At Swiss Re we’re working smarter together with our clients. That means working side by side, forming a deep understanding of their needs, applying our expertise and bringing fresh perspectives to manage risk in better ways.
Key information Our 2014 performance was strong, with continued progress toward achieving our 2011–2015 financial targets.
For details on these targets and our performance in 2014, see the 2014 Financial Report.
Mission and strategic priorities 24 How we operate 26 Board of Directors 28 Group Executive Committee 29 General information 30
Business Units at a glance swiss Re is a leader in wholesale reinsurance, insurance and risk transfer solutions. our clients include insurance companies, corporations, the public sector and policyholders.
̤ Admin Re® enters into a transaction with hsBC to acquire over 400 000 individual and group pension and related annuity policies, as well as gBp 4.2 billion in unit-linked assets from hsBC Life (uK) Limited.
̤ Life & health Reinsurance successfully executes its planned management actions on pre-2004 us life business, underlying its commitment to improve future profitability.
̤ gross premiums written, net of internal fronting, increase by 6.8% to usD 4.0 billion.
̤ increased net income driven by continued profitable business growth, primarily in property and credit.
Net earned premiums and fee income by region (Total usD 31.3 billion)
What is Swiss Re’s ongoing strategic response? The longer the low interest rate environment lasts, the more it erodes the running investment income from our very large asset base and depresses gross margins, in particular in the Life & Health Reinsurance segment, but also in Property & Casualty. Swiss Re’s response has been to maintain historically high margins from underwriting also for 2014. This combined with exceptionally low losses from natural disasters has allowed Reinsurance CEO Christian Mumenthaler and his team at P&C Re to produce another outstanding year in 2014.
Some words about capital, dividend and share buy-back Our core business is to enable risk-taking. And economic growth depends on exactly that: on risk-taking. We provide confidence and counsel for economic activity to proceed despite uncertainties such as climate change, or new developments like the digital revolution. However, our business has never been in a better position to deliver on the promise of supporting economic progress — despite a softening market environment. Our solid 2014 results confirm just that.
Risk-taking, however, requires a solid base of risk capital exactly for the moment when you have to be able to fund and digest large losses and that moment will come, it always does and it is our business. Our target capital structure is designed to achieve exactly that.
However, over the past few years the frequency and severity of large losses was below expectation, which in turn led to higher profits. For the company it was and still is difficult to find attractive opportunities to reinvest all of this additionally available capital in new insurance risks at returns in excess of our hurdle rates. We extensively used the tool of extraordinary capital repayments, which are tax advantageous particularly for Swiss retail shareholders. And we propose to do this again this year. Then, unfortunately, these reserves are exhausted. As we of course hope that the benign loss trend will continue we propose to establish a share buy-back programme for the next twelve months which we will use to achieve a similar objective: to repatriate capital that we cannot reinvest in the business at our hurdle rates.
There is however another reason that speaks for buying our own shares. Whilst over the past few years the economic value (according to our Economic Value Management (EVM) framework which assesses assets and liabilities on a true economic basis) was close to the market value, we have now seen for some time a trend of economic value significantly exceeding the market value. It makes therefore a lot of sense for the company to invest in its own shares and benefit from the discount. I hope you will support these capital motions at the upcoming AGM.
* Swiss withholding tax exempt distribution out of legal reserves from capital contributions.
Strong P&C underwriting drives net income Our Group’s full-year net income was USD 3.5 billion. Property & Casualty Reinsurance remains our strongest earnings pillar. Our 2014 results in this segment were strong, with net income of USD 3.6 billion, or 10% above 2013. Successful underwriting, reserve releases and benign natural catastrophe levels drove this strong result.
If you follow the industry closely, you will know that capital in various forms in the reinsurance market is abundant these days. That fact underlines the significance of our strong 2014 performance and demonstrates that we go beyond providing pure capacity. Our success lies in putting Swiss Re’s expertise and capital strength to work in solving problems together with our clients. We continue to innovate in traditional areas such as natural catastrophe and liability lines and are active in game-changing, long-term developments such as big data and cyber-risk. This means, looking ahead, that we will stay committed to delivering continued profitability through
Admin Re® had a good year as well. The unit walked the talk and continued on its path to exit the US market, as evidenced by the sale of the Aurora block of business in the US in October 2014. The sale has a one-time negative impact on our bottom line, but it supports our vision to redeploy capital to areas where we see growth opportunities and attractive shareholder returns.
disciplined underwriting and a systematic allocation of capital to risk portfolios.
An area that we believe has turned a corner in 2014 is Life & Health Reinsurance. The segment delivered a net loss of USD 462 million for 2014. This negative bottom-line result was in large part a clear reflection of the decisive actions we took to enhance profitability going forward. Over the last two years we identified and analysed, in close collaboration with our clients, the problematic pre-2004 life business in the US. The problems had to do with underperforming yearly renewable term business in which the under-performance was expected to continue. This year we actively addressed these issues with the clients concerned. The other action we took was to unwind the asset funding structure supporting a longevity transaction. Our aim is to arrive at a more sustainable solution for all. I’m pleased to report that the outcomes of both, as negative as they look today, are ultimately positive for clients, for Swiss Re, and especially for you, our shareholders and they enhance the sustainability of our business long-term. These measures were also essential to keep us on track to achieve the target of 10%–12% return on equity for Life & Health by the end of 2015. Life & Health continues to be an attractive business with great growth potential in both mature and developing markets.
Our next financial targets Looking at 2016 and beyond, we will remain committed to a strong capital position. We have introduced two financial targets for the Group that will begin in 2016, focusing on profitability and economic growth.
This timeframe provides a long-term aspiration without being distorted by outlying individual results.
Reinsurance Engagement in Sub-Saharan Africa, a region poised for long-term growth.
Corporate Solutions Helping an unusual client by providing an innovative solution combined with large capacity.
Admin Re® The core skills underlying our closed life book business.
Our people Maintaining a pipeline of talent to ensure we achieve our strategic ambitions.
Smarter together “We need to appreciate that we know different things about the same thing,” said Samuel Rimai, a representative of pan-African reinsurer Continental Re. Samuel was one of the stakeholders attending our fourth annual agricultural reinsurance conference in Nairobi.
“We have the contacts, we have the capacity,” Samuel continued. “Swiss Re has the experience, the skills and the expertise that they have developed in Europe, in Asia, and in Latin America. We need to fuse what we know.”
Economic growth in Mozambique has been strong for more than a decade. To support that momentum, many participants pointed out, the country can now look to its energy sector.
More than a third of global oil and gas discoveries in 2012 were located in Mozambique. The country is set to become the fourth largest exporter of liquefied natural gas (LNG) globally and second in Africa, behind only Nigeria. “Africa’s energy markets are changing on a massive scale, and the indaba really drove that home,” said Fabrice Jerlin, one of Swiss Re’s underwriters focused on Africa. “We anticipate USD 40 billion will initially be invested to develop LNG in Mozambique.”
A foundation for success We aim to become the leading global reinsurer in Sub-Saharan Africa by being integral to our clients’ success. Events like the indaba in Mozambique are an investment in that vision with more to follow in markets such as Nigeria, Ghana, Angola and Ethiopia. By sharing experiences and finding solutions we can prove our value as a strategic partner in the region.
A special kind of client When struck by severe weather and natural catastrophes, governments, NGOs and international organisations often act as the insurer of last — or only — resort. To transfer these risks more efficiently and bring help more quickly, these clients look to Swiss Re’s Global Partnerships.
Defense against uncertainty The Uruguayan government is investing in climate-friendly hydropower to drive its economy. However when rainfall is lower than normal, the government must compensate for the drop in power generation by burning more fossil fuels.
Global Partnerships, together with Corporate Solutions (see page 17), is participating in a USD 450 million weather coverage deal between the Uruguayan government and the World Bank. The innovative transaction uses actual rainfall data and oil prices to mitigate two key risks: the risk of climate uncertainty as well as the risk of oil price volatility. The solution gives the Uruguayan government greater certainty over its budget, as well as a strong boost to its climate-friendly energy policy.
To read about these activities in greater detail, see pages 114–116 of the 2014 Financial Report.
Focus on: A sustainable future As a champion of clean energy, we are a proud sponsor and the official insurance provider of Solar Impulse, the world’s first solar-powered airplane able to fly day and night. With a wingspan of 63 metres but weighing just 1 600 kilograms, this innovative aircraft will circumnavigate the globe over the course of five months in 2015 using the power of the sun alone.
Our support of Solar Impulse demonstrates our commitment to ensuring a sustainable future. With their pioneering spirit and our risk management expertise, together we can make a difference.
Swiss Re Corporate Solutions, in coordination with Global Partnerships (see page 15), has developed an innovative solution that eases MDPCS’s burden of risk protection.
By giving MDPCS long-term certainty around its costs, the school system can devote more resources to their real passion — educating the children of Miami-Dade County.
Focus on: Changes in the UK Over the last two years the UK regulatory environment has undergone significant change, most notably in 2014 when the government announced it would take measures to give customers a wider range of options for drawing on their retirement income.
At Admin Re® we’re greeting the changes enthusiastically. They’re opening up a number of new dynamics for us as we look to enhance our product offerings to retain invested funds for longer, and to acquire additional blocks of business as other providers find their business models challenged by the new regulations. In particular, the fact that we operate a single administration platform (rather than running multiple complex systems) gives us a competitive advantage in implementing communication, product or process changes.
A typical acquisition involves more than 100 people at any one time, applying an extensive mix of technical skills over a 15–18 month time line. The June 2014 acquisition of the pension business from HSBC Life (UK) is a prime example. Since the announcement, our teams have been working to prepare for the integration of approximately 400 000 pension policies onto Admin Re®’s systems.
By focusing on the UK for further acquisitions we will be reducing complexity and taking advantage of a changing market (see box), as well as capturing economies of scale. All of these benefits are ultimately made possible by our skills in business integration.
Focus on: The Sustainability Risk Framework Our Sustainability Risk Framework gives direction to our sustainability activities. It consists of policies on sensitive sectors or issues, such as forestry and logging. The criteria defined in these policies also provide for the exclusion of specific companies, such as those that cause repeated, severe and unmitigated damage to the environment. Countries with particularly poor human rights records and no prospect for improvement are also excluded under the Framework. And for case-by-case assessments, we employ our formal Sensitive Business Risks (SBR) process.
Yet the island’s tropical rainforests remain under threat. More than half has been lost in the last 35 years, reducing biodiversity and making global warming worse. That’s why we’re especially proud to promote sustainability in Sumatra — particularly in terms of sustainable forestry, mitigating climate change and defending human rights.
Managing sustainability risks Some opportunities offer economic benefits that are in direct conflict with our commitment to corporate responsibility. Swiss Re’s Sensitive Business Risks (SBR) process is our primary tool for handling such “sustainability risks”, and part of our overall Sustainability Risk Framework (see box). The SBR process allows us to screen out business that would cause excessive harm to the environment,
our reputation or our values. In the best cases, such as the case in Sumatra, the SBR process helps us to enhance the sustainability practices of our clients.
In this case our client asked us to offer coverage for a pulp and paper mill in Sumatra. Their plans raised questions about their forestry practices and their impact on local communities. We suspended business until we could meet with the client to discuss our concerns. Together we developed a plan to improve their business practices. Following concrete improvements in the company’s social and environmental practices in Sumatra, we were able to continue writing their business — sustainably.
At Swiss Re job rotations are an important tool to develop our employees. In the typical case, the employee takes a few months away from their normal role to perform specific tasks for a different unit or function. After the rotation they return to their original team. Rotations broaden skill sets, increase job satisfaction and expand horizons — for the benefit of the individual and for Swiss Re overall.
As a Graduate Benedikt remained with the Business Development team and transferred to Zurich, Switzerland. He also spent time in Madrid and Mexico City, where he took part in
Benedikt works directly with clients across Latin America, transferring the knowledge that he acquired in Europe to strategically important high growth markets. He’s part of the Latin America High Growth Development Programme, a regional development initiative for talent working in or for high growth markets.
Our mission Swiss Re aims to be the leading player in the wholesale re/insurance industry.
We seek to outperform peers in core areas, combined with smart expansion into areas where additional growth opportunities exist.
High growth markets By 2020 we estimate that up to 45% of new re/insurance business premiums will be generated in high growth markets.
̤ consistent underwriting performance continues through disciplined underwriting and differentiation of knowledge and services.
̤ continued expansion into high growth markets across Reinsurance, corporate Solutions and principal investments.
̤ continue to shift capital and talent to high growth markets.
̤ focus on differentiation to generate value for clients and shareholders.
̤ property & casualty Reinsurance underwriting results remain strong; rebalancing portfolio through casualty expansion.
̤ corporate Solutions continues profitable growth; strengthened presence in high growth markets; subordinated bond issuance.
̤ in corporate Solutions, build on recent acquisitions in high growth markets and maintain selective underwriting approach.
̤ admin Re® delivers excellent gross cash generation; strengthens uK franchise and continues exit of uS business to extract capital.
̤ meet return on equity target of 10%–12% in Life & Health Reinsurance (based on June 2013 equity base).
̤ target capital structure on track and group capitalisation very strong across all metrics.
A resilient business model our clients look to us as more than simply a provider of capacity. We work together with our clients to understand their needs, then develop solutions that capitalise on our more than 150 years of expertise.
New markets, new clients the fastest-growing insurance markets are emerging markets. Clients in these markets often have specialised knowledge and specialised needs.
A broad insurance gap the gap between economic losses and insured losses after a catastrophe remains unacceptably high.
Changes in 2014 Shareholders elected Susan L. Wagner as a new non-executive and independent member for a one-year term of office at the Annual General Meeting in April 2014. At the same time, they re-elected Walter B. Kielholz, Raymund Breu, Mathis Cabiallavetta, Raymond K.F. Ch’ien, Renato Fassbind, Mary Francis, Rajna Gibson Brandon, C. Robert Henrikson, Hans Ulrich Maerki, Carlos E. Represas and Jean-Pierre Roth for one-year terms. Jakob Baer, Malcolm D. Knight and John R. Coomber did not stand for re-election.
1 Walter B. Kielholz 2 Mathis Cabiallavetta 3 Renato Fassbind 4 Raymund Breu 5 Raymond K.F. Ch’ien 6 Mary Francis 7 Rajna Gibson Brandon 8 C. Robert Henrikson 9 Hans Ulrich Maerki 10 Carlos E. Represas 11 Jean-Pierre Roth 12 Susan L. Wagner
David Cole, Swiss Re’s Group CRO since March 2011, was appointed Group CFO as of 1 May 2014.
Patrick Raaflaub was appointed Swiss Re’s new Group CRO and member of the Group EC as of 1 September 2014.
7 Christian Mumenthaler CEO Reinsurance 8 Moses Ojeisekhoba CEO Reinsurance Asia 9 Patrick Raaflaub Group CRO
Mumbai Unit 701–702, 7th Floor Tower ‘A’ Peninsula Corporate Park Ganpatrao Kadam Marg Lower Parel Mumbai 400 013 Telephone +91 22 6661 2121
Financial highlights In a challenging business environment, our Group earned 2014 net income of USD 3.5 billion.
Corporate Solutions Net income attributable to common shareholders 279 319 14
Admin Re® Net income attributable to common shareholders 423 34 –92 Premiums earned and fee income 1 330 955 –28 Return on equity1 in % 6.8 0.6 1 Return on equity is calculated by dividing net income attributable to common shareholders by average common shareholders’ equity. 2 Regular staff
Risk and capital management Overview 50 Capital management 52 Economic Value Management 55 Liquidity management 57 Risk management 58 Risk assessment 62
Corporate responsibility Overview 110 Natural catastrophes and climate change 111 Expanding re/insurance protection 114 Our sustainability risk framework 117 Diversity and inclusion in our workforce 119
Compensation Report from the Compensation Committee 122 Compensation context and highlights in 2014 123 Compensation framework 125 Compensation governance 132 Compensation decisions in 2014 136 Report of the statutory auditor 144
General information Glossary 260 Cautionary note on forward-looking statements 266 Note on risk factors 268 Contacts 276 Corporate calendar 277
Business Units at a glance swiss Re is a leader in wholesale reinsurance, insurance and risk transfer solutions. Our clients include insurance companies, corporations, the public sector and policyholders.
Reinsurance Reinsurance is swiss Re’s largest business in terms of income and the foundation of our strength, providing about 85% of gross premiums and fee income 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.
̤ Admin Re® sells us Aurora block of business, releasing capital and continuing exit from us market.
̤ Target capital structure on track and group capitalisation very strong across all metrics.
Net earned premiums and fee income by Business Unit (Total usD 31.3 billion)
Fresh perspectives The issues before us require fresh perspectives, open minds and courageous solutions.
In addition, we also experience once again a time where large insurance companies retain larger shares of their business and reduce cessions to the reinsurance market. With our Business Unit Corporate Solutions we underwrite risks of large non-insurance corporates and their captive insurance companies directly. For our globally diversified book of large risks we need access to such risks on a continuous basis and cannot depend entirely on the short-term reinsurance programmes of a small number of global insurers. Agostino Galvagni, our CEO in Corporate Solutions, has achieved a lot with his team: he has grown the business significantly over the past few years, has maintained strong underwriting standards at the same time, and has expanded the Unit’s global footprint, staff and business infrastructure. Corporate Solution’s contribution is growing and gives us strategic flexibility.
But back to Life & Health Reinsurance As mentioned, Life & Health Reinsurance is suffering most from the low interest environment: some of this pain is due to accounting effects as the ever-lower rates produce significant unrealised capital gains in the equity of the segment which in turn make it very difficult to achieve a high ROE.
Proposed regular dividend in CHF for 2014* (CHF 3.85 in 2013)
Proposed special dividend in CHF for 2014* (CHF 4.15 in 2013)
Swiss Re at a glance | Statement from the Group CEO
Achieving our strategic goals Now in even stronger position to reach our 2011–2015 financial targets.
Corporate Solutions continued to deliver profitable growth, with net income of USD 319 million and an annual increase in net earned premiums of 18%. Two developments in 2014 will support expansion into high growth markets. The acquisition of Sun Alliance Insurance in China — once approved by the regulator — will enable us to offer corporate insurance directly from mainland China. In Latin America, we acquired 51% ownership of Colombian insurer Confianza, providing us with another foothold in the region in addition to our offices in Mexico and Brazil.
With our focus on sustainability it was a particular pleasure that Swiss Re was again named as the insurance sector leader in the 2014 Dow Jones Sustainability Indices, showcasing that sustainability is built into all facets of our management approach.
