Balance as of period end 1 622 –6 –3 897 –534 –2 815 1 Reclassification adjustment included in net income is presented in the “net realised investment gains/losses – non-participating business” line. this line also includes a shadow adjustment, please refer to note 5 “Deferred acquisition costs and acquired present value of future profits”.
Balance sHeet as of 31 December assets the accompanying notes are an integral part of the Group financial statements.
Fixed income securities: available-for-sale, at fair value (including 9 529 in 2012 and 11 720 in 2013 subject to securities lending and repurchase agreements) (amortised cost: 2012: 80 594; 2013: 76 349) 86 974 77 761 trading (including 196 in 2012 and 1 in 2013 subject to securities lending and repurchase agreements) 1 874 1 535 equity securities: available-for-sale, at fair value (including 0 in 2012 and 65 in 2013 subject to securities lending and
Policy loans, mortgages and other loans 2 299 2 895 investment real estate 777 825 short-term investments, at amortised cost which approximates fair value (including 3 464 in 2012 and 4 425 in 2013 subject to securities lending and repurchase agreements) 18 645 20 989 investments for unit-linked and with-profit business (including fixed income securities trading: 4 630 in 2012 and 4 585 in 2013, equity securities trading: 18 617 in 2012 and 21 180 in 2013) 25 501 27 215 cash and cash equivalents (including 75 in 2012 and 4 in 2013 subject to securities lending) 10 837 8 072
the accompanying notes are an integral part of the Group financial statements.
2 Please refer to note 1 “Organisation and summary of significant accounting policies” and note 10 “earnings per share” for details on the number of shares authorised and issued.
Swiss Re 2013 Financial Report 133 fiNaNciaL StatemeNtS | GROUP Financial statements
Retained earnings net income after attribution of non-controlling interests 4 257 4 511 interest on contingent capital instruments, net of tax –56 –67 cumulative effect of adoption of asU 2010-262, net of tax –24 attribution of value to option on redeemable non-controlling interest3 –132 Balance as of period end 26 322 30 766
Balance as of 1 January 1 697 24 change during the period4 –1 946 –1 income attributable to non-controlling interests 141 2 attribution of value to option on redeemable non-controlling interest3 132 Balance as of period end 24 25 134 Swiss Re 2013 Financial Report fiNaNciaL StatemeNtS | GROUP Financial statements
1 Dividends to shareholders were paid in the form of a withholding tax-exempt repayment out of legal reserves from capital contributions. 2 the Group adopted a new accounting guidance, asU 2010-26 “accounting for costs associated with acquiring or Renewing insurance contracts” as of 1 January 2012,
136 Swiss Re 2013 Financial Report fiNaNciaL StatemeNtS | GROUP Financial statements
Valuation of financial assets the fair value of the majority of the Group’s financial instruments is based on quoted prices in active markets or observable inputs. these instruments include government and agency securities, commercial paper, most investment-grade corporate debt, most highyield debt securities, exchange-traded derivative instruments, most mortgage- and asset-backed securities and listed equity securities. in markets with reduced or no liquidity, spreads between bid and offer prices are normally wider compared to spreads in highly liquid markets. such market conditions affect the valuation of certain asset classes of the Group, such as some asset-backed securities as well as certain derivative structures referencing such asset classes.
for assets or derivative structures at fair value, the Group uses market prices or inputs derived from market prices. a separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. although management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and judgment over these valuations. subsequent valuations could differ significantly from the results of the process described above. the Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. as of 31 December 2013, the Group had not provided any collateral on financial instruments in excess of its own market value estimates.
interest on fixed income securities is recorded in net investment income when earned and is adjusted for the amortisation of any purchase premium or discount. Dividends on equity securities are recorded on the basis of the ex-dividend date. realised gains and losses on sales are included in earnings and are calculated using the specific identification method.
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.
Derivative financial instruments and hedge accounting the Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange-traded financial futures for the Group’s trading and hedging strategy in line with the overall risk management strategy. Derivative financial instruments are primarily used as a means of managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or existing liabilities and also to lock in attractive investment conditions for funds which become available in the future. the Group recognises all of its derivative instruments on the balance sheet at fair value. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings.
cash and cash equivalents cash and cash equivalents include cash on hand, short-term deposits, certain short-term investments in money market funds, and highly liquid debt instruments with a remaining maturity at the date of acquisition of three months or less.
Deferred acquisition costs acquisition costs, which vary with, and are primarily related to, the production of new insurance and reinsurance business, are deferred to the extent they are deemed recoverable from future gross profits. Deferred acquisition costs consist principally of commissions. Deferred acquisition costs for short-duration contracts are amortised in proportion to premiums earned. future investment income is considered in determining the recoverability of deferred acquisition costs for short-duration contracts. Deferred acquisition costs for long-duration contracts are amortised over the life of underlying contracts. Deferred acquisition costs for universal-life and similar products are amortised based on the present value of estimated gross profits. estimated gross profits are updated quarterly.
modifications of insurance and reinsurance contracts the Group accounts for modifications of insurance and reinsurance contracts that result in a substantially unchanged contract as a continuation of the replaced contract. the associated deferred acquisition costs and present value of future profits (pVfp) will continue to be amortised. for modifications of insurance and reinsurance contracts that result in a substantially changed contract, the Group accounts for as an extinguishment of the replaced contract. the associated deferred acquisition costs or pVfp are written off immediately through income and any new deferrable costs associated with the replacement contract are deferred.
Business combinations the Group applies the purchase method of accounting for business combinations. this method allocates the cost of the acquired entity to the assets and liabilities assumed based on their estimated fair values at the date of acquisition.
admin re® blocks of business can be acquired in different legal forms, either through an acquisition of an entity’s share capital or through a reinsurance transaction. the Group’s policy is to treat these transactions consistently regardless of the form of acquisition. accordingly, the Group records the acquired assets and liabilities directly to the balance sheet. premiums, life and health benefits and other income statement items are not recorded in the income statement on the date of the acquisition.
the underlying liabilities and assets acquired are subsequently accounted for according to the relevant Gaap guidance, including specific guidance applicable to subsequent accounting for assets and liabilities recognised as part of the purchase method of accounting, including present value of future profit, goodwill and other intangible assets.
Other assets other assets include deferred expenses on retroactive reinsurance, prepaid reinsurance premiums, receivables related to investing activities, real estate for own use, property, plant and equipment, accrued income, certain intangible assets and prepaid assets.
the excess of estimated liabilities for claims and claim adjustment expenses payable over consideration received in respect of retroactive property and casualty reinsurance contracts is recorded as a deferred expense. the deferred expense on retroactive reinsurance contracts is amortised through earnings over the expected claims-paying period.
capitalised software costs external direct costs of materials and services incurred to develop or obtain software for internal use, payroll and payroll-related costs for employees directly associated with software development and interest cost incurred while developing software for internal use are capitalised and amortised on a straight-line basis through earnings over the estimated useful life.
Policyholder account balances policyholder account balances relate to universal life-type contracts and investment contracts. interest crediting rates for policyholder account balances range from 1.3% to 8.9%.
universal life-type contracts are long-duration insurance contracts, providing either death or annuity benefits, with terms that are not fixed and guaranteed.
on the liability side, funds held under reinsurance treaties’ consist mainly of amounts arising from the application of the deposit method of accounting to inward insurance and reinsurance contracts. in addition, amounts retained from ceded business written on a funds withheld basis are included.
funds withheld balances are presented together with assets and liabilities arising from the application of the deposit method because of their common deposit type character.
Shadow adjustments shadow adjustments are recognized in other comprehensive income reflecting the offset of adjustments to deferred acquisition costs and pVfp, typically related to universal life-type contracts, and policyholder liabilities. the purpose is to reflect the fact that certain amounts recorded as unrealised investment gains and losses within shareholders’ equity will ultimately accrue to policyholders and not shareholders.
shadow loss recognition testing becomes relevant in low interest rate environments. the test considers whether the hypothetical sale of afs securities and the reinvestment of proceeds at lower yields would lead to negative operational earnings in future periods and thereby causing a loss recognition event. for shadow loss recognition testing, the Group uses current market yields to determine best estimate Gaap reserves rather than using locked in or current book yields. if the unlocked best estimate Gaap reserves based on current market rates are in excess of reserves based on locked in or current book yields, then a shadow loss recognition reserve is recognized. shadow loss recognition is recognized in other comprehensive income and does not impact net income. in addition, shadow losses recognized can reverse up to the amount of losses recognized due to a loss recognition event.
life and health reinsurance premiums for group coverages are generally earned over the term of the coverage. for group contracts that allow experience adjustments to premiums, such premiums are recognised as the related experience emerges.
reinstatement premiums are due where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. the recognition of reinstatement premiums as written depends on individual contract features. reinstatement premiums are either recognised as written at the time a loss event occurs or in line with the recognition pattern of premiums written of the underlying contract. the accrual of reinstatement premiums is based on actuarial estimates of ultimate losses. reinstatement premiums are generally earned in proportion to the amount of reinsurance provided.
Reinsurance ceded the Group uses retrocession arrangements to increase its aggregate underwriting capacity, to diversify its risk and to reduce the risk of catastrophic loss on reinsurance assumed. the ceding of risks to retrocessionaires does not relieve the Group of its obligations to its ceding companies. the Group regularly evaluates the financial condition of its retrocessionaires and monitors the concentration of credit risk to minimise its exposure to financial loss from retrocessionaires’ insolvency. premiums and losses ceded under retrocession contracts are reported as reductions of premiums earned and claims and claim adjustment expenses. amounts recoverable for ceded short- and long-duration contracts, including universal life-type and investment contracts, are reported as assets in the accompanying consolidated balance sheet.
Pensions and other post-retirement benefits the Group accounts for its pension and other post-retirement benefit costs using the accrual method of accounting. amounts charged to expense are based on periodic actuarial determinations.
Share-based payment transactions the Group has a long-term incentive plan, a leadership performance plan, a fixed option plan, a restricted share plan, an employee participation plan and a global share participation plan. these plans are described in more detail in Note 13. the Group accounts for share-based payment transactions with employees using the fair value method. under the fair value method, the fair value of the awards is recognised in earnings over the vesting period.
treasury shares treasury shares are reported at cost in shareholders’ equity. treasury shares also include stand-alone derivative instruments indexed to the Group’s shares that meet the requirements for classification in shareholders’ equity.
