Gross premiums earned by segment, 2017 (Total USD 4 250 million)
Property 26% Other liability 16% Specialty 8% Accident & Health 13% Credit
North America 8% Asia-Pacific 22% Europe (including Middle East and Africa)
Swiss Re Corporate Solutions Ltd 56 Annual Report 56 Income statement 60 Balance sheet 61 Notes 63 Proposal for allocation of disposable result 72 Report of the statutory auditor 73
General Information 77 Cautionary note on forward-looking statements 77 Note on risk factors 79
Premiums earned 3 3 503 3 651 Net investment income 6 124 164 Net realised investment gains/losses1 6 49 105 Other revenues 5 5
Expenses Claims and claim adjustment expenses 3 –2 263 –3 558 Acquisition costs 3 –517 –554 Operating expenses –698 –739
Income/loss before interest and income tax expense/benefit 203 –926 Interest expenses –23 –23
Balance as of 1 January –28 –13 –41 Change during the period –6 8 2 Amounts reclassified out of accumulated other comprehensive income 59 59 Tax –13 –1 –14
Balance as of period end 12 –6 6 2017 Unrealised investment Foreign currency
Balance as of 1 January 12 –6 6 Change during the period 109 8 117 Amounts reclassified out of accumulated other comprehensive income –103 –103 Tax 4 10 14
Investments 6,7,8 Fixed income securities, available-for-sale (including 979 in 2016 and 1 711 in 2017 subject to securities lending and repurchase agreements) (amortised cost: 2016: 4 946; 2017: 6 647) 4 927 6 663 Equity securities, available-for-sale (including 4 in 2016 and 36 in 2017 subject to securities lending and repurchase agreements) (cost: 2016: 335; 2017: 271) 384 273 Short-term investments (including 366 in 2016 and 109 in 2017 subject to securities lending and repurchase agreements) 1 246 455 Other invested assets 1 773 2 102
Equity Common shares, CHF 1 000 par value 2016: 100 000; 2017: 100 000 shares authorised and issued 119 119 Additional paid-in capital 687 1 719 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax 12 22 Foreign currency translation, net of tax –6 12
Additional paid-in capital Balance as of 1 January 677 687 Capital contribution 1 000 Gain on sale to minority shareholder 34 Share-based compensation 10 –2 Balance as of period end 687 1 719
Net unrealised investment gains/losses, net of tax Balance as of 1 January –28 12 Changes during the period 40 10 Balance as of period end 12 22
Foreign currency translation, net of tax Balance as of 1 January –13 –6 Changes during the period 7 18 Balance as of period end –6 12
Retained earnings Balance as of 1 January 1 605 1 527 Net income/loss attributable to common shareholder 172 –740 Dividends on common shares –250 –150 Balance as of period end 1 527 637
Non-controlling interests Balance as of 1 January 66 60 Changes during the period1 –4 114 Income/loss attributable to non-controlling interests –2 –5 Balance as of period end 60 169 1Please refer to Note 9.
Cash flows from operating activities Net income/loss attributable to common shareholder 172 –740 Add net income/loss attributable to non-controlling interests –2 –5
Securities purchased/sold under agreement to resell/repurchase, net 26 –80 Cash paid/received for acquisitions/disposals and reinsurance transactions, net –127 36 Net purchases/sales/maturities of other investments –697 –191
Cash flows from financing activities Capital contribution received from parent 1 000 Dividends paid to parent –250 –150
Total net cash provided/used –38 149 Effect of foreign currency translation –17 23
Change in cash and cash equivalents –55 172 Cash and cash equivalents as of 1 January 504 449
Interest paid was USD 23 million for 2016 and 2017. Tax paid was USD 122 million and USD 22 million for 2016 and 2017, respectively.
Principles of consolidation The Group’s financial statements include the consolidated financial statements of SRCS and its subsidiaries. Voting entities which SRCS directly or indirectly controls through holding a majority of the voting rights are consolidated in the Group’s accounts. Variable interest entities (VIEs) are consolidated when the Group is the primary beneficiary. The Group is the primary beneficiary when it has power over the activities that impact the VIE’s economic performance and at the same time has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Companies which the Group does not control, but over which it directly or indirectly exercises significant influence, are accounted for using the equity method or the fair value option and are included in other invested assets. The Group’s share of net profit or loss in investments accounted for under the equity method is included in net investment income. Equity and net income of these companies are adjusted as necessary to be in line with the Groups accounting policies. The results of consolidated subsidiaries and investments accounted for using the equity method are included in the financial statements for the period commencing from the date of acquisition.