I’d also like to take the opportunity to thank you, dear shareholders, for your confidence in Swiss Re and your trust in us as we continue to plan our way forward. One important step is the introduction of two financial targets which will guide us as of 2016 and beyond. They are chosen to continue to focus our efforts on profitability and economic growth and will provide you with the right metrics to measure our success.
Building ties We’re making substantial investments on the ground to make sure Swiss Re continues to be a well-known, accessible partner for developing re/insurance solutions in our targeted high growth markets.
Innovating to make more resilient societies We continue to work with clients and partners to expand the reach of the re/insurance solution and to raise awareness about its importance.
Financial targets We delivered a strong net income in 2014 while moving one step closer to achieving our 2011–2015 financial targets.
OUR NExT FINaNcIal TaRgETS looking at 2016 and beyond, we will remain committed to a strong capital position. We have introduced two financial targets for the group that will begin in 2016, focusing on profitability and economic growth.
given our 2014 business performance and strong capital position, Swiss Re’s Board of Directors will propose a dividend of cHF 4.25 per share, a special dividend of cHF 3.00 per share and a public share buy-back programme of up to cHF 1.0 billion totalling approximately USD 3.7 billion in capital returned to shareholders.
— Target — actual — Target — actual in USD in USD
Overall, global economic growth was moderate and re/insurance market conditions remained challenging.
The global economy and financial markets Global economic growth accelerated in 2014 but remained uneven across different regions. Monetary policies of the major central banks started to diverge: the US Federal Reserve (US Fed) began winding down its asset purchases while the European Central Bank (ECB) and the Bank of Japan (BoJ) announced additional stimulus measures. Benchmark government bond yields declined while stock markets continued to perform well.
Market environment Global growth in 2014 improved but remained moderate. Benchmark government bond yields declined again while stock markets continued to perform well, supported by expansionary monetary policies.
Inflation declined in many economies, in part driven by the sharp drop in oil prices in the second half of the year. Inflation in the Eurozone was particularly weak, stoking fears of deflation. By contrast, Japanese inflation jumped as a consequence of the sales tax hike (see economic indicators table).
Economic performance in emerging markets also varied. Growth in emerging Asia remained fairly strong and steady even though economic indicators for the Chinese economy weakened on the back of a deepening housing market correction. Nevertheless, targeted fiscal and monetary stimulus measures helped sustain Chinese growth at 7.4%. In India, business and consumer sentiment improved significantly on expectations of a strong push toward economic reform and liberalisation. Growth in most Sub-Saharan African economies remained strong. The Republic of South
interest rates twice, bringing the deposit rate below zero. In addition, the ECB adopted various unconventional measures, including the provision of long-term funding to banks to boost bank lending as well as purchases of covered bonds and asset-backed securities. The Chinese central bank lowered interest rates in November while some other emerging market central banks (eg Russia, Brazil and India) increased rates to stem the rise in inflation and prevent capital outflows.
Currency movements The ECB’s and the BoJ’s monetary easing weakened the euro and the yen in the second half of the year. Other currencies also weakened against the US dollar, driven by diverging expectations of central bank policies. The yen and the euro ended the year down 12%, the Swiss franc 10% and the UK pound 6% vs the US dollar.
Economic indicators 2013–2014 USA Eurozone UK Japan China 1 Yearly average 2 Year-end 3 USD per 100 units of foreign currency Source: Swiss Re Economic Research & Consulting, Datastream, CEIC
How do interest rates affect the re/insurance industry? Policy rates of the major central banks have been close to zero for about six years and long-term bond yields have declined significantly. Corporate bond yields have also decreased, restraining investment yields for investors, including re/insurers (for our view on measures that could improve the investment climate for long-term investors, see page 30).
risk in long-tail business (such as casualty) can be contained through prudent asset-liability management. On the life insurance side, savings products, particularly those containing fixed guarantees, are the most exposed to interest rate risk. Hard-to-predict policyholder behaviour, such as lapses, makes it difficult for insurers to project their cash flows, thus complicating their asset-liability management. Life reinsurers tend to be less sensitive to interest rate risk than primary life insurers because they typically have little savings business.
There is considerable uncertainty as to when central banks will start raising rates. While there is broad agreement
that neither the ECB nor the BoJ will tighten monetary policy anytime soon, many expect the first rate hikes by the US Fed and the Bank of England in 2015 as improving economies are supposed to lead to gradually rising wage pressures. Nevertheless, there will be no quick relief for re/insurers. On the contrary, portfolio yields are likely to decline further for some time because the principal from maturing bonds with higher yields and new cash flows can only be invested at lower yields. One implication of the low-interest rate environment is clear — expert and disciplined underwriting will remain a key driver of performance in the sector.
Nevertheless, a few countries may still be vulnerable. Finally, an escalation of the conflict between Russia and Ukraine has the potential to derail European growth should there be significant disruptions to oil and gas supplies.
These risks would affect re/insurers mainly via adverse asset price reactions and slower growth potential in the affected markets. In addition, a “flight to quality” could lead to a drop in interest rates and exacerbate the challenges from the current low yield environment.
Market overview The global non-life industry generated around USD 2 100 billion of premium income in 2014, of which 18% came from 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.
Underwriting profitability in Europe improved in the first half of 2014 compared to the same period in 2013, with the average combined ratio below 95%. Most notably, there was a significant and broad-based improvement in Germany, driven by low natural catastrophe losses (whereas 2013 was impacted by severe floods and hailstorms) and better underwriting results in casualty insurance. In France, Spain, Italy and the UK, combined ratios were stable to slightly improving.
Market overview Global non-life reinsurance premiums in 2014 totalled about USD 190 billion, 25% of which were 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 underlying insurance products.
Market performance Real growth in the non-life reinsurance industry improved to 3% in 2014, from 1.8% in 2013. The increase was largely driven by large quota-share motor treaties from China, while growth in other emerging markets weakened alongside the slow-down in primary insurance growth. In advanced markets, premiums declined slightly due to weak reinsurance demand and softer reinsurance rates.
Nonetheless, the non-life reinsurance industry posted strong underwriting results during the first three quarters of 2014. Based on preliminary data, the reinsurance industry is expected to report a combined ratio of around 90% for 2014, reflecting lower than anticipated large natural catastrophe losses and significant reserve releases. Excluding the impact of those two windfall factors, the estimated combined ratio is around 98%.
Claims burden from large natural catastrophes losses were low in 2014, amounting to USD 35 billion. The largest natural catastrophe losses were a thunderstorm and hail event in the US in May, which caused USD 2.9 billion in insured losses, Storm Ela resulting in combined insured losses of USD 2.4 billion across France, Germany and Belgium, and a USD 2.5 billion snow storm in Japan in February. Losses from main risk categories such as earthquakes, North Atlantic hurricanes, and European winter storms were exceptionally low.
Outlook Real premium growth in the non-life reinsurance sector is expected to be weak in 2015. Advanced markets will be impacted by the current softening of rates, leading to stagnating premiums in 2015. Premium growth in emerging markets overall will be heavily influenced by developments in China. After this year’s increase of reinsurance cessions due to large quota share motor treaties, premium volumes in China are expected to drop back to normal levels in 2015. Excluding China, emerging markets are expected to have improving real premium growth rates of 5% for 2015.
Market performance Global life insurance premium income rose by 5% in real terms in 2014. In advanced markets, real premium income grew by 4% this year, with strong gains in Western Europe, Canada, Australia and Japan. In the US, premium income has rebounded following a dip in 2013. In emerging markets, premium income has risen by 9%. Growth has been strongest in the emerging Asian countries (up 13%). In China, premiums have increased by 16% and in India, premiums are up 6% after four years of contraction and stagnation. Premiums rose below long-term average in Latin America and Africa. In CEE, premiums were down 1.7%, led by a decline of single premium business in Poland.
Profitability in life insurance has improved since mid-2013, and ROE now stands at around 12%. The improvement has been largely driven by sharply stronger profitability for UK insurers, although North American and European insurers’ profitability has also picked up recently. Positive stock market developments and stronger premium growth, along with cost containment and in some cases gains from derivative positions reflecting a decline in interest rates (eg, in the US), have been the main drivers of the strengthening trend.
Swiss Re delivered strong results in 2014 and remains well on track to meet its 2011–2015 financial targets. We aim to outperform our peers in Reinsurance and Admin Re®, and through our balanced asset management approach. We also aim to achieve smart expansion in Corporate Solutions, in high growth markets and in longevity and health. This strategy has been successful and remains unchanged. In 2015 our Business Units will be approaching opportunities and market conditions as follows: Property & Casualty Reinsurance We believe that maintaining a diversified portfolio of growth opportunities and differentiating our knowledge and services are key to success for Property & Casualty Reinsurance in the current market environment. We aim to maintain earnings quality through disciplined underwriting and superior service. Our product offerings go beyond pure capacity, with customised solutions that complement traditional reinsurance. We have the expertise, knowledge and services to meet the increased demand for innovative and tailored solutions and we are well positioned to support clients in both developed and high growth markets.
Life & Health Reinsurance Despite challenging market conditions for Life & Health Reinsurance, we also recognise that it is a knowledge- and service-intensive business. Barriers to entry are high, and only a handful of relevant players work in the space. We will aim to use our superior tools and capabilities to capture an overproportionate share of the life and health risk pools and outperform our competitors in terms of profitable growth. This will mainly be achieved through superior client services in traditional life; innovation and product development in health; know-how and capital strength in structured solutions and longevity transactions;
Group strategy A strategy to become the leading player in the wholesale re/insurance industry.
and finally through pro-active portfolio steering and capital management. We are committed to meeting the segment’s 10%–12% return on equity target by 2015.
Corporate Solutions Corporate Solutions’ strategy is to serve mid-sized and large corporations. The product offerings range from traditional property and casualty insurance to highly customised solutions tailored to the needs of clients globally. In 2015, Corporate Solutions intends to expand its capabilities to act as a lead insurer in primary business programmes, to build on recent acquisitions in high growth markets and to maintain a selective underwriting approach. By executing this strategy, Corporate Solutions aims to continue on its successful growth path that started off in 2010.
̤ Property & Casualty Reinsurance underwriting results remain strong; rebalancing portfolio through casualty expansion.
̤ Corporate Solutions continues profitable growth; strengthened presence in high growth markets; subordinated bond issuance.
̤ In Corporate Solutions, build on recent acquisitions in high growth markets and maintain selective underwriting approach.
̤ Effective implementation of in-force management actions, setting the foundation for future profitable growth.
̤ Target capital structure on track and Group capitalisation very strong across all metrics.
̤ Business performance and strong balance sheet to support proposal of regular dividend, special dividend and share buy-back programme.
Swiss Re reported net income of USD 3.5 billion for 2014, compared to USD 4.4 billion for 2013. Earnings per share were USD 10.23 or CHF 9.33, compared to USD 12.97 (CHF 12.04) in 2013. Book value per common share increased to USD 101.78 or CHF 101.12 at the end of 2014 from USD 93.08 (CHF 82.76) twelve months earlier. The year was characterised by strong underwriting by Property & Casualty and Corporate Solutions, a series of previously announced management actions aimed at improving Life & Health’s profitability going forward and a solid performance by Admin Re®.
Technical result Premiums earned and fee income for the Group totalled USD 31.3 billion in 2014, compared to USD 28.8 billion in 2013. The increase reflected growth across all regions in both Reinsurance segments, driven by the USD 15.6 billion contribution from Property & Casualty Reinsurance, up from USD 14.5 billion in 2013, and USD 11.3 billion from Life & Health Reinsurance, compared to USD 10.0 billion in 2013. Corporate Solutions’ premiums earned increased to USD 3.4 billion from USD 2.9 billion in 2013, reflecting continued successful organic growth across most business lines and across all regions.
The Property & Casualty Reinsurance combined ratio was 83.7% in 2014, compared to 83.8% in 2013. The strong results continued to be driven by good underwriting, favourable loss experience and positive prior accident year development.
The Corporate Solutions combined ratio was 93.0% and 95.1% in 2014 and 2013, respectively. The improvement year-on-year was mainly due to lower than expected natural catastrophe experience in 2014, partially offset by a larger number of man-made losses.
The operating margin for Life & Health Reinsurance was 2.6% in 2014, compared to 5.8% in 2013. The 2014 result reflects an impact of USD 623 million from the management actions addressing the pre-2004 US individual life business, while the 2013 result was impacted by reserve strengthening for group disability business in Australia.
Admin Re® generated gross cash of USD 945 million in 2014, compared to USD 521 million in 2013. The increase was mainly driven by the Aurora sale, the release of surplus reserves and favourable mortality and longevity experience.
Investment result and expenses The return on investments was 3.7% for 2014, compared to 3.6% for 2013.
The Group’s non-participating investment income was USD 4.1 billion in 2014, compared to USD 3.9 billion in 2013. The increase largely related to the re-balancing of the investment portfolio across the Group. The fixed income running yield for 2014 was
Acquisition costs for the Group increased to USD 6.5 billion in 2014 from USD 4.9 billion in 2013 as a result of higher business volumes.
Other expenses were USD 3.2 billion in 2014, down from USD 3.5 billion in 2013. A number of smaller individual items led to the reduction, including the release of a provision for premium tax in Asia in the third quarter of 2014.
Interest expenses amounted to USD 721 million in 2014, 5% lower than in 2013.
Net premiums earned in 2013 by segment 49.9% P & C Re 36% L & H Re 11% Corporate Solutions 3.1% Admin Re
Strategy Swiss Re allocated its investments in 2014 in a manner consistent with an economic outlook of moderate global economic growth with increased downside risks. The portfolio changes during 2014 saw the reduction of the listed equities portfolio as well as hedge fund redemptions, both realising gains. At the same time, there was a net increase in government bonds driven by net purchases to lengthen the duration. The allocation to corporate bonds and securitised products remained steady, while the allocation to infrastructure loans increased.
Continued low policy rates supported government bonds (see page 19), with German 10-year Bund yields falling to record lows. Most major equity markets posted gains in 2014 despite geopolitical tensions, political uncertainties in Europe and concerns about China’s property market. Financial market volatility has remained relatively subdued, though it spiked in mid-October amid growth concerns and the US Treasury bond ‘flash crash’. Credit spreads continued to tighten during the first half of the year amid investors’ search for yield, but widened in the second half (high-yield in particular), driven largely by the fall in oil and energy prices, which accelerated sharply in the fourth quarter.
“ We delivered a strong investment result with 3.7% return on investments and 8.2% total return in challenging financial markets.”
The return on investments for 2014 was 3.7% compared to 3.6% in 2013, with the difference mainly attributable to increased net investment income in 2014, in part due to the asset re-balancing completed in 2013.
Outlook We expect the moderate economic recovery to continue, with the US economy leading the way. In contrast, Eurozone growth is forecast to remain weak. The divergence in monetary policies is likely to widen further. We believe that in this environment, a top-down investment approach will continue to be of greatest value, including an increasing focus on China as it aims to further liberalise its economic policies.4.1
One effect is clear: low interest rates help governments to fund their debt. This ability of governments to direct funds to themselves is called financial repression.
The costs of financial repression are significant. They include potential asset bubbles, increasing economic inequality, the potential of higher inflation and reputation damage for central banks. On top of these costs come a financial repression “tax” on savers and unknown effects on the supply of capital for investments.
Swiss Re has developed an index to estimate the extent of financial repression (see chart). The index is based on monetary and regulatory components but it also takes banks’ domestic sovereign debt holdings and capital flow developments into account. The index suggests that financial repression is currently near historical highs.
Looking ahead, financial repression is likely to remain. But rather than stand by until policy actions take effect, we should act vigorously to achieve the policies’ intended outcomes.
Source: Swiss Re Note: an increase in the index shows an increase in financial repression
Administrative expenses –3 159 –3 056 –3 Other expenses –349 –99 –72 Interest expenses –760 –721 –5
Interest on contingent capital instruments –67 –69 3 Net income attributable to common shareholders 4 444 3 500 –21
Purchase/sale of treasury shares and shares issued under employee plans –102 –114 –12 Other changes in equity 419 –300 – Total shareholders’ equity as of 31 December 32 952 35 930 9 Non-controlling interests 25 111 344 Total equity as of 31 December 32 977 36 041 9
Liabilities and equity Unpaid claims and claim adjustment expenses 61 484 57 954 –6 Liabilities for life and health policy benefits 36 033 33 605 –7
Fee income from policyholders 542 506 –7 Net investment income – non-participating 3 947 4 103 4 Net realised investment gains/losses – non-participating 766 567 –26 Net investment result – unit-linked and with-profit 3 347 1 381 –59
Expenses Claims and claim adjustment expenses –9 655 –10 577 10 Life and health benefits –9 581 –10 611 11 Return credited to policyholders –3 678 –1 541 –58
Income taxes payable 660 909 38 Deferred and other non-current taxes 8 242 9 445 15
Reinsurance Our 2014 performance was driven by excellent underwriting and progress on strategic goals.
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. The development of new solvency regimes in many markets, such as Europe, China and Mexico, provides attractive opportunities over the next few years. We continue to see growth opportunities in health, casualty and high growth markets, particularly in the focus countries China, India, Indonesia, Brazil and Mexico, as well as in Sub-Saharan Africa and Vietnam. We are continuing to expand our presence in these markets through a combination of organic growth and direct investment, and building expertise by hiring and developing local talent.
There is still a large protection gap in both mature and high growth countries which provides a good opportunity in Property & Casualty and Life & Health lines for Swiss Re, given our knowledge and underwriting expertise and ability to structure solutions and transfer risk to the capital markets.
Natural catastrophe prices have come under increasing pressure due to benign loss experience and abundant capacity. Over 2014 we were able to defend our leading position. Profit margins have been declining; however, Swiss Re’s underlying earnings were still strong. Property and specialty contributed significantly in 2014. Casualty price levels were softer overall, while terms and conditions were mostly stable. We continued to be successful in differentiating our business through tailored deals and large transactions.
Alongside this, we selectively grew in profitable lines of business and completed a number of large deals in health, structured solutions and longevity.
Outlook We believe that we are well positioned to capture the market opportunities ahead of us. We are strongly positioned for continued business growth and the payment of dividends to the holding company.
See below for further views on the outlook for P&C and L&H Reinsurance segments.
Compared to 2013, the underwriting result for 2014 increased by USD 192 million largely due to betterthan -expected natural catastrophe experience and lower expenses, partially offset by lower net reserve releases.