Recent accounting guidance in December 2011, the fasB issued “Disclosures about offsetting assets and liabilities” (asu 2011-11), an update to topic 210 – Balance sheet. in January 2013, a scope clarification of asu 2011-11 was issued, “clarifying the scope of Disclosures about offsetting assets and liabilities” (asu 2013-01). asu 2011-11 requires additional disclosures on derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are netted in accordance with current us Gaap guidance. the Group adopted this guidance as of 1 January 2013. the additional disclosure requirements are reflected in Note 2.
in July 2012, the fasB issued “testing indefinite-lived intangible assets for impairment” (asu 2012-02), an update to topic 350 – intangibles - Goodwill and other. the update allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test for indefinite-lived intangible assets. the Group adopted this guidance as of 1 January 2013. the adoption did not have an impact on the Group’s financial statements.
in october 2012, the fasB issued “subsequent accounting for an indemnification asset recognized at the acquisition Date as a result of a Government-assisted acquisition of a financial institution” (asu 2012-06), an update to topic 805 – Business combinations. this asu gives guidance on the subsequent accounting of an indemnification asset in a government-assisted acquisition. the Group adopted this guidance as of 1 January 2013. the adoption did not have an impact on the Group’s financial statements.
in february 2013, the fasB issued “reporting of amounts reclassified out of accumulated other comprehensive income” (asu 2013-02), an update to topic 220 – comprehensive income. this update supersedes and replaces the presentation requirements for reclassifications out of accumulated other comprehensive income in asu 2011-05 and asu 2011-12. the new guidance requires an entity to provide additional information about reclassifications out of accumulated other comprehensive income. the Group adopted this guidance as of 1 January 2013. the additional disclosures are presented below the statement of comprehensive income.
on 17 July 2013, the fasB issued “inclusion of the fed funds effective swap rate (or overnight index swap rate) as a Benchmark interest rate for hedge accounting purposes” (asu 2013-10), an update to topic 815 – Derivatives and hedging. this asu allows explicitly the use of the fed funds effective swap rate as a benchmark interest rate for hedge accounting purposes. the Group adopted this guidance as of 17 July 2013. the adoption did not have an impact on the Group’s financial statements.
Realised gains and losses realised gains and losses for fixed income, equity securities and other investments (excluding unit-linked and with-profit business) were as follows: usD millions 2012 2013 equity securities 91 143 policy loans, mortgages and other loans 313 119 investment real estate 134 139 short-term investments 102 109 other current investments 78 93 share in earnings of equity-accounted investees 508 350 cash and cash equivalents 79 48 Net result from deposit-accounted contracts 166 154 Deposits with ceding companies 430 595 investment expenses –464 –406 interest charged for funds held –27 –23 Net investment income – non-participating 4 473 3 947 usD millions 2012 2013 fixed income securities available-for-sale: Gross realised losses –383 –689 equity securities available-for-sale: Gross realised gains 181 349 Gross realised losses –77 –46 other-than-temporary impairments –162 –41 Net realised investment gains/losses on trading securities 58 –4 change in net unrealised investment gains/losses on trading securities 67 –38 other investments: Net realised/unrealised gains/losses –230 301 Net realised/unrealised gains/losses on insurance-related derivatives –189 –306 Gain/loss related to sale of admin re® us operations –399 foreign exchange gains/losses –255 25 Net realised investment gains/losses – non-participating 947 766 146 Swiss Re 2013 financial report
for securitised products, cash flow projection analysis is conducted by integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities, and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. for corporate bonds and hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecast economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. expected cash flows resulting from these analyses are discounted, and net present value is compared to the amortised cost basis to determine the credit component of other-thantemporary impairments.
Balance as of 1 January1 515 310 credit losses for which an other-than-temporary impairment was not previously recognised 14 1 reductions for securities sold during the period –237 –57 increase of credit losses for which an other-than-temporary impairment has been recognised previously, when the Group does not intend to sell, or more likely than not will not be required to sell before recovery 54 11 impact of increase in cash flows expected to be collected –61 –37 impact of foreign exchange movements 6
Balance as of 31 December 291 228 1 During 2013 the Group revised the other-than-temporary impairment on fixed income securities related to credit losses. the revision had no impact on net income and shareholders’ equity of the Group.
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 953 10 –48 915 residential mortgage-backed securities 796 54 –12 –3 835
Fixed income securities available-for-sale 76 349 2 999 –1 579 –8 77 761 equity securities available-for-sale 6 110 1 047 –81 7 076 148 Swiss Re 2013 financial report
Debt securities issued by governments and government agencies 1 506 1 202 corporate debt securities 182 145 mortgage- and asset-backed securities 186 188 Fixed income securities trading – non-participating 1 874 1 535 equity securities trading – non-participating 672 615 usD millions unit-linked With-profit unit-linked With-profit short-term investments 1 129 547 total investments for unit-linked and with-profit business 22 010 3 491 23 857 3 358 usD millions amortised cost or cost estimated fair value amortised cost or cost estimated fair value
Due in one year or less 2 746 2 768 3 308 3 305 Due after one year through five years 20 799 21 452 19 308 19 697 Due after five years through ten years 14 928 16 183 14 243 14 522 mortgage- and asset-backed securities with no fixed maturity 6 266 6 523 6 120 6 326 total fixed income securities available-for-sale 80 594 86 974 76 349 77 761
Offsetting of derivatives, financial assets and financial liabilities offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows: collateral pledged or received between two counterparties with a master netting arrangement in place, but not subject to balance sheet netting is disclosed at fair value. the fair values represent the gross carrying value amounts at the reporting date for each financial instrument received or pledged by the Group. management believes that master netting agreements provide for legally enforceable setoff in the event of default, which substantially reduces credit exposure. upon occurrence of an event of default the non-defaulting party may set off the obligation against collateral received regardless if offset on balance sheet prior to the defaulting event. the net amounts of the financial assets and liabilities presented on the balance sheet were recognised in “other invested assets”, and “accrued expenses and other liabilities”, respectively.
Gross amounts of recognised financial assets collateral set off in the balance sheet
Net amounts of financial assets presented in the balance sheet related financial instruments not set off in the balance sheet Net amount securities borrowing 0 0 2012 usD millions
Net amounts of financial liabilities presented in the balance sheet related financial instruments not set off in the balance sheet Net amount 150 Swiss Re 2013 financial report
Unrealised losses on securities available-for-sale the following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position as of 31 December 2012 and 2013. as of 31 December 2012 and 2013, usD 32 million and usD 77 million, respectively, of the gross unrealised loss on equity securities available-for-sale relates to declines in value for less than 12 months and usD 28 million and usD 4 million, respectively, to declines in value for more than 12 months.
less than 12 months 12 months or more total 2012 usD millions fair value unrealised losses fair value unrealised losses fair value unrealised losses
Debt securities issued by governments and government agencies: us treasury and other us government corporations and agencies 2 766 26 2 766 26 us agency securitised products 734 7 734 7 states of the united states and political subdivisions of the states 4 4 0 less than 12 months 12 months or more total 2013 usD millions fair value unrealised losses fair value unrealised losses fair value unrealised losses
Debt securities issued by governments and government agencies: us treasury and other us government corporations and agencies 2 874 113 2 874 113 states of the united states and political subdivisions of the states 703 48 703 48
substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies.
usD millions 2012 2013 policy loans 284 270 other loans 653 824 investment real estate 777 825 152 Swiss Re 2013 financial report
level 2 inputs are market-based inputs that are directly or indirectly observable, but not considered level 1 quoted prices. level 2 inputs consist of (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical assets or liabilities in non-active markets (eg markets which have few transactions and where prices are not current or price quotations vary substantially); (iii) inputs other than quoted prices that are observable (eg interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates); and (iv) inputs derived from, or corroborated by, observable market data.
the types of instruments valued, based on unadjusted quoted market prices in active markets, include most us government and sovereign obligations, active listed equities and most money market securities. such instruments are generally classified within level 1 of the fair value hierarchy.
the types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, include most government agency securities, investment-grade corporate bonds, certain mortgage- and asset-backed products, less liquid listed equities, and state, municipal and provincial obligations. such instruments are generally classified within level 2 of the fair value hierarchy.
certain financial instruments are classified within level 3 of the fair value hierarchy, because they trade infrequently and therefore have little or no price transparency. such instruments include private equity, less liquid corporate debt securities and certain asset-backed securities. certain over-the-counter derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. such instruments are classified within level 3 of the fair value hierarchy. pursuant to the election of the fair value option, the Group classifies certain liabilities for life and health policy benefits in level 3 of the fair value hierarchy. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations. such adjustments are generally based on available market evidence. in the absence of such evidence, management’s best estimate is used.
in certain situations, the Group uses inputs to measure the fair value of asset or liability positions that fall into different levels of the fair value hierarchy. in these situations, the Group will determine the appropriate level based on the lowest level input that is significant to the determination of the fair value.
Valuation techniques us government securities typically have quoted market prices in active markets and are categorised as level 1 instruments in the fair value hierarchy. Non-us government holdings are generally classified as level 2 instruments and are valued on the basis of the quotes provided by pricing services, which are subject to the Group’s pricing validation reviews and pricing vendor challenge process. Valuations provided by pricing vendors are generally based on the actual trade information as substantially all of the Group’s non-us government holdings are traded in a transparent and liquid market.
the Group holds both exchange-traded and over-the-counter (otc) interest rate, foreign exchange, credit and equity derivative contracts for hedging and trading purposes. the fair values of exchange-traded derivatives measured using observable exchange prices are classified in level 1. long-dated contracts may require adjustments to the exchange-traded prices which would trigger reclassification to level 2 in the fair value hierarchy. otc derivatives are generally valued by the Group based on the internal models, which are consistent with industry standards and practices, and use both observable (dealer, broker or market consensus prices, spot and forward rates, interest rate and credit curves and volatility indices) and unobservable inputs (adjustments for liquidity, inputs derived from the observable data based on the Group’s judgments and assumptions).
the Group’s otc interest rate derivatives primarily include interest rate swaps, futures, options, caps and floors, and are valued based on the cash flow discounting models which generally utilise as inputs observable market yield curves and volatility assumptions.
the Group’s investments in equity derivatives primarily include otc equity option contracts on single or baskets of market indices and equity options on individual or baskets of equity securities, which are valued using internally developed models (such as the Blackscholes option pricing model and various simulation models) calibrated with the inputs, which include underlying spot prices, dividend curves, volatility surfaces, yield curves, and correlations between underlying assets.
the Group also holds complex structured credit contracts, such as credit default swaps (cDs) referencing mortgage-backed securities, certain types of collateralised debt obligation (cDo) transactions, and the products sensitive to correlation between two or more underlying parameters (cDo-squared); all of which are classified within level 3 of the fair value hierarchy. a cDo is a debt instrument collateralised by various debt obligations, including bonds, loans and cDs of differing credit profiles. in a cDo-squared transaction, both the primary instrument and the underlying instruments are represented by cDos. Generally, for cDo and cDo-squared transactions, the observable inputs such as cDs spreads and recovery rates are modified to adjust for correlation between the underlying debt instruments. the correlation levels are modelled at the portfolio level and calibrated at a transaction level to liquid benchmark rates.
