Property 26% Other liabilities 17% Specialty 10% Accident & Health 11% Credit
North America 9% Asia-Pacific 22% Europe (including Middle East and Africa)
Swiss Re Corporate Solutions Ltd A+ Aa3 AASwiss Re International SE A+ Aa3 AAWestport Insurance Corporation A+ Aa3 AAOther Corporate Solutions US entities (NAS, NAE, NAC, FSIC) A+ AASwiss Re Corporate Solutions Brasil Seguros Baa3 Company Aseguradora de Fianzas S.A. Confianza Baa2
Group financial statements 2 Income statement 2 Statement of comprehensive income 3 Balance sheet 4 Statement of shareholder’s equity 6 Statement of cash flows 8
General Information 81 Cautionary note on forward-looking statements 81 Note on risk factors 83
Income/loss before income tax expense/benefit –949 –564 Income tax expense/benefit 11 204 113
Net income/loss attributable to common shareholder –740 –447 1 Total impairments for the years ended 31 December of USD 4 million in 2017 and nil in 2018 were fully recognised in earnings.
Balance as of period end 22 12 34 2018 Net unrealised investment Foreign currency Accumulated other comprehensive USD millions gains/losses1 translation income
Balance as of 1 January 22 12 34 Impact of Accounting Standards Updates2 –7 3 –4 Change during the period –122 –48 –170 Amounts reclassified out of accumulated other comprehensive income 31 31 Tax 16 –2 14
Investments 6, 7, 8 Fixed income securities, available-for-sale (including 1 711 in 2017 and 1 238 in 2018 subject to securities lending and repurchase agreements) (amortised cost: 2017: 6 647; 2018: 6 314) 6 663 6 264 Equity securities, available-for-sale (including 36 in 2017 subject to securities lending and repurchase agreements) (cost: 2017: 271)1 273 Equity securities, at fair value through earnings (including 73 in 2018 subject to securities lending and repurchase agreements)1 180 Short-term investments (including 109 in 2017 and 84 in 2018 subject to securities lending and repurchase agreements) 455 393 Other invested assets 2 102 2 066
Equity Common shares, CHF 1 000 par value 2017: 100 000; 2018: 100 000 shares authorised and issued 119 119 Additional paid-in capital 1 719 1 665 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax 22 –60 Foreign currency translation, net of tax 12 –35
Non-controlling interests 169 143 1 The Group changed the presentation of its Long term care and Disability portfolio which is fully retroceded to an external party. Comparative information for 2017 has been adjusted accordingly.
Additional paid-in capital Balance as of 1 January 687 1 719 Capital contribution 1 000 Impact of sale to non-controlling shareholder 34 Dividends on common shares –50 Share-based compensation –2 –4 Balance as of period end 1 719 1 665
Net unrealised investment gains/losses, net of tax Balance as of 1 January 12 22 Impact of ASU 2018-021 1 Impact of ASU 2016-011 –8 Changes during the period 10 –75 Balance as of period end 22 –60
Retained earnings Balance as of 1 January 1 527 637 Transactions under common control –8 Net income/loss attributable to common shareholder –740 –447 Dividends on common shares –150 Impact of ASU 2018-021 –4 Impact of ASU 2016-011 8 Balance as of period end 637 186
Cash flows from operating activities Net income/loss attributable to common shareholder –740 –447 Add net income/loss attributable to non-controlling interests –5 –4 Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items 50 49 Net realised investment gains/losses –105 –15 Income from equity-accounted investees, net of dividends received –48 –37 Change in: Technical provisions and other reinsurance assets and liabilities, net 1 067 500 Funds held by ceding companies and under reinsurance treaties –73 –399 Reinsurance recoverable on unpaid claims 322 175 Other assets and liabilities, net –28 –242 Income taxes payable/recoverable –226 –156 Trading positions, net 32 49
Cash flows from investing activities Fixed income securities: Sales 2 665 2 578 Maturities 584 307 Purchases –4 905 –2 664 Net purchases/sales/maturities of short-term investments 786 74
Cash flows from financing activities Issuance/repayment of long-term debt 300 Capital contribution received from parent 1 000 Dividends paid to parent –150 –50
Total net cash provided/used 149 153 Effect of foreign currency translation 23 –11
Change in cash and cash equivalents 172 142 Cash and cash equivalents as of 1 January 449 621
In the half-year 2018 report, the impact of the Accounting Standard Updates (ASUs) 2016-01 and 2018-02 was reflected in the Group’s statement of comprehensive income. In the year-end 2018 report, the Group revised the presentation and presented the statement of comprehensive income without the impact of these ASUs totalling USD –4 million. The revision had no impact on the Group’s financial position, net income and cash flow. Please refer to the subsection ”Adoption of new accounting standards” for more details about the ASUs.
