Good 2016 results were supported by a continued solid underwriting performance.
Net premiums and fees earned by business segment, 2016 (Total: USD 33.2 billion) Net premiums earned in 2016 by segment 51% P & C Reinsurance 35% L & H Reinsurance 10% Corporate Solutions 4% Life Capital
Net premiums earned in 2016 by segment 51% P & C Re 35% L & H Re 10% Corporate Solutions 4% Admin Re
3 Regular staff. 4 The Group’s new internal service cost framework resulted in a reallocation of operating expenses to Group items from the business segments. Comparative information for 2015 has been adjusted accordingly.
Business Units at a glance 2 Message from the Chairman 4 A conversation with the Group CEO 8 Our business model 12 Our strategy 14
This year’s report highlights some of the concrete ways we’re helping to make a more resilient future.
Thousands of Swiss Re employees, working together with our clients and partners, helping to protect assets and lives around the globe. For a resilient future.
Well positioned Swiss Re is well positioned to face industry challenges and seize opportunities.
A risk knowledge company We are a risk knowledge company, investing in research and development and technology to support our clients and differentiate from the competition.
51% P&C Reinsurance 35% L&H Reinsurance 10% Corporate Solutions 4% Life Capital
Strategic challenges — in turbulent times In the summer of 2016, as in every other year, I discussed the main strategic challenges of the coming years with our global top management, presenting to them both the viewpoint of the Board of Directors and my personal assessment. We on the Board of Directors address this matter on a continual basis, of course, and discuss the relevant questions intensively and thoroughly. In this context, we see four main topics taking centre stage in the coming years — on top of the current negative price cycles in the property and casualty businesses: ̤ Significantly higher geopolitical risk ̤ Transformation of business models in the insurance sector due to limitless possibilities opened up by digitalisation
Digitalisation, which is often assumed to be the new industrial revolution, is now also transforming the service sector — including the business model of the insurance industry. It is difficult to predict exactly where this is leading. However, it is certain that insurance risks will change — to some extent dramatically; the distribution of insurance products will be revolutionised and the development of relevant services will take a completely different form. In this context, banks are relatively progressive and have partly reinvented themselves already in recent years; yet, such changes in the insurance industry may potentially have a much more severe impact.
Let’s talk about climate change: global climate change is a fact, even if it is readily questioned by politicians in the so-called ‘post-factual’ era. While the political discussion mainly centres on questions of causation, the insurance industry, and reinsurers in particular, are concerned with providing solutions for both the prevention and management of losses.
Against this backdrop, we focus on closing what is known as the ‘protection gap’, referring to the huge global discrepancy between uninsured and unprotected risks, on the one hand, and the potentially high economic losses on the other. For this, we rely on cooperation with political authorities and international organisations. If these parties are impeded by a political discourse that does not focus on solutions, or if they are even prevented from cooperating, this doesn’t bode well — certainly for the people affected.
The uncertainties outlined make this task increasingly challenging. This is particularly true at a time when the regulatory environment in many parts of the world is diverging in an uncoordinated manner, leading to greater unpredictability. Meanwhile, the spectre of protectionist measures may return and suddenly become politically acceptable again, with the potential of provoking quick and sharp changes in monetary policy. If the political consensus on how to handle environmental risks also breaks down and the traditional business model comes under fundamental attack, institutions such as Swiss Re will be the best-positioned in the global insurance market when it comes to tackling these complex challenges.
In recent years, we have also purposefully set up the Group to allow for an agile response to fundamental shifts in primary-market structures. These measures were intended to ensure that, even in the event of changes in the primary insurance markets, we always have access to risks that we wish to underwrite and where we can invest our shareholders’ capital in the most profitable way.
Our activities in high growth markets of Asia, Africa and Latin America are primarily geared towards closing the aforementioned ‘protection gap’ in close collaboration with our clients. In these markets, which face above-average exposure to natural hazards, insurance coverage compared to potential economic losses is highly inadequate.
Finally I regret to announce that Matthias Weber, currently our Group Chief Underwriting Officer, will step down from his current role as of 30 June 2017 to focus on his family and begin a new chapter in his life. Throughout his 25-year career with Swiss Re, Matthias Weber has consistently stood for core Swiss Re strengths such as disciplined underwriting and a focus on the long term. The Board of Directors and I will miss his wise counsel, tireless commitment and good humour. We look forward to continuing our relationship with Matthias Weber in whatever form suits him.
Q How do reinsurance clients react to Swiss Re building up iptiQ?
A We don’t know for sure. A possible explanation is the following: there is a widespread conviction that insurance is expensive, while in fact, surveys show people would be prepared to pay more than the actual price. There is also a belief that the state will help in case something like a major earthquake happens. And finally, people generally don’t like to think about insurance. This is a challenge for the insurance industry. The only way we can overcome it is by looking at the sales process and simplifying it. I think the day everybody has digital advisors, on a smartphone for example, is the day more people will start buying insurance.
A I would like to see Swiss Re positioned differently than just as an ordinary traditional reinsurance company. Ideally, in the future, when people hear ‘Swiss Re’, they will think of all our incredible knowledge that is so relevant for the future. We should never lose sight of where we want to go. Swiss Re is well positioned to be a long-term thinker and I am convinced that every activity focusing on the long term will be an advantage in a few years.
Swiss Re is a risk knowledge company. We apply that knowledge to help clients, shareholders and society.
A strategy to help meet our financial targets and to make the world more resilient.
2. Broaden and diversify client base to increase access to risk 3. Optimise resources and platforms to support capital allocation
To support that capital allocation we devote substantial resources to developing state-of-the-art knowledge of the risks we underwrite and assets we invest in, looking at both historical performance and future outlook.
Many lines of business face shrinking cession rates and competition is increasing overall. At the same time, new risks are emerging while other underinsured risks continue to grow. We believe new client segments and distribution channels — both of which have been enhanced by technology — can strengthen our position as the supply and demand equilibrium shifts.
Technology promises to transform our entire industry. Read how this more than 150-year old company is responding in order to create a more resilient future.
Insurance 2.0 Conventional insurance practices are largely the remnants of a pre-digital world in which policies were committed to paper and sold face-to-face. Underwriting — a word which itself dates to the 17th century practice of accepting a risk by signing a contract — has evolved around 20th-century conventions of how insurers should estimate risk.
Embracing the new Swiss Re is eager to meet the future. Over the last three years, Swiss Re has run more than 500 case studies on digital products and applications. Some of these are already on the market today, such as the Magnum Mobile life underwriting application. This tabletbased tool enables agents to accept and price life insurance applications in real time. Magnum Mobile intuitively takes the applicant through the risk assessment process and gathers key information, even when an internet connection is not available.
CatNet® is another example where we’ve used technology to bring insight to our clients. CatNet® makes the risk profile of a given region visible. It combines hazard, loss, exposure and insurance information with maps and satellite imagery to assess the risk of individual locations or entire portfolios.
Some of our initial technology investments include stakes in personal data start-up Digi.me, which helps consumers manage their personal data, and wearable physiology monitoring company Biovotion Ltd (see page 28). The opportunities to transform our industry are vast — and it is our strategic priority to be at the heart of the technology transformation.
Fundamental change in the insurance business model Technological developments have the potential to profoundly change the way in which the re/insurance industry develops, distributes, underwrites, and administers the insurance protection it sells to consumers. The graphic above shows just a few examples of how technology can disrupt every stage of the insurance value chain.
The key catalysts for change begin with the growing preference of endconsumers to transact through their mobile devices. We also anticipate that interaction with computers will become more natural, for example employing conversational systems and digital advisors. The amount of data on people and objects is already staggering and we expect this to only increase through such advances as the so-called “internet of things” and telematics.
Insurers may be able to adapt their business models by using the common and secure use of distributed data (the so-called ‘blockchain’ technology), and increasingly they will be able to recognise patterns in large and unstructured data through artificial intelligence.
In October 2016, the city of Shanwei in the Guangdong province was struck by super-typhoon Haima, which smashed into the region after battering Hong Kong and the northern Philippines. The typhoon had already claimed 13 lives in the Philippines and brought heavy winds, rainfall and an increased risk of flash flooding and landslides. The storm also rekindled fears of 2013’s Typhoon Haiyan, which took thousands of lives, forced the evacuations of many areas and caused massive disruptions of air and rail traffic. But this time around, just one week after the storm, insurance companies were making a payout to Shanwei, with the funds quickly channelled to support immediate recovery and rebuild infrastructure.
In August 2016 a first scheme was announced, covering 28 rural counties in Heilongjiang province against flood, excessive rain, drought and low temperatures. This is an important support for the area’s significant low-income population — mainly farming families, whose livelihoods depend heavily on the weather. A second scheme followed in October 2016, focusing on ten prefectures in the economic powerhouse of Guangdong, where over USD 1 trillion of China’s GDP is generated. The maximum protection provided by the two schemes is USD 680 million, representing the two largest commercial natural disaster protection schemes ever established in China.
China experiences frequent natural disasters. Earthquakes, floods, typhoons and even droughts hammer it regularly, often causing deaths and widespread damage. Despite this experience, and the expectation that the frequency and severity of such events will increase in the years to come, governments at all levels lack the funds to finance relief and reconstruction. This is compounded by the lack of a comprehensive catastrophe insurance system in China, making people even more vulnerable.
A complicated environment China’s heterogeneity, with vast rural areas and many urban hotspots, is an added complication. While extreme weather events can take a heavy toll on communities that depend on farming to live, they can also hurt China’s booming economic hubs that see a greater concentration of assets, people and technology and can affect global supply chains and economic development over the longer term.
Local governments can count on readily available funds to help the population in the immediate aftermath of a natural catastrophe and to start reconstructing after the event — both of which cause a significant financial burden on public budgets in the absence of an insurance scheme. Also, a delay in recovery can hamper long-term economic prospects for the whole region and reverse hard-won development gains, making the risk of slipping into poverty very high for those affected.
True resilience: insurance helps rural families cope with natural disasters and stay out of poverty.
These two natural disaster protection schemes are truly landmark transactions. Compared with traditional re/insurance, parametric insurance payouts are much faster. The insurance schemes also hedge the massive fiscal contingency liabilities for disaster relief that are well beyond the fiscal budget capacity of municipalities like Shanwei. The concept of using insurance to hedge fiscal contingency liabilities for disaster relief was well beyond the understanding of the industry when it was initiated three years ago by Swiss Re’s Global Partnerships team, who specialise in working with the public sector.
New health challenges, new solutions 26 Swiss Re 2016 Business Report
Swiss Re has teamed up with the World Bank and other partners to design an innovative insurance vehicle which is expected to use both reinsurance and capital markets tools to help mobilise funds during a disease outbreak.
The Pandemic Emergency Financing Facility (PEF) is designed to guarantee swift access to funds for pre-approved international responders, such as emergency task forces, to accelerate intervention, help save lives and reduce costs to countries.
This year we invested in a share of wearable and digital health company Biovotion Ltd., which created a platform to collect and analyse data through a wireless, button-less wearable device worn around the upper arm. The medical-grade tool currently measures a number of health indicators, including heart rate, blood oxygenation, skin temperature, skin blood perfusion and motion, and it is poised to measure a slew of other metrics like blood glucose and sleep levels. The goal is to help predict and monitor health events, improving health and saving medical costs.
However, health underwriting today remains laborious and bureaucratic. It relies heavily on forms, tests, and consumer input. With the next generation of wearables, we expect to be able to streamline the process through automation, even if the majority of trackers are still limited in their accuracy. The devices may be capable of monitoring blood sugar levels and interpreting vital signs to anticipate a cardiac event, for example. Implanted smart health devices are not many years off — at which point the payoff for insurers and their customers will be even higher.
Changes in 2016 As of 1 July 2016 Christian Mumenthaler was appointed Group CEO, succeeding Michel M. Liès who has retired. Moses Ojeisekhoba was appointed CEO Reinsurance as of 1 July 2016, succeeding Christian Mumenthaler. Jayne Plunkett was appointed CEO Reinsurance Asia/Regional President Asia and became a member of the Group EC as of 1 July 2016, succeeding Moses Ojeisekhoba. Thierry Léger was appointed CEO Life Capital and became a member of the Group EC as of 1 January 2016.
From left to right: J. Eric Smith, CEO Swiss Re Americas, Jean-Jacques Henchoz, CEO Reinsurance EMEA, Jayne Plunkett, CEO Reinsurance Asia, John R. Dacey, Group CSO, David Cole, Group CFO, Patrick Raaflaub, Group CRO, Christian Mumenthaler, Group CEO, Moses Ojeisekhoba, CEO Reinsurance, Thomas Wellauer, Group COO, Matthias Weber, Group CUO, Thierry Léger, CEO Life Capital, Guido Fürer, Group CIO, Agostino Galvagni, CEO Corporate Solutions
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 forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Group’s actual results of operations, financial condition, solvency ratios, capital or liquidity positions or prospects to be materially different from any future results of operations, financial condition, solvency ratios, capital or liquidity positions or prospects expressed or implied by such statements or cause the Group to not achieve its published targets.
Such factors include, among others: ̤ further instability affecting the global financial system and developments related thereto; ̤ further deterioration in global economic conditions; ̤ the Group’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debt-like arrangements and collateral calls due to actual or perceived deterioration of the Group’s financial strength or otherwise; ̤ the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on the Group’s investment assets; ̤ changes in the Group’s investment result as a result of changes in its investment policy or the changed composition of its investment assets, and the impact of the timing of any such changes relative to changes in market conditions; ̤ uncertainties in valuing credit default swaps and other credit-related instruments; 32 Swiss Re 2016 Business Report
Sydney International Towers Sydney, Tower Two Level 36, 200 Barangaroo Avenue, Barangaroo Sydney, NSW 2000 Telephone +61 2 8295 9500
Beijing 23rd Floor, East Tower, Twin Towers, No. B12, Jianguomenwai Avenue Chaoyang District Beijing 100022 Telephone +86 10 6563 8888
Mumbai A 701, One BKC Plot No C-66, G Block Bandra-Kurla Complex Bandra (East) Mumbai 400051 Telephone +91 22 6661 2121
Group Net income attributable to common shareholders 4 597 3 558 –23 Premiums earned and fee income 30 214 33 231 10 Earnings per share in CHF 12.93 10.55 –18
5 As of 1 January 2016, the primary life and health insurance business (individual and group) is reported in the Life Capital segment instead of the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. 6 Gross cash generation is the change in excess capital available over and above the target capital position, with the target capital being the minimum statutory capital plus the additional capital required by Life Capital’s capital management policy.
Business Units at a glance 2 Message from the Chairman 4 A conversation with the Group CEO 8 Our business model 12
Overview 54 Capital management 56 Economic Value Management 59 Liquidity management 61 Risk management 63 Risk assessment 69
Overview 82 Group structure and shareholders 86 Capital structure 89 Board of Directors 92 Executive management 108 Shareholders’ participation rights 114 Changes of control and defence measures 115 Auditors 116 Information policy 118
Overview 122 Natural catastrophes and climate change 124 Strengthening risk resilience: highlights in 2016 128 Our sustainability risk framework 131 Diversity and inclusion in our workforce 134
Working across diversified insurance risks and businesses to maximise shareholder value.
Net premiums earned and fee income by business segment (Total USD 33.2 billion)
“ In the course of our 153 years of experience, we have shown an undisputed ability to operate successfully in ever-changing and highly challenging situations.”
Since the financial crisis, central banks have played an extraordinarily dominant role from a historical perspective, to the extent that they were sometimes the ‘only game in town’. However, the end of this period seems foreseeable now. Politicians are making every effort to get events under control and exert more influence over economic policy. But, it remains unclear how this paradigm shift will develop and how much upheaval it will cause. As major institutional investors, insurance companies are on the front line of this development in my view.
Swiss Re can thrive even under complex conditions Our main strategic task is to decide which risks we want to underwrite and hold on our books, and under which conditions. In other words, how much capital are we willing to invest to assume certain risks? This is capital that you, as Swiss Re shareholders, provide to us.
Swiss Re is very strong in terms of capital, which allows us to thrive also under increasingly volatile market conditions. And we have designed our strategic asset allocation taking into account potential upheaval in the financial markets. We remain aware that the extraordinary monetary policy environment was and is not sustainable and the Board of Directors, and in particular the Investment Committee, keep a very close eye on market developments and analyse the relevant trends in coordination with the Group Chief Investment Officer and his team. Hence, we are confident that Swiss Re is ideally positioned to respond quickly and flexibly to respective changes.
While we decisively invest in our business and actively address the challenges mentioned, we stay committed — in the context of our capital management priorities — to return capital to you if we do not identify any better investment opportunities. For this reason, we will increase the regular dividend to CHF 4.85 and, at the upcoming Annual General Meeting, we will again propose a share buy-back programme of up to CHF 1 billion.
On behalf of the Board of Directors, I would like to thank our 14 000 employees around the world, in all areas of the company, for their commitment — once again, it is them who drive Swiss Re’s success.
Our knowledge and its practical application to our business have been key to our success for the last 153 years. In a world that is changing ever more rapidly, a lead based on outstanding research and development will give us the crucial advantage necessary to identify and assess trends early on. We are convinced that the Swiss Re Institute will be a decisive factor setting Swiss Re apart from competitors. The Swiss Re Institute will in our view undoubtedly make a key contribution to the further improvement of revenue from our risk portfolios.
Q What makes Swiss Re’s business model successful in this environment?
Christian Mumenthaler Group Chief Executive Officer examples in 2016 were the Canadian wildfires. They lasted for a long time and there was uncertainty about the damage, but we worked very closely with our customers in Canada, making payments as fast as possible so they could start the reconstruction. Every bit helps, but we have more work to do. For instance in Italy, a country I know very well for family reasons, only about 1% of residential buildings are insured against earthquakes and most of the destruction we saw in 2016 was not covered.
Global economic growth remained moderate in 2016 in an environment of elevated political uncertainty. Stock markets had a negative start to the year before recovering in February. Monetary policy remained expansionary, and benchmark government bond yields reached new lows before recovering towards the end of the year.
Inflation moved up gradually from low levels in most markets, driven by the rebound in the price of oil from a low of USD 26/bbl in February to USD 54/bbl by year-end. Underlying inflation (excluding energy prices) was relatively stable in 2016 at a level consistent with the US Federal Reserve’s (Fed) target in the US, but below target in the Eurozone, the UK and Japan. The election of Donald Trump as president in the US raised expectations of higher inflation in anticipation of increased fiscal spending.
Economic performance in emerging markets also varied. Growth in emerging markets in Asia remained fairly steady and strong, supported by continued strong expansion in China. However, the Chinese economy has become increasingly reliant on government support and is prone to downside risks. India has outperformed since the start of the Modi administration, helped by improved business and consumer sentiment. Growth trends in Sub-Saharan African countries have been diverging. Non-commodity intensive markets, such as Kenya and Ivory Coast, continued to deliver solid growth. In contrast, commodity intensive markets expanded only slowly, or were even in recession due to low commodity prices and insufficient policy adjustments (eg, Nigeria and Angola). The South African economy avoided a recession in 2016, but many local and global headwinds remain.
Global growth remained moderate in 2016. Stock market performance varied across geographies while benchmark government bond yields reached new lows before recovering towards year-end.
US 10-year Treasury bond yield Year-end 2016 0.2% German 10-year Bund yield Year-end 2016
FINANCIAL YEARFINANCIAL YEAR The global economy and financial markets only a temporary dip in stock markets and there was a positive market reaction to the election of Trump. Overall equity performance varied across markets with the US S&P 500 (+10%), the MSCI UK (+14%) and the Eurostoxx50 (+1%) ending the year in positive territory, while the Swiss Market Index (–7%) and the Japanese TOPIX (–3%) had negative performance (see stock markets chart).