Debt securities issued by us government and government agencies 5 454 1 537 6 991 us agency securitised products 3 946 3 946 Debt securities issued by non-us governments and government agencies 30 092 30 092 residential mortgage-backed securities 915 915 other asset-backed securities 2 851 2 851 fixed income securities backing unit-linked and with-profit life and health policies 4 585 4 585 equity securities backing unit-linked and with-profit life and health policies 21 169 11 21 180 equity securities held for proprietary investment purposes 7 088 554 49 7 691 foreign exchange contracts 267 267 total assets at fair value 35 218 82 103 3 472 –2 877 117 916 liabilities interest rate contracts –2 123 –2 123 foreign exchange contracts –428 –428 Derivative equity contracts –14 –527 –190 –731 credit contracts –11 –38 –49 other contracts –8 –765 –773 liabilities for life and health policy benefits –145 –145 accrued expenses and other liabilities –1 634 –1 271 –2 905 total liabilities at fair value –1 648 –4 368 –1 138 2 656 –4 498 1 the netting of derivative receivables and derivative payables is permitted when a legally enforceable master netting agreement exists between two counterparties. a master netting agreement provides for the net settlement of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default or on the termination of any one contract.
assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) as of 31 December, the reconciliation of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs were as follows: 158 Swiss Re 2013 financial report
Derivative credit contracts other derivative contracts liabilities for life and health policy benefits total liabilities Balance as of 1 January 2013 –232 –271 –2 362 –272 –3 137 realised/unrealised gains/losses: included in other comprehensive income 0 purchases 0 issuances –62 –62 transfers into level 3 0 transfers out of level 3 0 impact of foreign exchange movements –4 –4 closing balance as of 31 December 2013 –190 –38 –765 –145 –1 138 160 Swiss Re 2013 financial report
corporate debt securities commercial mortgage-backed securities other asset-backed securities equity securities held for proprietary investment purposes Derivative equity contracts Derivative credit contracts other derivative contracts other invested assets total assets realised/unrealised gains/losses: included in net income –4 4 –235 44 –139 108 –222 included in other comprehensive income 1 12 13 sales –23 –16 –30 –182 –51 –462 –764 settlements –45 –1 –70 3 –113 transfers into level 3 419 419 transfers out of level 3 –292 –292 impact of foreign exchange movements 27 27 closing balance as of 31 December 2013 650 12 0 49 401 28 76 2 256 3 472
Derivative credit contracts other derivative contracts liabilities for life and health policy benefits total liabilities Balance as of 1 January 2013 –232 –271 –2 362 –272 –3 137 realised/unrealised gains/losses: included in other comprehensive income 0 purchases 0 issuances –62 –62 transfers into level 3 0 transfers out of level 3 0 impact of foreign exchange movements –4 –4 closing balance as of 31 December 2013 –190 –38 –765 –145 –1 138
assets transfer out of1 –78 –1 388 liabilities transfer into1 –1 930 transfer out of1 589 1 transfers are recognised at the date of the event or change in circumstances that caused the transfer. With the introduction of asu No. 2011-4, the Group has reassessed the observability of fair value inputs as of 1 January 2012. Yield curves for instruments with maturities above 20 years were deemed observable and related positions were therefore reclassified from level 3 to level 2. the inputs of one level 2 position were assessed to be unobservable, the respective assets and liabilities were therefore shifted to level 3.
assets corporate debt securities 685 650 surplus notes with a mortality underlying 168 195 Discounted cash flow model illiquidity premium 75 bps (n.a.) private placement corporate debt 437 383 corporate spread matrix illiquidity premium 0 bps–250 bps (79 bps) private placement credit tenant leases 72 68 Discounted cash flow model illiquidity premium 75 bps–200 bps (129 bps)
Derivative equity contracts 636 401 otc equity option referencing correlated equity indices 636 401 proprietary option model correlation –10%–100% (45%)1
Sensitivity of recurring level 3 measurements to changes in unobservable inputs the significant unobservable input used in the fair value measurement of the Group’s surplus notes, private placement debt securities and private placement credit tenant leases is illiquidity premium. a significant increase (decrease) in this input in isolation would result in a significantly higher (lower) fair value measurement.
the significant unobservable input used in the fair value measurement of the Group’s otc equity option referencing correlated equity indices is correlation. Where the Group is long correlation risk, a significant increase (decrease) in this input in isolation would result in a significantly higher (lower) fair value measurement. Where the Group is short correlation risk, a significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement.
Other invested assets measured at net asset value other invested assets measured at net asset value as of 31 December, respectively, were as follows: the hedge fund investments employ a variety of strategies, including global macro, relative value and event-driven strategies, across various asset classes, including long/short equity and credit investments.
the redemption frequency of hedge funds varies depending on the manager as well as the nature of the underlying product. additionally, certain funds may impose lock-up periods and redemption gates as defined in the terms of the individual investment agreement.
the Group elected the fair value option for positions in the following line items in the balance sheet: equity securities trading the Group elected the fair value option for an investment previously classified as available-for-sale within other invested assets in the balance sheet. the Group economically hedges the investment with derivative instruments that offset this exposure. the changes in fair value of the derivatives are recorded in earnings. electing the fair value option eliminates the mismatch previously caused by the economic hedging of the investment and reduces the volatility in the income statement.
Other invested assets the Group elected the fair value option for certain investments classified as equity method investees within other invested assets in the balance sheet. the Group applied the fair value option, as the investments are managed on a fair value basis. the changes in fair value of these elected investments are recorded in earnings.
liabilities for life and health policy benefits the Group elected the fair value option for existing GmDB reserves related to certain variable annuity contracts which are classified as universal life-type contracts. the Group has applied the fair value option, as the equity risk associated with those contracts is managed on a fair value basis and it is economically hedged with derivative options in the market.
assets and liabilities measured at fair value pursuant to election of the fair value option pursuant to the election of the fair value option for the items described, the balances as of 31 December were as follows: changes in fair values for items measured at fair value pursuant to election of the fair value option Gains/losses included in earnings for the years ended 31 December for items measured at fair value pursuant to election of the fair value option including foreign exchange were as follows: fair value changes from equity securities trading are reported in “Net realised investment gains/losses – non-participating business”. fair value changes from other invested assets are reported in “Net investment income – non-participating”. fair value changes from the GmDB reserves are shown in “life and health benefits”.
investments in real estate are fair valued primarily by external appraisers based on proprietary discounted cash flow models that incorporate applicable risk premium adjustments to discount yields and projected market rental income streams based on marketspecific data. these fair value measurements are classified in level 3 in the fair value hierarchy.
significant unobservable inputs (level 3) total assets policy loans 270 270 other loans 824 824 liabilities
Fair values and notional amounts of derivative financial instruments as of 31 December, the fair values and notional amounts of the derivatives outstanding were as follows: the notional amounts of derivative financial instruments give an indication of the Group’s volume of derivative activity. the fair value assets are included in “other invested assets” and the fair value liabilities are included in “accrued expenses and other liabilities”. the fair value amounts that were not offset were nil as of 31 December 2012 and 2013.
Derivatives not designated as hedging instruments foreign exchange contracts 25 739 441 –785 –344
Derivatives designated as hedging instruments foreign exchange contracts 1 609 –19 –19 amount offset Where a right of setoff exists –4 466 4 466 Due to cash collateral –1 179 524 total net amount of derivative financial instruments 2 284 –3 723 –1 439 2013 usD millions
Derivatives designated as hedging instruments interest rate contracts 0 amount offset Where a right of setoff exists –2 353 2 353 Due to cash collateral –524 303 total net amount of derivative financial instruments 1 222 –1 448 –226
Non-hedging activities the Group primarily uses derivative financial instruments for risk management and trading strategies. Gains and losses of derivative financial instruments not designated as hedging instruments are recorded in “Net realised investment gains/losses” in the income statement. for the years ended 31 December, the gains and losses of derivative financial instruments not designated as hedging instruments were as follows: Hedging activities the Group designates certain derivative financial instruments as hedging instruments. the designation of derivative financial instruments is primarily used for overall portfolio and risk management strategies. as of 31 December 2012 and 2013, the following hedging relationships were outstanding: Fair value hedges the Group enters into interest rate and foreign exchange swaps to reduce the exposure to interest rate and foreign exchange volatility for certain of its issued debt positions. these derivative instruments are designated as hedging instruments in qualifying fair value hedges. Gains and losses on derivative financial instruments designated as fair value hedging instruments are recorded in “Net realised investment gains/losses” in the income statement. for the years ended 31 December, the gains and losses attributable to the hedged risks were as follows: Hedges of the net investment in foreign operations the Group designates non-derivative monetary financial instruments as hedging the foreign currency exposure of its net investment in certain foreign operations.
credit risk-related contingent features certain derivative instruments held by the Group contain provisions that require its debt to maintain an investment-grade credit rating. if the Group’s credit rating were downgraded or no longer rated, the counterparties could request immediate payment, guarantee or an ongoing full overnight collateralisation on derivative instruments in net liability positions.
No credit spread available 72 773 773 total credit derivatives written/sold –56 17 054 0 167 17 221 174 Swiss Re 2013 financial report
total maximum potential payout 2013 usD millions 0–5 years 5–10 years over 10 years credit Default Swaps credit spread in basis points 251–500 0 credit index Products credit spread in basis points 251–500 0 total Return Swaps credit spread in basis points
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%, 6%, 6%, 6% and 6%.
The Group enters into long- and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines short-term debt as debt having a maturity at the balance sheet date of not greater than one year and longterm debt as having a maturity of greater than one year. Interest expense is classified accordingly.
Maturity of long-term debt As of 31 December, long-term debt as reported above had the following maturities: USD millions 2012 2013
Long-term debt – financial and operational debt 16 286 14 722
Total subordinated debt as of 31 December 2013 10 781 Total subordinated debt as of 31 December 2012 9 630 180 Swiss Re 2013 Financial Report
Long-term debt issued in 2013 In march 2013, Swiss Reinsurance Company ltd issued subordinated contingent write-off loan notes with a scheduled maturity in 2024. The instrument has a face value of USD 750 million, with a fixed coupon of 6.375% per annum until the optional redemption date (1 September 2019). The full principal amount of the instrument is mandatorily written off if Swiss Reinsurance Company ltd reports a Swiss Solvency Test (SST) ratio of less than 125% to the Swiss Financial market Supervisory Authority (FINmA).
In October 2013, Swiss Reinsurance Company ltd issued 32-year subordinated contingent write-off securities with a scheduled maturity in 2045. The instrument has a face value of ChF 175 million, with a fixed coupon of 7.5% per annum until the first optional redemption date (1 September 2020). The full principal amount of the instrument will be written off upon the earlier to occur of: 1) Swiss Reinsurance Company ltd reporting a Swiss Solvency Test (SST) ratio of less than 135% to the Swiss Financial market Supervisory Authority (FINmA), or 2) the occurrence of an Atlantic hurricane which causes insured industry losses defined in an USD billion amount exceeding those of a 1-in-200 year event, subject to an annual reset assessment to adjust for changes in insured values, while neutralising any impact due to model changes.
Amortisation of deferred expense on retroactive reinsurance and impact of commutations 64 151 paid related to: Current year –1 525 –2 103 prior year –7 962 –9 265
Foreign exchange 334 211 effect of acquisitions, disposals, new retroactive reinsurance and other items 299 239 net balance as of 31 December 45 680 44 307
Prior-year development Net claims development on prior years was favourable overall during 2013, driven by reserve releases from property, liability, accident and health and several of the special lines, especially engineering. In most cases, the releases were the result of betterthan -expected claims experience helped, particularly in the case of accident and health, by commutations. These releases come about despite further strengthening for US and UK asbestos and environmental claims, strengthening on motor business in several european countries and adverse development of claims arising from the New Zealand earthquakes, partly offset by favourable development on claims from hurricane Sandy in the US.
estimating ultimate asbestos and environmental liabilities is particularly complex for a number of reasons relating in part to the long period between exposure and manifestation of claims, and in part to other factors, which include risks and lack of predictability inherent in complex litigation, changes in projected costs to resolve, and in the projected number of, asbestos and environmental claims, the effect of bankruptcy protection, insolvencies, and changes in the legal, legislative and regulatory environment. As a result, the Group believes that projection of exposures for asbestos and environmental claims is subject to far less predictability relative to nonenvironmental and non-asbestos exposures. management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts and the current state of the law. however, reserves are subject to revision as new information becomes available and as claims develop. Additional liabilities may arise for amounts in excess of reserves, and the Groupʼs estimate of claims and claim adjustment expenses may change. Any such additional liabilities or increases in estimates cannot be reasonably estimated in advance but could result in charges that could be material to operating results.