Use of estimates in the preparation of financial statements The preparation of financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the related disclosure, including contingent assets and liabilities. The Group’s liabilities for unpaid claims and claim adjustment expenses and policy benefits for life and health include estimates for premium, claim and benefit data not received from ceding companies at the date of the financial statements. In addition, the Group uses certain financial instruments and invests in securities of certain entities for which exchange trading does not exist. The Group determines these estimates based on historical information, actuarial analyses, financial modelling and other analytical techniques. Actual results could differ significantly from the estimates described above.
sale securities, investments in consolidated subsidiaries and investments accounted for using the equity method are reported in shareholder’s equity.
Investments The Group’s investments in fixed income securities are classified as available-for-sale (AFS) or trading. Fixed income securities AFS are carried at fair value, based on quoted market prices, with the difference between the applicable measure of cost and fair value being recognised in shareholder’s equity. Trading fixed income securities are carried at fair value with unrealised gains and losses recognised in earnings. A trading classification is used for securities that are bought and held principally for the purpose of selling them in the near term.
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 will continue to be amortised. The Group accounts for modifications of insurance and reinsurance contracts that result in a substantially changed contract as an extinguishment of the replaced contract. The associated deferred acquisition costs are written off immediately through income and any new deferrable costs associated with the replacement contract are deferred.
Business combinations The Group applies the acquisition 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. The underlying assets and liabilities acquired are subsequently accounted for according to the relevant US GAAP guidance. This includes specific requirements applicable to subsequent accounting for assets and liabilities recognised as part of the acquisition method of accounting, including goodwill and other intangible assets.
The Group releases stranded tax effects for unrealised gains/losses on AFS securities to earnings on a straight-line basis over the average duration of the relevant AFS portfolio as an approximation of when the individual securities within the portfolio are sold or mature. For foreign currency translation, stranded tax effects are released to earnings in line with the recycling of the underlying foreign currency translation amounts.
All liabilities for life and health policy benefits are retroceded to an external party.
Adoption of new accounting standards In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers”, which creates topic 606, “Revenue from Contracts with Customers”. ASU 2014-09 outlines the principles that an entity should follow to provide useful information about the amount, timing and uncertainty of revenue and cash flows arising from contracts with its customers. The standard requires an entity to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Insurance contracts and financial instruments are not in the scope of the new standard. The Group adopted ASU 2014-09 on 1 January 2018 together with the following ASUs related to topic 606: ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, ASU 2016-10 “Identifying Performance Obligations and Licensing”, ASU 2016-12 “Narrow-Scope Improvements and Practical Expedients” and ASU 2016-20 “Technical Corrections and Improvements to Topic 606”. The retrospective adoption of ASU 2014-09 and related ASUs did not have a material impact on the Group's financial statements.
including partnerships, unincorporated joint ventures and limited liability companies at fair value through earnings, with the exception of equity method investments, investments that result in consolidation or investments for which the measurement alternative has been elected. The Group did not elect the measurement alternative for any of its investments. For financial liabilities to which the fair value option has been applied, the ASU requires an entity to separately present the change in fair value attributable to instrument-specific credit risk in other comprehensive income (OCI) rather than in net income. In addition, the ASU requires an entity to assess whether a valuation allowance is needed on a deferred tax asset (DTA) related to fixed income securities available-for-sale in combination with the entity’s other DTAs rather than separately from other DTAs. The Group adopted ASU 2016-01 on 1 January 2018 together with ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10)”. The opening balance sheet impact from the adoption was a reclassification within shareholder’s equity from net unrealised investment gains, net of tax, to retained earnings of USD 8 million. This reclassification can be found in the statement of shareholder’s equity.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, an update to topic 715, “Compensation – Retirement Benefits”. The amendments in this update require that an employer separates other components of net benefit cost from the service cost component and presents these components outside a subtotal of income from operations, if one is presented. Further, the ASU only allows the service cost component of net benefit cost to be capitalised. The Group adopted ASU 2017-07 retrospectively on 1 January 2018. The adoption did not have a material impact on the Group’s financial statements.
16 Swiss Re Corporate Solutions Ltd 2018 Annual Report applied by a lessor is largely unchanged from that applied under the current guidance. The Group will adopt this ASU on 1 January 2019. It is expected that the adoption will not have a material impact on the Group's financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, an update to topic 350, “Intangibles – Goodwill and Other”. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognised assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its regular goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognise an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognised should not exceed the total amount of goodwill allocated to that reporting unit. The new requirements are effective for goodwill impairment tests in annual and interim periods beginning after 15 December 2020. Early adoption of the ASU is permitted. The Group is currently assessing the impact of the new requirements.
Specialty The Specialty business segment consists of dedicated insurance offerings to specific industries on a global scale such as aviation and space, engineering and construction and marine.