For consolidation purposes, assets and liabilities of subsidiaries with functional currencies other than US dollars are translated from the functional currency to US dollars at closing rates. Revenues and expenses are translated at average exchange rates. Translation adjustments are reported in shareholder’s equity.
The excess of estimated liabilities for claims and claim adjustment expenses payable over consideration received in respect of retroactive 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.
Recent accounting guidance 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 will adopt ASU 201409 on 1 January 2018. It is expected that the adoption will not have a material impact on the Group’s financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases”, which creates topic 842, “Leases”. The core principle of topic 842 is that a lessee should recognise the assets and liabilities that arise from leases. A lessee should recognise in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing the right to use the underlying asset for the lease term. This accounting treatment applies to finance leases and operating leases. The accounting applied by a lessor is largely unchanged from that applied under the current guidance. The new requirements are effective for annual and interim periods beginning after 15 December 2018. Early application of the ASU is permitted. The Group is currently assessing the impact of the new requirements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, an update to topic 718, “Compensation – Stock Compensation”. This ASU is part of the Board’s Simplification Initiative and the areas for simplification in this update involve several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Group adopted ASU 2016-09 on 1 January 2017. The adoption did not have a material effect on the Group’s financial statements.
Credit The Credit segment provides innovative trade, commodity and infrastructure finance risk sharing solutions along with surety solutions and political risk insurance covers.
a) Business segments – income statement For the year ended 31 December
Net premiums written 1 206 332 1 016 601 507 3 662 Change in unearned premiums –14 –54 –33 59 –117 –159
Expenses Claims and claim adjustment expenses –541 –238 –861 –422 –201 –2 263 Acquisition costs –168 –29 –105 –111 –104 –517 Operating expenses –268 –49 –156 –120 –105 –698
Total expenses before interest expenses –977 –316 –1 122 –653 –410 –3 478
Net investment income 124 Net realised investment gains/losses 49 Other revenues 5 Interest expenses –23
Business segments – income statement For the year ended 31 December
Net investment income 164 Net realised investment gains/losses 105 Other revenues 5 Interest expenses –23
Gross premiums earned are allocated by country, based on the underlying contract.
Claims paid, thereof: Gross –2 757 –2 760 Ceded 919 558
Change in unpaid claims and claim adjustment expenses, thereof: Net unpaid claims and claim adjustment expenses –425 –1 356
Foreign exchange −20 90 Effect of acquisitions, disposals, new retroactive reinsurance and other items 18 88
A summary of prior-year net claims and claim adjustment expenses development by lines of business for the years ended 31 December is shown below: Line of business: Property –110 30 Accident & Health 30 17 Other liability 91 106 Specialty –51 1 Credit 56 54
US asbestos and environmental claims exposure The Business Unit’s obligation for claims payments and claims settlement charges also includes obligations for long-latent injury claims arising out of policies written prior to 1986 as well as out of such business acquired subsequently through reinsurance arrangements to other Swiss Re Group Companies, in particular in the area of US asbestos and environmental liability.
The information presented in the claims development tables is presented at the current balance sheet foreign exchange rates as of the date of these financial statements to permit an analysis of claims development excluding the impact of foreign exchange movements.
In addition, the following applies to all business: For the most recent underwriting years, reliance may be made on the Group’s costing and underwriting functions for the initial estimates of claims, although the initial reserving estimates may differ from these pricing estimates if there is good reason to believe losses are likely to emerge higher or lower, and in light of the limited claims experience to date. Reviews of those initial estimates are performed regularly, forming a basis for adjustments on both the current and prior underwriting years.
Liabilities for claims and claim adjustment expenses, net of reinsurance 958
Prior accident year claims development in Other liability is mostly driven by large losses and large loss development, primarily in North America. Accident years 2013 and 2014 saw favourable development from financial and professional liability. The liabilities before 2012 relate mainly to accident years 2006 and prior.
Liabilities for claims and claim adjustment expenses, net of reinsurance 785
Specialty had overall adverse prior year development with adverse development in accident years 2013 and 2016 driven by aviation large losses. Accident years 2012, 2014 and 2015 experienced favourable development.
Specialty business may have a moderate reporting lag between the accident date and the date reported to the Group. The reported claim counts have been trending up for 2012 to 2014, which is similar to the incurred losses. For all recent years, there will be moderate increases in reported claim counts over time, which will narrow the gap of claim counts.