USD millions 2012 2013 line of business: property –242 –441 Casualty –699 –455 Specialty –536 –475
Reinsurance ceded to external parties –3 490 –1 885 –575 –158 –6 108
Gross fee income before retrocession to external parties 72 713 785
Premiums earned and fees assessed against policyholders 2013 USD millions property & Casualty Reinsurance life & health Reinsurance
Reinsurance ceded to external parties –1 824 –1 392 –343 –39 –3 598
Corporate Solutions Admin Re® Group items Total claims paid, thereof: Gross claims paid to external parties –9 553 –8 341 –1 915 –2 868 –18 –22 695 Intra-group transactions (assumed and ceded) –818 –130 818 130 0 claims before receivables from retrocession to external parties –10 371 –8 471 –1 097 –2 738 –18 –22 695
Receivables from retrocession to external parties 1 713 1 230 425 65 3 433 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
Reinsurance ceded 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 property & Casualty Reinsurance life & health Reinsurance
Corporate Solutions Admin Re® Group items Total 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
Reinsurance ceded to external parties –3 571 –1 870 –780 –158 –6 379 2013 USD millions property & Casualty Reinsurance life & health Reinsurance
Reinsurance ceded to external parties –865 –1 383 –169 –39 –2 456
All of the Groupʼs companies prepare statutory financial statements based on local laws and regulations. Most jurisdictions require reinsurers to maintain a minimum amount of capital in excess of statutory definition of net assets or maintain certain minimum capital and surplus levels. In addition, some jurisdictions place certain restrictions on amounts that may be loaned or transferred to the parent company. The Groupʼs ability to pay dividends may be restricted by these requirements.
Diluted earnings per share Net income assuming debt conversion and exercise of options 4 123 4 513 Weighted average common shares outstanding 372 719 088 379 604 516 Net income per share in USD 11.06 11.89 Net income per share in CHF2 10.39 11.04 1 Please refer to Note 6 “Debt and contingent capital instruments”. 2 The translation from USD to CHF is shown for informational purposes only and has been calculated using the Group’s average exchange rates.
The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: tax rate reconciliation The following table reconciles the expected tax expense at the Swiss statutory tax rate to the actual tax expense in the accompanying income statement:
Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows:
As of 31 December 2013, the aggregate amount of temporary differences associated with investment in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognised amount to approximately USD 3.9 billion. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
The Group also had capital loss carryforwards of USD 677 million, expiring as follows: USD 1 million in 2016 and USD 676 million never expire.
Deferred tax assets Income accrued/deferred 480 503 Technical provisions 541 762 Pension provisions 355 206 Benefit on loss carryforwards 3 748 3 648 Currency translation adjustments 514 540
Valuation allowance –1 159 –935 total deferred tax assets 5 718 5 763
The balance of gross unrecognised tax benefits as of 31 December 2013 presented in the table above is less than the liability for unrecognised tax benefits reflected in the deferred and other non-current taxes section due to the exclusion of interest expense (USD 138 million).
During the year, certain tax positions and audits in Switzerland and Germany were effectively settled.
The following table summarises jurisdictions and tax years that remain subject to examination: USD millions 2012 2013
Additions based on tax positions related to current year 246 88 Additions based on tax positions related to prior years 91 158 Reductions for tax positions of prior years –163 –392 Settlements –8 –90 other (including foreign currency translation) 15 21
Defined benefit pension plans and post-retirement benefits The Group sponsors various funded defined benefit pension plans. Employer contributions to the plans are charged to income on a basis which recognises the costs of pensions over the expected service lives of employees covered by the plans. The Group’s funding policy for these plans is to contribute annually at a rate that is intended to maintain a level percentage of compensation for the employees covered. A full valuation is prepared at least every three years.
Benefits paid –158 –74 –15 –247 Employee contribution 25 25 Acquisitions/disposals/additions 0 Effect of curtailment and termination benefits 1 –56 –55 Effect of foreign currency translation 69 53 122 Fair value of plan assets as of 31 December 3 214 2 001 0 5 215 Funded status –478 –191 –383 –1 052 194 Swiss Re 2013 Financial Report
Amounts recognised in the balance sheet, as of 31 December were as follows: USD millions Swiss plan Foreign plans other benefits Total
Benefits paid –137 –74 –15 –226 Employee contribution 26 26 Acquisitions/disposals/additions 0 Effect of curtailment and termination benefits 1 1 Effect of foreign currency translation 109 34 143 Fair value of plan assets as of 31 December 3 661 2 245 0 5 906 Funded status 130 –60 –341 –271
Non-current assets 51 51 Current liabilities –3 –16 –19 Non-current liabilities –478 –239 –367 –1 084 Net amount recognised –478 –191 –383 –1 052
Amounts recognised in accumulated other comprehensive income, gross of tax, as of 31 December were as follows: Components of net periodic benefit cost The components of pension and post-retirement cost for the years ended 31 December, were as follows: USD millions Swiss plan Foreign plans other benefits Total
Expected return on assets –100 –98 –198 Amortisation of: Prior service cost –11 –11 Effect of settlement, curtailment and termination 1 10 11 Net periodic benefit cost 127 24 –1 150
Expected return on assets –102 –99 –201 Amortisation of: Prior service cost –10 –10 Effect of settlement, curtailment and termination 1 1 Net periodic benefit cost 146 13 1 160 196 Swiss Re 2013 Financial Report
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 5 767 million and USD 5 735 million as of 31 December 2012 and 2013, respectively.
Effect on total of service and interest cost components 1 –1 Effect on post-retirement benefit obligation 23 –21 198 Swiss Re 2013 Financial Report
Plan asset allocation by asset category The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2012 and 2013 was as follows: Actual asset allocation is determined by a variety of current economic and market conditions and considers specific asset class risks.
assets measured at fair value For a description of the different fair value levels and valuation techniques see Note 3 “Fair value disclosures”.
Real estate positions classified as level 1 and level 2 are exchange traded real estate funds where a market valuation is readily available. Real estate reported on level 3 is property owned by the pension funds. These positions are accounted for at the capitalised income value. The capitalisation based on sustainable recoverable earnings is conducted at interest rates that are determined individually for each property, based on the property's location, age and condition. If properties are intended for disposal, the estimated selling costs and taxes are recognised in provisions. Sales gains or losses are allocated to income from real estate when the contract is concluded.
other assets classified within level 3 mainly consist of private equity investments valued with the same methodology as mentioned in Note 3.
Swiss plan allocation Foreign plans allocation 2012 2013 target allocation 2012 2013 target allocation asset category
As of 31 December, the fair values of pension plan assets by level of input were as follows:
Debt securities issued by the US government and government agencies 62 62 Debt securities issued by non-US governments
Equity securities: Equity securities held for proprietary investment purposes 866 735 1 601
Balance as of 1 January 549 119 668 Realised/unrealised gains/losses: Relating to assets still held at the reporting date 1 –13 –12 Relating to assets sold during the period 3 3
Purchases, issuances and settlements 10 15 25 Transfers in and/or out of level 3 0 Impact of foreign exchange movements 12 1 13 Closing balance as of 31 December 572 125 697
Purchases, issuances and settlements 11 –1 10 Transfers in and/or out of level 3 0 Impact of foreign exchange movements 17 3 20 Closing balance as of 31 December 631 132 763
As of 31 December 2012 and 2013, the Group had the share-based compensation plans as described below.
Stock option plans Stock option plans include a fixed-option plan and an additional grant to certain members of executive management. No options were granted under these plans from 2007 onwards. Under the fixed-option plan, the exercise price of each option is equal to the market price of the shares on the date of the grant. options issued vest at the end of the fourth year and have a maximum life of ten years.
A summary of the activity of the Group’s stock option plans is as follows: The weighted remaining contractual life is 2.3 years and all stock options outstanding are also exercisable. The fair value of each option grant was estimated on the date of grant using a binomial option-pricing model. The underlying strike price for the outstanding option series has been adjusted for the special dividend payout in 2013.
Weighted average grant date fair value in CHF Number of shares
long-term incentive Plan Between 2006 and 2011, the Group annually granted a long-term Incentive plan (lTI) to selected employees with a three-year vesting period. The requisite service period as well as the maximum contractual term for each plan is three years and the final payment, if any, occurs at the end of this performance measurement period. The plans include a payout factor which was derived from Return on Equity (RoE) and Earnings per Share (EPS) targets over the vesting period. The payout ratio can vary between 0 and 2 and the final payment for each plan will depend on whether the performance targets have been achieved over the plan period. The fair values of the plans are based on stochastic models which consider the likelihood of achieving performance targets and the impact of dividends.
The 2010 lTI grant was settled in shares in March 2013. The payout factor was driven by average RoE and average EPS over the vesting period. The share price used for measurement is based on the date of grant and was CHF 48.15.
For the year ended 31 December 2013, the outstanding units were as follows: leadership Performance Plan During 2011 the Compensation Committee reviewed the existing long-term incentive scheme, and in March 2012, the lTI was replaced by a new plan called the leadership Performance Plan (lPP). The lPP plans are expected to be settled in shares, and the requisite service as well as the maximum contractual term are three years. At grant date the award is split equally into two underlying components - Restricted Share Units (RSU) and Performance Share Units (PSU). The RSU component is measured against a RoE performance condition and will vest within a range of 0–100%. The PSU is based on relative total shareholder return, measured against a pre-defined basket of peers and will vest within a range of 0–200%. The fair values of both components are measured separately, based on stochastic models.
For the year ended 31 December 2013, the outstanding units were as follows: lTI 2010 lTI 2011
The number of shares authorised for the Group’s share-based payments to employees was 8 172 503 and 5 538 418 as of 31 December 2012 and 2013, respectively.
The disclosure requirements under Swiss Company law in respect of management compensation to the members of the Board of Directors and of the Executive Committee of the Group, as well as to closely related persons, are detailed on pages 246–251 of the Annual Report of Swiss Re ltd.
The Group defines the following as related parties to the Group: subsidiaries of Swiss Re ltd, entities in which the group has significant influence, pension plans, members of the Board of Directors (BoD) and the Group Executive Committee (EC) and their close family members, and entities which are directly and indirectly controlled by members of governing bodies of Swiss Re ltd and their close family members.
Contributions made to defined benefit pension plans and post-retirement benefit plans are disclosed in Note 12 Benefit Plans. Plan assets of the defined benefit pension plans include Swiss Re common stock of USD 5 million (0.1% of total plan assets) and USD 7 million (0.1% of total plan assets) as of 31 December 2012 and 2013, respectively.
Share in earnings of equity-accounted investees 508 350 Dividends received from equity-accounted investees 128 198 206 Swiss Re 2013 Financial Report
Leasing commitments As part of its normal business operations, the Group enters into a number of lease agreements. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: The following schedule shows the composition of total rental expenses for all operating leases as of 31 December (except those with terms of a month or less that were not renewed): Other commitments As a participant in limited and other investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnerships for periods of up to 10 years. The total commitments remaining uncalled as of 31 December 2013 were USD 3 359 million.