Net premiums written 1 219 329 1 012 552 488 3 600 Change in unearned premiums 17 –6 –33 97 –24 51
Business segments – income statement For the year ended 31 December 2018 Accident & USD millions Property Health Other liability Specialty Credit Total
Net premiums written 1 424 431 1 129 694 444 4 122 Change in unearned premiums –83 –18 –79 14 –31 –197
Expenses Claims and claim adjustment expenses –1 115 –318 –1 035 –651 –122 –3 241 Acquisition costs –199 –59 –132 –109 –108 –607 Operating expenses –272 –69 –225 –196 –72 –834
United States 2 192 2 328 Brazil 243 245 United Kingdom 220 223 Germany 188 188 Canada 155 160 Australia 126 151 Netherlands 87 113 France 97 107 Bermuda 80 86 Italy 66 69 Other 796 802
Premiums earned, thereof: Direct 3 229 3 430 Reinsurance 1 021 1 042 Ceded –599 –547
Claims paid, thereof: Gross –2 760 –3 261 Ceded 558 764
The Group cedes certain re/insurance contracts to affiliated companies within the Swiss Re Group, but outside of the Group (please refer to Note 13).
4 Unpaid claims and claim adjustment expenses A reconciliation of the opening and closing reserve balances for unpaid claims and claim adjustment expenses for the years ended 31 December is presented as follows: Balance as of 1 January 10 271 11 818 Reinsurance recoverable −5 429 –5 458
Foreign exchange 90 –102 Effect of acquisitions, disposals, new retroactive reinsurance and other items 88 –44
SRCS was incorporated in 2011 and started operations in 2012. Corporate Solutions as a separately managed business unit likewise started operations in 2012 after the transfer of Swiss Reinsurance Company Ltd’s investment in SRCS in 2012 to the Swiss Re Group holding company, Swiss Re Ltd. Therefore, seven accident years and reporting periods are shown for the Group. Claims arising from older accident years prior to 2012 are shown as a reconciling item in ”All liabilities before 2012” in the claims development tables. All but an immaterial portion of these claims arise from accident years older than 10 years and therefore are out of the required range of disclosure.
In most cases, these standard actuarial techniques encompass a number of loss development factor techniques applied to claim tables of paid and reported losses. Other actuarial techniques may be applicable to specific categories. For instance, the analysis of frequency and severity could be applied in all disaggregation categories. In some cases, techniques specific to the projection of future payments for specific risks such as asbestos or pollution claims are applied to both proportional and non-proportional liability claims (see also separate section ’Asbestos and environmental claims exposure’ on page 24).
Claims frequency information Claims frequency is displayed for direct business only as individual claims information is generally not available for assumed and ceded business. Claims are counted individually per contract to produce the claims frequency table. For some direct business, summary reports are received and multiple claims are booked under a single claim code. This is usually done at a programme, policy year, state, country and/or line of business level of detail. This approach may be applied to business, which has a high volume of claim counts, but with only minor claims dollars associated with each claim.
Change in claim counts in Property for accident years 2013 and 2014 relate mostly to an agriculture programme written in 2013, leading to high claim counts in those years.
Liabilities for claims and claim adjustment expenses, net of reinsurance 947
The incurred claims and allocated claim adjustment expenses for Accident & Health experienced a large increase in small-to-mid sized claims relating to accident years 2017 and 2018. Accident & Health was impacted by the IHC Risk Solutions, LLC (IHC) acquisition in reporting year 2016. There was an increase in expected losses and changes in the accident year split for accident year 2016. The liabilities before 2012 relate mainly to accident years 2006 and prior.
Changes in claim count across accident years is volume driven. For accident year 2017, a portion of the Accident & Health business from the IHC acquisition moved from assumed reinsurance to direct business which is driving the increase in direct claim counts in that year relative to accident year 2016.
Specialty Incurred claims and allocated claim adjustment expenses, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance 917
Credit business may have a moderate reporting lag between the accident date and the date reported to the Group. Some of this business tends to have very small payouts on a high volume of claims. The high volume of small claims increases the variability of the reported claim counts by year, but may not necessarily have a significant impact on incurred losses. For all recent years, there will be significant increases in reported claim counts over time, which will narrow the gap of claim counts.
Reconciliation of gross liability for unpaid claims and claim adjustment expenses The following table reconciles the Group’s net outstanding liabilities to the gross liabilities for unpaid claims and claim adjustment expenses. The net outstanding liabilities correspond to the total liabilities for unpaid claims and claim adjustment expenses, net of reinsurance for each disaggregation category. Other short-duration contract lines include reserves for business that is not material to the Group.
Total unpaid claims and claim adjustment expenses 11 929 1 The reserves included in “Long duration contracts” are retroceded to an external party except for an insignificant part which remains with the Group.
34 Swiss Re Corporate Solutions Ltd 2018 Annual Report 6 Investments Investment income Net investment income by source was as follows: Fixed income securities 130 163 Equity securities 7 5 Short-term investments 7 9 Other current investments 9 7 Share in earnings of equity-accounted investees 48 37 Cash and cash equivalents 3 7 Net result from deposit-accounted contracts 6 7 Deposits with ceding companies 5
Equity securities available-for-sale: Gross realised gains1 97 Gross realised losses1 –4
Impairment on fixed income securities related to credit losses Other-than-temporary impairments for debt securities are bifurcated between credit and non-credit components, with the credit component recognised through earnings and the non-credit component recognised in other comprehensive income. The credit component of other-than-temporary impairments is defined as the difference between a securityʼs amortised cost basis and the present value of expected cash flows. Methodologies for measuring the credit component of impairment are aligned to market observer forecasts of credit performance drivers. Management believes that these forecasts are representative of median market expectations.