Major natural catastrophes in 2014 included hailstorms in Europe, a snowstorm in Japan, hurricane Odile in Mexico and floods in India and Pakistan. Large man-made losses included a large specialty loss in Asia, an explosion at a refinery in Russia and losses for Malaysian Airline flights MH370 and MH17.
Net premiums earned Net premiums earned increased by 7% to USD 15.6 billion in 2014, compared to USD 14.5 billion in 2013. The growth was mainly driven by the expiry of a major quota share retrocession agreement at the end of 2012 and growth in Asia stemming from large quota share treaties written at the end of 2013. This was partially offset by the non-renewal of a large European transaction.
in the previous year. Both periods benefited from a better than expected natural catastrophe experience and favourable prior-year reserve developments.
The impact from natural catastrophes in 2014 was 6.5 percentage points below the expected level of 9.3 percentage points. The favourable development of prior accident years improved the 2014 combined ratio by 3.9 percentage points compared to 7.4 percentage points in 2013.
in 2013, supported by benign natural catastrophe loss experience and favourable prior-year claims experience.
Interest expenses –207 –255 23 Income before income tax expenses 3 492 4 137 18 Income tax expense –244 –552 126 Income attributable to non-controlling interests –1 –1 0 Interest on contingent capital instruments –19 –20 5 Net income attributable to common shareholders 3 228 3 564 10
reflecting an increase in the investment result of USD 405 million. The increase was mainly driven by net realised gains from the sale of listed equities and alternative investments in the current period.
Net realised gains were USD 730 million compared to USD 380 million in 2013, mainly due to additional gains from the sale of listed equities as well as from the negative impact of losses from foreign exchange re-measurement in the prior year.
Through careful risk selection we’re growing our casualty share of business. To understand the drivers of casualty claims, we’re developing forward-looking models to systematically assess liability risk — for both our clients and ourselves.
Property & Casualty results USD millions 2013 2014 Change in %
Other expenses –1 541 –1 175 –24 Total expenses before interest expenses –12 186 –13 050 7
Claims ratio in % 54.2 54.5 Expense ratio in % 29.6 29.2 Combined ratio in % 83.8 83.7
Premiums earned by line of business, 2014 (Total: USD 15.6 billion)
As previously reported, Swiss Re has been focusing on a number of management actions to improve the profitability of its in-force Life & Health business. We concluded transactions with several clients in respect of the pre-2004 US individual life business during the fourth quarter which have resulted in a pre-tax charge of USD 623 million, slightly higher than previously communicated according to the ultimate form and structure established in the actual settlement agreements. In addition, Swiss Re unwound an asset funding structure supporting a longevity transaction which resulted in a pre-tax charge of USD 344 million. Swiss Re took advantage of an opportunity to unwind the structure as it was earning lower returns than the interest payable on the related debt. The unwinding created economic benefits and removed debt from Swiss Re’s balance sheet. The longevity part of the transaction remains unchanged. This transaction generated a tax benefit of USD 149 million which, following the established principle of applying a unified tax rate, was allocated to both Reinsurance segments. Along with other initiatives these actions are expected to support higher earnings and enable us to achieve our return on equity target of 10%–12% for 2015.
Net premiums earned and fee income Net premiums earned and fee income increased by 12.4% to USD 11.3 billion in 2014, compared to USD 10.0 billion
in 2013. The increase was driven by volume growth and new business in Asia, longevity transactions in the UK and regular rate increases in the US yearly-renewable term business.
The decrease was mainly due to management actions in respect of the pre-2004 US individual life business. Excluding the impact of these management actions, the 2014 operating margin would have been 7.4%. Note that 2013 was negatively impacted by the reserve strengthening in Australia group disability business.
Administrative expense ratio The administrative expense ratio improved to 6.9% for 2014 compared to 7.6% in 2013, mainly due to volume growth year on year.
Operating income of Life & Health does not include the pre-tax charge on the unwinding of the asset funding structure. This charge is included under nonparticipating realised gains/losses.
Life & Health results USD millions 2013 2014 Change in %
Expenses Life and health benefits –8 075 –9 194 14 Return credited to policyholders –286 –99 –65
reflecting a decrease in the investment result of USD 317 million. The decrease was driven by mark-to-market losses on certain hedging positions during 2014 as well as by foreign exchange gains in the prior year.
To manage these challenges we are pursuing opportunities presented by major demographic and socioeconomic trends, such as in high growth markets where growth remains dynamic, and particularly in health. We will continue to pursue large transaction opportunities, including longevity deals, which we
SEARCH is a clear example of how Swiss Re’s R&D activities lead to new knowledge on future risks, especially in health. The research helps us work together with our insurance clients to better define how insurers — as well as society at large — can meet the challenge of non-communicable diseases.
Fee income from policyholders 56 53 –5 Net investment income – non-participating 1 442 1 544 7 Net realised investment gains/losses – non-participating 269 –255 – Net investment result – unit-linked and with-profit 249 75 –70
Income before income tax expenses 503 –476 – Income tax expense –35 63 – Interest on contingent capital instruments –48 –49 2 Net income attributable to common shareholders 420 –462 –
Expenses Claims and claim adjustment expenses –1 773 –2 054 16 Acquisition costs –406 –463 14 Other expenses –601 –687 14 Interest expenses –1 –8 –
Strategy and priorities At the Swiss Re Investors’ Day, Corporate Solutions presented its strategic initiatives for growth beyond 2015, communicating the intent to focus on expansion into Primary Lead and moving more significantly into High Growth Markets. As part of the High Growth Markets strategic initiative, Corporate Solutions announced two acquisitions during the year.
In July 2014, Corporate Solutions signed an agreement to acquire Sun Alliance Insurance (China) Limited, subject to regulatory approval. Once closed, the acquisition will enable Corporate Solutions to offer corporate insurance directly from mainland China. China will be the fourth market in which Corporate Solutions is licensed as a commercial insurer in the Asia Pacific region, joining Australia, Japan and Singapore.
Corporate Solutions also successfully issued subordinated debt of USD 500 million in the third quarter of 2014, in line with implementation of the Group target capital structure.
Lines of business The property combined ratio improved by 8.2 percentage points to 81.1% for
In Trade & Infrastructure, we insure trade credits and political risks, which is a well-established commercial insurance line, serving a broad range of commercial clients, such as financial institutions, industrial corporates, commercial traders and multilateral agencies. The main risks insured are performance and credit risks associated with international commercial trade and project financing, as well as political risks resulting from government intervention. Our Trade & Infrastructure book is well-diversified and it aligns strongly with the interests of our clients through meaningful risk retention. Historical loss experience has been benign. Swiss Re has been active in this line of business for over a decade.
Investment result The return on investments for 2014 was 2.6% compared to 2.4% in 2013, driven by net realised gains.
Net investment income for 2014 was USD 113 million, consistent with the prior year, with additional income related to the asset re-balancing completed in 2013, offset by reduced income from alternative investments.
Shareholders’ equity Common shareholdersʼ equity decreased to USD 2.3 billion, primarily due to USD 700 million in dividends paid to the Group. Return on equity was
Outlook Overall, prices for commercial insurance are expected to continue softening. Corporate Solutions believes it is well positioned to navigate an increasingly challenging market thanks to its value proposition, strong balance sheet and selective underwriting approach.
“We delivered excellent gross cash generation, continued our exit from the US market and entered into a major transaction in the UK.”
Expenses Life and health benefits –1 506 –1 415 –6 Return credited to policyholders –3 392 –1 442 –57 Acquisition costs –30 –181 – Other expenses –441 –359 –19 Interest expenses –46 –25 –46 Total expenses –5 415 –3 422 –37
Strategy and priorities Admin Re® aims to enhance business profitability by applying a three- pronged strategy to leverage its core competencies of selective growth, value extraction and operational excellence.
Operational excellence involves continuous improvement of the scalable operating platform. It also means focusing on transformation and management actions, including business efficiency and cost reductions.
Income before income tax benefit 395 –18 – Income tax benefit 28 52 86 Net income attributable to common shareholders 423 34 –92
Expenses Expenses were USD 359 million in 2014 compared to USD 441 million in 2013. Admin Re® delivered against its strategy with cost reductions in 2014, and lower deal-related costs.
Swiss Re shares Swiss Re had a market capitalisation of CHF 31.0 billion on 31 December 2014, with 370.7 million shares outstanding, of which 342.2 million are entitled to dividends. Swiss Re shares are listed in accordance with the main standard on the SIX Swiss Exchange (SIX) and are traded under the ticker symbol SREN.
American Depositary Receipts (ADR) In the US Swiss Re maintains an ADR level I programme (OTC symbol SSREY).
Swiss Re’s dividend policy Swiss Re’s highest priority is to grow the regular dividend with long-term earnings. At a minimum Swiss Re aims to maintain the regular dividend. Then Swiss Re will deploy capital for business growth where it meets its profitability requirements.
Dividends are typically paid out of current earnings and Swiss Re pays its dividend annually. Shares are exdividend two working days after the Annual General Meeting (AGM). Dividend payment is typically two working days after the ex-dividend date. The corresponding dates in 2015 are 23 and 27 April.
1 Swiss Re’s ADRs are not listed but traded over the counter; one ADR corresponds to one Swiss Re share.
Insurance indices STOXX Europe 600 Insurance 5.33 Bloomberg Europe 500 Insurance 6.27 FTSEurofirst 300 Insurance 10.07 Dow Jones Insurance Titans 30 2.56
Sustainability indices Dow Jones Sustainability Europe 0.77 Dow Jones Sustainability World 0.33 FTSE4Good Global 0.17 MSCI Global Climate 1.01
Price per share year-end 50.30 47.87 65.90 82.05 83.65 Price per share year high (intra-day) 53.75 60.75 68.10 84.75 86.55 Price per share year low (intra-day) 42.10 35.12 47.25 66.10 69.25 Daily trading volume (in CHF millions) 86 73 58 78 95 Market capitalisation8 (in CHF millions) 18 646 17 746 24 430 30 417 31 010 ADR price at year-end (in USD) 53.72 50.55 72.30 92.38 84.57 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) for the period until 20 May 2011 and to shares of Swiss Re Ltd (ticker symbol: SREN) as of 23 May 2011.
Swiss Re share price and trading volume in 2014 Volume in millionsClosing price in CHF
Based on the Group’s capital strength, the Board of Directors proposes a 10% increase in the 2014 regular dividend to CHF 4.25 per share and a special dividend of CHF 3.00 per share. In addition, the Board of Directors proposes a public share buy-back programme of up to CHF 1.0 billion, exercisable until the AGM in 2016.
Capitalisation Throughout 2014 we held capital well in excess of applicable external capital adequacy requirements. In the mid2014 Swiss Solvency Test (SST), the Group’s regulatory capitalisation was 249%, as submitted to the Swiss Financial Market Supervisory Authority (FINMA) in October. Rating agencies A.M. Best, Moody’s, and Standard & Poor’s rated Swiss Re’s financial strength ‘superior,’ ‘excellent’ and ‘very strong’, respectively (see page 52).
Our overall goal for capital management is to maintain a capital structure that operates efficiently within the above constraints and maximises our financial flexibility. Our underwriting and investment decisions are steered so as to make capital and liquidity fungible to the Group wherever possible while complying with local regulations and client needs. Cash dividends paid to the Group’s parent holding company, Swiss Re Ltd, totalled USD 4.4 billion in 2014.
Risk Management Our proprietary integrated risk model provides a meaningful assessment of the risks to which the Group is exposed and is an important tool for managing our business. It determines the capital requirements for internal purposes and forms the basis for regulatory reporting under the SST and Solvency II.
Risk Management is embedded throughout our business. For each Business Unit, we have dedicated risk experts and Chief Risk Officers who analyse and challenge business decisions. Their independence is maintained by a direct reporting line to the Group Chief Risk Officer. They apply a consistent Enterprise Risk Management approach across the Group to ensure a fully integrated view of risk, and enable sustainable commercial success for Swiss Re.
Swiss Re’s Risk Management function is an integral part of our business model and key to the controlled risk taking that underpins our financial strength. Risk Management is mandated to ensure that the Group and its Business Units have the necessary expertise, frameworks and infrastructure to support good risk taking. In addition, it monitors and ensures adherence to the applicable frameworks, and also performs reserving and reporting activities.
Achievements since year-end 2012 ̤ Letters of Credit reduction of net USD 2.0 bn ̤ USD 4.4 bn deleveraging of senior debt in Reinsurance ̤ Entry into GBP 550 m revolving credit facility for Admin Re® ̤ First Corporate Solutions subordinated debt issuance of
USD 500 m ̤ Reinsurance subordinated debt reduction to come ̤ In 2013, issuance of CHF 175 m and USD 750 m dated subordinated contingent write-off instrument
Capital management We have already achieved USD 4.8 billion of deleveraging and further optimised the capital structure.
resettable callable loan notes, with a first call date in 2024 and a scheduled maturity in 2044 at an annual coupon of 4.5%. The transaction introduced subordinated debt into Corporate Solutions, maintaining its strong capital position while lowering its cost of capital.
Legal entity capital management Our regulated subsidiaries are subject to local regulatory requirements, which for our EU subsidiaries will include Solvency II. At the subsidiary level we set the target capital at a level tailored to each entity’s business and the market environment in which it operates. Our underwriting and investment decisions are steered so as to make capital and liquidity fungible to the Group wherever possible, while complying with local regulations and client needs. Cash dividends paid to the Group’s parent holding company, Swiss Re Ltd, totalled USD 4.4 billion in 2014.
External dividends to shareholders and share buy-back programme Based on the Group’s capital strength, the Board of Directors proposes a 10% increase in the 2014 regular dividend to CHF 4.25 per share, up from CHF 3.85 in 2013 and a special dividend of CHF 3.00 per share. In addition, the Board of Directors proposes a public share buy-back programme for the maximum amount of CHF 1.0 billion, exercisable until the AGM in 2016. Once completed, these capital measures are expected to bring the total amount of capital returned to shareholders to USD 10.7 billion since the implementation of the new Group structure in 2012.
Swiss Re’s capital adequacy Swiss Re holds excess capital under all relevant capital adequacy requirements such as the SST (see chart), Solvency I and Standard & Poor’s AA rating.
Swiss Re provides regulatory solvency reporting to FINMA under the rules of Solvency I and the SST. The SST is based on an economic view. We calculate available capital based on our Economic Value Management (EVM) framework and required capital under the SST using our internal risk model (see pages 55–56 for further information on EVM). The minimum requirement for Solvency I and the SST is a ratio of 100%. Swiss Re’s Solvency I and SST ratios both materially exceed the minimum requirement.
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 28 November 2014, S&P affirmed the AA- financial strength of Swiss Re and its core subsidiaries. The outlook on the rating is “stable”. S&P revised upward its assessment of Swiss Re’s financial risk profile and risk position. S&P sees increasing evidence that Swiss Re’s capital and earnings exhibit less potential for material volatility than most reinsurance peers.
On 6 November 2014, A.M. Best affirmed the A+ financial strength rating of Swiss Re and its subsidiaries. The outlook for the rating is “stable”. The rating reflects the Swiss Re Group’s excellent consolidated risk- adjusted capitalisation, strong operating performance and superior business profile as a leading global reinsurer.
Swiss Re’s financial strength ratings As of 17 December 2014 Financial strength rating Outlook Last update
Economic Value Management 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.
matches expenses to those revenues. EVM excludes the recognition of all potential future new business activities, as well as potential renewals.
ECONOMIC NET WORTH IN 2014 Economic net worth (ENW) is defined as the difference between the market value of assets and the market-consistent value of liabilities. ENW is the EVM measure of shareholders’ equity and the starting point in determining available capital for SST calculations.
Liquidity management We actively manage liquidity risks to ensure that we can satisfy the financial obligations of the Group.
The primary liquidity stress test is based on a one-year time horizon, a loss event corresponding to 99% Tail Value at Risk (see pages 62–63), and a three-notch ratings downgrade.
Liquidity position of the Swiss Reinsurance Company Ltd (SRZ) liquidity pool The SRZ pool is the primary liquidity pool of the Group. 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 20.4 billion as of 31 December 2014, compared with USD 18.3 billion as of 31 December 2013. This total includes USD 15.0 billion of liquid assets and cash, referred to as “spot liquidity”, compared with USD 12.7 billion in 2013. Based on the internal liquidity stress tests described above, we estimate that the SRZ liquidity pool holds surplus liquidity after dividends to Swiss Re Ltd.
Composition of spot liquidity in the Swiss Reinsurance Company Ltd liquidity pool as of 31 December 2014 (Total USD 15.0 billion)
̤ 53% Government bonds AAA rated & US ̤ 19% Other developed market government bonds investment grade
Composition of spot liquidity in the central liquidity pool as of 31 December 2011 Total USD 18.5 billion
Controlled risk-taking requires a strong and independent risk management organisation, as well as comprehensive risk management processes to identify, assess and control risk exposures. Our risk management is based on four guiding principles that we strive to apply consistently across all risk categories and Business Units: ̤ Controlled risk-taking: financial strength and sustainable value creation are central to Swiss Re’s value proposition. We thus operate within a clearly defined risk policy and risk control framework.
̤ Independent risk controlling: dedicated specialised units within Risk Management monitor all our risk-taking activities. They are supported by independent Compliance and Group Internal Audit functions.
Risk management Risk management is fully embedded in all our business activities to enable controlled risk-taking and efficient, risk-adjusted capital allocation.
Swiss Re’s Risk Control Framework comprises a body of standards that establishes an internal control system for managing risk. It defines key tasks which represent the five core components of the risk management cycle: ̤ Risk oversight of planning — ensures that the risk implications of plans are understood and determines whether the business plan at Group and Business Unit level adheres to Swiss Re’s risk tolerance.
̤ Risk measurement — enables the Group to understand the magnitude of its risks and set quantitative controls that limit its risk-taking.
̤ Risk exposure control — allows Swiss Re to control its risk-taking decisions and total risk accumulations, including the passive risk we are exposed to through our operations.
Risk management ensures an integrated approach to managing current and emerging threats. Embedded throughout the business, our Group Risk Management function ensures that strategic planning and limit-setting conform to Swiss Re’s Group-wide risk tolerance. Group Risk Management is also deeply involved in large transaction approvals, portfolio monitoring and performance measurement, as well as capital cost assessment.