Total operating lease commitments 670 Less minimum non-cancellable sublease rentals –51 Total net future minimum lease commitments 619
The Group presents four core operating business segments: property & Casualty Reinsurance, Life & health Reinsurance, Corporate Solutions and Admin Re®. The presentation of each segment’s balance sheet is closely aligned to the segment legal entity structure. The assignment of assets and liabilities for entities that span more than one segment are determined by considering local statutory requirements, legal and other constraints, the economic view of duration and currency requirements of the reinsurance business written, and the capacity of the segments to absorb risks. Interest expense is incurred from the segment’s capital funding position. The tax position of the operating segments is derived from legal entity tax obligations, subject to Group tax considerations.
Accounting policies applied by the business segments are in line with those described in the summary of significant accounting policies (please refer to Note 1 to the Group’s annual consolidated financial statements).
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, the Business Unit offers insurance-linked securities and other insurance-related capital market products in both property & Casualty and Life & health.
corporate Solutions Corporate Solutions offers innovative insurance capacity to mid-sized and large multinational corporations across the globe. offerings range from standard risk transfer covers and multi-line programmes, to customised solutions tailored to the needs of clients. Corporate Solutions serves customers from over 40 offices worldwide.
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.
Management expense ratio in % 7.9 operating margin in % 8.6 210 Swiss Re 2013 Financial Report
Business segments – income statement For the year ended 31 December 2013 USD millions property & Casualty Reinsurance
Interest expenses –207 –544 –1 –46 –22 60 –760 income/loss before income tax expense 3 561 434 391 395 44 0 4 825 Income tax expense/benefit –249 –30 –111 28 50 –312 net income/loss before attribution of non-controlling interests 3 312 404 280 423 94 0 4 513
Income attributable to non-controlling interests –1 –1 –2 net income/loss after attribution of non-controlling interests 3 311 404 279 423 94 0 4 511
Interest on contingent capital instruments –19 –48 –67 net income/loss attributable to common shareholders 3 292 356 279 423 94 0 4 444
Business segments – balance sheet As of 31 December 2012 2012 USD millions property & Casualty Reinsurance
Acquired present value of future profits 1 358 1 665 3 023
Liabilities Unpaid claims and claim adjustment expenses 48 465 9 505 12 258 1 247 21 –7 826 63 670 Liabilities for life and health policy benefits 17 439 216 18 469 –7 36 117
Non-controlling interests 14 10 24 1 The Group updated its balance sheet presentation of deferred tax assets and liabilities. Deferred tax assets and liabilities are presented on a gross basis as per the first quarter 2013. The comparative period has been adjusted accordingly and is consistent with the relevant income tax disclosure in the notes to the financial statements in the prior year.
Business segments – balance sheet As of 31 December 2013 2013 USD millions property & Casualty Reinsurance
Property & casualty Reinsurance business segment – by line of business For the year ended 31 December 2013 USD millions property Casualty Specialty Total expenses Claims and claim adjustment expenses –3 342 –3 563 –979 –7 884 Acquisition costs –883 –1 408 –470 –2 761 other expenses –764 –495 –213 –1 472 Total expenses before interest expenses –4 989 –5 466 –1 662 –12 117
Net realised investment gains/losses – non-participating and excluding insurance-related derivatives 709 Interest expenses –586 income before income tax expenses 1 008
Fee income from policyholders 56 56 Net investment income – non-participating 915 527 1 442 Net investment income – unit-linked and with-profit 39 39 Net realised investment gains/losses – unit-linked and with-profit 210 210 Net realised investment gains/losses – insurance-related derivatives –123 6 –117 other revenues 0 Total revenues before non-participating realised gains/losses 7 775 3 822 11 597 expenses Life and health benefits –5 216 –2 859 –8 075 Return credited to policyholders –286 –286 Acquisition costs –1 207 –491 –1 698 other expenses –685 –261 –946 Total expenses before interest expenses –7 394 –3 611 –11 005
Net realised investment gains/losses – non-participating and excluding insurance-related derivatives 386 Interest expenses –544 income before income tax expenses 434
USD millions 2012 2013 europe (including Middle east and Africa) 10 686 11 347 218 Swiss Re 2013 Financial Report
Germany Swiss Re Germany AG, Unterföhring bei München 62 55 100 f ireland Swiss Re International Treasury (Ireland) Ltd., Dublin 0 0 100 f
Luxembourg Swiss Re europe holdings S.A., Luxembourg 145 129 100 f Swiss Re europe S.A., Luxembourg 482 429 100 f Swiss Re Finance (Luxembourg) S.A., Luxembourg 0 0 100 f Swiss Re Funds (Lux) I, Senningerberg1 8 547 7 600 100 f Swiss Re International Se, Luxembourg 251 223 100 f malta netherlands Algemene Levensherverzekering Maatschappij N.V., Amsterdam 1 1 100 f
United Kingdom Admin Re UK Limited, Shropshire 121 108 100 f Reassure Limited, Shropshire 435 387 100 f Swiss Re Capital Markets Limited, London 60 53 100 f Swiss Re GB Limited, London 0 0 100 f Swiss Re Investment Management Limited, London 0 0 100 f Swiss Re Services Limited, London 4 3 100 f Swiss Re Specialised Investments holdings (UK) Limited, London 2 1 100 f Swiss Re Specialty Insurance (UK) Limited, London 30 27 100 f The palatine Insurance Company Limited, London 12 11 100 f americas and caribbean
Barbados european Finance Reinsurance Company Ltd., Bridgetown 5 4 100 f european International Reinsurance Company Ltd., Bridgetown 1 1 100 f Gasper Funding Corporation, Bridgetown 17 15 100 f Milvus I Reassurance Limited, Bridgetown 0 0 100 f Swiss Re (Barbados) Finance Limited, Bridgetown 994 884 100 f
Brazil Swiss Re Brasil Resseguros S.A., Sao paulo 51 45 100 f Swiss Re Corporate Solutions Brasil Seguros S.A., Sao paulo 38 34 84 f cayman islands Ampersand Investments (UK) Limited, George Town 584 519 100 f Swiss Re Strategic Investments UK Limited, George Town 0 0 100 f
United States Aurora National Life Assurance Company, Wethersfield 0 0 100 f Facility Insurance Corporation, Austin 0 0 100 f Facility Insurance holding Corporation, Dallas 0 0 100 f First Specialty Insurance Corporation, Jefferson City 5 4 100 f North American Capacity Insurance Company, Manchester 4 4 100 f North American elite Insurance Company, Manchester 4 3 100 f North American Specialty Insurance Company, Manchester 5 4 100 f Rialto Re I Inc., Burlington 0 0 100 f SR Corporate Solutions America holding Corporation, Wilmington 0 0 100 f Sterling Re Inc., Burlington 0 0 100 f Swiss Re America holding Corporation, Wilmington 0 0 100 f Swiss Re Atrium Corporation, Wilmington 1 0 100 f Swiss Re Capital Markets Corporation, New York 0 0 100 f Swiss Re Financial products Corporation, Wilmington 2 116 1 882 100 f Swiss Re Financial Services Corporation, Wilmington 0 0 100 f Swiss Re Life & health America holding Company, Wilmington 0 0 100 f Swiss Re Life & health America Inc., hartford 4 4 100 f Swiss Re partnership holding, LLC, Dover 368 327 100 f Swiss Re Risk Solutions Corporation, Wilmington 0 0 100 f Swiss Re Solutions holding Corporation, Wilmington 9 8 100 f Swiss Re Treasury (US) Corporation, Wilmington 0 0 100 f Swiss Reinsurance America Corporation, Armonk 6 5 100 f Washington International Insurance Company, Manchester 4 4 100 f Westport Insurance Corporation, Jefferson City 6 6 100 f africa
Swiss Re Group enters into arrangements with variable interest entities (VIes) in the normal course of business. The involvement ranges from being a passive investor to designing, structuring and managing the VIes. The variable interests held by the Group arise as a result of the Group’s involvement in certain insurance-linked and credit-linked securitisations, swaps in trusts, debt financing and other entities which meet the definition of a VIe.
When analysing the status of an entity, the Group mainly assesses if (1) the equity is sufficient to finance the entity’s activities without additional subordinated financial support, (2) the equity holders have the right to make significant decisions affecting the entity’s operations and (3) the holders of the voting rights substantively participate in the gains and losses of the entity. When one of these criteria is not met, the entity is considered a VIe and needs to be assessed for consolidation under the VIe section of the Consolidation Topic.
The Group assesses for all its variable interests in VIes whether it has a controlling financial interest in these entities and, thus, is the primary beneficiary. For this, the Group identifies the activities that most significantly impact the entity’s performance and determines whether the Group has the power to direct those activities. In conducting the analysis, the Group considers the purpose, the design and the risks that the entity was designed to create and pass through to its variable interest holders. In a second step, the Group assesses if it has the obligation to absorb losses or if it has the right to receive benefits of the VIe that could potentially be significant to the entity. If both criteria are met, the Group has a controlling financial interest in the VIe and consolidates the entity.
insurance-linked and credit-linked securitisations The insurance-linked and credit-linked securitisations transfer pre-existing insurance or credit risk to the capital markets through the issuance of insurance-linked or credit-linked securities. In insurance-linked securitisations, the securitisation vehicle assumes the insurance risk through insurance or derivative contracts. In credit-linked securitisations, the securitisation vehicle assumes the credit risk through credit default swaps. The securitisation vehicle generally retains the issuance proceeds as collateral. The collateral held predominantly consists of investment-grade securities.
As of 31 December 2013, the total assets of the insurance-linked and credit-linked securitisation vehicles in which the Group holds variable interests but is not the primary beneficiary were USD 2 470 million.
The Group consolidates certain debt financing vehicles as it has power over the investment management in the vehicles, which is considered to be the activity that most significantly impacts the entities' economic performance. In addition, the Group absorbs the variability of the investment return so that both criteria for a controlling financial interest are met.
As of 31 December 2013, the total assets of the debt financing vehicles in which the Group holds variable interests but is not the primary beneficiary were USD 2 081 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 6 708 million.
investment vehicles Investment vehicles are private equity limited partnerships, in which the Group is invested as part of its investment strategy. Typically, the Group’s variable interests arise through limited partner ownership interests in the vehicles. The Group does not own the general partners of the limited partnerships, and does not have any significant kick-out or participating rights. Therefore the Group lacks power over the relevant activities of the vehicles and, consequently, does not qualify as the primary beneficiary. The Group is exposed to losses when the values of the investments held by the vehicles decrease. The maximum exposure to loss equals the carrying amount of the ownership interest.
Other The VIes in this category were created for various purposes. Generally, the Group is exposed to the asset risk of the VIes by holding an equity stake in the VIe or by guaranteeing a part or the entire asset value to third-party investors. A significant portion of the Group’s exposure is either retroceded or hedged. The assets held by the VIes consist mainly of residential real estate and other.
The Group did not provide financial or other support to any VIes during 2013 that it was not previously contractually required to provide.
consolidated Vies The following table shows the total assets and liabilities on the Group’s balance sheet relating to VIes of which the Group is the primary beneficiary as of 31 December: USD millions Carrying value Whereof restricted: Carrying value Whereof restricted: Fixed income securities available-for-sale 6 896 6 896 6 490 6 490 other invested assets 258 258 8 Cash and cash equivalents 177 177 162 162
non-consolidated Vies The following table shows the total assets and liabilities in the Group’s balance sheet related to VIes in which the Group held a variable interest but was not the primary beneficiary as of 31 December: The following table shows the Group’s assets, liabilities and maximum exposure to loss related to VIes in which the Group held a variable interest but was not the primary beneficiary as of 31 December: The assets and liabilities for the swaps in trusts represent the positive and negative fair values of the derivatives the Group has entered into with the trusts. Liabilities are recognised for certain debt financing VIes when losses occur. To date, the respective debt financing VIes have not incurred any losses. Liabilities of USD 555 million recognised for the “other” category relate mainly to collateral received.