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. The reported claim counts have been trending up for 2012 to 2013, which is similar to the 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.
Total net discounted outstanding liabilities excluding other short duration contract lines 5 818 Other short duration contract lines 286
Allocated reinsurance recoverables on unpaid claims Corporate Solutions: Property 208 Accident & Health 2 026 Other liability 2 670 Specialty 105 Credit 4
Impact of acquisition accounting –15 Other short duration contract lines 415
Gross investment income 176 210 Investment expenses –39 –31 Interest charged for funds held –13 –15
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: 2016 Amortised cost Gross unrealised Gross unrealised Estimated USD millions or cost gains losses fair value
Total 2 831 15 –40 2 806 Corporate debt securities 1 790 18 –11 1 797 Mortgage- and asset-backed securities 325 1 –2 324
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 3 059 9 –14 3 054 US Agency securitised products 81 0 81 States of the United States and political subdivisions of the states 414 11 –3 422 Canada 324 4 –2 326 Brazil 224 2 0 226 Australia 140 –1 139 Other 213 1 –8 206
Due in one year or less 1 011 1 002 765 762 Due after one year through five years 1 804 1 801 3 908 3 905 Due after five years through ten years 1 281 1 280 1 243 1 259 Due after ten years 525 519 405 411 Mortgage- and asset-backed securities with no fixed maturity 325 325 326 326
Total fixed income securities available-for-sale 4 946 4 927 6 647 6 663
Offsetting of derivatives, financial assets and financial liabilities Offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows: Gross amounts of Net amounts of financial Related financial 2016 recognised Collateral set-off assets presented instruments not set-off USD millions financial assets in the balance sheet in the balance sheet in the balance sheet Net amount
Derivative financial instruments – assets 22 22 22 Reverse repurchase agreements 17 17 –17 0
Gross amounts of Net amounts of financial Related financial 2017 recognised Collateral set-off assets presented instruments not set-off USD millions financial assets 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 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.
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 2016 and 2017. As of 31 December 2016 and 2017, USD 5 million and nil, respectively, of the gross unrealised loss on equity securities available-for-sale relates to declines in value for less than 12 months and USD 1 million and nil, respectively, to declines in value for more than 12 months.
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.
Investments measured at net asset value as 2016 USD millions (Level 1) (Level 2) (Level 3) practical expedient Total
Debt securities issued by US government and government agencies 1 741 422 2 163 US Agency securitised products 116 116 Debt securities issued by non-US governments and government agencies 527 527 Corporate debt securities 1 797 1 797 Mortgage- and asset-backed securities 324 324
Equity securities held for proprietary investment purposes 379 5 384 Short-term investments held for proprietary investment purposes 697 549 1 246 Derivative financial instruments 9 13 22 Other invested assets 8 8
Quoted prices in active markets for identical assets Significant other observable Significant unobservable Investments measured at net 2017 and liabilities inputs inputs asset value as USD millions (Level 1) (Level 2) (Level 3) practical expedient Total
Equity securities held for proprietary investment purposes 269 4 273 Short-term investments held for proprietary investment purposes 233 222 455 Derivative financial instruments 6 16 22 Other invested assets 8 8
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: 2016 Derivative Other invested Total Derivative Total USD millions assets assets assets liabilities liabilities
Assets and liabilities Balance as of 1 January 5 12 17 –106 –106
2017 Derivative Other invested Total Derivative Total USD millions assets assets assets liabilities liabilities
Assets and liabilities Balance as of 1 January 13 13 –74 –74
Realised/unrealised gains/losses: Included in net income 40 40 –28 –28 Included in other comprehensive income 0 0
Purchases 5 5 0 Issuances 0 –63 –63 Sales –42 –42 81 81 Settlements 0 8 8 Transfers into level 31 0 0 Transfers out of level 31 0 0 Impact of foreign exchange movements 0 0
Weather contracts –41 –35 Proprietary Option Model Risk margin 8%−11% (10.9%) Correlation −69%−52% (−53.1%) Volatility (power/gas) 27%−110% (98.2%) Volatility (temperature) 146−467 (199) HDD/CAT1 Index value (temperature) 1769−4159 (3638)
Power outage contracts –20 –24 Proprietary Option Model Risk margin 6% (n.a.) Average power forward price USD 35−USD 65 (USD 40.0)
Industry loss warrants –13 –17 Credit Default Model Market implied probability of Nat Cat event 1 Heating Degree Days (HDD); Cumulative Average Temperature (CAT).