Investments available-for-sale Amortised cost or cost and estimated fair values of fixed income securities classified as available-for-sale as of 31 December were as follows: 2017 Amortised cost Gross unrealised Gross unrealised Estimated USD millions or cost gains losses fair value
Total 4 455 27 –28 4 454 Corporate debt securities 1 866 23 –6 1 883 Mortgage- and asset-backed securities 326 1 –1 326
Equity securities available-for-sale 271 2 273 2018 Amortised cost Gross unrealised Gross unrealised Estimated USD millions or cost gains losses fair value
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 2 580 6 –18 2 568 US Agency securitised products 220 1 –1 220 States of the United States and political subdivisions of the states 404 5 –4 405 Canada 417 1 –5 413 Brazil 196 3 199 Australia 144 –1 143 Other 197 1 –5 193
Total 4 158 17 –34 4 141 Corporate debt securities 1 827 4 –34 1 797 Mortgage- and asset-backed securities 329 1 –4 326
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 2 313 8 455 6 2 768 14 US Agency securitised products 10 0 39 0 49 0 States of the United States and political subdivisions of the states 52 1 84 2 136 3 Canada 17 2 14 0 31 2 Brazil 37 0 37 0 Australia 105 0 17 1 122 1 Other 41 1 132 7 173 8
Total 2 575 12 741 16 3 316 28 Corporate debt securities 544 3 90 3 634 6 Mortgage- and asset-backed securities 166 1 36 0 202 1
Maturity of fixed income securities available-for-sale The amortised cost or cost and estimated fair values of investments in fixed income securities available-for-sale by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2017 and 2018, USD 1 694 million and USD 1 689 million, respectively, of fixed income securities available-for-sale were callable.
Due in one year or less 765 762 2 054 2 042 Due after one year through five years 3 908 3 905 2 233 2 216 Due after five years through ten years 1 243 1 259 1 193 1 180 Due after ten years 405 411 505 500 Mortgage- and asset-backed securities with no fixed maturity 326 326 329 326
Accrued expenses and other liabilities2 93 0 73 0 360 526
Other invested assets Derivative financial instruments 14 14 Reverse repurchase agreements 20 20 Equity-accounted investments 1 944 1 944 Other 8 80 88
Derivative financial instruments – assets 14 14 –1 13 Reverse repurchase agreements 20 20 –20 0
Gross amounts of Net amounts of financial Related financial 2018 recognised Collateral set-off liabilities presented instruments not set-off USD millions financial liabilities in the balance sheet in the balance sheet in the balance sheet Net amount
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 set-off 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 it has been offset on the 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.
7 Fair value disclosures Fair value, as defined by the Fair Value Measurements and Disclosures Topic, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Corporate debt securities mainly include US and European investment-grade positions, which are priced on the basis of quotes provided by third-party pricing vendors and first utilise valuation inputs from actively traded securities, such as bid prices, bid spreads to Treasury securities, Treasury curves and same or comparable issuer curves and spreads. Issuer spreads are determined from actual quotes and traded prices and incorporate considerations of credit/default, sector composition, and liquidity and call features. Where market data is not available, valuations are developed based on the modelling techniques that utilise observable inputs and option-adjusted spreads and incorporate considerations of the security’s seniority and maturity and the issuer’s corporate structure.
Governance around level 3 fair valuation The Asset Valuation Committee, endorsed by the Swiss Re Group Executive Committee, has a primary responsibility for governing and overseeing all of the Group’s asset and derivative valuation policies and operating parameters (including level 3 measurements). The Asset Valuation Committee delegates the responsibility for implementation and oversight of consistent application of the Groupʼs pricing and valuation policies to the Pricing and Valuation Committee.
The Pricing and Valuation Committee, which is a joint Risk Management & Finance management control committee, is responsible for the implementation and consistent application of the pricing and valuation policies. Key functions of the Pricing and Valuation Committee include: oversight over the entire valuation process, approval of internal valuation methodologies, approval of external pricing vendors, monitoring of the independent price verification (IPV) process and resolution of significant or complex valuation issues.
Quoted prices in active markets for identical assets Significant other observable Significant unobservable
Investments measured at net asset value as 2018 and liabilities inputs inputs practical USD millions (level 1) (level 2) (level 3) expedient Total
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December, the reconciliations of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs were as follows: 2017 Derivative Total Derivative Total USD millions assets assets liabilities liabilities
Closing balance as of 31 December 16 16 –76 –76 1 Transfers are recognised at the date of the event or change in circumstances that caused the transfer.