Insurance-linked/credit1 The maximum exposure to loss for swaps in trusts cannot be meaningfully quantified due to their derivative character.
The increase of the provision in the property & Casualty Reinsurance business segment of USD 46 million is mostly related to leaving benefits.
For the years ended 31 December, restructuring provision developed as follows: 2012 USD millions property & Casualty Reinsurance
The Board of Directors generally deals with risk management through two committees: ̤ The Finance and Risk Committee is responsible for reviewing the Group Risk policy and capacity limits, as well as for monitoring risk tolerance and reviewing top risk issues and exposures. ̤ The Audit Committee is responsible for overseeing internal controls and compliance procedures.
The Group executive Committee (Group eC) implements the risk management framework through four sub-committees: ̤ The Group Risk and Capital Committee has responsibility for establishing the Group’s Risk Governance Framework, including setting and monitoring risk capacity limits and determining changes to the internal risk and capital measurement methodology. It also oversees Swiss Re’s economic value measurement framework, including the principles for the allocation of capital and funding resources.
̤ The Group Asset-Liability Committee oversees the management of Swiss Re’s balance sheet, in particular its liquidity, capital, and funding positions and related policies.
The Group Chief Risk officer (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. The Group CRo is a member of the four Group eC committees, serving as the chairman of both the Group Risk and Capital Committee and the Group Regulatory Committee. In addition, the Group CRo leads the Group’s Risk Management function, which is responsible for risk oversight and control across the Group.
For Swiss Re’s major legal entities, the Business Unit CRos are supported by designated legal entity CRos who are responsible for overseeing specific risk management issues that arise at the legal entity level.
The central departments support both the Group CRo and the Business Unit CRos in discharging their oversight responsibilities. They do so by providing specialised risk category expertise and accumulation control, risk modelling and reporting services, regulatory relations management, and central risk governance framework development. The central departments also oversee Group liquidity and capital adequacy and maintain the Group frameworks for controlling these risks throughout Swiss Re.
While in Reinsurance the setting of the reserves is performed by valuation actuaries working with the Business Management Unit, in Corporate Solutions and Admin Re® actuarial management is an integral part of Risk Management. The monitoring of reserves for the three Business Units is provided by a dedicated Actuarial Control Unit within Risk Management.
The Compliance function is principally responsible for overseeing Swiss Re’s compliance with applicable laws, regulations, rules, and the Code of Conduct, as well as managing compliance risk. It assists the Board of Directors, the Group eC and management in discharging their respective duties to identify, mitigate, and manage compliance risks.
Report of the statutory auditor on the consolidated financial statements As statutory auditor, we have audited the consolidated financial statements of Swiss Re Ltd, which comprise the balance sheet, income statement, cash flow statement, statement of changes in shareholders’ equity, comprehensive income and notes (pages 130 to 230), for the year ended 31 December 2013.
Board of Directors’ responsibility The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAp) and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Opinion In our opinion, the consolidated financial statements for the year ended 31 December 2013 present fairly, in all material respects, the financial position, the results of operations and the cash flows in accordance with accounting principles generally accepted in the United States of America (US GAAp) and comply with Swiss law.
Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor oversight Act (AoA) and independence (article 728 Co and article 11 AoA) and that there are no circumstances incompatible with our independence.
Liabilities Unpaid claims and claim adjustment expenses 54 189 54 447 77 829 78 195 70 944 68 412 64 690 64 878 63 670 61 484 Liabilities for life and health policy benefits 38 025 23 583 36 779 44 187 37 497 39 944 39 551 39 044 36 117 36 033 earnings/losses per share in USD 6.42 5.98 10.75 9.94 –2.00 1.46 2.52 7.68 11.85 12.97 earnings/losses per share in ChF 8.00 7.44 13.49 11.95 –2.61 1.49 2.64 6.79 11.13 12.04 1 Numbers are based on the Group’s previous accounting standards.
Group’s average exchange rates for the income statements and year-end rates for the balance sheets. 4 The Group updated its balance sheet presentation of deferred tax assets and liabilities. Deferred tax assets and liabilities are presented on a gross basis as per the first quarter 2013. The comparative period has been adjusted accordingly and is consistent with the relevant income tax disclosure in the notes to the financial statements in the prior year.
Net realised investment gains/losses 895 2 793 1 679 –615 –8 677 875 2 783 388 2 688 3 325 Trading revenues 351 278 expenses Claims and claim adjustment expenses –11 109 –11 866 –9 405 –10 035 –9 222 –8 336 –7 254 –8 810 –7 763 –9 655
Amortisation of goodwill –222 other operating costs and expenses –2 358 –2 477 –3 679 –4 900 –4 358 –3 976 –3 620 –3 902 –3 953 –4 268 income/loss before income tax expense 2 700 2 057 4 670 4 313 –1 074 920 2 675 2 875 5 523 4 825 Income tax expense –715 –205 –1 033 –853 411 –221 –541 –77 –1 125 –312 net income/loss before attribution of non-controlling interests 1 985 1 852 3 637 3 460 –663 699 2 134 2 798 4 398 4 513
Interest on contingent capital instruments –203 –1 117 0 –56 –67 net income/loss attributable to common shareholders 1 985 1 852 3 637 3 460 –663 496 863 2 626 4 201 4 444
Income statement Net income for 2013 amounted to CHF 2 707 million (2012: CHF 2 718 million) and was mostly driven by cash dividends from subsidiaries and affiliated companies of CHF 2 641 million. In addition, Swiss Reinsurance Company Ltd transferred to the Company its investment in Swiss Re Principal Investments Company Ltd through a dividend in kind of CHF 805 million, which resulted in a valuation adjustment to the Company’s investment in Swiss Reinsurance Company Ltd of the same amount.
Assets Total assets increased from CHF 19 961 million as of 31 December 2012 to CHF 20 116 million as of 31 December 2013.
Investments in subsidiaries and affiliated companies increased from CHF 16 351 million as of 31 December 2012 to CHF 17 117 million as of 31 December 2013 due to capital contributions made to subsidiaries of Swiss Re Principal Investments Company Ltd and Swiss Re Investments Holding Company Ltd.
Liabilities Total liabilities increased from CHF 7 million as of 31 December 2012 to CHF 26 million as of 31 December 2013, mainly due to higher payables to subsidiaries and affiliated companies and accrued expenses.
Shareholders’ equity Shareholders’ equity increased from CHF 19 954 million as of 31 December 2012 to CHF 20 090 million as of 31 December 2013, mainly driven by the inclusion of net income for 2013 of CHF 2 707 million, mostly offset by dividends to shareholders of CHF 2 571 million.
Legal reserves from capital contributions decreased from CHF 7 994 million as of 31 December 2012 to CHF 5 423 million as of 31 December 2013, reflecting the payment of dividends to shareholders of CHF 2 571 million.
INCome STATemeNT SwISS Re LTD For the years ended 31 December
Trademark license fees 231 284 other revenues 0 0 expenses Administrative expenses 3 –161 –174 Investment expenses 2 –6 961 –806 other expenses –57 –117
Income before income tax expense 2 726 2 708 Income tax expense –8 –1
CHF millions Notes 2012 2013 current assets Cash and cash equivalents 163 66 Short-term investments 4 61 364 Loans to subsidiaries and affiliated companies 2 710 1 774 Receivables from subsidiaries and affiliated companies 40 53 other receivables and accrued income 9 1 non-current assets Investments in subsidiaries and affiliated companies 5 16 351 17 117 total non-current assets 16 978 17 858 238 Swiss Re 2013 Financial Report
Reserve for own shares 882 948 Legal reserves from capital contributions 10 7 994 5 423
Use of estimates in the preparation of annual accounts the preparation of the annual accounts requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the related disclosures. Actual results could differ from these estimates.
Payables to subsidiaries and affiliated companies/Other liabilities these liabilities are carried at nominal value.
accrued expenses Accrued expenses consist of both income received before the balance sheet date but relating to a subsequent financial year, and charges relating to the current financial year but which are payable in a subsequent financial year.
the provision for currency fluctuation comprises the net effect of foreign exchange gains and losses arising from the revaluation of the opening balance sheet and the translation adjustment of the income statement from average to closing exchange rates at year-end. these net impacts are recognised in the income statement over a period of up to three years. where the provision for currency fluctuation is insufficient to absorb net foreign exchange losses for the financial year, the provision for currency fluctuation is reduced to zero and the excess foreign exchange loss is recognised in the income statement.
Dividends from subsidiaries and affiliated companies dividends from subsidiaries and affiliated companies are recognised as revenue in the year in which they are declared.
capital and indirect taxes Capital and indirect taxes related to the financial year are included in other expenses. Value-added taxes are included in the respective expense lines in the income statement.
Swiss Reinsurance Company Ltd Zurich 100% CHF 34.4 million Swiss Re Corporate Solutions Ltd Zurich 100% CHF 100.0 million Swiss Re Life Capital Ltd Zurich 100% CHF 0.1 million Swiss Re investments Holding Company Ltd Zurich 100% CHF 0.1 million Swiss Re Specialised investments Holdings (UK) Ltd London 100% GBP 1.0 million
Valuation adjustments on investments in subsidiaries and affiliated companies –6 960 –805 Realised losses on sale of investments 0 0 investment management expenses –1 –1 Other interest expenses 0 0 investment expenses –6 961 –806 242 swiss Re 2013 Financial Report
As of 31 december 2013, Swiss Re Ltd and its subsidiaries held 28 512 910 (2012: 27 560 372) of Swiss Re Ltd’s own shares, of which Swiss Re Ltd owned directly 25 685 817 (2012: 24 765 932) shares.
2 details on the proposed dividend payments for the financial year 2013 are disclosed on page 253.
Shareholder Number of shares % of voting rights and share capital Creation of the obligation to notify swiss Re 2013 Financial Report 243
authorised capital the Board of directors is authorised to increase the share capital of the Company at any time up to 10 April 2015 by an amount not exceeding CHF 8 500 000 through the issuance of up to 85 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10. increases by underwriting as well as partial increases are permitted. the date of issue, the issue price, the type of contribution and any possible acquisition of assets, the date of dividend entitlement as well as the expiry or allocation of non exercised subscription rights will be determined by the Board of directors.
with respect to a maximum of CHF 3 500 000 through the issuance 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 referred to above, the Board of directors may exclude or restrict the subscription rights of the existing shareholders for the use of shares in connection with (i) mergers, acquisitions (including takeover ) of companies, parts of companies or holdings, equity stakes (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, and/or (ii) improving the regulatory capital position of the Company or Group companies in a fast and expeditious manner if the Board of directors deems it appropriate or prudent to do so (including by way of private placements).
11 Release of undisclosed reserves in the year under report, undisclosed reserves on investments or on provisions were released by a net amount of CHF 16 million (2012: no net release).
Article 663b sub-para. 12 of the Swiss Code of Obligations requires disclosure of information on the performance of a risk assessment.