Risk culture Swiss Re fosters and maintains a strong risk culture to promote risk awareness and support appropriate attitudes and behaviours towards risk taking and risk management. Risk Management reinforces the Group’s risk culture by increasing risk transparency, and fostering open discussion and challenge in the Group’s risk-taking and risk management processes.
̤ A forward-looking mindset that enables us to pre-emptively assess and respond to risk developments and emerging risks. Proactive engagement can result in effective pre-emptive action that increases regulatory confidence and minimises the likelihood of regulatory sanctions.
̤ Awareness of the limitations of risk models: knowing when to use them and when to rely on judgment. A strong risk culture encourages employees to speak up against agreed wisdom and provide alternative perspectives.
̤ Reinforced risk management, control and awareness, enabling considered and effective responses to risk.
̤ Risk taker — executes an objective within the authority delegated by the risk owner; risk takers are required to provide the respective risk controller with all information required to monitor and control their risks.
Risk management bodies and functions Swiss Re’s Board of Directors is ultimately responsible for the Group’s governance principles and policies. It mainly performs risk oversight and governance through three committees: ̤ The Finance and Risk Committee reviews the Group Risk Policy and risk capacity limits, monitors adherence to risk tolerance, and reviews top risk issues and exposures.
The Group CRO, who is a member of the Group EC, reports directly to the Group CEO as well as to the Board’s Finance and Risk Committee. He leads the Group Risk Management function, which is responsible for risk oversight and control across Swiss Re. The Group Risk Management function is comprised of central risk management units providing shared services, along with dedicated teams for the Reinsurance, Corporate Solutions and Admin Re® Business Units.
Group CRO Leads the Risk Management function and represents it within the Group EC; reports to the Board‘s Finance and Risk Committee
Business Unit CROs Responsible for risk oversight and establishing risk governance in their respective Business Units; supported by functional, regional and legal entity CROs and risk teams
Central Risk Management units Manage financial market and credit risk; provide shared risk management services such as risk modelling, risk governance, political risks and emerging risks; maintain Group frameworks for liquidity, operational and regulatory risks
As part of these efforts, the Risk Management function promotes a forward-looking awareness of the Group’s risk profile and is integrated into the Group’s key business decisions, seeking to be a trusted partner within Swiss Re as well as the for our external stakeholders.
The central risk management units support the CROs at Group, Business Unit and lower levels in discharging their oversight responsibilities. They do so by providing services such as: ̤ Financial risk management ̤ Specialised risk category expertise and accumulation control ̤ Risk modelling and analytics ̤ Regulatory relations management ̤ Developing the central risk governance framework
Risk management activities are also supported by our Group Internal Audit and Compliance units. Group Internal Audit performs independent, objective assessments of adequacy and effectiveness of internal control systems. It evaluates execution processes of Swiss Re, including those within Risk Management. Our Compliance function oversees Swiss Re’s compliance with applicable laws, regulations, rules and Swiss Re’s Code of Conduct. In addition, it assists the Board of Directors, the Group EC and management in identifying, mitigating and managing compliance risks. For more information on our audit and compliance functions, see pages 95 of this Financial Report.
Alternative risk measures — 99% and 99.5% VaR — showed our risk decreasing by 2% to USD 14.3 billion and by 4% to USD 17.0 billion, respectively.
The Group capital requirement table on page 63 shows the 99% tail VaR on a standalone basis for each of Swiss Re’s core risk categories: ̤ Financial market risk decreased by 9% to USD 12.2 billion in 2014, in line with the implementation of planned changes in Swiss Re’s asset allocation (see Group Investments on page 28). This reduction was mainly driven by sales of listed equities (predominantly exchange-traded funds), partly offset by additional investments in corporate bonds.
Risk assessment Lower overall risk in 2014 mainly reflects planned changes in our asset allocation which reduced financial market risk.
Our model and its parameters are continuously refined and updated to reflect our experience, changes in the risk and regulatory environment, and advances in current best practice.
Our internal risk model takes account of the accumulation and diversification between individual risks. The effect of diversification at the category level is demonstrated in the table on page 63, which represents the difference between the Group 99% tail VaR and the sum of standalone tail VaR amounts for the risk categories. The extent of diversifi cation is largely determined by the selected level of aggregation (the higher the aggregation level, the lower the diversification effect).
In 2014, Swiss Reʼs overall risk decreased by 5%, mainly driven by lower financial market risk, as we implemented planned changes in our asset allocation, in particular a reduction in equity investments. Property and casualty risk remained stable as we successfully defended our book in a challenging environment.
Group capital requirement based on one-year 99% tail VaR USD billions, as of 31 December 2013 2014 Change in % cross reference information
Property and casualty 9.1 9.1 0 ➔ see page 64 Life and health 6.6 8.0 23 ➔ see page 65 Financial market 13.3 12.2 –9 ➔ see page 66 Credit1 3.0 2.6 –13 ➔ see page 67
Diversification effect –12.0 –12.9 Swiss Re Group 20.0 19.1 –5 1 Credit comprises credit default and credit migration risk.
Our Risk Management function is embedded in Swiss Re’s business processes. Before any business is written, Risk Management is involved in the Group-wide annual business planning; it also reviews underwriting guidelines, pricing models, and large individual transactions. Risk exposure is monitored against agreed risk limits.
Swiss Re’s Risk Management function monitors reserving levels; it provides information to the risk-taking functions on trends to ensure appropriate pricing. Underwriting systems across the Group provide timely information on risks assumed and capacity committed. Regular internal risk and issue reporting ensures transparency at all stages.
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 property and casualty risks in three categories at Group and Business Unit level: natural catastrophes (eg, earthquakes and windstorms), manmade 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 monitor accumulated exposure to single risks or to an underlying risk factor (such as Californian earthquake) on a Group-wide basis. We further manage our risk by external retrocession, risk swaps, or by transferring risk to capital markets through insurance-linked securities (such as the Successor and Mythen cat bond programmes).
Natural catastrophes Atlantic hurricane –4.5 –4.3 –5 Californian earthquake –3.5 –4.0 13 European windstorm –3.8 –3.1 –18 Japanese earthquake –3.3 –3.1 –5
Swiss Re’s overall life and health risk rose 23% to USD 8.0 billion: This increase was driven by an update of our life and health risk model as well as by the impact of a further decline in interest rates throughout the year.
In 2014, we enhanced our risk model to include the impact of mortality changes on premium income, as higher mortality will reduce the amount that Swiss Re receives in future premiums (see page 68). The increase in risk is amplified by a decline in interest rates to historically low levels. The long time horizon of life and health business means that a low interest rate environment has a direct economic impact on the present value of our best estimate of future cash flows.
The latter is reflected in the 16% decrease in the 200-year pandemic event shown in the table above. The decrease is driven by model enhancements and parameter updates — triggered by a review of how health systems would respond in the event of a pandemic — as well as an update of the age mix to reflect changes in Swiss Re’s book.
As in property and casualty, all large, complex, or unusual transactions are reviewed and require individual approval from Swiss Re’s underwriting, client management and risk management functions.
Financial market and credit risk management involves identifying, assessing and controlling risks inherent in the financial markets, while monitoring compliance with our risk management standards. Both risk categories are managed centrally by our Financial Risk Management team, supported by dedicated Business Unit teams who manage risks assumed by our credit and surety underwriting business.
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 that it holds.
This process is complemented by regular discussions between Financial Risk Management, Asset Management and the Group’s external fund managers.
Credit risk is primarily the risk of incurring a financial loss from the default of our counterparties or of third parties (credit spread risk falls under financial market risk). We also take account of the increase in risk from any deterioration in credit ratings. Credit risk arises from our investment activities as well as from liabilities underwritten by our Business Units and from retrocession. We distinguish between three types of credit exposure: the risk of issuer default from instruments in which Swiss Re invests or trades; counterparty exposure in a direct contractual relationship; and risk assumed by Swiss Re through reinsurance contracts.
In contrast, the credit default stress test increased by 16% (see table above). The stress calculation was not affected by the updated risk model parameters which drove the decrease in the credit risk calculation. Instead, the increase in stress is mainly due to the higher exposure, in particular from credit underwriting.
Financial market and credit risk stress tests Pre-tax impact on economic capital in USD billions, as of 31 December 2013 2014 Change in %
We use a proprietary integrated risk model to determine the capital required to support the risks on Swiss Re’s books, as well as to allocate risk-taking capacity to the different lines of business. Our internal model is based on two important principles. First, it applies an asset-liability management 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 Group 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. 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 55–56 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. Swiss Re’s risk model assesses the potential economic loss at a specific confidence level. There is thus a possibility that actual losses may exceed the selected threshold. In addition, the reliability of the model may be limited when future conditions are difficult to predict. For this reason, we continuously review and update our model and its parameters to reflect changes in the risk environment and current best practice.
̤ The second line of defence is formed by independent oversight functions, such as Risk Management and Compliance.
̤ The third consists of independent audits of processes and procedures carried out by Group Internal Audit.
The purpose at every stage is to identify operational risks and establish mitigating controls in order to close potential gaps in the internal control framework in a cost-effective manner. All operational losses and incidents are reported and tracked in a central system to ensure that they are resolved as well as to avoid the recurrence of the same or similar events.
The primary responsibility for managing strategic risk lies with Swiss Re’s Board of Directors, which establishes the Group’s overall strategy. The Business Unit Boards of Directors are responsible for the strategic risk inherent in their specific strategy development and execution.
Strategic risks are addressed not only during the development of strategy but also as part of its implementation in the Group’s business plan, where such risks are assessed through multi-year scenarios. These assessments consider potential risk exposures to both current and emerging risks as well as the operational risks associated with the activities required to execute Swiss Re’s business plan.
Regulatory risk Regulatory risk represents the potential impact of changes in the regulatory and supervisory regimes of the jurisdictions in which we operate. Swiss Re is strongly engaged in the regulatory debate, striving to mitigate potentially negative impacts while supporting reforms that could generate business opportunities, facilitate convergence of regulatory standards or enhance the overall health of the sector.
Swiss Re is actively engaged in dialogue on these initiatives and supports regulatory convergence as well as increased application of economic and risk-based principles. At the same time, we share the broad concerns of the insurance industry around the cumulative and cross-sectoral impacts of the reforms. Some proposed regulations are more appropriate for the banking industry and do not adequately take into account the nature and benefits of insurance and reinsurance. Regulatory fragmentation is another key concern — particularly in Europe, with the challenges in introducing Solvency II, but also in the context of cross-border dialogue and protectionist measures introduced in some growth markets.
There are also concerns that the design and implementation of regulatory reforms may increase procyclicality, which could exacerbate the effects of short-term market volatility. In 2014, Swiss Re participated in consultations with the Financial Stability Board (FSB), the International Association of Insurance Supervisors (IAIS), the OECD, the European Insurance and Occupational Pensions Authority (EIOPA) and the European Commission on the implications of regulatory reforms, in particular on long-term investments. For Solvency II, the institutions agreed to address the concerns regarding excessive capital requirements on longterm guarantee products.
The starting date for the implementation of Solvency II is now set for 1 January 2016. A decision on the equivalence of the Swiss supervisory system (including the Swiss Solvency Test) is expected in 2015.
The IAIS also confirmed its commitment to developing a global insurance capital standard (ICS), which will be applicable to internationally active insurance groups — including Swiss Re — as part of the IAIS common framework for international group supervision.
In 2014, Swiss Re was again recognised as “insurance industry sector leader” in the Dow Jones Sustainability Indices. This is the eighth time since 2004 that Swiss Re has led the insurance sector in these rankings. The award highlights Swiss Re’s long-term commitment to sustainable business and the efforts to continuously and progressively embed sustainability into key business processes and operations.
For more information on our sustainability practices, see also the Corporate Responsibility section beginning on page 108.
Emerging risks Anticipating possible developments in Swiss Re’s risk landscape is an important element of our integrated approach to enterprise risk management. We encourage pre-emptive thinking on risk in all areas of our business, combining our broad claims experience and risk expertise with a structured horizonscanning process. The key objectives are to reduce uncertainty and help diminish the volatility of the Group’s results, while also identifying new business opportunities and raising awareness of emerging risks, both within the Group and across the industry.
Our Group-wide SONAR framework gives Swiss Re employees an interactive forum for raising potential emerging risks and reporting early signals. This information is complemented with insights from collaboration with think tanks, academic networks, international organisations and institutions. Findings are reported to senior management and other internal stakeholders, providing them with a prioritised overview of newly identified emerging risks, along with an estimate of their potential impact on Swiss Re’s business and recommendations for risk mitigation. We also publish an annual emerging risk report to share findings, raise awareness and initiate a risk dialogue with key external stakeholders.
Swiss Re’s Corporate Governance aims at safeguarding the sustainable interests of the company.
Overview 74 Group Structure and Shareholders 76 Capital Structure 79 Board of Directors 82 Executive Management 96 Shareholder’s Participation Rights 102 Changes of Control and Defence Measures
Swiss Re’s corporate governance framework Swiss Re’s Board of Directors is responsible for oversight, while the Group EC is responsible for managing operations. This structure maintains effective mutual checks and balances between the top corporate bodies. Our corporate governance principles and procedures are defined in a series of documents governing the organisation and management of the company. These include at the Group level: ̤ the Group Code of Conduct, outlining
̤ the instructions and guidelines describing working methods, governance processes and timetables of the Board of Directors and Board committees.
the governance structure and principles within the Business Units Reinsurance, Corporate Solutions and Admin Re® in line with the Group Bylaws.
Swiss Re’s corporate governance adheres to the SIX Swiss Exchange’s Directive on Information Relating to Corporate Governance, including its annex. It is also in line with the principles of the revised Swiss Code of Best Practice for Corporate Governance (Swiss Code) of September 2014, issued by economiesuisse, the Swiss business federation. Swiss Re, moreover, conforms to the Swiss Financial Market Supervisory Authority (FINMA) provisions on corporate governance, risk management and internal control systems, which came into effect on 1 January 2009. Swiss Re’s corporate governance also complies with applicable local rules and regulations in all jurisdictions where it conducts business.
Articles of Association The amendments to the Articles of Association required by the Ordinance were proposed to the Annual General Meeting 2014 for approval. It approved the amendments with 93.71% of the votes validly cast.
̤ Susan L. Wagner was elected as new member to the Board of Directors by the shareholders at the Annual General Meeting which took place in Zurich on 11 April 2014.
̤ In line with the Group’s diversity efforts, Swiss Re is pleased that with the election of Susan L. Wagner the Board of Directors currently has three female members, which represents 25% of the total number of Board members.
̤ George Quinn stepped down as Group CFO and member of the Group EC as of 30 April 2014.
̤ David Cole, Group Chief Risk Officer since March 2011, was appointed Group CFO as of 1 May 2014.
̤ Patrick Raaflaub was appointed Group Chief Risk Officer and member of the Group EC as of
̤ The “Ordinance Against Excessive Compensation at Public Corporations” (Ordinance) became effective on 1 January 2014.
̤ Swiss Re had already introduced the possibility for shareholders to instruct the Independent Proxy electronically, via the investor web service on www.sherpany.com/ swissre, for the Annual General Meeting 2013 and shareholders had that possibility again at the Annual General Meeting 2014.
proposals submitted by the Board of Directors: in relation to 1. the maximum aggregate amount of the compensation of the Board of Directors for the next term of office; 2. the maximum aggregate amount awarded for the fixed and long-term compensation of the Group EC for the following financial year; and 3. the aggregate amount awarded for short-term compensation of the Group EC for the preceding completed financial year.
members of the Board of Directors and the Group EC. For further details please refer to pages 87 and 101.
The Annual General Meeting 2014 also elected the Independent Proxy for a one-year term until the completion of the Annual General Meeting 2015.
Swiss Re Ltd has a level I American Depositary Receipts (ADRs) programme in the US. The ADRs are traded over the counter (ISIN US8708861088, OTC symbol SSREY). Neither the ADRs, nor the underlying Swiss Re shares, are listed on a securities exchange in the US.
Shares held by Swiss Re 28 508 013 7.7 1 Excluding shares held by Swiss Re Ltd and Group companies
The table on page 80 provides an overview of the issued, conditional and authorised capital of Swiss Re Ltd as of 31 December 2014 and 31 December 2013, respectively.
More information is provided in the sections “Conditional and authorised capital in particular” below and “Changes in capital” on page 80.
Conditional and authorised capital in particular Conditional capital As of 31 December 2014, the conditional capital of Swiss Re Ltd consisted of the following categories: Conditional capital for Equity-Linked Financing Instruments The share capital of the company may be increased up to CHF 5 000 000 by
The Board of Directors may exclude or restrict the subscription rights of existing shareholders with respect to a maximum of CHF 3 500 000 through the issue of up to 35 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10, out of the total amount of authorised capital. Such exclusion or restriction relates to the use of shares in connection with mergers, acquisitions (including takeover ) of companies, parts of companies or holdings, participations or new investments planned by the company and/or Group companies, financing or re-financing of such mergers,
acquisitions or new investments, the conversion of loans, securities or equity securities. Exclusion and restriction may also relate to improving the regulatory capital position of the company or Group companies, including private placements, in a fast and expeditious manner if the Board of Directors deems it appropriate or prudent to do so.
Changes in capital Changes in 2014 No changes in share capital occured during 2014.
Financing Instruments were excluded, be extended to 10 April 2015 and the maximum number of shares under the same paragraph be set to
the issue of up to 40 050 613 registered shares, payable in full, each with a nominal value of CHF 0.10.
Changes in 2012 and previous years No changes in share capital of Swiss Re Ltd occurred during 2012.
The company cannot exercise the voting rights of treasury shares. As of
had registered 195 887 287 shares for the purpose of exercising their voting rights, out of a total of 370 706 931 shares issued. As of 31 December 2014, 342 199 440 shares were entitled to dividend payment.
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 specific 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.
Admissibility of nominee registrations Persons not expressly declaring in their application for entry in the share register that they are holding shares for their own account (nominees) are entered without further inquiry in the share register of Swiss Re Ltd as shareholders with voting rights of up to a maximum of 2% of the outstanding share capital available at the time. Additional shares held by such nominees that exceed the limit of 2% of the outstanding share capital are entered in the share register with voting rights only if such nominees disclose the names, addresses and shareholdings of any persons for whose account the nominee is holding 0.5% or more of the outstanding share capital. In addition, such nominees must comply with the disclosure requirements of the SESTA.