In Europe, the banking sector remains a source of vulnerability as profitability and capitalisation remain low. Other downside risks are mainly political in nature. For example, Brexit and the rising popularity of euro-sceptic parties increase the risk of further destabilisation in the EU, which could result in financial market volatility. In addition, the escalation of regional conflicts (Russia/Ukraine, South China Sea, etc) could also result in financial market volatility.
Upside risks are more limited and could result from a more-robust-than-expected upswing in the US as the drag from low oil prices and the strong US dollar fades. In Europe, a pick-up in structural reform momentum could boost sentiment and growth. In addition, increased government spending, particularly in the US, could lead to stronger growth. A more rapid upswing in commodity prices could bolster emerging market growth substantially, but would dampen growth elsewhere.
While it is hard to gauge the likelihood of different political risks materialising, it is nevertheless useful to frame possible economic outcomes of relevance for the re/insurance industry. Aside from the obvious impact associated with military conflict and civil unrest, the political environment can adversely influence the economic outlook three ways: heightened policy uncertainty, increased financial market volatility and sub-optimal economic policies (see figure). Each of these has the potential to reinforce the others. The first two are likely to impact aggregate demand in the short term, and the third could undermine long-run productive potential.
Over the short term, re/insurers will be mostly affected on the asset side in a scenario of heightened financial market volatility. In addition, slower growth may dampen the outlook for re/insurersʼ premium growth. It is hard to quantify the economic impact of political instability, although the economic downturn is likely to be less severe as a result of policy uncertainty alone compared to a scenario which also involves financial market volatility. Beyond the short term, re/insurers are likely to suffer most if political instability results in policies that complicate or hamper international business transactions, such as increased regulatory fragmentation or capital restrictions.
� Increased trade restrictions � Increased regulatory fragmentation � Lack of structural reforms
Market performance Primary non-life premium growth was slower in 2016 than in 2015. Global primary non-life premiums are estimated to have risen by 4% in real terms in 2016, after a 6% increase in 2015.
In mature markets, premium growth decelerated to 1.7% due to weaker economic growth and a softer pricing environment in commercial insurance. The Western European markets exhibited some momentum mainly from stronger motor business in Germany and Spain. The UK and France were stable, but weak. In Italy premium income declined again, albeit at a slower pace than in previous years. Larger markets with accelerating expansion include Canada, Japan and South Korea.
Primary non-life premiums in the emerging markets grew by an estimated 5.3% in 2016, up slightly from 2015, but significantly slower than the 8% annual average growth between 2010 and 2014. The weaker increase was due to continued economic slowdown in Latin America, with inflation-adjusted declines in Brazil, Argentina and Venezuela, sluggish-to-negative growth in the larger markets in Sub-Saharan Africa, and a premium growth slowdown in China (7% vs 10% in 2015). This was partly offset by recovery in Central and Eastern Europe and strong growth in the Middle East and North Africa.
In terms of underwriting profitability, the US non-life industry’s combined ratio worsened from 98% in 2015 to 100% in 2016, driven by higher catastrophe losses — claims from Hurricane Matthew are likely to add to an above average natural catastrophe burden in 2016 — and lower reserve releases. Softening rates in commercial lines contributed to a worsening of results and a decline in premium income in this segment.
Underwriting profitability in Europe1 was about the same in 2016 as in 2015, with an average combined ratio of around 95%. Underwriting results in Germany and France suffered from severe storms and floods (Elvira and Friederike) in May and June, which caused overall insured losses of EUR 2.7 billion (USD 3 billion). Underwriting results remained stable in Switzerland and were slightly worse in Italy, mainly driven by weaker but still profitable motor business. The earthquakes in Italy in August and October are expected to have only a minimal impact on 2016 underwriting profitability due to low insurance penetration. Other markets like the UK, the Nordic countries and Spain experienced some improvement, mainly based on motor.
Market overview Global non-life reinsurance premiums in 2016 totalled about USD 160 billion, 26% of which stemmed from ceding companies in emerging markets.
In general, reinsurance demand is a function of the size and capital resources of primary insurance companies, as well as of the risk profile of the insurance products provided.
Reinsurance prices remained soft almost across the board. In general, rates in casualty have been more stable than in property and specialty lines.
Market size in USD billions Estimated global premium income in 2016 0% Market performance Estimated global premium growth in 2016
Given the strong erosion of profit margins over the last two years, property catastrophe reinsurance rates are close to bottoming out. The softening of average rates is expected to moderate across all lines of business.
Reinsurance non-life 3 Claims reserve releases lower the amount of claims incurred which are booked in a certain financial year, thus positively impacting underwriting results and net income. Claims reserve additions add to the reported claims burden in a financial year, with the opposite effect on the P&L. For a more detailed discussion, see also media.swissre.com/documents/sigma4_2014_en.pdf
The savings business contracted or slowed due to low interest rates, equity market volatility, and the impact of pension reforms in some markets. Low interest rates have made it harder for insurers to earn enough investment income and in many countries, guarantees and profit sharing have been reduced. Savings-type insurance has also become more expensive for regulatory reasons (eg, higher capital requirements for long-term guarantees, or asset/liability mismatches). This has made savingstype insurance less attractive for both policyholders and suppliers. Together with adjusting their products and offering more flexible guarantees, insurers are introducing new concepts such as a guarantee of a certain return over the full duration of the contract, rather than an annual return.
Market performance The life reinsurance industry registered a 2% increase in 2016. The accident & health business supported some premium growth, as did large annuity and longevity contracts. Meanwhile, other business lines had weak organic growth and some treaties were cancelled. Health and annuity transactions are expected to continue driving growth in the coming years and also help reinsurers in the UK and North America diversify away from traditional mortality business.
Global premiums in traditional life reinsurance, consisting of mortality and morbidity risks, are estimated to have grown by 1.5% in real terms in 2016. In mature markets, a 0.5% increase was driven by positive developments in Canada, the UK, Japan and Australia, while premiums in the US contracted as a result of lower cession rates and weakness in protection sales. In the emerging markets, premiums grew by 9%, driven largely by China, with other emerging markets seeing more modest growth.
Market size in USD billions Estimated global premium income in 2016 2% Market performance Estimated global premium growth in 2016
Outlook World premiums in traditional life reinsurance are expected to increase only marginally over the next two years, driven by emerging markets, especially China. Premiums in the advanced markets are expected to be roughly flat, with modest growth in Australia, Canada, Japan and some Western European countries offsetting declines in the US and UK. In emerging markets, life reinsurance premiums are expected to increase by about 8%‒9%.
Capital allocation is at the core of our Group’s strategy. We allocate capital to risk pools and measure performance over time. We believe disciplined and agile capital allocation is the key to outperformance and the engine to pursue our strategic ambitions.
Technological innovation is another source of differentiation, especially when we can deliver unique products and solutions, such as CatNet. CatNet plots hazard, loss, exposure and insurance information over maps and satellite imagery to help visualise the risk of individual locations or entire client portfolios.
We have more than doubled our workforce in key high growth markets since 2011 and invested in strengthening our IT architecture, adding smart analytics and cognitive computing to our toolset. We are also investing in our financial steering and reporting capabilities to become an industry leader in financial management.
We continue to build on the aspects that set Swiss Re apart: our financial strength, our client relationships and our status as a risk knowledge company.
In 2016 we took another step forward by announcing the creation of the Swiss Re Institute, which we believe will further differentiate us from our peers. The Swiss Re Institute will leverage and steer our research and development activities, building on our role as a knowledge partner for clients.
At least 700 basis points greater than Swiss Re’s designated risk-free rate, currently ten-year US government bonds.
Growth Reinsurance is our core business. Market conditions are challenging, however, and prices have reached unsustainable levels in some lines of business and markets. We therefore emphasise to investors, clients, employees and others that we remain committed to disciplined underwriting and long-term success.
Risk knowledge Swiss Re is a risk knowledge company. In 2016 we announced the creation of the Swiss Re Institute to defend and even enlarge this source of competitive advantage. We have long employed leading experts in the perils we insure and the activities we undertake, investing over 3 200 man-years in research & development over the past 25 years. We believe this advantage is virtually impossible for new players to replicate within a reasonable time frame. We are especially eager to capitalise on the enormous technological opportunities before us and have prioritised activities in this area as well.
Our Group delivered a good net income of USD 3.6 billion.
Swiss Re reported a good net income of USD 3.6 billion for 2016, compared to USD 4.6 billion for 2015. The Group’s return on equity for 2016 was 10.6%, down from 13.7% for 2015. Common shareholders’ equity increased to USD 34.5 billion as of 31 December 2016, up by 6.5% compared to the end of 2015.
“ Swiss Re continues to create value for our clients and shareholders by applying our strategic framework.”
Christian Mumenthaler Group Chief Executive Officer 26 Swiss Re 2016 Financial Report
The Group’s net operating margin for 2016 was 13.0%, down from 17.1% for 2015.
Common shareholders’ equity, excluding non-controlling interests and the impact of contingent capital instruments, increased to USD 34.5 billion at the end of 2016, up from USD 32.4 billion at the end of 2015. The rise was driven by net income and an increase in unrealised gains on fixed income securities, partially offset by payments to shareholders for the 2015 regular dividend of USD 1.6 billion and the public share buy-back programmes of USD 1.1 billion.
Swiss Re achieved a return on equity of 10.6% for 2016, compared to 13.7% for 2015. Earnings per share for 2016 were CHF 10.55 or USD 10.72, compared to CHF 12.93 (USD 13.44) for the previous year.
Life & Health Reinsurance premiums earned and fee income totalled USD 11.5 billion in 2016, an increase of 8.6% from USD 10.6 billion year-on-year, driven by transactions in the US and successful renewals and new business wins in Asia. At constant exchange rates, premiums earned and fees increased by 11.3%.
Investment result and expenses The return on investments for 2016 was strong at 3.4%, compared to 3.5% in 2015, with the decrease reflecting slightly lower investment-related net realised gains on an increased asset base, in addition to the impact of lower reinvestment yields.
Acquisition costs for the Group amounted to USD 6.9 billion in 2016, up from USD 6.4 billion in 2015. The increase mainly reflected large transactions in Reinsurance and a higher share of proportional business in Property & Casualty Reinsurance.
Operating expenses of USD 3.4 billion in 2016 increased by 3.4%, or 6.5% at constant exchange rates, reflecting a slightly lower expense ratio on a higher premium base compared to 2015.
Interest expenses were USD 606 million, a small reduction compared to 2015.
Competitive advantage in underwriting The investing community debates whether an alpha or beta investment strategy has a higher likelihood of success. The alpha investor tries to actively outperform the benchmark of a segment by picking the right stocks within this segment. The beta investor tries to pick the right segments and asset classes.
The same concept applies to underwriting. An underwriter who tries to outperform the competition by: � selecting good risks and avoiding bad ones, � structuring policies and contracts to achieve contract certainty and better align policyholders’ interests with those of the re/insurance company,
� more precisely quantifying the costs associated with the acceptance of risks, and
� achieving higher prices for the risks assumed is the underwriting equivalent of an investor seeking alpha.
“Our effective investment in R&D is the basis for continued underwriting outperformance.”
Matthias Weber Group Chief Underwriting Officer 28 Swiss Re 2016 Financial Report
Underwriting performance in 2016 The Group’s overall underwriting performance was solid, with technical profitability across all businesses. Influenced by the softening market environment, the Group’s claims ratio for property and casualty increased from 53.3% in 2015 to 61.2% in 2016.
Both periods benefited from a lower-than-expected level of natural catastrophe losses. The 2016 loss burden amounted to USD 0.8 billion, still below the expected value but clearly higher than the 2015 loss number of USD 0.2 billion. The largest natural catastrophe losses in 2016 were the wildfires in Canada (USD 229 million net), the Kaikoura earthquake in New Zealand (USD 184 million net), and Hurricane Matthew (USD 113 million net).
In the short term we expect challenging market conditions to persist until demand and supply of capacity start to balance out. In such an environment underwriting outperformance remains key. We will therefore seek to exploit our competitive advantage in risk selection and capital allocation to protect our bottom line. We will continue to reduce capacity for some natural catastrophe scenarios and prune our reinsurance motor portfolio in selected regions.
Growth opportunities will be assessed with caution. We will focus on large and tailored transactions and pursue a small number of opportunities presented by major demographic, socioeconomic and technological trends, including the long-term rise of high growth markets, or the expanding need for health protection in ageing societies. In addition, we expect to write some new business in the public sector and in areas where protection gaps are threatening the resilience of society.
Strategy Swiss Re continues to maintain a high-quality investment portfolio while delivering strong and sustainable financial results. During 2016, Swiss Re increased its overall credit allocation through the Guardian acquisition. The allocation across government bonds and cash and short-term investments remained relatively steady, while the overall allocation to equities and alternative investments has been reduced. Swiss Re maintained a strong focus on real assets with a continued increase in its infrastructure debt and real estate allocation, strengthening the quality of earnings through further diversification of our sources of investment income.
Guido Fürer Group Chief Investment Officer 30 Swiss Re 2016 Financial Report
Financial markets ended 2016 with more uncertainties than at the beginning of the year. Currently, hopes for fiscal stimulus in the US are positive, yet global growth remains fragile, with the recovery amongst advanced economies being uneven. Looking to 2017, investors can be expected to closely monitor the US administration’s policy pronouncements and actions, inflation developments, the European election agenda and the upcoming “Brexit” negotiations.
Investment result The Group’s investment portfolio, excluding unit-linked and with-profit investments, increased to USD 130.5 billion at the end of 2016, compared to USD 116.8 billion at the end of 2015. The increase was driven by the Guardian acquisition and other large transactions as well as the impact of credit spread tightening, partially offset by a negative impact from foreign exchange movements.
Sharing knowledge Eight years have passed since the global financial crisis, but economic growth remains modest. Central banks have entered uncharted territory by cutting interest rates to record low levels and launching large-scale asset purchase programmes. In the meantime, governments have failed to implement much-needed structural reforms. Swiss Re argues that the capacity of capital markets to act as a buffer against adverse shocks has been hampered by these developments. Moreover, the global debt over-hang, declining productivity and demographic changes as well as growing income and wealth inequality also weigh on economic growth.
Furthermore, the report argues for a consistent, clear and reliable regulatory framework as a pre-condition for sustainable economic growth. Regulators should aim at increasing transparency and undertake regular studies of the cumulative and cross-sectoral impact of regulatory changes.
Swiss Re further encourages more standardisation to establish new asset classes, in particular with regard to infrastructure investment, which can support higher potential economic growth. A universal template for infrastructure debt documentation and disclosure requirements could help to overcome these hurdles.
Public-Private Partnerships (PPPs) are another essential ingredient for long-term investments in infrastructure, and they can be highly beneficial for economies more broadly. A PPP structure with clearly defined roles of involved parties could enable financing through recycling of existing assets or make project loans more accessible to the capital markets.
Swiss Re’s ESG integration builds on the Group-wide Sustainability Risk Framework, which is used to define its investment universe by excluding countries and companies that do not meet sector or issue criteria defined in that framework2 (see also Corporate Responsibility, beginning on page 120).
1 PRI: Principles for Responsible Investment 2 The Sustainability Risk Framework includes two umbrella policies on human rights and environmental protection and seven guidelines on sensitive sectors or issues. Sectors or issues covered are: the defence industry; oil and gas (including oil sands); mining; dams; animal testing; forestry, pulp & paper and oil palm; and nuclear weapons proliferation.
Fee income from policyholders 463 540 17 Net investment income – non-participating business 3 436 3 661 7 Net realised investment gains/losses – non-participating business 1 206 1 484 23 Net investment result – unit-linked and with-profit business 814 5 382 – Other revenues 44 28 –36
Income before interest and income tax expense 5 953 4 978 –16 Interest expenses1 –634 –606 –4 Income before income tax expense 5 319 4 372 –18 Income tax expense –651 –749 15 Net income before attribution of non-controlling interests 4 668 3 623 –22
Total shareholders’ equity as of 1 January 35 930 33 517 –7 Net income attributable to common shareholders 4 597 3 558 –23
Investments for unit-linked and with-profit business 28 241 32 178 14
Liabilities and equity Unpaid claims and claim adjustment expenses 55 518 57 355 3 Liabilities for life and health policy benefits 30 131 41 176 37
Our 2016 performance was driven by solid underwriting and progress on strategic goals.
Differentiation is at the core We stay relevant to our clients by addressing their specific needs, and we can only do this if we spend sufficient time with them to understand their needs and buying preferences. Client segmentation is a foundational element of our differentiation approach and it is built on a deep understanding of our clients, facilitating delivery of tailored offerings. We interact with clients across all levels and functions, enabling strategic discussions between the right people at the right time. This dedicated delivery model — serving global, large, and regional & national clients — continues to be effective.
In P&C Reinsurance, we continue to differentiate ourselves through active cycle management and by managing capacity according to price adequacy. Our P&C portfolio is well balanced and generates attractive economic returns, including long-tail lines. We remain committed to our disciplined underwriting approach. The global protection gap remains a significant opportunity and we continue to work with our clients on solutions to close it.
High growth markets, a key focus in our strategy Despite material foreign currency volatility for most high growth markets, our business has continued to thrive because demand for our products and solutions remains high. We remain disciplined in our underwriting approach and have built a diversified portfolio across lines of business and across focus markets of Brazil, China, India, Indonesia, Mexico, Sub-Saharan Africa and other parts of Latin America. From 2010 to 2016, reinsurance premiums in these markets grew at a CAGR of 15% in US dollar terms.
Technology is a key enabler Technology plays an important part in developing solutions for our clients along the entire insurance value chain. We leverage technology to understand risks better, improve underwriting and pricing, and to increase efficiency of the value chain. To help our clients improve their performance, we have developed new solutions such as an end-to-end telematics platform, predictive analytics to identify non-smokers as well as mobile underwriting platforms for life insurance.
The composition of gross premiums earned by region changed year on year, with a higher share of premiums generated in the Americas and EMEA in 2016 than in 2015. Based on net premiums earned, the share of proportional business was 72% in 2016, compared to 67% in to 2015.
The impact from natural catastrophes in 2016 was 3.3 percentage points below the expected level of 7.4 percentage points. Favourable development from prior accident years improved the 2016 combined ratio by 3.0 percentage points.
Administrative expense ratio The administrative expense ratio decreased to 7.1% in 2016, compared to 7.9% in 2015, driven by higher premium volume period over period.
Casualty The casualty combined ratio for 2016 was 103.9%, compared to 99.6% in 2015. Both years include reserve strengthening for US asbestos. The prior year benefited from significant reserve releases.
Investment result The return on investments for 2016 was 3.1% compared to 3.5% in 2015, reflecting a reduction in net investment income stemming from the impact of lower reinvestment yields as well as a lower contribution from equities and alternative investments.
Net realised gains were USD 475 million in 2016 compared to USD 497 million in 2015, due to a lower contribution from interest rate derivatives, which was partially offset by additional gains from sales of equities and alternative investments.
Premiums earned by line of business, 2016 (Total: USD 17.0 billion)
Investment in research and development (R&D) is the basis for continued underwriting outperformance in casualty, where forwardlooking modelling can give us a competitive advantage — especially in a changing market.
Modelling liability catastrophes and risk accumulation is especially challenging as there is limited historical loss information available, and new risks keep emerging. Moreover, growing digitisation and globalisation of society and industry is making our risk landscape more complex and interconnected, increasing the accumulation risk potential in our liability books.
Swiss Re’s proprietary and patented FLM approach for liability lines is Liability Risk Drivers™ (LRD). LRD starts with loss scenarios (instead of statistics of past claims). LRD runs the scenarios through the environment or jurisdiction in which the risk originates and looks at risk drivers, such as the economic or legal environment. This allows us to analyse the scenario against expected trends in risk drivers.