Other invested assets measured at net asset value As of 31 December 2016 and 2017, other assets measured at net asset value were USD 8 million. Additionally there were USD 1 million of unfunded commitments as of 31 December 2017.
8 Derivative financial instruments The Group enters into various financial contracts covering risks such as weather, weather-contingent price risks, outage contingent power price risks and industry loss warrants, that are accounted for as derivative financial instruments (also referred to as Environmental Commodity Markets and Weather business, or “ECM/Weather contracts/ ILW”). The Group also uses derivatives to manage exposure to foreign currency and credit risks. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models, with changes in fair value recorded in the income statement.
Derivatives not designated as hedging instruments Foreign exchange contracts 87 3 –1 2 ECM/Weather contracts/ILW 1 078 19 –79 –60
Total derivative financial instruments 1 165 22 –80 –58 2017 Notional amount assets/liabilities
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 2017, the following hedging relationships were outstanding: Fair value hedges The Group enters into foreign exchange swaps to reduce the exposure to foreign exchange volatility for certain fixed income securities. 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 year ended 31 December, the gains and losses attributable to the hedged risks were as follows: USD millions
The total fair value of derivative financial instruments containing credit risk-related contingent features amounted to USD 28 million and USD 36 million as of 31 December 2016 and 2017, respectively. For derivative financial instruments containing credit riskrelated contingent features, the Group posted collateral of nil as of 31 December 2016 and 2017. In the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD 36 million additional collateral would have had to be posted as of 31 December 2017. The total equals the amount needed to settle the instruments immediately as of 31 December 2017.
In addition, the intangibles not subject to amortisation are licences of USD 29 million and goodwill of USD 38 million. The goodwill relates to the property business segment and is not expected to be deductible for tax purposes.
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 23
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 27 31 Deferred taxes –17 –235
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 20.6% 37 –196 Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates 14 23 Impact of foreign exchange movements –12 Tax exempt income/dividends received deduction –9 6 Change in valuation allowance 5 4 Change in statutory rate –3 –15 Other income based taxes –1 3 Tax credits –41 Other, net1 8 –17 1 Other, net includes tax return to tax provision adjustments from various jurisdictions.
For the year ended 31 December 2017 the Group reported a tax benefit of USD 204 million on a pre-tax loss of USD 949 million, compared to a charge of USD 10 million on a pre-tax income of USD 180 million for 2016. This translates into an effective tax rate in the current and prior-year reporting periods of 21.5% and 5.6%, respectively.
Deferred tax liabilities Deferred acquisition costs –53 –34 Present value of future profits –70 –51 Property amortisation –8 –3 Income accrued/deferred –33 –24 Technical provisions –84 –38 Unrealised gains on investments –15 –6 Foreign exchange provisions –27 –21 Currency translation adjustments –53 –45 Other –27 –18
Liability for unrecognised tax benefits including interest and penalties –5 –3
As of 31 December 2017, the Group had USD 1 069 million net operating tax loss carryforwards, expiring as follows: USD 1 million in 2019, USD 1 million in 2020, USD 1 million in 2021, USD 926 million in 2022 and beyond, and USD 140 million never expire.
As of 31 December 2017, the Group has no capital loss carryforwards.
For the years ended 31 December 2016 and 2017, income taxes paid were USD 122 million and USD 22 million, respectively.
Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. Such expense for 2016 and 2017 were nil. As of 31 December 2016 and 2017, USD 1 million and USD 1 million 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.
As of 31 December 2017, the balance of gross unrecognised tax benefits presented in the table above excludes accrued interest and penalties (USD 1 million).
The following table summarises jurisdictions and tax years that remain subject to examination: United States 2011 – 2017
Net premiums written –149 –143 Change in unearned premiums 35 6
Premiums earned –114 –137 Net investment income/loss –18 –17 Net realised investment gains/losses 22 2
Expenses Claims and claim adjustment expenses –201 –188 Acquisition costs 16 19 Operating expenses –318 –346
Assets Other invested assets 4 11 Premiums and other receivables 196 166 Reinsurance recoverable on unpaid claims 3 943 3 727 Funds held by ceding companies 32 56 Deferred acquisition costs –2 1 Other assets 235 202
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 of the following: 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.