13 Compensation, participations and loans of members of governing bodies the section below is in line with articles 663bbis and 663c para. 3 of the Swiss Code of Obligations, which require disclosure of the elements of compensation paid to Swiss Re’s Board of directors and Group executive Committee (Group eC), as well as their shareholdings and loans.
compensation of the Group ec Aggregate compensation for members of the Group eC was: the table above covers payments to 12 members in 2013, of whom all were employed for the full year. the 2012 payments cover 16 members, of whom seven were employed for the full year.
in 2012, the previous Long term incentive plan (Lti) was replaced by the Leadership Performance Plan (LPP). the LPP grants made in 2012, 2013 and 2014 are generally expected to be settled in shares. For LPP 2012, 2013 and 2014 the vesting and performance measurement period is three years. For LPP 2014, an additional two year holding requirement applies for all Group eC and GMB members. At grant, the award is split equally into two underlying components: Restricted Share Units (RSU) and Performance Share Units (PSU). the RSU component is measured against a Roe performance condition and will vest within a range of 0–100%. the PSU component is based on relative total shareholder return, measured against a pre-defined basket of peers and will vest within a range of 0–200%. the fair values of both components are measured separately, based on stochastic models. For further information on the LPP award, see page 117, Compensation.
Value Alignment incentive (VAi) 8 359 8 532 Long-term incentives (LPP)6 12 400 11 400 total fixed and variable compensation7 47 794 44 902 Compensation due to members leaving8 2 268 1 the company contributions to social security systems paid by Swiss Re in line with applicable laws amounted to CHF 4 961 777 in 2012 and CHF 3 116 428 in 2013. the table shows gross amounts.
6 disclosure reflects all awards within a compensation cycle eg the 2013 value reflects the fair value of LPP granted in March 2014. 7 includes payments reflecting the time in the role as Group eC members.
each member of the Group eC (including the Group CeO) participates in a defined contribution pension scheme. the funding of pension benefits shown in the table on pages 246 and 247 reflects the actual employer contributions.
2 For 2012, includes one month for the former Group CeO, Stefan Lippe, and 11 months for the current Group CeO, Michel M. Liès. 3 disclosure reflects all awards within a compensation cycle e.g. the 2013 value reflects the fair value of LPP granted in March 2014.
compensation of the Board of Directors Group fees for the members of the Board of directors are delivered as 60% in cash and a mandatory 40% in Swiss Re shares with a four-year blocking period.
the share prices as of 12 April 2012 of CHF 57.15 and as of 9 April 2013 of CHF 78.10 were used for calculating the number of shares awarded to the members of the Board of directors based on the amount of the fee for 2012 and 2013, respectively.
Renato Fassbind, Vice Chairman4 461 302 202 504 Jakob Baer, Chairman of the Audit Committee 807 484 323 807
Mary Francis, Member6 120 80 200 Rajna Gibson Brandon, Member 335 197 131 328 C. Robert Henrikson, Chairman of the Compensation Committee7 306 257 171 428
Jean-Pierre Roth, Member 284 166 111 277 Robert A. Scott, former Chairman of the Compensation Committee9 145 1 Compensation for the members of the Board of directors includes fixed fees and allowances both in cash and shares. No sign-on or severance payments are made. 2 the company contributions to social security systems paid by Swiss Re in line with applicable laws amounted to CHF 1 294 292 in 2012 and CHF 1 282 026 in 2013.
the number of shares held as of 31 december were: Members of the Group eC 2012 2013
Michel M. Liès, Group CeO1 129 562 171 947 Guido Fürer, Group Chief investment Officer2 1 500 21 253 Agostino Galvagni, CeO Corporate Solutions 69 371 108 060 Jean-Jacques Henchoz, CeO Reinsurance eMeA 12 287 16 335 Christian Mumenthaler, CeO Reinsurance 50 000 50 984 Moses Ojeisekhoba, CeO Reinsurance Asia3 1 139 8 583 George Quinn, Group CFO 57 987 96 506 Matthias weber, Group Chief Underwriting Officer4 24 237 38 592 thomas wellauer, Group Chief Operating Officer 16 714 17 708 1 Appointed to the Group eC as of 1 February 2012. 2 Appointed to the Group eC as of 1 November 2012. 3 Appointed to the Group eC as of 15 March 2012. 4 Appointed to the Group eC as of 1 April 2012.
Mary Francis, Member4 1 027 Rajna Gibson Brandon, Member 24 368 26 047 C. Robert Henrikson, Chairman of the Compensation Committee5 2 144 4 339
Jean-Pierre Roth, Member 5 341 6 762 2 elected to Vice Chairman as of 13 April 2012. 3 Chairman of the Finance and Risk Committe until 13 April 2012. 4 elected to Swiss Re’s Board of directors at the Annual General Meeting of 10 April 2013. 5 elected to Swiss Re’s Board of directors at the Annual General Meeting of 13 April 2012.
Performance shares in 2009 and 2010, the Chairman and the then Vice Chairman received half their fees in the form of a performance share plan with a three-year vesting period. the Group did not grant any such plans from 2011 onwards.
Number of options Members of the Group eC 2012 2013 weighted average strike price in CHF as of grant date 82.32 83.92 Michel M. Liès, Group CeO1 66 000 42 000 Guido Fürer, Group Chief investment Officer2 7 500 7 500 George Quinn, Group CFO 26 000 20 000 Matthias weber, Group Chief Underwriting Officer3 9 500 7 000 1 Appointed to the Group eC as of 1 February 2012. 2 Appointed to the Group eC as of 1 November 2012. 3 Appointed to the Group eC as of 1 April 2012.
in general, credit is secured against real estate or pledged shares. the terms and conditions of loans and mortgages are typically the same as those available to all employees of the Swiss Re Group in their particular locations to the extent possible. For example, in Switzerland fixed-rate mortgages have a maturity of five years and interest rates that correspond to the five-year Swiss franc swap rate plus a margin of 10 basis points.
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. to the extent that fixed or floating interest rates are preferential, such values were factored into the compensation sums given to the governing body members.
CHF thousands 2012 2013 total mortgages and loans to members of the Group eC1 3 710 3 956 Highest mortgages and loans to an individual member of the Group eC: Christian Mumenthaler, CeO Reinsurance 2 143 1 919 total mortgages and loans not at market conditions to former members of the Group eC 4 300 4 300 Mortgages and loans to members of the Board of directors 1 For 2012, a loan to one member of the Group eC of USd 800 000 was not included. For 2013, a remaining loan of USd 550 000 is included.
the Board of directors proposes to the Annual General Meeting to be held in Zurich on 11 April 2014 to approve the following allocations and dividend payments: Dividends if the Board of directors’ proposal for allocations and dividend payments is accepted, a regular dividend of CHF 3.85 per share and an additional special dividend of CHF 4.15 per share will be paid on 22 April 2014 from other reserves after prior reclassification of legal reserves from capital contributions.
Retained earnings brought forward 19 7 net income for the financial year 2 718 2 707
Allocation to other reserves –2 730 –2 710 Retained earnings after allocation 7 4
CHF millions 2012 2013 other reserves brought forward – 2 730 Allocation from retained earnings 2 730 2 710 Reclassification of legal reserves from capital contributions into other reserves 2 5741 2 7382 Regular dividend payment out of other reserves –1 2011 –1 3182 Special dividend payment out of other reserves –1 3731 –1 4202 Other reserves after allocations and dividend payments 2 730 5 440 1 Since the Board of directors’ proposal for allocation of disposable profit, included in the Annual Report 2012, the number of registered shares eligible for dividend, at the dividend payment date of 17 April 2013, decreased due to the transfer of 340 411 shares for employee participation purposes from eligible to not eligible for dividend. this resulted in a lower dividend of CHF 3 million, compared to the Board of directors’ proposal, and in higher legal reserves from capital contributions by the same amount.
2 the Board of directors’ proposal to the Annual General Meeting of 11 April 2014, is subject to the actual number of shares outstanding and eligible for dividend.
Share structure per 31 december 2013 number of registered shares nominal capital in CHF
1 the Board of directors’ proposal to the Annual General Meeting of 11 April 2014, is subject to the actual number of shares outstanding and eligible for dividend.
Report of the statutory auditor on the Financial statements As statutory auditor, we have audited the financial statements of Swiss Re Ltd, which comprise the income statement, balance sheet and notes (pages 237 to 252), for the year ended 31 december 2013.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. the procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. in making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. we believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
General information Headquartered in Zurich, Switzerland, Swiss Re has operations across the globe. Our corporate structure allows us to sharpen our client focus, improve transparency and accountability, increase capital efficiency and operate with greater flexibility.
Maximum amount of risk that can be accepted in insurance. capacity also refers to the amount of insurance coverage allocated to a particular policyholder or in the marketplace in general.
Branch of insurance – mainly comprising accident and liability business – which is separate from property, engineering and life insurance.
Risk-based securities that allow insurance and reinsurance companies to transfer peak insurance risks, including natural catastrophes, to institutional investors in the form of bonds. catastrophe bonds help to spread peak exposures (see insurance-linked securities).
Bonds for which the payment of interest and/or principal depends on the occurrence or severity of an insurance event. the underlying risk of the bond is a peak or volume insurance risk.
adjustment of the book value or collateral value of a security, portfolio or account that reflects its current market value.
the operating margin is calculated as operating result divided by total operating revenues. the operating result is before interest expenses, taxes and net realised gains/ losses.
the payment, or one of the periodical payments, a policyholder agrees to make for an insurance policy.
collective term for fire and business interruption insurance as well as burglary, fidelity guarantee and allied lines.
amount of the risk accepted by the reinsurer which is then passed on to other reinsurance companies.
condition in which there is a possibility of injury or loss; also used by insurance practitioners to indicate the property insured or the peril insured against.
Financial transaction in which future cash flows from assets (or insurable risks) are pooled, converted into tradable securities and transferred to capital market investors. the assets are commonly sold to a special-purpose entity, which purchases them with cash raised through the issuance of beneficial interests (usually debt instruments) to thirdparty investors.
Form of reinsurance that protects the ceding insurer against an aggregate amount of claims over a period, in excess of either a stated amount or a specified percentage of estimated benefit costs. an example of this is employer stop-loss (ESl) coverage, which is used by uS companies to cap losses on self-funded group health benefit programmes. the stop-loss can apply to specific conditions or aggregate losses.
a life insurance contract which provides policyholder funds which are linked to an underlying investment product or fund. the performance of the policyholder funds is borne by the policyholder.
united States Generally accepted accounting Principles are the accounting rules, as issued by the Financial accounting Standards Board (FaSB), its predecessors and other bodies, used to prepare financial statements for publicly traded companies in the united States.