Net income for 2016 was USD 807 million compared to USD 968 million for 2015. Current year results were impacted by lower performance in the UK portfolio versus our expectations. The prior-year result benefited from more favourable valuation adjustments, especially interest rate updates to disabled life reserves. The return on equity was 12.8%, exceeding the upper end of the target range of 10%–12%, though lower than the 16.2% reported for 2015. This was mainly due to the lower net income and an increase in shareholders’ equity, driven by higher unrealised gains that reflected a decline in interest rates.
Net premiums earned and fee income Premiums earned and fee income increased by 8.6% to USD 11.5 billion compared to USD 10.6 billion for 2015. Premiums were higher stemming from transactions in the US and successful renewals and new business wins in Asia. At constant exchange rates, premiums earned and fee income were 11.4% higher compared to 2015.
Management expense ratio The management expense ratio was 6.0%, an improvement over the prior- year period, driven by a slightly lower expense base and higher premiums in the current year.
Fee income from policyholders 49 41 –16 Net investment income – non-participating business 1 330 1 279 –4 Net realised investment gains/losses – non-participating business 311 232 –25 Net investment result – unit-linked and with-profit business 42 15 –64
Expenses Life and health benefits –8 012 –8 963 12 Return credited to policyholders –60 –39 –35 Acquisition costs –1 965 –1 943 –1 Operating expenses –774 –763 –1 Total expenses before interest expenses –10 811 –11 708 8
Income before interest and income tax expense 1 492 1 350 –10 Interest expenses –323 –301 –7 Income before income tax expense 1 169 1 049 –10
Management expense ratio in % 6.5 6.0 Net operating margin in % 12.2 10.4
Health The Health segment reported EBIT of USD 352 million for 2016, compared to USD 587 million for 2015. The prior-year period result benefited from favourable valuation adjustments such as interest rate updates to disabled life reserves but was adversely impacted by reserve strengthening in the UK. The current period was impacted by lower performance of the UK health portfolio.
Premiums earned by line of business, 2016 (Total: USD 11.5 billion)
Life & Health Reinsurance provides industry-leading underwriting tools, automated solutions and a global perspective to our clients. We aim to maintain this edge by continuing to invest in technology and R&D.
The Life Guide, the underwriting manual that Life & Health Reinsurance shares with its customers, is one of the most visible examples of how Swiss Re’s knowledge creates a source of competitive advantage. The Life Guide is the industry’s most widely-used underwriting manual, used by more than 900 companies in more than 100 countries. It attracts more than 20 million hits per year on our website. Such authoritative tools position Swiss Re as a leading partner for conventional business as well as for tailored transactions among our life and health clients.
Strategy and priorities Corporate Solutions’ distribution network grew to 55 offices in 21 countries, supported by acquisitions. During the year, Corporate Solutions completed the acquisition of IHC Risk Solutions, LLC (IHC), a leading US employer stop- loss underwriter. The IHC acquisition broadens Corporate Solutions capabilities in the small- and middle-market selffunded healthcare benefits segment.
“In a difficult market like this, disciplined cycle management is required. At the same time, however, we continue to build the capabilities for our future growth.”
Net premiums earned Net premiums were USD 3.5 billion in 2016, an increase of 3.7% compared to 2015. Gross premiums written and premiums for insurance in derivative form, net of internal fronting for the Reinsurance Business Unit, increased 5.8% to USD 4.1 billion in 2016 compared to USD 3.9 billion in 2015. The increase was driven by the IHC acquisition completed in the first quarter of 2016.
Combined ratio The combined ratio increased to 101.1% in 2016 compared to 93.2% in 2015, impacted by large man-made losses. Lower than expected natural catastrophe losses improved the 2016 combined ratio by 4.2 percentage points.
The credit combined ratio for 2016 deteriorated by 16.6 percentage points to 106.9%, driven by a higher frequency of small- and medium-sized losses.
Income before interest and income tax expense 517 157 –70 Interest expenses –24 –23 –4 Income before income tax expense 493 134 –73 Income tax expense –134 –1 –99 Net income before attribution of non-controlling interests 359 133 –63
Investment result The return on investments for 2016 was 2.5% compared to 3.0% in 2015, reflecting a reduction in the investment result of USD 41 million stemming from lower net realised gains.
Net investment income increased by USD 9 million to USD 158 million in 2016, driven by higher income from fixed income securities. Net realised gains were USD 57 million in 2016 compared to USD 107 million in 2015, with the prior period benefiting from additional gains from sales of equity securities.
Shareholders’ equity Common shareholders’ equity decreased to USD 2.2 billion since the end of 2015, with a USD 250 million dividend paid to Swiss Re Ltd, partially offset by net income for the year. The return on equity was 6.0% in 2016, compared to 15.5% in 2015.
Today’s wind power projects are large and complex, requiring insurance for both manmade and natural perils for onshore and offshore projects alike. To help developers understand and manage these risks, Corporate Solutions has established a CoCWP in 2016. The CoCWP draws from over 100 man-years of experience in this sector, making expertise and insights available to Corporate Solutions’ underwriters, risk engineers and claims professionals. It also supports clients directly by offering them expert advice in how to mitigate risks and minimise exposures. With this support, clients are better positioned to get their projects initiated and to remain profitable.
The investment in renewable energy, like Corporate Solutions’ sponsorship of Solar Impulse, aligns with its commitment to sustainability and making the world more resilient. As a leading insurer of wind power, Corporate Solutions has closed major deals around the globe, insuring more than four thousand wind turbines onshore and offshore, during construction as well as commercial operation. Corporate Solutions generated in excess of USD 50 million gross premiums written in 2016 from insuring wind turbines.
In 2016 Life Capital made a strong contribution to the Group and delivered against its strategy.
In closed books, the strategy of ReAssure (formerly Admin Re® UK) remains unchanged. ReAssure is a leading UK life and pension consolidator and continues to provide effective and efficient services to policyholders. Its strategy is to pursue selective growth with a focus on the UK market, which is the most active closed book market in Europe.
“At Life Capital, we achieved a strong performance across all metrics.”
Technology is a key enabler for our strategy and Life Capital invests heavily in capabilities that provide a good customer experience and offer efficient platforms.
Life Capital had a successful first year and is delivering on its priorities. The ReAssure integration of Guardian is successfully on track. In its open book businesses, growth in Europe has accelerated, with elipsLife premium growth of 30% and iptiQ EMEA more than doubling its policy count. In the US, we established an operational platform for iptiQ, which launched in early 2017.
Performance During 2016 Life Capital reported net income of USD 638 million compared to USD 424 million in 2015. The increase was driven by investment performance, mainly from the Guardian portfolio, and solid underlying business performance. The comparative period of 2015 benefited from realised gains from sales of government bonds as part of the preparation for Solvency II.
The net operating margin in 2016 was 27.0% compared to 17.8% in the prior year.
Income before interest and income tax expense 417 798 91 Interest expenses –16 –29 81 Income before income tax expense 401 769 92 Income tax expense/benefit 23 –131 Net income attributable to common shareholders 424 638 50
Life Capital generated gross cash of USD 721 million in 2016 compared to USD 543 million in the prior-year period. Strong gross cash generated in the year was driven by management actions, despite the unfavourable impact of decreasing interest rates in the UK across the year.
Gross premiums written Gross premiums written increased by 10.6% to USD 1.5 billion during 2016. The increase was driven by the inclusion of Guardian and growth in open life and health insurance businesses.
Investment result The return on investments was 4.0% for 2016 compared to 4.7% for 2015, as the impact of a higher invested asset base in the current period alongside a reduction in net realised gains more than offset increased investment income arising from the Guardian investment portfolio.
Net investment income increased by USD 286 million to USD 942 million in 2016, due to net asset inflows from the Guardian acquisition.
Net realised gains decreased by USD 43 million to USD 221 million in 2016, as the prior period included significant gains from sales related to the repositioning of the portfolio ahead of Solvency II, while the current period included gains from the Guardian investment portfolio and reduced gains from sales.
Operating expenses Operating expenses were USD 503 million in 2016 compared to USD 365 million in 2015. The increase in expenses was mainly due to the cost of running and integrating the Guardian business.
Shareholders’ equity Common shareholders’ equity increased by USD 2.3 billion to USD 7.3 billion compared to 31 December 2015. The increase was driven by a USD 1.6 billion capital contribution from the Group to partially fund the Guardian acquisition and an increase of USD 1.2 billion from unrealised gains. Life Capital paid a dividend of USD 350 million during the second quarter. The return on equity was 10.4% for 2016, compared to 7.5% for 2015. The year-on-year increase was mainly due to higher net income.
Our leading in-house integration capability is a key differentiator that helps us deliver value from our transactions and provides a flexible framework that can be tailored to meet the specific requirements of any deal. Over the last 20 years, we have evolved this approach through 15 transactions, each bringing its own set of challenges and opportunities.
The integration programme is on track to deliver a diversified set of cost, capital and asset management synergies. The acquisition included 900 000 policies, 316 members of staff and the transfer of GBP 12.5 billion of assets onto the Swiss Re balance sheet. The launch of Life Capital allows our integration capability to be leveraged even more broadly across the different businesses.
Swiss Re will ask the AGM in April 2018 permission to cancel the repurchased shares.
During 2016 the STOXX Europe 600 Insurance index (SXIP) decreased by 5.6% and the broader index of Swiss blue chips (SMI) decreased by 6.8%. The Swiss Re share decreased by 1.7%.
Share trading The average on-exchange daily trading volume for 2016 was 1.4 million shares. Trading volume peaked at 3.1 million shares on 17 June 2016.
Swiss Re’s dividend policy Swiss Re’s dividend policy is a central element of Swiss Re’s capital management priorities. The Group aims to ensure a superior capitalisation at all times and maximise financial flexibility, growing the regular dividend with long-term earnings and at a minimum maintaining it.
Swiss Re will then deploy capital for business growth where it meets its strategy and profitability requirements and repatriate further excess capital to shareholders, with the preferred form of future capital repatriation being share buy-back programmes.
Dividend payment is typically two working days after the ex-dividend date. The corresponding dates in 2017 are 25 and 27 April.
The Board of Directors will seek the AGM’s authorisation to repurchase own shares for the purpose of cancellation by
Insurance indices STOXX Europe 600 Insurance 6.21 Bloomberg Europe 500 Insurance 6.05 FTSEurofirst 300 Insurance 11.22 Dow Jones Insurance Titans 30 2.73
Sustainability indices Dow Jones Sustainability Europe 0.38 Dow Jones Sustainability World 0.86 FTSE4Good Global 0.16 50 Swiss Re 2016 Financial Report
 Closing price  Volume on-exchange  Volume off-exchange 2015 Annual results unaudited
8 Calculated by dividing net income by the weighted average number of common shares outstanding. 9 Based on shareholders’ equity (excluding convertible perpetual capital instruments) divided by the number of external common shares entitled to dividend. 10 Based on shares outstanding. 11 Since 15 June 2015 every Swiss Re ADR represents one quarter of a Swiss Re share. Prior to close of business on 12 June 2015, one ADR represented one
In 2016 we continued to be very strongly capitalised and to apply our risk appetite framework, which establishes our approach for controlled risk-taking and efficient capital allocation throughout the Group.
“The Group continues to have superior capitalization and maintains significant financial flexibility.” David Cole Group Chief Financial Officer
“At Swiss Re, we live a strong risk culture to promote risk awareness, rigor and discipline.” Patrick Raaflaub Group Chief Risk Officer 54 Swiss Re 2016 Financial Report
Risk Management Swiss Re’s Risk Management function is an integral part of our business model and key to the controlled risk-taking that underpins our financial strength. Risk Management is mandated to ensure that the Group, its Business Units and the legal entities have the necessary expertise, frameworks and infrastructure to support good risk-taking. In addition, it monitors and ensures adherence to applicable frameworks and also performs reserving and reporting activities.
We continuously review and update our internal model and its parameters to reflect our experiences and changes in the risk environment and current best practice.
̤ Corporate Solutions inaugural subordinated debt issuance of USD 500 million
Senior leverage plus LOC ratio5 (target range: 15%–25%) Subordinated leverage ratio6 (target range: 15%–20%)
̤ Market access established across the Group with separate funding platforms for Business Units and Group holding
Optimised Group capital structure Swiss Re’s level of capitalisation and its capital structure are driven by regulatory and rating capital requirements, and by management’s view of risks and opportunities arising from our underwriting and investing activities. As announced at the June 2013 Investors’ Day, we set a target capital structure that aimed to operate efficiently within these constraints by maximising financial flexibility. The structure focused on the reduction of senior leverage, including letters of credit (LOCs), the issuance of innovative capital instruments (such as contingent capital) to replace traditional subordinated debt and extending the Group’s funding platform.
Swiss Re Admin Re Ltd (to be renamed Swiss Re ReAssure Ltd) established a capital markets funding platform with an inaugural EUR 750 million 7-year senior bond at an annual interest rate of 1.375%. The proceeds of this issuance were used to repay the bridge facility arranged for the Guardian acquisition.
Overall net Group deleveraging since year-end 2012 stands at USD 5.8 billion, well in excess of the deleveraging target of at least USD 4 billion by 2016.
The Group capital structure is comfortably within the senior leverage (15%–25%) and subordinated leverage (15%–20%) target ranges, providing further financial flexibility.
Legal entity capital management Our regulated subsidiaries are subject to local regulatory requirements, which for our EU subsidiaries include Solvency II. At the subsidiary level we set the target capital at a level tailored to each entity’s business and the market environment in which it operates. Our underwriting and investment decisions are steered so as to make capital and liquidity fungible to the Group wherever possible, while complying with local regulations and client needs.
The total amount of capital returned to shareholders since the implementation of the new Group structure in 2012 is USD 13.2 billion.
Moody’s Aa3 Stable 15 December 2015 Standard & Poor’s AA– Stable 25 November 2016 A.M. Best A+ Stable 16 December 2016
Swiss Re provides regulatory solvency reporting to FINMA under the rules of the Insurance Supervision Ordinance. This SST report is based on an economic view. We calculate available capital based on our Economic Value Management (EVM) framework and required capital under the SST using our internal risk model (see pages 59–60 for further information on EVM). The minimum requirement for the SST is a ratio of 100%. Swiss Re’s SST ratio materially exceeds the minimum requirement.
On 25 November 2016, S&P affirmed the AA-financial strength of Swiss Re and its core subsidiaries. The outlook on the rating is “stable”. The rating reflects Swiss Re’s extremely strong capital adequacy in excess of the ‘AAA’ benchmark and competitive position build on market leadership, long-standing reputation, and wide distribution networks across both life and non-life reinsurance.
On 16 December 2016, A.M. Best affirmed the A+ financial strength rating of Swiss Re and its core subsidiaries. The outlook for the rating is “stable”. The rating affirmation reflects Swiss Re’s excellent consolidated risk-adjusted capitalisation, strong operating performance and superior business profile as a leading global reinsurer.
Economic Value Management (EVM) is Swiss Re’s integrated economic valuation framework for planning, pricing, reserving and steering the business. Since 2003, Swiss Re has used the EVM framework as a tool to support business and strategic financial decisions, including compensation. EVM also provides the basis for determining available capital under the SST and Solvency II.
Market-consistent valuations All traded assets and liabilities are marked to market, based on quoted prices in active markets or observable inputs. Assets and liabilities that are not traded are valued consistently with market prices. The Group’s insurance liabilities are valued on a marketconsistent basis by replicating future expected cash flows with liquid financial market instruments. As the majority of the Group’s insurance liabilities do not contain embedded financial market risk exposure other than to interest rates, the market-consistent value can be determined by discounting future cash flows using prevailing risk- free interest rates. If insurance liabilities include embedded options or guarantees (eg, variable annuities or interest-ratesensitive life business), they are valued on a market-consistent basis using stochastic models and other appropriate valuation techniques.
In 2016, ENW decreased by USD 0.8 billion to USD 36.6 billion at the end of December 2016. 2016 total contribution to ENW of USD 4.2 billion was more than offset by the Swiss Re Ltd’s dividend payments, the share buy-back programme and a change in the EVM methodology.
EVM results for 2016 The 2016 EVM Report, showing Swiss Re’s results for the full year 2016, is available on swissre.com/investors/financial_ information 60 Swiss Re 2016 Financial Report
31% Cash, short-term investments and reverse repos 13% Other developed market government bonds investment grade 6% Developed market supranational, agencies and municipal bonds
Liquidity position of the Swiss Reinsurance Company Ltd (SRZ) liquidity pool The SRZ liquidity pool is the primary liquidity pool of the Group. The estimated total liquidity sources in the SRZ liquidity pool available within one year, after haircuts and net of short-term loans from Swiss Re Ltd and securities lending, amounted to USD 18.5 billion as of 31 December 2016, compared with USD 19.6 billion as of 31 December 2015. The 2016 total includes USD 13.4 billion of liquid assets and cash, referred to as “one-year spot liquidity”, compared with USD 13.7 billion in 2015. Based on the internal liquidity stress tests described above, we estimate that the SRZ liquidity pool holds surplus liquidity after dividends to Swiss Re Ltd.
Risk Management is an integral part of our business model. Our independency and close alignment to the business ensure consistent and effective risk oversight.
Embedded throughout the business, our Group Risk Management function ensures an integrated approach to managing current and emerging threats. Risk Management plays an integral role in business strategy and planning discussions, where our risk appetite framework facilitates risk-return discussions and sets boundaries to Group-wide risk-taking.
Taking and managing risk is central to Swiss Re’s business. The Group’s risk management framework sets out how Swiss Re organises and applies its risk management practices to ensure that all activities are conducted in line with the principles and limits mandated by the Group Risk Policy.
̤ Clear accountability: Swiss Re’s operations are based on the principle of delegated and clearly defined authority. Individuals are accountable for the risks they take on, and their incentives are aligned with Swiss Re’s overall business objectives.
̤ Independent risk controlling: dedicated units within Risk Management control all risk-taking activities. They are supported by independent Compliance and Group Internal Audit functions.
̤ Transparency: risk transparency, knowledge sharing and responsiveness to change are integral to the risk control process. The central goal of risk transparency is to create a culture of mutual trust, and reduce the likelihood of surprises in the source and potential magnitude of losses.
̤ Risk exposure control: allows Swiss Re to control its risk-taking decisions and total risk accumulations, including the passive risk we are exposed to through our operations.
̤ Risk reporting: creates internal risk transparency and enables Swiss Re to meet external disclosure requirements.
The Group’s risk-taking is steered by our risk appetite and risk tolerance (see below).
Committee (Group EC) and Business Unit management teams to assume risk. Risk tolerance criteria are specified for the Group and Business Units, as well as for Swiss Re’s major legal entities. Furthermore, Swiss Re uses a limit framework to limit its risk exposure accumulations at different levels.
The risk appetite framework establishes the overall approach through which Swiss Re practices controlled risk-taking throughout the Group. The framework is set out in the Group Risk Policy and consists of two inter-linked components: ̤ Risk appetite outlines the Group’s principles on acceptable risks and provides key directions for risk-taking and risk controlling as part of implementing Swiss Re’s strategy: achieving targeted performance, providing liquidity and financial flexibility, managing capital adequacy, and protecting and growing franchise value.
The risk appetite framework plays a particularly important role in the context of business strategy and planning discussions: the risk appetite facilitates discussions about where and how the Group should deploy its capital, liquidity and other resources under a risk-return view, while the risk tolerance sets clear boundaries to risk-taking.
In addition, Risk Management proposes risk capacity limits to ensure compliance with overall risk appetite and risk tolerance criteria. The risk capacity limits represent an aggregated constraint to risk-taking and seek to ensure that Group-wide accumulation risks remain within acceptable levels. They allow for risk monitoring and hence also for risk controlling during the execution of the plan. In addition to the risk capacity limits proposed by Risk Management, the Group EC also sets operational limits, which the business monitors and controls in day-to-day management.
