re based on a set of criteria that include an assessment of our capital adequacy. Each rating agency uses a different methodology for this assessment; A.M. Best and Standard & Poor’s (S&P) base their evaluation on proprietary capital models.
On 18 December 2012, S&P published its full year report on Swiss Re in which the financial strength, long-term and shortterm credit ratings were confirmed. The outlook on the ratings is “stable”. In its report, S&P pointed to Swiss Re’s very strong competitive position and capitalisation as key rating strengths.
On 23 January 2013, A.M. Best affirmed the A+ financial strength rating of Swiss Reinsurance Company Ltd and its subsidiaries. The outlook for all ratings is stable. In AM Best’s view, Swiss Re has consistently maintained superior levels of risk-based capitalisation, benefiting from its diverse books of business and efficient capital management programme.
Swiss Re’s capital management aims to ensure our ability to continue operations following an extremely adverse year of losses from insurance and/or financial market events. The tables below show the estimated capital adequacy ratios for rating and regulatory requirements at Group level.
Swiss Re’s capital adequacy Swiss Re holds excess capital under all relevant capital adequacy requirements such as S&P’s AA rating level, Group Solvency I and the SST: Estimated external Group capital adequacy As of 31 December 2012
Swiss Re’s financial strength ratings As of 15 February 2013 Financial strength rating Outlook Last update
Standard & Poor’s AA– Stable 18 December 2012 Moody’s A1 Positive 20 December 2012 A.M. Best A+ Stable 23 January 2013
Swiss Solvency Test (SST) of Swiss Re Group SST2/2011 SST1/2012 SST2/2012
Economic Value Management (EVM) is Swiss Re’s integrated economic valuation framework for planning, pricing, reserving and steering the business. Since 2003, Swiss Re has used the EVM framework as a tool to support business and strategic financial decisions, including compensation decisions. EVM also provides the basis for determining available capital under the Swiss Solvency Test (SST) and, in the future, Solvency II.
Best estimates Swiss Re values assets and liabilities based on best estimates of underlying cash flows – premiums, claims, expenses, taxes, capital costs, etc. – taking into consideration all the information available when a contract incepts. As with other valuation methods that depend on projections of future cash flows, EVM involves a significant degree of judgement in establishing what assumptions should be used. Swiss Re actively and carefully reviews its assumptions, seeking both to achieve consistency across business activities and to reflect all available information.
EVM is an integrated economic accounting and steering framework based on market consistent valuations and defines the method for measuring value creation for all business activities of Swiss Re.
In 2012, ENW increased by USD 4.9 billion from USD 29.0 billion at the end of December 2011. 2012 EVM income of USD 5.2 billion was partially offset by the Swiss Re Group’s dividend payments and changes in the EVM accounting principles.
̤ the long-term liquidity needs are taken into account as part of our asset-liability management approach to controlling financial market risk.
Liquidity risk management Our core liquidity policy is to retain sufficient liquidity, in the form of unencumbered liquid assets and cash, to meet potential funding requirements arising from a range of possible stress events. To allow for regulatory restrictions on intra-Group funding, liquidity is managed within pools of entities. The main pool comprises Swiss Reinsurance Company Ltd (SRZ) as well as those of its subsidiaries whose funds are freely transferable to SRZ.
Liquidity position of SRZ liquidity pool The estimated total liquidity sources in the SRZ liquidity pool available within one year after haircuts and net of short-term loans from Swiss Re Ltd amounted to USD 22.5 billion as of 31 December 2012, compared to USD 23.2 billion on the same date in 2011. This total includes USD 18.3 billion of liquid assets and cash, referred to as “spot liquidity”, compared to USD 20.5 billion on the same date in 2011. Based on the internal liquidity stress tests described above, we estimate that SRZ liquidity pool held surplus liquidity on 31 December 2012. Part of the surplus liquidity was used in 2012 to pay USD 2.6 billion in dividends to Swiss Re Ltd.
30% G7 government bonds, Swiss government bonds and reverse repurchase agreements 46 % Cash and bank deposits 17% Other developed market government and supranational bonds 7% Agencies and municipal bonds
̤ 46% Government bonds AAA rated & US and reverse repos
Controlled risk-taking requires a strong and independent risk management organisation, as well as comprehensive risk management processes to identify, assess and control the Group’s and the Business Units’ risk exposures. We base our risk management on four guiding principles, which we strive to apply consistently across all risk categories throughout the Group and our three Business Units: ̤ Controlled risk-taking: Financial strength and sustainable value creation are central to Swiss Re’s value proposition. We therefore operate within a clearly defined risk policy and risk control framework.
We fully embed risk management in our business to enable controlled risk-taking and efficient, risk-adjusted capital allocation.
Central Risk Management Units Identification, assessment, control and reporting of insurance, financial market, credit, liquidity, operational and other risks
The Group Risk Management function is structured with global departments providing shared services such as Risk Reporting, as well as dedicated departments for the Reinsurance, Corporate Solutions and Admin Re® Business Units.
For Swiss Re’s major legal entities, the Business Unit CROs are supported by designated legal entity CROs who are responsible for overseeing specific risk management issues that arise at the legal entity level.
Actuarial management is also an integral part of Risk Management, ensuring independent assessments of reserving adequacy.
A key responsibility of Risk Management is to ensure that Swiss Re’s risk tolerance is applied throughout the business. In particular, the Group’s risk tolerance forms the basis for risk management in our business planning process. Both our risk tolerance and risk appetite – the amount of risk we seek to take – are clearly defined and are translated into a consistent limit framework across all risk categories. The limit framework is approved at Group EC level through the Group Risk and Capital Committee. The individual limits are established through an iterative process to ensure that the overall framework complies with our Group-wide policies on capital adequacy and risk accumulation.
̤ The Group Products and Limits Committee determines Swiss Re’s product policy and underwriting standards, sets transaction limits, and decides on large or non-standard transactions.
The Group capital requirement table on page 49 shows 99% Tail VaR for each of Swiss Re’s core risk categories on a stand-alone basis: ̤ Property and casualty risk amounted to
Swiss Re’s risk landscape The risk categories set out in the table on the left are defined in the following sections. Across these categories we identify and evaluate emerging threats and opportunities through a systematic framework that includes the assessment of potential surprise factors that could affect known loss potentials. Liquidity risk management is discussed on page 45.
Property and casualty 7.7 7.8 1 Life and health 7.0 7.3 4 Financial market 10.7 10.5 –2
Property and casualty (P&C) insurance risk arises from the coverage that Swiss Re provides for Property, Liability, Motor and Accident risks through its Reinsurance and Corporate Solutions Business Units, as well as for specialty risks such as Engineering, Aviation and Marine. We classify and model our P&C risks in three categories at Group and Business Unit level: natural catastrophes (eg, earthquakes and windstorms), man-made risks (eg, liability and fire) and geopolitical risks (eg, terrorism). We also monitor and manage underlying risks inherent in the business we underwrite, such as inflation or uncertainty in pricing and reserving.
We further manage our risk by external retrocession, risk swaps, or by transferring risk to capital markets through insurancelinked securities. The quota share provided by Berkshire Hathaway, which expired on 31 December 2012, transferred 20% of our property and casualty risk covering all business written or renewed between 1 January 2008 and 31 December 2012. In addition, we have an adverse development cover (ADC) with Berkshire Hathaway on the Group’s total property and casualty reserves for 2008 and prior years. To reduce peak natural catastrophe exposure we use insurance-linked securities, such as the Successor and Mythen cat bond programmes.
The risk management function is embedded in our business process. Before any business is written, Risk Management is involved in annual business planning; it also reviews underwriting guidelines, pricing models, and large individual transactions. Total risk exposure is monitored against agreed risk limits.
The table above shows that Swiss Re’s exposure to a severe lethal pandemic remained stable. This is mainly due to the issuance of extreme mortality bonds in
We have an aggregate Group limit governing the acceptance of all life and health risks, with separate individual limits for mortality and longevity exposures. At the Business Unit level, acceptance of life and health risks is governed by aggregated Business Unit limits. Local teams can write reinsurance within their allocated capacity and clearly defined boundaries, such as per-life retention limits for individual business. Market 2012 which offset business growth. These bonds are part of an established Vita programme, used to manage our lethal pandemic exposure.
Insurance risk stress tests: Single events with a 200-year return period Pre-tax impact on economic capital in USD billions, as of 31 December 2011 2012 Change in %
Financial market risk is the risk that Swiss Re’s assets or liabilities may be affected by movements in financial market prices or rates – such as equity prices, interest rates, credit spreads, foreign exchange rates, or real estate prices. Our financial market risk originates from two main sources: our own investment activities and the sensitivity of the economic value of liabilities to financial market fluctuations. Swiss Re actively manages the potential mismatch in financial market risk between its liabilities and the assets held.
In 2012, Swiss Re’s overall financial market shortfall decreased by 2% (see table on page 49) mainly due to lower credit spread exposure following the sale of the Admin Re® US business and reduced interest rate and foreign exchange risk. This was largely offset by new equity investments and from introducing a new financial market risk model (see box on page 54).
The table on page 53 shows Swiss Re’s sensitivity to various market scenarios. The Group’s sensitivity to credit spread widening decreased as a result of the sale of the Admin Re® US business, which partly offset new investments in credit products.
Overall interest rate risk was more balanced than at the prior year-end, with the net position after asset-liability matching showing a modest exposure to rising yields. Exposure to equity market risk increased, mainly as a result of additional investments in exchange-traded funds, and also growth in the asset value of existing holdings. The equity scenario includes listed and private equities, hedge funds, equity derivatives, equity exposure embedded in insurance liabilities (eg, guaranteed minimum death benefit products, including variable annuities), fee income related to equities in unit-linked business, and funding obligations from equity holdings in Swiss Re pension funds.
Financial Risk Management oversees financial market activities, sets limits, provides quantitative risk assessment across financial risk factors, monitors portfolio risk, develops tactical proposals for risk mitigation or risk reduction, reviews risk and valuation models, assesses asset valuations, and approves transactions and new products. These responsibilities are exercised through defined governance procedures, including monthly reviews by our Asset Management Senior Risk
Credit risk is primarily the risk of incurring a financial loss from the default of Swiss Re’s counterparties or of third parties. We also take account of the increase in risk from any deterioration in credit ratings. Credit risk arises directly from our investment activities as well as from liabilities underwritten by our Business Units.
Swiss Re distinguishes between three types of credit exposure: the risk of issuer default from instruments in which Swiss Re invests or trades, such as corporate bonds,
Credit risk is managed and monitored by a dedicated Credit Risk Management team within our Financial Risk Management unit. In addition to the credit default stress limit set by the Group Risk and Capital Committee, we assign aggregate credit limits by Business Unit, corporate counterparty and country. These limits are based on a variety of factors, including the prevailing economic environment, the nature of the underlying credit exposures and, in the case of corporate counterparties, a detailed internal assessment of a corporate entity’s financial strength, industry position and other qualitative factors. Risk Management is also responsible for regularly monitoring corporate counterparty credit quality and exposures, and compiling watch lists of cases that merit close attention.
Financial market and credit risk stress tests Pre-tax impact on economic capital in USD billions, as of 31 December 2011 2012 Change in %
Market scenarios 100bp increase in credit spreads –3.5 –3.3 –5 30% fall in global equity markets (incl. hedge funds) –2.2 –2.9 29 15% fall in global real estate markets –0.6 –0.6 3 100bp parallel increase in global yield curves 0.5 –0.1 –122
Risk modelling and risk measures We use a proprietary integrated risk model to determine the capital required to support the risks on Swiss Re’s books, and to allocate risk-taking capacity to the different lines of business. Our internal model is based on two important principles. First, it applies an assetliability management (ALM) approach, which measures the net impact of risk on the economic value of both assets and liabilities. Second, it adopts an integrated perspective, recognising that a single risk factor can affect different sub-portfolios and that different risk factors can have mutual dependencies.
Swiss Re’s risk model provides a meaningful assessment of the risks to which the company is exposed and is an important tool for managing our business. It is used for determining capital requirements for internal purposes and for regulatory reporting under the Swiss Solvency Test (SST). The model provides the basis for capital cost allocation in our Economic Value Management (EVM) framework, which is used for pricing, profitability evaluation and compensation decisions (see pages 43 - 44 for further information on EVM).
The model generates a probability distribution for the Group’s annual economic profit and loss, specifying the likelihood that the outcome will fall within a given range. From this distribution, we derive a base capital requirement that captures the potential for severe, but rare, aggregate losses over a one-year time horizon.
Members of Swiss Re’s Group Management Board and Executive Committee are required to assess and certify the effectiveness of the internal control system for their particular business unit, corporate, or enabling function on a quarterly basis.
Strategic risk Strategic risk for Swiss Re represents the risk that poor strategic decision-making, execution, or response to industry changes or competitor actions could harm Swiss Re’s competitive position and consequently franchise value.
A further delay of the Solvency II Directive, due to ongoing discussions on the treatment of long-term guarantee products, raises concerns about the fragmentation of the solvency regime in Europe. The possible uncoordinated national introduction of parts of Solvency II before the overall implementation may lead to a lack of harmonised supervision.
Swiss Re remained fully engaged in the regulatory debate during 2012, striving to mitigate potentially negative impacts while supporting those reforms that could generate convergence of regulatory standards and business opportunities.
Reputational risk Swiss Re’s continued business success depends on maintaining our reputation with clients, investors, employees and other stakeholders. Environmental, socioeconomic and related ethical risks to reputation may arise from individual business transactions; our reputation could also be impacted by operational failures.
In addition, Swiss Re has been actively contributing over the years to the development of the UN Principles for Sustainable Insurance (UN PSI) and was a founding signatory at its launch on 19 June 2012 as part of the UN Conference on Sustainable Development in Rio de Janeiro (Rio+20).
In 2012, for the fifth year running, Swiss Re was named the insurance “Super Sector Leader” by SAM in their annual review for the Dow Jones Sustainability Indexes (DJSI).
Corporate Governance Swiss Re’s new Corporate Governance Guidelines harmonise our governance principles and procedures across the Group.
Information on compensation, shareholdings of and loans to members of the Board of Directors and the Group Executive Committee (Group EC) is provided on pages 93–117.
̤ introduce an annual Board selfassessment and certification process to ensure compliance with the Guidelines.
The Guidelines take into account relevant recommendations by FINMA, as well as the Swiss Code.
Proposed election to Board of Directors The Board of Directors nominated Mary Francis to be proposed to the General Meeting of Shareholders in 2013 for election as new Board member.
Executive management further strengthened Reflecting its new corporate structure and operating model, Swiss Re further strengthened its Group EC in 2012 by appointing additional members for the newly created positions of Regional President (one each for the Americas, Asia and EMEA) and of Group Chief Strategy Officer.Key developments in 201 58 Swiss Re 2012 Financial Report
̤ The Board of Directors appointed Renato Fassbind as additional Vice Chairman at its constitutional meeting in April 2012.
̤ The Board of Directors nominated Mary Francis to be proposed to the AGM in 2013 for election as new Board member.
̤ Matthias Weber was appointed Group Chief Underwriting Officer and member of the Group Executive Committee as of 1 April 2012, succeeding Brian Gray.
̤ Moses Ojeisekhoba was appointed Regional President Asia and member of the Group Executive Committee as of 15 March 2012, succeeding Martyn Parker who was appointed Chairman Global Partnerships.
̤ The Group adopted new Corporate Governance Guidelines which harmonise our governance principles and processes across all our legal entities.
Middle East & Africa ̤ Globals ̤ Property & Specialty ̤ Casualty ̤ Life & Health ̤ Claims,
Group Operations ̤ Human Resources ̤ Legal & Compliance ̤ Information
Swiss Re Ltd has a level I American Depositary Receipts (ADRs) programme in the US. The ADRs are traded over the counter (ISIN US8708861088, DTC symbol SSREY). Neither the ADRs, nor the underlying Swiss Re shares, are listed on a securities exchange in the US.
Significant shareholders and shareholder structure Under the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA), anyone holding shares in a company listed on the SIX Swiss Exchange is required to notify the company and the SIX Swiss Exchange if their direct or indirect holding reaches, falls below or exceeds the following thresholds: 3%, 5%, 10%, 15%, 20%, 25%, 33⅓%, 50% or 66⅔% of 60 Swiss Re 2012 Financial Report
Registered shareholdings by country as of 31 December 2012 45.0% Switzerland 23.0% United Kingdom 18.5% USA
Registered shareholders by type as of 31 December 2012 76.3% Institutional shareholders 20.5% Individual shareholders 3.2% Swiss Re employees
Capital As of 31 December 2012, the fully paid-in share capital of Swiss Re Ltd amounted to CHF 37 070 693.10. It was divided into 370 706 931 registered shares, each with a par value of CHF 0.10.
More information is provided in the sections “Conditional and authorised capital in particular” below and “Changes in capital” on page 64.
Authorised capital As of 31 December 2012, the authorised capital of Swiss Re Ltd consisted of the categories as presented in the table below.
execution of the company’s public exchange offer at any time up to 20 May 2013. Such increase in share capital may not exceed CHF 4 005 061.30 through the issue of up to 40 050 613 registered shares, payable in full, each with a nominal value of CHF 0.10. Increases by underwriting as well as partial increases are permitted. The Board of Directors determines the date of issue, the issue price, the type of contribution and any possible acquisition of assets as well as the date of dividend entitlement.