Assets and liabilities Balance as of 1 January 16 16 –76 –76
Purchases 3 3 0 Issuances 0 –140 –140 Sales –3 –3 23 23 Settlements –10 –10 42 42 Transfers into level 31 0 0 Transfers out of level 31 0 0 Impact of foreign exchange movements 0 0
Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) for the years ended 31 December were as follows: Gains/losses included in net income for the period 12 30 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date 22 3
Credit default model Market implied probability of Nat Cat event 1−14% (5.8%)
Power outage contracts –24 –18 Proprietary option model Risk margin 6−14% (7%) Average power forward price USD 36−91 (USD 44.7)
The fair values represent the gross carrying value amounts at the reporting date for each class of derivative contract held or issued by the Group. The gross fair values are not an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA master agreements or their equivalent. Management believes that such agreements provide for legally enforceable set-off in the event of default, which substantially reduces credit exposure.
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: 2017 Notional amount assets/liabilities
Derivatives designated as hedging instruments Foreign exchange contracts 156 –3 –3
10 Debt The Groupʼs debt as of 31 December was as follows: Long-term subordinated financial debt 497 798
Maturity of long-term debt As of 31 December, long-term debt as reported above had the following maturities: Total carrying value 497 798
Interest expense on long-term debt Interest expense on long-term debt for the years ended 31 December was as follows: Subordinated financial debt 23 24
Long-term debt issued in 2018 In December 2018, Swiss Re Ltd granted a USD 300 million subordinated floating rate callable loan to Swiss Re Corporate Solutions Ltd due in 2028 with a first optional redemption date on 19 December 2023. The loan bears interest at a floating rate of 6 month Libor plus 2.85%. The 6 month Libor rate is reset every 6 months.
48 Swiss Re Corporate Solutions Ltd 2018 Annual Report 11 Income taxes The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which it operates. The components of the income tax expense/benefit were: Current taxes 31 66 Deferred taxes –235 –179
Tax rate reconciliation The following table reconciles the expected tax expense/benefit at the Swiss statutory tax rate to the actual tax expense/benefit in the accompanying income statement: Income tax at the Swiss statutory tax rate of 21.15% (2017: 20.61%) –196 –119 Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates 23 7 Impact of foreign exchange movements –12 5 Tax exempt income/dividends received deduction 6 –10 Change in valuation allowance 4 5 Change in statutory rate –15 –7 Other income based taxes 3 22 Other, net1 –17 –16
For the year ended 31 December 2018 the Group reported a tax benefit of USD 113 million on a pre-tax loss of USD 564 million, compared to a benefit of USD 204 million on a pre-tax loss of USD 949 million for 2017. This translates into an effective tax rate in the current and prior-year reporting periods of 20.0% and 21.5%, respectively.
The lower tax rate in the current year is mainly driven by tax benefits from large losses.
Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows: Deferred tax assets Deferred acquisition costs 21 3 Income accrued/deferred 7 26 Unearned premium reserve 42 67 Technical provisions 21 37 Benefit on loss carryforwards 229 352 Currency translation adjustments 24 26 Other 32 70
As of 31 December 2018, the Group had USD 1 591 million net operating tax loss carryforwards, expiring as follows: USD 1 million in 2019, USD 1 million in 2021, USD 2 million in 2022, USD 1 422 million in 2023 and beyond, and USD 165 million never expire.
As of 31 December 2018, the Group has USD 13 million capital loss carryforwards expiring in 2023.
Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such expense for 2017 and 2018 were nil. As of 31 December 2017 and 2018, USD 1 million and nil were accrued for the payment of interest and penalties. The accrued interest balance is included within the deferred and other non-current taxes section reflected above and in the balance sheet.
The following table summarises jurisdictions and tax years that remain subject to examination: United States 2011 – 2018
12 Benefit plans SRCS is a wholly owned subsidiary of Swiss Re Ltd. Swiss Re Ltd is the ultimate parent company of the Swiss Re Group. SRCS and its subsidiaries participate in various pension plans sponsored by affiliated companies of the Swiss Re Group. These pension plans include the “Pension Fund Swiss Reinsurance Company (Swiss Re)“ among others.
Net premiums written –143 –177 Change in unearned premiums 6 16
Premiums earned –137 –161 Net investment income/loss –17 –20 Net realised investment gains/losses 2 37
Expenses Claims and claim adjustment expenses –188 –85 Acquisition costs 19 4 Operating expenses –346 –411 Interest expenses –1
Assets Other invested assets 11 10 Premiums and other receivables 166 160 Reinsurance recoverable on unpaid claims 3 727 3 675 Funds held by ceding companies 56 83 Deferred acquisition costs 1 –10 Other assets 202 480
Liabilities Unpaid claims and claim adjustment expenses 283 528 Unearned premiums 108 74 Funds held under reinsurance treaties 652 298 Reinsurance balances payable 269 168 Long-term debt 300 Accrued expenses and other liabilities 137 147
Share in earnings from equity-accounted investees for the years ended 31 December 2017 and 2018 were USD 48 million and USD 37 million, respectively.