Highest level risk authorities (level 0) are set forth in the Group Bylaws (SRL Bylaws) as well as in the charter for the Finance and Risk Committee of the Group Board of Directors. These documents outline ultimate authority for risk management within Swiss Re, assigning responsibilities between the Group Board of Directors and the Group EC. More detailed aspects of Swiss Re’s risk governance are outlined in the Group Risk Policy (level 1). This document defines the delegation of risk-taking from the Group Board of Directors to executive management through the risk appetite framework (see page 64) and describes the key risk management principles that apply to all risk taking within Swiss Re. The policy is owned by the Group Board of Directors and is binding for all Swiss Re employees.
The Group Risk Management Standards (level 2) outline how the Group organises and applies its risk management practices, while various category standards (level 3) describe how these practices are implemented for a specific risk category. The final level (level 4) of governance comprises risk management methodology and process documentation.
Level 0 ‒ Risk Management tasks of the Group Board of Directors
Group-level risk documents form the basis for all risk governance across Swiss Re. Additional risk governance for Business Units and legal entities is prepared as an addendum to the respective Group or Business Unit document.
Clear accountability In order to ensure clear control, accountability and independent monitoring for all risks, Swiss Re’s risk governance distinguishes between three fundamental roles in the risk- taking process: ̤ Risk owner — establishes a strategy, and delegates execution and control, retains ultimate responsibility for the outcomes.
̤ Risk controller — is tasked by the risk owner with independent oversight of risk-taking activities to mitigate potential conflicts of interest between the risk owner and risk taker; risk controllers are responsible for escalating relevant concerns.
Swiss Re applies a Group-wide approach, under which risk takers are responsible for reporting all relevant information on risks they are exposed to or undertake. The identification of risks is an ongoing process to establish transparency around all potentially material risks in order to make those risks controllable and manageable. The recognition of material risks allows for a sound basis for exposure monitoring, risk measurement, monitoring of capital requirements and reporting. All quantifiable risks identified must be reflected in costing, underwriting, reserving, as well as capital and steering models. Based on internal and external information, Swiss Re identifies risks such as: ̤ Previously unidentified risks ̤ Known non-material risks that have become material risks ̤ Known material risks that have changed following a re-assessment or increased understanding of the nature of the risk
Group Executive Committee Develops and implements the Group risk management framework, sets and monitors risk capacity limits; some responsibilities are delegated to the Group CRO and the Business Units
The 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 (see page 59), 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 the Business Units.
The Group CRO is appointed as the principal independent risk controller of Swiss Re. He is a member of the Group EC and reports directly to the Group CEO as well as to the Board’s Finance and Risk Committee. The Group CRO also advises the Group EC, the Chairman or the respective Group Board Committees, in particular the Finance and Risk Committee, on significant matters arising in his area of responsibility.
The central teams support the CROs at Group, Business Unit and lower levels in discharging their oversight responsibilities. They do so by providing services, such as: ̤ Financial risk management ̤ Specialised risk category expertise and accumulation control ̤ Risk modelling and analytics ̤ Regulatory relations management ̤ Maintaining the central risk governance framework
Risk Management is also in charge of actuarial reserving and monitoring of reserve holdings for Corporate Solutions and Life Capital, while for Reinsurance and its subsidiaries the setting of the reserves is performed by valuation actuaries within the P&C and L&H Business Management units.
̤ The Compliance function oversees Swiss Re’s compliance with applicable laws, regulations, rules, and the Group Code of Conduct. It also assists the Group Board of Directors, Group EC and other management bodies in identifying, mitigating and managing compliance risks.
Risk culture is directly linked to performance management, which is based not only on business results but also on behaviours. Swiss Re performs annually a risk culture assessment across all areas of Swiss Re, including a trend analysis as well as a high-level industry benchmarking. The assessment involves all employees.
In regular trainings, Swiss Re employees are sensitised in key areas of risk culture, such as taking accountability for decisions, learning from past actions and applying risk behaviours in daily work situations.
Swiss Re uses an internal risk model to determine the economic capital required to support the risks on the company’s books, as well as to allocate risk-taking capacity to the different lines of business. The Group’s integrated risk model provides a meaningful assessment of the risks to which the company is exposed and is an important tool for managing the business. It is used for determining capital requirements for internal purposes as well as for regulatory reporting under the Swiss Solvency Test (SST) and Solvency II for Swiss Re’s subsidiaries in Continental Europe. The model also provides the basis for capital cost allocation in Swiss Re’s Economic Value Management framework, which is used for pricing, profitability evaluation and compensation decisions.
In addition, the model is used to calculate value at risk (VaR) measures including 99.5% VaR, which is used in other regulatory regimes such as Solvency II. 99.5% VaR represents the loss likely to be exceeded in only one year out of two hundred and is thus more severe than the 99% VaR measure, which estimates the loss likely to be exceeded in one year out of one hundred. For Swiss Re’s loss distribution, the 99% shortfall (tail VaR) measure is generally significantly larger than the 99.5% VaR measure.
̤ Secondary effects resulting from the potential insolvency of other reporting entities
Swiss Re’s risk model assesses the potential economic loss at a specific confidence level. There is thus a possibility that actual losses may exceed the selected threshold. In addition, the reliability of the model may be limited when future conditions are difficult to predict. For this reason, the model and its parameters are continuously reviewed and updated to reflect changes in the risk environment and current best practice. In addition, Swiss Re complements its risk models by ensuring a sound understanding of the underlying risks within the company and by applying robust internal controls.
Risk modelling and risk measures 68 Swiss Re 2016 Financial Report
Alternative risk measurements — 99% and 99.5% VaR — remained unchanged at USD 14.5 billion and USD 17.4 billion, respectively.
The Group capital requirement table below shows the 99% tail VaR on a standalone basis for each of Swiss Re’s core risk categories: ̤ Property and casualty risk remained broadly stable at USD 9.4 billion (–1%) as higher costing and reserving risk was offset by lower natural catastrophe risk.
in USD billions, as of 31 December 2015 2016 Change in % cross reference information
Property & Casualty 9.4 9.4 –1 see page 72 Life & Health 7.2 7.4 2 see page 73 Financial market 12.6 12.3 –3 see page 74
Simple sum 32.7 32.5 –1 Diversification effect –13.1 –12.9 Swiss Re Group 19.6 19.5 –0 1 Credit comprises credit default and credit migration risk from both asset management and underwriting. Credit spread risk falls under financial market risk.
Alternative risk measurements to 99% tail VaR for Swiss Re Group in USD billions, as of 31 December 2015 2016 Change in %
Swiss Re’s risk landscape The risk categories shown in the table below are discussed on the following pages. Across these categories we identify and evaluate emerging threats and opportunities through a systematic framework that includes the assessment of potential surprise factors that could affect known loss potentials. Liquidity risk management is discussed on page 61.
Life and health risk Life and health insurance risk arises from coverage provided for mortality (death), longevity (annuity), and morbidity (illness and disability) as well as from acquiring closed books of business; in addition to potential shock events (such as a severe pandemic), this includes underlying risks inherent in life and health contracts that arise when mortality, morbidity, or lapse experience deviates from expectations.
Financial market risk Financial market risk represents the potential impact on assets or liabilities that may arise from movements in financial market prices or rates, such as equity prices, interest rates, credit spreads, foreign exchange rates or real estate prices. Financial market risk originates from two main sources: investment activities and the sensitivity of the economic value of liabilities to financial market fluctuations.
The risk landscape also includes other risks that are not explicitly part of the Group’s economic capital requirement but are actively monitored and controlled due to their significance for Swiss Re: Liquidity risk Liquidity risk represents the possibility that Swiss Re will not be able to meet expected and unexpected cash flow and collateral needs without affecting either daily operations or Swiss Re’s financial condition.
Operational risk Operational risk represents the potential economic, reputational or compliance impact of inadequate or failed internal processes, people and systems or from external events, including legal risk and the risk of a material misstatement in financial reporting.
Strategic risk Strategic risk represents the possibility that poor strategic decision-making, execution, or response to industry changes or competitor actions could harm Swiss Re’s competitive position and thus its franchise value.
Regulatory risk Regulatory risk represents the potential impact of changes in the regulatory and supervisory regimes of the jurisdictions in which Swiss Re operates.
Political risk Political risk comprises the consequences of political events or actions that could have an adverse impact on Swiss Re’s business or operations.
Valuation risk Valuation risk represents uncertainty around the appropriate value of assets or liabilities. It may arise from product complexity, parameter uncertainty, quality and consistency of data, valuation methodology, or changes in market conditions and liquidity. Swiss Re is exposed to financial valuation risk from investment assets it holds as well as reserve valuation risk from insurance liabilities that result from the coverage it underwrites.
Sustainability risk Sustainability risk comprises the environmental, social and ethical risks that may arise from individual business transactions or the way Swiss Re conducts its operations.
Emerging risk Swiss Re actively identifies emerging risks and threats across all categories as part of its risk identification process; this includes new risks as well as changes to previously known risks that could increase the potential exposure or interdependency between risks.
Property and casualty risk Change from 2015 99% tail VaR: –1%
Swiss Re also manages and mitigates insurance risk through external retrocession, insurance risk swaps or by transferring risk to capital markets through insurance-linked securities, industry loss warranties or other derivatives. This provides protection against extreme catastrophic events, further diversifies risk, stabilises economic results and releases underwriting capacity.
Property and casualty risk remained broadly stable at USD 9.4 billion after external hedging. Costing and reserving risk increased, mainly reflecting the impact of new large casualty transactions. This effect was offset by lower exposure to natural catastrophe risks, in particular Atlantic hurricane and California earthquake, due to challenging renewal conditions.
The first line of control for property and casualty risks lies within Swiss Re’s underwriting units. All transactions must be reviewed by at least two authorised individuals, and are subject to authority limits. Each underwriter is assigned an individual authority based on technical skills and experience, as well as allocated capacity limits for local teams; any business that exceeds this authority or is otherwise complex or unusual triggers an escalation process that extends up to the Group EC. As an exception, single risks can be authorised by an individual underwriter with the necessary authority — but these risks are subject to checks after acceptance.
In addition to the US transaction, our lethal pandemic exposure also increased from new business written in several other markets including Asia as well as a reduction in our VITA bond programme.
The increase in risk was largely offset by the depreciation of the British pound. As a result, the standalone lethal pandemic tail VaR as well as the lethal pandemic stress test shown in the table above remained broadly stable.
The CROs of Reinsurance and Life Capital are responsible for overseeing all life and health exposures written in their respective area. Accumulated exposures across Swiss Re are monitored and controlled by Group Risk Management to ensure that they remain at an acceptable level for the Group.
Underwriters represent the first line of control for life and health risks. As in property and casualty business, all transactions that could materially change risk at Group, Business Unit or legal entity level require independent review and sign-off by Risk Management before they can be authorised. This is part of a three signature principle, under which key transactions must be approved by Client Markets, Underwriting, and Risk Management. For transactions of defined types and within defined limits, this may be applied through the approval of underwriting or pricing guidelines. For other transactions, the signatures must be secured through a review of the individual transaction.
In addition to underwriting and capacity limits, Swiss Re’s limit framework includes aggregate Group limits for life and health risk as well as separate limits for mortality, longevity and lethal pandemic risk. At the Business Unit level, acceptance of life and health risks is governed by aggregated limits.
Market exposure limits are in place for catastrophe and stop loss business. Swiss Re pays particular attention to densely populated areas and applies limits for individual buildings to guard against risk exposure accumulations.
Swiss Re further manages life and health risks through external retrocession, risk swaps or transferring risk to the capital markets through insurance-linked securities to reduce peak exposures.
Insurance risk stress tests: Single event losses with a 200-year return period1 Pre-tax impact on economic capital in USD billions, as of 31 December 2015 2016 Change in %
Financial Risk Management oversees risk-taking and controls exposure accumulation for the primary financial market and credit risks identified in Swiss Re’s financial risk factor classification. In addition, Financial Risk Management is responsible for assurance activities related to asset valuation and financial risk models, as well as for reporting Swiss Re’s financial risks. These responsibilities are exercised through defined governance processes, including regular reviews by Swiss Re’s Senior Risk Council and other financial risk oversight bodies.
Overall financial market risk decreased by 3% to USD 12.3 billion. The decrease is mainly driven by lower equity risk. Exposure from the acquisition of Guardian Financial Services was already included in 2015.
Financial market risk is monitored and controlled by dedicated experts within the Group’s Financial Risk Management team.
All activities with financial market risk are subject to limits at various levels of the organisation (eg Group, Business Units, lines of business and legal entities). At the highest level, the Group Board of Directors sets a financial risk concentration limit which defines how much of the Group’s risk exposure can derive from financial risk factors. The
Credit tail VaR remained stable as the impact from higher credit underwriting exposure and credit quality deteriorations in credit and surety was offset by the strengthening of the US dollar and de-risking activities. The increase in credit stress test reflects the stronger impact of credit quality deteriorations, as the stress calculation does not benefit from diversification effects.
To take account of country risks other than from credit default, the Group’s Political Risk Management team prepares specific country ratings in addition to the sovereign ratings used by Swiss Re. These ratings are considered in the decision-making process and cover political, economic and securityrelated country risks.
Operational risk Risk Management is responsible for monitoring and controlling operational risks based on a centrally coordinated methodology. Members of the Group EC are required to certify the effectiveness of the internal control system for their respective area of responsibility on a quarterly basis.
Operational risk is inherent within Swiss Re’s business processes. As the company does not receive an explicit financial return for such risks, the approach to managing operational risk differs from the approach applied to other risk categories. The purpose of operational risk management is not to eliminate risks but rather to identify and cost-effectively mitigate operational risks that approach or exceed Swiss Re’s tolerance.
Swiss Re’s operational risk tolerance limits are based on the quantitative and qualitative impact as well as the probability of loss. The residual risk — the risk after mitigating controls — is assessed and reported on a quarterly basis to the management at Group, Business Unit and legal entity level.
Strategic risk Overall responsibility for managing strategic risk lies with the Group Board of Directors, which establishes Swiss Re’s overall strategy. The Boards of Directors of legal entities are responsible for the strategic risk inherent in their specific strategy development and execution. Strategic risks are addressed by examining multi-year scenarios, considering the related risks, as well as monitoring the implementation of the chosen strategy year-by-year in terms of the annual business plan.
In 2016, the International Association of Insurance Supervisors (IAIS) introduced a new designation methodology for Global Systemically Important Insurers (G-SIIs), with a particular focus on reinsurance. Under the new methodology, Swiss Re was not designated as G-SII. The non-designation confirms that Swiss Re is assessed by the international supervisory community as neither causing nor amplifying systemic risk.
While Solvency II took effect in 2016 and applies across the European Economic Area, national discretions and different supervisory interpretations (eg, the recognition of reinsurance) distort a level playing field. The European Commission will review Solvency II in 2018, in part to address such inconsistencies. Additionally, the European Insurance and Occupational Pensions Authority intends to add a macro-prudential framework for insurance in Solvency II, to regulate systemic risks across the insurance industry.
Political risk Political developments can threaten Swiss Re’s operating model but also open up opportunities for developing the business. The Group adopts a holistic view of political risk and analyses developments in individual markets and jurisdictions, as well as cross-border issues such as war, terrorism, energyrelated issues and international trade controls.
Swiss Re seeks to raise awareness of political risk within the insurance industry and the broader public, and actively engages in dialogue with clients, media and other stakeholders. We also build relationships that expand our access to information and intelligence, and allow us to further enhance our methodologies and standards. For example, we participate in specialist events hosted by institutions such as the International Institute of Strategic Studies, the International Studies Association and the Risk Management Association, and maintain relationships with political risk specialists in other industries, think tanks and universities, as well as with governmental and non-governmental organisations.
Model-related incidents are captured within Swiss Re’s operational risk framework. In addition, material model developments, incidents and risks are reported in regular risk updates to management and boards at Group and legal entity level.
Reserve valuation risk is managed by Swiss Re’s Actuarial Control function, with dedicated teams for property and casualty, and life and health valuation. These teams ensure that Swiss Re’s reserve setting process uses an appropriate governance framework, including defined accountabilities and decision-making processes for risk takers (as the first line of control) and for Actuarial Control. The framework ensures that there is independent assurance on the data, assumptions, models and processes used for valuation purposes; for property and casualty business it also includes an independent valuation of coverage provided to ensure that reserves remain within an adequate range.
In 2016, Swiss Re was again recognised as “insurance industry sector leader” in the Dow Jones Sustainability Indices. This is the tenth time since 2004 that Swiss Re has led the insurance sector in these rankings. The award highlights Swiss Re’s long-term commitment to sustainable business and our efforts to further embed sustainability into key business processes and operations.
For this purpose, Swiss Re’s risk identification processes are supported by a systematic framework that identifies, assesses and monitors emerging risks and opportunities across all areas of Swiss Re’s risk landscape, including potential surprise factors that could affect known loss potentials. A core element of emerging risk management is the SONAR system, which provides an interactive platform for every Swiss Re employee to suggest possible emerging risks and report early signals. This crowdsourcing bottom-up approach is combined with regional emerging risk capabilities in order to also reflect the regional picture. This information is complemented with insights from collaboration with external organisations such as think tanks, academic networks, international organisations and institutions, as well as from interaction with clients.
To further advance risk awareness across the industry and beyond, Swiss Re continues to participate actively in strategic risk initiatives such as the International Risk Governance Council, and the CRO Forum’s Emerging Risk Initiative.
Overview 82 Group structure and shareholders 86 Capital structure 89 Board of Directors 92 Executive Management 108 Shareholder’s Participation Rights 114 Changes of Control and Defence Measures 115 Auditors 116 Information policy 118
̤ the SRZ, SRCS, SRLC & Business Unit Bylaws, defining the governance structure and principles in line with the SRL & Group Bylaws for SRZ, SRCS and SRLC and their respective BUs Reinsurance, Corporate Solutions and Life Capital; and
Comprehensive revision of the Bylaws in 2016 In line with the Board of Directors’ efforts in monitoring corporate governance best practice and developments as well as to continuingly improve our Bylaws, the Board of Directors regularly reviews the Bylaws at Group and Business Unit level.
̤ The Board of Directors nominated Jay Ralph, Joerg Reinhardt and Jacques de Vaucleroy to be proposed to the Annual General Meeting 2017 for election as new members of the Board of Directors, whereas Carlos E. Represas will not stand for re-election.
Group EC ̤ Christian Mumenthaler became Group CEO as of 1 July 2016, succeeding Michel Liès, who retired.
̤ Moses Ojeisekhoba was appointed CEO Reinsurance as of 1 July 2016, succeeding Christian Mumenthaler. ̤ Jayne Plunkett was appointed CEO Reinsurance Asia and Regional President Asia as of 1 July 2016, succeeding Moses Ojeisekhoba. With that appointment she also became a member of the Group EC.
Information on its market capitalisation is provided on page 51 of this Financial Report. No other Group companies have shares listed. More information on the Group companies is provided in Note 19 to the Group financial statements on pages 267–269.
Significant shareholders and shareholder structure Under the Financial Markets Infrastructure Act (FMIA), anyone holding shares in a company listed on the SIX Swiss Exchange is required to notify the company and the SIX Swiss Exchange if its direct or indirect holding reaches, falls below or exceeds the following thresholds: 3%, 5%, 10%, 15%, 20%, 25%, 33⅓%, 50% or 66⅔% of the voting rights pursuant to the entry into the * Since 1 January 2016 Admin Re is part of the Business Unit Life Capital.
commercial register, whether or not the voting rights can be exercised*. Notifications must also include financial instruments, regardless of whether cash or physically settled, constituting a purchase or a sale position. Upon receipt of such notifications, the company is required to inform the public by publishing within two trading days the notification on the electronic platform of the SIX Swiss Exchange.