Non-consolidated VIEs The following table shows the total assets on 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: Equity securities available-for-sale 26 32 Other invested assets 1 630 1 937 Premiums and other receivables 3
Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
Opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company at 31 December 2017, the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America and comply with Swiss law.
We assessed and tested the design and operating effectiveness of selected key controls around the valuation models for level 2 and 3 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 relation to the matters set out opposite, our substantive testing procedures included the following: Challenging the Company’s methodology and assumptions, in particular, the yield curves, discounted cash flows, perpetual growth rates and liquidity premiums used in the valuation models.
Engaging our own valuation experts to perform independent valuationsvaluations of selected investments.
Key audit matter Valuation of actuarially determined P&C loss reserves involves a high degree of subjectivity and complexity. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses at a given date. The Company uses a range of actuarial methodologies and methods to estimate these reserves. Actuarially determined P&C loss reserves require significant judgement relating to certain factors and assumptions. Among the most significant reserving assumptions are the A-priori loss ratios, which typically drive the estimates of P&C loss reserves for the most recent contract years. Other key factors and assumptions include, but are not limited to, interest rates, inflation trends, claims trends, regulatory decisions, historical claims information and the growth of exposure.
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 can 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.
Assessing the process and related judgements of management in relation to natural catastrophes and other large losses, including using our industry knowledge to assess the reasonableness of market loss estimates and other significant assumptions.
How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls in place to determine the completeness of the uncertain tax items and management’s assessment of the items for recognition and valuation.
In relation to the matters set out opposite, our substantive testing procedures included the following: Involving our own tax specialists to critically review management’s ‘more likely than not’ tax assessments to evaluate the Company’s judgements and estimates of the probabilities and the amounts. 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. Examining tax audit documentation to validate the appropriateness of releases of uncertain tax provisions.
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 2017, the Company directly employed worldwide staff at an average of 303 full-time equivalents (2016: 325 full-time equivalents).
Financial year 2017 Net loss for the financial year 2017 amounted to CHF ‒904 million, compared to a net income of CHF 176 million in the prior year.
The financial year under review was marked by a 64% increase in claims incurred driven by high level of natural catastrophe losses and lower dividend income from subsidiaries.
Reinsurance result Reinsurance result amounted to CHF ‒870 million in 2017, compared to CHF 126 million in 2016.
Acquisition costs increased by 11% to CHF 873 million in 2017 (2016: CHF 786 million). The increase was mainly driven by a new intra-group program with a subsidiary.
Operating costs decreased by CHF 14 million to CHF 185 million in current year (2016: CHF 199 million).
The decrease in investment income in 2017 was driven by lower dividend income from a subsidiary, lower realised gains on the sale of investments and higher allocated investment expenses compared to prior year.
Technical provisions gross increased from CHF 5 481 million at 31 December 2016 to CHF 6 711 million at 31 December 2017, mainly reflecting the large natural catastrophe losses and increase in business volume.
Provision for currency fluctuations was released in 2017 (31 December 2016: CHF 39 million) mainly due to the weakening of the USD against the CHF.
Shareholder’s equity Shareholder’s equity slightly decreased from CHF 1 704 million at 31 December 2016 to CHF 1 652 million at 31 December 2017.
The Company established a locally licensed and regulated direct insurance company, and a service company in Mexico in 2017. Swiss Re Corporate Solutions Investment Holding Company Ltd, a subsidiary of the Company, established Swiss Re Corporate Solutions Services Slovakia s.r.o. for its operations in Slovakia.
Subsequent event In the context of the “Tax Cuts and Jobs Act of 2017” in the US, the Company is currently reassessing its intercompany structure with the affiliated company Westport Insurance Corporation and its subsidiaries. While the financial impact cannot be quantified at the date of approving the Company’s 2017 financial statements, it is assumed that significant impacts to the Company’s balance sheet and income statement are expected in 2018.
The Group Executive Committee (Group EC) is responsible for developing and implementing Swiss Re’s Group-wide risk management framework. It also sets and monitors risk capacity limits, oversees the Economic Value Management framework, determines product policy and underwriting standards, and manages regulatory interactions and legal obligations. The Group EC has delegated various risk management responsibilities to the Group Chief Risk Officer (Group CRO) as well as to certain legal entity CRO, including the Company CRO.