Existing shareholders’ subscription rights for registered shares issued according to this provision are excluded.
The subscription and acquisition of the new registered shares, as well as each subsequent transfer of the registered shares, shall be subject to the restrictions specified in the Articles of Association.
Joint provision for conditional capital for Equity-Linked Financing Instruments and for the above-mentioned authorised capital The total of shares issued from the authorised capital, where the existing shareholders’ subscription rights were excluded, and from the shares issued from conditional capital, where the existing shareholders’ advance subscription rights on the Equity-Linked Financing Instruments were excluded, may not exceed 74 140 927 shares up to 20 May 2013.
In the course of 2011, CHF 727 262.20 of the authorised capital for the exchange of shares were used through the issue of 7 272 622 registered shares with a nominal value of CHF 0.10.
In 2011, 2 778 shares were issued from conditional capital for employee participation purposes.
Changes in 2010 and previous years Information about changes in capital in 2010 is provided on pages 54 and 55 of the 2010 Annual Report. Information about changes in capital for earlier years is provided in the Annual Reports for the respective years.
Profit-sharing and participation certificates Swiss Re Ltd has not issued any profit-sharing and participation certificates.
The company may issue its registered shares in the form of single certificates, global certificates and intermediated securities. The company may convert its registered shares from one form into another at any time and without the approval of the shareholders. The shareholders have no right to demand a conversion into a certain form of registered shares. Each shareholder may, however, at any time request a written confirmation from the company of the registered shares held by such shareholder, as reflected in the company’s share register.
Persons acquiring registered shares will, upon application, be entered in the share register without limitation as shareholders with voting power if evidence of the acquisition of the shares is provided and if they expressly declare that they have acquired the shares in their own name and for their own account and, where applicable, that they are compliant with the disclosure requirement stipulated by the Federal Act on Stock Exchanges and Securities Trading (SESTA). The Board of Directors is allowed to remove the entry of a shareholder with voting rights from the share register retroactively from the date of entry if the entry was obtained under false pretences or if the owner, whether acting alone or as part of a group, has breached notification rules.
Convertible bonds and options Convertible bonds As of 31 December 2012, neither Swiss Re Ltd nor any of its subsidiaries has any bonds convertible into equity securities of Swiss Re Ltd solely at the option of bondholders outstanding. During 2012, Swiss Reinsurance Company Ltd issued CHF 320 000 000 of 7.25% perpetual subordinated notes and USD 750 000 000 of 8.25% perpetual subordinated capital instruments both with stock settlement (collectively the “subordinated securities”), which provide Swiss Reinsurance Company Ltd with options to initiate settlement of the subordinated securities by delivery of shares of Swiss Re Ltd.
Options Stock options granted to Swiss Re employees will be settled with treasury shares. The number of issued shares will not be affected.
Members of the Board of Directors According to the Articles of Association, the Board of Directors of Swiss Re Ltd, the holding company of the Swiss Re Group, consists of at least seven members. As of 31 December 2012 the Board of Directors consisted of the following members: Board of Directors
Independence Swiss Re’s Group Bylaws stipulate that the Board of Directors consists of at least a majority of independent members. To be considered independent, a director may not be employed as an executive officer of the Group, or have been employed in such function for the previous three years. Moreover, he or she must not have a material relationship with any part of the Group, directly or as a partner, director, or shareholder of an organisation that has a material relationship with the Group. All directors of Swiss Re meet our independence criteria.
The members of the Board of Directors are also subject to procedures to avoid any conflict of interest.
Career Walter B. Kielholz began his career at the General Reinsurance Corporation, Zurich, in 1976. In 1986, he joined Credit Suisse, where he was responsible for banking relationships with large insurance groups. He joined Swiss Re in 1989 where he became an Executive Board member in 1993 and was Chief Executive Officer from 1997 to 2002. He was Executive Vice Chairman of the Board of Directors from 2003 to 2006 and Vice Chairman from 2007 until he was nominated Chairman in 2009. In addition, he chairs the Chairman’s and Governance Committee of the Swiss Re Board.
̤ Chairman of the Zurich Art Society, the organisation that is in charge of the Zurich Kunsthaus
International and BlackRock, Inc. ̤ Executive Advisory Board member of General Atlantic Partners (GAP) ̤ Former member of the Bank Council of Swiss National Bank ̤ Past Vice Chairman of the Board of Directors of the Swiss Bankers Association
̤ Past committee member of the Board of Directors of SIX Swiss Exchange
̤ Past member of the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York
Career After two years with Kunz Consulting AG, Renato Fassbind joined F. Hoffmann-La Roche AG in 1984, becoming Head of internal audit in 1988. From 1986 to 1987, he worked as a public accountant with Peat Marwick in New Jersey. In 1990, he joined ABB Ltd as Head of Corporate Staff Audit and, from 1997 to 2002, was Chief Financial Officer and member of the Group Executive Committee. In 2002, he joined Diethelm Keller Holding Ltd as Group Chief Executive Officer. From 2004 to 2010, he was Chief Financial Officer and member of the Executive Board of Credit Suisse Group AG. Renato Fassbind was elected to Swiss Re’s Board of Directors in 2011 and is a member of the Chairman’s and Governance Committee, the Audit Committee and the Compensation Committee.
Career Raymund Breu started in group treasury at Sandoz in 1975, rising to Chief Financial Officer of Sandoz Corporation in New York in 1985. In 1990, he became Group Treasurer of Sandoz Ltd and in 1993 Head of Group Finance and a member of the Executive Board. From 1996 to 2010, he was Chief Financial Officer and member of the Executive Committee of Novartis. Raymund Breu was elected to Swiss Re’s Board of Directors in 2003 and is a member of the Audit Committee and the Investment Committee.
Career Raymond K.F. Ch’ien was Group Managing Director of Lam Soon Hong Kong Group from 1984 to 1997 and Chairman of CDC Corporation from 1999 to 2011. He was elected to Swiss Re’s Board of Directors in 2008 and is a member of the Audit Committee and the Investment Committee.
External appointments ̤ Chairman of the Boards of Directors of MTR Corporation Ltd and Hang Seng Bank Ltd
̤ Board member of the Hong Kong and Shanghai Banking Corporation Ltd, Convenience Retail Asia Ltd, China Resources Power Holdings Company Ltd, The Wharf (Holding) Ltd, Hong Kong Mercantile Exchange Ltd and UGL Ltd
External appointments ̤ Chairman of The Climate Group ̤ Chairman of ClimateWise ̤ Member of the Deutsche Bank Climate
Centre of Competence in Research “Financial Valuation and Risk Management” research network
External appointments ̤ Board member of Invesco Ltd ̤ Chairman of the S.S. Huebner Foundation for Insurance Education ̤ Member of the Board of Trustees of
Career Malcolm D. Knight began his career as an academic at the University of Toronto and the London School of Economics. In 1975, he joined the International Monetary Fund, holding positions in both research and operations until 1999. From 1999 to 2003, he was Senior Deputy Governor of the Bank of Canada and from 2003 to 2008 he was General Manager (CEO) of the Bank for International Settlements. He was Vice Chairman of Deutsche Bank from 2008 to 2012, where he is now an Advisor. He was elected to Swiss Re’s Board of Directors in 2010 and is a member of the Audit Committee and the Finance and Risk Committee.
Standards Council ̤ Member of the Board of Patrons of the European Association for Banking and Financial History
̤ Member of the Board of Directors of the Global Risk Institute in Financial Services
Career Hans Ulrich Maerki worked for IBM for 35 years, starting in 1973. From 1993 to 1995, he was General Manager of IBM Switzerland. He was appointed Chairman of the Board of Directors of IBM Europe, Middle East and Africa (EMEA) in 2001 and was Chief Executive Officer of IBM EMEA from 2003 to 2005. Hans Ulrich Maerki was elected to Swiss Re’s Board of Directors in 2007 and is a member of the Compensation Committee and the Finance and Risk Committee.
Merck & Co. Inc. ̤ Chairman Latin America, Bombardier Inc. ̤ President of the Mexico Chapter of the
Other activities and functions Any activities of Board members in governing and supervisory bodies of important Swiss and foreign organisations, institutions and foundations, as well as permanent management and consultancy functions for important Swiss and foreign interest groups and official functions and political posts, which are material, are stated in each of the directors’ biographies, which can be found on pages 67–71.
Changes in 2012 At the Annual General Meeting on 13 April 2012, Robert A. Scott stepped down as member of the Board of Directors. C. Robert Henrikson was elected as a new member of the Board of Directors. At the same time, the shareholders re-elected Jakob Baer and John R. Coomber to the Board for a further three-year term of office.
Election and term of office Election procedure Members of the Board of Directors are elected individually by the shareholders’ meeting.
The Chairman’s and Governance Committee evaluates candidates for Board membership and makes recommendations to the Board for election or re-election proposals. The Board nominates candidates for Board membership for election at the shareholders’ meeting, ensuring that the Board retains an adequate size and well-balanced composition and that the majority of the Board remains independent.
The term of office of a committee member is described below in the section on the committees of the Board of Directors on this page.
Nominations for election by the Annual General Meeting on 10 April 2013 The Board of Directors proposes that the following Board members be re-elected for a three-year term: ̤ Walter B. Kielholz ̤ Malcolm D. Knight ̤ Carlos E. Represas ̤ Jean-Pierre Roth
Organisational structure of the Board of Directors The Board of Directors constitutes itself and elects among its members the Chairman and Vice Chairmen as well as the chairpersons and members of the Board committees. It appoints its secretaries who do not need to be members of the Board.
Allocation of tasks within the Board of Directors Chairman of the Board of Directors The Chairman of the Board of Directors exercises ultimate supervision of the Group on behalf of the Board. He has the right to attend the meetings of the Group EC and the Business Units and receives all corresponding documentation and minutes. He ensures adequate reporting by the Group CEO and the Group EC to the Board of Directors and facilitates their communication with the Board. He is also responsible, with the chairperson of the Audit Committee, for overseeing Group Internal Audit and appoints its head, subject to confirmation by the Audit Committee.
The Chairman arranges orientation for new Board members and appropriate training for all Board members.
Vice Chairmen One of the Vice Chairmen will act in place of the Chairman in the latter’s absence or in the event of a conflict of interest of the Chairman. A Vice Chairman may prepare and execute Board resolutions on request of the Board and liaises between the Board and the Group EC in matters not reserved to the Chairman.
Audit Committee Responsibilities The central task of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities as they relate to the integrity of Swiss Re’s and the Group’s financial statements, the Swiss Re Group’s compliance with legal and regulatory requirements, the external auditor’s qualifications and independence, and the performance of the Swiss Re Group’s internal audit function (GIA) and the Group’s external auditor. The Audit Committee serves as an independent and objective monitor of Swiss Re’s and the Group’s financial reporting process and system of internal control, and facilitates ongoing communication between the external auditor, Group EC, Business Units, GIA, and the Board with regard to the Swiss Re Group’s financial situation.
Investment Committee Responsibilities The Investment Committee approves strategic asset allocation and reviews tactical asset allocation decisions. It reviews the monthly performance of all financial assets of the Swiss Re Group and makes proposals to the Board on strategic holdings. It reviews the risk analysis methodology as well as the valuation methodology related to each asset class and ensures that the relevant management processes and controlling mechanisms in Asset Management are in place.
Work methods of the Board of Directors and its committees Swiss Re’s Board of Directors oversees governance, audit, compensation, finance and risk, and investment and is supported in this responsibility by its committees. The full Board and its committees meet at the invitation of the Chairman of the Board as often as business requires or at least quarterly. Any member of the Board of Directors or the Group EC may, for a specific reason, require the Chairman to call an extraordinary Board of Directors or committee meeting,
The Chairman defines the agenda for each meeting and therefore works closely with the chairpersons of the committees and the Group CEO. The agenda, along with any supporting documents, is delivered to the participants about ten days before the meeting in order to allow enough preparation time.
Board of Directors 13 meetings Group EC members, President Swiss Re Ltd, Group General Counsel, 3.5 hours Company Secretary
Chairman’s and 8 meetings Group CEO, Company Secretary Governance Committee 1.5 hours
Group CEO, Group CFO, Group CRO, Group COO, Group General Counsel, Chief Compliance Officer, Head Group Internal Audit, Chief Accounting Officer, Lead auditors of external auditor, Company Secretary
Compensation Committee 8 meetings Group CEO, Group COO, Head Group Human Resources, 3 hours Head Compensation, Benefits & International Mobility, Advisers*
Finance and Risk Committee 4 meetings Group CEO, Group CFO, Group CRO, Group Chief Underwriting Officer, 3.5 hours Group Chief Investment Officer, Group Treasurer, CEO Reinsurance, 92.9% CEO Corporate Solutions, Company Secretary
Investment Committee 6 meetings Group CEO, Group CFO, Group CRO, Group Chief Investment Officer, 2 hours Head Financial Risk Management, CFO Admin Re®, Company Secretary 93.9%
Minutes are kept of discussions and resolutions taken at each meeting of the Board of Directors and its committees.
The table below provides an overview of the meetings of the Board of Directors and its committees held in 2012: Swiss Re 2012 Financial Report 75
Financial reporting ̤ Approves the annual report of the holding company and the Group
Risk management ̤ Approves the Group Risk Policy ̤ Monitors risk developments and adherence to the Group’s risk and capacity limits framework
Legal, regulatory and compliance matters ̤ Approves legal, regulatory and compliance matters which have a material effect on the Group’s business
Human resources ̤ Nominates Board member candidates for election by the General Meeting of shareholders
̤ Appoints the members of the Group Executive Committee (Group EC)
Group CEO and the overall compensation available for the members of the Group EC
Governance ̤ Has overall responsibility for managing operations, subject to the delegations by the Board of Directors
Strategy and structure ̤ Ensures implementation of the Group’s strategy ̤ Decides on legal, financial and management structures, subject to the delegations by the Board of Directors
Planning ̤ Prepares and proposes the Group business plan to the Board of Directors for approval and reviews the Business Units’ business plans
Financial reporting ̤ Prepares and presents to the Board the annual and interim financial statements of the Group together with segment reporting on the Business Units
Risk management ̤ Establishes the principles for external retrocession and the balancing of Group-wide catastrophe and accumulated risks
Compensation ̤ Proposes short-term compensation and benefit plans to the Compensation Committee for discussion and decision
Participation of Board members at executive management meetings The Chairman of the Board is invited to all meetings of the Group EC and Business Units and receives the corresponding documentation and minutes.
Involvement of executive management in Board committee meetings As a matter of principle, selected members of the Group EC as well as further executive management members participate at Board committee meetings as advisers. The Charters of the Board committees specify management participation at committee meetings. A detailed summary of executive management participation in Board committee meetings is provided on page 75.
Executive management furthermore regularly provides the Board of Directors with specific written reports containing: ̤ risk management issues and related actions; ̤ the legally required update on the solvency of the Swiss Re Group, Swiss Reinsurance Company Ltd, European Reinsurance Company of Zurich Ltd and Swiss Re Corporate Solutions Ltd; ̤ a detailed analysis of the loss reserves development of the major Group companies; ̤ the use of derivative financial instruments within the Group; ̤ an overview of the activities of the assurance work of Operational Risk Management and by the Business Risk Review, by Group Internal Audit and Compliance – including key risk indicators and significant losses and issues; ̤ major pending legal matters such as litigation and arbitration, investigations and inquiries, as well as information about key legal developments and risks; ̤ material compliance matters, including assessments of compliance risks and related mitigation efforts; ̤ an update on the most important regulatory issues and supervisory developments; as well as
Right to obtain information The Board of Directors has complete and open access to the Group CEO, the Group CFO, the Group CRO, the Group General Counsel, the Group Chief Compliance Officer and the Head of Group Internal Audit. Any member of the Board of Directors who wishes to have access to any other officer or employee of the Group will coordinate such access through the Chairman.
GIA applies a risk-based approach, performing its own risk assessment as well as making use of risk assessments performed by the Group’s risk management and other assurance functions (after reviewing the quality of the assurance work performed). Based on the results of the risk assessment, GIA produces an annual Audit Plan for review and approval by the Audit Committee. The Audit Plan is updated on a quarterly basis according to the Group’s evolving needs. GIA provides formal quarterly updates on its activities to the Audit Committee, which include audit results, the status of management actions required, the appropriateness of the resources and skills of GIA and any changes in the tools and methodologies it uses.
GIA is an integral part of the Group’s Integrated Assurance Framework and coordinates its activities with those of the other assurance functions as well as the external auditor whilst still ensuring its independence. As part of this process it reviews the quarterly Assurance Report, which provides a summary of key issues as well as the assurance activities across the Group.
External auditor For information regarding the external auditors, please refer to pages 88 - 89.
Members of the Group Executive Committee The Group Executive Committee (Group EC) consisted of the following members as of 31 December 2012: Executive management
Michel M. Liès Luxembourg 58 Group CEO David Cole Dutch, American 51 Group Chief Risk Officer John R. Dacey American 52 Group Chief Strategy Officer /
Professional experience Michel M. Liès joined Swiss Re in 1978, working initially for the life markets in Latin America and then Europe from 1983 to 1993. Moving to the non-life sector in 1994, he took responsibility for the Spanish market, becoming Head of the Southern Europe / Latin America Department in 1999. In 2000, he was appointed Head of the Europe Division of the Property & Casualty Business Group. In 2005, he assumed the position of Head Client Markets and was appointed member of the Group Executive Committee. Michel was Chairman Global Partnerships from January 2011 until becoming Group CEO in February 2012.