Neither Swiss Re Ltd nor the Group companies can exercise the voting rights of these shares. All notifications received in 2016 are published at www.swissre.com/investors/shares/ disclosure_of_shareholdings/
For further details on the past share buy-back programmes please visit: www.swissre.com/investors/shares/ share_buyback/
Creation of the obligation to notify 1 In the context of Swiss Reinsurance Company Ltd’s issuance of Perpetual Subordinated Capital Instruments in 2012 with a face value of USD 750 million with a stock settlement in registered shares of Swiss Re Ltd, Aquarius + Investments plc (“Aquarius”) reported in compliance with the Federal Act on Stock Exchanges and Securities Trading (Stock Exchange Act, SESTA) and the Ordinance of the Swiss Financial Market Supervisory Authority on Stock Exchanges and Securities Trading (Stock Exchange Ordinance – FINMA, SESTO-FINMA) a disclosable purchase and a sales position, each corresponding to 6.32% of the voting rights. Aquarius does not hold any registered shares of Swiss Re Ltd.
2 In compliance with Article 120 of the Financial Markets Infrastructure Act (FMIA), BlackRock, Inc., New York, U.S.A. (BlackRock), notified Swiss Re Ltd (Swiss Re) on 11 October 2016 following an acquisition of Swiss Re shares that it holds as of 10 October 2016 a total of 18 218 492 voting rights corresponding to 5.06% of the voting rights in Swiss Re. With recommendation of the Disclosure Office dated 15 July 2016, BlackRock was granted easing provisions from the obligation to disclose the direct shareholders according to Article 120 para. 1 FMIA in conjunction with Article 11 let. b and Article 22 para. 1 let. e and para. 3 FMIOFINMA when disclosing holdings according to Article 18 para. 1 and 4 FMIO-FINMA. However, collective investment schemes within the meaning of Article 18 para 2 let. a FMIO-FINMA that hold individually 3% or more of the voting rights of the relevant issuer will be mentioned in the relevant disclosure notificaton. Any person shall, at his/her request and without prove of interest, receive information about the direct shareholders within the meaning of Article 11 let. b and Article 22 para. 1 let. e and para. 3 FMIO-FINMA. Such request has to be addressed via email to the Disclosure Office: offenlegung@six-group.com. The information will be provided within five trading days from receipt of the relevant request by BlackRock, Inc. The information will be provided in electronic format with a reference date not older than one month. The easing provisions are granted until 15 July 2016. The 18 218 492 voting rights result from (i) the holding of 15 251 817 registered shares of Swiss Re (corresponding to 4.24% of the voting rights), of which 962 492 voting rights (corresponding to 0.27% of the voting rights) are due to repos (on the purchaser side) and/or collateral received with the title transfer (non-repo), (ii) 2 931 037 voting rights (corresponding to 0.81% of the voting rights) delegated by a third party and which can be exercised at BlackRock’s own discretion and (iii) contracts for difference conferring a total of 35 638 voting rights (corresponding to 0.01% of the voting rights) in Swiss Re. In addition, BlackRock disclosed sales positions arising from contracts for difference amounting to 57 194 voting rights corresponding to 0.02% of the voting rights in Swiss Re.
Shares held by Swiss Re 28 551 334 7.9 Share Buy-back Programme 5 542 500 1.6 1 Without Swiss Re’s holdings.
Registered shareholdings by country as of 31 December 2016 53.2% Switzerland 16.3% United Kingdom 14.4% USA 16.1% Other registered shareholders
As of 31 December 2016 Shareholders in % Shares in %
The table on page 90 of this Financial Report provides an overview of the issued, conditional and authorised capital of Swiss Re Ltd as of 31 December 2016 and 31 December 2015, respectively.
More information is provided in the sections “Conditional and authorised capital in particular” below and “Changes in capital” on page 90 of this Financial Report.
Conditional and authorised capital in particular Conditional capital As of 31 December 2016, the conditional capital of Swiss Re Ltd consisted of the following: Conditional capital for Equity-Linked Financing Instruments The share capital of the company may be increased up to CHF 5 000 000 by issuing a maximum of 50 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10.
According to the Articles of Association, the Board of Directors is authorised to increase the share capital of the company at any time up to 21 April 2017 by an amount not exceeding CHF 8 500 000 through the issue of up to 85 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10. Increases by underwriting as well as partial increases are permitted. The Board of Directors determines the date of issue, the issue price, the type of contribution and any possible acquisition of assets, the date of dividend entitlement as well as the expiry or allocation of non-exercised subscription rights.
The subscription and acquisition of the new registered shares, as well as each subsequent transfer of registered shares, shall be subject to the restrictions specified in the Articles of Association.
Changes in capital Changes in 2016 The Annual General Meeting 2016 approved the reduction of the ordinary share capital by CHF 1 063 437.00 from CHF 37 070 693.10 to CHF 36 007 256.10 via the cancellation of 10 634 370 shares with a nominal value of CHF 0.10 repurchased by Swiss Re Ltd on a second trading line on the SIX Swiss Exchange, via UBS AG as agent. The 10 634 370 shares were repurchased under the share buy-back programme lasting from 12 November 2015 until 2 March 2016. The purchase value of the repurchased own shares corresponded to CHF 999 999 867.20.
Changes in 2014 and previous years No changes in share capital occurred during 2014.
The registered shares are administered as intermediated securities. The transfer of intermediated securities and furnishing of collateral in intermediated securities must conform to the Intermediary-Held Securities Act. The transfer and furnishing of collateral by assignment is excluded.
In 2012, Swiss Reinsurance Company Ltd issued CHF 320 000 000 of 7.25% perpetual subordinated notes and USD 750 000 000 of 8.25% perpetual subordinated capital instruments both with stock settlement (collectively the “subordinated securities”), which provide Swiss Reinsurance Company Ltd with options to initiate settlement of the subordinated securities by delivery of shares of Swiss Re Ltd.
Options Valid exercise of stock options granted to Swiss Re employees are either cash or physically settled (with treasury shares). The number of issued shares will not be affected. For details on stock options granted to Swiss Re employees, see Note 15 to the Group financial statements on pages 261–262.
The Board of Directors is responsible for the overall direction, supervision and control of the Swiss Re Group.
Members of the Board of Directors According to the Articles of Association, the Board of Directors of Swiss Re Ltd, the holding company of the Swiss Re Group, consists of at least seven members. As of 31 December 2016 the Board of Directors consisted of the following members: Company Secretary
Conflicts of interest The members of the Board of Directors are also subject to procedures to avoid any action, position or interest that conflicts with an interest of Swiss Re Ltd or the Swiss Re Group or gives the appearance of a conflict. Each member must disclose any conflict of interest generally arising or relating to a matter to be discussed at a meeting, as soon as the member becomes aware of the conflict, to the Chairman. The respective member must not participate in the discussion and decision-making involving the interest at stake. The Chairman informs the Board of Directors of the existence of the conflict and it is reflected in the meeting minutes.
Mary Francis British 68 2013 Rajna Gibson Brandon Swiss 54 20001
Professional experience Walter B. Kielholz began his career at the General Reinsurance Corporation, Zurich, in 1976 where he held several positions in the US, UK and Italy before assuming responsibility for the company’s European marketing. In 1986, he joined Credit Suisse, where he was responsible for relationships with large insurance groups. He joined Swiss Re in 1989 where he became an Executive Board member in 1993 and was Chief Executive Officer from 1997 to 2002. He was also a member of the Board of Directors of Credit Suisse Group Ltd from 1999 to 2014 and served as Chairman from 2003 to 2009.
Educational background ̤ Business finance and accounting degree, University of St. Gallen, Switzerland
Professional experience After two years with Kunz Consulting AG, Renato Fassbind joined F. Hoffmann- La Roche Ltd in 1984, becoming Head of Internal Audit in 1988. From 1986 to 1987, he worked as a public accountant with Peat Marwick in New Jersey, US. In 1990, he joined ABB Ltd as Head of Corporate Staff Audit and, from 1997 to 2002, was Chief Financial Officer and member of the Group Executive Committee. In 2002, he joined Diethelm Keller Holding Ltd as Group Chief Executive Officer. From 2004 to 2010, he was Chief Financial Officer and member of the Executive Board of Credit Suisse Group Ltd.
Professional experience Raymond K.F. Ch’ien was Group Managing Director of Lam Soon Hong Kong Group from 1984 to 1997, Chairman of CDC Corporation from 1999 to 2011 and Chairman of MTR Corporation Limited from 2003 to 2015.
External appointments ̤ President of the Scientific Council of the Swiss Training Centre for Investment Professionals / AZEK
External appointments ̤ Chairman of the Board of Directors of Old Mutual Group Holdings Ltd and board member of Old Mutual plc
Philip K. Ryan was elected to the Board of Directors of Swiss Re Ltd in 2015. He chairs the Finance and Risk Committee and is a member of the Chairman’s and Governance Committee and the Audit Committee. He is also Chairman of Swiss Re America Holding Corporation.
Professional experience Philip K. Ryan held various positions with Credit Suisse from 1985 to 2008, including Chairman of the Financial Institutions Group, Chief Financial Officer of Credit Suisse Group Ltd, Chief Financial Officer of Credit Suisse Asset Management, and Managing Director of CSFB Financial Institutions Group. He was Chief Financial Officer of the Power Corporation of Canada from 2008 to 2012. In that capacity, he was a director of IGM Financial Inc., Great-West Lifeco Inc., and several of their subsidiaries, including Putnam Investments.
Information about managerial positions and significant business connections of non-executive directors Walter B. Kielholz, Chairman of the Board of Directors since 1 May 2009, was Swiss Re’s CEO from 1 January 1997 to 31 December 2002. In line with Swiss Re’s revised independence criteria, Walter B. Kielholz, being a full-time Chairman, is not considered independent. No other director has ever held a management position within the Group. None of the members of the Board of Directors has any significant business connections with Swiss Re Ltd or any of the Group companies.
Other mandates, activities and functions In line with Swiss Re Ltd’s Articles of Association the members of the Board of Directors may not hold more than ten additional mandates of which no more than four additional mandates with listed companies. Mandates (i) in companies which are controlled by Swiss Re Ltd or which control Swiss Re Ltd, (ii) mandates held at the request of Swiss Re Ltd or by companies controlled by Swiss Re Ltd as well as (iii) mandates in associations, charitable organisations, foundations, trusts, employee welfare foundations, investment companies, equity partnerships or limited liability partnerships are not subject to the above limitations. No member of the Board of Directors may hold more than five mandates as set out in (ii) above and not more than 15 mandates as set out in (iii) above. Mandates shall mean mandates in the supreme governing body of a legal entity which is required to be registered in the commercial register or a comparable foreign register. Mandates in different legal entities that are under joint control are deemed one mandate.
Any activities of Board members in governing and supervisory bodies of important Swiss and foreign organisations, institutions and foundations, as well as permanent management and consultancy functions for important Swiss and foreign interest groups and official functions and political posts, which are material, are stated in each of the directors’ biographies, which can be found on pages 93–96.
Changes in 2016 At the Annual General Meeting on 22 April 2016, Sir Paul Tucker was elected as new non-executive and independent member of the Board of Directors for a one-year term of office. At the same time, the shareholders re-elected Walter B. Kielholz (Chairman), Raymond K.F. Ch’ien, Renato Fassbind, Mary Francis, Rajna Gibson Brandon, C. Robert Henrikson, Trevor Manuel, Carlos E. Represas, Philip K. Ryan and Susan L. Wagner for a one-year term of office as members of the Board of Directors. Mathis Cabiallavetta, Hans Ulrich Maerki and Jean-Pierre Roth did not stand for re-election.
The Chairman’s and Governance Committee evaluates candidates for Board membership and makes recommendations to the Board of Directors for election or re-election proposals. The Board of Directors nominates candidates for Board membership for election at the General Meeting of shareholders, ensuring that the Board retains an adequate size and well-balanced composition and that at least three-quarters of its members are independent.
First election date The initial election year of each member is stated in the table on page 92.
Jay Ralph was a member of the Board of Management of Allianz SE from 2010 to 2016, where he also served on a number of boards of directors of Allianz SE subsidiaries. He was Chief Executive Officer of Allianz Re, from 2007 to 2009, and President and Chief Executive Officer of Allianz Risk Transfer from 1997 to 2006. Before joining Allianz, he was auditor at Arthur Andersen & Company, Investment Officer at Northwestern Mutual Life Insurance Company, President at Centre Re Bermuda Ltd and a member of the Executive Board of Zurich Re. Jay Ralph is a member of the Siemens Pension Advisory Board.
Jay Ralph is an American and Swiss citizen born in 1959. He graduated with an MBA in Finance and Economics from the University of Chicago, USA, and a BBA in Finance and Accounting from the University of Wisconsin, USA. He is a Certified Public Accountant (CPA), a Chartered Financial Analyst (CFA) and Fellow, Life Management Institute (FLMI).
Joerg Reinhardt was also Chairman of the Board of the Genomics Institute of the Novartis Research Foundation from 2000 to 2010, a member of the supervisory board of MorphoSys AG from 2001 to 2004, and a member of the Board of Directors of Lonza Group AG from 2012 to 2013.
Joerg Reinhardt is a German citizen born in 1956. He graduated with a doctorate in pharmaceutical sciences from Saarland University, Germany.
Organisational structure of the Board of Directors The Board of Directors constitutes itself at the first meeting following the Annual General Meeting. With the exception of the Chairman and the members of the Compensation Committee who are elected at the Annual General Meeting of shareholders, the Board of Directors elects among its members a Vice Chairman and a Lead Independent
The Chairman presides over General Meetings of shareholders and represents the Swiss Re Group towards its shareholders, in industry associations and in the interaction with other stakeholders such as the media, political and regulatory authorities, governmental officials and the general public. Specifically, the Chairman keeps regular contact with our Group regulator (FINMA).
Committees of the Board of Directors As determined by applicable law and the Articles of Association, the Board of Directors has non-transferable responsibilities and authorities. The Board of Directors has established Board committees which support the Board in fulfilling its duties. The Board of Directors has delegated certain responsibilities, including the preparation and execution of its resolutions, to the following five committees: the Chairman’s and Governance Committee, the Audit Committee, the Compensation Committee, the Finance and Risk Committee and the Investment Committee (see page 99).
Each committee is governed by a Charter which defines the committee’s responsibilities. The committees operate in line with the SRL & Group Bylaws and according to their respective Charters.
The committees have the following overall responsibilities: Chairman’s and Governance Committee Responsibilities The Chairman’s and Governance Committee’s primary function is to act as counsellor to the Chairman and to address corporate governance issues affecting the Group and impacting the legal and organisational structure. It is in charge of the succession planning at the Board of Directors level and oversees the annual performance assessment and self-assessment at both the Board of Directors and the Group EC level.
Walter B. Kielholz X (chair) Renato Fassbind X X (chair) X Raymond K.F. Ch’ien X X Mary Francis X X Rajna Gibson Brandon X X C. Robert Henrikson X X (chair) X Trevor Manuel X X Carlos E. Represas X Philip K. Ryan X X X (chair) Sir Paul Tucker X X Susan L. Wagner X X X (chair)
Members ̤ C. Robert Henrikson, Chair ̤ Renato Fassbind ̤ Carlos E. Represas ̤ Raymond K.F. Ch’ien
Members ̤ Philip K. Ryan, Chair ̤ Mary Francis ̤ Rajna Gibson Brandon ̤ C. Robert Henrikson ̤ Susan L. Wagner ̤ Sir Paul Tucker (since AGM 2016) ̤ Mathis Cabiallavetta (until AGM 2016)
Resolutions and quorum With regard to Board meetings, a quorum is constituted if at least either the Chairman or the Vice Chairman or the Lead Independent Director is present in person or participate by telephone or video conference, as well as the majority of the members of the Board of Directors. As regards Board committee meetings, a quorum shall be constituted if the majority of the Board committee members are present or participate by telephone or video conference.
The Board of Directors and its committees can also adopt resolutions by written agreement if no member of the Board of Directors requests a discussion of the topic. A circular resolution may be adopted only, if all the members sign the circular resolution or answer the e-mail respectively. A circular resolution
Number of meetings Average duration Average attendance (of Board members) Invitees in advisory capacity, in addition to members
Board of Directors 11 meetings1 Group EC members, Group Chief Legal Officer, Company Secretary 4 hours
Audit Committee 8 meetings Group CEO, Group CFO, Group CRO, Group COO, Group Chief Legal Officer, Chief Compliance Officer, Head Group Internal Audit, Chief Accounting Officer, Lead auditors of external auditor, Company Secretary 3 hours
Group Chief Underwriting Officer, Group Chief Investment Officer, Group COO, Group Treasurer, CEO Reinsurance, CEO Corporate Solutions, CEO Life Capital, Company Secretary
Accounting, financial control and financial planning ̤ approves the applicable accounting standard for external reporting, budgeting and financial control and planning; ̤ approves the applicable proprietary economic reporting and performance measurement standard (EVM); ̤ approves an annual budget and a mid-term financial plan based on both the accounting and the internal economic standards; ̤ approves the annual financial statements for both Swiss Re Ltd and the Swiss Re Group; ̤ is informed of the quarterly and semi-annual financial statements for both Swiss Re Ltd and the Swiss Re Group, which are approved by the Audit Committee; and
Appointment and removal of Group EC members and further key executives, People Strategy ̤ appoints and removes Group EC
̤ approves annually a debt funding plan, and, if required, approves individual debt issuances.
Self-Assessment The Board of Directors annually reviews its own performance and effectiveness. It evaluates the Board of Director’s work on one hand and the performance of the Chairman on the other. It conducts the self-assessment on the basis of pre-defined topics such as the Board responsibilities governed by the SRL&Group Bylaws, Board composition and meeting set-up. The topics are discussed and take-aways defined to be incorporated in the goals for the upcoming year. In addition, each Board committee annually reviews the adequacy of the scope of its responsibilities, assesses their accomplishment and the committee’s structure, processes and membership requirements and evaluates its performance.
Capital Management ̤ establishes principles on financing through capital markets and the allocation of financial resources within the Group; and
Group Chief Executive Officer The Group CEO is responsible for overseeing the operational management of the Group. This responsibility covers the Group Functions and the three Business Units Reinsurance, Corporate Solutions and Life Capital. He leads and manages the Group EC, its processes, including succession planning, cost and is responsible for its performance. He oversees the work of the Group Function heads and the Business Unit CEOs and gives them guidance on the execution of their tasks. He develops the Group Strategy together with the Group EC and submits it to the Board of Directors for approval. Once approved he focuses on the Group Strategy’s implementation and its further development.
Group Chief Operating Officer The Group COO is responsible for exercising governance and oversight of all Operations functions. This responsibility includes exercising governance on behalf of the Group in the functions under his responsibility, being a strategic partner to the Group and the Business Units in all operational matters, and providing a high quality, cost effective and differentiating operating platform for the whole Group.
Group Chief Risk Officer The Group CRO is responsible for providing the Board of Directors and Group EC with independent assurance that all of Swiss Re’s risks are being appropriately modelled, governed, managed and that adequate control instruments are in place. As part of executing these responsibilities, the Group CRO is charged with establishing the Group’s Risk Management Framework for financial, insurance and operational risk (comprising people, system, internal process and external event risk).
Regional Presidents The Regional Presidents for the areas Americas, Asia and EMEA are responsible for representing the Swiss Re Group externally and internally, as well as enhancing the Swiss Re brand and safeguarding the Group’s reputation in the geographies for which they are responsible. The Regional Presidents also assume responsibility for oversight of the Group’s operating platform and coordinate activities across the Business Units in their regions.