Forward-looking statements typically are identified by words or phrases such as “anticipate”, “assume”, “believe”, “continue”, “estimate”, “expect”, “foresee”, “intend”, “may increase”, “may fluctuate” and similar expressions, or by future or conditional verbs such as “will”, “should”, “would” and “could”. these forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results of operations, financial condition, solvency ratios, liquidity position or prospects to be materially different from any future results of operations, financial condition, solvency ratios, liquidity position or prospects expressed or implied by such statements or cause Swiss Re to not achieve its published targets. Such factors include, among others: ̤ instability affecting the global financial system and developments related thereto; ̤ deterioration in global economic conditions; ̤ Swiss Re’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debt-like arrangements and collateral calls due to actual or perceived deterioration of Swiss Re’s financial strength or otherwise; ̤ the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on Swiss Re’s investment assets; ̤ changes in Swiss Re’s investment result as a result of changes in its investment policy or the changed composition of its investment assets, and the impact of the timing of any such changes relative to changes in market conditions; ̤ uncertainties in valuing credit default swaps and other credit-related instruments; ̤ possible inability to realise amounts on sales of securities on Swiss Re’s balance sheet equivalent to their mark-to-market values recorded for accounting purposes; ̤ the outcome of tax audits, the ability to realise tax loss carryforwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings; ̤ the possibility that Swiss Re’s hedging arrangements may not be effective; ̤ the lowering or loss of one of the financial strength or other ratings of one or more
̤ uncertainties in estimating future claims for purposes of financial reporting, particularly with respect to large natural catastrophes, as significant uncertainties may be involved in estimating losses from such events and preliminary estimates may be subject to change as new information becomes available; ̤ the frequency, severity and development of insured claim events; ̤ acts of terrorism and acts of war; ̤ mortality, morbidity and longevity experience; ̤ policy renewal and lapse rates; ̤ extraordinary events affecting Swiss Re’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events; ̤ current, pending and future legislation and regulation affecting Swiss Re or its ceding companies and the interpretation of legislation or regulations; ̤ legal actions or regulatory investigations or actions, including those in respect of industry requirements or business conduct rules of general applicability; ̤ changes in accounting standards; ̤ significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions; ̤ changing levels of competition; and ̤ operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks.
General impact of adverse market conditions the recent temporary federal government shutdown in the united States and politicised discussions over increasing the u.S. debt limit, the market reaction to prospects of a tapering of the Federal Reserve’s asset purchase programme, and recent pessimistic global growth forecasts by the Organisation of Economic cooperation and development and the International Monetary Fund, among others, highlight the continued uncertainties around the post-crisis recovery and the risks that the world economy continues to face. In the European union, it remains unclear whether proposals for a single resolution mechanism and other components of a banking union, as well as actions of the European central Bank or the outcome of the upcoming European parliament elections, will create the conditions necessary for increased bank lending and greater economic growth. the volatility in the financial and credit markets could increase the severity and duration of economic recession, cause more economic turmoil in the near term, cause further disruptions in the global financial markets and impact foreign currency exchange rates. these uncertainties could be exacerbated by the uncertainty over the pace and extent of future economic growth in emerging markets. these developments in turn could have an adverse impact on the investment results of Swiss Re ltd (“Swiss Re”) and its direct or indirect subsidiaries (collectively, the “Group” or the “Swiss Re Group”), the Group’s ability to access the capital markets and the bank funding market, the ability of counterparties to meet their obligations to the Group and the short-term outlook for the life insurance industry, particularly in north america and Europe, with a corresponding negative impact on the Group’s life & Health business.
Regulatory changes Swiss Re and its subsidiaries are subject to Group supervision, and some of its subsidiaries are regulated in a number of jurisdictions in which they conduct business. new legislation as well as changes to existing legislation have been proposed and/or recently adopted in a number of jurisdictions that are expected to alter, in a variety of ways, the manner in which the financial services industry is regulated. although it is difficult to predict which proposals will become law and when and how new legislation ultimately will be implemented by regulators (including in respect of the extraterritorial effect of reforms), it is likely that significant aspects of existing regulatory regimes governing financial services will change. these include changes as to which governmental bodies regulate financial institutions, changes in the way financial institutions generally are regulated, enhanced governmental authority to take control over operations of financial institutions, restrictions on the conduct of certain lines of business, changes in the way financial institutions account for transactions and securities positions, changes in disclosure obligations and changes in the way rating agencies rate the creditworthiness and financial strength of financial institutions.
market risk Volatility and disruption in the global financial markets can expose the Group to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices and foreign currency exchange rates, which may adversely impact the Group’s financial condition, results of operations, liquidity and capital position. the Group’s exposure to interest rate risk is primarily related to the market price and cash flow variability associated with changes in interest rates. Exposure to credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads. when credit spreads widen, the net unrealised loss position of the Group’s investment portfolio can increase, as could other-than-temporary impairments. with respect to equity prices, the Group is exposed to changes in the level and volatility of equity prices, as they affect the value of equity securities themselves as well as the value of securities or instruments that derive their value from a particular equity security, a basket of equity securities or a stock index. the Group is also subject to equity price risk to the extent that the values of life-related benefits under certain products and life contracts, most notably variable annuity business, are tied to financial market values; to the extent market values fall, the financial exposure on guarantees related to these contracts would
increase to the extent this exposure is not hedged. while the Group has discontinued writing new variable annuity business and has in place an extensive hedging programme covering its existing variable annuity business that it believes is sufficient, certain risks cannot be hedged, including actuarial risks, basis risk and correlation risk. Exposure to foreign exchange risk arises from exposures to changes in spot prices and forward prices as well as to volatile movements in exchange rates.
Credit risk If the credit markets were again to deteriorate and further asset classes were to be impacted, the Group could experience further losses. changes in the market value of the underlying securities and other factors impacting their price could give rise to market value losses. If the credit markets were to deteriorate again, the Group could also face further write-downs in other areas of its portfolio, including other structured instruments, and the Group and its counterparties could once again face difficulties in valuing creditrelated instruments. differences in opinion with respect to valuations of credit-related instruments could result in legal disputes among the Group and its counterparties as to their respective obligations, the outcomes of which are difficult to predict and could be material.
liquidity risks the Group’s business requires, and its clients expect, that it has sufficient capital and sufficient liquidity to meet its reinsurance obligations, and that this would continue to be the case following the occurrence of any foreseeable event or series of events, including extreme catastrophes, that would trigger insurance or reinsurance coverage obligations. the Group’s uses of funds include obligations arising in its reinsurance business (including claims and other payments as well as insurance provision repayments due to portfolio transfers, securitisations and commutations), which may include large and unpredictable claims (including catastrophe claims), funding of capital requirements and operating costs, payment of principal and interest on outstanding indebtedness and funding of acquisitions. the Group also has unfunded capital commitments in its private equity and hedge fund investments, which could result in funding obligations at a time when it is subject to liquidity constraints. In addition, the Group has potential collateral requirements in connection with a number of reinsurance arrangements, the amounts of which may be material and the meeting of which could require the Group to liquidate cash equivalents or other securities. the Group manages liquidity and funding risks by focusing on the liquidity stress that is likely to result from extreme capital markets scenarios or from extreme loss events, or combinations of the two. Generally, the ability to meet liquidity needs could be adversely impacted by factors that the Group cannot control, such as market dislocations or interruptions, adverse economic conditions, severe disruption in the financial and worldwide credit markets and the related increased constraints on the availability of credit; changes in interest rates, foreign exchange rates and credit spreads; or by perceptions among market participants of the extent of the Group’s liquidity needs.
the Group may not be able to secure new sources of liquidity or funding, should projected or actual liquidity fall below levels it requires. the ability to meet liquidity needs through asset sales may be constrained by market conditions and the related stress on valuations, and through third-party funding may be limited by constraints on the general 268 Swiss Re 2013 Financial Report
legal and regulatory risks In the ordinary course of business, the Group is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which determine rights and obligations under insurance, reinsurance and other contractual agreements. From time to time, the Group may institute, or be named as a defendant in, legal proceedings, and the Group may be a claimant or respondent in arbitration proceedings. these proceedings could involve coverage or other disputes with ceding companies, disputes with parties to which the Group transfers risk under reinsurance arrangements, disputes with other counterparties or other matters. the Group cannot predict the outcome of any of the foregoing, which could be material for the Group.
the Group is also involved, from time to time, in investigations and regulatory proceedings, certain of which could result in adverse judgments, settlements, fines and other outcomes. the number of these investigations and proceedings involving the financial services industry has increased in recent years, and the potential scope of these investigations and proceedings has also increased, not only in respect of matters covered by the Group’s direct regulators, but also in respect of compliance with broader business conduct rules, such as market abuse regulations, anti-bribery legislation, anti-money laundering legislation and trade sanctions legislation. the Group also is subject to audits and challenges from time to time by tax authorities, which could result in increases in tax costs, changes to internal structures and interests and penalties. the Group could be subject to risks arising from alleged, or actual, violations of any of the foregoing, and could also be subject to risks arising from potential employee misconduct, including non-compliance with internal policies and procedures. Substantial legal liability could materially adversely affect the Group’s business, financial condition or results of operations or could cause significant reputational harm, which could seriously affect its business.
insurance, operational and other risks as part of the Group’s ordinary course of operations, the Group is subject to a variety of risks, including risks that reserves may not adequately cover future claims and benefits, risks that catastrophic events (including hurricanes, windstorms, floods, earthquakes, acts of terrorism, man-made disasters such as industrial accidents, explosions, and fires, and pandemics) may expose the Group to unexpected large losses (and related uncertainties in estimating future claims in respect of such events); changes in the insurance industry that affect ceding companies, particularly those that further increase their sensitivity to counterparty risk; competitive conditions; cyclicality of the industry; risks related to emerging claims and coverage issues (including, for example, trends to establish stricter building standards, which can lead to higher industry losses for earthquake cover based on higher replacement values); risks arising from the Group’s dependence on policies, procedures and expertise of ceding companies; risks related to investments in emerging markets; and risks related to the failure of operational systems and infrastructure. In addition, the occurrence of future risks that the Group’s risk management procedures fail to identify or anticipate could have a material adverse effect on the Group. any of the foregoing, as well as other concerns in respect of the Group’s business, could also give rise to reputational risk.
the Group uses non-GaaP financial measures in its external reporting, including in this report. these measures are not prepared in accordance with uS GaaP or any other comprehensive set of accounting rules or principles, and should not be viewed as a substitute for measures prepared in accordance with uS GaaP. Moreover, these may be different from or otherwise inconsistent with non-GaaP financial measures used by other companies. these measures have inherent limitations, are not required to be uniformly applied and are not audited.
Risks related to the Swiss Re corporate structure Swiss Re is a holding company, a legal entity separate and distinct from its subsidiaries, including Swiss Reinsurance company ltd. as a holding company with no operations of its own, Swiss Re is dependent upon dividends and other payments from Swiss Reinsurance company ltd and its other principal operating subsidiaries.
Swiss Re has over 60 office locations in more than 20 countries. For a full list of our office locations and service offerings, please visit swissre.com
Share Register share_register@swissre.com americas armonk 175 king Street armonk, new york 10504 overland Park 5200 Metcalf avenue Overland Park, kS 66202
New York 55 East 52nd Street new york, ny 10055 toronto 150 king Street west toronto, Ontario M5H 1J9 telephone +1 416 408 0272 mexico City Insurgentes Sur 1898, Piso 8 torre Siglum colonia Florida México, d.F. 01030
São Paulo avenida Paulista, 500 Bela Vista São Paulo, SP 01310-000 europe (incl. middle east and africa)
Hong Kong 61 / F central Plaza 18 Harbour Road G.P.O. Box 2221 wanchai, Hk
Photography: Swiss Re (cover, pg 1) Geri krischker (pgs 7, 9, 73–77, 81/01, 02, 88/01, 02, 89/01, 03, 90/03)
the web version of the 2013 annual Report is available at: www.swissre.com/annualreport