External appointments ̤ Board member of Fördergesellschaft des Instituts für Versicherungswirtschaft, St. Gallen
Reinsurance Advisory Board (RAB) ̤ Board member of IMD Foundation Board ̤ Board member of Pan-European
Professional experience David Cole began his career in 1984 with ABN AMRO. In 1999, he was appointed Executive Vice President and regional Head of Risk Management for Latin America, located in Brazil. In 2001, he returned to Amsterdam to assume Corporate Centre responsibility within Group Risk Management. He became Chief Financial Officer of Wholesale Clients (WCS) change management in 2002 and was appointed Senior Executive Vice President and Chief Operating Officer of WCS in 2004. In January 2006, he became Head of Group Risk Management for ABN AMRO Bank and in 2008 was named Chief Financial Officer and Chief Risk Officer. David joined Swiss Re in November 2010 as Deputy Chief Risk Officer and was appointed Group Chief Risk Officer and member of the Group Executive Committee in March 2011.
Professional experience Before joining Swiss Re, Guido Fürer worked for eight years in leading positions for the Swiss Bank Corporation/ O’Connor & Associates in option trading and structured capital markets transactions. Guido joined the New Markets Division of Swiss Re in 1997, focusing on Alternative Risk Transfer. Between 2001 and 2004, he worked for Swiss Re Capital Partners with responsibility for European strategic participations. He was named Head of the Chief Investment Office in 2008, with responsibility for Global Asset Allocation, Portfolio Steering and Portfolio Analytics. Guido became Group Chief Investment Officer and member of the Group Executive Committee in November 2012. In addition, he is Head Asset Management Reinsurance.
Jean-Jacques Henchoz (1964), Swiss Chief Executive Officer Reinsurance Europe, Middle East and Africa (EMEA) / Regional President EMEA
Professional experience Jean-Jacques Henchoz started his career in 1988 at the Swiss Federal Department of Economic Affairs and the European Bank for Reconstruction and Development. JeanJacques joined Swiss Re in 1998 and worked in several underwriting roles in the Europe Division until becoming Head of Strategy for Property & Casualty in 2003. From 2005 until 2010, he was Chief Executive Officer of Swiss Re Canada. Jean-Jacques assumed leadership of the Europe Division in March 2011. He was appointed Chief Executive Officer EMEA, Regional President EMEA and member of the Group Executive Committee in January 2012.
Moses Ojeisekhoba (1966), Nigerian and American Chief Executive Officer Reinsurance Asia / Regional President Asia
Professional experience Moses Ojeisekhoba started his career in insurance as a registered representative and agent of The Prudential Insurance Company of America in 1990. From 1992 to 1996, he was a Risk and Underwriting Manager at Unico American Corporation. He then joined the Chubb Group of Insurance Companies as regional Underwriting Manager and in 1999 became Corporate Product Development Manager in New Jersey and thereafter moved to London as Strategic Marketing Manager for Chubb Europe. In 2002, he was appointed International Field Operations Officer for Chubb Personal Insurance before becoming Head Asia Pacific in 2009. Moses joined Swiss Re in February 2012 and was appointed Chief Executive Officer Asia, Regional President Asia and member of the Group Executive Committee in March 2012.
Changes in 2012 Michel M. Liès was appointed Group CEO and member of the Group EC as of 1 February 2012, succeeding Stefan Lippe who took early retirement.
Jean-Jacques Henchoz was appointed Regional President EMEA, Martyn Parker was appointed Regional President Asia, and J. Eric Smith was appointed Regional President Americas; they took up these positions and joined the Group EC on 1 January 2012. Moses Ojeisekhoba was appointed Regional President Asia and member of the Group EC as of 15 March 2012, succeeding Martyn Parker who was appointed Chairman Global Partnerships.
As of 1 November 2012, John R. Dacey joined the Group EC in the newly created role of Group Chief Strategy Officer and was appointed Chairman Admin Re®, succeeding David Blumer in the latter role, who left the company.
Guido Fürer was appointed Group Chief Investment Officer and member of the Group EC as of 1 November 2012, succeeding David Blumer.
Statutory rules on participating in the General Meeting of shareholders The share whose owner, usufructuary or nominee is entered in the share register as having voting rights on a specific qualifying day (Record Date) determined by the Board of Directors entitles its holder to one vote at the General Meeting of shareholders.
Duty to make an offer Swiss Re has not put in place any specific measures to defend against potential unfriendly takeover attempts. The Board of Directors believes that the company’s best protection is a fair valuation of its shares, and that the efficiency of a free market is preferable to artificial obstacles, which can have a negative impact on the share price in the long term.
The Board of Directors believes that the company’s best protection is a fair valuation of its shares.
Dawn M. Kink and Alex Finn became lead auditors responsible for the auditing mandate of the former parent company, Swiss Reinsurance Company Ltd, on 1 September 2006 and 23 September 2011, respectively. With Swiss Re Ltd becoming the new holding company of the Group, they also became lead auditors for the Swiss Re Ltd audit mandate.
Other fees include permitted advisory work related to a range of projects, but are primarily related to corporate realignment activities and accounting advice.
The external auditor shares with the Audit Committee its findings on the adequacy of the financial reporting process and the efficacy of the system of internal controls. It informs the Audit Committee about any differences of opinion between the external auditor and management encountered during the audits or in connection with the preparation of the financial statements.
OBT AG did not prepare any audit reports under this mandate during the reporting year.
Information policy Swiss Re’s core business – managing global risk – makes us by necessity an information company. Our information policy therefore goes well beyond legal requirements in establishing transparency in our communications and equal access to the facts for all investors and the public.
The official medium for publications of the company is the Swiss Official Gazette of Commerce (Schweizerisches Handelsamtsblatt). In addition, we use our website to provide comprehensive, timely news and information on our activities as well as background discussion and analysis of issues relating to Swiss Re’s business and the broader insurance and reinsurance industries. Investors and other stakeholders can subscribe to receive ad hoc disclosures and other corporate news automatically at swissre.com/media. Our contact details are provided on page 262.
Swiss Re observes a strict close period around the publications of the Group’s quarterly and annual results. The close period applies throughout the preparation of the results and for an appropriate cooling-off period after the release of the results. During such close periods, employees of Swiss Re and members of the Board of Directors and Group Executive Committee are prohibited from trading in Swiss Re securities.
Our information policy goes well beyond legal requirements in establishing transparency in our communications and equal access to the facts for all investors and the public.
Compensation / Int﻿roduct﻿ion 94 Report﻿ from t﻿he Compensat﻿ion Commit﻿t﻿ee 95 Compensat﻿ion cont﻿ext﻿ and highlight﻿s in 2012 97 Compensat﻿ion governance 101 Compensat﻿ion framework 108 Compensat﻿ion decisions in 2012
We are cont﻿inuing t﻿o implement﻿ t﻿he changes t﻿o t﻿he compensat﻿ion framework out﻿lined in last﻿ year’s report﻿; we provide an updat﻿e on t﻿hese on page 96 under “Key development﻿s — Act﻿ivit﻿ies in 2012”.
As always, t﻿he Compensat﻿ion Commit﻿t﻿ee works cont﻿inuously t﻿o gauge and improve it﻿s own effect﻿iveness. It﻿ also cont﻿inues t﻿o maint﻿ain a sust﻿ained int﻿eract﻿ion wit﻿h t﻿he Swiss Financial Market﻿ Supervisory Aut﻿horit﻿y FINMA, as well as monit﻿oring ot﻿her regulat﻿ory development﻿s including Solvency II and Swiss corporat﻿e law.
Pay for performance In addit﻿ion t﻿o fixed compensat﻿ion, Swiss Re rewards employee performance t﻿hrough short﻿-t﻿erm and long-t﻿erm incent﻿ives. For senior execut﻿ives, a subst﻿ant﻿ial part﻿ of t﻿ot﻿al
Aggregat﻿e compensat﻿ion for all employees (CHF) 1 884 1 775 –6% 2 032 14%
1 Including CEO 2 Dividend payment﻿s are made in April of t﻿he following year. For 2012 a special dividend of CHF 4.00 is proposed.
The 2011 t﻿ot﻿al variable compensat﻿ion pool was lowered based on t﻿he overall business result﻿s. In t﻿he cont﻿ext﻿ of Swiss Re’s st﻿rong 2012 business result﻿s and based on t﻿he performance in 2012, t﻿he Company elect﻿ed t﻿o increase t﻿he t﻿ot﻿al variable compensat﻿ion pool. change t﻿o Based on t﻿he performance in 2012, t﻿he Company elect﻿ed t﻿o increase t﻿he t﻿ot﻿al variable compensat﻿ion pool by 35%.
̤ In 2012, Swiss Re int﻿roduced t﻿he concept﻿ of Target﻿ API, along wit﻿h a revised Performance Management﻿ framework, ensuring a balance bet﻿ween performance object﻿ives, achievement﻿s and desired appropriat﻿e risk-t﻿aking (see page 103).
̤ These changes make t﻿he way we det﻿ermine and allocat﻿e API pools more t﻿ransparent﻿, t﻿hus forging a st﻿ronger link bet﻿ween variable compensat﻿ion, individual performance and business performance.
̤ Swiss Re awarded it﻿s first﻿ grant﻿ under t﻿he new Leadership Performance Plan (LPP) in March 2012. Furt﻿her det﻿ails are on pages 104 and 105.
̤ We reviewed t﻿he Employee Share Purchase Plan (EPP) wit﻿h t﻿he aim of consolidat﻿ing, as far as appropriat﻿e, it﻿s previous variat﻿ions int﻿o one global plan. Furt﻿her det﻿ails are on page 102.
Board of Direct﻿ors ̤ Appoint﻿s members of t﻿he Compensat﻿ion Commit﻿t﻿ee ̤ Reviews and approves t﻿he compensat﻿ion framework and relat﻿ed mat﻿t﻿ers as proposed and endorsed by t﻿he Compensat﻿ion Commit﻿t﻿ee ̤ Furt﻿her det﻿ails can be found in t﻿he Corporat﻿e Governance sect﻿ion on pages 66 – 79
̤ Composed of independent﻿ direct﻿ors (as defined in t﻿he Corporat﻿e Bylaws) who are experienced and familiar wit﻿h regulat﻿ory requirement﻿s, compensat﻿ion pract﻿ices and t﻿rends, part﻿icularly also relat﻿ing t﻿o risk-relat﻿ed compensat﻿ion issues
̤ Reviews principles, policy and plans annually t﻿o ensure t﻿hat﻿ t﻿hey remain in line wit﻿h Swiss Re’s object﻿ives and st﻿rat﻿egy as well as wit﻿h legal and regulat﻿ory requirement﻿s
̤ Act﻿s on behalf of t﻿he Board of Direct﻿ors in reviewing and approving, as appropriat﻿e, compensat﻿ion proposals for senior management﻿, ensuring t﻿hat﻿ t﻿hey comply wit﻿h t﻿he Compensat﻿ion Policy
̤ Provides regular updat﻿es on it﻿s act﻿ivit﻿ies t﻿o t﻿he full Board of Direct﻿ors ̤ Furt﻿her det﻿ails can be found in t﻿he Corporat﻿e Governance sect﻿ion on pages 72 – 74
Management﻿ ̤ The Group CEO, Group COO and Head Group Human Resources are normally invit﻿ed t﻿o at﻿t﻿end Compensat﻿ion Commit﻿t﻿ee meet﻿ings
̤ No individual may at﻿t﻿end any part﻿ of a meet﻿ing where his or her own compensat﻿ion is discussed
Ext﻿ernal Advisors ̤ Mercer – provides informat﻿ion about﻿ remunerat﻿ion t﻿rends and advice on execut﻿ive compensat﻿ion issues
These ext﻿ernal advisors are ret﻿ained by t﻿he Compensat﻿ion Commit﻿t﻿ee. They supply t﻿he Compensat﻿ion Commit﻿t﻿ee wit﻿h market﻿ perspect﻿ive and occasionally provide ot﻿her services t﻿o Swiss Re. During 2012 t﻿he Compensat﻿ion Commit﻿t﻿ee also received independent﻿ advice from Host﻿et﻿t﻿ler, Kramarsch & Part﻿ner AG relat﻿ing t﻿o t﻿he compensat﻿ion framework review.
Roles and responsibilities Last﻿ year, Swiss Re’s Compensat﻿ion Report﻿ provided a det﻿ailed overview of t﻿he processes, roles and responsibilit﻿ies relat﻿ing t﻿o compensat﻿ion governance. These remain largely unchanged; t﻿he t﻿able on t﻿he right﻿ provides a summary.
Compensation | Compensat﻿ion governance cont﻿inued high level of effect﻿iveness and spends some t﻿ime at﻿ each meet﻿ing in closed sessions. It﻿ held eight﻿ meet﻿ings during t﻿he report﻿ing year and provided an updat﻿e t﻿o t﻿he Board of Direct﻿ors on decisions and t﻿opics discussed aft﻿er each of t﻿hese meet﻿ings. A summary of t﻿he t﻿opics dealt﻿ wit﻿h by t﻿he Compensat﻿ion Commit﻿t﻿ee during t﻿he year is shown on page 99.
Compensation Committee activities The Compensat﻿ion Commit﻿t﻿ee has a predet﻿ermined annual agenda t﻿o ensure t﻿hat﻿ import﻿ant﻿ reviews t﻿ake place at﻿ t﻿he appropriat﻿e t﻿imes t﻿hroughout﻿ t﻿he year. Along wit﻿h t﻿hese st﻿anding it﻿ems, t﻿he Compensat﻿ion Commit﻿t﻿ee discusses mat﻿t﻿ers relat﻿ing t﻿o t﻿he Compensat﻿ion Policy, labour market﻿ t﻿rends and regulat﻿ory development﻿s. The Compensat﻿ion Commit﻿t﻿ee also conduct﻿s periodic self-reviews t﻿o ensure it﻿s
Compensation approval The t﻿able on t﻿he right﻿ shows t﻿he role of t﻿he Compensat﻿ion Commit﻿t﻿ee in approving compensat﻿ion levels.
Individual compensat﻿ion of t﻿he members of t﻿he Group EC (excl. Group CEO)
̤ Performance assessment﻿ process and proposal of t﻿he Annual Performance Incent﻿ive pool for t﻿he prior business year
̤ Analysis of Group EC members’ compensat﻿ion relat﻿ive t﻿o ext﻿ernal peers June
̤ Analysis of GMB members’ compensat﻿ion relat﻿ive t﻿o ext﻿ernal peers December
̤ Review of t﻿he role and mandat﻿e of ext﻿ernal advisors June
The role of the Control Functions in compensation Swiss Re Cont﻿rol Funct﻿ions (defined as Risk Management﻿, Group Int﻿ernal Audit﻿ and Compliance) play an increasing role in compensat﻿ion mat﻿t﻿ers. Their act﻿ivit﻿ies include providing management﻿ wit﻿h informat﻿ion on risk and cont﻿rol awareness.
Influence of the control assessment on compensation The cont﻿rol assessment﻿ provides addit﻿ional input﻿ t﻿o det﻿ermining t﻿he Group Annual Performance Incent﻿ive (API) pool. It﻿ also influences t﻿he API pool t﻿hat﻿ is ult﻿imat﻿ely allocat﻿ed t﻿o each business funct﻿ion.
Independence of the Control Functions In order t﻿o ensure t﻿he cont﻿inued independence of Cont﻿rol Funct﻿ions, Swiss Re has modified it﻿s compensat﻿ion approval processes. Alt﻿hough t﻿he compensat﻿ion framework applicable t﻿o Cont﻿rol Funct﻿ions remains t﻿he same as for all ot﻿her employees, some of t﻿he key annual compensat﻿ion decisions for t﻿hese funct﻿ions are approved different﻿ly. For example t﻿he Chairman of t﻿he Audit﻿ Commit﻿t﻿ee and t﻿he Chairman of t﻿he Finance and Risk Commit﻿t﻿ee approve t﻿he aggregat﻿e API pool of t﻿heir respect﻿ive Cont﻿rol Funct﻿ions, as well as approving t﻿he individual compensat﻿ion for t﻿he head of each Cont﻿rol Funct﻿ion. Each of t﻿he Cont﻿rol Funct﻿ions also provides significant﻿ input﻿ t﻿oward det﻿ermining t﻿he overall Group API pools, as already described.
Compensat﻿ion framework Compensation Policy Swiss Re’s guiding principles and compensat﻿ion framework are capt﻿ured wit﻿hin t﻿he global Swiss Re Group Compensat﻿ion Policy. It﻿ governs t﻿he compensat﻿ion st﻿ruct﻿ure and processes across all funct﻿ions and locat﻿ions at﻿ Swiss Re and is reviewed annually.
The Compensat﻿ion Policy also cont﻿ains guidance for t﻿he execut﻿ion of individual compensat﻿ion act﻿ions. The Compensat﻿ion Commit﻿t﻿ee, t﻿oget﻿her wit﻿h t﻿he Group CEO, has approved an aut﻿horit﻿y mat﻿rix t﻿hat﻿ defines t﻿he limit﻿s t﻿o which each level of management﻿ can aut﻿horise compensat﻿ion payment﻿s. Separat﻿e limit﻿s apply t﻿o each compensat﻿ion element﻿, t﻿hereby ensuring t﻿hat﻿ all payment﻿s receive t﻿he appropriat﻿e level of approval. The Group CEO or Compensat﻿ion Commit﻿t﻿ee, as applicable, is informed of salaries, incent﻿ives, severance packages or sign-on payment﻿s t﻿hat﻿ exceed pre-set﻿ limit﻿s.