The Business Unit Chief Executive Officers The BU CEOs are responsible for the management and performance of the respective Business Unit Top-Level company as well as the respective Business Unit. The BU CEOs set the business and corporate agenda of the respective Business Unit, ensure high quality, performance-oriented and timely decision-making. They oversee the implementation of the decisions made and ensure the Business Unit Executive Committees fulfil their responsibilities.
Global Outlook for Insurance, Reinsurance and Financial Markets The report describes trends and provides forecasts regarding the economic environment, the Property & Casualty/ Life & Health (re)insurance markets and the financial markets.
Treasury Activities ̤ Group Regulatory Risk Report ̤ Financial Risk Management Update ̤ Own Risk and Solvency Assessment
Participation of Board members at executive management meetings The Chairman of the Board is invited to all meetings of the Group EC and Business Unit Executive Committees and receives the corresponding documentation and minutes.
The presence of the entire Group EC was required for four Board meetings in 2016, and selected members were invited to seven further Board meetings. The overall attendance rate for the Group EC members was 95.0%.
A detailed summary of executive management participation in Board committee meetings is provided on page 102.
Risk management Swiss Re’s Risk Management function provides regular risk reports to the Board of Directors, which are discussed in depth by the Finance and Risk Committee. These reports cover Swiss Re’s compliance with the Group’s risk tolerance criteria, major changes in risk and capital adequacy measures and a description of the Group’s main risk issues, including related risk management actions. The Finance and Risk Committee regularly reports to the entire Board of Directors.
The Head of GIA meets at least once per quarter with the Audit Committee, and immediately reports any issue which could have a potentially material impact on the business of the Group to the Chairman of the Audit Committee.
GIA staff govern themselves by following the Code of Ethics issued by the Institute of Internal Auditors (IIA). The IIA’s International Standards for the Professional Practice of Internal Auditing constitute the operating guidance for the department.
The Group Executive Committee has management responsibility for Swiss Re Ltd and the Swiss Re Group as delegated by the Board of Directors.
(EMEA)/Regional President EMEA Thierry Léger French, Swiss 50 CEO Life Capital Moses Ojeisekhoba Nigerian, British 50 CEO Reinsurance Jayne Plunkett American 46 CEO Reinsurance Asia/Regional President Asia Patrick Raaflaub Swiss, Italian 51 Group Chief Risk Officer J. Eric Smith American 59 CEO Swiss Re Americas/Regional President Americas Matthias Weber Swiss, American 55 Group Chief Underwriting Officer Thomas Wellauer Swiss 61 Group Chief Operating Officer 108 Swiss Re 2016 Financial Report
Educational background ̤ PhD in Physics, Swiss Federal Institute of Technology (ETH), Zurich, Switzerland
Guido Fürer joined Swiss Re in 1997 as Managing Director at Swiss Re New Markets, focusing on Alternative Risk Transfer. From 2001 to 2004, he worked for Swiss Re’s Private Equity unit with responsibility for the European strategic participations. In 2004, he joined Asset Management, first taking over responsibility for tactical asset allocation prior to assuming the role of Head of Swiss Re’s CIO Office with responsibility for strategic asset allocation and additionally Chief Investment Officer for the Business Units Reinsurance and Corporate Solutions. Guido Fürer has led Swiss Re Group Asset Management since his appointment as Group Chief Investment Officer and Member of the Group Executive Committee in November 2012.
Moses Ojeisekhoba joined Swiss Re in February 2012 and was appointed Chief Executive Officer Reinsurance Asia, Regional President Asia and member of the Group Executive Committee in March 2012. As of 1 July 2016, Moses Ojeisekhoba was appointed as Chief Executive Officer Reinsurance.
Following the acquisition of GE Insurance Solutions by Swiss Re in 2006, Jayne Plunkett joined Swiss Re as Head of the Kansas City Hub for Property & Casualty. From 2008 to 2012 she worked in Asia as Head of Casualty Underwriting for the region. In 2013 she assumed the global position as Head Casualty Reinsurance, also managing the unit dealing with large and complex transactions for P&C Reinsurance. As of 1 July 2016, Jayne Plunkett was appointed as Chief Executive Officer Reinsurance Asia, Regional President Asia and a member of the Group Executive Committee.
Professional experience Patrick Raaflaub began his career as an economist at Credit Suisse. He then was founding member of a consulting start-up and research fellow at the University of St. Gallen. He joined Swiss Re in 1994 and was appointed Chief Financial Officer of Swiss Re Italia SpA in 1997, and then was Divisional Controller Americas Division from 2000. He worked as Head of Finance Zurich from 2003, then Regional Chief Financial Officer Europe and Asia from 2005. From 2006, he was Head of Group Capital Management, where he was responsible for capital management at Group level and global regulatory affairs. In 2008 he joined the Swiss Financial Markets Supervisory Authority FINMA as Chief Executive Officer.
Professional experience J. Eric Smith worked in various roles in property and casualty insurance with Country Financial for more than 20 years, then joined Allstate in 2003 where he rose to the rank of President, Financial Services. He moved to USAA in 2010 as President USAA Life Insurance Co.
J. Eric Smith joined Swiss Re in July 2011 as Chief Executive Officer of Swiss Re Americas and as a member of the Group Management Board. He was appointed Regional President Americas and member of the Group Executive Committee in January 2012.
Matthias Weber was appointed Group Chief Underwriting Officer and member of the Group Executive Committee in April 2012.
Changes in 2016 Christian Mumenthaler was appointed Group CEO as of 1 July 2016, succeeding Michel M. Liès, who has retired.
Change in 2017 Edouard Schmid will become Group Chief Underwriting Officer and a member of the Group EC as of 1 July 2017. He will succeed Matthias Weber who has decided to step down as Group Chief Underwriting Officer.
Any activities of members of the Group EC in governing and supervisory bodies of important Swiss and foreign organisations, institutions and foundations as well as permanent management and consultancy functions for important Swiss and foreign interest groups and official functions and political posts, which are material, are stated in each of the Group EC members’ biographies on pages 109–113.
The duties of the Independent Proxy are determined by applicable laws, rules and regulations.
Voting right restrictions, statutory group clauses and exception rules There are no voting right restrictions and no statutory group clauses (other than the limitations on nominee registrations, page 91). Therefore, there are no procedures or conditions for cancelling restrictions and no rules on making exceptions to them. Accordingly, no such exceptions were made in 2016.
Swiss Re Ltd’s Articles of Association allow any shareholder with voting rights to have his or her shares represented at any General Meeting of shareholders by another person authorised in writing or by the Independent Proxy. Such representatives need not be shareholders.
Extraordinary General Meetings of shareholders may be called by a resolution of the General Meeting of shareholders or the Board of Directors, or by one or more shareholders with voting powers whose combined holdings represent at least 10% of the share capital.
In accordance with the Financial Markets Infrastructure Act (FMIA), whosoever acquires equity securities, which added to equity securities already owned, exceed the threshold of 33⅓% of Swiss Re Ltd shares with voting rights, either directly, indirectly or in concert with third parties, and regardless of whether these rights are exercisable or not, triggers a mandatory takeover offer for the outstanding Swiss Re Ltd shares owned by all other shareholders.
The Audit Committee reviews and approves in advance all planned audit services and any non-audit services provided by the external auditor.
PwC for a term of one year as external auditors. Alex Finn became lead auditor responsible for the auditing mandate of the former parent company, Swiss Reinsurance Company Ltd, on 23 September 2011. With Swiss Re Ltd becoming the new holding company of the Group, he also became lead auditor for the Swiss Re Ltd audit mandate. Bret Griffin was appointed as further new lead auditor following the election of PwC as auditors by the Annual General Meeting 2014.
In accordance with the Swiss Code of Obligations and to foster external auditor independence, the lead audit partner rotates out from his or her role after seven years.
News release, press conference 3 March Swiss Re completes public share buy-back programme News release 22 April Swiss Re shareholders approve all proposals put forward by the
Board of Directors at Swiss Re’s Annual General Meeting News release, AGM in Zurich 29 April Swiss Re reports strong first quarter net income of USD 1.2 billion; premium income rises to USD 7.9 billion
News release 29 July Swiss Re reports solid half-year net income of USD 1.9 billion News release, press conference 18 August Preliminary sigma estimates for first-half 2016: natural catastrophes drive global insured losses to USD 31 billion News release, sigma study 8 September Swiss Re remains insurance industry leader in sustainability, according to 2016 Dow Jones Sustainability Indices
News release 12 September Demand for customised reinsurance and insurance solutions is growing, Swiss Re sigma says
News release, media conference call 22 November Sustained insurance sector growth in 2017 largely based on demand from emerging markets
Overview 122 Natural catastrophes and climate change 124 Strengthening risk resilience: 2016 highlights 128 Our Sustainability Risk Framework 131 Diversity and inclusion in our workforce 134
Sustainable, long-term value creation serves as a guiding principle for our actions.
This approach is also in our own best interest, though: it strengthens our capabilities to identify, and address, both risks and opportunities manifesting themselves in the longer run and, as a consequence, to retain our licence to operate.
Corporate responsibility governance At Swiss Re’s highest governance level, the task of overseeing implementation of our commitment to corporate responsibility has been assigned to a committee of the Board of Directors: it is one of the responsibilities of the Chairman’s and Governance Committee to monitor the Group’s sustainability principles.
A) Processes for identifying and assessing climate- related risks: Understanding the risk pp. 125–126
B) Impact of climate-related risks and opportunities: The impact of climate change p. 124
B) Scope 1, 2 and 3 GHG emissions: Tackling our carbon footprint, p. 127
C) Integration into overall risk management: Understanding the risk, pp. 125–126
Our approach to materiality Reflecting the long-term view of our business, we seek to identify environmental and social issues that may undermine sustainable progress, and explore effective ways to address them. To do so, we use our deep understanding of re/insurance markets and the extensive risk expertise embedded within our company as well as insights from our ongoing dialogue with key stakeholders.
In this chapter of the Financial Report we present selected information on some of our corporate responsibility topics with a strong link to our financial performance. Climate change in particular remains a key issue for our core re/insurance business. In view of this, we use this section to start providing “Climate-related Financial Disclosures” as recommended by the Financial Stability Board (www.fsb-tcfd.org).
The impact of climate change On average, both economic and insured losses caused by natural catastrophes have increased steadily over the past 20 years. The key reasons have been economic development, population growth, urbanisation and a higher concentration of assets in exposed areas.
This general trend will continue. But crucially, losses will be further aggravated by climate change. The scientific consensus is that a continued rise in average global temperatures will have a significant effect on weatherrelated natural catastrophes. According to the Special Report on Extremes (SREX, 2012) and the Fifth Assessment Report (AR5, 2014) published by the Intergovernmental Panel on Climate Change (IPCC), a changing climate gradually leads to shifts in the frequency,
Having access to effective re/insurance protection against natural catastrophes creates significant benefits for our clients — as well as society at large. In 2016, we received USD 2.5 billion of P&C Reinsurance premiums for natural catastrophe covers (for losses larger than USD 20 million); this was equivalent to approximately 15% of total premiums in this business segment.
As a matter of fact, we first identified the potential mid- to long-term impact of climate change on our natural catastrophe business — and on society in general — almost 30 years ago. In response, we declared it a priority issue and introduced a comprehensive climate change strategy resting on four pillars: ̤ Advancing our knowledge and understanding of climate change risks, quantifying and integrating them into our risk management and underwriting frameworks where relevant; ̤ Developing products and services to mitigate — or adapt to — climate risk; ̤ Raising awareness about climate change risks through dialogue with clients, employees and the public, and advocacy of a worldwide policy framework for climate change; ̤ Tackling our own carbon footprint and ensuring transparent annual emissions reporting.
̤ Man-made disasters in USD bn, at 2016 prices 140USD 2.5 billion Natural catastrophe premiums in our P&C Reinsurance business (2015: USD 2.6 billion)
Understanding the risk To assess our P&C businesses accurately and to structure sound risk transfer solutions, we need to clearly understand the economic impact of natural catastrophes and the effect of climate change. This is why we invest in proprietary, state-of-the-art natural catastrophe models and regularly collaborate with universities and scientific institutions to review underlying parameters.
Natural catastrophes constitute one of the core modelled risks in Swiss Re’s risk landscape. Specifically, they are one of three categories in which we classify and model our P&C insurance risks (the other two being man-made and geopolitical risks). These P&C insurance risks arise from the coverage we provide to our clients for property, liability, motor, accident plus specialty risks.
Together, these four perils account for approximately two-thirds of our gross annual expected losses from weatherrelated perils.
We also carry out insurance risk stress tests on a regular basis to estimate the potential funding requirements stemming from extreme loss events. The basis for these calculations is the risk posed by a single event with a 200-year return period (ie with a likelihood of 0.5% over the next year). Major exposures include the following four natural catastrophe scenarios: Atlantic hurricanes, European windstorms, Californian earthquakes and Japanese earthquakes, of which the former two are prone to be affected by climate change. For further details, see pages 72–73.
Rentel will comprise 42 wind turbines of 7.35 megawatts each, in total producing 309 megawatts at peak. The turbines are connected to an offshore transformer station from which the power will be transmitted to an onshore substation at Zeebrugge and then fed into the grid. The electricity generated by the wind farm will be sufficient to supply approximately 285 000 households with climate-friendly energy. Construction has started in early 2017 and is expected to be completed by the end of 2018.
In our asset management, we measure our exposure to carbon emissions in listed equities and corporate bonds in a systematic manner. In order to mitigate the risk of stranded assets, we have also adopted a policy to avoid investments in companies where a substantial part of their revenues is stemming from thermal coal.
Mitigation: By “mitigation” we mean efforts to reduce CO2 emissions. Renewable energy projects are key to this. To date our product development has focused on offshore wind, which is considered one of the most promising renewable energy sources. However, these infrastructures present highly complex risks because the technology is developing rapidly and there is little loss history to rely upon for underwriting purposes. Our Corporate Solutions Business Unit takes a special interest in offshore wind, as we have both the large capacity and the technical expertise to assess and manage the complex risks associated with it (see right and page 45).
Adaptation to climate change requires effective risk transfer instruments that help our clients to cope with some of its effects. As we continuously adjust our natural catastrophe and weather solutions to reflect changes in the underlying risk, both are suitable for this purpose. On pages 128–130 we describe some recent examples of such products, along with two corresponding commitments we have made.
Tackling our carbon footprint The fourth pillar of our climate strategy focuses on the emissions from our own operations. Through our pioneering Greenhouse Neutral Programme we almost halved our emissions per employee between 2003 and 2013 and set off all remaining emissions. Our new target, valid until 2020, is to keep our per-capita emissions stable at the 2013 level even as we continue to pursue an ambitious strategy in high growth markets. In the present second phase of the Greenhouse Neutral Programme, our emissions accounting and reporting covers the following sources: heating (Scope 1), power consumption (Scope 2) and several activities along our supply chain (Scope 3). You can track the development of these emissions since 2013 in the table above.
In 2016, total CO2 emissions per employee (FTE) increased by 6.2% and were thus 3.9% higher than in 2013. The main reason was a significant rise in business travel, which outweighed further gains we have made in reducing our energy intensity. A second factor was that we created new jobs in countries where power consumption is carbon intensive at present, eg in India. This situation is one of the reasons why we helped to establish the Climate Group’s RE100 initiative (see below).
Switching to renewable energy is one of two main measures we have taken to reach our emissions reduction goals. Approximately 84% of the power we purchased in 2016 across the Group came from renewable energy sources. We are committed to raising this figure to 100%, but in some of the countries where we want to grow, reliable supplies of renewable energy are lacking. As a founding member of the RE100 initiative (theRE100.org) we work together with a number of like-minded companies to improve this situation, by talking to policy-makers and regulators at the national and sub-national level. The RE100 group grew further in 2016 and now includes more than 80 of the world’s largest companies.
For full details of our CO2 emissions and underlying environmental data, please refer to the 2016 Corporate Responsibility Report, page 53.
Change in % since 2013 1 The figures for 2013 and 2015 have been restated to account for company acquisitions and changes in emission factors. 2 Calculation based on a market-based approach taking into account the purchase of renewable energy instruments, with the exception of the UK where the government requires companies to report an average grid factor.
3 Commuting data are gathered bi-annually by means of a survey. The figures are rounded and fraught with considerable uncertainty.
Strengthening risk resilience: 2016 highlights presented to the public. Since then, the baseline exposure and existing resilience of all the city’s water, sanitation and related energy assets has been assessed to today’s risk as well as the risk in 30 years’ time, based on Swiss Re’s proprietary catastrophe modelling and climate risk analysis.
However, there remains significant unmet demand for effective, commercially viable re/insurance protection. As the graph below illustrates, the gap between total economic losses and insured losses remains substantial. Given this protection gap, we look beyond our established client base and traditional business model. In particular, we aim to expand re/insurance protection by focusing on underinsured risks, new markets, different clients and innovative risk transfer products. Many of these solutions help our clients to better cope with climaterelated threats.
Some of the pioneering transactions we completed in 2016 are outlined below.
Helping to make New Orleans more resilient More than ten years have passed since September 2005 when Hurricane Katrina hit New Orleans, causing massive damage through the ensuing storm surge and flooding. Culminating its fight back from disaster, the city’s leadership launched Resilient New Orleans (“Resilient Nola”, www.resilientnola.org) in 2015, the world’s first comprehensive urban resilience strategy.
Swiss Re supports the programme as a lead reinsurer. In total, Flood Re has secured GBP 2.1 billion of reinsurance cover, making it one of the five largest natural disaster schemes in the world. Ultimately, it is expected to reach some 350 000 households in the UK through cheaper flood insurance, providing valuable learnings for other countries at high risk of flooding.
As a result of these efforts, the scheme was approved for a milestone budget of THB 3 billion (approximately USD 90 million) in 2016, with the goal to cover a total of two million rice farmers. The plan for the future is to extend the scheme to further crops and to widen the policy covers.
Helping to insure small businesses in Guatemala After the devastating earthquake that struck Haiti in 2010, Swiss Re helped set up the Microinsurance Catastrophe Risk Organisation, or MiCRO for short (www.microrisk.org). Combining the capital efficiency of the reinsurance market with donor capital, MiCRO specialises in developing attractive and affordable insurance solutions for low-income populations, especially microentrepreneurs and smallholder farmers.
The small business and agriculture sectors are vital to the further development of Central American economies in general, but are highly vulnerable to weather-related risks. On top of this, climate change is expected to aggravate extreme weather events, increasing both their frequency and intensity. MiCRO plans to expand such index-based insurance products to further countries, and has already submitted one for approval in El Salvador. The goal is to reach a total of 250 000 people in the region by 2019.
Payouts to our clients in 2016 Innovative solutions, as described on these pages, all help to extend insurance protection. Three such solutions we have helped develop in recent years showed their practical benefit in 2016 by making payouts to their clients.
In the Caribbean, Hurricane Matthew caused many casualties and brought widespread destruction across the region. CCRIF SPC (www.ccrif.org, formerly the Caribbean Catastrophe Risk Insurance Facility), which we have been reinsuring since 2008, made payouts totalling USD 29 million to the governments of Haiti, Barbados, St. Lucia, St. Vincent and the Grenadines within two weeks of the disaster. This brought the total number of emergency payouts to 21 since 2008, worth USD 68 million.
USD 3.9 billion Total amount of climate protection offered to sovereigns and subsovereigns since 2014 1 million Smallholder farmers benefiting from the Grow Africa Partnership by 2016
Building on these experiences, we made a significant commitment to the United Nations at its Climate Summit in September 2014. Personally addressing the government leaders present at the summit, our then Group CEO Michel M. Liès made the following pledge: “By the year 2020, Swiss Re commits to having advised 50 sovereigns and sub-sovereigns on climate risk resilience, and to have offered them USD 10 billion against this risk.”