Convertible bonds and options Convertible bonds As of 31 December 2014, neither Swiss Re Ltd nor any of its subsidiaries has any bonds outstanding that are convertible into equity securities of Swiss Re Ltd solely at the option of bondholders. The same applied as
In 2012, Swiss Reinsurance Company Ltd issued CHF 320 000 000 of 7.25% perpetual subordinated
For details on stock options granted to Swiss Re employees, see Note 15 to the Group financial statements on pages 224–226.
Board of Directors The Board of Directors is guided by the goal of sustainable corporate development.
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 2014 the Board of Directors consisted of the following members: Name Nationality Age Initial election1
Swiss American 1 The members were initially elected to the Board of Directors of Swiss Reinsurance Company Ltd, the Group’s former parent company. All members were subsequently elected to the Board of Directors of the Group’s new holding company, Swiss Re Ltd, on 17 February 2011 with the exception of the following members who were elected to the Board of Directors of Swiss Re Ltd as follows: Renato Fassbind was elected on 15 April 2011, C. Robert Henrikson was elected on 13 April 2012, Mary Francis was elected on 10 April 2013 and Susan L. Wagner was elected on 11 April 2014.
Career Mathis Cabiallavetta held several positions at UBS AG from 1971, including President of the Group Executive Board in 1996 and Chairman in 1998. He joined Marsh & McLennan Companies in 1999 and was Vice Chairman of the company from 2001 to 2004. He is a former member of the Bank Council of the Swiss National Bank and a past Vice Chairman of the Board of Directors of the Swiss Bankers Association. He was also a member of the Committee of the Board of Directors of the Swiss Stock Exchange and the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York. Mathis Cabiallavetta was elected to Swiss Re’s Board of Directors in 2008 and became Vice Chairman in March 2009. He chairs the Finance and Risk Committee as well as the Investment Committee and is a member of the Chairman’s and Governance Committee.
Vice Chairman and Lead Independent Director, non-executive & independent Born: 1955 Nationality: Swiss
̤ Member of the Economic Development Commission of the Government of the Hong Kong SAR
Career Mary Francis joined the UK Civil Service in 1971, focusing on financial and economic policy. She held a number of senior positions including Financial Counsellor at the British Embassy in Washington DC from 1990 to 1992, Private Secretary to the Prime Minister from 1992 to 1995 and Deputy Private Secretary to the Queen from 1995 to
Career Rajna Gibson Brandon is a Professor of Finance at the University of Geneva and Director of the Geneva Finance Research Institute. She held professorships at the University of Lausanne from 1991 to 2000 and the University of Zurich from 2000 to 2008. She was a member of the Swiss Federal Banking Commission from 1997 to 2004. She was elected to Swiss Re’s Board of Directors in 2000 and is a member of the Finance and Risk Committee and the Investment Committee.
Career C. Robert Henrikson was Chairman and Chief Executive Officer of MetLife, Inc. from 2006 to 2011. Before, he held senior positions in MetLife’s individual, group and pension businesses and became Chief Operating Officer of the company in 2004. He is a former Chairman of the American Council of Life Insurers, a former Chairman of the Financial Services Forum, Director Emeritus of the American Benefits Council and a former member of the U.S. President’s Export Council. He was elected to Swiss Re’s Board of Directors in 2012 and chairs the Compensation Committee. In addition, he is a member of the Chairman’s and Governance Committee and the Finance and Risk Committee.
New York Philharmonic ̤ Member of the Boards of Trustees of
Emory University, S.S. Huebner Foundation for Insurance Education and Indian Springs School
Career Susan L. Wagner is a co-founder of BlackRock, where she served as Vice Chairman and a member of the Global Executive and Operating Committees before retiring in mid-2012. Over the course of her nearly 25 years with the firm, Susan L. Wagner served in several roles such as Chief Operating Officer, Head of Strategy, Corporate Development, Investor Relations, Marketing and Communications, Alternative Investments and International client businesses. Prior to founding BlackRock, Susan L. Wagner was a Vice President at Lehman Brothers supporting the investment banking and capital markets activities of mortgage and savings institutions. Susan L. Wagner was elected to Swiss Re’s Board of Directors in 2014 and is a member of the Finance and Risk Committee and the Investment Committee.
Other mandates, activities and functions In line with Swiss Re Ltd’s Articles of Association the members of the Board of Directors may not hold more than ten additional mandates of which no more than four additional mandates can be with listed companies. Mandates (i) in companies which are controlled by Swiss Re Ltd or which control Swiss Re Ltd, (ii) mandates held at the request of Swiss Re Ltd or by companies controlled by Swiss Re Ltd as well as (iii) mandates in associations, charitable organisations, foundations, trusts, employee welfare foundations, investment companies, equity partnerships or limited liability partnerships are not subject to the above limitations. No member of the Board of Directors may hold more than five mandates as set out in (ii) above and not more than fifteen mandates as set out in (iii) above. Mandates shall mean mandates in the supreme governing body of a legal entity which is required to be registered in the commercial register or a comparable foreign register. Mandates in different legal entities that are under joint control are deemed one mandate.
Election and term of office Election procedure Members of the Board of Directors are elected individually by the General Meeting of shareholders for a one-year term.
standing. Swiss Re’s Board members represent a wide range of backgrounds and capabilities in such key areas as insurance and reinsurance, finance, accounting, capital markets, risk management and regulatory topics. The company aims to constantly develop further the abilities of its Board members. Newly elected Board members receive a comprehensive introduction in order to gain a sound understanding of the Group’s organisation and business, allowing them to perform their duties effectively. All Board members update and enhance their knowledge of emerging business trends and risks through regular meetings with internal and external experts throughout the year.
Members whose term has expired are immediately eligible for re-election. As a rule no member shall serve as a member of the Board after reaching the age of 70. In the calendar year reaching that age a member shall tender his resignation at the respective Annual General Meeting. The Board can exempt a member from this age limit under exceptional circumstances.
The term of office of a committee member is described in the section on the committees of the Board of Directors.
Nominations for re-election and election by the Annual General Meeting on 21 April 2015 On 1 January 2014 the Ordinance Against Excessive Compensation at Public Corporations entered into effect. It provides that since the Annual General Meeting 2014 the shareholders will annually elect the members of the Board of Directors, the Chairman of the Board of Directors, as well as the members of the Compensation Committee, individually and separately, for one-year terms.
The Board of Directors proposes that the following Board members be re-elected for a one-year term: ̤ Walter B. Kielholz ̤ Mathis Cabiallavetta ̤ Renato Fassbind ̤ Raymond K.F. Ch’ien ̤ Mary Francis ̤ Rajna Gibson Brandon ̤ C. Robert Henrikson ̤ Hans Ulrich Maerki ̤ Carlos E. Represas ̤ Jean-Pierre Roth ̤ Susan L. Wagner
Furthermore, the Board of Directors proposes ̤ Trevor Manuel ̤ Philip K. Ryan to the Annual General Meeting 2015 for first-time election as members of the Board of Directors for a one-year term.
Walter B. Kielholz (chair) Mathis Cabiallavetta (chair) (chair) Renato Fassbind (chair) Raymund Breu Raymond K.F. Ch’ien Mary Francis Rajna Gibson Brandon C. Robert Henrikson (chair) Hans Ulrich Maerki Carlos E. Represas Jean-Pierre Roth Susan L. Wagner
Corporate Governance I Board of Directors number of voluntary public interest commissions including Africa Commission, Global commission on Growth and Development, Global Ocean Commission, and the New Climate Economy. He holds a National Diploma in Civil and Structural Engineering from the Peninsula Technikon, South Africa and completed an Executive Management Programme at the Stanford University, USA.
The Board of Directors proposes that the following Board member be re-elected as Chairman of the Board of Directors, for a one-year term: ̤ Walter B. Kielholz
The Board of Directors also proposes that the following Board members be re-elected as members of the Compensation Committee, for a one-year term: ̤ Renato Fassbind ̤ C. Robert Henrikson ̤ Hans Ulrich Maerki ̤ Carlos E. Represas
Organisational structure of the Board of Directors The Board of Directors constitutes itself with the exception of the Chairman and the members of the Compensation Committee who are elected by the shareholders at the Annual General Meeting of shareholders. The Board of Directors elects among its members one or more Vice Chairmen and a Lead Independent Director as well as the chairpersons and members of the Board committees (with the exception of the members of the Compensation Committee). It appoints its secretaries who do not need to be members of the Board.
The organisation of the Board of Directors is set forth in the Group Bylaws, which define the responsibilities of the Board of Directors, its committees and the Group EC, as well as the respective reporting procedures.
The Chairman’s and Governance Committee and the full Board at least annually review the Group Bylaws to ensure their continued effectiveness and compliance with the Articles of Association, applicable laws, regulations and best practice.
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, the Business Unit Board of Directors and Executive Committees and receives all corresponding documentation and minutes. He ensures adequate reporting by the Group EC and the Group CEO to the Board of Directors and facilitates their communication with the Board. He is also responsible together with the chairperson of the Audit Committee for overseeing Group Internal Audit (GIA) and appoints its head, subject to confirmation by the Audit Committee.
The Chairman convenes meetings of the Board and its committees and makes preparations for, and presides over, Board meetings. The Chairman coordinates the activities of Board committees and ensures that the Board is kept informed about the committees’ activities and findings. In cases of doubt, the Chairman makes decisions about the authority of the Board or its committees and about interpreting and applying the Group Bylaws.
The Chairman presides at General Meetings of shareholders and represents the Group vis-à-vis shareholders and other stakeholders such as regulatory and political authorities, industry associations, or the media.
If the Chairman of the Board is prevented from performing any of these duties, one of the Vice Chairmen, the Lead Independent Director or another member of the Board will assume them.
Committees of the Board of Directors The Board has delegated certain responsibilities, including the preparation and execution of its resolutions, to five committees: the Chairman’s and Governance Committee, the Audit Committee, the Compensation Committee, the Finance and Risk Committee and the Investment Committee.
Each committee consists of a chairperson and at least two other members elected from among the Board of Directors. The members of the Compensation Committee are elected by the Annual General Meeting.
The term of office of a Board committee member is one year, beginning with the appointment at the Board meeting following an Annual General Meeting and ending at the Board meeting following the subsequent Annual General Meeting. For the Compensation Committee members the term of office begins with the election at the Annual General Meeting and ends at the subsequent Annual General Meeting.
Each committee is governed by a Charter which defines the committee’s responsibilities. The committees operate in line with the Group Bylaws and according to their respective Charters.
The committees have the following overall responsibilities: Chairman’s and Governance Committee Responsibilities The Chairman’s and Governance Committee’s primary function is to act as advisor to the Chairman and to address corporate governance issues affecting the Group. It is in charge of the succession planning process at the Board of Directors level and oversees the annual performance assessment and self-assessment at both the Board of Directors and Group EC level.
Members ̤ Walter B. Kielholz, Chair ̤ Mathis Cabiallavetta ̤ Renato Fassbind ̤ C. Robert Henrikson ̤ Jakob Baer (until 11 April 2014) ̤ John R. Coomber (until 11 April 2014)
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 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.
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 members of the Board of Directors ensure that they are able to fulfil the responsibilities of their position even in periods when there are increased demands on their time. 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.
Chairman’s and 7 meetings2 Group CEO, Company Secretary Governance Committee 2 hours
Investment Committee 6 meetings Group CEO, Group CFO, Group CRO, Group Chief Strategy Officer & Chairman Admin Re®, 2.5 hours Group Chief Investment Officer, Head Financial Risk Management & CRO EMEA, 96.9% CFO Asset Management, Head of Internal Investments, Company Secretary
1 In addition, one decision by circular resolution. 2 In addition, two decisions by circular resolution. 3 The human resources consulting firm Mercer and the law firm Niederer Kraft & Frey AG (NKF) provided support and advice for compensation issues during the
The Board and its committees can also adopt resolutions by written agreement if no member of the Board of Directors requests a discussion of the topic. Each committee provides a report of its activities and recommendations following a committee meeting at the next Board of Directors meeting. If any significant topic comes up, the committees contact the Board of Directors immediately. It is the responsibility of each committee to keep the full Board of Directors informed on a timely basis as deemed appropriate.
Minutes are kept of the 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 2014.
Governance ̤ Supervises the Swiss Re Group ̤ Retains overall responsibility
̤ Approves the Group Risk Policy ̤ Monitors risk developments and
̤ Regularly reviews if the set-up of the compliance function suits the nature of the company’s needs
̤ Determines the compensation of the Group CEO in line with the overall compensation available for the members of the Group EC as approved by the Annual General Meeting
̤ Approves the overall incentive pool for the Group, subject to approval by the Annual General Meeting for short-term incentive for Group EC members
KEY RESPONSIBILITIES OF THE BOARD OF DIRECTORS Board of Directors and Group EC: areas of responsibility The Board of Directors exercises ultimate responsibility for the Group. It delegates the responsibility for managing the Group’s operations to the Group EC (see section Executive Management, starting on page 96). The Group EC also supports the Board of Directors in fulfilling its duties and prepares proposals for consideration and decision-making by the Board of Directors related to the following key responsibilities with Group relevance: strategy, the business plan, organisational structure, accounting principles, risk tolerance levels, share capital and any share repurchase programme, along with principles of financing through capital markets as well as for important strategic transactions. The following tables provide a summary of the key responsibilities of the Board of Directors and delegations to the Group EC.
̤ Issues guidelines relating to the delegation of decision-making authority within the Group
business plan to the Board of Directors for approval and reviews the Business Units’ business plan
of Directors the annual and interim financial statements of the Group together with segment reporting on the Business Units
through capital markets and the allocation of financial resources within the Group
talent management, subject to the authority of the Board of Directors
and benefit plans to the Compensation Committee for discussion and decision
Involvement of executive management in meetings of the Board of Directors As a matter of principle, some (or all) members of the Group EC are requested to attend the regular meetings of the Board of Directors as advisers. The members of the Group EC do not attend the constitutional meeting of the Board of Directors following the Annual General Meeting. The entire Group EC was present at two regular Board meetings in 2014. At two further meetings the entire Group EC was present with the exception of one member. At five meetings the presence of only a number of Group EC members was required. These members attended the meetings.
Involvement of executive management in Board committee meetings As a matter of principle, selected members of the Group EC as well as further senior 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 91.
Executive management furthermore regularly provides the Board of Directors with specific written reports containing: ̤ risk management issues and related
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 (GIA) 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
Executive Management The Group Executive Committee manages Swiss Re Ltd and steers the Swiss Re Group and its Business Units as delegated by the Board of Directors.
Michel M. Liès Luxembourg 60 Group CEO David Cole Dutch, American 53 Group CFO John R. Dacey American 54 Group Chief Strategy Officer/Chairman
Forum, 2014 ̤ Board member of Geneva Association ̤ Member of Insurance Europe’s
̤ Voting member of The Conference Board ̤ Member of IMD Foundation Board ̤ Board member of the Society for
Washington University, St. Louis, USA ̤ Master in Public Policy, Harvard
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 as of November 2012.
Chief Executive Officer Reinsurance Asia/ Regional President Asia Born: 1966 Nationality: Nigerian and American
̤ Member of the global Executive Board of the International Chamber of Commerce (ICC) since 2014
Professional experience J. Eric Smith worked in various roles in property and casualty insurance with Country Financial for more than 20 years, then joined Allstate in 2003 where he rose to the rank of President, Financial Services. He moved to USAA in 2010 as President USAA Life Insurance Co. Eric joined Swiss Re in July 2011 as Chief Executive Officer of Swiss Re Americas and as a member of the Group Management Board. Eric was appointed Regional President Americas and member of the Group Executive Committee in January 2012.
Other mandates, activities and vested interests In line with Swiss Re Ltd’s Articles of Association the members of the Group EC may not hold more than five additional mandates of which no more than one additional mandate can be with listed companies. Mandates (i) in companies which are controlled by Swiss Re Ltd or which control Swiss Re Ltd, (ii) mandates held at the request of Swiss Re Ltd or companies controlled by Swiss Re Ltd as well as (iii) mandates in associations, charitable organisations, foundations, trusts, employee welfare foundations, investment companies, equity partnerships or limited liability partnerships are not subject to the above limitations. No member of the Group EC may hold more than five mandates as set out in (ii) above and not more than fifteen mandates as set out in (iii) above. Mandates shall mean mandates in the supreme governing body of a legal entity which is required to be registered in the commercial register or a comparable foreign register. Mandates in different legal entities that are under joint control are deemed one mandate.
Any activities of members of the Group EC 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 Group EC members’ biographies on pages 97–100.
Shareholder’s Participation Rights Any shareholder with voting rights may have his or her shares represented at a General Meeting of shareholders.
Voting right restrictions, statutory group clauses and exception rules There are no voting right restrictions and no statutory group clauses (other than the limitations on nominee registrations, page 81). Therefore, there are no procedures or conditions for cancelling restrictions and no rules on making exceptions to them. Accordingly, no such exceptions were made in 2014.
Swiss Re’s Articles of Association allow any shareholder with voting rights to have his or her shares represented at any General Meeting of shareholders by another person authorised in writing or by the Independent Proxy. Such representatives need not be shareholders.
The Independent Proxy is elected by the General Meeting of shareholders for a term of office until completion of the next ordinary General Meeting of shareholders. The Independent Proxy whose term of office has expired is immediately eligible for re-election. The duties of the Independent Proxy are determined by applicable laws, rules and regulations. The General Meeting of shareholders may remove the Independent Proxy with effect as per the end of the General Meeting of shareholders. If the company does not have an Independent Proxy, the Board of Directors shall appoint the Independent Proxy for the next General Meeting of shareholders.
Business firms, partnerships and corporate bodies may be represented by legal or authorised representatives or other proxies, married persons by their spouses, minors and wards by their guardians, even though such representatives are not shareholders.
In accordance with the Federal Act on Stock Exchanges and Securities Trading (SESTA), whosoever acquires equity securities, which added to equity securities already owned, exceed the threshold of 33⅓% of Swiss Re shares with voting rights, either directly, indirectly or in concert with third parties, and regardless of whether these rights are exercisable or not, triggers a mandatory takeover offer for the outstanding Swiss Re shares owned by all other shareholders.
Alex Finn became lead auditor responsible for the auditing mandate of the former parent company, Swiss Reinsurance Company Ltd, on 23 September 2011. With Swiss Re Ltd becoming the new holding company of the Group, he also became lead auditor for the Swiss Re Ltd audit mandate. Bret Griffin was appointed as further new lead auditor following the election of PwC as auditors by the Annual General Meeting 2014 replacing Dawn M. Kink who had been on this audit mandate for seven years in a row. In line with the Swiss Code of Obligations she was therefore replaced.