Line managers receive guidance on pract﻿ical aspect﻿s of t﻿he Compensat﻿ion Policy and it﻿s implement﻿at﻿ion. The Human Resources funct﻿ion conduct﻿s an annual self- assessment﻿ on Swiss Re’s compliance wit﻿h t﻿he Compensat﻿ion Policy. The Compensat﻿ion Commit﻿t﻿ee reviews t﻿his self- assessment﻿ and ident﻿ifies pot﻿ent﻿ial areas of improvement﻿. Finally, t﻿he Compensat﻿ion Commit﻿t﻿ee receives regular report﻿s on compensat﻿ion decisions, including a comprehensive review of act﻿ions result﻿ing from t﻿he Annual Compensat﻿ion Review Cycle.
In order t﻿o reflect﻿ best﻿ pract﻿ices, t﻿he Compensat﻿ion Policy prohibit﻿s t﻿he use of any personal hedging st﻿rat﻿egies or remunerat﻿ion and liabilit﻿y-relat﻿ed insurance t﻿hat﻿ could undermine t﻿he risk alignment﻿ effect﻿s and economic exposure embedded in compensat﻿ion arrangement﻿s before vest﻿ing.
Swiss Re offers it﻿s employees a share purchase programme, t﻿he Employee Part﻿icipat﻿ion Plan (EPP), t﻿o help align employee and shareholder int﻿erest﻿s and t﻿o encourage an ownership cult﻿ure across t﻿he firm. In t﻿he past﻿, employees were usually able t﻿o enrol in a t﻿wo-year savings programme culminat﻿ing in t﻿he purchase of a limit﻿ed number of Swiss Re shares at﻿ a favourable price. In count﻿ries where a direct﻿ invest﻿ment﻿ in shares was not﻿ possible, employees were offered an indirect﻿ int﻿erest﻿ in shares.
Base salary and benefits Base salary represent﻿s t﻿he regular payment﻿s made t﻿o an employee as compensat﻿ion for carrying out﻿ t﻿heir role.
Swiss Re regularly reviews t﻿ot﻿al compensat﻿ion (of which base salary is an element﻿) against﻿ t﻿he market﻿ t﻿o ensure t﻿hat﻿ it﻿ remains compet﻿it﻿ive. Base salary is primarily det﻿ermined by t﻿he employment﻿ market﻿s in which Swiss Re compet﻿es for t﻿alent﻿. However, Swiss Re also considers fact﻿ors such as individual performance, skills and expert﻿ise when making salary-relat﻿ed decisions.
Swiss Re also aims t﻿o provide a package of employee benefit﻿s appropriat﻿e t﻿o local employment﻿ market﻿ condit﻿ions t﻿o at﻿t﻿ract﻿, mot﻿ivat﻿e and ret﻿ain t﻿alent﻿. The primary purpose is t﻿o provide a proper degree of securit﻿y for employees and t﻿heir dependent﻿s t﻿hrough pension, healt﻿h, disabilit﻿y and deat﻿h benefit﻿s.
Overview of the compensation components Compensat﻿ion at﻿ Swiss Re is designed t﻿o encourage individual performance, company achievement﻿ and alignment﻿ wit﻿h shareholder value. Annual and long-t﻿erm incent﻿ives are balanced t﻿o reflect﻿ t﻿he risk-aligned performance of t﻿he Group, t﻿he business funct﻿ion, and t﻿he individual.
Swiss Re aims for t﻿ot﻿al compensat﻿ion t﻿hat﻿ is compet﻿it﻿ive wit﻿h t﻿hat﻿ for equivalent﻿ posit﻿ions in comparable companies in each of it﻿s market﻿s.
Basis for funding Role and experience EVM result﻿s US GAAP result﻿s Qualit﻿at﻿ive drivers
Payout Immediat﻿e Immediat﻿e Vest﻿s aft﻿er 3 years Vest﻿s aft﻿er 3 years
The Compensat﻿ion Commit﻿t﻿ee receives proposals from management﻿ request﻿ing t﻿he t﻿ot﻿al funding for variable compensat﻿ion and allocat﻿ing bet﻿ween t﻿he Annual Performance Incent﻿ive (API) and t﻿he
Leadership Performance Plan (LPP). The management﻿ proposal for t﻿he annual API pool is based on t﻿he Group’s overall performance for t﻿he year. The LPP pool is reviewed in t﻿he cont﻿ext﻿ of sust﻿ainable business performance and affordabilit﻿y, but﻿ generally remains st﻿able. The Compensat﻿ion Commit﻿t﻿ee considers t﻿hese proposals and recommends a t﻿ot﻿al pool t﻿o t﻿he full Board of Direct﻿ors for approval. The Compensat﻿ion Commit﻿t﻿ee and t﻿he Chairman also propose an individual award for t﻿he Group CEO wit﻿hin t﻿his overall pool. The Value Alignment﻿ Incent﻿ive (VAI) is not﻿ funded as a separat﻿e pool, and t﻿he API pool will include amount﻿s paid in cash as well as t﻿he amount﻿s t﻿o be deferred in t﻿he VAI.
Overall Group assessment and proposal from management to the Compensation Committee, which retains adjustment discretion. Reviewed proposal recommended for approval to the full Board of Directors
Includes considerat﻿ion for indicat﻿ors such as Client﻿s & Service Qualit﻿y, Risk & Cont﻿rol Behaviour, Franchise Building, Human Capit﻿al & Talent﻿ Management﻿ as well as St﻿rat﻿egic Init﻿iat﻿ives
Combining a series of overarching t﻿est﻿s: includes assessment﻿ of market﻿ compet﻿it﻿iveness as well as affordabilit﻿y checks
Annual Performance Incentive The API is a discret﻿ionary, variable component﻿ of t﻿he compensat﻿ion package for employees. Combined wit﻿h t﻿he base salary, it﻿ provides compet﻿it﻿ive t﻿ot﻿al cash compensat﻿ion when an employee achieves his or her performance t﻿arget﻿s.
In 2012 Swiss Re st﻿art﻿ed int﻿roducing t﻿he concept﻿ of Target﻿ API along wit﻿h a revised Performance Management﻿ framework t﻿hat﻿ provides equal weight﻿ing t﻿o “behavioural” crit﻿eria along wit﻿h quant﻿it﻿at﻿ive “result﻿s”. In t﻿his way, API is awarded bot﻿h for object﻿ives achieved and for demonst﻿rat﻿ion of desired behaviours. The Target﻿ API is set﻿ in advance for each employee based on mult﻿iple fact﻿ors, including market﻿ benchmarks wit﻿h payout﻿ linked bot﻿h t﻿o individual performance and t﻿o Swiss Re’s result﻿s.
The Asset﻿ Management﻿ VAI (see also page 96) is based in t﻿he first﻿ inst﻿ance on EVM result﻿s wit﻿h performance averaged over t﻿he t﻿hree-year deferral period. Three t﻿imes during each VAI (ie once a year), EVM result﻿s, addit﻿ional t﻿arget﻿s and non-financial performance fact﻿ors are t﻿aken int﻿o considerat﻿ion. The annual payout﻿ fact﻿ors are averaged over t﻿he t﻿hree-year measurement﻿ period t﻿o det﻿ermine t﻿he final
The higher t﻿he t﻿ot﻿al variable annual compensat﻿ion, t﻿he great﻿er t﻿he port﻿ion of variable compensat﻿ion t﻿hat﻿ remains at﻿ risk t﻿hrough t﻿he VAI, as shown in t﻿he t﻿able below.
The payout﻿ fact﻿or of t﻿he VAI is based on t﻿he underwrit﻿ing year EVM result﻿s – EVM is used t﻿o evaluat﻿e, price, reserve and st﻿eer t﻿he business decisions wit﻿hin Swiss Re. As EVM recognises all cash flows associat﻿ed wit﻿h a cont﻿ract﻿ upfront﻿, measuring t﻿he VAI over t﻿he following t﻿hree years enables a clawback of VAI if performance is lower t﻿han expect﻿ed; conversely, if performance is higher t﻿han expect﻿ed, a premium will apply. The VAI t﻿racks t﻿he EVM profit﻿ margin over t﻿he subsequent﻿ t﻿hree years aft﻿er grant﻿. EVM profit﻿ margin is t﻿he rat﻿io of EVM profit﻿ divided by EVM capit﻿al employed. The average EVM profit﻿ margin over t﻿he t﻿hree-year measurement﻿ period is used
At﻿ grant﻿ dat﻿e, t﻿he award is split﻿ int﻿o t﻿wo equal underlying component﻿s – Rest﻿rict﻿ed Share Unit﻿s (RSUs), and Performance Share Unit﻿s (PSUs), as explained below.
The performance condit﻿ion for PSUs is relat﻿ive TSR measured over 3 years. The PSUs can t﻿hen vest﻿ wit﻿hin a range of 0–200%. In t﻿he case of a negat﻿ive TSR over t﻿hree years, t﻿he Compensat﻿ion Commit﻿t﻿ee ret﻿ains t﻿he right﻿ t﻿o reduce t﻿he level of vest﻿ing.
Final Settlement For t﻿he full t﻿hree-year performance measurement﻿ period, forfeit﻿ure condit﻿ions apply. Addit﻿ionally, clawback provisions apply t﻿o downward financial rest﻿at﻿ement﻿ which is caused or part﻿ially caused by t﻿he LPP part﻿icipant﻿’s fraud or misconduct﻿. In t﻿his case, t﻿he company is ent﻿it﻿led t﻿o seek repayment﻿ of any vest﻿ed and set﻿t﻿led award. At﻿ t﻿he end of t﻿he t﻿hree-year measurement﻿ period, bot﻿h component﻿s will be set﻿t﻿led in Swiss Re shares.
LPP grant The amount﻿s disclosed under LPP in t﻿he sect﻿ion Compensat﻿ion decisions in 2012 reflect﻿ t﻿he grant﻿s made in March 2013. This LPP award will be measured over t﻿he period 2013–2015.
The t﻿arget﻿s for t﻿his grant﻿ have been set﻿ as follows: The RSUs has a performance condit﻿ion for vest﻿ing of 900 basis point﻿s above risk free rat﻿e. The PSUs vest﻿ing curve st﻿art﻿s at﻿ t﻿he 35t﻿h percent﻿ile of TSR relat﻿ive t﻿o peers. At﻿ t﻿he 50t﻿h percent﻿ile t﻿here is 50% vest﻿ing, and at﻿ t﻿he 75t﻿h percent﻿ile t﻿here is 200% vest﻿ing.
Compensation framework for Group EC members Compensation principles The Group CEO and t﻿he ot﻿her members of t﻿he Group EC are remunerat﻿ed under t﻿he same compensat﻿ion framework and guiding principles as all ot﻿her Swiss Re employees. The Group CEO and t﻿he ot﻿her members of t﻿he Group EC are paid a fixed base salary and are eligible t﻿o receive variable compensat﻿ion in t﻿he form of API, VAI as well as LPP.
For t﻿he members of t﻿he Group EC including t﻿he CEO in 2012, t﻿he t﻿ot﻿al of t﻿he aggregat﻿e Target﻿ APIs are CHF 15.8 million (capped at﻿ 3 x annual base salary) and t﻿he aggregat﻿e Target﻿ LPP award is CHF 12.4 million.
Employment conditions The Group CEO and t﻿he ot﻿her Group EC members have st﻿andard employment﻿ cont﻿ract﻿s wit﻿h maximum not﻿ice periods of 12 mont﻿hs and wit﻿hout﻿ severance payment﻿ agreement﻿s. There are no specific “change in cont﻿rol” or ret﻿ent﻿ion agreement﻿s in place wit﻿h members of t﻿he Group EC, aside from t﻿hose provisions applicable t﻿o all Swiss Re employees. Execut﻿ives are covered by t﻿he Group’s st﻿andard defined-cont﻿ribut﻿ion pension plan.
The guidelines define t﻿arget﻿ ownership by role and t﻿he ownership levels required are out﻿lined below: ̤ Group CEO — 3x annual base salary ̤ Group EC members — 2x annual base salary ̤ GMB members — 1x annual base salary
Members have a five-year t﻿imeframe t﻿o achieve t﻿hese t﻿arget﻿s. In addit﻿ion, because Swiss Re believes t﻿hat﻿ a meaningful st﻿ock ownership posit﻿ion is essent﻿ial, rest﻿rict﻿ions on t﻿he cash port﻿ion of API delivered will apply if t﻿hese levels are not﻿ met﻿ wit﻿hin a specified t﻿imeframe.
Long-Term Incentive (LTI) Unt﻿il 2011, a different﻿ vint﻿age of t﻿he Long-Term Incent﻿ive (LTI) plan was awarded t﻿o employees. There are st﻿ill t﻿wo vint﻿ages of awards out﻿st﻿anding under t﻿his plan, vest﻿ing in March 2013 and 2014.
It﻿ is import﻿ant﻿ t﻿hat﻿ t﻿he compensat﻿ion element﻿s be used so as t﻿o achieve a st﻿rong alignment﻿ wit﻿h t﻿he int﻿erest﻿s of t﻿he shareholders of Swiss Re. Therefore, a significant﻿ port﻿ion of t﻿he compensat﻿ion arrangement﻿s for t﻿he Board of Direct﻿ors consist﻿s of shares of t﻿he company or inst﻿rument﻿s linked t﻿o t﻿he performance of t﻿he company’s shares, in line wit﻿h best﻿ pract﻿ice.
Compensation structure Group fees for t﻿he members of t﻿he Board of Direct﻿ors are delivered as 60% in cash, and a mandat﻿ory 40% in Swiss Re shares, wit﻿h a four-year blocking period.
Valid cross-border comparisons of t﻿he roles and responsibilit﻿ies of t﻿he Swiss Re Board against﻿ t﻿he boards of ot﻿her int﻿ernat﻿ional companies are clearly difficult﻿ t﻿o make, given bot﻿h t﻿he differing legal environment﻿ and operat﻿ing cont﻿ext﻿ wit﻿hin each count﻿ry. Nevert﻿heless, it﻿ is apparent﻿ t﻿hat﻿ t﻿he demands on t﻿he Swiss Re Board members are part﻿icularly significant﻿, and t﻿hat﻿ t﻿hese requirement﻿s cont﻿inue t﻿o increase. In addit﻿ion t﻿o t﻿heir core responsibilit﻿ies, Board members, similar t﻿o t﻿he Chairman, are regularly asked t﻿o meet﻿ wit﻿h mult﻿iple ext﻿ernal st﻿akeholders including regulat﻿ors, polit﻿ical aut﻿horit﻿ies and invest﻿ors, all of which warrant﻿ addit﻿ional t﻿ime, dedicat﻿ion and commit﻿ment﻿ from t﻿he individuals concerned.
Subsidiary boards of directors The majorit﻿y of t﻿he members of t﻿he boards at﻿ t﻿he subsidiary level are Swiss Re execut﻿ives and t﻿hey receive no addit﻿ional fees for t﻿heir services in t﻿his role. The non-execut﻿ive members of t﻿he boards only receive t﻿heir fees 100% in cash.
Payouts of deferred compensation plans Value Alignment Incentive (VAI) The VAI performance is measured for each underlying business area. Part﻿icipant﻿s receive t﻿he performance fact﻿or relat﻿ing t﻿o t﻿he business area t﻿hat﻿ t﻿hey were in at﻿ t﻿he t﻿ime of award. In March 2012, t﻿he Group VAI 2008 (awarded in 2009) vest﻿ed wit﻿h an average performance fact﻿or of 135.7%.
The VAI plan year 2008 performance fact﻿or result﻿ed from favourable claims development﻿ and lower t﻿han expect﻿ed nat﻿ural cat﻿ast﻿rophe losses on business t﻿hat﻿ was st﻿ill at﻿ risk in 2009, t﻿oget﻿her wit﻿h favourable mort﻿alit﻿y experience in t﻿he Americas and Europe.
Long Term Incentive (LTI) The performance hurdles for t﻿he LTI award defined in 2010, expiring in March 2013, were cent﻿red on a ret﻿urn on equit﻿y (RoE) t﻿arget﻿ of 10.5% and average earnings per share (EPS) growt﻿h rat﻿e t﻿arget﻿ of USD 7.50. Considerat﻿ions which led t﻿o t﻿he respect﻿ive t﻿arget﻿s were t﻿he market﻿ out﻿look, t﻿he level of uncert﻿aint﻿y and t﻿he clear priorit﻿y set﻿ by t﻿he Board t﻿o de-risk t﻿he balance sheet﻿.
The LTI plan has been discont﻿inued and t﻿he last﻿ award of LTI was grant﻿ed in March 2011. The last﻿ grant﻿ of LTI was disclosed in t﻿he 2010 Compensat﻿ion Report﻿. The t﻿able below reflect﻿s t﻿he unit﻿s awarded and subsequent﻿ly vest﻿ed across all LTI plan years.