Change in unearned premiums gross –56 –122 Change in unearned premiums retroceded 0 2 Change in unearned premiums net –56 –120
Other reinsurance revenues 5 2 Allocated investment return 44 55 Total revenues from reinsurance business 2 733 2 855
Claims paid and claim adjustment expenses gross –1 103 –1 519 Claims paid and claim adjustment expenses retroceded 2 7 Claims paid and claim adjustment expenses net –1 101 –1 512 Change in unpaid claims gross –539 –1 398 Change in unpaid claims retroceded 18 61 Change in unpaid claims net –521 –1 337 Claims and claim adjustment expenses –1 622 –2 849 Change in equalisation provision – 183 Claims incurred –1 622 –2 666 Acquisition costs gross –791 –878 Acquisition costs retroceded 5 5 Acquisition costs net –786 –873 Operating costs –199 –185 Acquisition and operating costs –985 –1 058 Other reinsurance expenses 0 –1 Total expenses from reinsurance business –2 607 –3 725
Interest expenses on subordinated liabilities –23 –23 Other income 13 0 Other expenses –22 –47 Result before income tax expense 191 –903 Income tax expense –15 –1 Net result 176 –904
Shares in investment funds 1 702 1 853 Short-term investments 714 290
Financial and reinsurance assets Assets in derivative financial instruments – 2 Funds held by ceding companies 604 1 567 Cash and cash equivalents 16 16 Reinsurance recoverable from unpaid claims 3 39 97 Reinsurance recoverable from unearned premiums 3 9 11 Reinsurance recoverable on technical provisions retroceded 48 108 Tangible assets 0 0 Deferred acquisition costs 3 412 449 Intangible assets 20 39 Premiums and other receivables from reinsurance 3 1 164 1 410 Other receivables 81 99 Other assets 3 3 Accrued income 3 4 Total financial and reinsurance assets 2 351 3 697
Shareholder’s equity 4 Share capital 100 100 Legal reserves from capital contributions 1 342 2 344 Other legal capital reserves 52 52
Voluntary profit reserves 26 46 Retained earnings brought forward 8 14 Net result for the financial year 176 –904
1 Significant accounting principles Basis of presentation In general, the financial statements are prepared in accordance with Swiss Company Law. As a reinsurance company and based on Art. 111b of the Ordinance on the supervision of private insurance companies (ISO), the Company is also required to follow the Insurance Supervisory Ordinance-FINMA (ISO-FINMA). The ISO-FINMA contains specific guidance for presentation of the balance sheet, the income statement and the notes of insurance companies and overrides the general guidance of the Swiss Code of Obligations (SCO).
The shares of technical provisions pertaining to retroceded business are determined or estimated according to the contractual agreement and the underlying gross business data per treaty.
For transfers of retroactive treaties with external counterparties, the initial set up of assets and liabilities is accounted as a balance sheet transaction.
Non-technical provisions The provision for currency fluctuation comprises the net effect of foreign exchange gains and losses arising from the yearly 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 time period of up to three years, based on the average duration of the technical provisions. 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.
Other provisions are determined according to business principles and are based on estimated needs. The tax provision is in accordance with tax regulations.
Liabilities from derivative financial instruments Liabilities from derivative financial instruments are generally maintained at the highest commitment amount as per a balance sheet date during the life of the underlying contracts.
Operating expenses Operating expenses also include unallocated loss adjustment expenses (ULAE) which are not reclassed to internal claim expenses.
Shares in investment funds 1 0 – 1 Short-term investments 3 – 0 3
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 2017 and 2016, the Company was a fully owned subsidiary of Swiss Re Ltd.
6 Contingent liabilities As of 31 December 2017, the Company has issued limited guarantees of notional CHF 869 million (2016: CHF 746 million) to a subsidiary in support of individual transactions.
7 Securities lending As of 31 December 2017, securities of CHF 744 million (2016: CHF 704 million) were lent to Swiss Reinsurance Company Ltd under securities lending agreements. As of 31 December 2017 and 2016, there were no securities lent to third parties.
Premiums and other receivables from reinsurance 1 163 1 1 1642 1 400 10 1 4102
1 Reported under “Reinsurance recoverable on technical provisions retroceded” on page 61. 2 In 2017, the netting process of assets and liabilities towards the same counterparty was decommissioned. This led to a gross-up of the receivable from reinsurance as well as the reinsurance balance payables. The effect of such a gross-up in 2016 would have been CHF 282 million.