The party that has a controlling financial interest is called a primary beneficiary and consolidates the VIE. The party is deemed to have a controlling financial interest if it has both: the power to direct the activities of the VIE that most significantly impact the entity‘s economic performance; and the obligation to absorb the entity‘s losses that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
For all its variable interests in VIEs, the Group assesses whether it has a controlling financial interest in these entities and, thus, is the primary beneficiary. 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. Additionally, 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.
The Group invests in an investment vehicle that is consolidated by Swiss Reinsurance Company. The investment vehicle is a VIE because it is structured as an umbrella company comprised of multiple sub-funds.
Engaging our own valuation experts to perform independent valuations of selected level 2 and 3 investments.
In particular, loss reserves for ‘long tail’ lines of business (for example, the Liability, US Asbestos and Environmental, Motor Liability and Workers’ Compensation portfolios) are generally more difficult to project. This is due to the protracted period over which claims may be reported as well as the fact that claim settlements are often less frequent but of higher magnitude. They are also subject to greater uncertainties than claims relating to ‘short-tail’ business. Long-tailed lines of business generally rely on many assumptions based on experts’ judgement.
In relation to the matters set out opposite, our substantive testing procedures included the following: Testing the completeness and accuracy of underlying data utilised by the Company’s actuaries in estimating P&C loss reserves.
Involving PwC’s internal actuarial specialists to independently test management’s estimates of P&C loss reserves, and evaluate the reasonableness of the methodology and assumptions used by comparing them with recognised actuarial practices and by applying our industry knowledge and experience.
Performing independent projections of selected portfolios. For these portfolios, we compared our calculations of projected reserves with those of the Company taking into account the available corroborating and contrary evidence and challenging management’s assumptions as appropriate.
Assessing how the Company had considered new information or changes in tax law or case law, and assessing the Company’s judgement of how these impact the Company’s position or measurement of the required provision.
Reinsurance and sub-holding company Swiss Re Corporate Solutions Ltd (the Company), domiciled in Zurich, Switzerland, performs a dual role within the Swiss Re Group as both a reinsurance company and a sub-holding company for the Corporate Solutions Business Unit. The Company is a whollyowned subsidiary of Swiss Re Ltd, the ultimate parent company domiciled in Zurich, Switzerland. In 2018, the Company directly employed worldwide staff at an average of 296 full-time equivalents (2017: 303 full-time equivalents).
Financial year 2018 Net loss for the financial year 2018 amounted to CHF -498 million, compared to a net loss of CHF -904 million in the prior year.
The financial year under review was marked by several large man-made losses, partially offset by lower natural catastrophe losses compared to prior year and the change of the intragroup retrocession programs with Westport Insurance Corporation.
Premiums earned decreased by 35.7% to CHF 1 800 million in 2018 (2017: CHF 2 798 million), mainly due to the change of the intragroup retrocession program with Westport Insurance Corporation, partially offset by higher premiums from Swiss Re International driven by the new intragroup quota share agreement for German credit & surety business. Excluding the effects of foreign exchange movements, premiums earned decreased by 35.5%.
Claims and claim adjustment expenses decreased by 46.7% to CHF 1 519 million in 2018 (2017: CHF 2 849 million). The reduction was mainly driven by lower natural catastrophe losses, partially offset by several large man-made losses, and the change of the intragroup retrocession program with Westport Insurance Corporation. Excluding the effects of foreign exchange movements, claims and claim adjustment expenses decreased by 46.4%.
Operating costs increased by CHF 41 million to CHF 226 million in the current year (2017: CHF 185 million) due to higher administrative expenses and lower capitalised project costs.
Result from other income and expenses Net result amounted to CHF -57 million , compared to CHF -70 million in the prior year. The increase in the result from other expenses and income was due to higher foreign exchange gains compared to prior year, mainly due to the strengthening of the US dollar against the Swiss franc.
Assets Total assets decreased by 8.6% to CHF 8 648 million at 31 December 2018 (31 December 2017: CHF 9 466 million). Excluding the effects of foreign exchange movements, total assets increased by 8.7%.
Total investments increased from CHF 5 769 million at 31 December 2017 to CHF 6 024 million at 31 December 2018, driven by higher reinsurance business volume and the increase of a loan from the parent company Swiss Re Ltd.
Funds held by ceding companies decreased by 69.0% to CHF 486 million at 31 December 2018 (31 December 2017: CHF 1 567 million). The reduction was mainly due to reduction of funds held by Westport Insurance Corporation as a result of change of the intragroup retrocession program and discontinuation of funds held with Swiss Re International Zurich Branch.
Reinsurance balance payables decreased by CHF 138 million mainly with Reinsurance carriers.
Subordinated liabilities increased by CHF 301 million mainly due to a new loan from the parent company Swiss Re Ltd.