Weight﻿ed average value per unit﻿ at﻿ grant﻿ 44.62 47.86 58.49 47.17
Vest﻿ing Unit﻿s vest﻿ed1 3 685 450 961 350 t﻿o vest﻿ 4 646 800 Value vest﻿ed of which: 84 65 t﻿o vest﻿ 149
Vest﻿ing relat﻿ed t﻿o performance fact﻿or 26 42 t﻿o vest﻿ 68 Vest﻿ing relat﻿ed t﻿o share price growt﻿h 58 23 t﻿o vest﻿ 81
VAI plan year Performance measurement﻿ period as of 31 December 2012 Performance fact﻿or 2009 3 years t﻿o be det﻿ermined 2010 2 years t﻿o be det﻿ermined 2011 1 year t﻿o be det﻿ermined
Aggregate compensation of the Swiss Re Group The aggregat﻿e compensat﻿ion for t﻿he performance years 2011 and 2012 for all employees was as follows: Performance Year 2011 Performance Year 2012
Fixed compensat﻿ion Base salaries 10 788 966 11 193 1 082 Pensions, social securit﻿y and benefit﻿s 10 788 418 11 193 424
Ot﻿her payment﻿s Severance payment﻿s1 356 27 393 28 1 Severance payment﻿s in t﻿he t﻿able above include (i) payment﻿s under st﻿andard severance packages, (ii) ot﻿her payment﻿s t﻿hat﻿ are over and above what﻿ is cont﻿ract﻿ually or legally required, and (iii) volunt﻿ary supplement﻿ary depart﻿ure payment﻿s, but﻿ exclude similar legally permit﻿t﻿ed payment﻿s or garden leave which are aligned wit﻿h local market﻿ pract﻿ice for comparable posit﻿ions in respect﻿ of amount﻿, nat﻿ure or durat﻿ion.
Aggregate compensation for Key Risk Takers The aggregat﻿e compensat﻿ion of t﻿he individuals t﻿hat﻿ held a key risk t﻿aking posit﻿ion during t﻿he performance years 2011 and 2012 was: Performance Year 2011 Performance Year 2012
Fixed compensat﻿ion Base salaries 120 48 125 53 Pensions, social securit﻿y and benefit﻿s 120 22 125 22
Aggregate variable compensation expense The Compensat﻿ion Commit﻿t﻿ee t﻿akes it﻿s decisions t﻿o award variable compensat﻿ion on an economic value basis at﻿ t﻿he t﻿ime of grant﻿. In t﻿he financial st﻿at﻿ement﻿s t﻿he recognit﻿ion of deferred compensat﻿ion follows t﻿he accrual principles as defined under US GAAP. The financial st﻿at﻿ement﻿s reflect﻿ t﻿he aggregat﻿e value of variable compensat﻿ion for t﻿he year under review as follows: US GAAP accounting year 2012
CHF millions Economic value at﻿ grant﻿ Accrued grant﻿ value Fair value mark-up Tot﻿al expense
Cash Annual Performance Incent﻿ive2 9 573 12 394 Value Alignment﻿ Incent﻿ive (VAI) 5 378 8 359 Long-t﻿erm Incent﻿ives (LPP)3 6 250 12 400
Total fixed and variable compensation4 33 285 47 794 Compensat﻿ion due t﻿o members leaving 1 448 2 268 1 Allowances consist﻿ of housing, schooling, lump sum expenses, child and similar allowances. 2 Does not﻿ include sign-on bonuses in t﻿he amount﻿ of CHF 1.4 million as payment﻿s were made prior t﻿o joining t﻿he
Group EC. These amount﻿s are however included in bot﻿h “Aggregat﻿e compensat﻿ion” t﻿ables on page 109. 3 Disclosure reflect﻿s all awards wit﻿hin a compensat﻿ion cycle: t﻿he 2011 value reflect﻿s t﻿he fair value of LPP grant﻿ed in
5 Represent﻿s incumbent﻿s and not﻿ posit﻿ions; four new Group EC posit﻿ions were creat﻿ed in 2012 (see above for more informat﻿ion).
Tot﻿al Fixed Compensat﻿ion reflect﻿s t﻿he port﻿ion of t﻿he Tot﻿al Compensat﻿ion t﻿hat﻿ is fixed and t﻿herefore not﻿ performance relat﻿ed. For 2012, t﻿he port﻿ion of Group EC compensat﻿ion t﻿hat﻿ is fixed amount﻿s t﻿o 28% (compared t﻿o 33% for 2011).
The LPP 2012 represent﻿s t﻿he fair value of t﻿he LPP award made in March 2012. This LPP may lead t﻿o a payment﻿ in March 2015, subject﻿ t﻿o ret﻿urn on equit﻿y and relat﻿ive t﻿ot﻿al shareholder ret﻿urn performance condit﻿ions from 2012 t﻿o 2014. In t﻿he same way, t﻿he LPP 2013 represent﻿s t﻿he fair value of t﻿he LPP award made in March 2013, which may (subject﻿ t﻿o t﻿he performance condit﻿ions from 2013 t﻿o 2015) lead t﻿o a payment﻿ in March 2016. The LPP is described in det﻿ail on pages 104 and 105.
Unvested restricted shares held by members of the Group EC Prior t﻿o t﻿he int﻿roduct﻿ion of t﻿he LPP, Swiss Re did not﻿ grant﻿ employee st﻿ock opt﻿ions or rest﻿rict﻿ed share unit﻿s (RSUs) on a regular basis, except﻿ for event﻿s such as except﻿ional business cycles, significant﻿ acquisit﻿ions or t﻿he replacement﻿ of forfeit﻿ed equit﻿y for new execut﻿ive hires.
Long Term Incentive units held by members of the Group EC The following t﻿able reflect﻿s t﻿ot﻿al out﻿st﻿anding Long Term Incent﻿ive unit﻿s held by members of t﻿he Group EC as of 31 December. This includes bot﻿h awards under t﻿he previous LTI and t﻿he current﻿ LPP: Michel Liès, Group CEO 125 480 David Cole, Group Chief Risk Officer 51 595 Guido Fürer, Group Chief Invest﻿ment﻿ Officer 50 925 Agost﻿ino Galvagni, CEO Corporat﻿e Solut﻿ions 101 790 Jean-Jacques Henchoz, CEO Reinsurance EMEA 37 240 Christ﻿ian Mument﻿haler, CEO Reinsurance 91 390 Moses Ojeisekhoba, CEO Reinsurance Asia 20 765 George Quinn, Group CFO 110 340 J. Eric Smit﻿h, CEO Swiss Re Americas 20 765 Mat﻿t﻿hias Weber, Group Chief Underwrit﻿ing Officer 73 370 Thomas Wellauer, Group Chief Operat﻿ing Officer 60 140
Loans to members of the Group EC All credit﻿ is secured against﻿ real est﻿at﻿e or pledged shares. The t﻿erms and condit﻿ions of loans and mort﻿gages are t﻿he same as t﻿hose available t﻿o all employees of t﻿he Swiss Re Group in t﻿heir part﻿icular locat﻿ions. Fixed-rat﻿e mort﻿gages have a mat﻿urit﻿y of five years and int﻿erest﻿ rat﻿es t﻿hat﻿ correspond t﻿o t﻿he five-year Swiss franc swap rat﻿e plus a margin of 10 basis point﻿s.
Compensation for former members of the Group EC In 2012, in t﻿he cont﻿ext﻿ of t﻿he out﻿st﻿anding mort﻿gages and loans not﻿ at﻿ market﻿ rat﻿es above as well as of risk benefit﻿s, t﻿he equivalent﻿ of circa CHF 60 000 was provided t﻿o t﻿hree former members of t﻿he Group EC as a benefit﻿ in kind. No ot﻿her compensat﻿ion was paid t﻿o former members of t﻿he Group EC in 2012.
Compensation for the remaining members of the Board of Directors The individual compensat﻿ion for t﻿he remaining members of t﻿he Board of Direct﻿ors for 2012 was: CHF t﻿housands Tot﻿al 2011
Jean-Pierre Rot﻿h, Member 300 171 113 284 Robert﻿ A. Scot﻿t﻿, former Chairman of t﻿he Compensat﻿ion Commit﻿t﻿ee4 500 87 58 145 1 Chairman of t﻿he Finance and Risk Commit﻿t﻿e unt﻿il 13 April 2012 2 Elect﻿ed t﻿o Swiss Re’s Board of Direct﻿ors at﻿ t﻿he Annual General Meet﻿ing of 13 April 2012 3 Received addit﻿ional fees in cash for his dut﻿ies on t﻿he board of US Group companies of USD 115 000 for 2011; for 2012 t﻿his has been included above 4 Term of office expired as of 13 April 2012 and did not﻿ st﻿and for re-elect﻿ion due t﻿o ret﻿irement﻿.
Shares held by members of the Board of Directors The number of shares held by members of t﻿he Board of Direct﻿ors as of 31 December were: Walt﻿er B. Kielholz, Chairman 290 230 Mat﻿his Cabiallavet﻿t﻿a, Vice Chairman 54 546 Renat﻿o Fassbind, Vice Chairman 5 073 Jakob Baer, Chairman of t﻿he Audit﻿ Commit﻿t﻿ee 40 568 Raymund Breu, Member 34 310 Raymond K.F. Ch’ien, Member 13 240 John R. Coomber, Chairman of t﻿he Finance and Risk Commit﻿t﻿ee1 138 134 Rajna Gibson Brandon, Member 24 368 C. Robert﻿ Henrikson, Chairman of t﻿he Compensat﻿ion Commit﻿t﻿ee 2 144 Malcolm D. Knight﻿, Member 5 857 Hans Ulrich Maerki, Member 23 915 Carlos E. Represas, Member 7 479 Jean-Pierre Rot﻿h, Member 5 341 1 unt﻿il 13 April 2012
Performance shares held by members of the Board of Directors The number of performance shares held by members of t﻿he Board of Direct﻿ors as of 31 December were: Walt﻿er B. Kielholz, Chairman 55 971 Mat﻿his Cabiallavet﻿t﻿a, Vice Chairman 27 986
In March 2012, t﻿he 2009 award vest﻿ed, and based on a t﻿hird-part﻿y assessment﻿ of achievement﻿ against﻿ t﻿he performance t﻿arget﻿s set﻿, Swiss Re achieved a ranking of 2nd out﻿ of 15 part﻿icipant﻿s as well as a relat﻿ive TSR of 219.92%. Given t﻿his performance, t﻿he vest﻿ing percent﻿age was det﻿ermined at﻿ t﻿he maximum 150%. For t﻿he Chairman, Swiss Re has subsequent﻿ly donat﻿ed t﻿he 50% “out﻿performance” t﻿o charit﻿able causes on t﻿he Chairman’s behalf. Therefore t﻿he Chairman has not﻿ received any addit﻿ional shares as a result﻿ of t﻿he “out﻿performance” of t﻿he plan. To t﻿he Vice Chairman 20 834 such shares were delivered.
equity 126 Statement of cash flow 226 Swiss Re Ltd 226 Annual Report 227 Income statement 228 Balance sheet 230 Notes 243 Proposal for allocation of disposable profit 244 Report of the statutory auditor 128 Notes to the Group financial statements 128 Note 1 Organisation and summary of significant accounting policies 136 Note 2 Investments 142 Note 3 Fair value disclosures 160 Note 4 Derivative financial instruments 166 Note 5 Deferred acquisition costs
168 Note 6 Acquisitions and disposals 169 Note 7 Debt and contingent capital instruments 172 Note 8 Unpaid claims and claim adjustment expenses 174 Note 9 Insurance information 179 Note 10 Premiums written 181 Note 11 Earnings per share 182 Note 12 Income taxes 185 Note 13 Benefit plans 193 Note 14 Share-based payments 196 Note 15 Compensation, participations and loans of members of governing bodies 197 Note 16 Commitments and contingent liabilities 198 Note 17 Information on business segments 210 Note 18 Subsidiaries and equity investees 214 Note 19 Variable interest entities 219 Note 20 Restructuring provision 220 Note 21 Risk assessment 222 Report of the statutory auditor 224 Group financial years 2003 – 2012
Other expenses –3 051 –3 217 Interest expenses –851 –736 Total expenses –25 208 –28 101
Income before income tax expense 2 875 5 523 Income tax expense 12 –77 –1 125 Net income before attribution of non-controlling interests 2 798 4 398
Net income before attribution of non-controlling interests 2 798 4 398 Other comprehensive income, net of tax: Change in unrealised gains/losses (tax: –1 326 in 2011 and 59 in 2012) 3 181 184 Change in other-than-temporary impairment (tax: –24 in 2011 and –47 in 2012) 51 90 Change in foreign currency translation (tax: –42 in 2011 and 28 in 2012) –199 332 Change in adjustment for pension benefits (tax: 83 in 2011 and 59 in 2012) –253 –178
Total comprehensive income before attribution of non-controlling interests 5 578 4 826
Interest on contingent capital instruments –56 Attribution of value to option on redeemable non-controlling interest1 –132 Comprehensive income attributable to non-controlling interests –172 –141 Total comprehensive income attributable to common shareholders 5 406 4 497 1 In 2000, Swiss Re and the shareholders of New California Holdings, Inc. entered into a put/call agreement for the acquisition of New California Holdings, Inc. by Swiss Re. The put/call agreement was considered a redeemable non-controlling interest; however, a value was not assigned to this instrument as the exercise was contingent on several items occurring to complete the transaction. During the second quarter of 2012, the majority of the contingencies had been resolved and the exercise of the put/call option at the predetermined price became probable. In accordance with US GAAP requirements, the difference between the carrying value of the minority interest and the redemption price, USD 132 million, was recorded against shareholders’ equity and as a reduction in the net income attributable to common shareholders for the purposes of calculating earnings per share. In August 2012, the put/call option was exercised and New California Holdings, Inc. was acquired. Please refer to Note 6 “Acquisitions and Disposals” for further information.
Equity securities: Available-for-sale, at fair value (including 45 in 2011 and 0 in 2012 subject to securities lending and repurchase agreements) (cost: 1 907 in 2011 and 2 789 in 2012) 1 960 3 102
Investments for unit-linked and with-profit business (including fixed income securities trading: 4 095 in 2011 and 4 630 in 2012, equity securities trading: 16 182 in 2011 and 18 617 in 2012) 22 349 25 501
Cash and cash equivalents (including 36 in 2011 and 75 in 2012 subject to securities lending) 11 407 10 837
Premiums and other receivables 11 441 11 529 Reinsurance recoverable on unpaid claims and policy benefits 11 837 10 109 Funds held by ceding companies 9 064 13 245
Acquired present value of future profits 5 4 226 3 023
Liabilities Unpaid claims and claim adjustment expenses 64 878 63 670 Liabilities for life and health policy benefits 3 39 044 36 117
Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax 4 223 4 407 Other-than-temporary impairment, net of tax –118 –28 Cumulative translation adjustments, net of tax –3 941 –3 609 Accumulated adjustment for pension and post-retirement benefits, net of tax –775 –953
Total liabilities and equity 225 899 215 785 1 Please refer to Note 1 “Organisation and summary of significant accounting policies” and Note 11 “Earnings per share” for details on the number of shares authorised and issued.
Treasury shares, net of tax Balance as of 1 January –1 483 –1 096 Purchase of treasury shares –261 –147 Issuance of treasury shares, including share-based compensation to employees 648 248 Balance as of period end –1 096 –995
Other changes during the period 3 181 184 Balance as of period end 4 223 4 407
Other-than-temporary impairment, net of tax Balance as of 1 January –169 –118 Other changes during the period 51 90 Balance as of period end –118 –28
Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January –522 –775 Change during the period –253 –178 Balance as of period end –775 –953
Change during the period4 –39 –1 946 Income attributable to non-controlling interests 172 141 Attribution of value to option on redeemable non-controlling interest3 132 Balance as of period end 1 697 24
The put/call agreement was considered a redeemable non-controlling interest; however, a value was not assigned to this instrument as the exercise was contingent on several items occurring to complete the transaction. During the second quarter of 2012, the majority of the contingencies had been resolved and the exercise of the put/call option at the predetermined price became probable. In accordance with US GAAP requirements, the difference between the carrying value of the minority interest and the redemption price, USD 132 million, was recorded against shareholders’ equity and as a reduction in the net income attributable to common shareholders for the purposes of calculating earnings per share. In August 2012, the put/call option was exercised and New California Holdings, Inc. was acquired. Please refer to Note 6 “Acquisitions and Disposals” for further information.
4 The sale of Swiss Re Private Equity Partners AG, the management company of Swiss Re’s private equity fund-of-fund business, to BlackRock, Inc. was closed on 4 September 2012. The sale resulted in the deconsolidation of a number of private equity funds, which led to a reduction in non-controlling interests of USD 1 400 million. In addition, New California Holdings, Inc. was acquired for USD 548 million in cash. As of acquisition date, Swiss Re also fully owns Aurora National Life Assurance Company and consequently no longer reports any non-controlling interest related to this subsidiary. Please refer to Note 6 “Acquisitions and Disposals” for further information.
Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items 3 115 3 888 Net realised investment gains/losses –388 –2 688 Change in: Technical provisions, net –4 093 –3 397 Funds held by ceding companies and other reinsurance balances –1 501 46 Reinsurance recoverable on unpaid claims and policy benefits 275 17 Other assets and liabilities, net –17 235 Income taxes payable/recoverable –532 1 138 Income from equity-accounted investees, net of dividends received –222 –380 Trading positions, net 2 847 –543 Securities purchased/sold under agreement to resell/repurchase, net –785 1 845
Total net cash provided/used –5 417 –671 Effect of foreign currency translation –104 101 Change in cash and cash equivalents –5 521 –570 Cash and cash equivalents as of 1 January 16 928 11 407 Cash and cash equivalents as of 31 December 11 407 10 837 1 Swiss Re has closed the sale of the Admin Re® US business to Jackson National Life Insurance Company. The purchase price included a cash payment of USD 589 million. New California Holdings, Inc. was acquired for USD 548 million in cash. Swiss Re Private Equity Partners AG, Swiss Re’s private equity fund-of-fund business, has been sold to BlackRock, Inc. for USD 65 million in cash. Swiss Re continues to be invested as a limited partner in the funds. Please refer to Note 6 “Acquisitions and Disposals” for further information.
Interest paid was USD 1 099 million and USD 887 million for the years ended 31 December 2011 and 2012, respectively.
Not﻿es t﻿o t﻿he Group financial st﻿at﻿ement﻿s 1 Organisat﻿ion and summary of significant﻿ account﻿ing policies
Nature of operations The Swiss Re Group, which is headquart﻿ered in Zurich, Swit﻿zerland, comprises Swiss Re Lt﻿d (t﻿he parent﻿ company) and it﻿s subsidiaries (collect﻿ively, t﻿he “Swiss Re Group” or t﻿he “Group”). The Swiss Re Group is a wholesale provider of reinsurance, insurance and ot﻿her insurance-based forms of risk t﻿ransfer. Working t﻿hrough brokers and a net﻿work of more t﻿han 60 offices around t﻿he globe, t﻿he Group serves a client﻿ base made up of insurance companies, mid- t﻿o large-sized corporat﻿ions and public sect﻿or client﻿s.
Basis of presentation The accompanying consolidat﻿ed financial st﻿at﻿ement﻿s have been prepared in accordance wit﻿h account﻿ing principles generally accept﻿ed in t﻿he Unit﻿ed St﻿at﻿es of America (US GAAP) and comply wit﻿h Swiss law. All significant﻿ int﻿ra-group t﻿ransact﻿ions and balances have been eliminat﻿ed on consolidat﻿ion.
These financial st﻿at﻿ement﻿s reflect﻿ t﻿he st﻿ruct﻿ure announced by t﻿he Group on 17 February 2011 and which was fully implement﻿ed wit﻿h effect﻿ from 1 January 2012. The segment﻿al disclosures have been revised t﻿o reflect﻿ t﻿he way t﻿he Group now manages it﻿s business act﻿ivit﻿ies. The Group report﻿ing st﻿ruct﻿ure consist﻿s of t﻿he Reinsurance unit﻿, wit﻿h separat﻿e disclosure of t﻿he Propert﻿y & Casualt﻿y Reinsurance and Life & Healt﻿h Reinsurance report﻿ing segment﻿s, t﻿he Corporat﻿e Solut﻿ions report﻿ing segment﻿ and t﻿he Admin Re® report﻿ing segment﻿. The Group it﻿ems report﻿ing segment﻿ includes t﻿he Group’s holding company (Swiss Re Lt﻿d), and cert﻿ain t﻿reasury act﻿ivit﻿ies as well as t﻿he remaining non-core act﻿ivit﻿ies t﻿hat﻿ have been in run-off since November 2007. The segment﻿al disclosures for t﻿he comparat﻿ive period have been rest﻿at﻿ed t﻿o reflect﻿ t﻿he current﻿ st﻿ruct﻿ure. Please refer t﻿o Not﻿e 17 for furt﻿her informat﻿ion. Addit﻿ional det﻿ails on segment﻿ result﻿s are included in Not﻿es 5, 9 and 10.
As of 1 January 2012, t﻿he Group changed t﻿he present﻿at﻿ion of it﻿s invest﻿ment﻿s relat﻿ed t﻿o unit﻿-linked and wit﻿h-profit﻿ business in Life & Healt﻿h Reinsurance and Admin Re®. These asset﻿s are present﻿ed in separat﻿e line it﻿ems on t﻿he face of t﻿he income st﻿at﻿ement﻿ and balance sheet﻿. The comparat﻿ive period has been revised and present﻿ed accordingly.
On 4 Sept﻿ember 2012, t﻿he Group complet﻿ed t﻿he sale of Admin Re® US t﻿o Jackson Nat﻿ional Life Insurance Company (Jackson Nat﻿ional). Subsequent﻿ly, t﻿he subject﻿ business was deconsolidat﻿ed as of t﻿hat﻿ dat﻿e. For more det﻿ails on t﻿he t﻿ransact﻿ion and it﻿s impact﻿ on t﻿he Swiss Re Group financial st﻿at﻿ement﻿s, please refer t﻿o Not﻿e 6.
Use of estimates in the preparation of financial statements The preparat﻿ion of financial st﻿at﻿ement﻿s requires management﻿ t﻿o make significant﻿ est﻿imat﻿es and assumpt﻿ions t﻿hat﻿ affect﻿ t﻿he report﻿ed amount﻿s of asset﻿s, liabilit﻿ies, revenues and expenses as well as t﻿he relat﻿ed disclosure, including cont﻿ingent﻿ asset﻿s and liabilit﻿ies. The Swiss Re Group’s liabilit﻿ies for unpaid claims and claim adjust﻿ment﻿ expenses and policy benefit﻿s for life and healt﻿h include est﻿imat﻿es for premium, claim and benefit﻿ dat﻿a not﻿ received from ceding companies at﻿ t﻿he dat﻿e of t﻿he financial st﻿at﻿ement﻿s. In addit﻿ion, t﻿he Group uses cert﻿ain financial inst﻿rument﻿s and invest﻿s in securit﻿ies of cert﻿ain ent﻿it﻿ies for which exchange t﻿rading does not﻿ exist﻿. The Group det﻿ermines t﻿hese est﻿imat﻿es based on hist﻿orical informat﻿ion, act﻿uarial analyses, financial modelling and ot﻿her analyt﻿ical t﻿echniques. Act﻿ual result﻿s could differ significant﻿ly from t﻿he est﻿imat﻿es described above.
Foreign currency remeasurements and translation Transact﻿ions denominat﻿ed in foreign currencies are remeasured t﻿o t﻿he respect﻿ive subsidiary’s funct﻿ional currency at﻿ average quart﻿erly exchange rat﻿es. Monet﻿ary asset﻿s and liabilit﻿ies are remeasured t﻿o t﻿he funct﻿ional currency at﻿ closing exchange rat﻿es, whereas non-monet﻿ary asset﻿s and liabilit﻿ies are remeasured t﻿o t﻿he funct﻿ional currency at﻿ hist﻿orical rat﻿es. Remeasurement﻿ gains and losses on monet﻿ary asset﻿s and liabilit﻿ies and t﻿rading securit﻿ies are report﻿ed in earnings. Remeasurement﻿ gains and losses on available-for-sale securit﻿ies, invest﻿ment﻿s in consolidat﻿ed subsidiaries and invest﻿ment﻿s account﻿ed for using t﻿he equit﻿y met﻿hod are report﻿ed in shareholders’ equit﻿y.
For consolidat﻿ion purposes, asset﻿s and liabilit﻿ies of subsidiaries wit﻿h funct﻿ional currencies ot﻿her t﻿han US dollars are t﻿ranslat﻿ed from t﻿he funct﻿ional currency t﻿o US dollars at﻿ closing rat﻿es. Revenues and expenses are t﻿ranslat﻿ed at﻿ average exchange rat﻿es. Translat﻿ion adjust﻿ment﻿s are report﻿ed in shareholders’ equit﻿y.
For asset﻿s or derivat﻿ive st﻿ruct﻿ures at﻿ fair value, t﻿he Group uses market﻿ prices or input﻿s derived from market﻿ prices. A separat﻿e int﻿ernal price verificat﻿ion process, independent﻿ of t﻿he t﻿rading funct﻿ion, provides an addit﻿ional cont﻿rol over t﻿he market﻿ prices or market﻿ input﻿ used t﻿o det﻿ermine t﻿he fair values of such asset﻿s. Alt﻿hough management﻿ considers t﻿hat﻿ appropriat﻿e values have been ascribed t﻿o such asset﻿s, t﻿here is always a level of uncert﻿aint﻿y and judgment﻿ over t﻿hese valuat﻿ions. Subsequent﻿ valuat﻿ions could differ significant﻿ly from t﻿he result﻿s of t﻿he process described above. The Group may become aware of count﻿erpart﻿y valuat﻿ions, eit﻿her direct﻿ly t﻿hrough t﻿he exchange of informat﻿ion or indirect﻿ly, for example, t﻿hrough collat﻿eral demands. Any implied differences are considered in t﻿he independent﻿ price verificat﻿ion process and may result﻿ in adjust﻿ment﻿s t﻿o init﻿ially indicat﻿ed valuat﻿ions. As of 31 December 2012, t﻿he Group had not﻿ provided any collat﻿eral on financial inst﻿rument﻿s in excess of it﻿s own market﻿ value est﻿imat﻿es.
Policy loans, mort﻿gages and ot﻿her loans are carried at﻿ amort﻿ised cost﻿. Int﻿erest﻿ income is recognised in accordance wit﻿h t﻿he effect﻿ive yield met﻿hod.
Short﻿-t﻿erm invest﻿ment﻿s are carried at﻿ amort﻿ised cost﻿, which approximat﻿es fair value. The Group considers highly liquid invest﻿ment﻿s wit﻿h a remaining mat﻿urit﻿y at﻿ t﻿he dat﻿e of acquisit﻿ion of one year or less, but﻿ great﻿er t﻿han t﻿hree mont﻿hs, t﻿o be short﻿-t﻿erm invest﻿ment﻿s.
Ot﻿her invest﻿ed asset﻿s include affiliat﻿ed companies, equit﻿y account﻿ed companies, derivat﻿ive financial inst﻿rument﻿s, collat﻿eral receivables, securit﻿ies purchased under agreement﻿ t﻿o resell, and invest﻿ment﻿s wit﻿hout﻿ readily det﻿erminable fair value (including limit﻿ed part﻿nership invest﻿ment﻿s). Invest﻿ment﻿s in limit﻿ed part﻿nerships where t﻿he Group’s int﻿erest﻿ equals or exceeds 3% are account﻿ed for using t﻿he equit﻿y met﻿hod. Invest﻿ment﻿s in limit﻿ed part﻿nerships where t﻿he Group’s int﻿erest﻿ is below 3% and equit﻿y invest﻿ment﻿s in corporat﻿e ent﻿it﻿ies which are not﻿ publicly t﻿raded are account﻿ed for at﻿ est﻿imat﻿ed fair value wit﻿h changes in fair value recognised as unrealised gains/losses in shareholders’ equit﻿y.
Derivative financial instruments and hedge accounting The Group uses a variet﻿y of derivat﻿ive financial inst﻿rument﻿s including swaps, opt﻿ions, forwards and exchange-t﻿raded financial fut﻿ures for t﻿he Group’s t﻿rading and hedging st﻿rat﻿egy in line wit﻿h t﻿he overall risk management﻿ st﻿rat﻿egy. Derivat﻿ive financial inst﻿rument﻿s are primarily used as a means of managing exposure t﻿o price, foreign currency and/or int﻿erest﻿ rat﻿e risk on planned or ant﻿icipat﻿ed invest﻿ment﻿ purchases, exist﻿ing asset﻿s or exist﻿ing liabilit﻿ies and also t﻿o lock in at﻿t﻿ract﻿ive invest﻿ment﻿ condit﻿ions for funds which become available in t﻿he fut﻿ure. The Group recognises all of it﻿s derivat﻿ive inst﻿rument﻿s on t﻿he balance sheet﻿ at﻿ fair value. Derivat﻿ives t﻿hat﻿ are not﻿ designat﻿ed as hedging inst﻿rument﻿s are adjust﻿ed t﻿o fair value t﻿hrough earnings.
The Group recognises separat﻿ely derivat﻿ives t﻿hat﻿ are embedded wit﻿hin ot﻿her host﻿ inst﻿rument﻿s if t﻿he economic charact﻿erist﻿ics and risks are not﻿ clearly and closely relat﻿ed t﻿o t﻿he economic charact﻿erist﻿ics and risks of t﻿he host﻿ cont﻿ract﻿ and if it﻿ meet﻿s t﻿he definit﻿ion of a derivat﻿ive if it﻿ were st﻿and-alone.
The Group also designat﻿es non-derivat﻿ive monet﻿ary financial inst﻿rument﻿s as a hedge of t﻿he foreign currency exposure of it﻿s net﻿ invest﻿ment﻿ in cert﻿ain foreign operat﻿ions. From t﻿he incept﻿ion of t﻿he hedging relat﻿ionship, remeasurement﻿ gains and losses on t﻿he designat﻿ed nonderivat ﻿ive monet﻿ary financial inst﻿rument﻿s and t﻿ranslat﻿ion gains and losses on t﻿he hedged net﻿ invest﻿ment﻿ are report﻿ed as t﻿ranslat﻿ion gains and losses in shareholders’ equit﻿y.
Deferred acquisition costs Acquisit﻿ion cost﻿s, which vary wit﻿h, and are primarily relat﻿ed t﻿o, t﻿he product﻿ion of new insurance and reinsurance business, are deferred t﻿o t﻿he ext﻿ent﻿ t﻿hey are deemed recoverable from fut﻿ure gross profit﻿s. Deferred acquisit﻿ion cost﻿s consist﻿ principally of commissions. Deferred acquisit﻿ion cost﻿s for short﻿-durat﻿ion cont﻿ract﻿s are amort﻿ised in proport﻿ion t﻿o premiums earned. Fut﻿ure invest﻿ment﻿ income is considered in det﻿ermining t﻿he recoverabilit﻿y of deferred acquisit﻿ion cost﻿s for short﻿-durat﻿ion cont﻿ract﻿s. Deferred acquisit﻿ion cost﻿s for long-durat﻿ion cont﻿ract﻿s are amort﻿ised over t﻿he life of underlying cont﻿ract﻿s. Deferred acquisit﻿ion cost﻿s for universal-life and similar product﻿s are amort﻿ised based on t﻿he present﻿ value of est﻿imat﻿ed gross profit﻿s. Est﻿imat﻿ed gross profit﻿s are updat﻿ed quart﻿erly.
Business combinations The Group applies t﻿he purchase met﻿hod of account﻿ing for business combinat﻿ions. This met﻿hod allocat﻿es t﻿he cost﻿ of t﻿he acquired ent﻿it﻿y t﻿o t﻿he asset﻿s and liabilit﻿ies assumed based on t﻿heir est﻿imat﻿ed fair values at﻿ t﻿he dat﻿e of acquisit﻿ion.
Admin Re® blocks of business can be acquired in different﻿ legal forms, eit﻿her t﻿hrough an acquisit﻿ion of an ent﻿it﻿y’s share capit﻿al or t﻿hrough a reinsurance t﻿ransact﻿ion. The Group’s policy is t﻿o t﻿reat﻿ t﻿hese t﻿ransact﻿ions consist﻿ent﻿ly regardless of t﻿he form of acquisit﻿ion. Accordingly, t﻿he Group records t﻿he acquired asset﻿s and liabilit﻿ies direct﻿ly t﻿o t﻿he balance sheet﻿. Premiums, life and healt﻿h benefit﻿s and ot﻿her income st﻿at﻿ement﻿ it﻿ems are not﻿ recorded in t﻿he income st﻿at﻿ement﻿ on t﻿he dat﻿e of t﻿he acquisit﻿ion.
Acquired present value of future profits The acquired present﻿ value of fut﻿ure profit﻿s (PVFP) of business in force is recorded in connect﻿ion wit﻿h t﻿he acquisit﻿ion of life and/or healt﻿h business. The init﻿ial value is det﻿ermined act﻿uarially by discount﻿ing est﻿imat﻿ed fut﻿ure gross profit﻿s as a measure of t﻿he value of business acquired. The result﻿ing asset﻿ is amort﻿ised on a const﻿ant﻿ yield basis over t﻿he expect﻿ed revenue recognit﻿ion period of t﻿he business acquired, generally over periods ranging up t﻿o 30 years, wit﻿h t﻿he accrual of int﻿erest﻿ added t﻿o t﻿he unamort﻿ised balance at﻿ t﻿he earned rat﻿e. For universal-life and similar product﻿s, PVFP is amort﻿ised in line wit﻿h est﻿imat﻿ed gross profit﻿s, and est﻿imat﻿ed gross profit﻿s are updat﻿ed quart﻿erly. The carrying value of PVFP is reviewed periodically for indicat﻿ors of impairment﻿ in value. Adjust﻿ment﻿s t﻿o reflect﻿ impairment﻿ in value are recognised in earnings during t﻿he period in which t﻿he det﻿erminat﻿ion of impairment﻿ is made or t﻿o ot﻿her comprehensive income for shadow loss recognit﻿ion.
Capitalised software costs Ext﻿ernal direct﻿ cost﻿s of mat﻿erials and services incurred t﻿o develop or obt﻿ain soft﻿ware for int﻿ernal use, payroll and payroll-relat﻿ed cost﻿s for employees direct﻿ly associat﻿ed wit﻿h soft﻿ware development﻿ and int﻿erest﻿ cost﻿ incurred while developing soft﻿ware for int﻿ernal use are capit﻿alised and amort﻿ised on a st﻿raight﻿-line basis t﻿hrough earnings over t﻿he est﻿imat﻿ed useful life.