Our commitment to the Grow Africa Partnership includes the following three elements: ̤ Give farmers in Sub-Saharan Africa access to tools such as weather and yield index insurance products; ̤ Invest in resources equivalent to about USD 2 million per year to support the development of sustainable agricultural risk management markets; ̤ Provide agricultural insurance for up to 1.4 million smallholder farmers.
Working together with different partners, we helped to bring weather insurance to 1 million smallholder farmers in 11 Sub-Saharan countries by the end of 2016. This is less than the 1.6 million recorded in the previous year. The reasons for the decrease are twofold: Firstly, developing schemes that promise to become commercially viable continues to face significant challenges, in particular regarding the creation of effective distribution networks and overcoming market fragmentation. Secondly, the entry of additional capacity providers into some existing schemes has led to a decrease of Swiss Re’s participation share in them.
Based on our long-standing commitment to enabling sustainable progress, we believe that it is important to recognise and address such dilemmas. Doing so requires a well-defined approach and the willingness to make decisions based on ethical principles.
Guidelines and policies Our Sustainability Risk Framework is based on the principles of respecting human rights and protecting the environment. Through detailed guidelines, the framework applies these umbrella policies to seven sectors in which we perceive major sustainability risks: the defence industry; oil and gas (including oil sands and hydraulic fracturing); mining; dams; animal testing; forestry, pulp & paper and oil palm; and nuclear weapons proliferation. (The list of key concerns addressed by the policies and guidelines can be viewed at reports.swissre.com/corporateresponsibility -report/2016/cr-report/ risk-intelligence/our-sustainability-riskframework /policies.html)
The Sensitive Business Risks process Each of the two umbrella policies and seven sector guidelines of our Sustainability Risk Framework contains criteria and qualitative standards which define precisely when a transaction may present a “sustainability risk”.
Integrating anti-bribery & corruption guidance Swiss Re prohibits all forms of bribery and corruption, as expressed by our Code of Conduct. We clearly state this position and explain what it means for daily business conduct through our Group Anti-Bribery and Corruption (ABC) Policy and detailed Group ABC Guidelines. In 2016, we took further steps to mitigate our potential exposure to bribery and corruption risks by integrating corresponding guidance in our SBR assessment tool, thus ensuring appropriate due diligence on our counterparties.
Number of sensitive business transactions referred to our team of sustainability experts 132 Swiss Re 2016 Financial Report
This guidance specifies both the countries and industries with a heightened risk of bribery and corruption, and instructs our underwriters how to carry out additional due diligence in order to assess the risk. In grave cases, our due diligence procedure leads to an automatic requirement to abstain from the transaction. If there is disagreement about this, the transaction needs to be discussed with our internal legal and compliance team who will provide additional advice.
Company exclusions The policies of our Sustainability Risk Framework specify certain criteria that may lead to the exclusion of a company from both our re/insurance transactions and our investments, to the extent that such an exclusion is permissible (eg by virtue of mandatory law or internal policies) and possible (eg if existing documentation relating to such re/insurance transactions and investments provide for it). These criteria include: involvement in prohibited war material; verifiable complicity in systemic, repeated and severe human rights violations; causing repeated, severe and unmitigated damage to the environment; unregulated proliferation of nuclear weapons; and unethical/cruel animal testing practices.
Sensitive Business Risks referred to our expert team in 2016 28% Oil and gas 27% Mining 25% Dams 9% Excluded/critical country 4% Human rights 4% Defence 1% Animal testing 1% Environmental issues 1% Forestry, pulp & paper and oil palm
One of the key aspirations of our People Strategy is to attract and engage talented employees from different backgrounds by living a flexible, inclusive and open culture where dialogue and different perspectives are valued. This aspiration is reflected in our diversity and inclusion (D&I) vision: “See, feel and live diversity — diversity of gender, race, ethnicity, generation, sexual orientation (LGBT), physical abilities, personalities and experiences — at all levels, functions and regions of Swiss Re”.
We are committed to this vision because it supports an environment in which our employees value each other’s differences and where they can all bring their authentic selves to the workplace — an environment in which our inclusive culture enables us to truly live our “smarter together” brand promise.
Bridging generations To ensure Swiss Re attracts and retains the talent needed for the future and remains an employer of choice, it is important we understand the diverse needs of the multiple generations making up our workforce. In particular, we are focusing on building dialogue across different age groups to break the stereotypes attached to generational preferences and workstyles.
Inclusive culture A key aspect of our People Strategy is to prevent stereotyping of individuals based on any dimensions of diversity. It centres on raising awareness of the “unconscious biases” that every one of us have and which can unintentionally influence our decision-making and our behaviour towards others. Besides the ongoing self-awareness and skills training in reducing bias throughout Swiss Re, line managers and employees participate in a variety of face-to-face and web-based training that promotes self-awareness and skills in reducing bias such as those related to generations, sexual orientation and gender.
C. Robert Henrikson Chairman of the Compensation Committee 138 Swiss Re 2016 Financial Report
Group business performance 2016 Key considerations for annual compensation decisions continue to cover a combination of US GAAP and Economic Value Management (EVM) based business results, qualitative factors and Swiss Re’s pay-forperformance approach. Compensation decisions were made considering Swiss Re’s overall performance for the reporting year in which the Group delivered good US GAAP and strong economic results. Net income was supported by all Business Units, with a strong contribution from investments. The Group’s overall underwriting performance was solid, with technical profitability across all businesses. Property & Casualty Reinsurance delivered good US GAAP and solid economic results. Life & Health Reinsurance exceeded its return on equity target and reported strong economic results. The Corporate Solutions US GAAP result was driven by continued pricing pressure and large man-made losses, and the economic result was impacted by the non-recognition of intangible assets (including goodwill) related to the IHC acquisition. Life Capital delivered a strong performance across all metrics and generated significant gross cash for the Group.
Group EC changes in 2016 During 2016 significant changes to the Group EC occurred whereby Christian Mumenthaler became the new Group Chief Executive Officer on 1 July 2016, succeeding Michel Liès. All subsequent vacancies were filled with strong internal candidates who were already members of the Group EC or promoted onto the Group EC, all proof of a strong and well established talent pool. The fixed compensation and variable long-term compensation granted to the existing members of the Group EC for 2016 was within the budget approved by the shareholders at the AGM 2015. An additional amount was available to cover compensation granted in 2016 to two new members of the Group EC because of their promotions which is in accordance with Art. 23 of the Articles of Association (see detailed disclosure on pages 155 and 160 of this Compensation Report).
2016 was a year of stability with no material changes to our existing compensation framework.
AGM 2017 The Compensation Committee remains committed to providing compensation policies and programmes that support our business strategy and align the interests of our employees with those of our shareholders. We are therefore keen to maintain regular interactions with shareholders and other key stakeholders.
As was the case last year and in line with our Articles of Association, shareholders will again be asked to approve the following amounts: ̤ Aggregate amount of variable short-term compensation for the members of the Group EC for the financial year 2016; ̤ Maximum aggregate amount of compensation for the members of the Board of Directors for the term of office from the AGM 2017 to the AGM 2018; and
̤ Maximum aggregate amount of fixed compensation and variable long-term compensation for the members of the Group EC for the financial year 2018.
Separate to this and as in the past, shareholders will also be asked to support this Compensation Report in a consultative vote. The Compensation Committee is satisfied that this Compensation Report complies with applicable laws, rules and regulations and provides a comprehensive view of the compensation framework at Swiss Re and the 2016 compensation decisions.
Aggregate compensation for all employees (CHFm)2 2 081 2 213 6% 2 265 2% Group EC members3,4 13 12 14 Aggregate Group EC compensation (CHF thousands)2 42 612 47 360 11% 51 430 9%
Income before tax and variable compensation 4 629 100% 5 758 100% 4 773 100%
2 Includes shares bought back between 4 November 2016 and 9 February 2017 as part of the buy-back programme authorised at the AGM 2016. The total amount represents an estimate translated at the 2016 average CHF/USD FX rate.
Life Capital, which includes ReAssure (formerly Admin Re®) and, as of 6 January 2016, the operations formerly known as Guardian Financial Services (Guardian), reported strong results, driven by investment performance, mainly from the Guardian portfolio, and solid underlying business performance. Gross cash generation was strong, driven by management actions and despite the unfavourable impact of decreasing interest rates in the UK.
For further details on the US GAAP financial performance, refer to pages 26–49 of this Financial Report.
For further details on the economic financial performance, refer to the EVM section on pages 59–60 of this Financial Report.
Value Alignment Incentive Value Alignment Incentive (VAI) performance is measured for the Group and each underlying business area. The performance factor for each participant is determined based on the business area that the participant was in at the time of award. In March 2016, the Group VAI 2012 (awarded in 2013) vested with a performance factor of 101.5% (see page 145 for a detailed description of the VAI).
Leadership Performance Plan The LPP award is consistently linked to Swiss Re Group’s future achievement of multi-year performance conditions (ROE and relative Total Shareholder Return/TSR), keeping the focus on the long-term success of the Group. Swiss Re made LPP grants in 2016 consistent with this rationale. The LPP is generally part of total target compensation (see page 146 for a detailed description of the LPP).
VAI plan year Performance measurement period elapsed as of 31 December 2016
Swiss Re Group performance factor 2013 (awarded 2014) 3 years to be determined 2014 (awarded 2015) 2 years to be determined 2015 (awarded 2016) 1 year to be determined 142 Swiss Re 2016 Financial Report
The Compensation Committee has also approved an authority matrix that defines the limits to which each level of management can authorise compensation payments. Separate limits apply to each compensation element, thereby ensuring that all payments receive the appropriate level of approval. The Group CEO or the Compensation Committee, as applicable, approves all compensation that exceeds the pre-set limits. The Group CEO is not involved in decision making concerning his own compensation.
To reflect best practices, the Compensation Policy prohibits the use of any personal hedging strategies or remuneration and liability-related insurance that could undermine the risk alignment effects and economic exposure embedded in compensation arrangements.
This approach adds to the success of the business by: ̤ supporting a culture of high performance with a focus on risk-adjusted financial results; ̤ ensuring alignment of compensation to business results, individual contribution and compliance; ̤ supporting Swiss Re’s commitment to attract, motivate and retain key talent; ̤ aligning the interests of employees with those of Swiss Re’s shareholders; and
Overview of the compensation components for Group EC members and other employees Swiss Re aims for total compensation that is competitive in the market.
Structure Swiss Re operates a Target API (TAPI) system along with a performance management framework that provides equal weighting to results-oriented and behavioural related performance criteria for all employees. API is awarded for both objectives achieved and the demonstration of desired behaviours.
A TAPI is set based on multiple factors, but primarily on the role being performed and market benchmarks. Similar to the determination of the base salary, the employee’s total compensation and overall pay-mix are taken into account, when setting the TAPI. The possible payout for the API ranges from 0 to 2x TAPI. For Group EC members an additional cap applies which is 3x base salary.
Measurement of the economic impact of profit/loss from previous years business, over three years
Performance measurement Starting with the 2015 award, the performance measurement calculation has been simplified to increase transparency. This was achieved by using fewer performance factors (at the Business Unit and Group level) and, where possible, published EVM information.
The payout factor of the VAI is calculated based on the three-year average EVM previous years’ business profit margin for all prior underwriting years. EVM is Swiss Re’s proprietary integrated economic valuation and accounting framework for planning, pricing, reserving, and steering the business (please refer to the EVM section on pages 59–60 of this Financial Report). The EVM previous years’ business profit margin is the ratio of EVM previous years’ business profit to EVM capital allocated to previous years’ business in the current year.
Group CEO 50% of API Group EC members 45% of API Other key executives 40% of API All other employees 50% of the amount exceeding USD 100 000 with a minimum deferral amount of USD 5 000 at USD 100 000 and up to a maximum of 40% of API
The intention of the LPP is to: ̤ focus participants’ energies on earnings, capital efficiency and Swiss Re’s position against peers, all of which are critical to sustained shareholder value creation; ̤ focus participants on long-term goals; ̤ attract and retain individuals of exceptional skill; and ̤ provide competitive compensation that rewards long-term performance.
Grant The amounts disclosed under LPP in the section “Compensation disclosure and shareholdings 2016” reflect the grants made in April 2016. This LPP award will be measured over the period 2016 to 2018 and will vest in 2019. Grant levels are determined based on multiple factors which include the role being performed and market benchmarks.
Swiss Re’s TSR performance is assessed relative to the TSR of the pre-defined peer group. This peer group consists of companies that are similar in scale, have a global footprint or a similar business mix as Swiss Re. The peer group which is set at the beginning of the plan period includes Allianz SE, American International Group Inc, AXA SA, Chubb Limited, Everest Re Group Ltd, Hannover Rueck SE, Muenchener Rueckversicherungs-Gesellschaft AG, Reinsurance Group of America Inc, RenaissanceRe Holding Ltd, SCOR SE, XL Group Ltd and Zurich Insurance Group Ltd.
Settlement At the end of the three-year measurement period, both RSUs and PSUs will typically be settled in Swiss Re Ltd shares. For the full three-year performance measurement period, forfeiture conditions apply. Additionally, clawback provisions apply in a range of events (the same as outlined under the VAI section) as defined in the LPP plan rules, enabling Swiss Re to seek repayment of settled awards.
A d d iti o n al t w o -y ea r h o ld in g p er io d fo r
C a n d o th er ke y ex ec u tiv es
Incentive Share Plan The ISP provides employees with an opportunity to purchase with some or all of their immediate cash API Swiss Re Ltd shares. Shares are offered with a 10% discount on the Fair Market Value (FMV) and are subject to a one-year blocking period. Full shareholder rights apply during this blocking period. The ISP encourages alignment with shareholder interests. At the end of the one-year period, the employee assumes full ownership of the shares.
The key objectives of Swiss Re’s benefits packages are to: ̤ provide a degree of security for employees as they relate to pension, health matters, disability and death; ̤ be competitive in the markets where Swiss Re competes for talent, as such perquisites are generally provided where these are market driven; and
Includes consideration for indicators such as client and service quality, risk and control behaviour, franchise building, human capital & talent management, and strategic initiatives
Employment conditions The Group EC including the Group CEO have employment contracts with notice periods of 12 months and no severance clauses. Information on “change of control” clauses is covered in the Corporate Governance section on page 115 of this Financial Report.
Compensation framework for the Board of Directors The objective in compensating members of the Board of Directors is to attract and retain experienced individuals who are highly motivated to perform a critical role in the strategic oversight of Swiss Re and to contribute their individual business experience and expertise. The structure of compensation for members of the Board of Directors must, however, take account of the way their contribution to the success of Swiss Re differs from that of the Group EC.
Compensation structure Fees for the members of the Board of Directors are delivered 60% in cash and 40% in Swiss Re Ltd shares, with a four-year blocking period.
Swiss Re’s Vice Chairman was appointed in 2012, acting also as the Lead Independent Director since 2014. He is a member of the Chairman’s and Governance Committee, chairs the Audit Committee and is a member of the Compensation Committee. His overall responsibility is to act as a deputy of the Chairman, if the Chairman is prevented from performing his duties or if a conflict of interest situation arises. The Board of Directors may assign further tasks to the Vice Chairman.
The degree of in-depth oversight requires a high level of professional experience and expertise from each Board member in their field. Swiss Re is confident that the skill set of its Board of Directors is well balanced, which in turn ensures an effective level of supervision.
Fee approval The aggregate compensation of the Board of Directors for the next term of office is subject to shareholder approval at the AGM as outlined in the Articles of Association.
Subsidiary boards of directors The majority of the members of the boards at the subsidiary level are Swiss Re executives and they receive no additional fees for their services in this role. The non-executive members of the subsidiary boards receive their fees 100% in cash.
Authority for decisions related to compensation at the Board and Group EC level are governed by the Articles of Association and the Corporate Bylaws including the Compensation Committee Charter (Charter). The main responsibilities of the Compensation Committee are summarised in the table on the right.
Full details on these rules are available on the Swiss Re website: www.swissre.com — About us — Corporate governance — Corporate regulations — Articles of Association of Swiss Re Ltd.
̤ Is supported by the Compensation Committee in establishing and reviewing Swiss Re’s compensation framework and guidelines and performance criteria as well as in preparing the proposals to the AGM regarding the compensation of the members of the Board of Directors and the Group EC.
̤ Further details can be found in the Corporate Governance section on page 101 of the Financial Report.
̤ Niederer Kraft & Frey AG provides legal advice, mainly about specific aspects of compliance and disclosure matters regarding compensation.
Maximum aggregate amount of compensation of Group Board members for the next term of office
Individual compensation of Group Board members Compensation Committee, Chairman of the Board of Directors1
Compensation of Group CEO Compensation Committee, Chairman of the Board of Directors
Short-term compensation pools and long-term incentive pools for the Group and Group EC
Board of Directors2 1 Other than the Chairman’s compensation. 2 Within the maximum aggregate amount of compensation approved by the AGM. 3 Within the maximum aggregate amount of compensation approved by the AGM and the additional amount available for changes in the Group EC after the AGM as per the Articles of Association respectively. 4 Board of Directors informed.
It held six meetings during 2016 and provided an update to the Board of Directors on topics discussed, decisions made and items for approval after each of these meetings. A summary of the topics dealt with by the Compensation Committee during the year is shown on page 152.
̤ Approval of individual compensation proposals for the Group EC1 February and April
This includes the approval by the Chairmen of the Audit and the Finance and Risk Committees, of the aggregate API pool of their respective Control Functions, and the approval of the individual compensation for the head of each respective Control Function.
Aggregate compensation of the Swiss Re Group The aggregate compensation for the performance years 2015 and 2016 for all employees was as follows: As of 31 December 2016 Swiss Re Group had 14 053 employees worldwide, compared to 12 767 employees at the end of 2015.
Long-term variable compensation Leadership Performance Plan 286 44 347 50 Other payments Severance payments2 346 33 399 19 1 Regular staff.
At the AGM 2015 and AGM 2016 the shareholders approved maximum aggregate compensation amounts for the Board of Directors and Group EC for prospective periods. For the reconciliation of these aggregate amounts to what was awarded please refer to page 160.
The compensation increase in 2016 compared to the previous fiscal year is mainly caused by the following factors: ̤ The 12 members of the Group EC of 2015 received in 2016 total compensation of
̤ The compensation for Thierry Léger and Jayne Plunkett was not originally considered in the CHF 31 million prospective budget for 2016 given their appointments were made post the AGM 2015 (see the explanations on page 160).
4 Disclosure reflects all awards for a reporting year, ie the 2015 value reflects the fair value of LPP awards granted in April 2015 and the 2016 value reflects the fair value of LPP granted in April 2016. 5 Covers payments reflecting the time in the role as Group EC members. 6 For Group EC members leaving during the reporting period, this covers only legally or contractually required payments for the period when the member was no longer in the role (eg base salary when on garden leave). 7 Amounts are gross and include social security contributions of the employees. Additionally and not included are company contributions to social security systems paid by Swiss Re in line with applicable laws which amounted to CHF 3 755 675 in 2015 and CHF 2 922 518 in 2016.
̤ 29% Base salary ̤ 22% Cash API ̤ 18% VAI (paid after 3 years) ̤ 31% LPP (paid after 5 years)
̤ 28% Base salary ̤ 24% Cash API ̤ 21% VAI (paid after 3 years) ̤ 27% LPP (paid after 5 years)
Additional information on compensation decisions For US GAAP and statutory reporting purposes, VAI and LPP awards are accrued over the period during which they are earned. For the purpose of the disclosure required in this Compensation Report, the value of awards granted is included as compensation in the year of performance for the years 2015 and 2016 respectively.