Shareholder’s equity Shareholder’s equity decreased from CHF 1 652 million at 31 December 2017 to CHF 1 106 million at 31 December 2018. The decrease resulted from the net loss for 2018 of CHF 498 million and the ordinary cash dividend of CHF 48 million.
Future prospects and business development Structural changes Change in subsidiaries The Company contributed in kind its shareholding in the service companies in Slovakia, Mexico, Brasil and the United Kingdom to its subsidiary Swiss Re Corporate Solutions Investment Holding Company Ltd.
Reinsurance business Strategy and priorities The Company conducts the commercial insurance business of the Swiss Re Group and is committed to deliver long-term profitability and economic growth. Through our network of subsidiaries, future growth aspirations are focused on selected areas, with dedicated strategic initiatives in Primary Lead and further broadening of the footprint. Corporate Solutions offers customised, innovative and multi-line, multi-year risk transfer solutions, taking into account the unique needs of local markets and specialty industries.
̤ The Compliance function oversees Swiss Re’s compliance with applicable laws, regulations, rules, and the Group Code of Conduct. It also assists the Business Unit and the Group Board of Directors, Executive Committees and other management bodies in identifying, mitigating and managing compliance risks.
Change in unearned premiums gross –122 338 Change in unearned premiums retroceded 2 1 Change in unearned premiums net –120 339
Investments 2 Investment income 124 64 Investment expenses –13 –11 Allocated investment return –55 –59 Investment result 56 –6
Interest expenses on subordinated liabilities –23 –24 Other income 0 10 Other expenses –47 –43 Result before income tax expense –903 –499 Income tax expense –1 1 Net result –904 –498
Shares in investment funds 1 853 1 823 Short-term investments 290 508
Provisions for profit commissions gross 3 50 51 Equalisation provision gross – – Total technical provisions gross 6 711 6 308
Liabilities from derivative financial instruments 16 7 Reinsurance balances payable 3 480 342 Other liabilities 60 30 Accrued expenses 16 14 Subordinated liabilities 487 788
Notes Swiss Re Corporate Solutions Ltd Reinsurance and sub-holding company Swiss Re Corporate Solutions Ltd (the Company), domiciled in Zurich, Switzerland, performs a dual role within the Swiss Re Group as both a reinsurance company and a sub-holding company for the Corporate Solutions Business Unit. The Company is a wholly-owned subsidiary of Swiss Re Ltd, the ultimate parent company domiciled in Zurich, Switzerland.
Time period The financial year 2018 comprises the accounting period from 1 January 2018 to 31 December 2018.
Fixed income securities are carried at their amortised cost, less necessary depreciation to address other than temporary market value decreases.
Investment income Subsidiaries and affiliated companies 2 – – 2 Fixed income securities 20 – 0 20 Equity securities – – 0 0
Investment management expenses –12 – – –12 Investment expenses –12 0 –1 –13
3 Assets and liabilities from reinsurance 4 Change in shareholder’s equity 5 Share capital and major shareholder The nominal share capital of the Company amounted to CHF 100 million. It is divided into 100 000 shares, each with a nominal value of CHF 1 000. The shares were fully paid-in and held directly by Swiss Re Ltd. As of 31 December 2018 and 2017, the Company was a fully owned subsidiary of Swiss Re Ltd.
6 Contingent liabilities As of 31 December 2018, the Company has issued limited guarantees of notional CHF 920 million (2017: CHF 869 million) to a subsidiary in support of individual transactions.
Funds held by ceding companies 1 567 – 1 567 486 – 486
Fair value of securities transferred to third parties – – Fair value of securities transferred to affiliated companies 744 509
8 Security deposits To secure the technical provisions at the 2018 balance sheet date, securities with a value of CHF 642 million (2017: CHF 484 million) were deposited in favour of ceding companies. Thereof CHF 81 million were security deposits to external third parties (2017: none). The Company further secured reinsurance obligation towards Swiss Re international SE, Luxembourg, Zurich branch with CHF 348 million (2017: none) in CHF denominated and borrowed securities pursuant to regulatory directions.
13 Obligations towards employee pension fund As of 31 December 2018, other liabilities included CHF 0.4 million payable to the employee pension fund (2017: CHF 1 million).