Capital contribution on 1.11.2017 by Swiss Re Ltd – 1 002 – – – 1 002 Allocation to voluntary profit reserves – – 170 – –170 – Allocation to retained earnings – – – 6 –6 – Dividend for the financial year 2016 – – –150 – –150 Net result for the year – – – – –904 –904
Fair value of securities transferred to third parties – – Fair value of securities transferred to affiliated companies 704 744
9 Public placed debentures As of 31 December 2017, the following public placed debentures were outstanding: 10 Deposit arrangements The following balances were related to deposit accounted reinsurance contracts: 11 Claims on and obligations towards affiliated companies 12 Release of undisclosed reserves In 2017, no net undisclosed reserves on investments or on provisions were released (2016: release of CHF 77 million).
13 Obligations towards employee pension fund As of 31 December 2017, other liabilities included CHF 1 million payable to the employee pension fund (2016: CHF 2 million).
14 Auditor‘s fees In 2017, the Swiss Re Group incurred total auditor‘s fees of CHF 30 million (2016: CHF 33 million) and additional fees of CHF 2 million (2016: CHF 4 million), of which CHF 0.5 million (2016: CHF 0.6 million) incurred for the Company solely relating to auditor’s fees and CHF 0.1m (2016: none) relating to additional fees.
Other reinsurance revenues 2 3 Premiums and other receivables from reinsurance 2 1 Reinsurance balances payable 2 1
Financial statements Swiss Re Corporate Solutions Ltd 15 Investments in subsidiaries As of 31 December 2017 and 2016, Swiss Re Corporate Solutions Ltd held the following direct and indirect investments in subsidiaries and affiliated companies.
Compania Aseguradora de Fianzas S.A. Confianza Colombia Bogotá 0% 0% 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%
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% Swiss Re Corporate Solutions Services Ltd United Kingdom London 100% 100% Swiss Re Serviços de Consultoria em Seguros e Resseguros Ltda Brazil São Paulo 100% 100%
Total administrative expenses for 2017, including charges by affiliates, amounted to CHF 305 million (2016: CHF 306 million).
17 Subsequent event In the context of the “Tax Cuts and Jobs Act of 2017” in the US, the Company is currently reassessing its intercompany structure with the affiliated company Westport Insurance Corporation and its subsidiaries. While the financial impact cannot be quantified at the date of approving the Company’s 2017 financial statements, it is assumed that significant impacts to the Company’s balance sheet and income statement are expected in 2018.
Proposal for allocation of disposable result The Board of Directors proposes to the Annual General Meeting of the Company, to be held on 26 March 2018, to approve the following allocations and payment of cash dividend of USD 50 million, which must not exceed CHF 60 million, translated into CHF at spot rate on the settlement date. The cash dividend is paid to its sole shareholder, Swiss Re Ltd, out of voluntary profit reserves on 29 March 2018.
Voluntary profit reserves brought forward 26 46 Allocation from legal reserves from capital contributions – 905 Allocation from retained earnings 170 – Voluntary profit reserves after proposed allocation of legal reserves from capital contributions and before cash dividend 196 951 Proposed cash dividend (maximal amount in CHF of the proposed dividend in USD translated into CHF) -1502 -601
Legal reserves from capital contributions brought forward 1 342 1 342 Capital injection on 1.11.2017 from Swiss Re Ltd – 1 002 Proposed allocation to voluntary profit reserves – –905 Legal reserves from capital contributions after proposed allocation to voluntary profit reserves 1 342 1 439
Accordingly market values have to be observed to assess the appropriate application of the prudence principle.
In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Challenging the Company’s methodology and assumptions, in particular, the yield curves, discounted cash flows, perpetual growth rates and liquidity premiums used in the valuation models.
̤ Comparing the assumptions used against appropriate benchmarks and investigating significant differences.
On the basis of the work performed, we consider the assumptions used by management to be appropriate and that investments are properly valued as of 31 December 2017.
̤ Performing sensitivity testing to determine the impact of selected key assumptions.
̤ Evaluating the appropriateness of any significant adjustments made by management to P&C loss reserve estimates.
On the basis of the work performed, we consider the methods and assumption used by management to be reasonable. We agree with their conclusion that the book values for all investments in subsidiaries are recoverable.