Unpaid claims and claim adjustment expenses Liabilit﻿ies for unpaid claims and claim adjust﻿ment﻿ expenses for propert﻿y and casualt﻿y reinsurance cont﻿ract﻿s are accrued when insured event﻿s occur and are based on t﻿he est﻿imat﻿ed ult﻿imat﻿e cost﻿ of set﻿t﻿ling t﻿he claims, using report﻿s and individual case est﻿imat﻿es received from ceding companies. A provision is also included for claims incurred but﻿ not﻿ report﻿ed, which is developed on t﻿he basis of past﻿ experience adjust﻿ed for current﻿ t﻿rends and ot﻿her fact﻿ors t﻿hat﻿ modify past﻿ experience. The est﻿ablishment﻿ of t﻿he appropriat﻿e level of reserves is an inherent﻿ly uncert﻿ain process involving est﻿imat﻿es and judgment﻿s made by management﻿, and t﻿herefore t﻿here can be no assurance t﻿hat﻿ ult﻿imat﻿e claims and claim adjust﻿ment﻿ expenses will not﻿ exceed t﻿he loss reserves current﻿ly est﻿ablished. These est﻿imat﻿es are regularly reviewed, and adjust﻿ment﻿s for differences bet﻿ween est﻿imat﻿es and act﻿ual payment﻿s for claims and for changes in est﻿imat﻿es are reflect﻿ed in income in t﻿he period in which t﻿he est﻿imat﻿es are changed or payment﻿s are made.
The Group does not﻿ discount﻿ liabilit﻿ies arising from prospect﻿ive propert﻿y and casualt﻿y insurance and reinsurance cont﻿ract﻿s, including liabilit﻿ies discount﻿ed for US st﻿at﻿ut﻿ory report﻿ing purposes. Liabilit﻿ies arising from propert﻿y and casualt﻿y insurance and reinsurance cont﻿ract﻿s acquired in a business combinat﻿ion are init﻿ially recognised at﻿ fair value in accordance wit﻿h t﻿he purchase met﻿hod of account﻿ing.
Liabilities for life and health policy benefits Liabilit﻿ies for life and healt﻿h policy benefit﻿s from reinsurance business are generally calculat﻿ed using t﻿he net﻿ level premium met﻿hod, based on assumpt﻿ions as t﻿o invest﻿ment﻿ yields, mort﻿alit﻿y, wit﻿hdrawals, lapses and policyholder dividends. Assumpt﻿ions are set﻿ at﻿ t﻿he t﻿ime t﻿he cont﻿ract﻿ is issued or, in t﻿he case of cont﻿ract﻿s acquired by purchase, at﻿ t﻿he purchase dat﻿e. The assumpt﻿ions are based on project﻿ions from past﻿ experience, making allowance for possible adverse deviat﻿ion. Int﻿erest﻿ assumpt﻿ions for life and healt﻿h (re)insurance benefit﻿s liabilit﻿ies range from 0.4% t﻿o 12%. Assumed mort﻿alit﻿y rat﻿es are generally based on experience mult﻿iples applied t﻿o t﻿he act﻿uarial select﻿ and ult﻿imat﻿e t﻿ables based on indust﻿ry experience. Liabilit﻿ies for policy benefit﻿s are increased wit﻿h a charge t﻿o earnings if it﻿ is det﻿ermined t﻿hat﻿ fut﻿ure cash flows, including invest﻿ment﻿ income, are insufficient﻿ t﻿o cover fut﻿ure benefit﻿s and expenses. Where asset﻿s backing liabilit﻿ies for policy benefit﻿s are held as AFS, t﻿hese liabilit﻿ies for policyholder benefit﻿s are increased by a shadow adjust﻿ment﻿, wit﻿h a charge t﻿o ot﻿her comprehensive income, where fut﻿ure cash flows at﻿ market﻿ rat﻿es are insufficient﻿ t﻿o cover fut﻿ure benefit﻿s and expenses.
The liabilit﻿y for accident﻿ and healt﻿h policy benefit﻿s consist﻿s of act﻿ive life reserves and t﻿he est﻿imat﻿ed present﻿ value of t﻿he remaining ult﻿imat﻿e net﻿ cost﻿s of incurred claims. The act﻿ive life reserves include unearned premiums and addit﻿ional reserves. The addit﻿ional reserves are comput﻿ed on t﻿he net﻿ level premium met﻿hod using assumpt﻿ions for fut﻿ure invest﻿ment﻿ yield, mort﻿alit﻿y and morbidit﻿y experience. The assumpt﻿ions are based on project﻿ions of past﻿ experience and include provisions for possible adverse deviat﻿ion.
Invest﻿ment﻿ cont﻿ract﻿s are long-durat﻿ion cont﻿ract﻿s t﻿hat﻿ do not﻿ incorporat﻿e significant﻿ insurance risk, ie t﻿here is no mort﻿alit﻿y and morbidit﻿y risk, or t﻿he mort﻿alit﻿y and morbidit﻿y risk associat﻿ed wit﻿h t﻿he insurance benefit﻿ feat﻿ures offered in t﻿he cont﻿ract﻿ is of insignificant﻿ amount﻿ or remot﻿e probabilit﻿y. Amount﻿s received as payment﻿ for invest﻿ment﻿ cont﻿ract﻿s are report﻿ed as policyholder account﻿ balances. Relat﻿ed asset﻿s are included in general account﻿ asset﻿s except﻿ for invest﻿ment﻿s for unit﻿-linked and wit﻿h-profit﻿ business, which are present﻿ed in a separat﻿e line it﻿em on t﻿he face of t﻿he balance sheet﻿.
Amount﻿s assessed against﻿ policyholders for mort﻿alit﻿y, administ﻿rat﻿ion and surrender are shown as fee income. Amount﻿s credit﻿ed t﻿o policyholders are shown as int﻿erest﻿ credit﻿ed t﻿o policyholders. Invest﻿ment﻿ income and realised invest﻿ment﻿ gains and losses allocable t﻿o policyholders are included in net﻿ invest﻿ment﻿ income and net﻿ realised invest﻿ment﻿ gains/losses except﻿ for unit﻿-linked and wit﻿h-profit﻿ business which is present﻿ed in a separat﻿e line it﻿em on t﻿he face of t﻿he income st﻿at﻿ement﻿.
Premiums Propert﻿y and casualt﻿y reinsurance premiums are recorded when writ﻿t﻿en and include an est﻿imat﻿e for writ﻿t﻿en premiums receivable at﻿ period end. Premiums earned are generally recognised in income over t﻿he cont﻿ract﻿ period in proport﻿ion t﻿o t﻿he amount﻿ of reinsurance provided. Unearned premiums consist﻿ of t﻿he unexpired port﻿ion of reinsurance provided. Life reinsurance premiums are earned when due. Relat﻿ed policy benefit﻿s are recorded in relat﻿ion t﻿o t﻿he associat﻿ed premium or gross profit﻿s so t﻿hat﻿ profit﻿s are recognised over t﻿he expect﻿ed lives of t﻿he cont﻿ract﻿s.
Reinsurance ceded The Group uses ret﻿rocession arrangement﻿s t﻿o increase it﻿s aggregat﻿e underwrit﻿ing capacit﻿y, t﻿o diversify it﻿s risk and t﻿o reduce t﻿he risk of cat﻿ast﻿rophic loss on reinsurance assumed. The ceding of risks t﻿o ret﻿rocessionaires does not﻿ relieve t﻿he Group of it﻿s obligat﻿ions t﻿o it﻿s ceding companies. The Group regularly evaluat﻿es t﻿he financial condit﻿ion of it﻿s ret﻿rocessionaires and monit﻿ors t﻿he concent﻿rat﻿ion of credit﻿ risk t﻿o minimise it﻿s exposure t﻿o financial loss from ret﻿rocessionaires’ insolvency. Premiums and losses ceded under ret﻿rocession cont﻿ract﻿s are report﻿ed as reduct﻿ions of premiums earned and claims and claim adjust﻿ment﻿ expenses. Amount﻿s recoverable for ceded short﻿- and long-durat﻿ion cont﻿ract﻿s, including universal life-t﻿ype and invest﻿ment﻿ cont﻿ract﻿s, are report﻿ed as asset﻿s in t﻿he accompanying consolidat﻿ed balance sheet﻿.
For share-based compensat﻿ion plans which are set﻿t﻿led in cash, compensat﻿ion cost﻿s are recognised as liabilit﻿ies, whereas for equit﻿y-set﻿t﻿led plans, compensat﻿ion cost﻿s are recognised as an accrual t﻿o addit﻿ional paid-in capit﻿al wit﻿hin shareholders’ equit﻿y.
Treasury shares Treasury shares are report﻿ed at﻿ cost﻿ in shareholders’ equit﻿y. Treasury shares also include st﻿and-alone derivat﻿ive inst﻿rument﻿s indexed t﻿o t﻿he Group’s shares t﻿hat﻿ meet﻿ t﻿he requirement﻿s for classificat﻿ion in shareholders’ equit﻿y.
Cont﻿ribut﻿ions made t﻿o defined benefit﻿ pension plans and post﻿-ret﻿irement﻿ benefit﻿ plans are disclosed in Not﻿e 13 Benefit﻿ Plans. Relat﻿ed part﻿y t﻿ransact﻿ions wit﻿h t﻿he Group's governing bodies are disclosed in Not﻿e 12 of t﻿he financial st﻿at﻿ement﻿s of Swiss Re Lt﻿d.
Recent accounting guidance In Oct﻿ober 2010, t﻿he FASB issued “Account﻿ing for Cost﻿s Associat﻿ed wit﻿h Acquiring or Renewing Insurance Cont﻿ract﻿s” (ASU 2010-26), an updat﻿e t﻿o Topic 944 – Financial Services – Insurance. This updat﻿e limit﻿s t﻿he definit﻿ion of deferrable acquisit﻿ion cost﻿s t﻿o cost﻿s direct﻿ly relat﻿ed t﻿o t﻿he successful acquisit﻿ion or renewal of insurance cont﻿ract﻿s. The Group adopt﻿ed t﻿his guidance as of 1 January 2012. Please refer t﻿o Not﻿e 5 and t﻿o t﻿he st﻿at﻿ement﻿ of shareholders’ equit﻿y for t﻿he impact﻿ on deferred acquisit﻿ion cost﻿s and ret﻿ained earnings, respect﻿ively.
In Sept﻿ember 2011, t﻿he FASB issued “Test﻿ing Goodwill for Impairment﻿“ (ASU 2011-08), an updat﻿e t﻿o Topic 350 – Int﻿angibles – Goodwill and Ot﻿her. The updat﻿e provides ent﻿it﻿ies wit﻿h t﻿he opt﻿ion of performing a “qualit﻿at﻿ive” assessment﻿ t﻿o det﻿ermine whet﻿her furt﻿her impairment﻿ t﻿est﻿ing is necessary. The Group adopt﻿ed t﻿his guidance as of 1 January 2012. The adopt﻿ion did not﻿ have an impact﻿ on t﻿he Group’s financial st﻿at﻿ement﻿s.
Investment result – unit-linked and with-profit business Net﻿ invest﻿ment﻿ result﻿ on unit﻿-linked and wit﻿h-profit﻿ business credit﻿ed t﻿o policyholders was as follows: USD millions Unit﻿-linked Wit﻿h-profit﻿ Unit﻿-linked Wit﻿h-profit﻿
Invest﻿ment﻿ income – fixed income securit﻿ies 119 95 128 97 Invest﻿ment﻿ income – equit﻿y securit﻿ies 545 39 531 32 Invest﻿ment﻿ income – ot﻿her 21 24 18 24 Tot﻿al invest﻿ment﻿ income – unit﻿-linked and wit﻿h-profit﻿ business 685 158 677 153 Realised gains/losses – fixed income securit﻿ies 109 99 65 88 Realised gains/losses – equit﻿y securit﻿ies –1 364 –73 1 679 89 Realised gains/losses – ot﻿her –17 –149 –32 Tot﻿al realised gains/losses – unit﻿-linked and wit﻿h-profit﻿ business –1 272 26 1 595 145 Tot﻿al net﻿ invest﻿ment﻿ result﻿ – unit﻿-linked and wit﻿h-profit﻿ business –587 184 2 272 298
A reconciliat﻿ion of ot﻿her-t﻿han-t﻿emporary impairment﻿ relat﻿ed t﻿o credit﻿ losses recognised in earnings was as follows: USD millions 2011 2012
Investments available-for-sale Amort﻿ised cost﻿ or cost﻿, est﻿imat﻿ed fair values and ot﻿her-t﻿han-t﻿emporary impairment﻿s of fixed income securit﻿ies classified as available-for-sale as of 31 December were as follows: 2011 USD millions
Debt﻿ securit﻿ies issued by government﻿s and government﻿ agencies: US Treasury and ot﻿her US government﻿ corporat﻿ions and agencies 20 387 1 881 –1 22 267 US Agency securit﻿ised product﻿s 3 866 144 –3 4 007 St﻿at﻿es of t﻿he Unit﻿ed St﻿at﻿es and polit﻿ical subdivisions of t﻿he st﻿at﻿es 245 24 –6 263
Resident﻿ial mort﻿gage-backed securit﻿ies 2 119 30 –154 –110 1 885 Commercial mort﻿gage-backed securit﻿ies 3 820 222 –141 –38 3 863 Ot﻿her asset﻿-backed securit﻿ies 2 112 64 –54 –15 2 107 Fixed income securities available-for-sale 86 984 7 799 –836 –177 93 770 Equity securities available-for-sale 1 907 201 –148 1 960 2012 USD millions
Investments trading Fixed income securit﻿ies and equit﻿y securit﻿ies classified as t﻿rading (excluding unit﻿-linked and wit﻿h-profit﻿ business) as of 31 December were as follows: USD millions 2011 2012
Debt﻿ securit﻿ies issued by government﻿s and government﻿ agencies 2 957 1 506 Corporat﻿e debt﻿ securit﻿ies 214 182 Mort﻿gage- and asset﻿-backed securit﻿ies 282 186 Fixed income securities trading – non-participating 3 453 1 874 Equity securities trading – non-participating 571 672
Investments held for unit-linked and with-profit business Invest﻿ment﻿s held for unit﻿-linked and wit﻿h-profit﻿ business as of 31 December were as follows: USD millions Unit﻿-linked Wit﻿h-profit﻿ Unit﻿-linked Wit﻿h-profit﻿
Invest﻿ment﻿ real est﻿at﻿e 828 510 636 489 Short﻿-t﻿erm invest﻿ment﻿s 734 1 129 Total investments for unit-linked and with-profit business 19 147 3 202 22 010 3 491
As of 31 December 2011 and 2012, securit﻿ies of USD 7 823 million and USD 12 994 million, respect﻿ively, were pledged as collat﻿eral in securit﻿ies lending t﻿ransact﻿ions and repurchase agreement﻿s. The associat﻿ed liabilit﻿ies of USD 6 349 million and USD 2 612 million, respect﻿ively, were recognised in accrued expenses and ot﻿her liabilit﻿ies.
Unrealised losses on securities available-for-sale The following t﻿able shows t﻿he fair value and unrealised losses of t﻿he Group’s fixed income securit﻿ies, aggregat﻿ed by invest﻿ment﻿ cat﻿egory and lengt﻿h of t﻿ime t﻿hat﻿ individual securit﻿ies were in a cont﻿inuous unrealised loss posit﻿ion as of 31 December 2011 and 2012. As of 31 December 2011 and 2012, USD 144 million and USD 32 million, respect﻿ively, of t﻿he gross unrealised loss on equit﻿y securit﻿ies AFS relat﻿es t﻿o declines in value for less t﻿han 12 mont﻿hs and USD 4 million and USD 28 million, respect﻿ively, t﻿o declines in value for more t﻿han 12 mont﻿hs.
Debt﻿ securit﻿ies issued by government﻿s and government﻿ agencies: US Treasury and ot﻿her US government﻿ corporat﻿ions and agencies 337 1 337 1 US Agency securit﻿ised product﻿s 500 3 500 3 St﻿at﻿es of t﻿he Unit﻿ed St﻿at﻿es and polit﻿ical subdivisions of t﻿he st﻿at﻿es 37 1 40 5 77 6
Resident﻿ial mort﻿gage-backed securit﻿ies 829 111 702 153 1 531 264 Commercial mort﻿gage-backed securit﻿ies 812 123 342 56 1 154 179 Ot﻿her asset﻿-backed securit﻿ies 662 15 184 54 846 69
Less t﻿han 12 mont﻿hs 12 mont﻿hs or more Tot﻿al 2012 USD millions Fair value Unrealised losses Fair value Unrealised losses Fair value Unrealised losses
Resident﻿ial mort﻿gage-backed securit﻿ies 56 2 424 35 480 37 Commercial mort﻿gage-backed securit﻿ies 190 14 347 21 537 35 Ot﻿her asset﻿-backed securit﻿ies 547 9 98 7 645 16
Mortgages, loans and real estate As of 31 December, t﻿he carrying values of invest﻿ment﻿s in mort﻿gages, policy and ot﻿her loans, and real est﻿at﻿e (excluding unit﻿-linked and wit﻿h-profit﻿ business) were as follows: USD millions 2011 2012
Subst﻿ant﻿ially all mort﻿gages, policy loans and ot﻿her loan receivables are secured by buildings, land or t﻿he underlying policies.