Other reinsurance revenues 3 1 Premiums and other receivables from reinsurance 1 1 Reinsurance balances payable 1 0
Compania Aseguradora de Fianzas S.A. Confianza Colombia Bogotá 0% 0% Swiss Re Corporate Solutions México Seguros, S.A. de C.V. Mexico Mexico City 0% 1% Swiss Re Corporate Solutions México Servicios, S. de R.L. de C.V. Mexico Mexico City 100% 67% Swiss Re Corporate Solutions Services Ltd United Kingdom London 100% 100% Swiss Re Corporate Solutions Services s.r.o. Slovakia Bratislava 100% 100% Swiss Re Serviços de Consultoria em Seguros e Resseguros Ltda Brazil São Paulo 100% 100%
Swiss Re Corporate Solutions México Seguros, S.A. de C.V. Mexico Mexico City 100% 99% Swiss Re Corporate Solutions México Servicios, S. de R.L. de C.V. Mexico Mexico City 0% 33% Swiss Re Serviços de Consultoria em Seguros e Resseguros Ltda Brazil São Paulo 0% 0% Westport Insurance Corporation - Escritório de Representação no Brasil Ltda. Brazil São Paulo 0% 0%
Swiss Re Corporate Solutions Brasil Seguros S.A. Brazil São Paulo 60% 60% Compania Aseguradora de Fianzas S.A. Confianza Colombia Bogotá 51% 51% Swiss Re Corporate Solutions Advisors South Africa (Pty) Ltd South Africa Johannesburg 100% 100% Swiss Re Corporate Solutions Investment Holding Company Ltd Switzerland Zurich 100% 100%
Voluntary profit reserves brought forward 46 903 Allocation from legal reserves from capital contributions 905 1 000 Voluntary profit reserves after proposed allocation of legal reserves from capital contributions and before cash dividend 951 1 903 Cash dividend -481 – Voluntary profit reserves after proposed allocation of legal reserves from capital contributions and after cash dividend 903 1 903 1 The 2017 figure was recalculated based on the final cash dividend, converted into CHF at spot rate on the settlement date.
Legal reserves from capital contributions brought forward 1 342 1 439 Capital injection on 1.11.2017 from Swiss Re Ltd 1 002 – Proposed allocation to voluntary profit reserves –905 –1 000 Legal reserves from capital contributions after proposed allocation to voluntary profit reserves 1 439 439
Unobservable or interpolated inputs used for the valuation of certain investments
Investment valuation continues to be an area with inherent risk for certain investments that have unobservable or interpolated inputs. The risk is not the same for all investment types and is greatest for derivatives, which are more difficult to value because quoted prices are not always available.
How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls around the valuation models for certain investments, including the Company’s independent price verification process. We also tested management’s data integrity and change management controls relating to the valuation models.
In particular, loss reserves for ‘long tail’ lines of business (for example, the Liability, Motor Liability and Workers’ Compensation portfolios) are generally more difficult to project. This is due to the protracted period over which claims may be reported as well as the fact that claim settlements are often less frequent but of higher magnitude. Long-tailed lines of business generally rely on many assumptions based on experts’ judgement.
̤ Performing independent projections of selected portfolios, we compared our calculations of projected reserves with those of the Company taking into account the available corroborating and contrary evidence and challenging management’s assumptions as appropriate.
How our audit addressed the key audit matter In relation to the matter set out opposite, our substantive testing procedures included the following: ̤ Assessing whether the group valuation method is still appropriate.
̤ Understanding changes in the approach and discussing these with management to ensure they are in accordance with our own expectation based on our knowledge of the business and industry.
Based on the work performed, we consider the methods and assumption used by management to be appropriate.
These factors are not exhaustive. We operate in a continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance on forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
This communication is not intended to be a recommendation to buy, sell or hold securities and does not constitute an offer for the sale of, or the solicitation of an offer to buy, securities in any jurisdiction, including the United States. Any such offer will only be made by means of a prospectus or offering memorandum, and in compliance with applicable securities laws.
Market risk Volatility and disruption in the global financial markets could 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.
Liquidity risks The Group’s business requires, and its clients expect, that it has sufficient capital and sufficient liquidity to meet its insurance 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 coverage obligations. The Group’s uses of funds include obligations arising in its insurance business, 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.
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 the Group’s 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 clients, 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.
Tax authorities may also actively pursue additional taxes based on retroactive changes to tax laws. 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 and malfeasance, such as undertaking or facilitating cyber attacks on internal systems. 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.
Capital, funding, reserve and cost allocations are made at the Swiss Re Group level across the four operating segments based principally on business plans as measured against US GAAP and economic value management metrics. Decisions at the Swiss Re Group level in respect of the broader Swiss Re Group could have an adverse impact on the Group’s financial condition, including its capital and liquidity levels, as well as on its SST ratio. As part of the Swiss Re Group’s focus on efficient capital allocation, the Group expects to be paying dividends to SRL. Decisions on dividends payable by each of the operating segments, including the Group, are made at the Swiss Re Group level based on legal entity, regulatory, capital and liquidity considerations. While to date the Group remains wholly owned by SRL, in the future, the Swiss Re Group may partner (for purposes of acquisitions or otherwise) with other investors in, or within, one or more of its business units or sub-groups within its business units (including the Group), which, subject to applicable regulatory requirements, have the potential to alter its historical approaches taken in respect of capital, liquidity, funding and/or dividends, as well as other governance matters, including strategy for such business unit or sub-group and board composition at the relevant corporate level. The Group’s structure could also change in connection with acquisitions or dispositions. To the extent it undertakes acquisitions, it is subject to the risks inherent in acquiring and integrating new operations.