Auditing fees PwC fees (excluding value add taxes) for professional services during the year ended 31 December 2014 were: ̤ Audit fees: USD 35.9 million ̤ Audit-related fees: USD 3.0 million ̤ Corporate Finance Services:
tax services: USD 0.4 million ̤ Other fees: USD 1.1 million
Cooperation and flow of information between the auditor and the Audit Committee The Audit Committee liaises closely with the external auditor; the lead auditors participate as advisers at all the Audit Committee’s meetings. For more information, see page 91.
Evaluation of the external auditor The Audit Committee, which is responsible for recommending an audit firm to the Board of Directors for election at the Annual General Meeting of shareholders, assesses the performance of the external auditor annually and presents its findings to the Board. This assessment is based on the external auditor’s qualifications, independence and performance.
Independence At least once a year, the external auditor provides a formal written statement delineating all relationships with the company that might affect its independence. Any disclosed relationships or services that might bear on the external auditor’s objectivity and independence are reviewed by the Audit Committee, which then recommends appropriate action to be taken by the Board.
Special Auditor Swiss Re Ltd’s Articles of Association foresee that the Annual General Meeting may elect a Special Auditor for a term of three years which will be responsible for the special audit reports that are required by law in connection with changes in capital. Currently there is no Special Auditor elected.
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 276.
News release 6 March Swiss Re supports Aviva in the largest longevity transaction with a pension scheme completed to date
regulation ahead of schedule News release 11 April Swiss Re shareholders approve all proposals put forward by the Board of Directors at Swiss Re's Annual General Meeting
News release, report 11 June Swiss Re's Admin Re® enters into a transaction with HSBC and demonstrates commitment to the Admin Re® strategy
News release, press conference 27 August Preliminary sigma estimates for H1 2014: global catastrophe-related insurance losses comparatively low at USD 21 billion
News release, sigma study 21 October Swiss Re Admin Re® agrees to sell US subsidiary Aurora to RGA News release 7 November Swiss Re reports strong net income of USD 3.3 billion for the first nine months of 2014
and third quarter net income of USD 1.2 billion News release, media conference call
Overview 110 Natural catastrophes and climate change 111 Expanding re/insurance protection 114 Our Sustainability Risk Framework 117 Diversity and inclusion in our workforce 119
Swiss Re has a long-standing commitment to being a responsible company. A key element of our understanding of this is the desire to contribute to sustainable, long-term value creation. Or as we express it in our values: “Taking the long-term view, and playing our part in enabling sustainable progress — for stakeholders and society in general.”
In corporate responsibility reporting, there has recently been an increased focus on materiality: companies are urged to reflect more on which topics really matter. However not everyone understands this term the same way. Some stakeholders expect companies to report on all their actions that impact the environment and society; others primarily focus on those aspects that have a tangible link to a company’s financial performance.
In view of the potentially significant medium- to long-term impact of climate change on our business, we made it a priority issue 20 years ago and set up a comprehensive climate change strategy with four pillars: USD 2.9 bn Natural catastrophe premiums in our P&C Reinsurance business
̤ Advancing our knowledge and understanding of climate change risks, quantifying and integrating them into our risk management and underwriting frameworks where relevant; ̤ Developing products and services to mitigate — or adapt to — climate risk; ̤ Raising awareness about climate change risks through dialogue with clients, employees and the public, and advocacy of a worldwide policy framework for climate change; ̤ Tackling our own carbon footprint and ensuring transparent, annual emissions reporting.
Man-made disastersWeather-related catastrophesEarthquake/tsunami 10-year average total insured losses 140 in USD bn, at 2014 prices
Natural catastrophes constitute a key risk in our Property & Casualty (P&C) business. Losses from floods, storms, earthquakes and other natural disasters can affect millions of lives and the economies of entire countries. In 2014, the total worldwide economic loss from natural and man-made catastrophes was estimated at USD 109 billion, while insured losses totalled USD 35 billion.
Providing effective re/insurance protection against natural catastrophes therefore creates significant value-added for our clients — and society at large. In 2014, we received USD 2.9 billion of P&C Reinsurance premiums for natural catastrophe covers (for losses larger than USD 20 million); this was equivalent to 19% of total premiums in this business segment.
Understanding the risk In order to assess our Property & Casualty business accurately and to structure sound risk transfer solutions, it is vital that we understand natural catastrophe risks and the impact of climate change. This is why we invest in proprietary, state-of-the-art natural catastrophe models and collaborate with universities and scientific institutions. Doing so enables us to stay abreast of the latest knowledge on the economic impact of natural disasters, including the effects of climate change.
While the effect of climate change will increase over the coming decades, most of our business is renewed annually and our risk models are refined every few years. Risks are essentially covered for 12 months, for cat bonds up to five years. Thus, reinsurance premiums do not reflect expected loss trends over the next decades. Rather, for underwriting and risk management purposes, our models provide an estimate of the current risk. However, as natural catastrophe losses continue to rise as a result of the different factors described above, our forward-looking models will gradually reflect this trend, as they are updated and refined at regular intervals.
Developing products and services With our re/insurance products, we aim to support two objectives: mitigation of climate change and adaptation to it.
Adaptation to climate change requires effective risk transfer instruments that help our clients cope with some of the effects of climate change. As we continuously adjust our natural catastrophe and weather solutions to reflect changes in the underlying risk, both are suitable for this purpose. The substantial efforts we have recently been making to extend the reach of such products are described in detail on pages 114–116, as well as corresponding commitments we have recently made.
Offshore wind energy for the UK In 2014, we were involved in a number of offshore wind transactions. One of them is the Dudgeon Offshore Wind Park (www.dudgeonoffshorewind. co.uk), which will be constructed over the next three years on a site 32 km off the UK’s Norfolk coast. As a lead underwriter, Swiss Re Corporate Solutions provides an “all risk” cover for the whole construction period as well as a “maintenance cover” for the first 24 months of the windfarm’s operation. Norwegian company Statoil is one of the shareholders of the limited company that develops the project, and will be the operator for both the construction and operational phases.
A reliable international policy framework facilitates the development of effective responses to climate change because it creates planning security and encourages investment. We support these efforts, eg through regular participation in the United Nations’ COP conferences. Furthermore, our Group CEO is a member of the Global Commission on the Economy and Climate; through its flagship project “The New Climate Economy” (newclimateeconomy.net), the Commission seeks to help governments, businesses and society make betterinformed decisions on how to achieve economic prosperity and development while also addressing climate change. In 2014, we contributed to the “Better Growth, Better Climate” report, which points out the climate-friendly investments required in the next 15 years to keep the world economy on a sustainable development path.
helped launch the RE:100 initiative as a founding member, together with a number of like-minded companies. The group will approach policy-makers and regulators at the national and subnational level to make renewable energy more available, eg in countries such as China, India, Brazil and South Africa.
Becoming more energy efficient in our own operations has been the second key measure of our Greenhouse Neutral Programme. Through many optimisation measures and by concentrating back office tasks in fewer and more energyefficient buildings, we managed to reduce our energy intensity by 46.5% between 2003 and 2013, and by 7.6% in 2014. These measures have led to substantial cost savings. We will explore further potential to reduce our energy intensity in the coming years.
Total emissions per employee (FTE, fulltime equivalent) increased by 1.2% during 2014, mainly driven by a rise in business travel. Although we managed to achieve a further reduction in internal energy consumption (power and heating), this was not enough to outweigh the additional emissions caused by business travel (detailed data for all eight emission sources will be disclosed in the 2014 Corporate Responsibility Report).
Switching to renewable energy is one of two main measures we have taken to reach our emissions reduction goals. However, in countries where we want to grow, reliable supplies of renewable energy are usually not available. This is one of the reasons why we have
Total CO2 emissions per employee kg/FTE1 6 6452 6 723 1.2%
Working with different clients and partners Offering effective re/insurance protection for such risks requires cooperation with a wider range of partners, ranging from governments, supranational organisations, private companies and NGOs to “aggregators” such as financial institutions or service providers. We actively seek to build such client and partner relationships, depending on the specific risk to be addressed. To offer tailor-made solutions and expertise to public sector clients, for example, we established our Global Partnerships function several years ago.
Moving into new markets It stands to reason that many underinsured risks are located in countries where insurance markets are less well developed. This means that a special effort is required to gain a foothold in these markets and to develop a good understanding of local needs, conditions and challenges. Selecting and working with the right partner organisations can greatly help this. To intensify our efforts in Africa, for example, we have dedicated market development teams in both Reinsurance and Corporate Solutions.
With new challenges and new needs for risk protection emerging around the world, we have made considerable efforts in recent years to widen the reach of our re/insurance solutions. An important part of this has been to look beyond our established client base and traditional business model. We believe there is significant unmet demand for effective, commercially viable re/insurance protection, but offering suitable solutions requires innovative thinking on several levels (see below for details).
Highlights of 2014 In 2014, we completed a range of transactions that help expand re/insurance protection: Hydropower insurance in Uruguay We have assumed a portion of risk in a USD 450 million weather coverage deal between the government of Uruguay and the World Bank Treasury. Weather risk has become an increasing burden to the government, as lower-than-usual rainfall affects hydropower generation and makes it necessary to buy costly electricity produced from fossil fuels as a substitute. Using rainfall data and oil prices for settlement, this landmark transaction provides the government with compensation for the combined risk of drought conditions and an increase in the price of energy.
Rainfall protection in the Caribbean Our innovative risk transfer instruments protect a number of Caribbean countries from the impact of tropical cyclones and earthquakes, through the Caribbean Catastrophe Risk Insurance Facility (CCRIF). We enhanced that protection for eight countries in August 2014, extending insurance cover to extreme rainfall. We developed this innovative product together with CCRIF at the request of several Caribbean governments. It estimates the impact of heavy rain using satellite data so that payouts can be made quickly without time-consuming damage and loss assessments.
The governments protected by the new policy — Anguilla, Barbados, Dominica, Grenada, Haiti, Saint Lucia, St. Kitts & Nevis and St. Vincent & the Grenadines — did not have to wait long for the first payouts. The first payment was made to Anguilla on 27 October 2014 after flooding caused by Hurricane Gonzalo just two weeks earlier. Some of the funds will be used to make the island more resistant to future flooding. The largest payment in 2014 was made to
Barbados, which received USD 1.3 million in December, less than three weeks after the heavy rains on 21 and 22 November. The four payments on the new product totalled USD 3.4 million in 2014.
Improving resilience to natural disasters in China We are also playing an active role in developing natural catastrophe insurance markets in China. At present, insurance protection against natural catastrophes is very low in China: it is estimated that payouts usually cover less than 1% of economic losses, so there is an urgent need to improve resilience to disasters such as earthquakes and windstorms.
African Risk Capacity As a provider of capacity and expertise, we supported the launch of the African Risk Capacity (ARC). Set up by the African Union and drawing support from the public and private sectors, ARC is the continent’s first parametric natural disaster insurance pool. Initially, it will offer drought insurance to five governments — Kenya, Mauritania, Mozambique, Niger and Senegal.
Drought is a key risk across Sub-Saharan Africa, threatening the very livelihoods of millions of citizens. When there is too little rainfall in the countries protected by the scheme, ARC will estimate drought-related adverse impacts by using satellite weather surveillance technology, triggering automatic payouts to the insured governments.
ARC is only the third sovereign risk transfer pool, after the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and the Pacific Catastrophe Risk Insurance Pilot. Swiss Re has played an instrumental role in all of them.
First weather index insurance programme in Nigeria Another of our key achievements in 2014 was to help establish the first weather index insurance programme in Nigeria, Africa’s most populous country and now its largest economy. Developed in partnership with impact investment firm Doreo Partners (www.doreopartners.com) and its agricultural franchise Babban Gona (www.babbangona.com), the programme protects smallholder farmers against the risk of adverse weather patterns. The weather index solution underlying it uses satellite data to determine whether there is a lack of rainfall and then pays out automatically.
Our Sustainability Risk Framework is an advanced risk management instrument specifically designed to identify and address “sustainability risks” and prevent the reputational damage they may cause. It applies to all of our business transactions, re/insurance as well as investments, to the extent that we can influence their various aspects.
process — a due diligence tool for assessing individual business transactions; ̤ Company exclusions; ̤ Country exclusions beyond mere compliance with international trade controls.
The Sensitive Business Risks process Each of the eight policies of our Sustainability Risk Framework contains criteria and qualitative standards which define precisely when our underwriters and client managers need to refer a transaction to the SBR process. In such a case our sustainability and other experts carry out a due diligence assessment: they carefully analyse the economic benefits and environmental/social impacts of the transaction at hand and decide whether it is acceptable on ethical grounds.
This decision takes the form of a binding recommendation either to go ahead with the transaction, to go ahead with certain conditions attached or to abstain from it. If there is disagreement about the recommendation, the case can be escalated to the next management level, ultimately to the Group Chief Risk Officer and the Group Executive Committee.
In 2014, the number of transactions referred to the SBR process rose to 454. We issued negative recommendations in 43 cases and positive recommendations with conditions in 60 cases.
The strong increase in transactions referred to the SBR process reflected our continued expansion in high growth markets, where legislation tends to be less stringent and the chance of facing sustainability risks thus larger.
Company exclusions The policies of our Sustainability Risk Framework specify certain criteria that may lead to the exclusion of a company from both our re/insurance transactions and our investments, to the extent that such an exclusion is permissible (eg by virtue of mandatory law or internal policies) and possible (eg if existing documentation relating to such re/ insurance transactions and investments provide for it). These criteria include: involvement in prohibited war material; verifiable complicity in systemic, repeated and severe human rights violations; infliction of repeated, severe and unmitigated damage to the environment; and proliferation of nuclear weapons.
Total number of business transactions referred to the Sensitive Business Risk process in 2014
The commitment and expertise of our employees is the foundation of our continued success in a rapidly changing world. Our goal is to be seen as an employment leader that can attract talented people from a broad range of disciplines and backgrounds. Fostering a culture of inclusion is the key to enabling us to leverage, and grow, the diversity of our workforce.
To foster diversity and inclusion across the whole organisation, we have set up a comprehensive strategic framework. Backed by the Group CEO and the Group Executive Committee, our Diversity & Inclusion (D&I) agenda is driven forward by a network of 35 D&I Champions from the various business units, multiple geographically-based D&I Councils and 25 inclusive employee networks worldwide.
Our Global Inclusion Framework Our “Global Inclusion Framework” rests on three pillars: ̤ The first pillar focuses on “Inclusive
All management positions1 30.7 31.1 31.5 1 “Executive/senior management positions” is comprised of the management levels of Director/Senior Vice President upwards. “All management positions” refers to Vice President and above.
Regarding our efforts to promote gender balance, the Women Leading Swiss Re Programme is a key initiative. It is designed to strengthen the pipeline of talented women for leadership positions and, in doing so, also tackles gender stereotypes.
Report from the Compensation Committee 122 Compensation context and highlights in 2014 123 Compensation framework 125 Compensation governance 132 Compensation decisions in 2014 136 Report of the statutory auditor 144
Dear shareholders I am pleased to share with you the Report from the Compensation Committee for 2014.
Swiss Re’s compensation framework is designed to promote long-term sustainable performance for the Group and its shareholders through a mix of fixed and variable elements. It comprises core components such as base salary, pensions and other benefits, as well as a combination of short- and long-term incentives as outlined in this section of the 2014 Financial Report.
In 2014, Swiss Re’s compensation governance was further aligned with the new requirements under the Ordinance Against Excessive Compensation at Public Corporations (the Ordinance), but no substantive changes were made to the compensation framework. We are confident that Swiss Re's compensation framework supports our business strategy, providing for alignment with shareholders’ interests as well as being competitive and compliant.
On 1 January 2014, the Ordinance came into force, with important implications for compensation governance. Swiss Re continued to align its compensation governance and regulations as well as processes during 2014 with the requirements of the Ordinance, with the main changes including:
̤ Yearly individual election of the members of the Compensation Committee by the Annual General Meeting (AGM) of shareholders.
This is the first Compensation Report prepared under the new requirements of the Ordinance. These new requirements mandate a specific Audit Report which is at the end of this Compensation Report on page 144.
The Compensation Committee is satisfied that this Compensation Report complies with the requirements of the Ordinance and provides a comprehensive view of the compensation framework at Swiss Re and the 2014 compensation decisions.
We remain committed to providing compensation policies and programmes that support our business strategy and align the interests of our employees with those of our shareholders.
All employees variable/performance-related variable/performance-related variabel/leistungsabhänging variabel/leistungsabhänging variabel/leistungsabhänging 1 Including Group CEO
Pay for performance The Compensation Committee ensures that executive management compensation is linked to the business performance of Swiss Re by delivering a substantial portion of compensation in the form of variable and performance-related incentives.
1 Dividend payments are made in April of the following year. Special dividends per share for 2012 and 2013 were CHF 4.00 and CHF 4.15, respectively. For 2014 a dividend of CHF 4.25 and a special dividend of CHF 3.00 is proposed.
US GAAP net income attributable to shareholders 4 201 4 444 3 500 of which paid out as dividend 1 2 760 47% 3 129 59% 2 637 57% of which added to retained earnings within 1 FY 2012 and 2013 include special dividends of USD 1.5bn and USD 1.6bn. FY 2014 includes a special dividend of approximatively USD 1.1bn and is estimated based on average year-to-date CHF/USD FX rates as of February 2015. The dividend is subject to AGM approval and the amount depends on the final number of dividend eligible shares and FX rates upon dividend pay out.
Activities in 2014 Swiss Re continued to interact with key shareholders to discuss the compensation framework.
Compensation changes ̤ Continued embedding of twodimensional performance management system as well as launch of Leadership and Personal Imperatives which reflect expectations on effective behaviour.
̤ Approval of the new Group Reward Strategy aligned with Swiss Re’s new Human Capital Strategy, covering compensation, benefits, non-cash recognition and international mobility topics.
Legal and regulatory oversight Implementation of the provisions of the Ordinance continued, focusing on: ̤ Inclusion of the overarching
̤ Alignment of the Compensation Report with the new requirements as of the reporting year 2014.
̤ Introduction of the binding shareholders’ votes on compensation at the AGM in 2015.
̤ Adjustments to employment contracts of the Group EC members in line with the requirements of the Ordinance.
̤ At the same time, the aggregate compensation of the members of the Board of Directors and the Group EC will be subject to binding votes.
Outlook 2015 The Compensation Committee will continue focusing on legal and regulatory oversight, in addition to monitoring and further improving the overall compensation framework and plans.