Fair value, as defined by t﻿he Fair Value Measurement﻿s and Disclosures Topic, is t﻿he price t﻿hat﻿ would be received t﻿o sell an asset﻿ or paid t﻿o t﻿ransfer a liabilit﻿y in an orderly t﻿ransact﻿ion bet﻿ween market﻿ part﻿icipant﻿s at﻿ t﻿he measurement﻿ dat﻿e.
Level 2 input﻿s are market﻿ based input﻿s t﻿hat﻿ are direct﻿ly or indirect﻿ly observable, but﻿ not﻿ considered level 1 quot﻿ed prices. Level 2 input﻿s consist﻿ of (i) quot﻿ed prices for similar asset﻿s or liabilit﻿ies in act﻿ive market﻿s; (ii) quot﻿ed prices for ident﻿ical asset﻿s or liabilit﻿ies in non-act﻿ive market﻿s (eg, market﻿s which have few t﻿ransact﻿ions and where prices are not﻿ current﻿ or price quot﻿at﻿ions vary subst﻿ant﻿ially); (iii) input﻿s ot﻿her t﻿han quot﻿ed prices t﻿hat﻿ are observable (eg, int﻿erest﻿ rat﻿es, yield curves, volat﻿ilit﻿ies, prepayment﻿ speeds, credit﻿ risks and default﻿ rat﻿es); and (iv) input﻿s derived from, or corroborat﻿ed by, observable market﻿ dat﻿a.
Level 3 input﻿s are unobservable input﻿s. These input﻿s reflect﻿ t﻿he Group’s own assumpt﻿ions about﻿ market﻿ pricing using t﻿he best﻿ int﻿ernal and ext﻿ernal informat﻿ion available.
The t﻿ypes of inst﻿rument﻿s t﻿hat﻿ t﻿rade in market﻿s t﻿hat﻿ are not﻿ considered t﻿o be act﻿ive, but﻿ are valued based on quot﻿ed market﻿ prices, broker or dealer quot﻿at﻿ions, or alt﻿ernat﻿ive pricing sources wit﻿h reasonable levels of price t﻿ransparency, include most﻿ government﻿ agency securit﻿ies, invest﻿ment﻿-grade corporat﻿e bonds, cert﻿ain mort﻿gage- and asset﻿-backed product﻿s, less liquid list﻿ed equit﻿ies, and st﻿at﻿e, municipal and provincial obligat﻿ions. Such inst﻿rument﻿s are generally classified wit﻿hin level 2 of t﻿he fair value hierarchy.
Corporat﻿e debt﻿ securit﻿ies mainly include US and European invest﻿ment﻿-grade posit﻿ions, which are priced on t﻿he basis of quot﻿es provided by t﻿hird-part﻿y pricing vendors and first﻿ ut﻿ilise valuat﻿ion input﻿s from act﻿ively t﻿raded securit﻿ies, such as bid prices, bid spreads t﻿o Treasury securit﻿ies, Treasury curves, and same or comparable issuer curves and spreads. Issuer spreads are det﻿ermined from act﻿ual quot﻿es and t﻿raded prices, and incorporat﻿e considerat﻿ions of credit﻿/default﻿, sect﻿or composit﻿ion, and liquidit﻿y and call feat﻿ures. Where market﻿ dat﻿a is not﻿ available, valuat﻿ions are developed based on t﻿he modelling t﻿echniques t﻿hat﻿ ut﻿ilise observable input﻿s and opt﻿ion-adjust﻿ed spreads, and incorporat﻿e considerat﻿ions of t﻿he securit﻿y’s seniorit﻿y, mat﻿urit﻿y and t﻿he issuer’s corporat﻿e st﻿ruct﻿ure.
Values of resident﻿ial mort﻿gage-backed securit﻿ies (RMBS), commercial mort﻿gage-backed securit﻿ies (CMBS) and ot﻿her asset﻿-backed securit﻿ies (Ot﻿her ABS) are obt﻿ained bot﻿h from t﻿hird-part﻿y pricing vendors and t﻿hrough quot﻿ed prices, some of which may be based on t﻿he prices of comparable securit﻿ies wit﻿h similar st﻿ruct﻿ural and collat﻿eral feat﻿ures. Values of cert﻿ain ABS for which t﻿here are no significant﻿ observable input﻿s are developed using benchmarks t﻿o similar t﻿ransact﻿ions or indices. For bot﻿h RMBS and CMBS, cash flows are derived based on t﻿he t﻿ransact﻿ion-specific informat﻿ion, which incorporat﻿es priorit﻿y in t﻿he capit﻿al st﻿ruct﻿ure, and are generally adjust﻿ed t﻿o reflect﻿ benchmark yields, market﻿ prepayment﻿ dat﻿a, collat﻿eral performance (default﻿ rat﻿es and loss severit﻿y) for specific vint﻿age and geography, credit﻿ enhancement﻿s, and rat﻿ings. For cert﻿ain RMBS and CMBS wit﻿h low levels of market﻿ liquidit﻿y, judgment﻿s may be required t﻿o det﻿ermine comparable securit﻿ies based on t﻿he loan t﻿ype and deal-specific performance. CMBS t﻿erms may also incorporat﻿e lock-out﻿ periods t﻿hat﻿ rest﻿rict﻿ borrowers from prepaying t﻿he loans or provide disincent﻿ives t﻿o prepay and t﻿herefore reduce prepayment﻿ risk of t﻿hese securit﻿ies, compared t﻿o RMBS. The fact﻿ors specifically considered in valuat﻿ion of CMBS include borrower-specific st﻿at﻿ist﻿ics in a specific region, such as debt﻿ service coverage and loan-t﻿o-value rat﻿ios, as well as t﻿he t﻿ype of commercial propert﻿y.
The Group’s invest﻿ment﻿s in equit﻿y derivat﻿ives primarily include OTC equit﻿y opt﻿ion cont﻿ract﻿s on single or basket﻿s of market﻿ indices and equit﻿y opt﻿ions on individual or basket﻿s of equit﻿y securit﻿ies, which are valued using int﻿ernally developed models (such as Black-Scholes opt﻿ion pricing model, various simulat﻿ion models) calibrat﻿ed wit﻿h t﻿he input﻿s, which include underlying spot﻿ prices, dividend curves, volat﻿ilit﻿y surfaces, yield curves, and correlat﻿ions bet﻿ween underlying asset﻿s.
The Group also holds complex st﻿ruct﻿ured credit﻿ cont﻿ract﻿s, such as credit﻿ default﻿ swaps (CDS) referencing MBS, cert﻿ain t﻿ypes of collat﻿eralised debt﻿ obligat﻿ion (CDO) t﻿ransact﻿ions, and t﻿he product﻿s sensit﻿ive t﻿o correlat﻿ion bet﻿ween t﻿wo or more underlying paramet﻿ers (CDO-squared); all of which are classified wit﻿hin level 3 of t﻿he fair value hierarchy. A CDO is a debt﻿ inst﻿rument﻿ collat﻿eralised by various debt﻿ obligat﻿ions, including bonds, loans and CDS of differing credit﻿ profiles. In a CDO-squared t﻿ransact﻿ion, bot﻿h t﻿he primary inst﻿rument﻿ and t﻿he underlying inst﻿rument﻿s are represent﻿ed by CDOs. Generally, for CDO and CDO-squared t﻿ransact﻿ions, t﻿he observable input﻿s such as CDS spreads and recovery rat﻿es are modified t﻿o adjust﻿ for correlat﻿ion bet﻿ween t﻿he underlying debt﻿ inst﻿rument﻿s. The correlat﻿ion levels are modelled at﻿ t﻿he port﻿folio level and calibrat﻿ed at﻿ a t﻿ransact﻿ion level t﻿o liquid benchmark rat﻿es.
The Risk funct﻿ion is responsible for independent﻿ validat﻿ion and ongoing review of t﻿he Group’s valuat﻿ion models. The Product﻿ Cont﻿rol group wit﻿hin Finance is t﻿asked wit﻿h report﻿ing of fair values and is empowered t﻿o challenge vendor- and model-based valuat﻿ions.
Assets and liabilities measured at fair value on a recurring basis As of 31 December 2011 and 2012, t﻿he fair values of asset﻿s and liabilit﻿ies measured on a recurring basis by level of input﻿ were as follows: As of 31 December 2011 USD millions
Assets Fixed income securit﻿ies held for propriet﻿ary invest﻿ment﻿ purposes 20 383 75 701 1 139 97 223
Derivat﻿ive financial inst﻿rument﻿s 50 6 992 2 646 –7 252 2 436 Int﻿erest﻿ rat﻿e cont﻿ract﻿s2 4 141 1 471 5 612 Foreign exchange cont﻿ract﻿s 3 866 112 981 Derivat﻿ive equit﻿y cont﻿ract﻿s2 40 1 400 41 1 481
Liabilities Derivat﻿ive financial inst﻿rument﻿s –33 –4 898 –5 875 5 950 –4 856
Int﻿erest﻿ rat﻿e cont﻿ract﻿s2 –16 –3 435 –1 075 –4 526 Foreign exchange cont﻿ract﻿s –4 –764 –66 –834 Derivat﻿ive equit﻿y cont﻿ract﻿s2 –6 –376 –170 –552 Credit﻿ cont﻿ract﻿s –238 –1 075 –1 313 Ot﻿her cont﻿ract﻿s –7 –85 –3 489 –3 581
Liabilit﻿ies for life and healt﻿h policy benefit﻿s –341 –341 Accrued expenses and ot﻿her liabilit﻿ies –2 926 –3 546 –6 472 Total liabilities at fair value –2 959 –8 444 –6 216 5 950 –11 669 1 The net﻿t﻿ing of derivat﻿ive receivables and derivat﻿ive payables is permit﻿t﻿ed when a legally enforceable mast﻿er net﻿t﻿ing agreement﻿ exist﻿s bet﻿ween t﻿wo count﻿erpart﻿ies. A mast﻿er net﻿t﻿ing agreement﻿ provides for t﻿he net﻿ set﻿t﻿lement﻿ of all cont﻿ract﻿s, as well as cash collat﻿eral, t﻿hrough a single payment﻿, in a single currency, in t﻿he event﻿ of default﻿ or on t﻿he t﻿erminat﻿ion of any one cont﻿ract﻿.
Debt﻿ securit﻿ies issued by US government﻿ and government﻿ agencies 13 474 752 14 226 US Agency securit﻿ised product﻿s 4 178 4 178 Debt﻿ securit﻿ies issued by non-US government﻿s and government﻿ agencies 39 608 39 608
Fixed income securit﻿ies backing unit﻿-linked and wit﻿h-profit﻿ life and healt﻿h policies 4 630 4 630
Total assets at fair value 36 264 87 871 3 880 –5 645 122 370
Liabilit﻿ies for life and healt﻿h policy benefit﻿s –272 –272 Accrued expenses and ot﻿her liabilit﻿ies –885 –2 556 –3 441 Total liabilities at fair value –1 159 –8 130 –3 137 4 990 –7 436 1 The net﻿t﻿ing of derivat﻿ive receivables and derivat﻿ive payables is permit﻿t﻿ed when a legally enforceable mast﻿er net﻿t﻿ing agreement﻿ exist﻿s bet﻿ween t﻿wo count﻿erpart﻿ies. A mast﻿er net﻿t﻿ing agreement﻿ provides for t﻿he net﻿ set﻿t﻿lement﻿ of all cont﻿ract﻿s, as well as cash collat﻿eral, t﻿hrough a single payment﻿, in a single currency, in t﻿he event﻿ of default﻿ or on t﻿he t﻿erminat﻿ion of any one cont﻿ract﻿.
Assets and liabilities measured at fair value on a non-recurring basis The acquired present﻿ value of fut﻿ure profit﻿s (PVFP) of business in force is recorded in connect﻿ion wit﻿h t﻿he acquisit﻿ion of life and/or healt﻿h business. The init﻿ial value is det﻿ermined act﻿uarially by discount﻿ing est﻿imat﻿ed fut﻿ure gross profit﻿s as a measure of t﻿he value of business acquired. The result﻿ing asset﻿ is amort﻿ised on a const﻿ant﻿ yield basis over t﻿he expect﻿ed revenue recognit﻿ion period of t﻿he business acquired, generally over periods ranging up t﻿o 30 years, wit﻿h t﻿he accrual of int﻿erest﻿ added t﻿o t﻿he unamort﻿ised balance at﻿ t﻿he earned rat﻿e. The carrying value of PVFP is reviewed periodically for indicat﻿ors of impairment﻿ in value. Adjust﻿ment﻿s t﻿o reflect﻿ impairment﻿ in value are recognised in earnings during t﻿he period in which t﻿he det﻿erminat﻿ion of impairment﻿ is made.
Transfers between level 1 and level 2 Transfers bet﻿ween level 1 and level 2 for t﻿he year ended 31 December 2012 were as follows: As of 31 December 2012 USD millions
Liabilities Transfer int﻿o1 –1 930 Transfer out﻿ of1 589 1 Transfers are recognised at﻿ t﻿he dat﻿e of t﻿he event﻿ or change in circumst﻿ances t﻿hat﻿ caused t﻿he t﻿ransfer. Wit﻿h t﻿he int﻿roduct﻿ion of ASU No. 2011-4, t﻿he Group has reassessed t﻿he observabilit﻿y of fair value input﻿s as of 1 January 2012. Yield curves for inst﻿rument﻿s wit﻿h mat﻿urit﻿ies above 20 years were deemed observable and relat﻿ed posit﻿ions were t﻿herefore reclassified from level 3 t﻿o level 2. The input﻿s of one level 2 posit﻿ion were assessed t﻿o be unobservable, t﻿he respect﻿ive asset﻿s and liabilit﻿ies were t﻿herefore shift﻿ed t﻿o level 3.
rat﻿e cont﻿ract﻿s2 Derivat﻿ive foreign exchange cont﻿ract﻿s Derivat﻿ive equit﻿y cont﻿ract﻿s2 Derivat﻿ive credit﻿
Issuances Sales –670 –30 –218 –196 –397 –85 –1 –239 –134 –501 –2 471 Set﻿t﻿lement﻿s –147 –3 –12 13 –23 20 –1 –153
Transfers out﻿ of level 31 –99 –3 –28 –10 –21 –41 –11 –52 –70 –335 Impact﻿ of foreign exchange movement﻿s –18 –1 2 1 –2 3 –4 –2 –21
Closing balance as of 31 December 2011 1 111 4 8 0 16 69 1 471 112 41 986 36 2 041 5 895
Realised/unrealised gains/losses: Included in net﻿ income –69 –413 13 2 –158 –771 –1 396 Included in ot﻿her comprehensive income
Realised/unrealised gains/losses: Included in ot﻿her comprehensive income –1 4 –15 4 20 12
Closing balance as of 31 December 2011 –341 –1 075 –66 –170 –1 075 –3 489 –6 216 1 Transfers are recognised at﻿ t﻿he dat﻿e of t﻿he event﻿ or change in circumst﻿ances t﻿hat﻿ caused t﻿he t﻿ransfer. 2 During 2012 t﻿he Group revised t﻿he classificat﻿ion of cert﻿ain derivat﻿ive inst﻿rument﻿s from int﻿erest﻿ rat﻿e cont﻿ract﻿s t﻿o equit﻿y cont﻿ract﻿s and t﻿he 2011 figures have been revised accordingly. The revision has no impact﻿ on net﻿ income and shareholders’ equit﻿y of t﻿he Group.
Transfers out﻿ of level 31 –26 –4 –3 –7 –1 474 –112 –41 –257 –74 –1 998 Impact﻿ of foreign exchange movement﻿s 10 10
Closing balance as of 31 December 2012 685 0 13 0 74 0 0 636 223 151 2 098 3 880
Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) The gains and losses relat﻿ing t﻿o t﻿he asset﻿s and liabilit﻿ies measured at﻿ fair value using significant﻿ unobservable input﻿s (level 3) for t﻿he years ended 31 December 2011 and 2012 were as follows: USD millions 2011 2012
Ot﻿her derivat﻿ive cont﻿ract﻿s and liabilit﻿ies for life and healt﻿h policy benefit﻿s –2 634 Variable annuit﻿y and fair valued GMDB cont﻿ract﻿s –2 287 Discount﻿ed cash flow model Risk margin 4% (na)
USD millions Fair value as of 31 December 2012 Valuat﻿ion t﻿echnique Unobservable input﻿ Range (weight﻿ed average)
The significant﻿ unobservable input﻿ used in t﻿he fair value measurement﻿ of t﻿he Group’s OTC equit﻿y opt﻿ion referencing correlat﻿ed equit﻿y indices is correlat﻿ion. Where t﻿he Group is long correlat﻿ion risk, a significant﻿ increase (decrease) in t﻿his input﻿ in isolat﻿ion would result﻿ in a significant﻿ly higher (lower) fair value measurement﻿. Where t﻿he Group is short﻿ correlat﻿ion risk, a significant﻿ increase (decrease) in t﻿his input﻿ in isolat﻿ion would result﻿ in a significant﻿ly lower (higher) fair value measurement﻿.