Forward-looking statements typically are identified by words or phrases such as “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “foresee,” “intend,” “may increase” and “may fluctuate” and similar expressions or by future or conditional verbs such as “will,” “should,” “would” and “could.” These forwardlooking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results of operations, financial condition, liquidity position or prospects to be materially different from any future results of operations, financial condition, liquidity position or prospects expressed or implied by such statements. Among the key factors that have a direct bearing on our results of operations, financial condition, liquidity position or prospects are: ̤ further instability affecting the global financial system and developments related thereto, including as a result of concerns over, or adverse developments relating to, sovereign debt of eurozone countries; ̤ further deterioration in global economic conditions; ̤ our ability to maintain sufficient liquidity and access to capital; ̤ the effect of market conditions, including the global equity and credit markets, and the level and volatility of interest rates, credit spreads, equity prices, currency values and other market indices, on our investment assets; ̤ changes in our investment result as a result of changes in our investment policy or the changed composition of our investment assets, and the impact of the timing of any such changes relative to changes in market conditions; ̤ possible inability to realise amounts on sales of securities on our balance sheet equivalent to their mark-to-market values recorded for accounting purposes; ̤ mortality, morbidity and longevity rates; ̤ policy renewal and lapse rates; ̤ uncertainties in estimating reserves;
Regulatory changes Swiss Re and its subsidiaries operate in a highly regulated environment. The regulatory regimes to which members of the Group are subject have changed significantly in recent years and are expected to continue to evolve. During this period, there has been a noticeable trend to extend the scope of reforms and oversight, which initially targeted banks, beyond such institutions to cover insurance operations.
These risks can have a significant effect on investment returns and market values of securities positions, which in turn may affect both the Group’s results of operations and financial condition. The Group continues to focus on asset-liability management for its investment portfolio, but pursuing even this strategy has its risks – including possible mismatch – that in turn can lead to reinvestment risk. The Group seeks to manage the risks inherent in its investment portfolio by repositioning the portfolio from time to time, as needed, and to reduce risk and fluctuations through the use of hedges and other risk management tools.
As claims paying and financial strength ratings are key factors in establishing the competitive position insurers, a decline in ratings alone could make insurance provided by the Group less attractive to clients relative to insurance from competitors with similar or stronger ratings. A decline in ratings could also cause the loss of clients who are required by policy or regulation to purchase insurance only from insurers with certain ratings. Moreover, a decline in ratings could impact the availability and terms of unsecured financing (potentially impacting both the Group’s ability to roll over facilities and obtain new facilities) and obligate the Group to provide collateral or other guarantees in the course of its insurance business or trigger early termination of funding arrangements, potentially resulting in a need for additional liquidity. As a ratings decline could also have a material adverse impact on the Group’s costs of borrowing or ability to access the capital markets, the adverse implications of a downgrade could be more severe.
Use of models; accounting matters The Group is subject to risks relating to the preparation of estimates and assumptions that management uses, including as part of its risk models as well as those that affect the reported amounts of assets, liabilities, revenues and expenses in the Group’s financial statements. In addition, particularly with respect to large natural catastrophes, it may be difficult to estimate losses, and preliminary estimates may be subject to a high degree of uncertainty and change as new information becomes available.
Risks related to the Swiss Re corporate structure Following the realignment of the corporate structure of SRL and the creation of separate business units in 2012, the asset base, liquidity position, capital profile and other characteristics of the Group of relevance to its counterparties changed. Swiss Re is a wholly owned subsidiary of SRL, and the Group represents only one of the four principal operating segments of the Swiss Re Group.
The Group does not currently operate on a standalone basis. It is dependent on other members of the Swiss Re Group for a range of asset management services, corporate services (including general management services, human resources, logistics, IT support, finance, treasury and accounting services, auditing services, risk management oversight and legal and compliance) and technical services (including actuarial services support, underwriting services support and claims operations support). In addition, the Group derives a range of significant operational and other benefits from its status as a part of the Swiss Re Group, including its ability to market its products on a worldwide basis under the “Swiss Re Corporate Solutions” brand name. As a result, factors affecting the Swiss Re Group, whether involving developments or events unique to Swiss Re or events or developments applicable more broadly, could have a material adverse effect on the Group’s ability to conduct its business, even if such factors do not directly impact the Group’s business operations.
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. The Swiss Re Group’s structure provides flexibility in the way in which it finances operations and the Swiss Re Group expects that its structure will continue to evolve over time. In 2017, the Swiss Re Group entered into a transaction with MS&AD Insurance Group Holdings Inc. (“MS&AD”) pursuant to which MS&AD agreed to invest in the closed books segment of the Swiss Re Group’s Life Capital business unit. 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.