Other payments to members of the Group EC During 2016, no payments (or waivers of claims) other than those set out in the section compensation disclosure and shareholdings in 2016 were made to current members of the Group EC or persons closely related.
Shares held by members of the Group EC The following table reflects Swiss Re share ownership by members of the Group EC as of 31 December: Vested options held by members of the Group EC For the years ended 31 December 2015 and 2016, no member of the Group EC held any vested options.
Christian Mumenthaler, Group CEO 50 000 63 854 Michel Liès, previous Group CEO1 262 808 n/a David Cole, Group Chief Financial Officer 54 207 68 061 John R. Dacey, Group Chief Strategy Officer 171 7 526 Guido Fürer, Group Chief Investment Officer 42 302 56 156 Agostino Galvagni, CEO Corporate Solutions 65 816 79 670 Jean-Jacques Henchoz, CEO Reinsurance EMEA 35 476 46 817 Thierry Léger, CEO Life Capital n/a 57 610 Moses Ojeisekhoba, CEO Reinsurance 26 404 27 895 Jayne Plunkett, CEO Reinsurance Asia n/a 29 095 J. Eric Smith, CEO Reinsurance Americas2 6 990 13 984 Matthias Weber, Group Chief Underwriting Officer 25 410 25 750 Thomas Wellauer, Group Chief Operating Officer 116 111 130 224 1 The number of shares held on 30 June 2016 when Michel Liès stepped down from the Group EC was 290 692. 2 The figure shown in the 2015 Compensation Report did not reflect the sale of 10 000 shares in May 2015, which was appropriately reported as a management transaction in May 2015 according to the listing rules of the SIX Swiss Exchange.
Cash Annual Performance Incentive2 1 600 1 113 1 Benefits or allowances paid in cash. Consisting of housing, schooling, lump sum expenses, relocation expenses/taxes, child and similar allowances. 2 For 2016, subject to shareholders approval at the AGM 2017. For 2015, as part of the aggregate amount of short-term variable compensation approved by the shareholders at the AGM 2016.
Swiss Re in line with applicable laws which amounted to CHF 813 446 in 2015 and CHF 308 237 in 2016.
Total mortgages and loans to members of the Group EC 420 0 Highest mortgages and loans to an individual member of the Group EC1: J. Eric Smith, CEO Reinsurance Americas 420 n/a Total mortgages and loans not at market conditions to former members of the Group EC 4 300 4300 1 The member of the Group EC having the highest mortgage in 2015 transferred the mortgage to a bank in 2015.
Renato Fassbind, Vice Chairman, Chairman of the Audit Committee1 875 538 359 897 Raymund Breu, former Member2 89 n/a n/a n/a Mathis Cabiallavetta, former Member3 907 63 39 102 Raymond K.F. Ch’ien, Member 340 199 133 332
Jean-Pierre Roth, former Member3 267 50 33 83 Philip K. Ryan, Chairman of the Finance and Risk Committee5,6 708 654 239 893 Sir Paul Tucker, Member7 n/a 136 91 227 Susan L. Wagner, Chairman of the Investment Committee 491 344 229 573 Total compensation for the reported financial years8,9 10 595 6 263 3 821 10 084 1 Acting also as the Lead Independent Director.
6 Includes fees received for duties on the board of US Group companies. 7 Elected to Swiss Re’s Board of Directors at the AGM of 22 April 2016. 8 Compensation for the members of the Board of Directors includes fixed fees (cash and shares) and minimal allowances. No sign-on or severance payments have been or are made.
9 Amounts are gross and include social security contributions of the Board member. Additionally and not included are company contributions to social security systems paid by
Walter B. Kielholz, Chairman 4 900 Renato Fassbind, Vice Chairman C M 225 500 175 900 Raymond K.F. Ch’ien, Member M M 225 100 325
Rajna Gibson Brandon, Member M M 225 100 325 C. Robert Henrikson, Member C M 225 250 475 Trevor Manuel, Member M M 225 125 350
Shares held by members of the Board of Directors The number of shares held by members of the Board of Directors as of 31 December were: Vested options held by members of the Board of Directors For the years ended 31 December 2015 and 2016, no member of the Board of Directors held any vested options.
Related parties transactions Disclosure on compensation decisions in 2016 covers members of the Board of Directors and the Group EC as indicated, and for both include related parties to the extent applicable. Such related parties cover spouses, partners, children and other dependents or closely linked persons. In 2016 no compensation was paid to any related party.
Rajna Gibson Brandon, Member 20 216 21 700 C. Robert Henrikson, Chairman of the Compensation Committee 8 896 11 065 Hans Ulrich Maerki, former Member2 28 969 n/a Trevor Manuel, Member3 868 2 363
The amount of fixed compensation and variable long-term compensation effectively granted to these 12 members of the Group EC during the financial year 2016 amounted to CHF 29.5 million and also covers adjustments in the compensation of existing members of the Group EC as a result of their promotions as per 1 July 2016 to new Group CEO and new CEO Reinsurance respectively, and the related additional costs. The amount also includes contractual salary payments in 2016 for the former Group CEO (see the comments on page 155).
The CHF 31.0 million did not account for additional fixed compensation and variable long-term compensation required as a result of the changes in the Group EC in 2016, announced after the AGM 2015. For such compensation for the year 2016 an “additional amount” (Zusatzbetrag) is available pursuant to the Ordinance and Art. 23 of the Articles of Association per person and applicable compensation period amounting to a maximum of 20% of the aggregate amount of compensation for the Group EC last approved by the Shareholders’ Meeting. This additional amount available was therefore CHF 12.4 million in total for the two new members of the Group EC.
As shown on page 158, the compensation paid to the 11 members of the Board of Directors for their term of office from the AGM 2016 to the AGM 2017 was CHF 9.9 million and therefore within the approved amount.
Report of the statutory auditor to the General Meeting on the Compensation Report 2016
We have audited pages 155 to 160 of the accompanying Compensation Report included in this 2016 Financial Report of Swiss Re Ltd (the Company) for the year ended 31 December 2016.
Board of Directors’ responsibility The Board of Directors is responsible for the preparation and overall fair presentation of the Compensation Report in accordance with Swiss law and the Ordinance against Excessive Compensation at Public Corporations (the Ordinance). The Board of Directors is also responsible for designing the compensation framework and defining individual compensation packages.
Group financial statements 164 Income statement 164 Statement of comprehensive income 165 Balance sheet 166 Statement of shareholders’ equity 168 Statement of cash flow 170
Swiss Re Ltd 282 Annual Report 282 Income statement 283 Balance sheet 284 Notes 286 Proposal for allocation of disposable profit 294 Report of the statutory auditor 295
Income before interest and income tax expense 5 953 4 978 Interest expenses3 –634 –606 Income before income tax expense 5 319 4 372 Income tax expense 13 –651 –749 Net income before attribution of non-controlling interests 4 668 3 623
Income/loss attributable to non-controlling interests –3 3 Net income after attribution of non-controlling interests 4 665 3 626
Interest on contingent capital instruments –68 –68 Net income attributable to common shareholders 4 597 3 558
Total comprehensive income before attribution of non-controlling interests 787 4 827
Interest on contingent capital instruments –68 –68 Comprehensive income attributable to non-controlling interests –3 3 Total comprehensive income attributable to common shareholders 716 4 762 2015 USD millions
Change during the period –2 166 –10 –870 –310 –3 356 Amounts reclassified out of accumulated other comprehensive income –1 523 74 –1 449
Balance as of period end 2 748 –11 0 –5 687 –1 016 –3 966 2016 USD millions
Other-than- temporary impairment1 Cash flow hedges1 Foreign currency translation Adjustment from pension benefits2
Cash and cash equivalents (including 319 in 2015 and 1 169 in 2016 subject to securities lending) 8 204 9 011 Accrued investment income 983 1 108 Premiums and other receivables 11 709 13 270 Reinsurance recoverable on unpaid claims and policy benefits 6 578 7 461 Funds held by ceding companies 9 870 8 184
Income taxes recoverable 191 291 166 Swiss Re 2016 Financial Report
Treasury shares, net of tax Balance as of 1 January –1 185 –1 662 Purchase of treasury shares –584 –1 190 Cancellation of shares bought back 1 018 Issuance of treasury shares, including share-based compensation to employees 107 71 Balance as of period end –1 662 –1 763
Cash flow hedges, net of tax Balance as of 1 January 0 0 Changes during the period –7 Balance as of period end 0 –7
Foreign currency translation, net of tax Balance as of 1 January –4 675 –5 687 Changes during the period –1 012 –387 Balance as of period end –5 687 –6 074
Interest paid was USD 729 million and USD 674 million (thereof USD 57 million and USD 51 million for letter of credit fees) for the years ended 31 December 2015 and 2016, respectively. Tax paid was USD 1 190 million and USD 755 million for the years ended 31 December 2015 and 2016, respectively.
Cash flows from investing activities Fixed income securities: Net purchases/sales/maturities of short-term investments 6 103 –3 675
Equity securities: Securities purchased/sold under agreement to resell/repurchase, net –2 089 789 Cash paid/received for acquisitions/disposal and reinsurance transactions, net 404 318 Net purchases/sales/maturities of other investments 2 264 1 293 Net purchases/sales/maturities of investments held for unit-linked and with-profit business 1 218 2 762 Net cash provided/used by investing activities 1 694 1 597
Total net cash provided/used 1 098 1 315 Effect of foreign currency translation –365 –508 Change in cash and cash equivalents 733 807 Cash and cash equivalents as of 1 January 7 471 8 204 Cash and cash equivalents as of 31 December 8 204 9 011 170 Swiss Re 2016 Financial Report
The Group considers both the credit risk of its counterparties and own risk of non-performance in the valuation of derivative instruments and other over-the-counter financial assets. In determining the fair value of these financial instruments, the assessment of the Group’s exposure to the credit risk of its counterparties incorporates consideration of existing collateral and netting arrangements entered into with each counterparty. The measure of the counterparty credit risk is estimated with incorporation of the observable credit spreads, where available, or credit spread estimates derived based on the benchmarking techniques where market data is not available. The impact of the Group’s own risk of non-performance is analysed in the manner consistent with the aforementioned approach, with consideration of the Group’s observable credit spreads. The value representing such risk is incorporated into the fair value of the financial instruments (primarily derivatives), in a liability position as of the measurement date. The change in this adjustment from period to period is reflected in realised gains and losses in the income statement.
For assets or derivative structures at fair value, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Although management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and judgement over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. As of 31 December 2016, the Group has not provided any collateral on financial instruments in excess of its own market value estimates.
Cash and cash equivalents Cash and cash equivalents include cash on hand, short-term deposits, certain short-term investments in money market funds, and highly liquid debt instruments with a remaining maturity at the date of acquisition of three months or less.
Life Capital closed blocks of business can be acquired in different legal forms, either through an acquisition of an entity’s share capital or through a reinsurance transaction. The Group’s policy is to treat these transactions consistently regardless of the legal form of the acquisition. Accordingly, the Group records the acquired assets and liabilities directly to the balance sheet. Premiums, life and health benefits and other income statement items are not recorded in the income statement on the date of the acquisition.
On the liability side, funds held under reinsurance treaties’ consist mainly of amounts arising from the application of the deposit method of accounting to inward insurance and reinsurance contracts. In addition, the account also includes amounts retained from ceded business written on a funds withheld basis.
Funds withheld balances are presented together with assets and liabilities arising from the application of the deposit method because of their common deposit type character.
Shadow loss recognition testing becomes relevant in low interest rate environments. The test considers whether the hypothetical sale of AFS securities and the reinvestment of proceeds at lower yields would lead to negative operational earnings in future periods, thereby causing a loss recognition event. For shadow loss recognition testing, the Group uses current market yields to determine best estimate GAAP reserves rather than using locked in or current book yields. If the unlocked best estimate GAAP reserves based on current market rates are in excess of reserves based on locked in or current book yields, a shadow loss recognition reserve is set up. These reserves are recognised in other comprehensive income and do not impact net income. In addition, shadow loss recognition reserves can reverse up to the amount of losses recognised due to past loss events.
Life and health reinsurance premiums for group coverages are generally earned over the term of the coverage. For group contracts that allow experience adjustments to premiums, such premiums are recognised as the related experience emerges.
Reinstatement premiums are due where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. The recognition of reinstatement premiums as written depends on individual contract features. Reinstatement premiums are either recognised as written at the time a loss event occurs or in line with the recognition pattern of premiums written of the underlying contract. The accrual of reinstatement premiums is based on actuarial estimates of ultimate losses. Reinstatement premiums are generally earned in proportion to the amount of reinsurance provided.
In August 2014, the FASB issued ASU 2014-13, “Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity — a consensus of the FASB Emerging Issues Task Force”, an update to topic 810, “Consolidation”. The ASU applies to entities that are required to consolidate a collateralised financing entity (CFE) under the variable interest entity (VIE) consolidation guidance when the entity measures all financial assets and financial liabilities of the CFE at fair value, with changes in fair value recorded in earnings. Before the ASU became effective, if an entity would measure the fair value of assets and liabilities separately following applicable US GAAP rules, the aggregate fair value might have differed. The new guidance allows the use of the more observable of the fair value of the financial assets or the fair value of the financial liabilities of the CFE to measure both. The Group adopted ASU 2014-13 on 1 January 2016. The adoption did not have a material effect on the Group’s financial statements.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, an update to subtopic 205-40, “Presentation of Financial Statements — Going Concern”. The ASU requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are available to be issued. When management identifies such conditions or events, footnote disclosures need to be provided on the relevant conditions and events identified and on whether management’s plans to mitigate those conditions or events will alleviate the substantial doubt. The Group adopted ASU 2014-15 as of year-end 2016. The adoption did not have an impact on the Group’s financial statements.
ASU 2015-07 on 1 January 2016 and removed investments for which fair values are measured using the net asset value per share practical expedient from the fair value hierarchy as of the adoption date. The amended disclosures are provided in Note 8 Fair value disclosures.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”, an amendment to topic 805, “Business Combinations”. ASU 2015-16 is on adjustments to provisional amounts from business combinations during the measurement periods. It requires that an acquirer recognises such adjustments in the reporting period in which the adjustment amounts are determined. Further, the ASU requires that the acquirer records, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortisation, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The Group adopted this guidance on 1 January 2016. The adoption did not have an effect on the Group’s financial statements.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, an update to subtopic 825-10, “Financial Instruments — Overall”. The ASU requires an entity to carry investments in equity securities, including other ownership interests and limited liability companies at fair value through net income, with the exception of equity method investments, investments that result in consolidation or investments for which the entity has elected the practicability exception to fair value measurement. The practicability exception can only be applied by certain entities and only to equity investments without a readily determinable fair value. Investments under the practicability exception will be subject to an indicator-based impairment test. For financial liabilities to which the fair value option has been applied, the ASU also requires an entity to separately present the change in fair value attributable to instrument-specific credit risk in other comprehensive income rather than in net income. Specific exceptions apply to this requirement. 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 AFS in combination with the entity’s other DTAs rather than separately from other DTAs. The ASU also introduces changes to disclosure requirements for financial instruments not measured at fair value and introduces new requirements for equity instruments where the practicability exception to fair value measurement is applied. The new requirements are effective for annual and interim periods beginning after 15 December 2017 with early adoption permitted for requirements relating to the presentation of the impact of instrument-specific credit risk on qualifying financial liabilities in other comprehensive income. The Group is currently assessing the impact of the new requirements.
The Group provides reinsurance and insurance throughout the world through its business segments. The business segments are determined by the organisational structure and by the way in which management reviews the operating performance of the Group.
Life Capital Life Capital was created on 1 January 2016 to manage Swiss Re’s primary life and health business. It comprises the closed and open life and health insurance books, including the existing ReAssure business and the existing primary life and health insurance business formerly conducted by Life & Health Reinsurance. Through ReAssure, Swiss Re acquires closed blocks of inforce life and health insurance business, either through reinsurance or corporate acquisition, and typically assumes responsibility for administering the underlying policies. The administration of the business may be managed directly or, where appropriate, in partnership with a third party.
Group items Items not allocated to the business segments are included in the “Group items” column, which encompasses Swiss Re Ltd, the Groups’ ultimate parent company, the former Legacy business in run-off, Principal Investments and certain Treasury units. Swiss Re Ltd charges trademark licence fees to the business segments which are reported as other revenues. Certain administrative expenses of the corporate centre functions that are not recharged to the operating segments are reported as Group items.
Fee income from policyholders 49 414 463 Net investment income – non-participating business 1 097 1 330 135 939 –70 5 3 436 Net realised investment gains/losses – non-participating business 445 311 142 274 34 1 206 Net investment result – unit-linked and with-profit business 42 772 814
Total expenses before interest expenses –12 926 –10 811 –3 148 –2 698 –496 318 –29 761
Income tax expense/benefit –451 –152 –134 23 63 –651 Net income/loss before attribution of non-controlling interests 3 028 1 017 359 424 –160 0 4 668
Income/loss attributable to non-controlling interests –1 –2 –3 Net income/loss after attribution of non-controlling interests 3 027 1 017 357 424 –160 0 4 665
Interest on contingent capital instruments –19 –49 –68 Net income/loss attributable to common shareholders 3 008 968 357 424 –160 0 4 597
Management expense ratio in % 6.5 1 As of 1 January 2016, the primary life and health insurance business (individual and group) is reported in the Life Capital segment instead of the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly.
2 Letter of credit fees of USD 45 million in Life & Health Reinsurance and USD 10 million in Property & Casualty Reinsurance have been reclassified from “Operating expenses” to “Interest expenses”.
Income/loss attributable to non-controlling interests 1 2 3 Net income/loss after attribution of non-controlling interests 2 119 856 135 638 –122 0 3 626
Interest on contingent capital instruments –19 –49 –68 Net income/loss attributable to common shareholders 2 100 807 135 638 –122 0 3 558
Liabilities Unpaid claims and claim adjustment expenses 39 366 9 468 10 619 1 380 –5 315 55 518 Liabilities for life and health policy benefits 15 472 257 14 409 –7 30 131
Liabilities Unpaid claims and claim adjustment expenses 39 753 10 288 10 271 1 498 –4 455 57 355 Liabilities for life and health policy benefits 15 431 268 25 499 –22 41 176
FINANCIAL STATEMENTS Notes to the Group financial statements b) Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2015 USD millions Property Casualty Specialty Unallocated Total
Expenses Claims and claim adjustment expenses –2 567 –4 139 –1 186 –7 892
Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2016 USD millions Property Casualty Specialty Unallocated Total
Expenses Claims and claim adjustment expenses –3 745 –5 466 –1 090 –10 301
Income/loss before interest and income tax expense 891 –316 523 1 792 2 890 Interest expenses –293 –293 Income/loss before income tax expense 891 –316 523 1 499 2 597
Income before interest and income tax expense 725 587 180 1 492 Interest expenses2 –323 –323 Income/loss before income tax expense 725 587 –143 1 169
Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2016 USD millions Life Health Unallocated Total
Premiums earned, thereof: Intra-group transactions (assumed and ceded) 57 595 –57 –595 0
Premiums earned before retrocession to external parties 15 358 11 987 3 547 745 31 637
Fee income from policyholders, thereof: Gross fee income before retrocession to external parties 50 414 464
Premiums earned, thereof: Intra-group transactions (assumed and ceded) 113 594 –113 –594 0
Premiums earned before retrocession to external parties 17 279 12 843 3 734 872 34 728
Retrocession to external parties –271 –1 357 –231 –178 –2 037
Fee income from policyholders, thereof: Gross fee income before retrocession to external parties 40 499 539
Claims paid, thereof: Gross claims paid to external parties –8 651 –8 931 –2 726 –2 310 –38 –22 656 Intra-group transactions (assumed and ceded) –739 –456 739 456 0