The interaction with key shareholders will also be maintained in 2015.
Compensation Policy Building on the overarching compensation principles included in Swiss Re‘s Articles of Association, the compensation framework is captured within the Swiss Re Group Compensation Policy. The Compensation Policy governs the compensation structure and processes across all functions and locations at Swiss Re and is reviewed regularly.
The Compensation Policy also contains guidance for the execution of individual compensation actions. The Compensation Committee, together with the Group Chief Executive Officer (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 the Compensation Committee, as applicable, approves all compensation that exceed the pre-set limits. The Group CEO is not involved in his own pay decisions.
The Human Resources function conducts a regular self-assessment on Swiss Re’s compliance with the Compensation Policy. The Compensation Committee reviews this self-assessment and identifies potential areas of improvement. The Compensation Committee receives reports on compensation decisions as appropriate, including a comprehensive review of actions resulting from the Annual Compensation Review Cycle.
Swiss Re is required to assess the degree to which the Compensation Policy complies with the requirements of FINMA. As part of this process, the Board’s Finance and Risk Committee is required to review risks related to the Compensation Policy. In order to facilitate the compliance certification process, a comprehensive risk analysis of the Compensation Policy is conducted on an annual basis.
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.
Swiss Re has a range of incentive programmes that reflect the long-term nature of the business: both the VAI as the deferred part of the Annual Performance Incentive (API) as well as the LPP aim to reward sustained performance rather than short-term results. This supports closer alignment of the interests of shareholders and employees.
Employees can invest some or all of their cash API in shares under the Incentive Share Plan (ISP).
̤ market value of the role in the location in which Swiss Re competes for talent; and
Overview of the compensation components Swiss Re aims for total compensation that is competitive in the market.
Base salary Base salary is the fixed compensation paid to employees for carrying out their role and is established based on the following factors: ̤ scope and responsibilities of the role,
Base salary Cash API VAI (deferred API) LPP GSPP ISP Benefits
Eligibility All employees All employees Employees with an API at or above
Additionally, clawback provisions apply in a range of events as defined in the plan rules, enabling Swiss Re to seek repayment of settled awards. Examples of events are the Participant’s conduct or acts which can be considered malfeasance, fraud or misconduct.
The payout factor of the VAI is calculated based on the three-year average EVM previous years’ business profit margin for all prior underwriting years. EVM is Swiss Re’s integrated economic valuation and reporting framework for planning, pricing, reserving, and steering the business (please refer to the EVM section on pages 55–56 of this Financial Report). The EVM previous years’ profit margin is the ratio of EVM previous years’ business profit to EVM capital allocated to previous years’ business in the current year.
A higher EVM previous years’ profit margin (for all prior underwriting years) results in a higher payout factor. Conversely, a lower EVM previous years’ profit margin results in a lower payout factor. The payout factor is a linear function that ranges from 50% to 150%.
Review during 2014 During the course of 2014, a review of the VAI was conducted with a view to ensuring that it continues to meet the requirements of all key stakeholder groups while supporting the overall balance of the compensation framework.
As a result of the review, efforts were made to further simplify the performance measurement calculation to increase transparency. This is achieved by using fewer performance factors (at the business unit and Group level only) as well as by using, where possible, published EVM information.
Group CEO 50% of API Group EC members 45% of API Group Managing Directors 40% of API All other employees 50% of the amount at or above USD 100 000
Leadership Performance Plan Purpose The purpose of the LPP is to provide an incentive for Swiss Re's senior management to create successful and sustainable company performance over the long-term. The LPP is a forwardlooking instrument awarded to participants as part of total target compensation with an objective to incentivise decision-making that is in the shareholders' interest.
earnings, capital efficiency and Swiss Re’s position against peers, all of which are critical to sustained shareholder value creation; ̤ focus participants on long-term goals which are forward-looking; ̤ attract and retain individuals of exceptional skill; and
Plan duration For Group EC members (and Group Managing Directors), the duration of the LPP is five years comprising a three-year vesting and performance measurement period and an additional two-year holding requirement. For all other participants, the vesting and performance measurement period is three years with no additional holding requirement.
Settlement At the end of the three-year measurement period, both RSUs and PSUs will typically be settled in Swiss Re Ltd shares. For Group EC members, an additional two-year holding is required. For the full three-year performance measurement period, forfeiture conditions apply.
Additionally, clawback provisions apply in a range of events (same as outlined under the VAI section) as defined in the plan rules, enabling Swiss Re to seek repayment of settled awards.
Benefits Swiss Re aims to provide a competitive package of employee benefits. Benefits are designed and implemented under a global framework and principles while appropriately reflecting differing local employment market conditions.
̤ be competitive in the markets where Swiss Re competes for talent as such perquisites are generally provided where they are market driven; and
Includes assessment of the financial performance versus targets as well as a multi-year view and review of the quality of earnings that then impacts the overall assessment. KPIs
include US GAAP income, EVM profit, economic net worth and return on equity
Funding of the Annual Performance Incentive and Leadership Performance Plan pools The Compensation Committee focuses primarily on financial results and qualitative criteria in determining global variable compensation pools.
Incentive Share Plan Employees also have the opportunity to receive some or all of their immediate cash API in the form of shares subject to a one-year blocking period under the ISP, encouraging alignment with shareholder interests. After one year, the restriction period ceases.
AGM 2015, the aggregate compensation of the Group EC members is subject to AGM approval as outlined in the Articles of Association.
̤ LPP plan duration: for Group EC members, the LPP plan duration is five years. Plan duration comprises a three-year vesting and performance measurement period and an additional two-year holding requirement.
In 2014, for the members of the Group EC including the Group CEO, the total of the aggregate TAPIs was CHF 15.1 million (capped at both 2x TAPI or 3x annual base salary) and the aggregate LPP 2014 award was CHF 11.4 million. For the Group CEO the TAPI was CHF 2.5 million and the LPP award was CHF 2.0 million.
Employment conditions The Group CEO and the other Group EC members have employment contracts with notice periods of 12 months and without severance payment agreements. Information on “change of control” clauses is covered in the Corporate Governance section on page 103 of this Financial Report. Executives are covered by the Group’s standard definedcontribution pension plans.
Stock Ownership Guidelines With effect from 1 January 2010, Swiss Re established stock ownership guidelines which articulate the levels of stock ownership expected of the members of the Group EC. The guidelines are designed to increase the alignment of individual members of senior management with shareholders and demonstrate that Swiss Re executives bear the same risks as other shareholders.
Discontinued compensation plans Long-Term Incentive Until 2012, a different vintage of the LTI plan was awarded to employees. The last outstanding award vested in March 2014.
Roles and time commitment The fees for the members of the Board of Directors reflect differing levels of responsibility and time commitment. The individual levels of pay therefore vary. Certain committees, such as the Audit Committee as well as the Finance and Risk Committee, meet more frequently with longer meetings and require more preparation time than other committees and hence have higher workloads. Chairpersons of these committees devote even more time to their tasks.
The degree of in-depth oversight requires from each Board member a high level of professional experience and expertise in their respective field. Furthermore, the demands on the Chairs
The determination for whether a Group EC member has met the guidelines will include all vested shares that are owned directly or indirectly by the relevant members and related parties.
Compensation framework for the Board of Directors The objective in compensating members of the Board of Directors is to attract and retain experienced individuals who are motivated to perform a critical role in the strategic oversight of the company and to contribute their individual business experience and expertise. The structure of compensation for members of the Board of Directors must, however, take account of the way their contribution to the success of Swiss Re differs from that of the Group EC.
The fees for the Board of Directors are determined in advance for the term of office they are elected for. They receive no variable or performance-based compensation. The fee level for each Board member is reviewed annually to ensure that it remains appropriate.
Compensation structure Group fees for the members of the Board of Directors are delivered 60% in cash, and a mandatory 40% in Swiss Re Ltd shares, with a four-year blocking period.
of the respective committees continue to increase. Swiss Re is confident that the skill set of its Board of Directors is well balanced, which in turn ensures an effective level of supervision.
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 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 receive their fees 100% in cash.
̤ Is supported by the Compensation Committee in establishing and reviewing the Company’s compensation strategy and guidelines and performance criteria as well as in preparing the proposals to the AGM regarding the compensation of the members of the Board of Directors and the Group EC
̤ Further details can be found in the Corporate Governance section on pages 82–95
̤ Submits proposals and recommendations to the Board of Directors on compensation-related issues
̤ Reviews compensation principles, policies and plans annually to ensure that they remain in line with Swiss Re’s objectives and strategy, shareholders’ interests as well as legal and regulatory requirements
̤ Other members of senior management may attend as deemed appropriate by the Compensation Committee
̤ No individual may attend any part of a meeting where his or her own compensation is discussed
Secretary ̤ The Head Reward serves as the Secretary to the Compensation Committee and attends its meetings (apart from the Executive Sessions)
̤ Mercer – provides information about remuneration trends and advice on executive compensation issues
These advisors are retained by the Compensation Committee. They provide the Compensation Committee with an external perspective and from time to time provide other services to Swiss Re.
Authority for decisions related to compensation are governed by the Articles of Association, the Corporate Bylaws and the Compensation Committee Charter (Charter). The main responsibilities of the Compensation Committee are summarised in the table on the right.
for both the members of the Board of Directors and the Group EC covering short-term and long-term elements, performance related pay, registered shares, financial instruments or units, compensation in kind or other types of benefits (Art. 24); and
Individual compensation of the members of the Group EC (excl. Group CEO)
Compensation Committee4,5 1 Board members concerned abstain from voting 2 Other than the Chairman compensation 3 As from AGM 2015 4 Within the aggregate amounts of Group EC compensation approved at the AGM 5 Board of Directors informed
Compensation Committee’s time allocation to key topics in 2012 24% Variable compensation for the Group 8% Review of compensation framework 18% Compliance and Regulatory 9% Compensation and performance of
Directors on decisions, topics discussed and items for approval after each of these meetings. A summary of the topics dealt with by the Compensation Committee during the year is shown on page 134.
Variable compensation for the Group At Swiss Re, the compensation cycle begins in December and runs through to March/April of the following year. The Compensation Committee oversees each stage of the process, starting with deciding on the variable compensation pool for the prior performance year, reviewing these decisions, and setting targets for the upcoming year.
Outlined below is an overview of the topics discussed during 2014: Items relating to past performance cycle MEETING ̤ Performance assessment process and proposal of the Group API pool for the prior business year January and February
̤ Setting of the performance targets for variable and long-term compensation for the upcoming year
̤ Approval of individual compensation proposals for the Group EC February
̤ Review and confirm reference companies for the Group EC compensation benchmarking April
̤ Fees of the Board of Directors for the following compensation period February and April
̤ Review of the Group Compensation Policy June, September and December
Compliance and regulatory The Compensation Committee spends time reviewing materials relating to regulatory or statutory reporting. In addition, the structure of the Compensation Committee and its advisors is reviewed on an ongoing basis.
̤ Review and proposal of the Compensation Report January, February, June and December
̤ Review of the role and mandate of external advisors September and December
Control assessment of Group and business functions The Compensation Committee continues to focus on the link between compensation and risk awareness. The Control Functions provide assessments on the business’ risk- and control-related behaviour and performance. This information is collected from all Control Functions and combined into a Group report. This report includes information on each business function.
Swiss Re has identified 141 positions that qualify as Key Risk Takers. This group consists of the members of the Group EC and other roles with significant risk authority.
The Control Functions together with senior management review and update the list of Key Risk Takers on an annual basis.
Influence of the control assessment on compensation The control assessment provides additional input to determining the Group API pool. It also influences the API pool that is allocated to each business function.
Since Key Risk Takers are responsible for managing substantial risk, their performance in this task needs to be assessed. The Control Functions assess the risk- and control-related behaviour of each Key Risk Taker and deliver a report to the business and Human Resources on an annual basis. This assessment serves as an additional factor when considering the individual performance and compensation review.
Independence of the Control Functions In order to ensure the continued independence of Control Functions, their compensation approval processes differ in that the key annual compensation decisions for these functions are approved at the Board level.
The VAI 2010 performance factor of 105.9%, which applies to all Group functions, was mainly driven by positive investment performance in 2012 and 2013 and favourable prior year development.
Long-Term Incentive For the vesting in March 2014 of the last Long-Term Incentive (LTI) award (the LTI 2011), an indicative share price of CHF 82.20 was used for the settlement calculation for the Financial Report 2013 (page 120). This indicative share price was set as at 28 February 2014. Final settlement of the LTI 2011 was calculated at vesting on 31 March 2014 at a share price of CHF 81.95, corresponding to the closing share price at the actual vesting date. The difference of CHF 0.25 in the share price only impacted the ‘Weighted average value per unit at vesting’. This was disclosed in 2013 as CHF 49.16 but with the final share price of CHF 81.95 should have been CHF 49.09 on settlement. The other amounts disclosed in 2013 in respect of the LTI 2011 remain unchanged. The LTI plan has been discontinued and replaced by the LPP in 2012.
value reflects the fair value of LPP granted in April 2014. 2 Accrual related to prior performance year.
Other payments Severance payments2 0 0 1 0 1 Aligning with new guidance as outlined on page 138, disclosure reflects all awards for a reporting year, ie the 2013 value reflects the fair value of LPP granted in April 2013 and the 2014 value reflects the fair value of LPP granted in April 2014.
The section below is in line with Swiss law and specifically with articles 14 to 16 of the Ordinance which requires disclosure of compensation paid to members of the Board of Directors and the Group EC. This section replaces previous disclosure under Article 663bbis of the Swiss Code of Obligations. Compensation to members of the Board of Directors and the highest paid member of the Group EC is shown individually. This section (pages 138 to 143) is audited as required by the Ordinance.
In order to align with new guidance issued in the context of the Ordinance, disclosure of the LPP now reflects all awards for a reporting year. Accordingly, the 2013 value now reflects the fair value of LPP granted in April 2013 and the 2014 value reflects the fair value of LPP granted in April 2014. In the Compensation Report 2013, disclosure reflected awards within a compensation cycle: The 2012 column had reflected the fair value of LPP granted in April 2013 (the CHF 12.4 million now included for 2013 below), and the 2013 column had reflected the fair value of LPP granted in April 2014 (the CHF 11.4 million now included in 2014).
Compensation decisions for the Group EC The variable compensation awarded to all members of the Group EC (including the Group CEO) totalled CHF 28.1 million for 2014, compared to CHF 31.0 million in 2013. The following table covers payments to 12 members for 2013 who were all employed for the full year. The 2014 payments cover 13 members, of whom 11 were employed for the full year.
the period when the member was no longer in the role (e.g. base salary when on garden leave). 6 Amounts are gross and include social security contributions of the employee. Additionally and not included are
Compensation decisions for the Group CEO Michel M. Liès, Group CEO since February 2012
For US GAAP and statutory reporting purposes, VAI and long-term incentive awards are accrued over the period during which they are earned. For the purpose of the disclosure required in this Compensation Report, the value of awards granted is included as compensation in the year of performance for the years 2013 and 2014 respectively.
Each member of the Group EC (including the Group CEO) participates in a definedcontribution pension scheme. The funding of pension benefits shown in the table above and on page 138 reflects the actual employer contributions.
Base salary and allowances 1 639 1 651 Funding of pension benefits 177 177
2013 and the 2014 value reflects the fair value of LPP granted in April 2014. 3 Amounts are gross and include social security contributions of the employee. Additionally and not included are
Shares held by members of the Group EC The following table reflects total current Swiss Re share ownership by members of the Group EC as of 31 December: Unvested restricted share units held by members of the Group EC Prior to the introduction of the LPP, Swiss Re did not grant restricted share units on a regular basis, except for events such as exceptional business cycles, significant acquisitions or the replacement of forfeited awards for new executive hires.
Weighted average strike price in CHF 83.92 74.34 Michel Liès, Group CEO 42 000 15 000 Guido Fürer, Group Chief Investment Officer 7 500 George Quinn, former Group Chief Financial Officer1 20 000 n/a Matthias Weber, Group Chief Underwriting Officer 7 000 3 500 1 Member of the Group EC until 30 April 2014.
Leadership Performance Plan units held by members of the Group EC The following table reflects total unvested LPP units held by members of the Group EC as of 31 December: Loans to members of the Group EC As per Art. 27 of the Articles of Association, credits and loans to members of the Group EC may be granted at employee conditions applicable for the Swiss Re Group, with a cap on the total amount of such credits and loans outstanding per member.
Swiss-based variable-rate mortgages have no agreed maturity dates. The basic preferential interest rates equal the corresponding interest rates applied by the Zurich Cantonal Bank minus one percentage point. Where fixed or floating interest rates are preferential, the value of this benefit has been included in the line item “base salary and allowances” on pages 138 and 139.
Compensation for the members of the Board of Directors The individual compensation for the members of the Board of Directors for 2013 and 2014 was: 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: CHF thousands Total 2013
Raymond K.F. Ch’ien, Member 353 209 140 349 John R. Coomber, former Member3 409 70 43 113
Rajna Gibson Brandon, Member 328 202 130 332 C. Robert Henrikson, Chairman of the Compensa-
Malcolm D. Knight, former Member3 353 57 38 95 Hans Ulrich Maerki, Member 328 213 137 350
9 The fees are agreed for a term of office, ie from AGM 2013 to AGM 2014 and from AGM 2014 to AGM 2015 respectively. The fees are shown for the terms 2013/2014 and 2014/2015 for comparison purposes.
Rajna Gibson Brandon, Member 26 047 27 787 C. Robert Henrikson, Chairman of the Compensation Committee 4 339 6 808 Malcolm D. Knight, former Member1 7 665 n/a Hans Ulrich Maerki, Member 25 594 27 431
Vested options held by members of the Board of Directors Swiss Re does not grant employee stock options to members of the Board of Directors. The stock options shown in the table below were awarded at a time when the recipients were still members of Swiss Re’s executive management. The vested options held by members of the Board of Directors as of 31 December were: The underlying exercise prices for the outstanding option series have been adjusted for special dividend payouts. The vested options held by members of the Board of Directors will expire in 2015.
Compensation for former members of governing bodies During 2014, payments in the total amount of CHF 1.0m were made to eight former members of the Group EC. This amount is made up of company contributions to social security paid by Swiss Re in line with applicable laws, benefits in the context of the outstanding mortgages and loans not at market rates above, risk benefits as well as company commitments for tax related services.
We have audited pages 138 to 143 of the accompanying Compensation Report included in this Financial Report 2014 dated 17 March 2015 of Swiss Re Ltd for the year ended 31 December 2014.
Board of Directors’ responsibility The Board of Directors is responsible for the preparation and overall fair presentation of the Compensation Report in accordance with Swiss law and the Ordinance against Excessive Compensation at Public Corporations (the Ordinance). The Board of Directors is also responsible for designing the compensation system and defining individual compensation packages.
Auditor’s responsibility Our responsibility is to express an opinion on the accompanying Compensation Report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Compensation Report complies with Swiss law and articles 14 to 16 of the Ordinance.
An audit involves performing procedures to obtain audit evidence on the disclosures made in the Compensation Report with regard to compensation, loans and credits in accordance with articles 14 to 16 of the Ordinance. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatements in the Compensation Report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of compensation, as well as assessing the overall presentation of the Compensation Report.
Fee income from policyholders 3 542 506 Net investment income – non-participating 8 3 947 4 103 Net realised investment gains/losses – non-participating business (total impairments for the years ended 31 December were 41 in 2013 and 40 in 2014, of which 41 and 40, respectively, were recognised in earnings) 8 766 567 Net investment result – unit-linked and with-profit 8 3 347 1 381 Other revenues 24 34
Expenses Claims and claim adjustment expenses 3 –9 655 –10 577 Life and health benefits 3 –9 581 –10 611 Return credited to policyholders –3 678 –1 541
Other expenses –3 508 –3 155 Interest expenses –760 –721 Total expenses –32 077 –33 120
Total comprehensive income before attribution of non-controlling interests 1 881 6 299
Interest on contingent capital instruments –67 –69 Comprehensive income attributable to non-controlling interests –2 Total comprehensive income attributable to common shareholders 1 812 6 230 2013 USD millions
Balance as of 1 January 4 407 –28 –3 609 –953 –183 Change during the period –3 057 34 –327 479 –2 871 Amounts reclassified out of accumulated other comprehensive income –834 59 –775
Balance as of period end 1 622 –6 –3 897 –534 –2 815 2014 USD millions
Fixed income securities: Available-for-sale, at fair value (including 11 720 in 2013 and 12 677 in 2014 subject to securities lending and repurchase agreements) (amortised cost: 2013: 76 349; 2014: 77 867) 77 761 84 450 Trading (including 1 in 2013 and 645 in 2014 subject to securities lending and repurchase agreements) 1 535 2 219
Investments for unit-linked and with-profit business (including fixed income securities trading: 4 585 in 2013 and 3 680 in 2014, equity securities trading: 21 180 in 2013 and 20 045 in 2014) 27 215 25 325
Cash and cash equivalents (including 4 in 2013 and 65 in 2014 subject to securities lending) 8 072 7 471
Premiums and other receivables 12 276 12 265 Reinsurance recoverable on unpaid claims and policy benefits 8 327 6 950 Funds held by ceding companies 12 400 11 222
Income taxes payable 660 909 Deferred and other non-current tax liabilities 8 242 9 445
Additional paid-in capital 4 963 1 806 Treasury shares, net of tax –1 099 –1 185 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax 1 622 5 418 Other-than-temporary impairment, net of tax –6 –3 Cumulative translation adjustments, net of tax –3 897 –4 675 Accumulated adjustment for pension and post-retirement benefits, net of tax –534 –825
Common shares Balance as of 1 January 35 35 Issue of common shares Balance as of period end 35 35
Share-based compensation 14 –34 Realised gains/losses on treasury shares –12 6 Dividends on common shares1 –2 760 –3 129 Balance as of period end 4 963 1 806
Treasury shares, net of tax Balance as of 1 January –995 –1 099 Purchase of treasury shares –290 –223 Issuance of treasury shares, including share-based compensation to employees 186 137 Balance as of period end –1 099 –1 185
Changes during the period –2 785 3 796 Balance as of period end 1 622 5 418
Other-than-temporary impairment, net of tax Balance as of 1 January –28 –6 Changes during the period 22 3 Balance as of period end –6 –3
Balance as of 1 January 24 25 Changes during the period –1 86 Income attributable to non-controlling interests 2 Balance as of period end 25 111 1 Dividends to shareholders were paid in the form of a withholding tax-exempt repayment of legal reserves from capital contributions.
Tax paid was USD 447 million and USD 509 million for the years ended 31 December 2013 and 2014, respectively.
Cash flows from investing activities Fixed income securities: Net purchase/sale/maturities of short-term investments –2 017 5 900
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 offices around the globe, the Group serves a client base made up of insurance companies, mid- to large-sized corporations and public sector clients.
The Group enters into security lending arrangements under which it loans certain securities in exchange for collateral and receives securities lending fees. The Group’s policy is to require collateral, consisting of cash or securities, equal to at least 102% of the carrying value of the securities loaned. In certain arrangements, the Group may accept collateral of less than 102% if the structure of the overall transaction offers an equivalent level of security. Cash received as collateral is recognised along with an obligation to return the cash. Securities received as collateral that can be sold or repledged are also recognised along with an obligation to return those securities. Security lending fees are recognised over the term of the related loans.
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 a free-standing contract.
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 legal form of the 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.
The underlying assets and liabilities acquired are subsequently accounted for according to the relevant GAAP guidance. This includes specific requirements applicable to subsequent accounting for assets and liabilities recognised as part of the acquisition method of accounting, including present value of future profits, goodwill and other intangible assets.
Real estate for own use as well as other classes of property, plant and equipment are carried at depreciated cost. Depreciation on buildings is recognised on a straight-line basis over the estimated useful life. Land is recognised at cost and not depreciated.
Liabilities for life and health 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.
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
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.
Funds held assets and liabilities On the asset side, funds held by ceding companies’ consist mainly of amounts retained by the ceding company for business written on a funds withheld basis. In addition, amounts arising from the application of the deposit method of accounting to ceded retrocession or reinsurance contracts are included.
Subsequent events Subsequent events for the current reporting period have been evaluated up to 17 March 2015. This is the date on which the financial statements are available to be issued.
In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”, an update to Topic 830, “Foreign Currency Matters”. ASU 2013-05 precludes the release of the cumulative translation adjustment into net income for derecognition events that occur within a foreign entity, unless such events represent a complete or substantially complete liquidation of the foreign entity. Derecognition events related to investments in a foreign entity result in the release of the entire cumulative translation adjustment related to the derecognised foreign entity, even when a non-controlling financial interest is retained. The Group adopted ASU 2013-05 on 1 January 2014. The adoption did not have an effect on the Group’s financial statements.
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”, an update to Topic 740, “Income Taxes”. ASU 2013-11 requires an entity to present an unrecognised tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, subject to some exceptions. The Group adopted ASU 2013-11 on 1 January 2014 on a prospective basis. The financial statement presentation of unrecognised tax benefits was adjusted accordingly.
Property & Casualty Reinsurance and Life & Health Reinsurance Reinsurance consists of two segments, Property & Casualty and Life & Health. The Reinsurance Business Unit operates globally, both through brokers and directly with clients, and provides a large range of solutions for risk and capital management. Clients include insurance companies and mutual as well as public sector and governmental entities. In addition to traditional reinsurance solutions, Reinsurance offers insurance-linked securities and other insurance-related capital market products in both Property & Casualty and Life & Health.
Admin Re® Through Admin Re®, Swiss Re acquires closed blocks of in-force life and health insurance business, either through reinsurance or corporate acquisition, and typically assumes responsibility for administering the underlying policies. The administration of the business may be managed directly or, where appropriate, in partnership with a third party. Since 1998, Swiss Re has acquired more than 50 blocks of business spanning a range of product types. It currently operates in the UK, US and the Netherlands.
Fee income from policyholders 56 486 542 Net investment income – non-participating 1 098 1 442 98 1 180 150 –21 3 947 Net realised investment gains/losses – non-participating 184 269 150 201 –38 766 Net investment result – unit-linked and with-profit 249 3 098 3 347
Expenses Claims and claim adjustment expenses –7 884 –1 773 2 –9 655 Life and health benefits –8 075 –1 506 –9 581 Return credited to policyholders –286 –3 392 –3 678
Income attributable to non-controlling interests –1 –1 –2 Net income after attribution of non-controlling interests 3 247 468 279 423 94 0 4 511
Interest on contingent capital instruments –19 –48 –67 Net income attributable to common shareholders 3 228 420 279 423 94 0 4 444
Business segments – income statement For the year ended 31 December 2014 USD millions
Fee income from policyholders 53 453 506 Net investment income – non-participating 1 076 1 544 94 1 256 115 18 4 103 Net realised investment gains/losses – non-participating 699 –255 168 –114 69 567 Net investment result – unit-linked and with-profit 75 1 306 1 381
Business segments – balance sheet As of 31 December 2013 USD millions
Investments for unit-linked and with-profit business 988 26 227 27 215
Liabilities Unpaid claims and claim adjustment expenses 41 233 10 177 11 720 1 132 38 –6 346 57 954 Liabilities for life and health policy benefits 16 442 241 16 922 33 605
Financial statements I Notes to the Group financial statements b) Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2013 USD millions Property Casualty Specialty Total
Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2014 USD millions Property Casualty Specialty Total
Other expenses –669 –355 –151 –1 175 Total expenses before interest expenses –4 731 –6 699 –1 620 –13 050
Net investment income 1 076 Net realised investment gains/losses 699 Other revenues 69 Interest expenses –255 Income before income tax expenses 4 137
Net realised investment gains/losses – non-participating and excluding insurance-related derivatives 386 Interest expenses –544 Income before income tax expenses 503
Management expense ratio in % 8.3 6.3 7.6 1 Operating margin is calculated as operating result divided by total operating revenues. Total operating revenues are total revenues excluding unit-linked and with-profit revenues.
Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2014 USD millions Life Health Total
Expenses Life and health benefits –5 890 –3 304 –9 194 Return credited to policyholders –99 –99 Acquisition costs –1 808 –681 –2 489 Other expenses –628 –257 –885 Total expenses before interest expenses –8 425 –4 242 –12 667
Net realised investment gains/losses – non-participating and excluding insurance-related derivatives –369 Interest expenses –438 Income before income tax expenses –476
Financial statements I Notes to the Group financial statements 3 Insurance information
Premiums earned, thereof: Intra-group transactions (assumed and ceded) –228 254 228 –254 0
Retrocession to external parties –1 824 –1 392 –343 –39 –3 598
Fee income from policyholders, thereof: Intra-group transactions (assumed and ceded) 0
Gross fee income before retrocession to external parties 56 486 542
Retrocession to external parties –478 –1 249 –163 –42 –1 932
Acquisition costs For the year ended 31 December 2013 USD millions
Change in unpaid claims and claim adjustment expenses; life and health benefits, thereof: Intra-group transactions (assumed and ceded) 1 695 121 –1 698 –118 0
Retrocession to external parties –1 035 –46 –25 –26 –1 132 Net unpaid claims and claim adjustment expenses; life and health benefits 2 241 –407 –534 367 6 1 673
Claims and claim adjustment expenses; life and health benefits –7 884 –8 075 –1 773 –1 506 2 –19 236 2013 USD millions
Acquisition costs, thereof: Gross acquisition costs with external parties –3 429 –2 005 –432 –34 –5 900 Intra-group transactions (assumed and ceded) 49 –2 –49 2 0
Acquisition costs before impact of retrocession to external parties –3 380 –2 007 –481 –32 –5 900
Acquisition costs For the year ended 31 December 2014 USD millions
Claims paid, thereof: Gross claims paid to external parties –10 176 –9 120 –2 068 –2 153 –9 –23 526 Intra-group transactions (assumed and ceded) –427 –238 428 238 –1 0
Acquisition costs, thereof: Gross acquisition costs with external parties –3 514 –2 681 –462 –184 –6 841 Intra-group transactions (assumed and ceded) 25 –1 –25 1 0
Acquisition costs before impact of retrocession to external parties –3 489 –2 682 –487 –183 –6 841
Reinsurance recoverable on unpaid claims and policy benefits As of 31 December 2013 and 2014, the Group had a reinsurance recoverable of USD 8 327 million and USD 6 950 million, respectively. The concentration of credit risk is regularly monitored and evaluated. The reinsurance programme with Berkshire Hathaway and subsidiaries accounted for 62% of the Group’s reinsurance recoverable as of year-end 2013 and 60% as of yearend 2014.
Reinsurance receivables Reinsurance receivables as of 31 December were as follows: Policyholder dividends Policyholder dividends are recognised as an element of policyholder benefits. The relative percentage of participating insurance of the life and health policy benefits in 2013 and 2014 was 7% and 8%, respectively. The amount of policyholder dividend expense in 2013 and 2014 was USD 139 million and USD 113 million, respectively.
Receivables invoiced from ceded re/insurance business 446 341 Assets arising from the application of the deposit method of accounting and meeting the definition of financing receivables 1 273 779 Recognised allowance –101 –86
Gross premiums written, thereof: Intra-group transactions (ceded) –549 –328 –254 1 131 0
Retrocession to external parties –865 –1 383 –169 –39 –2 456 2014 USD millions
Gross premiums written before retrocession to external parties 16 347 12 434 3 941 554 33 276
Paid related to: Current year –2 103 –2 193 Prior year –9 265 –8 693
Prior-year development In 2014, claims development on prior years was driven by favourable experience in all lines of business. For property, releases on recent years more than offset increases for the earthquakes in New Zealand. Within casualty, favourable experience in liability across all regions more than offset increases for asbestos and environmental losses and increases elsewhere in the portfolio. Unfavourable experience in motor in France and UK were offset by good claims experience in other countries. In addition, releases in accident and health due to positive experience combined with some favourable commutations contributed to the overall improvement on casualty. Favourable development in engineering contributed to the overall reserve releases on specialty lines due to a reassessment of reserves relating to Spain and France combined with very good claims experience.
As of 31 December, the PVFP was as follows: Retroceded PVFP may arise on retrocession of reinsurance portfolios, including reinsurance undertaken as part of a securitisation. The associated potential retrocession recoveries are determined by the nature of the retrocession agreements and by the terms of the securitisation.
The percentage of PVFP which is expected to be amortised in each of the next five years is 7%, 7%, 7%, 7% and 6%.
Effect of foreign currency translation –19 –19 2 –1 –2 –39 Closing balance as of 31 December 2013 1 591 2 845 319 1 0 4 756 2014 USD millions
Effect of foreign currency translation –66 –136 –3 –205 Closing balance as of 31 December 2014 1 756 2 723 360 1 0 4 840
Aurora primarily consists of bonds and policyholder liabilities. The expected loss on the disposition of the net assets has been reflected in “Net realised investment gains/losses – non-participating” in the 2014 income statement of the Admin Re® segment. This loss will be adjusted principally, for the definitive purchase price to be determined as of the closing of the transaction.
The major classes of assets and liabilities held for sale as of 31 December 2014 are listed below.
Equity securities available-for-sale: Gross realised gains 349 686 Gross realised losses –46 –84
Other-than-temporary impairments –41 –40 Net realised investment gains/losses on trading securities –4 46 Change in net unrealised investment gains/losses on trading securities –38 120 Other investments: Net realised/unrealised gains/losses 301 –340 Net realised/unrealised gains/losses on insurance-related activities –306 –331 Loss related to sale of Aurora National Life Assurance Company1 –247 Foreign exchange gains/losses 25 174 Net realised investment gains/losses – non-participating 766 567 1 Please refer to Note 7 “Assets held for sale“ for more information.
Investment income – fixed income securities 117 97 109 92 Investment income – equity securities 511 26 621 32
Total investment income – unit-linked and with-profit business 653 136 752 137 Realised gains/losses – fixed income securities –133 –105 132 168 Realised gains/losses – equity securities 2 711 136 206 –1 Realised gains/losses – other 1 –52 5 –18 Total realised gains/losses – unit-linked and with-profit business 2 579 –21 343 149 Total net investment result – unit-linked and with-profit business 3 232 115 1 095 286
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: The “Other-than-temporary impairments recognised in other comprehensive income” column includes only securities with a credit-related loss recognised in earnings. Subsequent recovery in fair value of securities previously impaired in other comprehensive income is also presented in the “Other-than-temporary impairments recognised in other comprehensive income” column.
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 6 027 143 –113 6 057
States of the United States and political subdivisions of the states 1 047 80 –2 1 125
Mortgage- and asset-backed securities 5 739 231 –23 –2 5 945 Fixed income securities available-for-sale 77 867 6 954 –367 –4 84 450 Equity securities available-for-sale 3 133 959 –68 4 024
Investments trading The carrying amounts of fixed income securities and equity securities classified as trading (excluding unit-linked and with-profit business) as of 31 December were as follows: Investments held for unit-linked and with-profit business The carrying amounts of investments held for unit-linked and with-profit business as of 31 December were as follows: Maturity of fixed income securities available-for-sale The amortised cost or cost and estimated fair values of investments in fixed income securities available-for-sale by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2013 and 2014, USD 11 476 million and USD 11 579 million, respectively, of fixed income securities available-for-sale were callable.
Assets pledged As of 31 December 2014, investments with a carrying value of USD 8 114 million were on deposit with regulatory agencies in accordance with local requirements, and investments with a carrying value of USD 10 191 million were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries.
As of 31 December 2014, a real estate portfolio with a carrying value of USD 230 million serves as collateral for short-term senior operational debt of USD 503 million.
Debt securities issued by governments and government agencies 1 202 1 997 Corporate debt securities 145 60 Mortgage- and asset-backed securities 188 162 Fixed income securities trading – non-participating 1 535 2 219 Equity securities trading – non-participating 615 65
Other invested assets 547 435 Total investments for unit-linked and with-profit business 23 857 3 358 22 095 3 230
Mortgage- and asset-backed securities 1 834 47 565 31 2 399 78
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: The fair value of the real estate as of 31 December 2013 and 2014 was USD 2 551 million and USD 2 482 million, respectively. The carrying value of policy loans, mortgages and other loans approximates fair value.
Values of mortgage- and asset-backed securities 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 asset-backed securities (ABS) for which there are no significant observable inputs are developed using benchmarks to similar transactions or indices. The two primary categories of mortgage- and asset-backed securities are residential mortgagebacked securities (RMBS) and commercial mortgage-backed securities (CMBS). 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. Mortgage- and asset-backed securities also includes debt securitised by credit card, student loan and auto loan receivables. Pricing inputs for these securities also focus on capturing, where relevant, collateral quality and performance, payment patterns, and delinquencies.